Summary of Blue Ocean Strategy PDF

Md. Mizanur Rahman MBA (Canada), PhD (Dhaka) Professor of Marketing Dhaka University ----------------------------------------------------------------------------- Background of BOS...

Md. Mizanur Rahman MBA (Canada), PhD (Dhaka) Professor of Marketing Dhaka University ----------------------------------------------------------------------------- Background of BOS Blue Ocean Strategy is the result of over 15 years of research by Professors W. Chan Kim and Renee Mauborgne of INSEAD. The professors studied over 150 strategic moves by companies between 1880 and 2000 across more than 30 industries to see what made some a success and some fail. Summary of BOS This groundbreaking research spawned the BOS concepts, analytical tools (strategy canvas and value innovation), and strategy frameworks (4-action framework), and easy-to-use apps (6 paths, 3 tires of non-customers), that were first outlined in a series of Harvard Business Review articles and refined into the Harvard Business Press book Blue Ocean Strategy published in 2005. BOS assumes that a market universe consists of two sorts of oceans: Red Oceans and Blue Oceans. To win in the future new market space, companies must stop competing with each other. Blue Ocean metaphor is used to describe the competitive space where products and industries are not yet well defined, competitors are not structured and the market is relatively unknown. It is grounded in analysis and empowers you through tools and frameworks. It provides a step-by-step process like six paths to remarking market boundaries, four-step process to create your “to be” strategy. It maximizes your opportunities while minimizing risks. The proponents of the blue ocean strategy take the view that innovation should create new market space, tap into unsatisfied consumer demand, and find uncontested market space. In this way, competition can become quite irrelevant. Now BOS has had a lot of enthusiasts and people like Starbucks and Dell have been cited as examples where you can get into territory that is uncontested and profitable. BOS has literally changed the way companies do business. It has turned the way we think of competition on its head. Literally, it challenges everything you thought you knew about strategy. Throughout the world BOS is now recognized as best practice in strategic planning and change management. It is the only strategic planning method to appear in Harvard Business Reviews. BOS uses a “strategy canvas” to chart the competition and exploit their shortcomings, builds execution into strategy, and shows how to align the 3 strategy propositions to create a win-win outcome. BOS is a new strategic mind set, a new way of thinking, defining (products, industries, competition), and crafting and executing strategy, and a bold, new path to winning the future. BOS provides a systematic approach to creating and capturing new, uncontested market space. It anchors value innovation through cost minimization and differentiation. A Quick Check of RED or BLUE a) Does your company feel that they are facing increasing competition from rivals? (Companies are scared of everyday) b) Does your company depend on offering deeper and deeper price discounts to make sales happen? c) Is your company increasing ads and marketing expense every year, yet the impact of these efforts keep falling? d) Is your company focusing on cost cutting and quality control at the expense of growth, innovation, and brand creating? e) Do people in your company blame slow economic and market conditions most of the time? f) Is your company seeing outsourcing and job cuts as a way to regain competitiveness and profitability? g) Does your company management see mergers and acquisitions as one of the principal means to grow in future? h) Does your company think that it is easier to follow competitors than to break away from them? i) Is your company now starting to worry that the marketplace has become crowded? If your answer to 3 or more questions is YES, you are more likely in RED OCEAN. Attack on “Five Forces“ Model While avoiding use of Mr. Porter’s name, Mr. Kim and Ms. Mauborgne nevertheless attack him head on, arguing that the “five forces” analysis is a formula for remaining in “red oceans,” where sharks compete mercilessly for the action. The key to exceptional business success, they say, is to redefine the terms of competition and move into the “blue ocean,” where you have the water to yourself. The goal of these strategies is not to beat the competition, but to make the competition irrelevant. Blue Ocean and Red Ocean Red oceans represent all the industries in existence today. This is the known market space. In the red oceans, industry boundaries are defined and accepted, industry’s structural conditions are given, and the competitive rules of the game are known. Firms are involved in head-to-head competition & apply market-competing strategy. 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. Products become commodities, and cutthroat competition turns the red ocean bloody. Marketers can expect only incremental improvements in growth and profit. Companies caught in red oceans follow a conventional approach and race to beat the competition by building a defensible position within the existing industry. Most companies do benchmarking, focus on strategic positioning and value addition. Companies make the value-cost trade-off and align the whole system of a strategic firm's activities with its choice of either differentiation or low cost. Companies caught in BOs apply market competing strategy. Blue oceans, in contrast, denote all the industries not in existence today. This is the unknown market space. Blue oceans are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Companies break the value-cost trade-off and align the whole system of a firm's activities in pursuit of differentiation and low cost, called value innovation. Companies in ROs apply market creating strategy. Although some BOs 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. Blue oceans help company formulate and execute blue ocean strategies, examining a wide range of strategic moves across a host of industries. Blue Ocean creating businesses follow a different strategic logic. They say: We challenge industry conditions & paradigms We focus on customers, not competitors We don’t segment customers, we aggregate them  Our assets capabilities are not fixed, they are fluid Impact of Creating Blue Oceans We set out to quantify the impact of creating blue oceans on a company’s growth in both revenues and profits in a study of the business launches of 108 companies (see figure 1-1). We found that 86 percent of the launches were line extensions, that is, incremental improvements within the red ocean of existing market space. Yet they accounted for only 62 percent of total revenues and a mere 39 percent of total profits. The remaining 14 percent of the launches were aimed at creating blue oceans. They generated 38 percent of total revenues and 61 percent of total profits. Given that business launches included the total investments made for creating red and blue oceans (regardless of their subsequent revenue and profit consequences, including failures), the performance benefits of creating blue waters are evident. Rising Imperative of Creating BOs Nowadays supply outweighs demand due to technological improvement and the greater number of industries. Niche markets and havens for monopoly don’t exits due to dismantled trade barriers and instantly and globally available information. Globalism has made many brands similar and harder than ever to differentiate among brands. Strategy and management approach in the 20th century are on the wane. All these result in accelerated commoditization, increasing price wars, shrinking profit margins, more similar brands which are selected based on price only. All these are forcing companies to fall in the red ocean. Thus, go beyond competing & make competition irrelevant. From Company and Industry to Strategic Move The company is not the appropriate unit of analysis for exploring BOs. Marketers focus on the strategic move rather than the company or industry. This book focuses on 150 strategic moves by companies between 1880 and 2000 across more than 30 industries to see what made some a success and some fail. Creating Blue Ocean How many of today’s industries were unknown 100 years ago? BOs have continuously been created over time. Companies don’t use competition as benchmark and look for value innovation– the cornerstone of BOS which makes competition irrelevant. Companies open up new and uncontested market space and appeal to new customers prepared to pay a price. Two generic ways you can create BO: (i) launching completely new industries, as eBay did with online auctions and (ii) expanding the boundaries of existing industries in RO. BOs are created by new and old companies, attractive and unattractive industries, and private and public companies. The Cornerstone of Blue Ocean Strategy Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proportion to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer values are lifted by raising & creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. Value innovation places equal emphasis on value and innovation. Value without innovation creates value only on an incremental scale which is not sufficient to stand out in the marketplace. Conversely, innovation without value often creates a technology-driven or futuristic product that buyers are not willing to pay for. Anchoring innovation without value is like technology innovators and market pioneers are laying eggs which are hatched by others. Value innovation aligns innovation with utility, price, and cost positions to make it happen. Value innovation makes the competition irrelevant and creates a leap in value for both buyers and company. 