Blue Ocean Strategy - Complete

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Creating Blue Oceans

Hilary Becker, Ph.D.


Carleton University

December 1, 2005
* These slides are based on the work of Kim and Mauborgne in their book
Blue Ocean Strategy, Harvard Business Press 2005.
Overview
• 9:00 -10:15 Introduction and Blue vs. Red Oceans
• 10:15 – 10:30 Break
• 10:30 – 12:00 Steps in Creating a Blue Ocean Strategy
• 12:00 – 1:00 Lunch
• 1:00 – 2:00 Breakout Groups
• 2:00 – 2:15 Break
• 2:15 – 3:45 Implementation Issues
• 3:45 – 4:00 Conclusion and Where do we go from
here?
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.
Cirque du Soleil

Cirque du
Soleil

Circus Theater
Markets

BLUE RED
OCEANS OCEANS

All unknown markets or markets Established markets. All known


not in existence today markets in existence
-Industry boundaries are -Industry boundaries are
undefined defined
-Competitive rules unknown -Competitive rules known and
and companies look for demand companies compete on
creation traditional methods
Blue Ocean vs. Red Ocean
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
Examples in past 30 years
• Mutual funds • Bacardi Rum
• Cell phones • CNN
• Biotechnology • Microsoft
• Coffee bars (Starbucks) • Southwest Airlines
• Home video, VCD, DVD • Cirque du Soleil
• CD, MP3, IPOD • Bacardi Rum
• Minivans • Big Screen
• Snowboards/In-line TV/LCD/Plasma
skates • Celebrity
• Internet Clothing/Perfume Lines
New Business Launches
Launches from Red Oceans

Business
86% 14%
launch

62% Revenue
38%
Impact

Profit
39% 61%
Impact

Launches from Blue Oceans


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)
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.
Results
• Accelerated commoditization of products
and services
– As products become standardized, selection
is based more on prices
• Increasing price wars
• Shrinking profit margins
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.
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
Value Innovation
Costs

Simultaneous pursuit of
Differentiation and Low Value
Costs. Innovation
*****

Buyer value
Red Ocean vs. Blue Ocean
• Red Ocean Strategy • Blue Ocean Strategy
• Competes in existing • Create uncontested
market space. market space
• Beat the competition • Make the competition
• Exploit existing demand irrelevant
• Make the value-cost • Create and capture new
trade-off demand
• Align firms activities with • Break the value-cost
strategic choice of trade-off
differentiation OR low • Align activities in pursuit
cost of differentiation AND low
cost.
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.
Six Principles of Blue Ocean
Strategy - Summary
• Formulation Principles • Risk Factors
– Reconstruct market – Decrease search risk
boundaries
– Focus on big picture, not – Decrease planning risk
numbers
– Reach beyond existing
– Decrease scale risk
demand
– Get the strategic sequence
straight – Decrease business model
risk
• Execution Principles
– Overcome key
• Risk Factor
organizational hurdles – Organizational risk
– Build execution into
strategy – Management risk
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).
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).
The Blue Ocean

Analytical Tools and Framework


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)
Wine Industry
• Intense competition (8 main competitors)
– 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.
Strategy Canvas
• Purpose:
– 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
Low
High
Price

Terminology

Marketing

Aging
Strategy Canvas

Legacy

Complexity

Range
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
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.
Four Actions Framework
Reduce
Which factors to
Reduce?

Eliminate Create
A New Value
Which factors to Which factors to
Curve
Eliminate? Create?

Raise
Which factors to
Raise?
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.
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.
ERRC Grid – Yellow Tail
Eliminate Raise
- Terminology and distinction -Price vs. budget wine
-Aging quality -Retail store
- Above the line marketing environment

Reduce Create
-Wine complexity -Easy drinking
-Wine range -Ease of selection
-Vineyard Prestige -Fun and adventure
Low
High
Price

