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Blue ocean strategy report
1. An excerpt from the book written by W. CHAN KIM & RENEE MAUBORGNE Presented by: ERNEST R. VERA CRUZ, DPA
2. Blue Ocean Strategy Creativity & Innovation “ Creating uncontested market space and make the competition irrelevant”
3. Two worlds According to the book Red Ocean Compete in crowded markets Blue Ocean Create and capture new market space
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6. Two worlds … Red Ocean Strategy Blue Ocean Strategy Compete in existing market space. Create uncontested market space. Beat the competition. Make the competition irrelevant. Exploit existing demand. Create and capture new demand. Make the value-cost trade-off. Break the value-cost trade-off. Align the whole system of a strategic firm's activities with its choice of differentiation or low cost. Align the whole system of a firm's activities in pursuit of differentiation and low cost. VALUE INNOVATION
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11. Utility Create new buyer utilities Price Set a price that attracts a mass of buyers Cost Set the structure based on a target Value Innovation Unlocking non-customer demand
12. Generic Strategies vs. Value Innovation High Low V 1 C 1 Cost Quality High High High Low Low Low Quality Cost • • V 1 C 1 Red Ocean Strategy Blue Ocean Strategy Structuralist Reconstructionist
14. BOS Logic: The Core Principles Reconstruct Market Boundaries … overcome believes . Reach beyond existing Demand … go for uncontested space. Get the strategic sequence right … value [innovation] first . VI VI COST VALUE
15. BOS Logic: Reconstruct market boundaries Boundaries of Competition Head-to-Head Competition Creating New Market Space Industry Focuses on rivals within its industry Strategic Group Focuses on competitive position within strategic group Clientele Focuses on better serving the clientele Scope of Product and Service Offerings Focuses on maximizing the value of product and service offerings within the bounds of its industry Functional-emotional Orientation of an Industry Focuses on improving price-performance with the functional-emotional orientation of this industry Time/Trends Focuses on adapting to external trends as they occur Looks across alternative industries Looks across strategic groups within its industry Redefines the clientele of the industry Looks across to complementary product and service offerings that go beyond the bounds of its industry Rethinks the functional-emotional orientation of its industry Participation in shaping external trends over time
16. BOS Logic: The Core Principles Reconstruct Market Boundaries … overcome believes . Reach beyond existing Demand … go for uncontested space. Get the strategic sequence right … value [innovation] first . VI VI COST VALUE
20. BOS Logic: The Core Principles Reconstruct Market Boundaries … overcome believes . Reach beyond existing Demand … go for uncontested space. Get the strategic sequence right … value [innovation] first . VI VI COST VALUE
21. BOS Logic: Get the Strategic Sequence right Buyer utility Is there exceptional buyer utility in your business idea? Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Price Is your price easily accessible to the mass of buyers? Cost Can you attain your cost target to profit at your strategic price? A commercially viable Blue Ocean Strategy YES YES YES YES No Rethink No Rethink No Rethink No Rethink
22. Four Actions Framework: Key to Value Curve Reduce What factors should be reduced well below the industry standard? Raise What factors should be raised well above the industry standard? The key to discovering a new value curve lies in answering four basic questions Creating new markets: A new value curve Eliminate What factors that the industry has taken for granted should be eliminated? Create/Add What factors that the industry has never offered should be created or added?
31. Eliminate-Reduce-Raise-Create Eliminate Excessive Law and MBA subjects; Multiple enrollment in different schools Raise Academic standards in the law profession; Passing rate in Bar Exams; Reduce Period to finish two courses; Cost of two courses; Competition with schools offering Legal education Create Unique academic program; Employment assurance of graduates;
32. The Strategy Canvas of DLSU-FEU hi offering level lo Price Period Multiple enrollment Cost for 2 courses Excessive subjects Other schools Competition Employment Opportunities Academic Standards BAR Passing rate Unique Program Consortium Reduce Eliminate Raise Create
33. Sample form 1. List Factors of Competition 2. Top 2 or 3 in Grid Quadrants
To win in the future New Market Space, companies must stop competing with each other. Because the only way to beat the competition is to stop trying to beat the competition. To understand this idea, imagine a market universe composed to two sorts of oceans: -red oceans and -blue oceans.
Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowed, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody. Blue Oceans , in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue oceans competition is irrelevant because the rules of the game are waiting to be set. Logic of Blue Ocean Strategy is so called value innovation and is the cornerstone of Blue Ocean Strategy Value innovation places equal emphasis on value and innovation. It is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy: The value-cost trade-off. It is conventionally believed that companies can either create greater value to the customers at higher cost or create reasonable value at a lower cost. Here strategy is seen as making a choice between differentiation and low cost. In contrast , those that seek to create blue oceans pursue differentiation and low cost simultaneously. Now turn the clock back only thirty years, How many industries of today's industries were then unknown? Mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail, snowboards and coffee bars to name a few.