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 who 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. Conclusion: The Sustainability and Renewal of Blue Ocean Strategy Creating blue oceans is not a static achievement but a dynamic process. Once a company creates a blue ocean and its powerful performance consequences are known, sooner or later imitators appear on the horizon. The question is, how soon or late will they come? Put differently, how easy or difficult is blue ocean strategy to imitate? As the company and its early imitators succeed and expand the blue ocean, more companies eventually jump in. This raises a related question: When should a company reach out to create another blue ocean? In other words, companies have to make two decisions: (a) how to create barriers to imitation? and (b) when to value-innovate again? Barriers to Imitation A blue ocean strategy brings with its considerable barriers to imitation. Some of these are operational, and others are cognitive. More often than not, a blue ocean strategy will go without credible challenges for ten to fifteen years, as was the case with Cirque du Soleil, Southwest Airlines, Federal Express, The Home Depot, Bloomberg, and CNN, for starters. This sustainability can be traced to the following imitation barriers rooted in blue ocean strategy: A value innovation move does not make sense based on conventional strategic logic. When CNN was introduced, for example, NBC, CBS, and ABC ridiculed the idea of twenty-four-hour, seven- day, real-time news without star broadcasters. CNN was referred to as Chicken Noodle News by the industry. Ridicule does not inspire rapid imitation. Brand image conflict prevents companies from imitating a blue ocean strategy. The blue ocean strategy of The Body Shop, for example—which shunned beautiful models, promises of eternal beauty and youth, and expensive packaging— left major cosmetic houses the world over actionless for years because imitation would signal an invalidation of their current business models. Natural monopoly blocks imitation when the size of a market cannot support another player. For example, the Belgian cinema company Kinepolis created the first megaplex in Europe in the city of Brussels and has not been imitated in more than fifteen years despite its enormous success. The reason is that the size of Brussels could not support a second megaplex, which would cause both Kinepolis and its imitator to suffer. Patents or legal permits block imitation.  The high volume generated by a value innovation leads to rapid cost advantages, placing potential imitators at an ongoing cost disadvantage. The huge economies of scale in purchasing enjoyed by Wal-Mart, for example, have significantly discouraged other companies from imitating its blue ocean strategy. Network externalities also block companies from easily and credibly imitating a blue ocean strategy, such as eBay enjoys in the online auction market. In short, the more customers eBay has online, the more attractive the auction site becomes for both sellers and buyers of wares, creating scant incentive for buyers to switch to a potential imitator. Because imitation often requires companies to make substantial changes to their existing business practices, politics often kick in, delaying for years a company’s commitment to imitate a blue ocean strategy. When Southwest Airlines, for example, created a service that offered the speed of air travel with the cost and flexibility of driving, imitating this blue ocean strategy would have meant major revisions in routing planes, retraining staff, and changing marketing and pricing, not to mention culture—significant changes that the politics of few companies can bear in the short term. When a company offers a leap in value, it rapidly earns brand buzz and a loyal following in the marketplace. Even large advertising budgets by an aggressive imitator rarely have the strength to overtake the brand buzz earned by the value innovator. Microsoft, for example, has been trying for years to dislodge Intuit’s value innovation, Quicken. More than ten years out, despite all its efforts and investment, it has not been able to do so. Quicken is a personal finance management tool developed by Intuit, Inc. Figure 9-1 provides a snapshot of these barriers to imitation. As the figure shows, the barriers are high. This is why we have seldom observed 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. When to Value-Innovate Again Eventually, however, almost every blue ocean strategy will be imitated. As imitators try to grab a share of your blue ocean, you typically launch offenses to defend your hard-earned customer base. But imitators often persist. Obsessed with hanging on to market share, you may fall into the trap of competing, racing to beat the new competition. Over time, the competition, and not the buyer, may come to occupy the center of your strategic thought and actions. If you stay on this course, the basic shape of your value curve will begin to converge with those of the competition. To avoid the trap of competing, you need to monitor value curves on the strategy canvas which signals when to value-innovate and when not to and can alert when your value curve begins to converge with those of the competition and reach out for another BO to create value innovation. The strategy canvas is a diagnostic tool and an action framework for building a compelling BOS that: (a) shows the current state of play in the known market space and (b) allows you to understand: where the competition is currently investing, the factors the industry currently competes on in product, service, and delivery, and (c) what customers receives from existing competitive offerings on the market. It also keeps you from pursuing another blue ocean when there is still a huge profit stream to be collected from your current offering. When the company’s value curve still has focus, divergence, and a compelling tagline, you should resist the temptation to value-innovate again and instead should focus on lengthening, widening, and deepening your rent stream through operational improvements and geographical expansion to achieve maximum economies of scale and market coverage. As shown in the strategy canvas, [yellow tail]’s value curve has focus; the company does not diffuse its efforts across all key factors of competition. The shape of its value curve diverges from the other players’, a result of not benchmarking competitors but instead looking across alternatives. The tagline of [yellow tail]’s strategic profile is clear: a fun and simple wine to be enjoyed every day. As discussed in chapter 2, the strategic profile with high blue ocean potential has three complementary qualities: focus, divergence, and a compelling tagline. If a company’s strategic profile does not clearly reveal those qualities, its strategy will likely be muddled, undifferentiated, and hard to communicate. It is also likely to be costly to execute. When the company’s value curve still has focus, divergence, and a compelling tagline, you should resist the temptation to value- innovate again and instead should focus on lengthening, widening, and deepening your rent stream through operational improvements and geographical expansion to achieve maximum economies of scale and market coverage. Winning strategy focuses on few number of key value attributes. It saves cost and offers product at a low price. Value curve must stand apart and diverge from competition. Value curve must have a clear-cut tagline. Tagline is the motto that syntheses your strategic profile. You should swim as far as possible in the blue ocean, making yourself a moving target, distancing yourself from your early imitators, and discouraging them in the process. The aim here is to dominate the blue ocean over your imitators for as long as possible. As rivalry intensifies and total supply exceeds demand, bloody competition commences and the ocean will turn red. As competitors’ value curves converge toward yours, you should begin reaching out for another value innovation to create a new blue ocean. Hence, by charting your value curve on the strategy canvas and intermittently replotting your competitors’ value curves versus your own, you will be able to visually see the degree of imitation, and hence of value curve convergence and the extent to which your blue ocean is turning red. The Body Shop, for example, dominated the blue ocean it had created for more than a decade. The company, however, is now in the middle of a bloody red ocean, with declining performance. It did not reach out for another value innovation when competitors’ value curves converged with its own. Similarly, [yellow tail] is swimming in the clear blue waters of new market space. It has made the competition irrelevant and is enjoying strong, profitable growth as a result. However, the test of Casella Wines’ long-run profitable growth will be its ability to value-innovate again when imitators compete both aggressively and credibly with converging value curves. The six principles of blue ocean strategy proposed in this book should serve as essential pointers for every company thinking about its future strategy if it aspires to lead the increasingly overcrowded business world. This is not to suggest that companies will suddenly stop competing or that the competition will suddenly come to a halt. On the contrary, the competition will be more present and will remain a critical factor of the market reality. What we suggest is that to obtain high performance in this overcrowded market, companies should go beyond competing for share to creating blue oceans. Because blue and red oceans have always coexisted however, practical reality demands that companies succeed in both oceans and master the strategies for both. But because companies already understand how to compete in red oceans, what they need to learn is how to make the competition irrelevant. This book aims to help balance the scales so that formulating and executing blue ocean strategy can become as systematic and actionable as competing in the red oceans of known market space. Four Actions Framework: Key to Value Curve The key to discovering a new value curve lies in answering four basic questions. o Eliminate: What factors that the industry has taken for granted should be eliminated? o Reduce: What factors should be reduced well below the industry standard? o Raise: What factors should be raised well above the industry standard? o Create: What factors that the industry has never offered should be created or added? Six Principles of BOS These principles help minimize risks and maximize opportunities in formulating and executing BOS. These are given in detail: 1. Reconstruct Market Boundaries The first principle of blue ocean strategy is to reconstruct market boundaries to break from the competition and create blue oceans. This principle addresses the search risk many companies struggle with. 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. Specifically, we found six basic approaches to remaking market boundaries. We call this the six paths framework. These paths have general applicability across industry sectors, and they lead companies into the corridor of commercially viable blue ocean ideas. None of these paths requires special vision or foresight about the future. All are based on looking at familiar data from a new perspective. These paths challenge the six fundamental assumptions underlying many companies’ strategies. These six assumptions, on which most companies hypnotically build their strategies, keep companies trapped competing in red oceans. Specifically, companies tend to do the following: Define their industry similarly and focus on being the best within it Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry) Define the scope of the products and services offered by their industry similarly Accept their industry’s functional or emotional orientation Focus on the same point in time—and often on current competitive threats—in formulating strategy The more that companies share this conventional wisdom about how they compete, the greater the competitive convergence among them. To break out of red oceans, companies must break out of the accepted boundaries that define how they compete. Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time. This gives companies keen insight into how to reconstruct market realities to open up blue oceans. Let’s examine how each of these six paths works. Path 1: Look across Alternative Industries 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. Alternatives are broader than substitutes. Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose. For example, to sort out their personal finances, people can buy and install a financial software package, hire a CPA, or simply use pencil and paper. The software, the CPA, and the pencil are largely substitutes for each other. They have very different forms but serve the same function: helping people manage their financial affairs. In contrast, products or services can take different forms and perform different functions but serve the same objective. Consider cinemas versus restaurants. Restaurants have few physical features in common with cinemas and serve a distinct function: They provide conversational and gastronomical pleasure. This is a very different experience from the visual entertainment offered by cinemas. Despite the differences in form and function, however, people go to a restaurant for the same objective that they go to the movies: to enjoy a night out. These are not substitutes, but alternatives to choose from. Path 2: Look across Strategic Groups within Industries Blue oceans can be unlocked by looking across strategic groups. The term refers to a group of companies within an industry that pursue a similar strategy. In most industries, the fundamental strategic differences among industry players are captured by a small number of strategic groups. Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. Each jump in price tends to bring a corresponding jump in some dimensions of performance. Most companies focus on improving their competitive position within a strategic group. Mercedes, BMW, and Jaguar, for example, focus on outcompeting one another in the luxury car segment as economy car makers focus on excelling over one another in their strategic group. Neither strategic group, however, pays much heed to what the other is doing because from a supply point of view they do not seem to be competing. The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another. Path 3: Look across the Chain of Buyers In most industries, competitors converge around a common definition of who the target buyer is. In reality, though, there is a chain of “buyers” who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ. When they do, they frequently hold different definitions of value. A corporate purchasing agent, for example, may be more concerned with costs than the corporate user, who is likely to be far more concerned with ease of use. Similarly, a retailer may value a manufacturer’s just-in-time stock replenishment and innovative financing. But consumer purchasers, although strongly influenced by the channel, do not value these things. 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. Path 4: Look across Complementary Product and Service Offerings Few products and services are used in a vacuum. In most cases, other products and services affect their value. But in most industries, rivals converge within the bounds of their industry’s product and service offerings. Take movie theaters. The ease and cost of getting a babysitter and parking the car affect the perceived value of going to the movies. Yet these complementary services are beyond the bounds of the movie theater industry as it has been traditionally defined. Few cinema operators worry about how hard or costly it is for people to get babysitters. But they should, because it affects demand for their business. Imagine a movie theater with a babysitting service. Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used. Babysitting and parking the car are needed before people can go to the movies. Operating and application software are used along with computer hardware. In the airline industry, ground transportation is used after the flight but is clearly part of what the customer needs to travel from one place to another. Untapped value is often hidden in complementary products and services. Path 5: Look across Functional or Emotional Appeal to Buyers Competition in an industry tends to converge not only on an accepted notion of the scope of its products and services but also on one of two possible bases of appeal. Some industries compete principally on price and function largely on calculations of utility; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional. Yet the appeal of most products or services is rarely intrinsically one or the other. Rather it is usually a result of the way companies have competed in the past, which has unconsciously educated consumers on what to expect. Companies’ behavior affects buyers’ expectations in a reinforcing cycle. Over time, functionally oriented industries become more functionally oriented; emotionally oriented industries become more emotionally oriented. No wonder market research rarely reveals new insights into what attracts customers. Industries have trained customers in what to expect. When surveyed, they echo back: more of the same for less. When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space. We have observed two common patterns. Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand. Path 6: Look across Time All industries are subject to external trends that affect their businesses over time. Think of the rapid rise of the Internet or the global movement toward protecting the environment. Looking at these trends with the right perspective can show you how to create blue ocean opportunities. What trends have a high probability of impacting your industry, are irreversible, and evolving in a clear trajectory? How will these trends impact your industry? Given this, how can you open up unprecedented customer utility? Most companies adapt incrementally and somewhat passively as events unfold. Whether it’s the emergence of new technologies or major regulatory changes, managers tend to focus on projecting the trend itself. That is, they ask in which direction a technology will evolve, how it will be adopted, whether it will become scalable. They pace their own actions to keep up with the development of the trends they’re tracking. But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise from business insights into how the trend will change value to customers and impact the company’s business model. By looking across time—from the value a market delivers today to the value it might deliver tomorrow—managers can actively shape their future and lay claim to a new blue ocean. Looking across time is perhaps more difficult than the previous approaches we’ve discussed, but it can be made subject to the same disciplined approach. We’re not talking about predicting the future, something that is inherently impossible. Rather, we’re talking about finding insight in trends that are observable today. Three principles are critical to assessing trends across time. To form the basis of a blue ocean strategy, these trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory. Many trends can be observed at any one time—for example, a discontinuity in technology, the rise of a new lifestyle, or a change in regulatory or social environments. But usually only one or two will have a decisive impact on any particular business. And it may be possible to see a trend or major event without being able to predict its direction. 2. Focus on the Big Picture, Not the Numbers How do you align your strategic planning process to focus on the big picture and apply these ideas in drawing your company’s strategy canvas to arrive at a blue ocean strategy? This is no small challenge. Our research reveals that most companies’ strategic planning process keeps them wedded to red oceans. The process tends to drive companies to compete within existing market space. Think of a typical strategic plan. It starts with a lengthy description of current industry conditions and the competitive situation. Next is a discussion of how to increase market share, capture new segments, or cut costs, followed by an outline of numerous goals and initiatives. A full budget is almost invariably attached, as are lavish graphs and a surfeit of spreadsheets. The process usually culminates in the preparation of a large document culled from a mishmash of data provided by people from various parts of the organization who often have conflicting agendas and poor communication. In this process, managers spend the majority of strategic thinking time filling in boxes and running numbers instead of thinking outside the box and developing a clear picture of how to break from the competition. If you ask companies to present their proposed strategies in no more than a few slides, it is not surprising that few clear or compelling strategies are articulated. It’s no wonder that few strategic plans lead to the creation of blue oceans or are translated into action. Executives are paralyzed by the muddle. Few employees deep down in the company even know what the strategy is. And a closer look reveals that most plans don’t contain a strategy at all but rather a smorgasbord of tactics that individually make sense but collectively don’t add up to a unified, clear direction that sets a company apart—let alone makes the competition irrelevant. Does this sound like the strategic plans in your company? This principle is key to mitigating the planning risk of investing lots of effort and lots of time but delivering only tactical red ocean moves. Here we develop an alternative approach to the existing strategic planning process that is based not on preparing a document but on drawing a strategy canvas. This approach consistently produces strategies that unlock the creativity of a wide range of people within an organization, open companies’ eyes to blue oceans, and are easy to understand and communicate for effective execution. In our research and consulting work, we have found that drawing a strategy canvas not only visualizes a company’s current strategic position in its marketplace but also helps it chart its future strategy. By building a company’s strategic planning process around a strategy canvas, a company and its managers focus their main attention on the big picture rather than becoming immersed in numbers and jargon and getting caught up in operational details. As previous chapters reveal, drawing a strategy canvas does three things. First, it shows the strategic profile of an industry by depicting very clearly the factors (and the possible future factors) that affect competition among industry players. Second, it shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically. Finally, it shows the company’s strategic profile—or value curve—depicting how it invests in the factors of competition