22 - Blue Ocean Strategy Part 1

Blue Ocean Strategy – Part 1 Comparative of Red Ocean and Blue Ocean Red Ocean Compete in existing market Concern with competition Focus on existing customers Work with existent demand/ market share Deal with value and cost trade-off (creating value at higher cost OR creating reasonable value at low cost) Whole company is aligned with the strategy of differentiation OR low cost

Blue Ocean Create a new market Make competition irrelevant Focus on non-customers Create a new demand and market share Don’t use value/cost trade-off (create both, greater values and low cost) Company is aligned with the strategy of differentiation AND low cost.

The first highlighted case from the Blue Ocean Strategy book is the Cirque du Soleil. •

They created a new market. One of the first shows was titled “We Reinvent the Circus”.

•

They didn’t compete in the same market from the conventional circus.

•

They didn’t use animals or Hollywood stars.

•

They focused on other customers: adults and corporation clients, and, by consequence, caused a different perspective about prices and motivation/capacity to pay for a different experience.

Why it is so important, nowadays, the Blue Ocean Strategy? With the current technological stage, productivity is at high levels, the supply exceeds the demand, so the prices are falling, the globalization adds a component that facilitates new entrants and low production cost, and to make it worst, the rich countries (with more consuming power/demand) have their population decreasing. So to create new markets and develop focus on non-customers to create demand, blue ocean strategy will be a fundamental approach, besides other aspects. One key point of Blue Ocean Strategy is how to create value and how to make customer comfortable and willing to pay for it. Innovation has a key role on this matter, but not only. It must be aligned with utility, price and cost.

Principles of Blue Ocean strategy Formulation Reconstruct market boundaries Focus on big picture, not numbers Reach Beyond existing demand Get the strategy sequence right Execution Surpass organizational barriers Build execution into strategy

Risk Factor Attenuated Search risk Planning risk Scale risk Business model risk Organizational risk Management risk

IF followed correctly those principles the mentioned risks are attenuated. Effective blue ocean strategies should be about risk minimization and not risk taking. About Strategy, to shift the strategy of an industry, you must reorient the focus from competitors to alternatives and from customers to noncustomers. To use value and cost approach, it must not be used benchmarking competitors, because, it will return to differentiation or to cost approach, in the conventional way. Moving the focus from competitors and customers, it will be possible to develop insights to create new solutions, better buyer value elements and to create market across industry boundaries.

The Eliminate-Reduce-Raise-Create Grid, to create a new value curve. Eliminate Which of the factors that industry takes for granted should be eliminated? Reduce Which factors should be reduced well bellow the industry’s standard?

Raise Which factors should be raised well above the industry’s standards? Create Which factors should be created that the industry has never offered?

The Cirque du Soleil exemple: Eliminate Star performers, animals shows, aisle concession sales, multiple show arenas Reduce Fun and humour, thrill and danger

Raise Unique venue Create Theme, refinement environment, multiple productions, artistic music and dance

A good strategy should have focus demonstrated on a clear company’s strategic profile and value curve. Also, must diverge from competition. And, it should have a compelling motto.

Reconstructing market boundaries, the First Principle To move from red oceans, companies must not accept boundaries that define how they compete. They must look across alternative industries, look across strategic groups within industries, look across the chain of buyers, look across complementary product and services, look across functional and emotional appeal, and look across time. This will give some insights to reconstruct market and to open up blue oceans. Focus on the Big Picture, not Numbers, the Second Principle The conventional strategic planning tends to drive companies to red oceans. A typical strategic planning starts with current industry conditions and competitors analysis. Then goes to how increase market share, new segments or cut costs, followed by goals and actions. It goes through SWOT, PEST, BCG, McKinsey, and so on, analysis coupled with some spreadsheets, and graphics. The perspective must change, must think outside the box and develop a clear picture of how to break from competition. To see the Big Picture, it needs a visual awakening, a visual exploration, a visual strategy fair and a visual communication. Visual awakening: compare your business with your competitors and see where your strategy needs to change. Visual exploration: go to the filed to explore the six paths to creating blue oceans; observe the distinctive advantages of alternative products; see which factors should eliminate, create or change. Visual strategy fair: draw your strategy based on field observations; get feedback on alternatives from customers, competitors’ customers and noncustomers; use feedback to design the best future strategy. Visual communication: distribute your “best future strategies” on one page for ease comparison; choose only those that allow the company to close the gaps to actualize the new strategy. The Pioneer-Migrator-Settler (PMS) Map According to the authors of the Blue Ocean Strategy book, all companies in their studies, that created blue oceans, have been pioneers in their industries. Pioneers are businesses that offer unprecedented values, they are blue ocean strategists. Their value curve diverges from competition. Settlers are the other extreme, they are the me-too business. Their value curve is similar to the basic one of the industry. Migrators lie between both and they extend the industry’s curve by giving more for less, but they have the same basic curve shape. They improve value but not an innovative value.

Testing the Growth Potential Pioneers Migrators Settlers

Today

Tomorrow

Reach Beyond the Existing Demand, the Third Principle The conventional strategic initiatives are the focus on existing customers to retain and expand the market share, which usually takes to greater tailoring and offerings, and finer segmentation, with the risk of creating small target markets. To maximize blue oceans, companies need to focus on noncustomers. Instead of focusing on customer differences, the seeking must be on same interests that they value, which will allows companies to reach beyond existing demand and will aggregate a new mass of customers. The Three Tiers of Noncustomers First the companies need to understand the universe of noncustomers. The three tiers are related with the distance, that they are, from the current market.

Third Tier Second Tier First Tier Your Market

First Tier: “Soon-to-be” noncustomers who are on the edge of the market. Second Tier: “Refusing” noncustomers who consciously choose against your market. Third Tier: “Unexplored” noncustomers who are in markets distant from yours.

These soon-to-be customers they almost don’t use your market offerings because they search better offers. If they find a better alternative they will go after it and leave this market. A market stops growing when there are many soon-to-be customers. The insight is to figure out what they are searching. The refusing noncustomers are people that can’t afford or don’t use the market offerings. Their necessities are attended by other means or are ignored. It is a vast ocean to pursue. The unexplored noncustomers have not been explored or thought by industry players. They are seen as participants of other markets. It is an unexplored ocean, where results could be outstanding. As the authors mentioned, that there is no magic formula to suggest which tier should be focused. The blue ocean opportunities, in a specific tier, may be different, across time and industries. The ideal would be to unlock the potential across tiers, discover the commonalities across all three tiers. A fundamental aspect to maximize the scale of Blue Ocean, first, is to reach beyond existing demand to noncustomers and desegmentation opportunities, as you develop futures strategies. Next article, second part, it will be discussed the other three principles.

Reference: Kim, W.Chan. Mauborgne, Renée. Blue Ocean Strategy.