The reason of the appearance of the Blue Ocean Strategy -is that in increasing numbers of industries, supply exceeds demand. -The trend toward globalization compounds the situation. As trade barriers between nations and regions are dismantled and as information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to disappear. -The result has been accelerated commoditization of products and services, increasing price wars, and shrinking profit margins. -And for major product and service categories, brands are generally becoming more similar and as they are becoming more similar people increasingly select based on price.
Prof. Shipilov INSEAD
Prof. Shipilov INSEAD
Reconstruct Market Boundaries The first principle of Blue Ocean Strategy is to reconstruct market boundaries to break from the competition and create blue oceans. The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. This challenge is key because managers cannot afford betting their strategy on intuition or on a random drawing.
There are a clear pattern for creating blue oceans, with six basics approaches to remarking market boundaries: The six paths framework In the first path companies in the red ocean define their industry similarly and focus on being the best within it. But to create new market space companies must look across alternative industries because a company competes not only with the other firms in its own industry, but also with companies in those other industries that produce alternative products and services. The second path: The next boundary is the strategic group. A strategic group is companies within an industry that pursue a similar strategy. The key in creating new market space is to understand what factors determine buyers´ decision to switch from one strategic group to another. The third path: In most industries, competitors converge on the definition of the target buyer. In the reality, though, there is a chain of buyer who directly or indirectly involved in the buying decision: the purchaser, the user, for example. But by looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers. The fourth path: In the red ocean: few products and services are used in a vacuum. In most cases, other products and services affect their value. But companies can create new market space by focusing on the complements that detract from the value of their product or service. The fifth path: Competition in an industry tends to converge around two bases of appeal: -Some industries compete principally on price and function, their appeal is rational. Other industries compete largely on feelings, their appeal is emotional. Companies can find new market spaces when they are willing to challenge the functional-emotional orientation of their industry. The sixth path: All industries are subject to external trends that affect their business over time. Firms tend to pace their own thinking to keep up with the development of the trends they are tracking. By finding insights trends that are observable today, firms can unlock innovation that creates new market spaces.
Reach beyond existing Demand The second principle of Blue Ocean Strategy. This a key component of achieving value innovation. By aggregation the greatest demand for a new offering. To achieve this, companies should challenge two conventional strategy practices. One is the focus on existing customers. The other is the drive for finer segmentation to accommodate buyer differences. To maximize the size of blue oceans, companies need to take a reverse course.
Instead of concentration on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before. There are three types of noncustomer that can be transformed into customers. They differ in their relative distance from the market. -The first of noncustomers is closest to the market. They are buyers who nominally purchase an industry's offering out of necessity, but are mentally noncustomers of the industry. -The second type of noncustomers is people who refuse to use the industry's offerings. These are buyers who have seen the industry's offerings as an option to fulfill their needs but have voted against them. -The third type of noncustomers is farthest from the market. They are noncustomers who have never thought of the market´s offerings as an option. You must look at each of the three types of noncustomers to understand how you can attract them and expand the own blue ocean.
Prof. Shipilov INSEAD
Get the strategic sequence right This next challenge is to build a robust business model to ensure that you make a healthy profit on your blue ocean idea. Here you can see again the Logic of Blue Ocean Strategy: The value innovation , the cornerstone of Blue Ocean Strategy. In order to create blue oceans the companies pursue differentiation and low cost simultaneously.
This brings us to the fourth principle of the Blue Ocean Strategy: Get the strategic sequence right. As shown in this figure, companies need to build their Blue Ocean Strategy in the sequence of buyer utility, price, cost, and adoption. The starting point is buyer utility . Does your offering unlock exceptional utility? Is there a compelling reason for the mass of people to buy it? Absent this, there is no Blue Ocean potential to begin with. Here there are only two options. Park the idea, or rethink it until you reach an affirmative answer. When you clear the exceptional utility bar, you advance to the second step: setting the right strategic price . Remember a company does not want to rely on price to create demand. The key question her is this: Is your offering priced to attract the mass of target buyers so that they have a compelling ability to pay for your offering? If it is not, they cannot buy it. Nor will the offering create irresistible market buzz. These two steps address the revenue side of a company's business model. Securing the profit side bring the third element: cost . Can you produce your offering at the target cost and still earn a healthy profit margin? Can you profit at the strategic price-the price easily accessible to the mass of target buyers? You should not let costs drive prices. Nor should you scale down utility because high costs block your ability to profit at the strategic price. When the target cost cannot be met, you must either forgo the idea because the Blue Ocean won't be profitable, or you must innovate your business model to hit the target cost. It is the combination of exceptional utility, strategic pricing, and target costing that allows companies to achieve value innovation-a leap in value for both buyers and companies. The last step is to address adoption hurdles. What are the adoption hurdles in rolling out your idea? Have you addressed these up front? The formulation of Blue Ocean Strategy is complete only when you address adoption hurdles in the beginning to ensure the successful actualization of your idea. Adoption hurdles include, for example, potential resistance to the idea by retailers or partners. Because Blue Ocean Strategies represent a significant departure from red oceans, it is key to address adoption hurdles up front.
