Value Innovation

Value innovation is created in the region where a company’s actions favorably affect both
its cost structure and its value proposition to buyers. Cost savings are made by eliminating
and reducing the factors an industry competes on. Buyer value is lifted by raising and
creating elements the industry has never offered. Over time, costs are reduced further as
scale economies kick in due to the high sales volumes that superior value generates.

Costs

Value
Innovation

Buyer Value
Value Innovation
Red Ocean Versus Blue Ocean Startegy
In the red ocean, differentiation costs because firms compete with the
same best-practice principle. Here, the strategic choices for firms are to
pursue either differentiation or low cost. In the reconstructionist world,
however, the strategic aim is to create new best-practice rules by breaking
the existing value-cost trade-off and thereby creating blue ocean.

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space. Create uncontested market space.

Beat the competition. Make the competition irrelevant.

Exploit existing demand. Create and capture new demand.

Make the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of a firm’s Align the whole system of a firm’s
activities with its strategic choice of activities in pursuit of differentiation and
differentiation or low cost. low cost.
Red Ocean Versus Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy

 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 Risk factor each principle attenuates

Reconstruct market boundaries Search risk
Focus on the big picture, not the numbers Planning risk
Reach beyond existing demand Scale risk
Get the strategic sequence right Business model risk

Evaluation principles Risk factor each principle attenuates

Overcome key organizational hurdles Organizational risk
Build execution into strategy Management risk
 The Six Principles of Blue Ocean Strategy

Formulation Principles Risk factor each principle attenuates

Evaluation principles Risk factor each principle attenuates

 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
Above-the-line Vineyard prestige Wine range
Price Use of
enological marketing Aging and legacy Wine
terminology quality complexity
 Strategy Canvas
High

Low
 Four Actions Framework +
Eliminate/Reduce/Raise/Create Grid
Reduce
The four actions framework offers an Which factors should be
technique that breaks the trade-off between reduced well below
industry standards?
differentiation and low cost and to create a
new value curve. It answers the four key
questions of what industry takes for granted Eliminate A Create
Which of the factors New Which factors should be
and needs to be eliminated; what factors need Value created that the industry
that the industry takes
to be reduced below industry standards; what for granted should be Curve has never offered?
factors need to be raised above industry eliminated?
standards; and what should be created that Raise
the industry has never offered. Which factors should
be raised well above
the industry’s standard?

Eliminate Raise The eliminate-reduce-raise-create grid pushes

Enological terminology and Price versus budget wines
distinctions
companies not only to ask all four questions in
Retail Store involvement the four actions framework but also to act on all
Aging qualities four to create a new value curve. By driving
companies to fill in the grid with the actions of
Above-the-line marketing
eliminating, reducing, raising, and creating, the
Reduce Create grid provides four immediate benefits: it pushes
Wine complexity Easy drinking them to simultaneously pursue differentiation and
low costs; identifies companies who are only
Wine range Ease of selection
raising and creating thereby raising costs; makes
Vineyard prestige Fun and adventure it easier for managers to understand and comply;
and it drives companies to scrutinize every factor
the industry competes on.
 Four Actions Framework +
Eliminate/Reduce/Raise/Create Grid
Reduce

Four Actions Framework

Eliminate Create

A New
Value
Curve

Raise Eliminate Raise

Reduce Create

The Eliminate-Reduce-Raise-Create
Grid
Four Steps of Visualizing Strategy
The four steps of visualizing strategy builds on the six paths of creating blue
oceans and involves a lot of visual stimulation in order to unlock people’s
creativity. The four steps include visual awakening, visual exploration, visual
strategy fair, and visual communication.