and how it might invest in them in the future. As discussed in chapter 2, the strategic profile with high blue ocean potential has three complementary qualities: focus, divergence, and a compelling tagline. If a company’s strategic profile does not clearly reveal those qualities, its strategy will likely be muddled, undifferentiated, and hard to communicate. It is also likely to be costly to execute. Four Steps of Visualizing A 150-year-old financial services group that we’ll call European Financial Services (EFS) is one of the companies that adopted this process to develop a strategy that breaks away from the competition. The resulting EFS strategy yielded a 30 percent revenue boost in its initial year. The process, which builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people’s creativity, has four major steps. Visual Awakening: Reluctant to change because of interest in status quo or that time will bring success. High determination or a crisis is usually the cause the search for a blue ocean. If you cannot agree on where you are, you cannot agree on where you need to be. And if you cannot agree on where you need to be you cannot get there. If a strategy is not clear it cannot be followed. Contradictions of a cluttered strategy, EFS and the easy to use slow web site. Shell shocked by the clutter, to much detail in the big picture leading to an information overload. (ANY MANAGEMENT CLASS). When looking at the strategy for EFS it was actually a mix of tactics rather that a true strategy. The development of specialized projects of no true value such as the RISK MANAGEMENT CONSULTANCY. This is a service that was thought necessary by the European members and irrelevant by the American members. This is where the numbers can clutter the true strategy. Compare your business with your competitors’ by drawing your “as is” canvas. See where your strategy needs to change. Visual Exploration: Managers need to deeply understand how what they do is utilized by the end users. Bloomberg made a shift in focus from Purchasers to users. He realized the problem of information overload and the need to remedy this as well as improve the system accuracy. When looking at your customers, look at the noncustomers. This was the case for Bloomberg as the individual traders were the true users but they were not the ones who had the decision to buy. Another good thing to look at is the array of complimentary products that can be offered as well (CHILDCARE WITH MOVIES) (APPLE’S GENIUS BAR FOR ITUNES) Again to look for what alternatives may be suitable for your product or service, you need to look at your current, lost and new customers as well as the same customers for their competitors. It is by looking at the actually users and potential users you can truly find what is needed and valued by the user. EFC went through these steps and they found most interestingly that speedy transaction confirmation, a feature that only one of the executives thought of as important, was seen by the users to be the most valuable As the team went back to the drawing board for a new strategy they took a look at the 6 path frame work and worked on shaping its value curve into something that would force out conventional thought and force managers to create areas that would break out of the traditional business. Go into the field to explore the six paths to creating blue oceans. Observe the distinctive advantages of alternative products and services. See which factors you should eliminate, create or change. Visual Strategy Fair: Draw your “to be” canvas based on insights from field observations. Get feedback on alternative strategy canvases from customers, competitors’ customers, and non- customers. Use feedback to build the best “to be” future strategy. The process is given as under: After two weeks of drawing and redrawing, the teams presented their strategy canvases at what we call a visual strategy fair. Attendees included senior corporate executives but consisted mainly of representatives of European Financial Services' (EFS’s) external constituencies—the kinds of people the managers had met with during their field trips, including noncustomers, customers of competitors, and some of the most demanding EFS customers. In two hours, the teams presented all twelve curves—six by the online group, and six by the offline group. They were given no more than ten minutes to present each curve, on the theory that any idea that takes more than ten minutes to communicate is probably too complicated to be any good. The pictures were hung on the walls so that the audience could easily see them. After the twelve strategies were presented, each judge—an invited attendee—was given five sticky notes and told to put them next to his or her favorites. The judges could put all five on a single strategy if they found it that compelling. The transparency and immediacy of this approach freed it from the politics that sometimes seem endemic to the strategic planning process. Managers had to rely on the originality and clarity of their curves and their pitches. One began, for example, with the line, “We’ve got a strategy so cunning that you won’t be our customers, you’ll be our fans.” Visual Communication: Distribute your before-and-after strategic profiles on one page for easy comparison. Support only those projects and operational moves that allow your company to close gaps and actualize the new strategy. The process is given as under: After the future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee. EFS distributed the one-page picture showing its new and old strategic profiles so that every employee could see where the company stood and where it had to focus its efforts to create a compelling future. The senior managers who participated in developing the strategy held meetings with their direct reports to walk them through the picture, explaining what needed to be eliminated, reduced, raised, and created to pursue a blue ocean. Those people passed the message on to their direct reports. Employees were so motivated by the clear game plan that many pinned up a version of the picture in their cubicles as a reminder of EFS’s new priorities and the gaps that needed to be closed. 3. Reach beyond Existing Demand Companies want to venture beyond red oceans only when they find themselves in a puddle. The question is, How do you maximize the size of the blue ocean you are creating? This brings us to the third principle of blue ocean strategy: Reach beyond existing demand. This is a key component of achieving value innovation. By aggregating the greatest demand for a new offering, this approach attenuates the scale risk associated with creating a new market. 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. Typically, to grow their share of a market, companies strive to retain and expand existing customers. This often leads to finer segmentation and greater tailoring of offerings to better meet customer preferences. 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 segmentation, they often risk creating too-small target markets. To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating 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. The Three Tiers of Noncustomers Although the universe of noncustomers typically offers big blue ocean opportunities, few companies have keen insight into who noncustomers are and how to unlock them. To convert this huge latent demand into real demand in the form of thriving new customers, companies need to deepen their understanding of the universe of noncustomers. There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. There is a universe of noncustomers which can be turned into customers to offer a big blue ocean market. 1st tier: “Soon-to-be” noncustomers who are on the edge of your market. Buyers buy your industry offerings out of necessity; will jump ship if given an opportunity. 2nd tier: “Refusing” noncustomers who consciously choose against your market. Buyers buy alternative offerings that serve the same function. 3rd tier: “Unexplored” noncustomers who are in markets distant from yours. People don’t consume even the alternatives to your offerings. Go for the Biggest Catchment There is no hard-and-fast rule to suggest which tier of noncustomers you should focus on and when. Because the scale of blue ocean opportunities that a specific tier of noncustomers can unlock varies across time and industries, you should focus on the tier that represents the biggest catchment at the time. But you should also explore whether there are overlapping commonalities across all three tiers of noncustomers. In that way, you can expand the scope of latent demand you can unleash. When that is the case, you should not focus on a specific tier but instead should look across tiers. The rule here is to go for the largest catchment. Challenge existing customers and existing strategic orientation, that is, competition. If there are no opportunities then concentrate on existing customers but be aware that a competitor could create a blue ocean, attracting some of your existing customers. 4. Get the Strategic Sequence Right The next challenge is to build a robust business model to ensure that you make a healthy profit on your blue ocean idea. This brings us to the fourth principle of the blue ocean strategy: get the strategic sequence right. This chapter discusses the strategic sequence of fleshing out and validating blue ocean ideas to ensure their commercial viability. 