Terminolog
y

Marketing

Agin
g

Legacy

Complexity

Range
Easy
drinking
Easy
Yellow Tail – Strategic Canvas

Selectio
n
Fun
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
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?
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).
Reconstructing Market
Boundaries
Blue Ocean
Reconstructing Market Boundaries
(Six Fundamental Assumptions)
• 1st principle of blue ocean strategy is to reconstruct
market boundaries to break from the competition.
• Six Fundamental Assumptions companies work on today:
(RED OCEAN)
– Define industry similarly and focus on being the best within the
industry
– Look at industry through generally accepted strategic groupings,
and strive to stand out.
– Focus on same buyer group
– Define scope of product offerings similarly
– Accept industries functional and emotional orientation (customer)
– Focus on same point in time – and often competitive threats – in
formulating strategy.
Six Paths Framework
• To break out of red oceans, companies must
break out of accepted boundaries that define
how they compete.
• Instead of looking within boundaries, look across
them systematically to create blue oceans,
similar to ABC.
• Look across: (6 paths)
– Alternative industries, strategic groupings, buyer
groups, complementary products and service
offerings, functional-emotional orientation, and time.
Path 1: Look Across Alternative
Industries
• Alternatives are broader than substitutes.
– Substitute is a product or service that have different
forms but offer the same functionality or core utility.
(ex. electric vs. regular toothbrush)
– Alternative is a product or service that have different
functions and forms but the same purpose. (ex. Dinner
vs. movie – entertainment).
– Example NetJets – offer one-sixteenth ownership in a
plane for business traveller’s vs. 1st class travel on
commercial flights (avoid initial investment, reduce
travel/wait time, allow point-to-point travel, energized
exec’s)
– Home Depot – offers expertise and low costs to
professionals and do-it-yourself publics.
Questions – Path 1
• What are the alternative industries to your
industry?
• Why do customers trade across them?
– By focusing on the key factors that lead
buyers to trade across alternative industries
and eliminating or reducing everything else, a
new blue ocean of new market space can be
developed.
Path 2: Look Across Strategic
Groups within Industries
• Strategic Groups: a group of companies within
an industry that pursue a similar strategy.
• Most strategic groups can be ranked on a two
dimensionally hierarchy based upon Price and
Performance.
• Most companies compete in trying to focus on
out-competing one another in the segment.
• Key to blue ocean is to determine the factors
which cause customers to trade up or down from
one group to another.
Examples
• Curves health centers for woman
– Eliminated all things woman do not like in gym
(mirrors, special machines, juice bars, etc.) and made
it interactive by focusing machines facing each other
to increase interaction.
• Toyota – Lexus, offering high quality of
Mercedes, BMW at a cost of lower-end Lincoln
and Cadillac
• Sony – Looking at High Fidelity Boombox with
low end transistor radios developed the portable-
stereo market.
Questions to Ask? – Path 2
• What are the strategic groups in your
industry?
• Based on strategic canvas. Why do
customers trade up for the higher group,
and why do they trade down to the lower
one?
Path 3: Look Across the Chain of
Buyers
• In most industries, competitors converge around
a common definition of who the target buyer is.
• There is, in reality, a chain of buyers who either
directly or indirectly involved in the buying
decision.
– The person who pays for the product or service may
not be the one using it. (family members) and their
may be other influencers (friends).
– Ex. Purchasing department does not use the product
in production. Engineers may have an influence on
decision.
Looking across Buyers
• By looking across buyer groups, companies can
gain insights into how to redesign their value
curves to focus on previously overlooked set of
buyers.
• Novo Nordisk – producer of insulin
