Lesson 7.2 Blue Ocean Strategy PDF

Flynn’s Story Flynn is a graduate of Business-Analytics course in the University of Florida, he has worked as a marketing manager for 8 year in a big tech company. He resigned from his job to take care of his sick Mother. He thought of...

Flynn’s Story Flynn is a graduate of Business-Analytics course in the University of Florida, he has worked as a marketing manager for 8 year in a big tech company. He resigned from his job to take care of his sick Mother. He thought of starting a business while taking care of his mother. However, he is not sure about the business he should start. He knows that if he tries to venture into the field of electronics and consumer goods, his business would face a lot of tough competition from the existing players in the field. The market space of electronics and consumer goods is so crowded that in order for his business to succeed, Flynn would have to beat the existing competition and also exploit the existing demand. Flynn’s Story Flynn’s long time friend, Mark Yardley comes to him to share a word of advice. Mark tells Flynn that in order to start a successful business venture, it is crucial that Flynn’s business should create a unique and uncontested market space just for itself. In such a market space which is free from competition, Flynn can be sure that his has hard work will pay off and he his business will succeed in the long-run. Mark tells Flynn to carefully study and implement the ‘Blue Ocean Strategy’ for his business. Mark tells Flynn that in order to implement the ‘Blue Ocean Strategy’ he would have to come up with a business idea that will create a new uncontested market space for his business. Blue Ocean Strategy CBMC-SM 301 Strategic Management Joseph Anthony M. Romero What is Blue Ocean Strategy? What are Red Oceans? What are Blue Oceans? Uniqueness of Blue Ocean Strategy There is a compelling evidence that where new markets and/or new industries are created, there is a significantly greater generation of revenues and profits when compared to new ventures that are merely extensions of, or improvements to, existing industries. Traditional strategy is focused on competitive positioning and therefore, focused on competing with existing competition. Blue Ocean strategy is about doing business where there are no competitors. Uniqueness of Blue Ocean Strategy Technology is not necessarily the key driver however, innovation is important particularly where it creates customer value. Blue Ocean strategic success is about enabling strategic vision. Blue ocean strategic success creates significant brand equity. Successful Blue Ocean strategy never benchmarks the competition. Successful Blue Ocean strategy rejects the conventional strategic position that there must be a trade-off between value (differentiation) and cost, instead pursuing both low cost and differentiation simultaneously. Uniqueness of Blue Ocean Strategy Technology is not necessarily the key driver however, innovation is important particularly where it creates customer value. Blue Ocean strategic success is about enabling strategic vision. Blue ocean strategic success creates significant brand equity. Successful Blue Ocean strategy never benchmarks the competition. Successful Blue Ocean strategy rejects the conventional strategic position that there must be a trade-off between value (differentiation) and cost, instead pursuing both low cost and differentiation simultaneously. Value Innovation: Cornerstone of Blue Ocean Strategy Creators of blue oceans follow value innovation Value Innovation – Equal emphasis on value and innovation – Defies value-cost trade-off of competition- based strategy – Successful value innovation: Drives down costs while driving up buyers’ value Uses a whole-system approach Follows reconstructionist view 6 Principles of Blue Ocean Strategy Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Overcome key organizational hurtles Build execution into strategy Principles of Blue Ocean Strategy Formulation Principles Risk factor each principle attenuates 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 Evaluation principles Risk factor each principle attenuates Overcome key organizational hurdles Organizational risk Build execution into strategy Management risk 3 Tiers of Non-Customers Tier One Investigate dissatisfaction. Understand commonalities across needs and desires. Tier Two Eliminate access barriers. Tier Three Remove assumptions on customer needs and behaviour. To break the trade-off between differentiation and low cost, the framework poses four key questions to challenge an industry’s strategic logic: Which factors that the industry takes for granted should be eliminated? Which factors should be reduced well below the industry’s standard? Which factors should be raised well above the industry’s standard? Which factors that the industry has never offered should be created? Marvel was able to break the value-cost trade-off, i.e., strategic actions that created unprecedented value at low cost.  BACHELOR OF Example: A highly competitive Industry INNOVATION The American Wine Industry  BACHELOR OF INNOVATION What the industry offers Premium Wines Budget Wines Polarised Strategic Groups Massive Choice  American Wine Industry BACHELOR OF INNOVATION 3rd largest in world: worth $20 billion Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia Exploding number of new wines – new vineyards in Oregon, Washington, New York Customer base stagnant 31st in the world in per capita consumption!  