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. From Utility, Price, and Cost to Adoption Even an unbeatable business model may not be enough to guarantee the commercial success of a blue ocean idea. Almost by definition, it threatens the status quo, and for that reason it may provoke fear and resistance among a company’s three main stakeholders: its employees, its business partners, and the general public. Before plowing forward and investing in the new idea, the company must first overcome such fears by educating the fearful. Testing for Exceptional Utility The need to assess the buyer utility of your offering may seem self-evident. Yet many companies fail to deliver exceptional value because they are obsessed by the novelty of their product or service, especially if new technology plays a part in it. Consider Philips’ CD-i, an engineering marvel that failed to offer people a compelling reason to buy it. The player was promoted as the “Imagination Machine” because of its diverse functions. CD-i was a video machine, music system, game player, and teaching tool all wrapped into one. Yet it did so many different tasks that people could not understand how to use it. In addition, it lacked attractive software titles. So even though the CD-i theoretically could do almost anything, in reality it could do very little. Customers lacked a compelling reason to use it, and sales never took off. The buyer utility map helps managers look at this issue from the right perspective (see figure 6-2). It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. This map allows managers to identify the full range of utility spaces that a product or service can potentially fill. Let’s look at the map’s dimensions in detail. A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. Purchasing, for example, may include the experience of browsing eBay as well as the aisles of The Home Depot. At each stage, managers can ask a set of questions to gauge the quality of buyers’ experience, as described in figure 6-3. Cutting across the stages of the buyer’s experience are what we call utility levers: the ways in which companies can unlock exceptional utility for buyers. Most of the levers are obvious. Simplicity, fun and image, and environmental friendliness need little explanation. Nor does the idea that a product might reduce a customer’s financial, physical, or credibility risks. And a product or service offers convenience simply by being easy to obtain, use, or dispose of. The most commonly used lever is that of customer productivity, in which an offering helps a customer do things faster or better. To test for exceptional utility, companies should check whether their offering has removed the greatest blocks to utility across the entire buyer experience cycle for customers and noncustomers. The greatest blocks to utility often represent the greatest and most pressing opportunities to unlock exceptional value. Figure 6-4 shows how a company can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six spaces of the buyer utility map, you can clearly see how, and whether, the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers. If your offering falls on the same space or spaces as those of other players, chances are it is not a blue ocean offering. The Profit Model of Blue Ocean Strategy Figure 6-6 shows how value innovation typically maximizes profit by using the foregoing three levers (exceptional utility, strategic pricing, and target costing). As the figure depicts, a company begins with its strategic price, from which it deducts its target profit margin to arrive at its target cost. To hit the cost target that supports that profit, companies have two key levers: One is streamlining and cost innovations, and the other is partnering. When the target cost cannot be met despite all efforts to build a low-cost business model, the company should turn to the third lever, pricing innovation, to profitably meet the strategic price. Of course, even when the target cost can be met, pricing innovation still can be pursued. When a company’s offering successfully addresses the profit side of the business model, the company is ready to advance to the final step in the sequence of blue ocean strategy. A business model built in the sequence of exceptional utility, strategic pricing, and target costing produces value innovation. Executing Blue Ocean Strategy (Principles 5 and 6) Tipping Point Leadership (TPL) in Action Tipping point leadership allows you to overcome these four hurdles fast and at low cost while winning employees’ backing in executing a break from the status quo (from convergence to divergence in value). It focuses on transforming the extremes: the people, acts, and activities that exercise a disproportionate influence on performance. Consider the New York City Police Department (NYPD), which executed a blue ocean strategy in the 1990s in the public sector. When Bill Bratton was appointed police commissioner of New York City in February 1994, the odds were stacked against him to an extent few executives ever face. In the early 1990s, New York City was veering toward anarchy. Murders were at an all-time high. Muggings, Mafia hits, vigilantes, and armed robberies filled the daily headlines. New Yorkers were under siege. But Bratton’s budget was frozen. Indeed, after three decades of mounting crime in New York City, many social scientists had concluded that it was impervious to police intervention. The citizens of New York City were crying out. A front-page headline in the New York Post had screamed: “Dave do something!”—a direct call to then mayor David Dinkins to get crime down fast. With miserable pay, dangerous working conditions, long hours, and little hope of advancement in a tenure promotion system, morale among the NYPD’s thirty-six thousand officers was at rock bottom—not to mention the debilitating effects of budget cuts, dilapidated equipment, and corruption. In business terms, the NYPD was a cash-strapped organization with thirty-six thousand employees wedded to the status quo, unmotivated, and underpaid; a disgruntled customer base—New York City’s citizens; and rapidly declining performance as measured by the increase in crime, fear, and disorder. Entrenched turf wars and politics topped off the cake. In short, leading the NYPD to execute a shift in strategy was a managerial nightmare far beyond the imaginations of most executives. The competition—the criminals—was strong and rising. Yet in less than two years and without an increase in his budget, Bratton turned New York City into the safest large city in the United States. He broke out of the red ocean with a blue ocean policing strategy that revolutionized U.S. policing as it was then known. Between 1994 and 1996, the organization won as “profits” jumped: Felony crime fell 39 percent, murders 50 percent, and theft 35 percent. “Customers” won: Gallup polls reported that public confidence in the NYPD leaped from 37 percent to 73 percent. And employees won: Internal surveys showed job satisfaction in the NYPD reaching an all-time high. As one patrolman put it, “We would have marched to hell and back for that guy.” Perhaps most impressively, the changes have outlasted its leader, implying a fundamental shift in the organizational culture and strategy of the NYPD. Even after Bratton’s departure in 1996, crime rates have continued to fall. Few corporate leaders face organizational hurdles as steep as Bratton did in executing a break from the status quo. And still fewer are able to orchestrate the type of performance leap that Bratton achieved under any organizational conditions, let alone those as stringent as he encountered. Even Jack Welch needed some ten years and tens of millions of dollars of restructuring and training to turn GE into a powerhouse. Moreover, defying conventional wisdom, Bratton achieved these breakthrough results in record time with scarce resources while lifting employee morale, creating a win-win for all involved. Nor was this Bratton’s first strategic reversal. It was his fifth, with each of the others also achieved despite his facing all four hurdles that managers consistently claim limit their ability to execute blue ocean strategy: the cognitive hurdle that blinds employees from seeing that radical change is necessary; the resource hurdle that is endemic in firms; the motivational hurdle that discourages and demoralizes staff; and the political hurdle of internal and external resistance to change (see figure 7-1). 5. Overcome Key Organizational Hurdles Once a company has developed a blue ocean strategy with a profitable business model, it must execute it. The challenge of execution exists, of course, for any strategy. Companies, like individuals, often have a tough time translating ‘Thought’ into action whether in red or blue oceans. But compared with red ocean strategy, blue ocean strategy represents a significant departure from the status quo. It hinges on a shift from convergence to divergence in value curves at lower costs. That raises the execution bar. Managers have assured us that the challenge is steep. They face four hurdles. One is cognitive: waking employees up to the need for a strategic shift. Red oceans may not be the paths to future profitable growth, but they feel comfortable to people and may have even served an organization well until now, so why rock the boat? The second hurdle is limited resources. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it. But resources were being cut, and not raised, in many of the organizations we studied. Third is motivation. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo? That will take years, and managers don’t have that kind of time. The final hurdle is politics. As one manager put it, “In our organization you get shot down before you stand up.” Although all companies face different degrees of these hurdles, and many may face only some subset of the four, knowing how to triumph over them is key to attenuating organizational risk. This brings us to the fifth principle of blue ocean strategy: Overcome key organizational hurdles to make blue ocean strategy happen in action. To achieve this effectively, however, companies must abandon perceived wisdom on effecting change. Conventional wisdom asserts that the greater the change, the greater the resources and time you will need to bring about results. Instead, you need to flip conventional wisdom on its head using what we call tipping point leadership. Tipping point leadership allows you to overcome these four hurdles fast and at low cost while winning employees’ backing in executing a break from the status quo. The Pivotal Lever: Disproportionate Influence Factors Tipping point leadership traces its roots to the field of epidemiology and the theory of tipping points. It 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 toward an idea. Key to unlocking an epidemic movement is concentration, not diffusion. Tipping point leadership builds on the rarely exploited corporate reality that in every organization, there are people, acts, and activities that exercise a disproportionate influence on performance. Hence, contrary to conventional wisdom, mounting a massive challenge is not about putting forth an equally massive response where performance gains are achieved by proportional investments in time and resources. Rather, it is about conserving resources and cutting time by focusing on identifying and then leveraging the factors of disproportionate influence in an organization. The key questions answered by tipping point leaders are as follows: What factors or acts exercise a disproportionately positive influence on breaking the status quo? On getting the maximum bang out of each buck of resources? On motivating key players to aggressively move forward with change? And on knocking down political roadblocks that often trip up even the best strategies? By singlemindedly focusing on points of disproportionate influence, tipping point leaders can topple the four hurdles that limit execution of blue ocean strategy. They can do this fast and at low cost. Let us consider how you can leverage disproportionate influence factors to tip all four hurdles to move from thought to action in the execution of blue ocean strategy. Break Through the Cognitive Hurdle In many turnarounds and corporate transformations, the hardest battle is simply to make people aware of the need for a strategic shift and to agree on its causes. Most CEOs will try to make the case for change simply by pointing to the numbers and insisting that the