1. Visual 2. Visual 3. Visual Strategy 4. Visual

Awakening Exploration Fair Communication

•Compare your business •Go into the field to •Draw your “to be” strategy •Distribute your before-and-
with your competitors’ by explore the six paths to canvas based on insights after strategic profiles on one
drawing your “as is” creating blue oceans. from field observations. page for easy comparison.
strategy canvas.
•Observe the distinctive •Get feedback on alternative •Support only those projects
•See where your strategy advantages of alternative strategy canvases from and operational moves that
needs to change products and services. customers, competitors’ allow your company to close
customers, and the gaps to actualize the
•See which factors you noncustomers. new strategy.
should eliminate, create,
or change. •Use feedback to build the
best “to be” future strategy.
 Four Steps of Visualizing Strategy
1. Visual 2. Visual 3. Visual Strategy 4. Visual
Awakening Exploration Fair Communication
Pioneer, Settler, Migrator Map
A corporate management team pursuing profitable growth can plot the
company’s current and planned portfolios on a pioneer-migrator-settler
(PMS) map. This strategy can help a company determine which businesses
experience the highest and lowest growth and cash flow. These are
classified accordingly with the highest growth potential being pioneers, then
to migrators, then to the lowest rung, settlers.

Pioneers

Migrators

Settlers

Today Tomorrow
Pioneer, Settler, Migrator Map

Pioneers

Migrators

Settlers

Today Tomorrow
Three Tiers of Noncustomers
There are three tiers of noncustomers that can be transformed into
customers. They differ in their relative distance from your market. The
first tier of customers minimally buy an industry’s offering out of necessity.
The second tier of noncustomers refuse to use your industries offerings.
The third tier are noncustomers who have never thought of your market’s
offerings as an option.

Third
Second Tier
Tier
First
Tier

Your
Market
Three Tiers of Noncustomers
 Sequence of Blue Ocean Strategy
Buyer utility
Is there exceptional buyer utility in your
business idea?
No-- Rethink

An important part of blue ocean strategy is to Yes

“get the strategic sequence right.” This Price

sequence fleshes out and validates blue Is your price easily accessible to the mass
ocean ideas to ensure their commercial of buyers?
viability. This can then reduce business No-- Rethink
model risk. In this model, potential blue Yes
ocean ideas must pass through a sequence
of buyer utility, price, cost, and adoption. At Cost
each step there are only two options: a “yes” Can you attain your cost target to profit at
answer, in which case the idea may pass to your strategic price?
No-- Rethink
the next step, or “no”. If an idea receives a
no at any point, the company can either park Yes
the idea or rethink it until you get a yes. Adoption
What are the adoption hurdles in
actualizing your business idea? Are you
addressing them up front?
No-- Rethink

Yes

A Commercially
Viable Blue
Ocean Idea
Sequence of Blue Ocean Strategy
Buyer utility

No-- Rethink

Yes

Price

No-- Rethink

Yes

Cost

No-- Rethink

Yes

Adoption

No-- Rethink

Yes

A Commercially
Viable Blue
Ocean Idea
 Buyer Utility Map
The buyer utility map helps managers look at this issue from the right
perspective. It 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.

The Six Stages of the Buyer Experience Cycle

1. 2. 3. 4. 5. 6.
Purchase Delivery Use Supplements Maintenance Disposal

Customer
Productivity
The Six Utility Levers

Simplicity

Convenience

Risk

Fun and
Image

Environmental
friendliness
 Buyer Utility Map
The Six Stages of the Buyer Experience Cycle
1. 2. 3. 4. 5. 6.
Purchase Delivery Use Supplements Maintenance Disposal

Customer
Productivity
The Six Utility Levers

Simplicity

Convenience

Risk

Fun and
Image

Environmental
friendliness
 Buyer Experience Cycle
A buyer’s experience can usually be broken into a cycle of six stages,
running more or less sequentially from purchase to disposal. Each
stage encompasses a wide variety of specific experiences. At each
stage, managers can ask a set of questions to gauge the quality of
buyer’s experience.

