Blue Ocean Strategy

University Degree Business and Administrative studies

Tove Brink

Brink Development ApS

Summary of the book: ”Blue Ocean Strategy”

Requested in mail regarding Blue Ocean Strategy Certification.

How to Create Uncontested Market Space and Make the Competition Irrelevant.

Part One: Blue Ocean Strategy

Chapter 1:

Creating Blue Oceans.

The Market conditions in most markets have gradually evolved with the result that supply exceeds demand in nearly every market. Accelerated technological advances improving industrial productivity are some of the main reason. Further globalization compounds the situation as trade barriers are dismantled and information are flowing much more freely. The result is accelerated commoditization of products and services. Therefore red oceans become increasingly bloody. Management will need to be more concerned with blue oceans than the current cohort of managers are used to.

The dominant focus of strategy work over the past 25 years has been on competition-based red ocean strategies. This means more competition in known market space. Competition – in the book called: red oceans – will always matter and will always be a fact of business life. However another approach can add much more value to business. Tremendous value can be created by the business by changing focus to unknown market space. This is in the book called Blue Oceans, which denote all the industries not in existence today.

A practical example is given from Cirque du Soleil. Further research from professors Kim & Mauborgne show a significant difference between red and blue ocean business launches. Blue Ocean launches support growth and are much more profitable – details can be seen in figure 1-1.

The cornerstone of blue ocean strategy is value innovation. The authors focus on making the competition irrelevant by creating a leap in value for buyers and the company, thereby opening up new and uncontested market space. Value innovation places equal emphasis on value and innovation. Technology-driven innovation tends to be without value, often shooting beyond what buyers are ready to accept and pay for. If companies fail to anchor innovation with value, technology innovators and market pioneers often lay the eggs that other companies hatch.

Value innovation is achieved only when the whole system of the company’s utility, price, and cost activities is properly aligned. It is this whole system approach that makes the creation of blue oceans a sustainable strategy. In this sense, value innovation is more than innovation. It is about strategy that embraces the entire system of a company’s activities. Value innovation requires the companies to orient the whole system toward achieving a leap in value for both buyers and themselves. The integrated factors can be seen in the below figure from the book.

Figure: 1-2 Value Innovation: The Cornerstone of Blue Ocean Strategy – p. 16.

Here the academic paradigm shifts from the structuralist view to the reconstructionist view. Market boundaries and industry structure are no longer given.

Chapter 2:

Analytical Tools and Frameworks.

Executives need analytics to break out of existing competition. They need strategy as systematic and actionable as when they compete in red waters of known market space.

Therefore they need a Strategy Canvas, which provide both a diagnostic and an action framework for building a compelling Blue Ocean Strategy. The authors show an example drawn from the U.S. wine industry, where they on the horizontal axis captures the range of factors the industry competes on and invests in and on the vertical axis captures the offering level that buyers receive across all the key competing factors. Below the Strategy Canvas framework are illustrated in principle.

The Strategy Canvas in Principle:

From this framework a value curve can be established by plotting the current offerings of the industry across all these factors. The value curve is a graphic depiction of a company’s relative performance across its industry’s factors of competition.

Strong profitable growth is neither obtained through benchmarking competitors nor through conducting extensive customer research. It will not work to out-compete competitors by offering a little more for a little less. Nor will it work to have customer-word-of-mouth on “we want a little more for a little less”. Minor growth can be expected through such actions.

Fundamentally you must begin with reorienting your strategic focus from competitors to alternatives, and from customers to non-customers of the industry. As you shift the strategic focus, you gain insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value elements that reside across industry boundaries.

The authors have developed a four actions framework to craft the new value curve. It is illustrated in figure 2-2 in the book.

Figure 2-2-The Four Actions Framework – p. 29

It is by pursuing the questions of eliminating and reducing that you gain insight into how to drop your cost structure vis-â-vis competitors. The second two questions of creating and raising, by contrast, provide you with insight into how to lift buyer value and create new demand. Of particular importance are the actions of eliminating and creating, which push companies to go beyond value maximization exercises with existing factors of competition. Eliminating and creating prompt companies to change the factors themselves, hence making the existing rules of competition irrelevant.