– Normally, industry focused on doctors to promote and
sell products
– They focused on customers and devised a pre-filled
disposable insulin injection pen with dosing system
that provided ease of use and convenience.
Questions – Path 3
• What is the chain of buyers in your
industry?
• Which buyer group does your industry
typically focus on?
• If you shifted the buyer group of your
industry, how could you unlock new value?
Path 4: Look across Complementary
Product and Service Offerings
• In most industries, rivals converge within the
bounds of their industry’s product and service
offerings, although there is often complementary
products or services which go along with them.
– Example: going to movie, requires babysitters and
parking. In Canada, they now offer Matinee “Moms
with Strollers” features on Wednesday afternoons.
• Key is to find the total solution buyers seek when
they choose a product or service.
• Think about what happens both before and after
your product is used.
Example: NABI bus lines
• Sold buses to municipalities, but most cost
came from after market service
(maintenance, wear and tear, rust, etc.)
• Developed a total solution of
comprehensive activities:
– Adopted fiberglass buses:
• Do not rust
• Body repairs faster and easier
• Light weight reduced gas consumption
• More environmentally friendly
• Lower manufacturing cost
Questions? – Path 4
• What is the context in which your product
is used?
• What happens before, during and after?
• Can you identify the pain points?
• How can you eliminate these pain points
through a complementary product or
service offering?
Path 5: Look across Functional or
Emotional Appeal to Buyers
• Industries tend to converge on accepted
notions of scope of products or services,
and also on the possible basis of appeal.
– Some industries compete on the basis of price
based on utility, while others on the basis of
emotional appeal to consumers.
– Industries have essentially, over time, trained
customers what to expect (Pavlovian
response).
Two common patterns to find Blue
Oceans
• Emotionally orientated industries offer many
extras that add price without enhancing
functionality.
– Stripping away those extras may create a simpler,
lower priced, lower cost business model. (Ex. Body
Shop or QB House – Japanese Barbershop reduced
time from 1 hour to 10 minutes, and deleted
ceremony that went with haircut.)
• Functionally orientated industries can often
infuse commodity products with new life by
adding a dose of emotion and, in doing so,
stimulate new demand. (Ex. Swatch, Viagra from
medical treatment to lifestyle enhancement.)
Questions? Path 5
• Does your industry compete on
functionality or emotional appeal?
• If you compete on emotional appeal, what
elements can you strip out to make it
functional?
• If you compete on functionality, what
elements can be added to make it
emotional?
Path 6: Look across Time
• All industries are subject to external trends that
affect a business over time.
– Rise of Internet, Globalization, Aging population,
lowering tariffs and trade barriers.
• Most companies adapt incrementally to changes
as they unfold (environmental scanning)
• Most try to project the trend and try to keep up
with trend.
• Blue ocean is developed by focusing on insight
as to how the trend will change value to
customers and impact the company’s business
model. (value delivered today to value it might
deliver tomorrow).
Three Principles to assessing
trends across time
• The trends must be:
– Decisive to your business
– Must be irreversible
– They must have a clear trajectory
• Ex. development of European Union
• Ex. Apple observed trend of illegal download of
music
– Developed the iPod, made arrangements with record
companies and charged minimal fee for download of
songs ($0.99).
Questions – Path 6
• What trends have a high probability of
impacting on your industry, are
irreversible, and are evolving in a clear
trajectory?
• How will these trends impact on your
industry?
• Given this, how can you open up
unprecedented customer utility?
Conceiving New Markets
• By thinking across the 6 paths, you can
reconstruct established market boundaries
and create blue oceans.

