KOM3433 L5.ppt

Chapter 5 Blue Ocean Strategy Business Creativity & Innovation Creating uncontested market space and make the competition irrelevant Tool 4: Blue Ocean Strategy About the Founders: Chan & Renee W. Chan Kim The Boston Consulting Group Bruce D. Henderson Chair Professor of Strateg...

Chapter 5 Blue Ocean Strategy Business Creativity & Innovation Creating uncontested market space and make the competition irrelevant Tool 4: Blue Ocean Strategy About the Founders: Chan & Renee W. Chan Kim The Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management Renée Mauborgne The INSEAD Distinguished Fellow and Professor of Strategy and International Management Two worlds … Red Ocean Compete in crowded markets Blue Ocean Create and capture new market space Creating Blue Oceans Two types of markets: – Red Oceans – all industries in existence today (known market space) – Blue Oceans – all industries not in existence today (unknown market space) New Market Space There is a fairly good understanding of how to compete in Red Oceans Blue Oceans are known to exist, however, there is little practical guidance on how to create them This book focuses on the analytical frameworks necessary to create Blue Oceans and the managerial strategy needed to sustain them New Market Space In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known In Blue Oceans, there exists untapped market space, demand creation, and the opportunity for highly profitable growth Most Blue Oceans are created from within red oceans by expanding industry boundaries The Continuing Creation of Blue Oceans How many of today’s industries were unknown 100 years ago? Blue Oceans have continuously been created over time The key to strength in the business world is to create new, uncontested market space Two worlds … Red Ocean Strategy Blue Ocean Strategy Compete in existing market Create uncontested market space. 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 Align the whole system of a strategic firm's activities with firm's activities in pursuit of its choice of differentiation or differentiation and low cost. low cost. VALUE INNOVATION The rising Imperative of Creating Blue Oceans Supply exceeds demand Accelerated commoditization of products and services Increasing price wars Shrinking profit margins Brands are becoming more similar select based on price The Rising Imperative of Creating Blue Oceans Globalism has made many brands become increasingly similar and more of a commodity Technological improvement has caused supply to outweigh demand It is now harder than ever to differentiate among brands The Impact of Creating Blue Oceans In a study of the launches of 108 companies, 86% were line extensions (Red Ocean) However, these only accounted for 62% of total revenues and 39% of total profits The other 14% of launches were aimed at creating blue oceans and accounted for 38% of revenue and 61% of total profit The Profit and Growth Consequences of Blue Oceans From Company and Industry to Strategic Move The company is not the appropriate unit of analysis for exploring blue oceans Blue Oceans focus on the strategic move rather than the company or industry This book focuses on 150 strategic moves made from 1880 to 2000 in various industries Blue Oceans were found to be created by new and old companies, attractive and unattractive industries, and both private and public companies Value Innovation: The Cornerstone of Blue Ocean Strategy Value creation alone improves value but is not sufficient to make you stand out in the marketplace Innovation alone will often create a product that buyers are not willing to pay for Value innovation occurs only when companies align innovation with utility, price, and cost positions Value innovation: – Make the competition irrelevant – Create a leap in value for both buyers and your company – Open up new and uncontested market space Unlocking non-customer demand Value Innovation Utility Price Cost Create new Set a price that Set the structure buyer attracts a mass based on a utilities of buyers target  Generic Strategies vs. Value Innovation Red Ocean Strategy Blue Ocean Strategy High High V1 V1 Quality Quality Low Low High C1 Low High C1 Low Cost Cost Structuralist Reconstructionist Minimizing Risks and Maximizing Opportunities in Formulating and Executing Blue Ocean Strategy Core/Formulation Principles Formulation Risks Reconstruct market boundaries Search Risk Focus on the big picture, not the numbers Planning Risk Reach beyond existing demand Scale Risk Get the strategic sequence right Business Model Risk Execution Principles Execution Risks Overcome key organizational hurdles Organizational Risk Build execution into strategy Management Risk © Kim & Mauborgne 2006  BOS Logic: The Core Principles Reconstruct Market Boundaries … overcome believes. Reach beyond existing Demand … go for uncontested space. COST VI VI Get the strategic sequence right VALUE … value [innovation] first.  