company set and achieve better results: “There are only two performance alternatives: to make the performance targets or to beat them.” But as we all know, figures can be manipulated. Insisting on stretch goals encourages abuse in the budgetary process. This, in turn, creates hostility and suspicion between the various parts of an organization. Even when the numbers are not manipulated, they can mislead. Salespeople on commission, for example, are seldom sensitive to the costs of the sales they produce. What’s more, messages communicated through numbers seldom stick with people. The case for change feels abstract and removed from the sphere of the line managers, who are the very people the CEO needs to win over. Those whose units are doing well feel that the criticism is not directed at them; the problem is top management’s. Meanwhile, managers of poorly performing units feel that they are being put on notice, and people who are worried about personal job security are more likely to scan the job market than to try to solve the company’s problems. Tipping point leadership does not rely on numbers to break through the organization’s cognitive hurdle. To tip the cognitive hurdle fast, tipping point leaders such as Bratton zoom in on the act of disproportionate influence: making people see and experience harsh reality firsthand. Research in neuroscience and cognitive science shows that people remember and respond most effectively to what they see and experience: “Seeing is believing.” In the realm of experience, positive stimuli reinforce behavior, whereas negative stimuli change attitudes and behavior. Simply put, if a child puts a finger in icing and tastes it, the better it tastes the more the child will taste it repetitively. No parental advice is needed to encourage that behavior. Conversely, after a child puts a finger on a burning stove, he or she will never do it again. After a negative experience, children will change their behavior of their own accord; again, no parental pestering is required. On the other hand, experiences that don’t involve touching, seeing, or feeling actual results, such as being presented with an abstract sheet of numbers, are shown to be non-impactful and easily forgotten. Tipping point leadership builds on this insight to inspire a fast change in mindset that is internally driven of people’s own accord. Instead of relying on numbers to tip the cognitive hurdle, they make people experience the need for change in two ways. Ride the “Electric Sewer” To break the status quo, employees must come face-to-face with the worst operational problems. Don’t let top brass, middle brass, or any brass hypothesize about reality. Numbers are disputable and uninspiring, but coming face-to-face with poor performance is shocking and inescapable, but actionable. This direct experience exercises a disproportionate influence on tipping people’s cognitive hurdle fast. Consider this example. In the 1990s the New York subway system reeked of fear, so much so that it earned the epithet “electric sewer.” Revenues were tumbling fast as citizens boycotted the system. But members of the New York City Transit Police department were in denial. Why? Only 3 percent of the city’s major crimes happened on the subway. So no matter how much the public cried out, their cries fell on deaf ears. There was no perceived need to rethink police strategies. Then Bratton was appointed chief, and in a matter of weeks he orchestrated a complete break from the status quo in the mindset of the city’s police. How? Not by force, nor by arguing for numbers, but by making top brass and middle brass—starting with himself—ride the electric sewer day and night. Until Bratton came along, that had not been done. Although the statistics may have told the police that the subway was safe, what they now saw was what every New Yorker faced every day: a subway system on the verge of anarchy. Gangs of youths patrolled the cars, people jumped turnstiles, and the riders faced graffiti, aggressive begging, and winos sprawled over benches. The police could no longer evade the ugly truth. No one could argue that current police strategies didn’t require a substantial departure from the status quo—and fast. Showing the worst reality to your superiors can also shift their mindset fast. A similar approach works to help sensitize superiors to a leader’s needs fast. Yet few leaders exploit the power of this rapid wake-up call. Rather, they do the opposite. They try to garner support based on a numbers case that lacks urgency and emotional impetus. Or they try to put forth the most exemplary case of their operational excellence to garner support. Although these alternatives may work, neither leads to tipping superiors’ cognitive hurdle as fast and stunningly as showing the worst. When Bratton, for example, was running the police division of the Massachusetts Bay Transportation Authority (MBTA), the MBTA board decided to purchase small squad cars that would be cheaper to buy and to run. That went against Bratton’s new policing strategy. Instead of fighting the decision, however, or arguing for a larger budget—something that would have taken months to reevaluate and probably would have been rejected in the end—Bratton invited the MBTA’s general manager for a tour of his unit to see the district. To let the general manager see the horror he was trying to rectify, Bratton picked him up in a small car just like the ones that were being ordered. He jammed the seats up front to let the manager feel how little legroom a six-foot cop would get, and then Bratton drove over every pothole he could. Bratton also put on his belt, cuffs, and gun for the trip so that the manager would see how little space there was for the tools of the police officer’s trade. After two hours, the general manager wanted out. He told Bratton he didn’t know how Bratton could stand being in such a cramped car for so long on his own, never mind having a criminal in the back seat. Bratton got the larger cars his new strategy demanded. Meet with Disgruntled Customers To tip the cognitive hurdle, not only must you get your managers out of the office to see operational horror, but also you must get them to listen to their most disgruntled customers firsthand. Don’t rely on market surveys. To what extent does your top team actively observe the market firsthand and meet with your most disgruntled customers to hear their concerns? Do you ever wonder why sales don’t match your confidence in your product? Simply put, there is no substitute for meeting and listening to dissatisfied customers directly. In the late 1970s, Boston’s Police District 4, which housed the Symphony Hall, Christian Science Mother Church, and other cultural institutions, was experiencing a serious surge in crime. The public was increasingly intimidated; residents were selling their homes and leaving, thereby pushing the community into a downward spiral. But even though the citizens were leaving the area in droves, the police force under Bratton’s direction felt they were doing a fine job. The performance indicators they historically used to benchmark themselves against other police departments were tip-top: 911 response times were down, and felony crime arrests were up. To solve the paradox Bratton arranged a series of town hall meetings between his officers and the neighborhood residents. It didn’t take long to find the gap in perceptions. Although the police officers took great pride in short response times and their record in solving major crimes, these efforts went unnoticed and unappreciated by citizens; few felt endangered by large-scale crimes. What they felt victimized by and harassed by were the constant minor irritants: winos, panhandlers, prostitutes, and graffiti. The town meetings led to a complete overhaul of police priorities to focus on the blue ocean strategy of “broken windows.”5 Crime went down, and the neighborhood felt safe again. When you want to wake up your organization to the need for a strategic shift and a break from the status quo, do you make your case with numbers? Or do you get your managers, employees, and superiors (and yourself) face-to-face with your worst operational problems? Do you get your managers to meet the market and listen to disenchanted customers holler? Or do you outsource your eyes and send out market research questionnaires? Jump the Resource Hurdle After people in an organization accept the need for a strategic shift and more or less agree on the contours of the new strategy, most leaders are faced with the stark reality of limited resources. Do they have the money to spend on the necessary changes? At this point, most reformist CEOs do one of two things. Either they trim their ambitions and demoralize their work force all over again, or they fight for more resources from their bankers and shareholders, a process that can take time and divert attention from the underlying problems. That’s not to say that this approach is not necessary or worthwhile, but acquiring more resources is often a long, politically charged process. How do you get an organization to execute a strategic shift with fewer resources? Instead of focusing on getting more resources, tipping point leaders concentrate on multiplying the value of the resources they have. When it comes to scarce resources, there are three factors of disproportionate influence that executives can leverage to dramatically free resources, on the one hand, and multiply the value of resources, on the other. These are hot spots, cold spots, and horse trading. Hot spots are activities that have low resource input but high potential performance gains. In contrast, cold spots are activities that have high resource input but low performance impact. In every organization, hot spots and cold spots typically abound. Horse trading involves trading your unit’s excess resources in one area for another unit’s excess resources to fill remaining resource gaps. By learning to use their current resources right, companies often find they can tip the resource hurdle outright. What actions consume your greatest resources but have scant performance impact? Conversely, what activities have the greatest performance impact but are resource starved? When the questions are framed in this way, organizations rapidly gain insight into freeing up low-return resources and redirecting them to high-impact areas. In this way, both lower costs and higher value are simultaneously pursued and achieved. Redistribute Resources to Your Hot Spots At the New York Transit Police, Bratton’s predecessors argued that to make the city’s subways safe they had to have an officer ride every subway line and patrol every entrance and exit. To increase profits (lower crime) would mean increasing costs (police officers) in multiples that were not possible given the budget. The underlying logic was that increments in performance could be achieved only with proportional increments in resources—the same inherent logic guiding most companies’ view of