Exercise:
• For McDonalds corporation, identify how
they used these 6 principles to deliver
healthier sandwiches to open a blue
ocean.
Focus on the Big Picture, Not
the Numbers
For
Blue Oceans
(Accountants please close your eyes)!!!
Focus on the big picture, not the
numbers
• Alternative approach to strategic planning
– Don’t focus on business plan and get bogged
down in numbers, budgets, etc.
– Instead of preparing a document, develop a
strategic canvas.
• Visual Strategizing
– 4 steps to drawing a strategy canvas
4 steps of Visualizing Strategy
1. Visual 2. Visual 3. Visual 4. Visual
Awakening Exploration Strategy Communic-
Fair ation
Compare your Go into the field to Draw your “to be” Distribute your
business with your explore the six paths strategy canvas before/after strategic
competitors by - customers, non- based on insight profiles on one page
drawing your “as is” customers, lost from field for easy comparison
canvas customers. (Tiers) observation

See where your Observe the Get feedback on Support only those
strategy needs to distinctive alternative strategy projects and
change advantages of canvases from operational moves
alternative customers, that allow your
products/service competitor company to close
customers and non- the gaps to actualize
customers (tiers) the new strategy
See which factors Use feedback to
you should change, build the best “to be”
eliminate or create future strategy
Process
• Visual Awakening – devise current
strategy canvas (quick – 90 minutes)
• Visual Exploration – go into the field and
interview clients, potential clients and lost
clients
• Visual Strategy Fair – revise strategy
canvas maps
• Visual Communication – distribute 1 page
before/after strategic profiles.
Pioneer-Migrator-Settler Map
• Pioneer – company that offer unprecedented
value – mass of customers
• Settler – company that follows leaders (Stuck in
red ocean – competitive benchmarking,
imitation, price competition)
• Migrator – somewhere in between (extend value
curve by offering customers more for less)
– Moderate growth potential but costly to develop
Growth Potential

Pioneer
.
. .
Migrator
.. ...
Settler
. .. . .
.
• Caution: moving each business
in a portfolio, realize that
settlers may often be Cash
Cows that can finance Today Tomorrow
Migrators/Pioneers. (Need a
balance).
Reach Beyond Existing
Demand
Blue Ocean
Maximize Size of Ocean
• How do you maximize the size of the blue ocean
you are creating?
– Reach Beyond Existing Demand
– By aggregating the greatest demand for the offering,
reduces the scale risk (size of market) associated with
creating a new market.
• To achieve this, challenge two strategic
practices. (Retain and expand existing
customers)
– Focus on Existing customers
– Drive for finer segmentation to accommodate different
buyer groups.
Take a reverse course
• Instead of focusing on customers, look to
non-customers.
• Ex. Callaway Golf looked to why people
had not taken up golf.
– Cost
– Hitting the ball accurately, hand-eye
coordination.
• Developed the Big Bertha, with large head, that
made it easier to hit the ball (greater sweet spot).
Questions to Ask
• Where is your focus of attention:
– Capturing a greater share of existing customers, or on
converting non-customers of the industry into new
demand?
• Do you seek out key commonalities in what
buyers value, or do you strive to embrace
customer differences through finer customization
and segmentation?
• To reach beyond existing demand, think non-
customers before customers; commonalities
before differences; and de-segmentation before
pursuing finer segmentation.
Three Tiers of Non-customers
• Differ in relative distance from your market.
– First Tier: Soon to be customers who sit on edge of
your market, minimal purchasers out of necessity.
They can be pushed into industry if opportunity
presents itself. If offered leap in value, frequency of
purchase would increase (ex. Golf Industry)
– Second Tier: Non-customers who refuse to use your
industry’s offering. (ex. Sports enthusiasts who
choose to play a different sport)
– Third Tier: Unexplored non-customers who have
never thought of your market’s offerings as an option
(ex. African Americans and golf).
Three Tiers
First Tier : “Soon to be
customers”
Second Tier: “Refusing”

Second Third Tier: “Unexplored”


tier Third
First Tier tier
Your
market
First Tier
• Looking for something better within more broadly defined
market.
• Ocean of untapped demand waiting to be released
– Ex. Subway restaurants, offered healthy alternative to fast food
restaurants (McDonalds is now copying).
– Survey existing and non-current customers.
• Lesson: Non-customers tend to offer far more insight into
how to unlock and grow a blue ocean than do relatively
content existing customers.
– Look for commonalities across responses of non-customers
– Focus on these, and not the differences between them.
Second Tier
• Refusing non-customers, do not use (current
market unacceptable) or cannot afford the use of
the current market offering.
– Ex. Media advertising on benches in cities while
waiting for bus. Offered free to city, but advertisers
who could not afford big billboards could afford these.
• Questions: What are the key reasons second-
tier non-customers refuse to use the products of
your service or industry?
– Look for commonalities across responses. Focus on
these not differences.
Third Tier
• Typically unexplored non-customers have not
been targeted or thought of as potential
customers by any player in the industry.
• Needs and business opportunities were not
connected or thought to belong to another
market. Ex. African Americans with golf vs.
basketball.
• Example: Dental Care and teeth whitening gel.
Go for the biggest Tier
• No specific tier to focus as the scale of the
blue ocean opportunities that a specific tier
of non-customers differs across time and
industries.
• Focus on the biggest tier at the time.
• Explore if there are overlapping
commonalities across all three tiers of
non-customers. (Ex. New technology
unlocks opportunities).
Get the Strategic Sequence
Right

