Blue Ocean Strategy

Leadership & Strategy First

Approach summary on a website recently visited,

Our approach to helping clients’ transform their businesses rests on recognizing three vectors for change:

1. Leadership.

2. Strategy.

3. Operational and process excellence.

Leadership is where it all starts – where executive leadership sets the vision and establishes the purpose and direction of the business.

Strategy is the means whereby leadership has identified how the business will establish a competitive position in the marketplace and serve its customers from a position of strategic advantage.

Operational effectiveness builds the system and process capabilities required to satisfy the corporate strategy.

A key difference in our approach is our recognition that direction is needed before speed and quality. There is no point in having excellent speed and quality operationally if it is achieved with the wrong products and services targeted to the wrong markets and customers.

Blue Ocean Strat Ch 5

Reach Beyond Existing Demand

Challenge 2 conventional strategy practices

1) the focus on existing customers

2) the drive for finer segmentation to accommodate buyer differences

- the more intense the competition is, the greater the resulting customization of offerings – risking creating ‘too small’ target markets

Companies should take a reverse course.
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. This unlocks a mass of customers that did not exist before

By looking to noncustomers and focusing on their key commonalities – [Callaway Golf] see how to aggregate new demand and offer the mass of customers & noncustomers a leap in 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.

3 Tiers of Noncustomers

1) Buyers who minimally purchase an industry’s offering out of necessity but are mentally noncustomers. They are waiting to jump ship & leave the industry as soon as the opportunity presents itself. Given a leap in value they will stay & their frequency of purchases will multiply [Pret A Manger]

Noncustomers tend to offer far more insight into how to unlock & grow a blue ocean than do relatively content existing customers.

Key reasons 1st tier noncustomers want to jump ship? Look for commonalities across their responses.

2) People who refuse to use your industry’s offerings; they see your offerings as an option to fulfill their needs but have voted against them. [Callaway example: country club tennis players that could choose golf but didn’t]

Refusing noncustomers: People who either do not use or cannot afford to use the current market offerings. [JCDecaux, street furniture, found that municipalities could offer stationary downtown locations, where people tended to wait a few minutes and hence had time to read & be influenced by ads]

What are the key reasons 2nd tier noncustomers refuse to use the products/services of your industry? Look for the commonalities across their responses.

3) Noncustomers who have never thought of your market’s offerings as an option. By focusing on key commonalities across these non customers & existing customers, co. can understand how to pull them into their new market

Unexplored noncustomers have not been targeted or thought of as potential customers, b/c their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets. [Joint Strike Fighter]

Focus on the tier that represents the biggest catchment at the time.
Also explore whether there are overlapping commonalities across all 3 tiers.

1st reach beyond existing demand to noncustomers and desegmentation opportunities as you formulate future strategies.

If no such opportunities can be found, you can then move on to further exploit differences among existing customers. But in making such a strategic move, you should be aware that you might end up landing in a smaller space. You should also be aware that when your competitors succeed in attracting the mass of noncustomers with a value innovation move, many of your existing customers may be attracted away b/c they too may be willing to put their differences aside to gain the offered leap in value.

Blue Ocean Strategy Part 2 Ch 4

Ch 4

- most plans don’t contain a strategy at all but rather a smorgasborg of tactics that individually make sense but collectively don’t add up to a unified, clear direction that sets a company apart – let alone make the competition irrelevant.

- What seems to be a very big difference to the ( ) manager may not be important to customers, who look at the complete offering. Some managers will define the competitive factors according to internal benefits.

- A common mistake is to discuss changes in strategy before resolving differences of opinion about the current state of play. Another problem is execs are often reluctant to accept the need for change; they may have a vested interest in the status quo, or feel time will eventually vindicate their previous choices.

- usually a highly determined leader or crisis prompts execs to seek blue oceans
- asking execs to draw the value curve of their company’s strategy can bring home the need for change – as a wake up call to challenge existing strategies

- send a team to the field to see face-to-face; how people use or don’t use their products
- this is often outsourced – they rely on the reports other people (often at 1 or 2 removes from the world they report on) have put together
- The 1st port of call should be the customers. Do not stop there. Also go after non-customers. When the customer is not the same as the user, extend observations to the users (Bloomberg).
- Not only talk to these people, watch them in action. Identify the array of complementary products & services consumed alongside to give insight into bundling opportunities
- Ex. Parents going to movies need babysitters = cinema + onsite childcare service

- A visual strategy fair was held, including execs but mainly reps the managers had met with: noncustomers, customers of competitors, & some of the most demanding customers
- They were given no more than 10 minutes to present each curve, on the theory that any idea that takes more than 10 min. to communicate is probably too complicated to be any good. Pictures were hung on the walls so the audience could easily see them.
- After 12 strategies presented, each judge (an invited attendee) was given 5 sticky notes & put them next to their favourites.

