Embracing Blue Ocean strategy framework into a company

What is blue ocean strategy? Blue ocean strategy is a phrase coined by Prof. Chan Kim and Prof. Renee Mauborgne in their book, ‘Blue Ocean Strategy’ published in 2005. The term encompasses three major concept; untapped market, unknown market space and industries that are not in existence today Blue ocean according to Chan Kim and Renee (2005) refers to industries that are not in existence today-untapped market that is waiting to be explored. It is more of a strategy that creates demand by carving its own market niche/space by venturing into untested waters. Chief among its strategy is value innovation. It seeks to create value that is both beneficial to both the company and buyers of their products while those that the market views as less loosing value or will loose value in the future. (Harvard Business Review, 1997)

Cont. Blue ocean strategy seeks to reconstruct market boundaries through the action and belief of industry players by; Rise of new industries e.g. eBay introduced online auction or, New innovation from existing industries e.g. M-pesa introduced mobile money transfer. Blue ocean can be created through; Rise of new industries. This entails a company or industry player starting a new business that has never been done before anyone else in the industry. For example, eBay saw an opportunity to revolutionize the way auctions are done. Instead of limiting the auction to a geographical are, it saw an opportunity of auction transcending boundaries- thus online auction came to be. New innovation from existing industries. An industry may add value to its existing products or core mandate, for example, the Japanese automakers saw an opportunity to create smaller cars with better fuel efficiency. They managed to create a whole new demand from existing industry. M-pesa a mobile money transfer service introduced by Safaricom Ltd a telecoms company revolutionized the way money is sent. It broke down the tradition way of sending money and by so doing added value to its core business by creating demand while building market space.

Cont. It is different from the traditional strategy (red ocean strategy) in which companies/industries that exist today focus on their competitive advantage in a known market with rules of engagement well defined (known market space). The traditional strategy or red ocean is a term used to describe the existing industries that are competing in the same market and for the same demand. Emphasis is placed on efficiency and low cost to have competitive advantage over their rivals. This was advocated by Michael Porters. Companies try to wrestle market share from their rivals by either efficiency to reduce the cost of their products and services or through mergers to create bigger companies. (Andrew Chua, 2008). Industries operating within this strategy have their structural and boundaries set in which they operate. They do not have the capacity to operate outside the set rules of the industry.. (HBR, 2004)

Cont. Blue ocean pursues three important strategies; Costing Value innovation-pursues both differential & low cost simultaneously Demand-creating demand instead of competing for it the strategy aims to create new untapped markets. It does not fight for control and growth of existing demand with other industry players like in the traditional strategy. It creates market for its services. For example Costing-because it attracts customers in large volume, it creates economies of scale which discourages imitators. The large economies of scale translate to low cost in the long run. Their cost goes down as demand for their product is high. For example, the concept introduced by Wal-Mart which it embraced so it achieve economies of scale which enabled it to incur low cost in its business. Other players have found it difficult to imitate this type of model. Other telecoms players have tried to introduce mobile money transfers to compete with M-pesa. They have failed to make an impact because Safaricom established large economies of scale with its high customer numbers which has reduced the cost of its product offering.

Simultaneous pursuit of differential and low cost Figure from Harvard business school 2004 Buyer value cost Blue ocean This shows the strategy of pursuing value innovation with the aim of meeting the customer needs with concurrent low costing. This creates an opportunity to the company to create customer loyalty through their product offerings while at the same time pursuing an operating environment that has low cost benefits. It encourages economies of scale, creates demand and fill up market space not yet occupied.

Either differential or low cost Differential (value) strategy Or Low cost Red ocean A traditional strategy or red ocean where emphasis is on efficiency to reduce cost. Its aim is to create competitive advantage of its product in relation to its rival’s. this strategy seeks to grow a company’s market share by exploiting the existing demand within the boundaries and rules of the market. It is value addition driven as opposed to value innovation.

Differences Traditional strategy (red ocean) Blue ocean strategy Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value/cost trade off The strategy is to pursue differential & low cost Compete in existing market space Beat the competition Exploit existing demand Make value/cost trade off Company’s strategic choice is based on pursuing differential or low cost

Example A study on 108 companies found that of their total investment; 14% went to creating new markets & industries accounting for 38% of total revenue & 61% of total profits. 86% (improvement of services) accounted for 62% of total revenue & 39% of total profit. Through the study, it is noted that investing in new markets or embracing value innovation has the benefit of improving a company’s overall balance sheet. Emphasis should be placed on finding new markets, creating new demand as opposed to exploiting existing demand.

Examples M-pesa service introduced by Safaricom has been able to move £ 12 billion in 5 years with active subscribers of over 15 million. Mumias sugar used its by-product to generate 34 MW of electricity & 26MW is exported to the national grid.

The Four Actions to create Blue Ocean Raise- what factors should be raised well above the industry’s standard? Eliminate-what factors the industry takes for granted should be eliminate? Reduce-what factors should be reduced well below the industry’s standard & Raise- this entails the industry embracing values that sets it apart from the rest. This will create customer loyalty Create-bring innovation that the industry has not encountered before. This is aimed at building your own market niche Reduce-to achieve economies of scale with low cost, pursue an innovation that seeks to exploit opportunities but at a cost lower than the industry’s standard. Eliminate-eliminate business practices and mindsets that tend to focus on pursuing the concept of competitive advantage through efficiency or low cost. Companies should seek to break the boundaries and think outside the box to create new markets and demand through value innovation as opposed to value addition.

Cont. Create-what factors should be created that the industry has never offered?

REFERENCES Chan Kim & Renee Mauborgne, 2005-Blue ocean strategy-Harvard Business Review 76-85 (2004) Chan Kim & Renee Mauborgne-’The strategic logic of high growth-Harvard Business Review 75, Jan-Feb 103-112 (1997) Wall Street Journal guide to management-2009. published by Harper Business. (Alan Murray) Red Ocean strategy-blogged by Alex Chua, October 12 2008.