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Creating Blue Oceans
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The Book and the Authors
© JOHN ABBOTT
Prof Chan Kim
© JOHN ABBOTT
Prof Renee
Mauborgne
Accolades
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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
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New Market Space
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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
Red Oceans vs. Blue Oceans
Red oceans
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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
The Rising Imperative of
Creating Blue Oceans
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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
The Continuing Creation
of Blue Oceans
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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
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The Impact of Creating Blue Oceans
From Company and Industry
to Strategic Move
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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
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
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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
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• 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
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
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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!”
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The Six Principles of Blue Ocean Strategy
This figure highlights the six principles driving the successful formulation and
execution of blue ocean strategy and the risks that these principles attenuate.
Formulation Principles
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Risk factor each principle
attenuates
Reconstruct market boundaries
Search risk
Focus on the big picture, not the
numbers
Planning risk
Reach beyond existing demand
Business model risk
Scale risk
Get the strategic sequence right
Evaluation principles
Risk factor each principle
attenuates
Overcome key organizational hurdles
Organizational risk
Build execution into strategy
Management risk
Points of view
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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
Generic Strategies vs.
Value Innovation
Red Ocean Strategy
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Blue Ocean (VI) Strategy
High
High
V1
•
D
V1
Quality
Quality
•
LC
Low
Low
High
C1
Low
C1
High
Cost
Cost
Structuralist
Reconstructionist
Low
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Example: A highly competitive Industry
™
The American
Wine Industry
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What the industry offers
™
Premium Wines
Budget Wines
Polarised
Strategic Groups
Massive Choice
American Wine Industry
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3rd 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!
American Wine Industry
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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.
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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)
What are people
looking for in a wine?
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Segmentation of Market and Brands
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Low
Involvement
Easy Going
Glass with
friends
Least care
choosing a wine
Not wine
preferrers
Price is a strong
influencer
Brand:
Demographic:
High
Involvement
Enjoyers
Aspirationals
Everyday
enjoyment
To relax/unwind
Stick with limited
list of known
brands
Choose in-store
Not interested in
wine language
Image important
Wine preferrers
(sic)
Varietal
knowledge
Interested in
some wine
language
Enjoy trying new
wines
Influenced by
major brand
advertising
Lindemans
M/F: 50/50 Age:
35-49
Appreciators
Connoisseurs
Want to
discover wine
Knowledge of
wine regions
Frequently buy
>$10 wines
Join wine clubs
Don’t stick to
known brands
Sophisticated
drinker
Discerning wine
tastes
Don’t decide in
store
Have a cellar
Less influenced
by specials/
promotions
Ideal wine is
Visit wineries /
complex &
read wine articles interesting
Actively pursue
wine knowledge
Rosemount
Estate
Wolf Blass
Penfolds
M/F: 30/70; Age:
30-40
M/F: 70/30; Age:
35-50
Age: 40+
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
Premium Wines
Budget Wines
Low
Price
Wine range
Vineyard prestige
Use of Above-the-line
enological marketing Aging and legacy Wine
quality
complexity
terminology
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Four Steps of Visualizing
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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
•Go into the field to
explore the six paths
to creating blue
oceans
•Draw your “to be”
canvas based on
insights from field
observations
•Distribute your
before-and-after
strategic profiles on
one page for easy
comparison
•Observe the
distinctive advantages
of alternative products
and services
•Get feedback on
alternative strategy
canvases from
customers,
competitors’
customers, and noncustomers
•See where your
strategy needs to
change
•See which factors
you should eliminate,
create or change
•Use feedback to build
the best “to be” future
strategy
•Support only those
projects and
operational moves
that allow your
company to close
gaps and actualize the
new strategy
Four Actions to create a Blue Ocean
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Raise
What factors
should be raised
well beyond the
industry standard?
Eliminate
Create
What factors
should be
eliminated that the
industry has taken
for granted?
What factors should
be created that the
industry has never
offered?
Reduce
What factors
should be reduced
well below the
industry standard?
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.
Eliminate
Raise
Enological terminology and
distinctions
Price versus budget wines
Retail Store involvement
Aging qualities
Above-the-line marketing
Reduce
Create
Wine complexity
Easy drinking
Wine range
Ease of selection
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Reduce
Which factors should be
reduced well below
industry standards?
Eliminate
Which of the factors
that the industry takes
for granted should be
eliminated?
A
New
Value
Curve
Create
Which factors should be
created that the industry
has never offered?
Raise
Which factors should
be raised well above
the industry’s standard?
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.
ERRC Grid yellow tail
T h e C as e o f yell o w t ail
E lim ina te
R ais e
E no log ic a l t erm in ol og y & d is tr ac tion s
A g ing q ua li tie s
A bo ve -the- li n e ma rk et ing
P ric e ve rs u s bu dget wi ne s
R eta in s tore inv o lv eme nt
R e d uce
C reate
Wi ne co m p le xi ty
Wi ne R an ge
Vi ne yar d pr es tige
E asy d ri n ki n g
E ase o f s elect io n
F u n & a dv ent u re
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To Be Canvas
• Eliminate
• Reduce
• Raise
• Create
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Yellow Tail
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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.
Value Innovation of [yellow tail]
Utility proposition
•Creating of a social drink that is accessible to
anyone
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•Easy drinking, ease of selection, sense of fun and
(customers, distributors and adventure
retailers)
•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
Results
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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.
The Case of Cirque du Soleil
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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
http://www.youtube.com/watch?v=M4lAPI5BAuk
Example: Cirque du Soleil
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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
Example: Cirque du Soleil
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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 highpriced concessions and vendors thereby
cutting costs
Example: Cirque du Soleil
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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
Eliminate-Reduce-Raise-Create
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Eliminate
Star Performers
Animal shows
Aisle concession sales
Multiple show arenas
Reduce
Fun and humor
Thrill and danger
Raise
Unique venues
Create
Theme
Refined environment
Multiple productions
Artistic music and dance
The Strategy Canvas
of Cirque du Soleil
Eliminate
hi
Raise
Reduce
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Create
Ringling Brothers
offering level
Cirque du Soleil
Smaller Regional Circus
lo
Price
Animal Shows
Star Performers
Multiple Show
Arenas
Aisle Concessions
Thrills & Danger
Fun & Humor
Theme
Unique Venue
Multiple
Productions
Refined Viewing
Environment
Artistic Music
& Dance
© Kim & Mauborgne 2006
Key Takeaways
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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)
Comparison of approaches
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Red Ocean Strategy
Blue Ocean Strategy
Exercise
•
1. List Factors of
Competition
•
2. Top 2 or 3 in ERRC
Grid Quadrants
•
Clearly define the
group of “noncustomer” that you are
going after.
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Examples
Exercise
3.
Write on
Worksheet:
left, C right
4.
Draw “As Is”
5.
Draw “To Be”
E
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Examples
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Blue Ocean Strategy