1. Creating Blue Oceans Hilary Becker, Ph.D. Carleton University
* These slides are based on the work of Kim and Mauborgne in their book Blue Ocean Strategy, Harvard Business Press 2005.

2. Cirque du Soleil Why do blue oceans exist?
Business and markets never stands still
Achieved rapid growth in declining market
Found new market space
Customer focus
Eliminated animal acts
Introduced Theater ideas and storyline
Offer fun and thrill of circus with sophistication of theater.

3. Cirque du Soleil
Cirque du Soleil
Theater
Circus

4. Markets BLUE OCEANS RED OCEANS
All unknown markets or markets not in existence today
Industry boundaries are undefined
Competitive rules unknown and companies look for demand creation
Established markets. All known markets in existence
Industry boundaries are defined
Competitive rules known and companies compete on traditional methods

5. Blue Oceans Created (generally) from expansion of red oceans.
Management ideas, opportunities, SWOT, Environmental scan, R&D, Technology
No Competition – No competitors
Traditional focus of strategic management based on red ocean strategies
analyze underlying economic structure,
determining strategic position/strategy
Benchmarking industry
Convergence to target market

6. Examples in past 30 years Mutual funds Cell phones Biotechnology
Coffee bars (Starbucks)
Home video, VCD, DVD
CD, MP3, IPOD
Minivans
Snowboards/In-line skates
Internet
Bacardi Rum
CNN
Microsoft
Southwest Airlines
Cirque du Soleil
Big Screen TV/LCD/Plasma
Celebrity Clothing/Perfume Lines

7. New Business Launches Launches from Red Oceans Business launch 86% 14%
Revenue Impact
62%
38%
Profit Impact
39%
61%
Launches from Blue Oceans

8. Driving Forces of Blue Ocean
Globalization
Firms looking to expand beyond local borders to gain efficiencies and increase profitability
Decline of trade barriers, niche markets and monopolies
Development of economic free trade zones and clustering (European Union, Caribbean Common Market).
Increasing supply without increasing demand is forcing companies to look for new markets/opportunities
Technology & Telecommunications
Decreased cost, increased efficiency, greater flexibility
Increased communications
Allows foreign companies to effectively manage international operations (Favors creation of IJV)
Improved industrial productivity
Limited competitive advantage for technological advances (shorter time horizon)
Organizational Structure
Flatter, flexible and mobile
Strategic Alliances and JV
Bureaucracy: Persists but at a different level
Focus on Environment
Sustainable Development (Balanced Scorecard)

9. Driving Forces of Blue Ocean
Accounting & Finance
Harmonization of Accounting Principles
Importance of International Monetary Management
Managing Foreign Exchange
Human Resources
Work Teams (multiculturalism)
Flexibility
Increased training and cross-training
Communication
Coordination of Activity
Management
Geocentric: view entire world as one organization
Polycentric: view host country cultures are different and allow operations to be managed more autonomously
Ethnocentric: view home-country standards to be superior.

10. Results Accelerated commoditization of products and services
As products become standardized, selection is based more on prices
Increasing price wars
Shrinking profit margins

11. Strategic Moves to succeed
Research has shown that a move to Blue Ocean has identified commonalities in strategic moves.
Strategic move: The set of managerial actions and decisions involved in making a major market-creating business offering.
Commonality seems to exist in strategic moves by all firms finding blue oceans.
However, there was not commonality in types of firms:
small/large - attractive/unattractive industries
Young/mature - private/public
Low/hi tech - diverse national origins
The basis of Blue Ocean Strategy is in developing Value Innovation.

12. Value Innovation
Instead of focusing on competition, focus on making the competition irrelevant by creating a leap in value for buyers, and opening uncontested market space.
Value without innovation – red ocean strategy of value creation on incremental scale (new bells or whistles)
Innovation without value – red ocean technology innovation (often beyond what consumers are ready to accept or pay for).
Value innovation occurs when companies align innovation with utility, price and cost positions thereby defying the traditional Cost-Value Tradeoff.
Focus on differentiation and low cost simultaneously

13. Value Innovation Costs Simultaneous pursuit of Differentiation and Low
*****
Buyer value

14. Blue Ocean vs. Red Ocean

15. Formulating and Executing Blue Ocean Strategy
General belief (red ocean) that going beyond existing industry space is low odds of success.
Most business strategy is red ocean focused.
Based on 6 principles
Decreasing search risk, planning risk, scale risk, business model risk, organizational risk and management risk.

16. Six Principles of Blue Ocean Strategy - Summary
Formulation Principles
Reconstruct market boundaries
Focus on big picture, not numbers
Reach beyond existing demand
Get the strategic sequence straight
Execution Principles
Overcome key organizational hurdles
Build execution into strategy
Risk Factors
Decrease search risk
Decrease planning risk
Decrease scale risk
Decrease business model risk
Risk Factor
Organizational risk
Management risk

17. Four Guiding Formulation Principles
Identify paths to systematically create uncontested market space and make the competition irrelevant (search risk)
Design strategic planning to go beyond incremental improvements to create value innovations (planning risk)
Maximize the blue ocean to create the greatest market of new demand. (scale risk)
Design strategy to allow companies to provide a leap in value to buyers and build viable business model to produce and maintain profitable growth for itself. (business model risk).