BACHELOR OF What wine customers said … INNOVATION “It is too confusing and complex” Wine descriptions and terminology The shopping experience The lack of clear guidance on what to buy and drink Thus, massively intimidating for ‘noncustomers’ (the large majority of the US population who were not wine drinkers) What are people looking for BACHELOR OF in a wine? INNOVATION Chateau Petrus Label  Segmentation of Market and Brands BACHELOR OF INNOVATION Low High Involvement Involvement Easy Going Enjoyers Aspirationals Appreciators Connoisseurs Glass with Everyday Image important Want to Sophisticated friends enjoyment Wine preferrers discover wine drinker To relax/unwind (sic) Knowledge of Discerning wine Least care Stick with limited Varietal wine regions tastes choosing a wine list of known knowledge Frequently buy Don’t decide in brands Interested in >$10 wines store Not wine Choose in-store some wine Join wine clubs Have a cellar preferrers Not interested in language Don’t stick to Less influenced wine language Enjoy trying new known brands by specials/ Price is a strong wines promotions influencer Influenced by Ideal wine is major brand Visit wineries / complex & Actively pursue advertising read wine articles interesting wine knowledge Rosemount Brand: Lindemans Wolf Blass Penfolds Estate Demographic: M/F: 50/50 Age: M/F: 30/70; Age: M/F: 70/30; Age: Age: 40+ 35-49 30-40 35-50  Strategy Canvas BACHELOR OF INNOVATION The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on an invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition. High Premium Wines Budget Wines Low Wine range Use of Above-the-line Vineyard prestige Price enological marketing Aging and legacy Wine terminology quality complexity  Four Steps of Visualizing BACHELOR OF INNOVATION 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 customers, and non- company to close See which factors customers gaps and actualize the you should eliminate, new strategy create or change Use feedback to build the best “to be” future strategy Four Actions to create a Blue Ocean BACHELOR OF INNOVATION Raise What factors should be raised well beyond the industry standard? Eliminate Create What factors What factors should should be be created that the eliminated that the industry has never industry has taken offered? for granted? Reduce What factors should be reduced well below the industry standard?  Four Actions Framework + BACHELOR OF Eliminate/Reduce/Raise/Create Grid INNOVATION Reduce The four actions framework offers an technique Which factors should be that breaks the trade-off between reduced well below industry standards? differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to Eliminate A Create Which of the factors New Which factors should be be eliminated; what factors need to be reduced Value created that the industry that the industry takes below industry standards; what factors need to for granted should be Curve has never offered? be raised above industry standards; and what eliminated? should be created that the industry has never Raise offered. Which factors should be raised well above the industry’s standard? Eliminate Raise The eliminate-reduce-raise-create grid pushes Enological terminology and Price versus budget wines companies not only to ask all four questions in the distinctions four actions framework but also to act on all four to create a new value curve. By driving Retail Store involvement Aging qualities companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes Above-the-line marketing them to simultaneously pursue differentiation and Reduce Create low costs; identifies companies who are only Wine complexity Easy drinking raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor Wine range Ease of selection the industry competes on.  ERRC Grid yellow tail BACHELOR OF INNOVATION The Case of yellow tail Eliminate Raise Enological terminology & distractions Price versus budget wines Aging qualities Retain store involvement Above-the-line marketing Reduce Create Wine complexity Easy drinking Wine Range Ease of selection Vineyard prestige Fun & adventure  To Be Canvas BACHELOR OF INNOVATION Eliminate Reduce Raise Create  BACHELOR OF Yellow Tail INNOVATION Only 2 types initially – Chardonnay and Shiraz Fruity, soft on palette, sweet-ish – great for those who had not drunk wine before Same bottle for red and white – low logistics costs Simple vibrant packaging – lower case letters/kangaroo Un-intimidating They were selling “The essence of a great land … Australia” – ie they were not selling the wine Australian clothing for the retail staff – they enthusiastically promoted a wine they could understand.  Value Innovation of [yellow tail] BACHELOR OF INNOVATION Creating of a social drink that is accessible to anyone Utility proposition Easy drinking, ease of selection, sense of fun and (customers, distributors and adventure retailers) Limit number of SKUs Price to move at volume Price proposition Targeted at the mass of customers Priced against the alternative (6-pack) Elimination of working capital tied up in aging wines Cost structure Fast product turnover  Results BACHELOR OF INNOVATION No 1 imported wine (outsells France and Italy) Fastest growing imported wine in the history of the USA industry New consumers of wine Jug drinkers trade up Premium wine drinkers trade down Industry criticizes them mercilessly at first Now wine press blurb gives it a “best buy” for value; winning wine awards.