Blue Ocean Strategy

by W. Chan Kim and Renée Marbourgne

Red Ocean = competitive, bloody - compete in existing markets, 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

Blue Ocean = open, uncontested - create uncontested market space, make the competition irrelevant, create and capture new demand, break the value-cost trade-off (deliver more value at lower cost), align the whole system of a firm's activities in pursuit of differentiation AND lower costs. Blue Ocean creates natural barriers to imitation. Takes time for competition to recognize, replicate operations, replicate mindset, catch up with learning curve, etc.

Six Principles and the Risks they Address/Reduce?

Strategy Formulation Principles

Redefine/Reconstruct? market boundaries - reduces Search Risk to find customers
Focus on the Big Picture (purpose), not the numbers (incremental gains, jargon) - reduces Planning Risk
Reach beyond existing demand, look for common needs/interests across buyer rather than segmenting - reduces Scaling Risk
Get the strategic sequence right (utility, price, cost, adoption) - reduces business model risk, makes sure company and customers benefit together

Execution Principles

Overcome key org hurdles, surmount cognitive, resource, motivational, and political hurdles to execution, tipping point leadership - reduce Organizational Risk
Build execution into strategy-making, motivating people to execute, fair process, inviting voluntary cooperation, getting attitude and behaviors right - reduces Management Risk

ANALYSIS - IDENTIFY BLUE OCEANS

Identify common/key factors on which firms currently compete:

Which factors does industry take for granted and should be eliminated? - identify and eliminate factors that companies in the industry have long competed on, often taken for granted even though they no longer have value or might even detract from value
Which factors should be reduced well below industry standards? - what's been overdesigned in race to compete, and unnecessarily raises costs. Here companies are over-serving customer needs.
Which factors should be raised above industry standards? - push to uncover and eliminate the compromises the industry forces customers to make/accept.
Which factors should that the industry has never offered should be created? - probe for new sources of value that can lead to new demand and higher revenue.

The first two help lower cost structure. The second two help grow demand/value/revenue. => Create Eliminate, Reduce, Raise, Create Grid of factors => Creates a new value proposition

Three characteristics of good strategy:

Focus - emphasize and invest in delivering a few factors at high level
Divergence - the factors emphasized should set you apart from the others
Compelling Tagline - should be able to reduce/convey this new value in a clear phrase (e.g. southwest airlines: the speed of a plane at the cost of a car)

Pitfalls to watch out for and avoid:

Caught in red ocean - value curve (levels of performance across all factors) looks like everyone else
Overdelivery - trying to perform at high level on all factors
Incohernet strategy - no logic to high/low performance on factors
Contradictions - offering high perf on one factor, but not the factors that might support it
Internally-driven/focused - how does company define factors, in technical production terms or customer experience terms (e.g. MgHz? vs Speed)

PRINCIPLES IN PRACTICE

Redefining/Reconstructing?

Red Ocean competitors tend to define the industry similarly, focus on being best within agreed boundaries, generally accepted strategic groups, focus on same buyer groups, define products using same standards/feature sets, accept common functionality/emotional orientation, focus on same time horizon when setting strategy (e.g. model year).
Blue Ocean Path #1: Learn to look across industries, across whole/larger processes, costs outside of primary activity (e.g. travel time costs, not just airline ticket prices).
Blue Ocean Path #2: Look across and try to connect strategic groups, i.e. clusters of providers, e.g. low cost, high quality, other factors... try to combine most important factors of two or more
Blue Ocean Path #3: Look at whole chain of buyers, from purchaser, decision-maker, end user, maybe even maintenance people. Understand different definitions of value. Can we target a different buyer in the chain? One with different definition of value? One with more influence in the buying decision?
Blue Ocean Path #4: Look across complementary product/service offerings, make valuable connections, define total solution.
Blue Ocean Path #5: Look across functional/emotional appeal to buyers, often functional and emotional appeal are separate competitive factors - can we cross/connect the two?
Blue Ocean Path #6: Look across timing, not just projecting trends, but understanding effect of trend over time, how value will be perceived/understood over time.
=> redefinition looks across industries, strategic segments within industries, redefines buyer group(s), looks across complementary products for whole solutions, rethinks function/emotional appeal mix, looks to shape/exploit external trends over time

Focus on Big Picture (beyond the usual/known/knowable/comfortable metrics)

Identify strategic/value factors - not easy, straightforward
Visual Awakening - visualize strategy/factors/value as is before identifying possible changes
Visual Exploration - go observe/test hypotheses in the market place
Visual Strategy Fair - draw the "to become" canvas based on observations in mktplace, get feedback from all sides (cx, ex, etc), apply feedback to build best strategy
Visual Communication - distill visual strategy to one page, focus investment on closing most important gaps

''Reach Beyond Existing Customers: three tiers of non-customers -

soon-to-be (they're getting by on bad alternatives),
refusing (won't use bad or unaffordable existing alternatives),
unexplored (usually assumed to be unattainable or belonging to some other market)
=> focus on the tier that offers biggest catchment opportunity.

Get the Sequence Right

Buyer Utility: is there exceptional utility/value in your business idea? Consider a grid of attributes... productivity, simplicity, convenience, risk, fun/image, environmental friendliness AND/AT times... purchase, delivery, use, supplements, maintenance, disposal
Price: is your proposed pricing easily accessible to masses of buyers? Consider price corridor to mass, choose level (hi, middle, low) within that corridor.
Cost: can you hit your cost target(s) to earn a profit at your proposed price? Strategy price => Target Cost => Target Profit. Consider cost/production innovations, pricing innovations, partnering options.
Adoption: what are the adoption hurdles in actualizing your idea? can you address these hurdles up front? Consider employees, business partners, general public, suppliers/sellers, etc.

Overcome Organizational Hurdles

Tipping Point Leadership addresses...
Cognitive (waking up to the need for strategic shift, get out in the worst parts of the field, meet with disgruntled customers, )
Limited resources (often additional resources are needed just at the time when they are scarce, focus on hot spots, do some horse trading, find synergies)
Motivation (how to motivate people to deviate from the way things have always been? leaders go first, refine the shift to tasks in every part of the organization, engage everyone)
Politics (how to deal with internal squabbles and CYA behavior, find leadership sponsors, spread the word about risks, successes, laud failures for the learnings gained)

Build Execution into Strategy

Engagement, Explanation, Clarity of Expectations = Fair Process
Fair process (i.e. invitation) -> intellectual/emotional recognition -> trust/commitment -> voluntary cooperation in strategy execution