Revision as of 08:49, 21 September 2016

Blue Ocean Strategy

The Blue Ocean Strategy is a strategy to gain a competitive advantage. It is used to create uncontested market space and to make the competition irrelevant. New demands are made instead of fighting over existing demand, where fighting for shear of the demand will always be limited. This strategy has the possibility to open up an opportunity for rapid and profitable growth. The strategy is meant to be used for companies that builds future where the customers, employees, shareholders, and society wins. The people behind the Blue Ocean Strategy are W.Chan Kim & Renée Mauborgne. They met in a classroom where Mr. W.Chan was a professor, and Miss Reneé was a student, twenty years ago (1995). The Blue Ocean Strategy is relevant for everyone, companies, corporations, entrepreneurs, etc. that want to create something for unknown markets. (Resource)

Blue ocean vs. Red ocean

Red ocean is the definition on the current existing markets. In those markets the competition is bloody, companies are fighting for a share of the available customers for a potential profit. Most companies cannot stay in this heated competition for a long time without going bankrupt. The big players in each market within the red ocean dominate the smaller players, therefore the need to think outside of the box is necessary to develop a sustainable career. The blue oceans are the markets that have not been identified, in the blue ocean there are no current competitors because the ocean is clear for whoever comes there first. Blue ocean is developed from the competition within the red ocean, with strategy canvas, identifying focus points and with the eliminate-reduce-raise-change grid. Blue oceans eventually turn red, imitators will always exist and competition will arise with hungry competitors wanting their share of the cake. (Resource, netsíða)

The 8 Principles of Blue Ocean Strategy

There are 8 principles that guide the way into how to develop a strategy into the blue ocean and how to execute the strategy. The 8 principles are categorized into two different steps, formulation principles and execution principles.

Formulation Principles

The first step is to formulate the path into the blue ocean. Following are the four principles on what to consider to formulate a blue ocean strategy.

Reconstruct Market Boundaries

The first principle of the blue ocean strategy is to reconstruct the market boundaries. It includes risks that some companies are not willing to take, and therefore end up being a riverboat gambler. Subsequently the six path framework was developed for companies to use to create a blue ocean, no matter the industry. (Resource)

The first path in the six path framework is: Look across alternative industries Competitors do not only exist in the same industry, there are also companies that produce alternative products or services that are in other industries. Those products or services may have different forms or functions but offer the same functionality, and have the same purpose. Looking across alternative industries, there might be a gap to develop a blue ocean. (Resource,p 51) For example, Cinemas versus restaurants. They are different, cinemas offer a visual entertainment, while restaurant offers more of a social gathering. Even though they are different, they both have the same purpose, and that is for people to enjoy. (Resource,p 51)

Second path is: Look across strategic groups within industries There are companies within the same industry that pursue similar strategies, and therefore are classified into strategic groups. These groups can be ranked in a hierarchical order built on price and performance. Where most companies focus on outperforming other firms within the strategy group. (Resource,p 58) For example, Global gyms versus Crossfit gyms. In a global gym people are more to themselves rather than in Crossfit gyms people socialize. Some people don't like to socialize while working out and therefore choose the global gym over the other. Both options are competing in the same market but with different focus points.

Third path is: Look across the chain of buyers There are three groups of buyers. The purchasers, the users, and the influencers. These three groups may overlap, but the purchasers may differ from the actual users and sometimes influencers are important as well. Companies can target different buyer segment to discover a new blue ocean. (Resource,p 63) For example, Novo Nordisk the Danish insulin producers created a blue ocean within the pharmaceutical industry. Where most pharmaceutical companies focus on the influencers, the doctors, to focusing on the user with new innovations. Before, insulin had to be injected via needles, which only doctors could prescribe to the patients. After the innovation, Novo Nordisk invented the NovoPen which was user-friendly and eliminated the hassle of needles. (Resource,p 63)

Fourth path is: Look across complementary product and service offerings Companies need to think about what happens before, during and after the product or service is used. Sometimes extra service is needed for the customers to be interested to use the service or buy the products. (Resource,p 67) For example, Movie theaters. Parking may be a problem, and if the customer doesn't feel like looking for a place to park they will eventually not go to the cinemas. Therefore, the cinemas need to think about how to provide the service for easier parking. (Resource,p 67)

Fifth path is: Look across functional or emotional appeal to buyers Some companies compete for price and functions, while other companies compete on feelings for the customers. (Resource,p 71) For example, Fast food chain vs. fancy restaurant. They both compete in the food industry, while the fast food chains think more about the price and less about the customer’s experience. On the other hand, fancy restaurants rely on customer’s feelings, they want the customer to experience emotional feelings.