performance gains. Bratton, however, achieved the sharpest drop in subway crime, fear, and disorder in Transit’s history, not with more police officers but with police officers targeted at hot spots. His analysis revealed that although the subway system was a maze of lines and entrances and exits, the vast majority of crimes occurred at only a few stations and on a few lines. He also found that these hot spots were starved for police attention even though they exercised a disproportionate impact on crime performance, whereas lines and stations that almost never reported criminal activity were staffed equally. The solution was a complete refocusing of cops at subway hot spots to overwhelm the criminal element. And crime came tumbling down while the size of the police force remained constant. Similarly, before Bratton’s arrival at the NYPD the narcotics unit worked nine-to-five weekday-only shifts and made up less than 5 percent of the department’s human resources. To search out resource hot spots, in one of his initial meetings with the NYPD’s chiefs Bratton’s deputy commissioner of crime strategy, Jack Maple, asked people around the table for their estimates of the percentage of crimes attributable to narcotics usage. Most said 50 percent, others 70 percent; the lowest estimate was 30 percent. On that basis, as Maple pointed out, it was hard to argue that a narcotics unit consisting of less than 5 percent of the NYPD force was not grossly understaffed. What’s more, it turned out that the narcotics squad largely worked Monday to Friday, even though most drugs were sold over the weekend, when drug-related crimes persistently occurred. Why? That was the way it had always been; it was the unquestioned modus operandi. When these facts were presented and the hot spot identified, Bratton’s case for a major reallocation of staff and resources within the NYPD was quickly accepted. Accordingly, Bratton reallocated staff and resources on the hot spot, and drug crime plummeted. Where did he get the resources to do this? He simultaneously assessed his organization’s cold spots. Redirect Resources from Your Cold Spots Leaders need to free up resources by searching out cold spots. Again in the subway, Bratton found that one of the biggest cold spots was processing criminals in court. On average, it would take an officer sixteen hours to take someone downtown to process even the pettiest of crimes. This was time officers were not patrolling the subway and adding value. Bratton changed all that. Instead of bringing criminals to the court, he brought processing centers to the criminals by using “bust buses”—roving old buses retrofitted into miniature police stations that were parked outside subway stations. Now instead of dragging a suspect down to the courthouse across town, a police officer needed only escort the suspect up to street level to the bus. This cut processing time from sixteen hours to just one, freeing more officers to patrol the subway and catch criminals. Engage in Horse Trading In addition to internally refocusing the resources a unit already controls, tipping point leaders skillfully trade resources they don’t need for those of others that they do need. Consider again the case of Bratton. The chiefs of public sector organizations know that the size of their budgets and the number of people they control are often hotly debated because public sector resources are notoriously limited. This makes chiefs of public sector organizations unwilling to advertise excess resources, let alone release them for use by other parts of the larger organization, because that would risk a loss of control over those resources. One result is that over time, some organizations become well endowed with resources they don’t need even while they are short of ones they do need. On taking over as chief of the New York Transit Police in 1990, Bratton’s general counsel and policy adviser, Dean Esserman (now police chief of Providence, Rhode Island), played a key horse trading role. Esserman discovered that the Transit unit, which was starved for office space, had been running a fleet of unmarked cars in excess of its needs. The New York Division of Parole, on the other hand, was short of cars but had excess office space. Esserman and Bratton offered the obvious trade, which was gratefully accepted by the parole officials. For their part, Transit unit officers were delighted to get the first floor of a prime downtown building. The deal stoked Bratton’s credibility within the organization, something that later made it easier for him to introduce more fundamental changes. At the same time, it marked him to his political bosses as a man who could solve problems. Jump the Motivational Hurdle To reach your organization’s tipping point and execute blue ocean strategy, you must alert employees to the need for a strategic shift and identify how it can be achieved with limited resources. For a new strategy 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. How can you motivate the mass of employees fast and at low cost? When most business leaders want to break from the status quo and transform their organizations, they issue grand strategic visions and turn to massive top-down mobilization initiatives. They act on the assumption that to create massive reactions, proportionate massive actions are required. But this is often a cumbersome, expensive, and time-consuming process, given the wide variety of motivational needs in most large companies. And overarching strategic visions often inspire lip service instead of the intended action. It would be easier to turn an aircraft carrier around in a bathtub. Or is there another way? Instead of diffusing change efforts widely, tipping point leaders follow a reverse course and seek massive concentration. They focus on three factors of disproportionate influence in motivating employees, what we call kingpins, fishbowl management, and atomization. Zoom in on Kingpins For strategic change to have real impact, employees at every level must move en masse. To trigger an epidemic movement of positive energy, however, you should not spread your efforts thin. Rather, you should concentrate your efforts on kingpins, the key influencers in the organization. These are people inside the organization who are natural leaders, who are well respected and persuasive, or who have an ability to unlock or block access to key resources. As with kingpins in bowling, when you hit them straight on, all the other pins come toppling down. This frees an organization from tackling everyone, and yet in the end everyone is touched and changed. And because in most organizations there are a relatively small number of key influencers, who tend to share common problems and concerns, it is relatively easy for the CEO to identify and motivate them. At the NYPD, for example, Bratton zoomed in on the seventy-six precinct heads as his key influencers and kingpins. Why? Each precinct head directly controlled two hundred to four hundred police officers. Hence, galvanizing these seventy-six heads would have the natural ripple effect of touching and motivating the thirty-sixthousand-deep police force to embrace the new policing strategy. Place Kingpins in a Fishbowl At the heart of motivating the kingpins in a sustained and meaningful way is to shine a spotlight on their actions in a repeated and highly visible way. This is what we refer to as fishbowl management, where kingpins’ actions and inaction are made as transparent to others as are fish in a bowl of water. By placing kingpins in a fishbowl in this way you greatly raise the stakes of inaction. Light is shined on who is lagging behind, and a fair stage is set for rapid change agents to shine. For fishbowl management to work it must be based on transparency, inclusion, and fair process. At the NYPD, Bratton’s fishbowl was a biweekly crime strategy review meeting known as Compstat that brought together the city’s top brass to review the performance of all the seventy-six precinct commanders in executing its new strategy. Attendance was mandatory for all precinct commanders; three-star chiefs, deputy commissioners, and borough chiefs were also required to attend. Bratton himself was there as often as possible. As each precinct commander was questioned on decreases and increases in crime performance in front of peers and superiors based on the organization’s new strategic directives, enormous computer-generated overhead maps and charts were shown, visually illustrating in inescapable terms the commander’s performance in executing the new strategy. The commander was responsible for explaining the maps, describing how his or her officers were addressing the issues, and outlining why performance was going up or down. These inclusive meetings instantly made results and responsibilities clear and transparent for everyone. Atomize to Get the Organization to Change Itself The last disproportionate influence factor is atomization. Atomization relates to the framing of the strategic challenge—one of the most subtle and sensitive tasks of the tipping point leader. Unless people believe that the strategic challenge is attainable, the change is not likely to succeed. On the face of it, Bratton’s goal in New York City was so ambitious as to be scarcely believable. Who could believe that anything an individual could do would turn such a huge city from being the most dangerous place in the country into the safest? And who would want to invest time and energy in chasing an impossible dream? To make the challenge attainable, Bratton broke it into bite-size atoms that officers at different levels could relate to. As he put it, the challenge facing the NYPD was to make the streets of New York City safe “block by block, precinct by precinct, and borough by borough.” Thus framed, the challenge was both all-encompassing and doable. For officers on the street, the challenge was to make their beat or block safe—no more. For the precinct commanders, the challenge was to make their precinct safe—no more. Borough heads also had a concrete goal within their capabilities: making their boroughs safe—no more. No one could say that what was being asked of them was too tough. Nor could they claim that achieving it was largely out of their hands—“It’s beyond me.” In this way, responsibility for executing Bratton’s blue ocean strategy shifted from him to each of the NYPD’s thirty-six thousand officers. Do you indiscriminately try to motivate the masses? Or do you focus on key influencers, your kingpins? Do you put the spotlight on and manage kingpins in a fishbowl based on fair process? Or do you just demand high performance and cross your fingers until the next quarter numbers come out? Do you issue grand strategic visions? Or do you atomize the issue to make it actionable to all levels? Knock Over the Political Hurdle Youth and skill will win out every time over age and treachery. True or false? False. Even the best and brightest are regularly eaten alive by politics, intrigue, and