Blue Ocean
Sequence
• You’ve looked across paths to discover possible
blue oceans
• You’ve constructed a strategy canvas that
clearly articulates your future blue ocean
• You’ve explored how to aggregate the largest
possible mass of buyers for your idea.
• Now: Build a business model to evaluate the
commercial viability of the new blue ocean and
reduce business risk.
The Right Strategic Sequence

Buyer Utility
No - Rethink
yes
Revenue Side
Price
No - Rethink
yes

Cost
No - Rethink
yes
Cost Side
Adoption
No - Rethink
yes

A commercially viable
Blue Ocean
The right strategic sequence
• Starting point is buyer utility
– Yes, proceed, no – park idea (maybe wrong time) or rework it
(Ex. Disposable Diapers)
• Setting the right price point.
– Is it the right price for the utility.
• These two ensure leap in net buyer value = utility
received – price paid.
• Can you produce it for the target cost
– Do not let cost drive prices (other way around)
• These three achieves value innovation for customer and
company
• Address Adoption Hurdles – in rolling out idea (including
value chain suppliers, customers accepting idea)
Testing for Utility
• Value innovation is NOT the same as
technology innovation.
• Use of buyer utility map to determine the
full range of utility spaces that a product or
service may potentially have.
• Utilities:
– Ownership, place, possession, time
– Product or process
Buyer Utility Map
Six stages of the Buyer Experience Cycle

Purchase Delivery Use Supplements Maintenance Disposal

Customer
Productivity
Simplicity
Six Utility Levers

Convenience

Risk

Fun and
Image
Environmental
Friendliness
Buyer Experience Cycle
Purchase Delivery Use Supplements Maintenance Disposal

How long does How long does Does the Do you need Does the Does use of
it take to find it take to get product other products product the product
the product? delivery? require or services to require create waste
training? make this external items?
work? maintenance
Is the place of How difficult is Is the product If so, how How easy is it How easy is it
purchase it to unpack easy to store costly are to maintain or to dispose of?
attractive? and install when not in they? upgrade
use product?
How secure is Do buyers How effective How much How costly is Are there legal
the have to is the products time do they maintenance? or
transaction? arrange features and take? environmental
delivery functions issues
themselves
How rapidly Does it have How easy are How costly is
can you make too many they to obtain disposal?
a purchase? bells/whistles
How much
pain do they
cause?
Utility Levers
• The most commonly used lever is productivity, in
which the product or service helps customers do
things faster and better.
• Does the product or service remove the greatest
blocks to utility across the entire buyer
experience cycle for customers and non-
customers.
• Example: Model T Ford: Other cars focused on
stylish image, but did not address the two
biggest blocks to utility, convenience in use
(bumpy, muddy back roads) and maintenance
(no experts to fix them). Only came in black.
Strategic Pricing
• Identify the Price Corridor of the Mass
– Compare form, function and objective of your offering vs.
competitors/non-competitors
• Specify price level within corridor
– Based on legal protection (patent), resource protection (entry
barriers) and ability of competitors to imitate
• In General – Ability to buy.
– Lower prices are warranted if your offering has high fixed costs
and marginal variable costs, attractiveness depends on network
externalities (value to customers increase as more people use it.
Ex. eBay), or as cost structure benefits from economies of scale.
• Once price is set, use target costing to develop cost
structure.
– Use of cost slashing, streamlining and partnering (SAP with
Oracle Databases and Management Consulting sales force)
Blue Ocean Index
• Used to determine if the company is ready to
implement their blue ocean idea:
IPod MP3

Utility Is there exceptional utility to buyers? +++ ++

Price Is the price accessible to the mass of - +


buyers?
Cost Does your cost structure meet the + +
target cost?
Adoption Have you addressed adoption hurdles +/- +
up front?
Executing Blue Ocean Strategy
Overcome Key Organizational Hurdles

