#Notes Blue Ocean Strategy

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Summary

Blue Ocean Strategy is all about finding ways to systematically create new market opportunities and value propositions. Stop competing with your competition and function in an industry all to your own.

Top Lessons Learned

  1. Competing in a red ocean (competitive market) will basically lead you towards an eventual demise, prices will continue to work their way down to zero.
  2. Focusing on value creation over anything else, it's what matters to the buyers.
  3. Eliminating and reducing industry held assumptions is oftentimes the quickest way to cut cost model and create a blue ocean.

General Notes

There are five points of distinction in thinking about blue ocean strategy:

  1. Competition should not occupy the center if strategic thinking. Instead the customer should always be the focal point.
  2. Industry structure is not given, it can be shaped. Don't let traditional models such as SWOT or five forces dominate your thinking about structure, try to find ways to reinvent based on value.
  3. Strategic creativity can be unlocked systematically.
  4. Execution can be built into strategy formulation.
  5. A step by step model for creating strategy.

The only way to beat the competition is to stop trying to beat the competition.

Blue oceans, in contrast to red oceans, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.

A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.

With value innovation, instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space. Value innovation occurs only when companies align innovation with utility, price, and cost positions.

Those that seek to create blue oceans pursue differentiation and low cost simultaneously.

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.

  • Buyer value comes from the utility and price that the company offers to buyers.
  • Value to the company is generated from price and its cost structure.
    Value innovation visualized

Analytic tools
Strategy canvas

The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It serves two purposes. First, 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.

Strategy canvas for yellow tail wine

Four actions framework

The four actions framework breaks the trade-off between differentiation and low cost and to create a new value curve, there are four key questions to challenge an industry’s strategic logic and business model:

  1. Which of the factors that the industry takes for granted should be eliminated?
  2. Which factors should be reduced well below the industry’s standard?
  3. Which factors should be raised well above the industry’s standard?
  4. Which factors should be created that the industry has never offered?

The first two questions focus on reducing cost structure. The second two focus on how to increase value and create new demand.

The eliminate-reduce-raise-create grid

Compliment to the four actions framework, is focused on action plans coming out of the four actions to create new value curves.

It has a few key advantages:

  • It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off.
  • It 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.
  • It is easily understood by managers at any level, creating a high level of engagement in its application.
  • 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.

An effective blue ocean strategy should have focus, divergence, and a compelling tagline. It's important as well that there not be strategic contradictions in the factors being invested in, neglected, or reduced.

Six paths framework

Used to systematically identify new market opportunities.

  1. Look across alternative industries
  2. Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose.
  3. 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, you can create a blue ocean of new market space.
  4. Look across strategic groups within industries (groups of companies that pursue a similar strategy).
  5. Usually grouped together based on price and performance.
  6. What are the strategic groups in your industry? Why do customers trade up for the higher group, and why do they trade down for the lower one? Draw from the strengths of each.
  7. Look across the chain of buyers.
  8. Different buyers (users, influencers, purchasers) will likely have different definitions of value.
  9. 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?
  10. Look across complimentary product and service offerings
  11. A simple way to do so is to think about what happens before, during, and after your product is used.
  12. What is the context in which your product or service 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?
  13. Look across functional or emotional appeal to buyers
  14. 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?
  15. Look across time
  16. What trends have a high probability of impacting your industry, are irreversible, and are evolving in a clear trajectory? How will these trends impact your industry? Given this, how can you open up unprecedented customer utility?

Summary table unlocking new markets

Focus on the big picture, not on the numbers.

The four steps to visualizing strategy

A pioneer, migrator, settler map can help visualize where a company is at now versus where they want to be.

  • Settlers are the "me too" companies that exist everywhere.
  • Migrators are slightly better and are usually the big cash generators of today.
  • Balancing the desire to generate cash today as a migrator versus innovating as a pioneer is tricky (covered later).
    PMS map

Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value.

  • Where is your locus of attention—on capturing a greater share of existing customers, or on converting noncustomers 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 noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.

Tiers of non-customers

Focus on the tier that represents the biggest catchment that your organization has the capability to act on. But you should also explore whether there are overlapping commonalities across all three tiers of noncustomers.

Strategic sequencing is the order that everything happens is important.

Blue ocean implementation sequence

When trying to validate if you have enough buyer utility identified, use The following tool.

Buyer utility map

To test for exceptional utility, companies should check whether their offering has removed the greatest blocks to utility across the entire buyer experience cycle for customers and noncustomers. The greatest blocks to utility often represent the greatest and most pressing opportunities to unlock exceptional value.

Some questions to ask throughout the process:

Once the utility is found, to minimize the risk of imitation and maximize the customer base/revenue, the price corridor tool can be used.

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.
  • The attractiveness of the blue ocean offering depends heavily on network externalities.
  • The cost structure behind the blue ocean offering 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.