Sixth and the last path is: Look across time With time there come changes, and industries need to adapt to those changes. (Resource,p 77) For example, with the green house gas emission(GHG) effects, industries that rely heavily on gas need to adapt to the fact that GHG needs to be reduced. Airplane, car, and boat producers are all working on engines that pollute less. Even some companies now have electrical vehicles, like Tesla, that release no GHG into the air. (Resource,p 77)

Focus On the Big Picture, not the numbers

Many companies tend to get stuck in red oceans, because their main focus is on the numbers. There are four major steps that need to be considered when drawing the strategy canvas, and are build on the six paths. The first step is visual awakening: That involves drawing the first strategy canvas, to see where their focuses are at and how they are compared to competitors. It also allows mangers to see where the strategy needs changes. The second step is visual exploration: This step depends on a lot of research, why customers buy and why non-customers don’t buy. This is a critical step in understanding what the current customer values, and what the non-customers wants. Several strategy canvases are drawn with different focus points, to have the divergence for the next step The third step is visual strategy fair: All of the pervious drawn strategy canvases are presented for a certain group of people that each company finds accurate to present it to. Then each member is then asked to vote for their favorite strategy canvas and asked to explain why they came to that conclusion. This feedback gives a concrete solution where to place the focus values at to develop the final strategy canvas. The last step is to visual communicate: Once the final and future strategy has been developed, the strategy is then presented to every employee at the firm. Employees are informed where the future value should be at, and what should be eliminated reduced raised and created. This is extremely necessary for every employee to know, so everyone can work towards the same goal.

Reach Beyond Existing Demands

To reach beyond the existing demands, companies need to look past the current customers to the noncustomers which can be turned into customers. There are three tiers of noncustomers, first it is the noncustomers that are closest to the market. Those noncustomers only buy your service or product out of necessity, if there were a substitute product they would eventually become a competitor’s customer. If values would be added to the current service or product those noncustomers would jump onboard and become customers. EXAMPLE The second tier of noncustomers are noncustomers that have decided that the service or product doesn’t fulfil their needs, or they refuse to use these offerings. Therefore, they don’t see the necessity in the offers, and turn to something else. EXAMPLE The third tier of noncustomers, are those that the market has never tried to target. The market that doesn’t even know about the companies’ products or services. EXAMPLE These three noncustomers should always be considered as potential future customers. Each tier should be researched and looked into to see which one would expand the customer market the most. Also, these three tiers can also have overlapping commonalities which has to be taken into account. The idea with reaching beyond the existing demand is to catch the largest non-market share and expand the blue ocean.

Get the Strategy Sequence Right

Once the previous principles have been formed, it is time to get the strategy sequence right. Getting the sequence right is a formal step in leaping into a blue ocean, it ensures that strategy will appeal to the market. There are four steps in the sequence; buyer utility, price, cost and adoption. First it is buyer utility, does the product or service offer the potential customer some benefits. If it doesn’t it´s clear that there is no blue ocean for this particular offer, and the idea needs to be rethought. Second is the price; the price should be fair for both partners. It should be attractive enough for the customer to buy it. Third is cost, the cost is a key element in bringing the offer at a fair price for the customer. It is obvious that the cost needs to be lower than the price to earn profits. The cost should not come down on the utility of the product or service, and therefore the strategy needs to be further developed so the customer will be attracted to the right prices. The fourth and last is adoption, hurdles need to be spotted in advance. Turning from red ocean to blue ocean, is certainly not easy and even though the people behind the new idea have faith in the product or service. Others might not, that means that it will be hard to adopt the offer for the vendors to bring it to the market.

Execution Principles

Once the formulation for the blue ocean strategy has been developed, the formulation must be executed. The following are the four principles on what to consider to execute.

Overcome Key Organizational Hurdles

There are four key organizational hurdles that managers face when developing a blue ocean strategy. The first is cognitive: informing employees that there is a need for change in strategy for future growth. The second is limited resources: the greater the change in strategy, the need for resources become higher to execute. The third is motivation: it is necessary to motivate key stakeholders and key players to change the strategy towards a better future. The fourth and last is politics: politics will always exist, and there is always someone willing to turn against new ideas. (Resource,p 147)

Build Execution into Strategy

Changing strategies requires significant change within each corporation. These changes cannot be made only with the top players within each firm. The need for everyone, from the top down to the bottom employees, to participate in these changes is the key to this success. Therefore, the need for trust from all employees is necessary for the strategy to be successful and sustainable. (Resource,p 172)

Align the Value, Profit and People Proposition

There are three proposition that each firm has to align form the to successfully adapt a sustainable strategy, those are: value proposition, profit proposition and people proposition. The value proposition; it must be clearly visual within each firm for them to attract potential customers to buy. The profit proposition; each company has to make money of off what they offer. The people proposition; all employees must be motivated working towards the change of strategy for future growth. (Resource,p 190) If these three proposition do not align, the strategy change will develop into complete failure.