Blue Ocean
Executing Strategy
• Strategy implementation is an internal,
operations-driven activity involving
organizing, budgeting, motivating, culture-
building, supervising, and leading to “make
the strategy work” as intended in a timely
manner!
Executing the Blue Ocean
• Challenge exists for all strategies
• Four Hurdles:
– Cognitive: getting employees onboard. (eliminating
comfort zone of current strategy)
– Limited Resources: The greater the shift from the
norm, the greater the need for resources to execute.
– Motivation: Key players (stakeholders) to break from
status quo.
– Politics: Internal and external resistance to change
• Use Tipping Point Leadership to overcome
hurdles fast, at a low cost, while winning
employees backing.
Four Organizational Hurdles
Cognitive Hurdle
An organization wedded
To status quo

Political Hurdle
Resource Hurdle Opposition from
Limited resources Powerful vested
interests

Motivational Hurdle
Unmotivated staff
Tipping Point Leadership
• Use of organizational culture and leadership
style in which the belief that a fundamental
change can happen quickly when the beliefs and
energies of a critical mass of people create an
epidemic movement towards an idea.
• Key is concentration, not diffusion.
• There is a disproportionate influence by a few
key players, acts and activities, ie. Leveraging
those factors.
• Bill Bratton and NY Police.
Key Questions?
• What factors or acts exercise a
disproportionately positive influence on
breaking the status quo?
– “Maximum bang for your buck”
– “Motivating key players to move aggressively
forward with change”
– “Knocking down political roadblocks that often
trip up strategies”
Break Through Cognitive Hurdles
• Need to make people aware of the need for a
strategic shift and to agree on its causes.
• Not using financial measures as whip or tool to
“stretch and meet budgetary goals”,
• Make people see and experience reality first
hand. “seeing is believing”.
– Bratton made top brass ride the subway to and from
work to show how bad the crime was (gangs, winos,
aggressive begging).
– Get the managers out of the office, have them meet
with disgruntled customers first hand.
Jump the Resource Hurdle
• Instead of asking for more resources, tipping
point advocates multiplying the value of the
resources you have.
• Three forces of disproportionate influence:
– Hot spots: activities that have low resource inputs but
high potential performance gains. (Focal point)
– Cold spots: activities that have high resource inputs
but low performance impact. (Reduce expenditure)
– Horse trading: trading your units excess resources for
another units excess resources to fulfill resource
gaps. (possibilities)
Questions?
• What actions consume your greatest
resources but have little performance
impact?
• What activities have the greatest
performance impact but are resource
starved?
Actions for Resource Hurdles
• Redistribute Resources to Hot Spots:
– Question the status Quo.
– Bratton achieved success with limited resources by
targeting the worst subway lines on the route and
targeting resources at it.
• Redirect Resources from Cold Spots:
– Bratton found a large time delay occurred in bringing
criminals from subway to station to process, so he set
up processing buses that was mobile to come and get
criminals.
• Engage in Horse Trading:
– Bratton traded unmarked cars that transit had for
office space which was in excess to transit division.
Questions?
• Are you allocating resources based on old
assumptions, or do you seek out and
concentrate resources on hot spots?
• Where are your hot spots?
• What activities have the greatest performance
impacts but are resource starved?
• Where are your cold spots?
• What activities are resource oversupplied, but
have little performance impact?
• Do you have a horse trader, and what can you
trade?
Jump the Motivational Hurdle
• For a new strategy to be successful, people
must not only recognize what needs to be done,
but must also act on that insight in a sustained
and meaningful way.
• Tipping Point strategy follows the course of
massive concentration, by focusing on three
disproportionate influencers in motivating
employees.
– Kingpins
– Fishbowls management
– Atomization
Influencers - Motivation
• Focus on Kingpins
– The key influencers in the organization (based on powerbase,
O.B.), natural leaders, respected and persuasive.
• Fighting
• Place Kingpins in Fishbowl
– A sustained and meaningful way to shine a spotlight on the
actions in a repeated and highly visible way.
– Based on Transparency, Inclusion and Fair Process.
• Presentation of results at monthly manager meeting (like BSC
defense)
• Everyone knows how they are being evaluated.
• Atomize to Get the Organization to Change Itself
– Framing of the strategic challenge, as achievable, by breaking
down overall project in smaller or bite-size chunks.
– Bratton made the streets of NY safer, one block at a time.
Questions?
• Do you indiscriminately try to motivate the
masses, or do you focus on key
influencers, your kingpins?
• Do you put the spotlight on and manage
kingpins in a fishbowl based on fair
process?
• Do you issue grand strategic visions, or do
you atomize the issue to make it
actionable to all levels?
Knock over the Political Hurdles
• Organizational politics are an inescapable reality
of corporate and public life.
• There are those who will resist the changes,
those who face to lose power or control as a
result of the changes.
• Three disproportionate influencers:
– Leverage Angels (those who have most to gain)
– Silencing Devils (those who have most to lose)
– Getting a consigliore on the management team. (well
respected person who knows the landscape, where
and who will oppose you, how and where and who will
support you.
Build Execution into the Strategy
• To effectively execute the blue ocean strategy,
every person in the organization needs to be
involved and engaged in the process.
• To build employee’s trust and commitment, and
inspire voluntary cooperation