The Eliminate-Reduce-Raise-Create Grid p 35 supplements the Four Actions Framework by not only pushing companies to ask all four questions in the four actions framework but also to act on all four to create a new value curve. To fill in the grid gives four immediate benefits:

Simultaneous pursue differentiation and low costs
Flags over-engineering of products and services
Easily understood and creating a high level of engagement
Drive robust scrutinizing of every factor the industry competes on and hold as implicit assumptions

The authors show the U.S wine industry case to show how the Eliminate-Reduce-Raise-Create Grid

is elaborated in practice and what result can be uncovered.

There are three characteristics of a good strategy to support direction, value and commitment:

Focus
Shape of the value curve diverges
Tagline of the strategic tagline is clear and compelling

Further the authors show ...

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Simultaneous pursue differentiation and low costs
Flags over-engineering of products and services
Easily understood and creating a high level of engagement
Drive robust scrutinizing of every factor the industry competes on and hold as implicit assumptions

The authors show the U.S wine industry case to show how the Eliminate-Reduce-Raise-Create Grid

is elaborated in practice and what result can be uncovered.

There are three characteristics of a good strategy to support direction, value and commitment:

Focus
Shape of the value curve diverges
Tagline of the strategic tagline is clear and compelling

Further the authors show how the value curves should be read through interesting examples.

Part Two: Formulating Blue Ocean Strategy

Chapter 3:

Reconstruct Market Boundaries.

The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. As the authors proclaim: “This challenge is key because managers cannot afford to be riverboat gamblers betting their strategy on intuition or on random drawing”

The authors found clear patterns for creating blue oceans. Specifically they found six basic approaches to remarking market boundaries. It is called the Six Paths Framework, and is shown in short description below.

The Six Paths Framework

The paths do not require special vision or foresight about the future. They are all based on looking at familiar data from a new perspective. The paths challenge the assumptions underlying many business strategies.

Companies tend to do the following:

Define their industries similarly
Look at industries through generally accepted lenses
Focus on the same buyer group
Define their scope of offerings similarly
Accept their industries functional or emotional orientation
Focus on the same point in time

It means that companies sharing information get into conventional wisdom on how to compete and by this the competitive convergence get stronger.

Looking across alternative industries means to search for alternatives which include products and/or services that have different functions and forms but the same purpose. In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously. For some reason this is forgotten when people become sellers. Therefore a shift in factors creates space between alternative industries and provides opportunities for value innovation. The authors illuminate an example from NetJet through the Strategy Canvas - tool. Could you unlock further value by focusing on the key factors that lead buyers to trade across alternative industries?

Looking across strategic groups within industries means to look across fundamental differences among industry players – captured in small groupings. These groupings can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. The challenge is to break out of the narrow tunnel by understanding which factors determine customers decisions to trade up or down from one group to another. The authors give a practical example of a Texas based women’s fitness company. Further draws on Ralph Lauren, Toyota’s Lexus and Michigan based Champion Enterprises. Could you unlock further value by shifting strategic groups?

Looking across the chain of buyers, mean to identify and interpret the whole chain of buyers, which can be grouped into purchasers, users and influencers. They may overlap, however, they often differ. The authors give a practical example from Novo Nordisk – a Danish company and Blomberg. Could you unlock further value by shifting the buyer group?

Looking across complementary product and service offerings focus on the definition of the total solution buyers seek when they choose a product or service. A simple way of doing this is to think about what happens before, during and after your product and/or service is used. The authors give a practical example from NABI – Hungarian company - through the strategy canvas- tool. Could you unlock further value by eliminating the pain points?

Looking across functional or emotional appeal to the buyers means to look across what companies unconsciously have educated the buyers in what to expect. Further company’s behaviour affects buyers expectations in a reinforcing cycle. The trap is that functional oriented companies become more functional and emotional oriented companies become more emotional. The authors give examples of Swatch, QB House, Cemex and Pfizer. Could you unlock further value by going across these traps in functional and emotional appeal?

Looking across time means looking at trends with the right perspective of business insight on how these trends will affect the value offering to the customer. See the trends through the customers own business model. The trends must be decisive, irreversible and they must have clear trajectory to be focused. The most important trends are sorted out by using these three criteria. The authors give a practical example from Apple, Cisco Systems and CNN. Could you unlock further value by going across time the very most important trends to your business?

Convention-altering strategic moves are done through thinking across conventional boundaries of competition. Engaging in a structured process creates blue oceans for the company.

Chapter 4:

Focus on the Big Picture, Not the numbers.

The alternative approach of the strategy canvas is very important because it consistently produces strategies that unlock the creativity of a wide range of people within an organisation.

