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Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne

Blue Ocean Strategy

RATING: 8/10…READ: October 11, 2011

A systematic way to analyze and disrupt markets, creating uncontested market space aka a Blue Ocean. Somewhat academic in language and has a “corporate” feel, but the strategy as a whole makes this a noteworthy read.

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Notes:

Research confirms that there are no permanently excellent companies, just as there are no permanently excellent industries.

In less than twenty years Cirque du Soleil has achieved a level of revenues that took Ringling Bros. and Barnum & Bailey—the global champion of the circus industry—more than one hundred years to attain.

–What makes this rapid growth all the more remarkable is that it was not achieved in an attractive industry but rather in a declining industry in which traditional strategic analysis pointed to limited potential for growth.

The only way to beat the competition is to stop trying to beat the competition.

Imagine a market universe composed of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space.

Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.

To focus on the red ocean is therefore to accept the key constraining factors of war—limited terrain and the need to beat an enemy to succeed—and to deny the distinctive strength of the business world: the capacity to create new market space that is uncontested.

Neither the company nor the industry is the best unit of analysis in studying the roots of profitable growth.

The strategic move, and not the company or the industry, is the right unit of analysis for explaining the creation of blue oceans and sustained high performance. A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.

Our study shows that what separates winners from losers in creating blue oceans is neither bleeding-edge technology nor “timing for market entry.” Sometimes these exist; more often, however, they do not. Value innovation occurs only when companies align innovation with utility, price, and cost positions. If they fail to anchor innovation with value in this way, technology innovators and market pioneers often lay the eggs that other companies hatch.

Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and 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.

Effective blue ocean strategy should be about risk minimization and not risk taking.

Our research found that customers can scarcely imagine how to create uncontested market space. Their insight also tends toward the familiar “offer me more for less.” And what customers typically want “more” of are those product and service features that the industry currently offers.

To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to noncustomers of the industry.

THE FOUR ACTIONS FRAMEWORK:

Which of the factors that the industry takes for granted should be eliminated?

Which factors should be reduced well below the industry’s standard?

Which factors should be raised well above the industry’s standard?

Which factors should be created that the industry has never offered?

Our research has found that rarely do managers systematically set out to eliminate and reduce their investments in factors that an industry competes on.

When a company’s value curve, or its competitors’, meets the three criteria that define a good blue ocean strategy—focus, divergence, and a compelling tagline that speaks to the market—the company is on the right track. These three criteria serve as an initial litmus test of the commercial viability of blue ocean ideas.

THE FIRST PRINCIPLE of blue ocean strategy is to reconstruct market boundaries to break from the competition and create blue oceans.

Red Ocean Mistakes:

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

PATH 1: LOOK ACROSS ALTERNATIVE INDUSTRIES

–Examples: Cirque du Solei , Net Jets

What are the alternative industries to your industry? Why do customers trade across them? By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, you can create a blue ocean of new market space.

PATH 2: LOOK ACROSS STRATEGIC GROUPS WITHIN INDUSTRIES

Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance.

–Examples: Curves, Ralph Lauren, Lexus, Champion (Prefab housing that offers customization)

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.

— 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.

— What is the chain of buyers in your industry? Which buyer group does your industry typically focus on? If you shifted the buyer group of your industry, how could you unlock new value?

Examples: Bloomberg, Novo Nordisk (insulin directly to patients, instead of selling to doctors)

PATH 4: LOOK ACROSS COMPLIMENTARY PRODUCT AND SERVICE OFFERINGS

What is the context in which your product or service is used? What happens before, during, and after? Can you identify the pain points? How can you eliminate these pain points through a complementary product or service offering?

–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.

Examples: Nabi (more expensive buses up front, but less to operate), Dyson (get rid of the bag costs),

++ Industries have trained customers in what to expect. When surveyed, they echo back: more of the same for less.

PATH 5: LOOK ACROSS FUNCTIONAL OR EMOTIONAL APPEAL TO BUYERS

— Swatch, which transformed the functionally driven budget watch industry into an emotionally driven fashion statement.

— Body Shop, which did the reverse, transforming the emotionally driven industry of cosmetics into a functional, no-nonsense cosmetics house.

–QB House: Japan’s no nonsense haircut

–Pfizer: regular drugs to Viagra (lifestyle enhancement)

Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make it functional? If you compete on functionality, what elements can be added to make it emotional?

PATH 6: LOOK ACROSS TIME

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.

–Apple iPod w/ iTunes

–Cisco: High Speed data transfer

THE SECOND PRINCIPLE: Focus on the Big Picture, Not the numbers

Step 1: Visual Awakening –drawing the value curve for the market/business you want to start

Step 2: Visual Exploration—going into the field, interacting with customers, exploring the alternatives to your product offering.

Step 3-4: Refine value curve, adapt final strategy

THE THIRD PRINCIPLE: Reach beyond existing demand

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.

Where is your locus of attention—on capturing a greater share of existing customers, or on converting noncustomers of the industry into new demand? Do you seek out key commonalities in what buyers value, or do you strive to embrace customer differences through finer customization and segmentation? To reach beyond existing demand, think noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.

First-Tier Noncustomers:

— These soon-to-be noncustomers are those who minimally use the current market offerings to get by as they search for something better. Upon finding any better alternative, they will eagerly jump ship. In this sense, they sit on the edge of the market. A market becomes stagnant and develops a growth problem as the number of soon-to-be noncustomers increases. Yet locked within these first-tier noncustomers is an ocean of untapped demand waiting to be released.

— What are the key reasons first-tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to desegment buyers and unleash an ocean of latent untapped demand.

Second-Tier Noncustomers:

— These are refusing noncustomers, people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. Their needs are either dealt with by other means or ignored. Harboring within refusing noncustomers, however, is an ocean of untapped demand waiting to be released.

— What are the key reasons second-tier noncustomers refuse to use the products or services of your industry? Look for the commonalities across their responses. Focus on these, and not on their differences. You will glean insight into how to unleash an ocean of latent untapped demand.

Third-Tier Noncustomers:

— The third tier of noncustomers is the farthest away from an industry’s existing customers. Typically, these unexplored noncustomers have not been targeted or thought of as potential customers by any player in the industry. That’s because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets.

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.