• Use of fair process will minimize the


management risk of distrust, non-cooperation,
and even sabotage.
Fair Process affects People’s
Attitudes and Behaviours
Strategy Fair Process
Formulation Engagement
Process Explanation
Expectation Clarity

Trust and
Attitudes
Commitment
“My Opinion Counts”

Voluntary
Behaviour Cooperation
“I’ll go beyond the
Call of duty”

Strategy Exceeds
Execution Expectations
Self-initiated
Fair Process

Voluntary
Intellectual and
Trust and Cooperation in
Fair Process Emotional
Commitment Strategy
Recognition
Execution

Intellectual and Refusal to


Violation of Distrust and
Emotional Execute
Fair process Resentment
Indignation Strategy
Implementation – 90 Day Plan
• Month 1: Draw distinction between innovation and blue-
ocean creation
– Challenge ideas and proposals – do they deliver radically
superior utility?
– Understand new technology, product, service
• Month 2: Gain agreement on Strategic Pricing
– Identify alternatives from buyers point of view, not competitions.
– Which alternatives capture greatest mass of buyers and at what
price. (Do not overdeliver on what buyers actually value).
• Month 3: Set aggressive target costs for employees
– Set price-minus, not cost-plus targets.
– Engage employees to reduce costs where possible (Technology,
process).
Sustainability and Renewal of the
Blue Ocean
• Creating a blue ocean eventually will
attract other entrants/competitors and will
form a red ocean
• Reap benefits of first mover advantage.
• What barriers exist to blue ocean
imitators?
• When should a company look to find a
new blue ocean?
Barriers to the imitation of blue
oceans
• CNN was ridiculed and not thought of as serious to other
stations.
• Brand image conflict. Body Shop used unconventional
advertising and for others to copy would invalidate their
current business models.
• Patents
• High volume sales and low cost through value innovation
reduces imitators on cost disadvantage, and economies of
scales.
• Network externalities. The more customers a product/service
has, the harder it is for others to enter the market and draw
customers away, ex. eBay and online auctioning.
• Politics, operational and culture change from having to
change business models of competitors may provide short-
term protection.
• Leap-in-value provides customer loyalty through branding.
When to Look for New Blue
Oceans
• By constantly updating your strategy canvass,
you can see how others in the industry is trying
to converge on your value curve.
• By looking for ways to outdistance your
competitors on your value curve you may be
able to prevent them from converging.
• When you no longer have focus, divergence and
a compelling tag line, it is time to look for new
blue oceans.
Principles of Implementation
• Leadership and tone from the top. • Tipping point management.
• Evaluation of the organization with • Link the results with compensation
the external environment packages.
(stakeholders). • Participation and communication with
• Development of Strategy Canvas every level of the organization.
• Development of Strategic Plan • Apropriate corporate culture,
(short and long term). motivation and learning, continuous
• Implementation Team and Leader. improvement.
• Evaluation of the systems of • Suficient resources destined to the
accounting, information systems to implementation, both finances and
determine the ability to capture human.
information. • Sufficient time for the implementation.
• Evaluation of the current
performance measurement system
to evaluate implementation.
• Evaluation of the organizational
structure
Continual Process
BOS
Update Test
Hypothesis
Strategy
Rolling
Budget
Funding Reporting

Performance

Input Value Chain Output

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