The strategy canvas focus the big picture by showing

The strategic profile of an industry
Strategic profile of current and potential competitors
The company’s strategic profile – or value curve

Thereby the strategic Canvas can uncover the overall dynamics of the industry. The authors have developed a structured process for drawing and discussing a strategic canvas that pushes a company’s strategy towards a Blue Ocean.

The Four Steps of Visualizing Strategy

The first step is to resolve differences in opinion about the current state of play. People need to

accept the need of change. According to experience trying to draw the strategy canvas had made

a stronger case than any argument based on numbers and word could have done. This wake up call

functions excellent.

The second step is to employ an internal team to have managers making sense of how people use

products and services. The managers need to explore the six paths to creating blue oceans in the

field – actually see and internalise how it works.

The third step is a visual strategy fair which through a short presentation of strategies create votes

for the strategies presented through invited judges. Attendees include senior managers and

external and internal people involved in drawing and giving input to the strategy canvas. The

judges explain the votes. A reassessment of market boundaries is by the different views launched in

the team. After the fair the value curve is drawn and action can be focused through the Eliminate-

Reduce-Raise-Create Grid.

The last and fourth step is to communicate it so that the strategy can be easily understood by every

employee. The one-page picture of the Strategy Canvas is extremely helpful here. The picture also

serves as reference point for all investment decisions.

The authors provide a further practical example of the Strategy Canvas at Samsung Electronics.

Managers responsible for corporate strategy can also utilise The Strategy Canvas to plot the

company’s current and planned portfolios into the Pioneer-Migrator-Settler (PMS) map.

Pioneers offer unprecedented value.

Settlers offer only conform values

Migrators offer value in between the other two

Chief executives hereby can use value and innovation as the important parameters for managing

their portfolio of business. The Balance is hereby illustrated by plotting into the map- see p. 98.

The principle is seen below.

Testing the Growth Potential of a Portfolio of Businesses

The steps are more about collective wisdom building than top-down or bottom-up planning.

Further it should be more about the big picture than number –crunching; more about creativity and motivation. This will overcome the discontent seen currently with strategic planning.

Aristotle pointed out: “The soul never thinks without an image”

Chapter 5:

Reach Beyond Existing Demand.

A key component of innovation is to reach beyond the known. This means in practice to challenge the focus on existing customers and to resist the drive for finer segmentation to accommodate buyer differences. The more intense the competition is, the greater on average, is the resulting customization of offerings. As companies compete to embrace customer preferences through finer and finer segmentation, they often risk creating to small target markets.

The contrary is required. By focusing non-customers the customer base is enhanced and by focusing commonalities across customers the base is even further enhanced. This unlocks the new mass of customers who did not exist before.

Companies need to deepen their understanding the universe of non-customers. Here the three tiers of non-customers as illustrated below can help.

Figure 5-1 The Three Tiers of Non-customers – p. 104.

First tier: “soon to be”. Here looking for the commonalities across the needs of these non-customers will release the blue ocean. Clear insight into how to desegment buyers will unleash an untapped demand. What are the key reasons first tier non-customers to stay on ship and use your industry?

Second tier: ”Refusing”. Their needs are earlier dealt with by other means or ignored. It takes non-customers to shed insight into the implicit assumptions of the industry and its existing customers that could be challenged and rewritten to create a leap in value. Clear insight into how to desegment buyers will unleash an untapped demand. What are the key reasons second tier customers to engage to use the products and services of your industry?

Third tier: ”Unexplored”. Typically these unexplored non-customers have not been targeted or thought of as potential customers by any player in the industry. That is because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets. Clear insight into how to desegment buyers will unleash an untapped demand. What are the key reasons for third tier customers to explore and use the products and services of your industry?

Go for the Biggest Catchment!

Because the scale of blue ocean opportunities that a specific tier of non-customers can unlock varies across time and industries, the focus should be on the tier representing the biggest catchment at the time. But you should also explore whether there are overlapping commonalities across all three tiers of non-customers

The point here is not to argue on whether it is wrong or not wrong to focus on existing customers as most players in business do. The point is to challenge the existing taken for granted strategic orientations and business assumptions.

What the authors suggest is to maximise the scale of the blue ocean. You should first reach beyond existing demand to non-customers and desegmentation opportunities as you formulate future strategies. If no such opportunities can be found, you can then move on to further exploit differences among existing customers. However, be aware of this strategic move can cause you to end up in a much smaller space.

