innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Creating Blue Oceans

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Book and the Authors Prof Renee Mauborgne © JOHN ABBOTT Prof Chan Kim © JOHN ABBOTT

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Accolades Over 2 million copies sold Translated into over 41 foreign languages – a world record Taught as the major theory of strategy at leading business schools Gives insights to CEOs, Executives, Heads of State and Prime Ministers

innovation.uccs.edu B ACHELOR OF I NNOVATION ™

innovation.uccs.edu B ACHELOR OF I NNOVATION ™

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ New Market Space Red oceans and blue oceans make up market universe Red oceans: all industries in existence = known market space Blue oceans: all industries not in existence = unknown market space

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Red Oceans vs. Blue Oceans Red oceans Industry boundaries defined and accepted Competitive rules of game known Companies try to outperform rivals; cutthroat competition As market space gets crowded, prospects for profit and growth reduced Products become commodities Red ocean strategy is a market-competing strategy Blue oceans Undefined market space, demand creation, opportunity for highly profitable growth Most are created from within red oceans by expanding existing industry boundaries Rules of game waiting to be set Competition irrelevant Blue ocean strategy is a market-creating strategy

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Rising Imperative of Creating Blue Oceans Supply is exceeding demand in most industries global competition is intensifying Problems: Accelerated commodization of products and services Increasing price wars Shrinking profit margins Red oceans becoming bloodier, need to be concerned with creating blue oceans

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Continuing Creation of Blue Oceans Blue oceans have been around for some time; a feature of business life Industries never stand still, constantly evolving Significant expansion of blue oceans over years So why the focus on red ocean strategy? Corporate strategy influenced by military strategy Need to create new market space that is uncontested

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Impact of Creating Blue Oceans

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ From Company and Industry to Strategic Move Are there lasting visionary companies that continuously outperform the market and create blue oceans? Found success of these model companies was a result of industry sector performance, not companies themselves Strategic move used as unit of analysis (rather than company or industry) Strategic move: the set of managerial actions and decisions involved in making a major market-creating business offering

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Value Innovation: The Cornerstone of Blue Ocean Strategy Creators of blue oceans follow value innovation Value Innovation –Equal emphasis on value and innovation –Defies value-cost trade-off of competition-based strategy –Successful value innovation: Drives down costs while driving up buyers’ value Uses a whole-system approach Follows reconstructionist view

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Red Ocean Vs. Blue Ocean Compete in existing market space Beat the competition Exploit existing demand Make the value-cost trade-off Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value-cost trade-off Align the whole system of a firm’s activities in pursuit of differentiation and low cost

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Formulating and Executing Blue Ocean Strategy Six Principles of Blue Ocean Strategy Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Overcome key organizational hurtles Build execution into strategy The remaining chapters will give you the principles and generalized frameworks to succeed in blue oceans

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Take Aways Red ocean strategy is a market-competing strategy, while blue ocean strategy is a market-creating strategy As red oceans are becoming bloodier, we need to create more blue oceans “The only way to beat the competition is to stop trying to beat the competition!”

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Six Principles of Blue Ocean Strategy Formulation PrinciplesRisk factor each principle attenuates Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Search risk Planning risk Scale risk Business model risk Evaluation principlesRisk factor each principle attenuates Overcome key organizational hurdles Build execution into strategy Organizational risk Management risk This figure highlights the six principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles attenuate.

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Points of view Business often look at the industry from a structuralist (supply) point of view What if we looked at the industry from a reconstructionist (demand) point of view? Market boundaries are not viewed as given, but could be reconstructed to unlock new demand

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Generic Strategies vs. Value Innovation High Low V1V1 C1C1 Cost Quality High Low Quality Cost D LC V1V1 C1C1 Red Ocean StrategyBlue Ocean (VI) Strategy StructuralistReconstructionist

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Example: A highly competitive Industry The American Wine Industry

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ What the industry offers Premium WinesBudget Wines Massive Choice Polarised Strategic Groups

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ American Wine Industry 3 rd largest in world: worth $20 billion Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia Exploding number of new wines – new vineyards in Oregon, Washington, New York Customer base stagnant 31st in the world in per capita consumption!

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ American Wine Industry Top 8 producers had 75% of the market; 1600 had the remaining 25% $ millions spent in marketing - Titanic battles – intense competition Sever price pressure The dominant growth strategy was towards premium wines – more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ What wine customers said … “It is too confusing and complex” Wine descriptions and terminology The shopping experience The lack of clear guidance on what to buy and drink Thus, massively intimidating for ‘noncustomers’ (the large majority of the US population who were not wine drinkers)

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ What are people looking for in a wine?