Renew Blue Oceans

Once a blue ocean has been spotted, it will eventually turn into a red ocean. When a company strategizes their way into blue oceans, there will always be someone that will imitate them and therefore, competitors arise within that ocean. When that happens that particular ocean will turn red, there will be a warzone staying in that ocean and competition just gets harder. In that case looking across time is highly important, to manage to discover new blue oceans and always stay ahead of competitors. Renewal is then needed, to re-gain that competitive advantage. Renewal of blue oceans are however not necessary if the competitors can be dominated, and the profit stream is still huge. Swimming as far as possible in the blue ocean should be the goal before deciding to renew the ocean. (Resource,p 203)

Analytical Tools & Frameworks

The analytical tools and frameworks are used to identify and diagnose where in the ocean each project is located. When the location has been found, the process of turning the focus from red oceans to blue oceans begin. The focus points are shifted with the tools and frameworks to create new markets, and new demand. (Resource,p 26)

Three Steps

Strategy Canvas

The strategy canvas is the first tool, used to diagnose where in the current market competitors are focused on when delivering their product or service to the customers. To understand each market, the principal factors in those markets are identified. A graph is drawn where the principles are located on the x-axis, no matter the order of the principles, and y-axis goes from low to high. Then each principle is rated independently on the graph according to how the market is. When the ratings have been made clear, the graph can then be used as an action framework. As in where to place the focus points to identify blue ocean. (Resource,p 27)

Example - Picture

Four Action Framework

The four action framework is the second tool, and is used to reconstruct the buyers value to create new values. (Resource,p 31)

There are four key questions used, to create new value curve for new markets. Those are:

1. Which of the factors that the industry takes for granted should be eliminated? (Resource,p 31)

This forces the management team needs to ask themselves is what factors could or can be eliminated that the current market has been competing on for a long time and eventually takes for granted. This can be factors that the customers don’t value anymore and can even detract the value of the product or service provided. (Resource,p 32)

2. Which factors should be reduced well below the industry's standard? (Resource,p 31)

This forces the management team to clearly identify if the current products or services have been over-designed to match or beat the competitor, therefore the companies are loosing money on something that is unnecessary to their business, and can be reduced to reduce unnecessary costs. (Resource,p 32)

3. Which factors should be raised well above the industry's standard? (Resource,p 32)

This pushes the management team to raise the standard of something that the industry has forced on to the customers to accept. (Resource,p 32)

4. Which factors should be created that the industry has never offered? (Resource,p 32)

This question is the key to blue oceans, and is for the management team to discover new values for the customers. Values that will create new demand in new markets. (Resource,p 32)

Example - Picture

Eliminate-Reduce-Raise-Create Grid

The third and final tool is the eliminate-reduce-raise-create grid, and is used as a supplementary to the four actions framework. This tool forces the management team to act on the four previously asked question in the four actions framework tool. This grid gives companies four instant benefits: (Resource,p 37)

- It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off.(Resource,p 37)

- It immediately flags companies that are focused only on raising and creating and thereby lifting their cost structure and often over engineering products and services. (Resource,p 37)

- It is easily understood by managers at any level, creating a high level of engagement in its application. (Resource,p 37)

- Completing the grid drives companies to robustly scrutinize every factor the industry competes on, making them discover the range of implicit assumptions they make unconsciously in competing. (Resource,p 38)

Three Characteristics

There are three characteristics of a great strategy to develop in a blue ocean, those are focus, divergence and compelling tagline. (Resource,p 39)

Focus

While developing the strategy canvas, companies have made clear in advance where they want to differ from the current markets. Those points are where they place their focus on. (Resource,p 40)

Divergence

When two or more companies are competing in a market, they focus on the same values. In that case there is no divergence. Therefore, creating a product or service in the same field but with different focus factors, divergence is being created. When the divergence is present, new markets are being created. (Resource,p 41)

Compelling Tagline

The compelling tagline is the final of the three characteristics. The tagline needs to include a clear message and advertise where companies has their focus on. (Resource,p 42)

References

[Blue Ocean Strategy – W.Chan Kim & Renée Mauborgne – 2015]

Harvard Business Review - [1]

Corporate Strategy - [2]