plotting. Organizational politics is an inescapable reality of corporate and public life. Even if an organization has reached the tipping point of execution, there exist powerful vested interests that will resist the impending changes. (Also see our discussion on adoption hurdles in chapter 6.) The more likely change becomes, the more fiercely and vocally these negative influencers—both internal and external—will fight to protect their positions, and their resistance can seriously damage and even derail the strategy execution process. To overcome these political forces, tipping point leaders focus on three disproportionate influence factors: leveraging angels, silencing devils, and getting a consigliere on their top management team. Angels are those who have the most to gain from the strategic shift. Devils are those who have the most to lose from it. And a consigliere is a politically adept but highly respected insider who knows in advance all the land mines, including who will fight you and who will support you. Secure a Consigliere on Your Top Management Team Most leaders concentrate on building a top management team having strong functional skills such as marketing, operations, and finance—and that is important. Tipping point leaders, however, also engage one role few other executives think to include: a consigliere. To that end, Bratton, for example, always ensured that he had a respected senior insider on his top team who knew the land mines he would face in implementing the new policing strategy. At NYPD, Bratton appointed John Timoney (now the police commissioner of Miami) as his number two. Timoney was a cop’s cop, respected and feared for his dedication to the NYPD and for the more than sixty decorations and combat crosses he had received. Twenty years in the ranks had taught him not only who all the key players were but also how they played the political game. One of the first tasks Timoney did was to report to Bratton on the likely attitudes of the top staff to the NYPD’s new policing strategy, identifying those who would fight or silently sabotage the new initiative. This led to a dramatic changing of the guard. Leverage Your Angels and Silence Your Devils To knock down the political hurdles, you should also ask yourself two sets of questions: Who are my devils? Who will fight me? Who will lose the most by the future blue ocean strategy?  Who are my angels? Who will naturally align with me? Who will gain the most by the strategic shift? Don’t fight alone. Get the higher and wider voice to fight with you. Identify your detractors and supporters—forget the middle—and strive to create a win-win outcome for both. But move quickly. Isolate your detractors by building a broader coalition with your angels before a battle begins. In this way, you will discourage the war before it has a chance to start or gain steam. One of the most serious threats to Bratton’s new policing strategy came from New York City’s courts. Believing that Bratton’s new policing strategy of focusing on quality-of-life crimes would overwhelm the system with small crime cases such as prostitution and public drunkenness, the courts opposed the strategic shift. To overcome this opposition, Bratton clearly illustrated to his supporters, including the mayor, district attorneys, and jail managers, that the court system could indeed handle the added quality-of-life crimes and that focusing on them would, in the long term, actually reduce their caseload. The mayor decided to intervene. Then Bratton’s coalition, led by the mayor, went on the offensive in the press with a clear and simple message: If the courts did not pull their weight, the city’s crime rate would not go down. Bratton’s alliance with the mayor’s office and the city’s leading newspaper successfully isolated the courts. They could hardly be seen to publicly oppose an initiative that would not only make New York a more attractive place to live but would also ultimately reduce the number of cases brought before them. With the mayor speaking aggressively in the press of the need to pursue quality-of-life crimes and the city’s most respected—and liberal—newspaper giving credence to the new police strategy, the costs of fighting Bratton’s strategy were daunting. Bratton had won the battle: The courts would comply. He also won the war: Crime rates did indeed come down. Key to winning over your detractors or devils is knowing all their likely angles of attack and building up counterarguments backed by irrefutable facts and reason. For example, when the NYPD’s precinct commanders were first requested to compile detailed crime data and maps, they balked at the idea, arguing that it would take too much time. Anticipating this reaction, Bratton had already done a test run of the operation to see how long it would take: no more than eighteen minutes a day, which worked out, as he told the commanders, to less than 1 percent of their average workload. Armed with irrefutable information, he was able to tip the political hurdle and win the battle before it even began. Do you have a consigliere—a highly respected insider—in your top management team, or only a CFO and other functional head heads? Do you know who will fight you and who will align with the new strategy? Have you built coalitions with natural allies to encircle dissidents? Do you have your consigliere remove the biggest land mines so that you don’t have to focus on changing those who cannot and will not change? 6. Build Execution into Strategy Since company means everyone from top to bottom, to great and consistent execution needs (a) everyone must support and be aligned with strategy, and (b) the involvement of frontline employees in creating strategy because they execute strategy day in and day out. Companies must create a culture of trust and commitment. This motivates people to execute the agreed strategy. To build this commitment, build execution into strategy from the start. Fair process is a key variable that distinguishes BO moves from those that failed. Poor Process Can Ruin Strategy Execution Our research shows that fair process is a key variable that distinguishes successful blue ocean strategic moves from those that failed. The presence or absence of fair process can make or break a company’s best execution efforts. Strategy execution for blue oceans requires significant change and a well thought out process contributed by every level of the company. When the process is poor, decisions, if made at all, are likely to be poor as well. Countless mistakes can be made, the issues can be misidentified or dealt with out of order, the process can be too complex with too many steps, or so short and simple that important facts or opinions are not considered. For example, water-based liquid coolants for metalworking industries The Power of Fair Process But the direct theoretical origin of fair process traces back to two social scientists: John W. Thibaut and Laurens Walker. In the mid-1970s, they combined their interest in the psychology of justice with the study of process, creating the term procedural justice. Focusing their attention on legal settings, they sought to understand what makes people trust a legal system so that they will comply with laws without being coerced. Their research established that people care as much about the justice of the process through which an outcome is produced as they do about the outcome itself. People’s satisfaction with the outcome and their commitment to it rose when procedural justice was exercised. 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 playing field exists. This inspires them to cooperate voluntarily in executing the resulting strategic decisions. Voluntary cooperation is more than mechanical execution, where people do only what it takes to get by. It involves going beyond the call of duty, wherein individuals exert energy and initiative to the best of their abilities—even subordinating personal self-interest—to execute resulting strategies.3 Figure 8-1 presents the causal flow we observed among fair process, attitudes, and behavior. Use the Fair Process Fair process aligns people’s minds and hearts with the new strategy by building a culture of trust, commitment, and voluntary execution, as well as support for the leader Three E Principles of Fair Process Engagement o Involving individuals in the strategic decisions that affect them o Ask for input o Allow employees to question the ideas or assumptions of others o Communicates management’s respect for individuals and their ideas o Creates better strategic decisions from management and greater commitment from everyone involved Explanation o Everyone involved should understand why the final strategic decisions are made o People are confident that managers have considered all opinions and made decisions based on the overall interest of the company o Employees can trust managers intentions o Managers can receive feedback from employees allowing for enhanced learning of the decision Clarity of expectation o Once the strategy has been set into action, managers must clearly communicate the new rules and procedures  o Employees should know what standards they will be judged on and what penalties they will receive for failure o Are the new goals, targets, and responsibilities for our employees clearly understood? How Fair Process Affects Attitudes and Behaviors The Tale of Two Plants Three E’s of fair process in a real life example: Elco Inc. elevator company needs to implement new manufacturing system to offer buyers a leap in value while cutting costs to stimulate demand and break from the competition. The basic Principles were (a) begin implementing change at ‘Chester plant’, then roll over to ‘High Park plant’, (b) ‘Chester’ had ideal employees and no union, unlike ‘High Park’, and (c) expected Chester’s success to provide momentum for change at High Park. However the opposite occurred. The introduction of new process quickly led to disorder and rebellion. Cost and quality performance were in a free fall. Management at Chester violated the three E’s, unlike High Park. High Park is more successful than Chester. People felt as if they had been treated fairly, and so they willingly participated in the rapid execution of the new process. Chester Plant vs. High Park plant Chester High Park Failed to Engage Employees Engaged Employees Consulting firm ordered not to disturb Introduced consultants to employees, employees. held company meetings Failed to Explain Explained why new process was being Employees were not explained why new implemented system was being implemented. Clearly stated employee Expectations in new Failed to clarify Expectations system Did not elaborate on how new system worked, and what employees jobs were. Why Does Fair Process Matter? It all comes down to intellectual and emotional recognition. Intellectually Individuals seek recognition that their ideas are sought after and given thoughtful reflection. Emotionally Individuals seek recognition of their value.