Further it is not enough to end up maximising the size of the blue ocean. You must obtain profit from it as well otherwise it will not be sustainable in the long run. It is essential to create a win-win situation and win-win outcome.

Chapter 6:

Get the Strategic Sequence Right.

The next challenge is to build a robust business model to ensure that a healthy profit can be made on the blue ocean strategy idea. A sequence is needed as illustrated below with the starting point within buyer utility – otherwise there is no Blue Ocean potential to begin with.

Figure 6-1 The Sequence of Blue Ocean Strategy – p. 118.

It is the combination of exceptional utility, strategic pricing, target costing and the address of adoption hurdles that allows companies to achieve value innovation.

Figure 6-2 The Buyer Utility Map – p. 121.

The starting point is the buyer utility map uncovering the kick-off for Blue Ocean Strategy. The map allows managers to identify the full range of utility spaces that a product and/or service can potentially fill. Below the six stages of the buyer experience cycle is illustrated.

Figure 6-3 The Buyer Experience Cycle – p. 123.

Testing across the six utility levers uncovers the location of the proposed offer. Further it will be essential to remove the biggest blocks to turn non-customers into customers.

Figure 6-4 Uncovering the Blocks to Buyer Utility – p. 124.

It is increasingly important to know from the start what price will quickly capture the mass of target buyers. This can be done through a toll developed by the authors and called the price corridor of the mass

Figure 6-5 The Price Corridor of the Mass – p. 128.

Value innovation typically maximises by using the foregoing levers for sustainable profit.

Figure 6-6 The Profit Model of Blue Ocean Strategy – p. 136.

Part Three: Executing Blue Ocean Strategy

Chapter 7:

Overcome Key Organizational Hurdles.

The execution bar is set higher by employing the Blue Ocean Strategy, because it represents a significant departure from status quo. The focus shifts from convergence to divergence. The challenge faces four hurdles as illustrated below

Figure 7-1 The Four Organizational Hurdles to Strategy Execution – p. 150.

All though the change is significant, it is not about using a lot of resources, as conventional thinking would apply. Instead there is a need to flip conventional thinking on its head using what the author’s call tipping point leadership. The approach allows for overcoming the four hurdles.

Figure 7-3 Conventional Wisdom Versus Tipping Point Leadership p. 169.

The authors highlight a very interesting example of tipping point leadership in the New York City Police Department.

Theory of tipping point leadership hinges on the insight that in any organization, fundamental changes can happen quickly when the beliefs and energies of a critical mass of people create an epidemic movement towards an idea. It is about conserving resources and cutting time by focusing on identifying and then leveraging the factors of disproportionate influence in the organization.

The hardest battle is to break through the cognitive hurdle. See how it can be done below.

Break Through the Cognitive Hurdle:

The next battle is to concentrate on multiplying the value of the resources available.

Jump the Resource Hurdle:

The third battle is to alert employees to the need for strategic shift. Blue Ocean Strategy needs to become a movement, people must not only recognize what needs to be done, but they must also act on that insight in a sustained and meaningful way. See how it can be done below.

Jump the Motivational Hurdle:

The fourth battle is to overcome the political forces, which are an inescapable reality of corporate and public life. See how it can be done below.

Knock over the Political Hurdle:

It is never easy to execute a strategic shift, and doing it fast with limited resources is even more difficult. Yet the research of the authors and their practical examples shows that it is possible.

Chapter 8:

Build Execution into Strategy.

This is the sixth and last principle of Blue Ocean Strategy and means to build execution into the strategy from the start.

It is only when all members of an organization are aligned around a strategy and support it, for better or for worse, that a company stands apart as a great and consistent executor. The company needs to invoke the must fundamental base of action: the attitudes and behavior of its people deep in the organization. A culture is essential of trust and commitment to execute the agreed strategy – not to the letter, but to the spirit.

Trepidation build as people are required to step out of their comfort zones and change how they have worked in the past. On the frontline, at the very level at which a strategy must be executed day in and day out, people can resent having a strategy thrust upon them with little regard for what they think and feel. Therefore executions need to build into the strategy from the start. The principle allows companies to minimize the management risk of distrust, non-cooperation, and even sabotage. This management risk are present both for red and blue oceans, but it is greater for Blue Ocean Strategy because its execution often requires significant change. Companies must reach beyond the usual suspects of carrot and sticks. They must reach to fair process in strategy making and execution of the strategy.

Figure 8-1 How Fair Process Affects People’s Attitudes and Behavior p. 174.

