Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant - By Chan W. Kim
Date read: 2018-01-06How strongly I recommend it: 8/10
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Instead of trying to compete in a "red ocean" full of competitors and cut-throat competition you should instead work on developing a "blue ocean" strategy by reinventing your value proposition and looking for new non-customers. Great book on building a unique strategy that will bring tremendous value to your current and new customers.
Contents:
- DEFINING BLUE OCEAN STRATEGY
- TOOLS & FRAMEWORK
- FORMULATING BLUE OCEAN STRATEGY
- EXECUTING BLUE OCEAN STRATEGY
- COMMON RED OCEAN TRAPS
My Notes
Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant. Instead of dividing up existing—and often shrinking—demand and benchmarking competitors, blue ocean strategy is about growing demand and breaking away from the competition
The only way to beat the competition is to stop trying to beat the competition.
Imagine a market universe composed of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space. Blue oceans, in contrast, 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.
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. It 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.
Effective blue ocean strategy should be about risk minimization and not risk taking.
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 value curve, the basic component of the strategy canvas, is a graphic depiction of a company’s relative performance across its industry’s factors of competition.
To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to noncustomers of the industry.
The Four Actions Framework - There are four key questions to challenge an industry’s strategic logic and business model:
The eliminate-reduce-raise-create grid - Pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve.
An effective blue ocean strategy like [yellow tail]’s has three complementary qualities: focus, divergence, and a compelling tagline. Without these qualities, a company’s strategy will likely be muddled, undifferentiated, and hard to communicate with a high cost structure.
Focus - Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.
Divergence - When a company’s strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness. In contrast, the value curves of blue ocean strategists always stand apart. By applying the four actions of eliminating, reducing, raising, and creating, they differentiate their profiles from the industry’s average profile.
Compelling Tagline - A good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic tagline. A good tagline must not only deliver a clear message but also advertise an offering truthfully, or else customers will lose trust and interest. In fact, a good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic tagline.
There are six basic approaches to remaking market boundaries, aka the six paths framework.
Path 1: Look Across Alternative Industries - 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.
Path 2: Look Across Strategic Groups within Industries - The term refers to a group of companies within an industry that pursue a similar strategy. 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?
Path 3: Look Across the Chain of Buyers - Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of a new blue ocean. By looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers.
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 - 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.
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?
Path 5: Look Across Functional or Emotional Appeal to Buyers - Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand.
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 - 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?
focus on the big picture, not the numbers.
The four steps of visualizing strategy:
Step 1: Visual Awakening - We’ve found that asking executives to draw the value curve of their company’s strategy brings home the need for change. It serves as a forceful wake-up call for companies to challenge their existing strategies.
Step 2: Visual Exploration - send a team into the field, putting managers face-to-face with what they must make sense of: how people use or don’t use their products or services. Obviously, the first port of call should be the customers. But you should not stop there. You should also go after noncustomers. You need to look at how customers might find alternative ways of fulfilling the need that your product or service satisfies.
Step 3: Visual Strategy Fair.
Step 4: Visual Communication - After the future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee.
Chief executives should instead use value and innovation as the important parameters for managing their portfolio of businesses. They should use innovation because, without it, companies are stuck in the trap of competitive improvements. They should use value because innovative ideas will be profitable only if they are linked to what buyers are willing to pay for. They should reach beyond existing demand.
By aggregating the greatest demand for a new offering, this approach attenuates the scale risk associated with creating a new market.
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. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.
There are three tiers of noncustomers that can be transformed into customers:
Get the strategic sequence right - Companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption:
What are the key reasons first-tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to desegment buyers and unleash an ocean of latent untapped demand.
What are the key reasons second-tier noncustomers refuse to use the products or services of your industry? Look for the commonalities across their responses. Focus on these, and not on their differences. You will glean insight into how to unleash an ocean of latent untapped demand.
Unless the technology makes buyers’ lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins. Value innovation is not the same as technology innovation.
We have developed a tool called the price corridor of the target mass to help managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct but interrelated steps:
Step 1: Identify the Price Corridor of the Target Mass - Listing the groups of alternative products and services allows managers to see the full range of buyers they can poach from other industries as well as from nonindustries. The price bandwidth that captures the largest groups of target buyers is the price corridor of the target mass.
Step 2: Specify a Level within the Price Corridor - The second part of the tool helps managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services. That assessment depends on two principal factors. First is the degree to which the product or service is protected legally through patents or copyrights. Second is the degree to which the company owns some exclusive asset or core capability, such as an expensive production plant or unique design competence that can block imitation.
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.
To maximize the profit potential of a blue ocean idea, a company should start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost. Here, price-minus costing, and not cost-plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match.