Purchase Delivery Use Supplements Maintenance Disposal

How long does it How long does Does the product Do you need other Does the product Does use of the
take to find the it take to get require training or products and require external product create
product you the product expert assistance? services to make maintenance? waste items?
need? delivered? this product work?
Is the product easy to How easy is it to How easy is it to
Is the place of How difficult is store when not in If so, how costly are maintain and dispose of the
purchase it to unpack use? they? upgrade the product?
attractive and and install the product?
How effective are the How much time do Are there legal
accessible? new product?
product’s features they take? How costly is or
How secure is Do buyers and functions? maintenance? environmental
How easy are they
the transaction have to issues in
Does the product or to obtain?
environment? arrange disposing of the
service deliver far
delivery product safely?
How rapidly can more power or
themselves? If
you make a options than required How costly is
yes, how costly
purchase? by the average user? disposal?
and difficult is
Is in overcharged with
this?
bells and whistles?
 Buyer Experience Cycle
Purchase Delivery Use Supplements Maintenance Disposal
Uncovering Blocks to Buyer Utility
Uncovering blocks to buyer utility can identify the most compelling
hot spots to unlock exceptional utility. By locating your proposed
offering on the thirty-six space of the buyer utility map, you can
clearly see how, and whether the new idea not only creates a
different utility proposition from existing offerings but also
removes the biggest blocks to utility that stand in the way of
converting noncustomers into customers.
Purchase Delivery Use Supplements Maintenance Disposal

Customer Productivity: In which stage are the biggest blocks to customer productivity?

Simplicity: In which stages are the biggest blocks to simplicity?

Convenience: In which stage are the biggest blocks to convenience?

Risk: In which stage are the biggest blocks to reducing risks?

Fun and Image: In which stage are the biggest blocks to fun and image?

Environmental In which stage are the biggest blocks to environmental friendliness?

Friendliness:
 Uncovering Blocks to Buyer Utility
Purchase Delivery Use Supplements Maintenance Disposal

Customer Productivity:

Simplicity:

Convenience:

Risk:

Fun and Image:

Environmental
Friendliness:
 Price Corridor of the Mass
This tool helps managers find the right price for an irresistible offer, which, by
the way, isn’t necessarily the lower price. The tool involves two distinct buy
interrelated steps. The first step involves identifying the price corridor of the
mass which deals with customer price sensitivity and pricing strategies of
products offered outside the group of traditional competitors. The second step
deals with specifying a level within the price corridor which factors in legal
protection and exclusive assets.
Step 1: Identify the price corridor Step 2: Specify a price level within the
of the mass. price corridor.

Three alternative product/service types:

Different form and
Same Different form, function, same
form same function objective

High degree of legal and resource

protection
ing
el pric Difficult to imitate
ev
er-l
Upp
Some degree of legal and resource
Price Corridor protection
Mid-level pricing
of the Mass

Lower-l Low degree of legal and resource

ev el pricin
g protection
Easy to imitate
 Price Corridor of the Mass
Step 1: Identify the price Step 2: Specify a price level
corridor of the mass. within the price corridor.
Three alternative product/service types:
Different form
Same Different form, and function,
form same function same objective

High degree of legal and

resource protection
i ng
el pric Difficult to imitate
v
per-le
Up
Price Some degree of legal and
Corridor of Mid-level pricing resource protection
the Mass
Lower-le Low degree of legal and
vel pric
ing resource protection
Easy to imitate
Profit Model of Blue Ocean Strategy
The profit model of blue ocean strategy shows how value
innovation typically maximizes profit by using the three levers of
strategic price, target cost, and pricing innovation.

The Strategic Price

The Target Profit

The Target Cost

Streamlining and Cost

Partnering
Innovations

Pricing Innovation
Profit Model of Blue Ocean Strategy
 Blue Ocean Idea Index
The blue ocean idea index is a simple but robust test
demonstrating how the sequence of utility, price, cost, and
adoption form an integral whole to ensure commercial success
through blue ocean strategy.

DoCoMo
Philips Motorola I-mode
CD-i Iridium Japan
Utility Is there exceptional utility? Are there
compelling reasons to buy your offering? - -
+

Price Is your price easily accessible to the mass

of buyers? - - +

Cost Does your cost structure meet the target

cost? - - +

Adoption Have you addressed adoption hurdles up

front?
- +/- +
 Blue Ocean Idea Index

Utility Is there exceptional utility? Are there

compelling reasons to buy your offering?

Price Is your price easily accessible to the mass

of buyers?

Cost Does your cost structure meet the target

cost?

Adoption Have you addressed adoption hurdles up

front?