BOS Logic: Reconstruct market boundaries Boundaries of Head-to-Head Creating Competition Competition New Market Space Focuses on rivals within its Looks across alternative Industry industries industry Focuses on competitive position Looks across strategic groups Strategic Group within its industry within strategic group Focuses on better serving the Redefines the buyer group of the Buyer Group industry buyer group Scope of Product Focuses on maximizing the value Looks across to complementary and Service of product and service offerings product and service offerings that Offerings within the bounds of its industry go beyond the bounds of its industry Focuses on improving price- Rethinks the functional-emotional Functional-emotional performance with the functional- orientation of its industry Orientation of an emotional orientation of this Industry industry Focuses on adapting to external Participation in shaping external Time/Trends trends over time trends as they occur  BOS Logic: The Core Principles Reconstruct Market Boundaries … overcome believes. Reach beyond existing Demand … go for uncontested COST space. VI VI Get the strategic sequence right VALUE … value [innovation] first. BOS Logic: Reach beyond existing demand Core Customer Noncostumer Soon-to-be-NC Refusing Customer  Three Tiers of Customers There is a universe of noncustomers which can be turned into customers to offer a big blue ocean market. 3rd 1st tier: “Soon-to-be” noncustomers who are on the 2nd edge of your market 2nd tier: “Refusing” 1st noncustomers who consciously choose against your market 3rd tier: “Unexplored” noncustomers who are in markets distant from yours Three Tiers of Customers Three tiers of non-customers: – 1: buyers who purchase your industry offerings out of necessity; will jump ship if given an opportunity. – 2: buyers who purchase alternative offerings that serve the same function – 3: people who don’t consume even the alternatives to your offerings Non-customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass of buyers, given target costs. Buyers could be not only end-users, but also other participants in a value chain (e.g. distributors)  BOS Logic: The Core Principles Reconstruct Market Boundaries … overcome believes. Reach beyond existing Demand … go for uncontested space. COST VI VI Get the strategic sequence right VALUE … value [innovation] first.  BOS Logic: Get the Strategic Sequence right Buyer utility Is there exceptional buyer utility in your business idea? No  Rethink YES Price Is your price easily accessible to the mass of buyers? No  Rethink YES Cost Can you attain your cost target to profit at your strategic price? No  Rethink YES Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up No  Rethink front? YES A commercially viable Blue Ocean Strategy Four Actions Framework: Key to Value Curve Reduce The key to discovering a What factors should new value curve lies in be reduced well answering four basic below the industry questions standard? Eliminate Create/Add Creating What factors that the What factors that the new markets: industry has taken for industry has never A new value granted should be offered should be curve eliminated? created or added? Raise Cirque du Soleil example What factors should be raised well above the industry standard?  Strategy Canvas high low Industry Variables Four Steps of Visualizing 1. Visual 2. Visual 3. Visual 4. Visual Awakening Exploration Strategy Fair Communication Compare your Go into the field to Draw your “to be” Distribute your business with your explore the six paths canvas based on before-and-after competitors’ by to creating blue insights from field strategic profiles on drawing your “as is” oceans observations one page for easy canvas comparison Observe the Get feedback on See where your distinctive advantages alternative strategy Support only those strategy needs to of alternative products canvases from projects and change and services customers, operational moves competitors’ that allow your See which factors customers, and non- company to close you should eliminate, customers gaps and actualize the new strategy create or change Use feedback to build the best “to be” future strategy The Case of Cirque du