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Segmentation of Market and Brands Low Involvement High Involvement Easy GoingEnjoyersAspirationalsAppreciatorsConnoisseurs  Glass with friends  Least care choosing a wine  Not wine preferrers  Price is a strong influencer  Everyday enjoyment  To relax/unwind  Stick with limited list of known brands  Choose in-store  Not interested in wine language  Influenced by major brand advertising  Image important  Wine preferrers (sic)  Varietal knowledge  Interested in some wine language  Enjoy trying new wines  Visit wineries / read wine articles  Want to discover wine  Knowledge of wine regions  Frequently buy >$10 wines  Join wine clubs  Don’t stick to known brands  Ideal wine is complex & interesting  Sophisticated drinker  Discerning wine tastes  Don’t decide in store  Have a cellar  Less influenced by specials/ promotions  Actively pursue wine knowledge Brand:Lindemans Rosemount Estate Wolf BlassPenfolds Demographic:M/F: 50/50 Age: M/F: 30/70; Age: M/F: 70/30; Age: Age: 40+

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Strategy Canvas The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on an invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition. High Low PriceUse of enological terminology Above-the-line marketing Aging quality Vineyard prestige and legacy Wine complexity Wine range Budget Wines Premium Wines

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Four Steps of Visualizing 1. Visual Awakening 2. Visual Exploration 3. Visual Strategy Fair 4. Visual Communication Compare your business with your competitors’ by drawing your “as is” canvas See where your strategy needs to change 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 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 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

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ What factors should be eliminated that the industry has taken for granted? Eliminate What factors should be reduced well below the industry standard? Reduce What factors should be created that the industry has never offered? Create What factors should be raised well beyond the industry standard? Raise Four Actions to create a Blue Ocean

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Four Actions Framework + Eliminate/Reduce/Raise/Create Grid The four actions framework offers an technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered. The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on. Eliminate Enological terminology and distinctions Aging qualities Above-the-line marketing Raise Price versus budget wines Retail Store involvement Reduce Wine complexity Wine range Vineyard prestige Create Easy drinking Ease of selection Fun and adventure A New Value Curve Reduce EliminateCreate Raise Which factors should be reduced well below industry standards? Which factors should be created that the industry has never offered? Which factors should be raised well above the industry’s standard? Which of the factors that the industry takes for granted should be eliminated?

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ ERRC Grid yellow tail

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ To Be Canvas Eliminate Reduce Raise Create

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Yellow Tail Only 2 types initially – Chardonnay and Shiraz Fruity, soft on palette, sweet-ish – great for those who had not drunk wine before Same bottle for red and white – low logistics costs Simple vibrant packaging – lower case letters/kangaroo Un-intimidating They were selling “The essence of a great land … Australia” – ie they were not selling the wine Australian clothing for the retail staff – they enthusiastically promoted a wine they could understand.

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Value Innovation of [yellow tail] Utility proposition (customers, distributors and retailers) Creating of a social drink that is accessible to anyone Easy drinking, ease of selection, sense of fun and adventure Limit number of SKUs Price to move at volume Price proposition Targeted at the mass of customers Priced against the alternative (6-pack) Cost structure Elimination of working capital tied up in aging wines Fast product turnover

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Results No 1 imported wine (outsells France and Italy) Fastest growing imported wine in the history of the USA industry New consumers of wine Jug drinkers trade up Premium wine drinkers trade down Industry criticizes them mercilessly at first Now wine press blurb gives it a “best buy” for value; winning wine awards.

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Case of Cirque du Soleil Cirque du Soleil achieved rapid growth in a declining industry with low profit potential Cirque du Soleil created uncontested new market space that made the competition irrelevant If you don’t know them you can see some at

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Example: Cirque du Soleil Instead of simply trying to outpace the competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual sophistication of the theater Because of this, Cirque du Soleil appealed to both circus customers and noncustomers

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Example: Cirque du Soleil Each show, like a theater production, had its own unique theme and storyline This allowed customers to return to the show more frequently They also did away with the traditional high- priced concessions and vendors thereby cutting costs

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Example: Cirque du Soleil Cirque du Soleil effectively combined the best of both the circus and the theater while eliminating everything else This allowed them to achieve both differentiation and low cost

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Eliminate-Reduce-Raise-Create Eliminate Star Performers Animal shows Aisle concession sales Multiple show arenasRaise Unique venues Reduce Fun and humor Thrill and dangerCreate Theme Refined environment Multiple productions Artistic music and dance

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ The Strategy Canvas of Cirque du Soleil hi offering level lo Price Fun & Humor Unique Venue Aisle Concessions Multiple Show Arenas Thrills & Danger Animal Shows Star Performers Theme Refined Viewing Environment Multiple Productions Artistic Music & Dance Cirque du Soleil Reduce Eliminate Raise Create © Kim & Mauborgne 2006 Ringling Brothers Smaller Regional Circus

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Key Takeaways Three tiers of non-customers: 1: buyers who purchase your industry offerings out of necessity; will jump ship if given an opportunity. 2: buyers who purchase alternative offerings that serve the same function 3: people who don’t consume even the alternatives to your offerings Non-customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass of buyers, given target costs. Buyers could be not only end-users, but also other participants in a value chain (e.g. distributors)

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Comparison of approaches Red Ocean StrategyBlue Ocean Strategy

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Exercise 1. List Factors of Competition 1. List Factors of Competition 2. Top 2 or 3 in ERRC Grid Quadrants 2. Top 2 or 3 in ERRC Grid Quadrants Clearly define the group of “non- customer” that you are going after. Clearly define the group of “non- customer” that you are going after.

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Examples

innovation.uccs.edu B ACHELOR OF I NNOVATION ™Exercise 3.Write on Worksheet: E left, C right 4.Draw “As Is” 5.Draw “To Be”

innovation.uccs.edu B ACHELOR OF I NNOVATION ™ Examples