To hit the cost target, companies have three principal levers:
Another model is the slice-share; mutual fund managers, for example, bring high-quality portfolio services—traditionally provided by private banks to the rich—to the small investor by selling a sliver of the portfolio rather than its whole.
Freemium is yet another pricing strategy some companies are using by which a product or service (typically a digital offering such as software, media, games, or web services) is provided free of charge to pull in the target mass, but a premium is charged for proprietary features, functionality, or virtual goods.
Before companies go public with an idea and set out to implement it, they should make a concerted effort to communicate to employees that they are aware of the threats posed by the execution of the idea. Companies should work with employees to find ways of defusing the threats so that everyone in the company wins, despite shifts in people’s roles, responsibilities, and rewards.
Potentially even more damaging than employee disaffection is the resistance of partners who fear that their revenue streams or market positions are threatened by a new business idea.
Opposition to a new business idea can also spread to the general public, especially if the idea threatens established social or political norms.
In educating these three groups of stakeholders—your employees, your partners, and the general public—the key challenge is to engage in an open discussion about why the adoption of the new idea is necessary. You need to explain its merits, set clear expectations for its ramifications, and describe how the company will address them.
Tipping point leadership builds on the rarely exploited corporate reality that in every organization, there are people, acts, and activities that exercise a disproportionate influence on performance.
The key questions answered by tipping point leaders are as follows:
Tipping point leadership does not rely on numbers to break through the organization’s cognitive hurdle. To tip the cognitive hurdle fast, tipping point leaders such as Bratton zoom in on the act of disproportionate influence: making people see and experience harsh reality firsthand.
Showing the worst reality to your superiors can also shift their mind-set fast. A similar approach works to help sensitize superiors to a leader’s needs fast. Yet few leaders exploit the power of this rapid wake-up call. Rather, they do the opposite. They try to garner support based on a numbers case that lacks urgency and emotional impetus.
Get them to listen to their most disgruntled customers firsthand. Don’t rely on market surveys.
There are three factors of disproportionate influence that executives can leverage to dramatically free resources:
To trigger an epidemic movement of positive energy, however, you should not spread your efforts thin. Rather, you should concentrate your efforts on kingpins, the key influencers in the organization. These are people inside the organization who are natural leaders, who are well respected and persuasive, or who have an ability to unlock or block access to key resources.
At the heart of motivating the kingpins in a sustained and meaningful way is shining a spotlight on their actions in a repeated and highly visible way. This is what we refer to as fishbowl management, where kingpins’ actions and inaction are made as transparent to others as are fish in a bowl of water. By placing kingpins in a fishbowl in this way, you greatly raise the stakes of inaction. Light is shined on who is lagging behind, and a fair stage is set for rapid change agents to shine. For fishbowl management to work, it must be based on transparency, inclusion, and fair process.
The three E principles of fair process:
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?
Red Ocean Trap One: The belief that blue ocean strategy is a customer-oriented strategy that’s about being customer led.
To create new demand, an organization needs to turn its focus to noncustomers and why they refuse to patronize an industry. Noncustomers, not customers, hold the greatest insight into an industry’s pain points and points of intimidation that limit the size and boundary of the industry.
Red Ocean Trap Two: The belief that to create blue oceans, you must venture beyond your core business. Blue oceans are right next to you in every industry.
Red Ocean Trap Three: The misconception that blue ocean strategy is about new technologies. Value innovation, not technology innovation, is what opens up commercially compelling new markets.
Red Ocean Trap Four: The belief that to create a blue ocean, you must be first to market. Companies need to continuously drive home the idea that while speed may be important, even more important is linking innovation to value.
Red Ocean Trap Five: The misconception that blue ocean strategy and differentiation strategy are synonymous.
Red Ocean Trap Six: The misconception that blue ocean strategy is a low-cost strategy that focuses on low pricing.
Blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing. The key here is not to pursue pricing against the competition within an industry but to pursue pricing against substitutes and alternatives that are currently capturing the noncustomers of your industry.
Red Ocean Trap Seven: The belief that blue ocean strategy is the same as innovation. Value innovation, not innovation per se, is the singular focus of blue ocean strategy.
Red Ocean Trap Eight: The belief that blue ocean strategy is a theory of marketing and a niche strategy.
It is more about desegmenting markets by focusing on key commonalities across buyer groups to open up and capture the largest catchment of demand. When practitioners confuse the two, they all too often are driven to look for customer differences for niche markets in the existing industry space rather than the commonalities that cut across buyer groups in search of blue oceans of new demand.
Red Ocean Trap Nine: The belief that blue ocean strategy sees competition as bad when in fact it can be good for companies.
Red Ocean Trap Ten: The belief that blue ocean strategy is synonymous with creative destruction or disruption. Blue ocean strategy is about redefining the problem itself, which tends to create new demand or an offering that often complements rather than displaces existing products and services.