Red oceans – all the industries in existence today (known market space)

Blue oceans – all the industries not in existence today (unknown market space)

Blue Ocean Strategy

z Challenges companies to break out of the red ocean of bloody competition by creating
uncontested market space that makes the competition irrelevant.
z Defined by untapped market space, demand creation, and the opportunity for highly profitable
growth.

Value Innovation
z Equal emphasis on value and innovation.
z Value without innovation tends to focus on value creation on an incremental scale, something that
improves value but is not sufficient to make you stand out in the marketplace
z Innovation with values tends to be technology-driven, market pioneering, or futuristic, often
shooting beyond what buyers are ready to accept or pay for
z Occurs only when companies align innovation with utility, price, and cost position
z Achieving a leap in value for both buyers and companies themselves.
z Defies value-cost trade-off

Red Ocean Versus Blue Ocean Strategy

Analytical Tools and Frameworks

The Strategy Canvas
z Shows the strategic profile of an industry by depicting very clearly the factors (and possible
future factors) that affect competition among industry players.
z Shows the strategic profile of current and potential competitors, identifying which factors they
invest in strategically.
z Shows the company’s value curve depicting how it invests in the factors of competition and how
it might invest in them in the future.
Value curve
z Basic component of the strategy canvas
z A graphic depiction of a company’s relative performance across its industry’s factors of
competition

Four action Framework: Eliminate-Reduce-Raise-Create Grid

z Pushes them to simultaneously pursue differentiation and low cost to break the value-cost
trade-off
z Immediately flags companies that are focused only on raising and creating and thereby lifting
their cost structure and often overengineering products and services—a common plight in many
companies.
z Easily understood by managers at any level, creating a high level of engagement in its
application.
z Because completing the grid is a challenging task, it drives companies to robustly scrutinize every
factor the industry competes on, making them discover the range of implicit assumptions they
make unconsciously in competing.

Three Characteristics of a Good Strategy

z Focus Emphasize on factors that help the company stand apart from the competition.
z Divergence Differentiate company profiles from the industry’s average profile.
z Compelling Tagline Deliver clear message truthfully.

Formulating Blue Ocean Strategy

z Reconstruct Market Boundaries
z Focus on the Big Picture, Not the Numbers
z Reach Beyond Existing Demand
z Get the Strategic Sequence Right
Path 1: Look Across Alternative Industries
Alternatives include products or services that have different functions and forms but the same purpose.

Path 2: Look Across Strategic Groups Within Industries

The term refers to a group of companies within an industry that pursue a similar strategy.

Path 3: Look Across the Chain of Buyers

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.

Path 4: Look Across Complementary Product and Service Offerings

Untapped value is often hidden in complementary products and services. The key is to define the total
solution buyers seek when they choose a product or service. A simple way to do so is to think about what
happens before, during, and after your product is used.

Path 5: Look Across Functional or Emotional Appeal to Buyers

Some industries compete principally on price and function largely on calculations of utility; their appeal
is rational. Other industries compete largely on feelings; their appeal is emotional.

Path 6: Look Across Time

Subject to external trends that affect their businesses over time.

The Four Steps of Visualizing Strategy

Pioneer-Migrator-Settler (PMS) Map
A company’s pioneers are the businesses that offer unprecedented value.
Settlers are businesses whose value curves conform to the basic shape of the industries.
Migrators lies somewhere in between.

The Three Tiers of Noncustomers

Go for the Biggest

Catchment

First tier of noncustomers - closest to your market.

They are buyers who minimally purchase an industry’s offering out of necessity but are mentally
noncustomers of the industry.
Second tier of noncustomers - people who refuse to use your industry’s offerings.
These are buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted
against them.
Third tier of noncustomers - farthest from your market.
They are noncustomers who have never thought of your market’s offerings as an option.
Get the Strategic Sequence Right
z Buyer utility ->
z Price ->
z Cost ->
z Adoption ->
z Commercially viable Blue Ocean idea

The Buyer Utility Map

z Outlines all the levers companies can pull to
deliver exceptional utility to buyers as well as the
various experiences buyers can have with a
product or service.
z Allows managers to identify the full range of
utility spaces that a product or service can
potentially fill.
Strategic Pricing
Price will quickly capture the mass of target buyers.
z First, companies are discovering that volume generates higher returns than it used to. As the
nature of goods becomes more knowledge intensive, companies bear much more of their costs in
product development than in manufacturing.
z A second reason is that to a buyer, the value of a product or service may be closely tied to the
total number of people using it.
z Rival vs nonrival good
z Excludability is a function both of the nature of the good and of the legal system. Lack of
excludability reinforces the risk of free riding.

Price corridor of the mass

help managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower
price.

Companies would be wise to pursue mid- to lower-boundary strategic pricing from the start if any of the
following apply:
• Their blue ocean offering has high fixed costs and marginal variable costs.
• Their attractiveness depends heavily on network externalities.
• Their cost structure benefits from steep economies of scale and scope. In these cases, volume brings
with it significant cost advantages, something that makes pricing for volume even more key.

Target Costing
Addresses the profit side of the business model
Three principal levers:
z involves streamlining operations and introducing cost innovations from manufacturing to
distribution.
z pull to meet their target cost is partnering.
z make their desired profit margin without compromising their strategic price: changing the pricing
model of the industry.
Abandoning the concept of price
z equity interest
z pricing innovation

Educating the Fearful

„ Employees
„ Business Partners
„ The General Public

Blue Ocean Idea (BOI) Index

provides a simple but robust test of this system view

Four hurdles on the execution of BOS

1. cognitive: waking employees up to the need for a strategic shift
2. limited resources.
3. motivation
4. politics
Tipping point leadership
z Break Through the Cognitive Hurdle
- Ride the “Electric Sewer” – come face to face with worst operational problems
- Meet with Disgruntled Customers
z Jump the Resource Hurdle (Hot spots, Cold spots and House Trading)
- Redistribute Resources to your Hot Spots
- Redirect Resources from your Cold Spots
- Engage in Horse Trading
z Jump the Motivational Hurdle
- Zoom in on Kingpins
- Place Kingpins in a Fishbowl
- Atomize to Get the Organization to Change itself
z Knock Over the Political Hurdle
- Secure a Consigiliere on Your Top Management Team
- Leverage Your Angels
- Silence Your Devils

Build Execution into Strategy

How Fair Process Affects People’s Attitudes and Behavior
The Three E Principles of Fair Process
z Engagement means involving individuals in the strategic decisions that affect them by asking for
their input and allowing them to refute the merits of one another’s ideas and assumptions.
z Explanation means that everyone involved and affected should understand why final strategic
decisions are made as they are
z Expectation clarity requires that after a strategy is set, managers state clearly the new rules of the
game.

Why Does Fair Process Matter?

z Emotionally, individuals seek recognition of their value, not as “labor,” “personnel,” or “human
resources” but as human beings who are treated with full respect and dignity and appreciated for
their individual worth regardless of hierarchical level.
z Intellectually, individuals seek recognition that their ideas are sought after and given thoughtful
reflection, and that others think enough of their intelligence to explain their thinking to them.

The Sustainability and Renewal of BOS

Imitation Barrier to BOS

When to Value-Innovate Again?

z Keep monitoring value curves on the strategy canvas.
z If company’s value curve still has focus, divergence, and a compelling tagline, you should swim
as far as possible in the blue ocean.
z If ocean turns red, you should begin reaching out for another value innovation to create a new
blue ocean.