18. Two Guiding Execution Principles
Mobilize the organization to overcome key organizational hurdles that block implementation of a blue ocean. (Organizational risk)
Motivating people to act on and execute a blue ocean strategy (management risk).

19. Analytical Tools and Framework
The Blue Ocean
Analytical Tools and Framework

20. Red Ocean Governed by existing framework of strategic management
Porter 5 Forces model
Three Generic Strategies
Value Chain management
Offer better solutions than rivals to existing problems defined by industry
Effective Blue Ocean seeks to minimize risk not maximize risk
Take notes from Entrepreneurs, learn and apply to new situations
Create entrepreneurial framework within organizational structure (Ex. 3M – Post-it Notes)

21. Wine Industry Intense competition (8 main competitors) What to do?
Leverage distribution, shelf space and marketing driven
Downward pressure on prices
Increasing bargaining power of distribution channel and flat demand
What to do?
Develop a strategy canvas
Analytical framework that is central to value innovation and creating a blue ocean.

22. Strategy Canvas Purpose: Wine industry Price per bottle Refined Image
Capture current state of play in market space
Develop an action Framework
Wine industry
7 principle factors
Price per bottle
Refined Image
Marketing
Aging of wine
Legacy of vineyard
Complexity and sophistication
Range of wines

23. Strategy Canvas Marketing Range Price Legacy Aging High Low Complexity
Terminology
Marketing
Aging
Legacy
Complexity
Range

24. Strategy Canvas - Analysis
Convergence in values, but at different levels between premium (differentiation) and (low cost)
Look for uncontested market space.
Re-orient strategic focus from competitors to alternatives, from customers to non-customers.
Casella Wines – Yellow Label

25. Four Actions Framework
Reconstruct buyer value
4 Key Questions:
Which of the factors that industry takes for granted should be eliminated?
Environmental Scan – factors companies have long competed on.
Which factors should be reduced well below the industry’s standards?
Which products or services have been overdesigned?
Which factors should be raised well above the industry’s standards?
Uncover and eliminate the compromises the industry has forced on customers.
Which factors should be created that the industry has never offered?
Helps to discover new sources of value for buyers and to create demand.

26. Four Actions Framework
Reduce
Which factors to
Reduce?
Eliminate
Which factors to
Eliminate?
A New Value
Curve
Create
Which factors to
Create?
Raise
Which factors to
Raise?

27. Eliminate-Reduce-Raise-Create Grid
Key to creating Blue Oceans.
Four immediate benefits
Simultaneously pursue differentiation and low-cost strategies to break Value-Cost Tradeoff.
Flags companies that are focused on raising and creating (thus increasing cost structure and over-engineering products and services)
Easily understood and communicated
Drives company to scrutinize every factor the industry competes upon.

28. Yellow Tail Developed a fun new drink not pretentious
Reduced aging (less capital cost)
Ease of selection by reducing wine offerings (Chardonnay and Shiraz)
Removed technical jargon from bottles
Simple, eye catching non-traditional label
Wine boxes were simple and used for display
Advertising in stores with clerk outfits
Offered a LEAP IN VALUE to customers.

29. ERRC Grid – Yellow Tail Eliminate - Terminology and distinction Raise
Aging quality
Above the line marketing
Raise
Price vs. budget wine
Retail store environment
Reduce
Wine complexity
Wine range
Vineyard Prestige
Create
Easy drinking
Ease of selection
Fun and adventure

30. Yellow Tail – Strategic Canvas
High
Low
Price
Terminology
Marketing
Aging
Legacy
Complexity
Range
Easy drinking
Easy Selection
Fun

31. Characteristics of a Good Strategy
Focus
The company does not diffuse efforts across all key factors of competition
Divergence
The shape of the value curve diverges from that of its competition
Company does not act reactively
Compelling Tagline
Strategic profile is clear and concise to customers.
Used to develop marketing campaign

32. Reading the Value Curves (6 Ways)
Blue Ocean Strategy
Whether 3 criteria for good blue ocean strategy are met (focus, divergence, tagline), this is a litmus test for commercial viability of blue ocean.
Company caught in Red Ocean
Companies value curve converges with competitors
Company is attempting to compete head to head with competitors (slower growth and potential)
Overdelivery without Payback
If value curve is higher across all factors, Does Market share and profitability reflect investment?

33. Reading the Value Curves (6 Ways)
An Incoherent Strategy
All over the map, it signals it does not have a cohesive and coherent strategy, likely based upon independent sub-strategies (divisional or functional silos).
Strategic Contradictions
Offering high level on one competing factor while ignoring others that support that factor. (ex. Self serve gasoline at higher prices)
Internally Driven Companies
How does it label its factors (If highly technical, built on internal perspective rather than external perspective).