Start by figuring out the strategic price, then work towards the target cost. Cut costs by:

  • streamlining operactions
  • partnering
  • changing the pricing model of the industry

When putting strategy into action, companies face four challenge types:

  1. Cognitive, getting people onboard with the approach.
  2. Limited resources, no more budget or decreasing budget
  3. Motivation, unmotivated staff
  4. Politics

To get over these hurdles, use a technique dubbed tipping point leadership. The key to this concept is concentration. There are people, acts, and activities that exercise a disproportionate influence on performance.

  • Cut down on what you’re doing
  • Spend resources on the things that will have the biggest payoff (disproportionate influence)

Answer these questions:

  • What factors or acts exercise a disproportionately positive influence on breaking the status quo?
    • Show people/managers the worst operational problems, face your fears.
  • On getting the maximum bang out of each buck of resources?
    • Hot spots: low resource, high payoff
    • Cold spots: high resource, low payoff
    • Horse trading: trading resources with another unit to balance the scales
    • Do everything you can to maximize hot spots, apply the 80/20 rule.
  • On motivating key players to aggressively move forward with change?
    • Don’t pursue top down strategy. Focus on kingpins, fishbowl management and atomization
    • Focus on taking the top influencers and putting them in a transparent spotlight (the fishbowl) so that both action and inaction are seen. This creates positive and negative reinforcement in all the right ways.
    • Clear and transparent expectations and process are very important in this style of leadership.
    • Break down goals of the larger strategic plan into bite-sized atoms that people at all levels can relate to. Everyone takes a building block of the overall strategy and nobody can say it’s too ambitious then.
  • And on knocking down political roadblocks that often trip up even the best strategies?
    • Focus on leveraging angels, silencing devils, and getting a consigliere on their top management team.
    • Get a trusted person who is aligned with and will fight for you in top management.
    • Who are my devils? Who will fight me? Who will lose the most by the future blue ocean strategy?
    • Who are my angels? Who will naturally align with me? Who will gain the most by the strategic shift?

There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation. This is needed to turn strategy into execution.

  • Engagement means asking others opinions and giving them a chance to refute the approach.
  • Explanation means that everyone should clearly understand why a decision was made and feel as though their opinions were considered.
  • Clear expectations means that the ground rules are clearly explained, how people will be judged, what will the consequences be, both bad and good.

At the highest level, there are three propositions essential to the success of strategy: the value proposition, the profit proposition, and the people proposition.

To produce a high-performing and sustainable blue ocean strategy, you need to ask the following questions.

  • Are your three strategy propositions aligned in pursuit of differentiation and low cost?
  • Have you identified all the key stakeholders, including external ones on which the effective execution of your blue ocean strategy will depend?
  • Have you developed compelling people propositions for each of these to ensure they are motivated and behind the execution of your new idea?

CREATING A BLUE OCEAN is not a static achievement but a dynamic process. What are th barriers to entry for imitators? Sustainability can be traced to the following types of barriers:

  • alignment barrier (value, profit, and people)
    • how hard would it be to create the alignment between these propositions?
  • cognitive and organizational barrier
    • Will competitors need substantial investments in retraining, politics shifts or in general massive undertakings to imitate?
  • Brand barrier
    • would imitation cause a current competitors business model to be in conflict with and invalidate their current branding?
  • Economic or legal barriers?
    • are network effects or a natural monopoly in place that would make it very difficult to compete?
    • is there a patent or trademark active that would it make it far too expensive?

To avoid the trap of competing, renewal is needed. The questions here are:

  • When should a single-business firm value-innovate again?
  • And, how can a multibusiness firm renew its portfolio of businesses in blue ocean terms as competition heats up?
  • look out for where the value curves start to converge. Don’t jump into a new opportunity too soon though, ride the wave as long as possible then extend the blue ocean to pivot away from competition.

By plotting the corporate portfolio as pioneers, migrators, and settlers on the dynamic PMS map, executives can see at a glance where the gravity of its current portfolio of businesses is, how this has shifted over time, and when there is a need to create a new blue ocean to renew the portfolio.

There are 10 common red ocean traps, avoid them:

  • The belief that blue ocean strategy is a customer-oriented strategy that’s about being customer led.
  • The belief that to create blue oceans, you must venture beyond your core business.
  • The misconception that blue ocean strategy is about new technologies.
  • The belief that to create a blue ocean, you must be first to market.
  • The misconception that blue ocean strategy and differentiation strategy are synonymous.
  • The misconception that blue ocean strategy is a low-cost strategy that focuses on low pricing.
  • The belief that blue ocean strategy is the same as innovation.
  • The belief that blue ocean strategy is a theory of marketing and a niche strategy.
  • The belief that blue ocean strategy sees competition as bad when in fact it can be good for companies.
  • The belief that blue ocean strategy is synonymous with creative destruction or disruption.