The figure shows the causal flow the authors observed among fair process, attitudes, and behaviors.

Research within psychology of justice by John W. Thibaut, and Laurens Walker shows: people care as much about the justice of the process through which an outcome is produced as they do about the outcome itself. As in legal settings, fair process builds execution into strategy by creating people’s

buy-in up front. When fair process is exercised in the strategy-making process, people trust that a level of playing field exists. This expires them to cooperate voluntarily in executing the resulting strategic decisions.

The three E-principles in the process mutually reinforce elements defining fair process.

Taken together, the three E-principles collectively lead to judgements of fair process. This is important, because any subset of the three does not create judgements of fair process.

The authors give a practical example from “Elco”. Here the violation of fair process in making and rolling out strategies, managers turn their best employees into their worst, earning their distrust of an resistance to the very strategy they depend on them to execute.

Fair process matters because it all comes down to intellectual and emotional recognition. Emotionally individuals seek recognition of their value, not as “labor”, “personal”, or “human resources” but as human beings who are treated wit full respect and dignity and appreciated for their individual worth regardless of hierarchical level.

Intellectual individuals seek recognition that their ideas are sought after and given full reflection, and that others think enough of their intelligence to explain their thinking to them. It proves through action that there is an eagerness to trust and cherish the individual as well as a deep-seated confidence in the individual’s knowledge, talents, and expertise.

Frederick Herzberg’s classic study on motivation, recognition was found to inspire strong intrinsic motivation, causing people to go beyond the call of duty and engage in voluntary cooperation.

Commitment, trust and voluntary cooperation are not merely attitudes or behaviors. They are intangible capital.

Traditional incentives of power and money – carrots and sticks – help. But they fall short of inspiring human behavior that goes beyond outcome-driven self-interest. Where behavior cannot be monitored with certainty, there is still plenty of room for foot-dragging and sabotage.

Chapter 9:

Conclusion: The sustainability and Renewal of Blue Ocean Strategy

Creating Blue Oceans is not a static achievement but a very dynamic process creating excellent performance. Imitators will soon emerge and require the company to address the issues of sustainability and renewal of the Blue Ocean Strategy.

However, imitation is not easy for conventionally thinking companies as can be seen below.

Figure 9-1 Imitation Barriers to Blue Ocean Strategy – p. 188.

This snapshot shows that the barriers are high. Therefore the authors seldom have seen rapid imitation of Blue Ocean Strategy. In addition, Blue Ocean Strategy is a systems approach that requires not only getting each strategic element right but also aligning them in an integral system to deliver value innovation. Imitating such a system is not an easy feat.

In the end, however, every Blue Ocean Strategy will be imitated. As imitators try to grab a share of the company’s Blue Ocean Strategy. The company typically launch offenses to defend the hard-earned customer base. But imitators often persist. The trap of the red ocean is nearby and the company can be tempted to fall into this trap of competition, racing to beat the new competition.

Over time the competition and not the buyer may come to occupy the center of the company’s strategic thought and actions. Here the basic shape of the value curve begins to converge with the value curves of the competition.

To avoid the trap of red oceans there is a need to monitor value curves on the strategic canvas. It signals when to value innovate and when not to. It alerts you to reach out for another Blue Ocean when your value curve begins to converge with those of the competition.

In practice it means to employ and continuously elaborate employment of the value curve on The Strategy Canvas.

The Strategy Canvas in Principle:

Focus on the company’s value curve and the value curves of the competitors in the way as illustrated by The Strategy Canvas principle keeps the company from pursuing another Blue Ocean when there is still a huge profit stream to be collected from the current offerings.

The acid test for renewal of Blue Ocean Strategy is to find out if the value curve on the strategy canvas still fulfils the following:

Focus
Divergence
Compelling tagline

If it does the company should resist the temptation to value innovate again and instead should focus on lengthening, widening, and deepening the rent stream through operational improvements and geographical expansion to achieve maximum economies of scale and market coverage.

As rivalry intensifies and total supply exceeds demand, bloody competition commences and the ocean will turn red.

The six principles of Blue Ocean Strategy serve as essential pointers for every company aspiring to lead the increasingly overcrowded business world. The authors aim to show and elaborate to balance the scales on red and blue oceans so that formulating and executing Blue Ocean Strategy can become as systematic and actionable as competing in the red ocean of known market space.

Summary of the book: “Blue Ocean Strategy” written by W. Chan Kim and Reneé Mauborgne.

The summary is written by Tove Brink