Soleil Cirque du Soleil achieved rapid growth in a declining industry with low profit potential Cirque du Soleil created uncontested new market space that made the competition irrelevant http ://www.youtube.com/watch?v=M4lAPI 5BAuk Example: Cirque du Soleil Instead of simply trying to outpace the competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual sophistication of the theater Because of this, Cirque du Soleil appealed to both circus customers and noncustomers Example: Cirque du Soleil Each show, like a theater production, had its own unique theme and storyline This allowed customers to return to the show more frequently They also did away with the traditional high-priced concessions and vendors thereby cutting costs Example: Cirque du Soleil Cirque du Soleil effectively combined the best of both the circus and the theater while eliminating everything else This allowed them to achieve both differentiation and low cost Eliminate-Reduce-Raise-Create Eliminate Raise Star Performers Unique venues Animal shows Aisle concession sales Multiple show arenas Reduce Create Fun and humor Theme Thrill and danger Refined environment Multiple productions Artistic music and dance  The Strategy Canvas of Cirque du Soleil hi Ringling Brothers Cirque du Soleil offering level Smaller Regional Circus lo Animal Shows Multiple Show Theme Multiple Price Thrills & Danger Arenas Productions Star Performers Aisle Concessions Fun & Humor Unique Venue Refined Viewing Artistic Music Environment & Dance © Kim & Mauborgne 2006  The Strategy Canvas of Cirque du Soleil Eliminate Reduce Raise Create hi Ringling Brothers Cirque du Soleil offering level Smaller Regional Circus lo Animal Shows Multiple Show Theme Multiple Price Thrills & Danger Arenas Productions Star Performers Aisle Concessions Fun & Humor Unique Venue Refined Viewing Artistic Music Environment & Dance © Kim & Mauborgne 2006  The Case of Yellow Tail Eliminate-Reduce-Raise-Create Grid: Eliminate Raise Enological terminology and Price versus budget wines distinctions Retail store involvement Aging qualities Above-the-line marketing Reduce Create Wine complexity Easy drinking Wine range Ease of selection Vineyard prestige Fun and adventure Source: Blue Ocean Strategy, Kim and Mauborgne  Eliminate Raise Enological terminology and Price versus budget wines Costs distinctions Retail store involvement Strategy Canvas Aging qualities Above-the-line marketing Value Innovation Reduce Create Wine complexity Easy drinking Buyer Value Wine range Ease of selection Vineyard prestige Fun and adventure Four Actions Framework ERRC Grid Source: Blue Ocean Strategy, Kim and Mauborgne  The Case of Accor's Formule 1 Budget Hotel From Formule 1’s perspective: Cost per room 100,000 FF  270,000 FF Cost of staff 20-23% of sales vs. 23-25% Profit Margins > 2x industry average Occupancy rates > 3x industry average From customers’ perspective: Hygiene > average 2* hotel Bed quality > average 2* hotel Silence > average 2* hotel Price 100 FF  200 FF of industry Source: HBR: Value Innovation Logic, Kim and Mauborgne Results of Formule 1’s Strategy The value curve of Formule 1 in the French Low Budget Hotel Industry The Strategy Canvas of Southwest Airlines The value curve of Southwest Airline High Southwest Average Airline Car Transport Low Pric Lou Hub Sp Frequen e Meal nge Seatin g conne Frie ee t point- s s Class ctivity ndly d to-point serv  Strategy Canvas of Personal Finance Software Industry hi Quicken Personal Finance Software offering level The Pencil lo Price Ease of Use Optional Features Speed Accuracy © Kim & Mauborgne 2006  1. List 8 to 12 important Factors of Competition Exercise Blue Ocean Strategy 2. Enter top 2 or 3 in each ERRC Grid Quadrant 3. Draw the Strategy Canvas: 1 on left, 4 on right Factors of Competition / Value Factors: 1. List Factors of Competition 2. Top 2 or 3 in ERRC Grid Quadrants 1. Eliminate: 3. Raise: 2. Reduce: 4. Create: Rev: 2006.02.21 Exercise Project Name: 3. 10 Write on 9 Very High Worksheet: E8 left, C right 7 High 6 4. Draw “As Is” 5 Medium 5. Draw “To Be” 4 3 Low 2 1 Very Low 0 Value Factors Examples Examples Examples References W. Chan Kim, Renée Mauborgne, Blue Ocean Strategy, 2005, Havard Business School Press. http://www.blueoceanstrategy.com HANDELSBLATT, Donnerstag, 06. Oktober 2005, Mit Nichtkunden neue Märkte finden. http://www.hotelformule1.com  Howework: Choose a real product that is already on the market (it can be either one of the above or your own preferences of product), brainstorm the value factors of the product and develop the Strategy Canvas