- Judges could put all 5 on 1 strategy if they wanted. The transparency & immediacy of this approach freed it from the politics that sometimes seem endemic to the strategic planning process. Managers had to rely on the originality and clarity of their curves & their pitches. [example: we’ve got a strategy so cunning you won’t be our customers, you’ll be our fans]

- After notes were posted, judges were asked to explain their picks, adding another level of feedback to the strategy making process. Judges were also asked to explain why they did not vote for the other value curves

- They also learned buyers from all markets had a basic set of needs and expected similar services. If you met those common needs, customers would happily forgo everything else. Regional differences became significant only when there was a problem with the basics. This was news to many people who had claimed their regions were unique.

- Then draw a new strategy canvas


- Relationship Management Raise
- ease of use
- security
- accuracy
- speed
- market commentary
- acct executives
- corporate dealers Create
- confirmation
- tracking

- Once future strategy is set, communicate it in a way that can be easily understood by any employees. A one page picture showing its new & old strategic profiles can be distributed to show every employee where the company stood & where it had to focus its efforts to create a compelling future.

- Senior managers who participated in developing the strategy met with their direct reports to walk them through the picture, explaining what needed to be eliminated, reduced, raised and created to pursue a blue ocean. Those people passed the message on to their direct reports.

- The new picture becomes a reference point for ALL investment decisions. Only those ideas helping move from the old to the new value curve were given the go-ahead.
- The ability of suggested/requested items/ideas to meet the new value curves strategic needs was the chief metric by which it was judged.

- When business units present their strategy canvases to one another, they deepen their understanding of the other businesses in the corporate portfolio and fosters the transfer of strategic best practices across units

- Samsung has established an annual Value Innovation conference presided over by all its top execs. This is one way they establish a common language system, instilling a corporate culture & strategic norms that drive its corporate business portfolio to blue oceans

- Do your business unit heads lack an understanding of the other businesses in your corporate portfolio? Are your strategic best practices poorly communicated across your business units? Are your low performing units quick to blame their competitive situations for their results? If yes to any to these, try drawing & sharing strategy canvasses.

Pioneer-Migrator-Settler (PMS) map

– business offering unprecedented value; blue ocean strategists; most powerful sources of profitable growth – have a mass following of customers; value curve diverges from the competition

- business whose value curve conform to the basic industry shape; me-too business; stuck in a red ocean, will not contribute much to future growth

- somewhere between; extend the industry’s curve by giving more for less but don’t alter its shape; improved value but no innovative value

- Revenue, profitability, market share, and customer satisfaction are all measure of a company’s current position. Contrary to what conventional strategic thinking suggests, those measures cannot point the way to the future; changes in the environment are too rapid. Today’s market share is a reflection of how well a business has performed historically.
- Value & Innovation should be used instead as important parameters for managing businesses

o Innovation gets companies out of the rut of competitive improvements

o Value because innovative ideas will only be profitable if they are linked to what buyers are willing to pay for

- In pushing their businesses toward pioneers, be aware that even though settlers have marginal growth potential, they are frequently today’s cash generators. On the other hand, pioneers have max growth potential but often consume cash at the outset as they grow & expand. Manage your portfolio of businesses wisely to balance between profitable growth and cash flow at a given point in time.

Blue Ocean Strategy Part 2 Ch. 3

Part 2: Formulating Blue Ocean Strategy

Ch. 3 Reconstruct Market Boundaries

There are 6 fundamental strategies underlying many companies’ strategies. Most companies typically do the following:

1) Define their industry similarly and focus on being the best within it
2) Look at their industries through the lens of generally accepted strategic groups and strive to stand out in the strategic group they play in
3) Focus on the same buyer group, be it the purchaser, the user, or the influencer
4) Define the scope of the products and services offered by their industry similarly
5) Accept their industry’s functional or emotional orientation
6) Focus on the same point in time – and often on current competitive threats – in formulating strategy

Reconstruct accepted boundaries defining how to compete:

1) Look Across Alternative Industries

a. Alternatives are broader than substitutes.
b. A company competes not only with other firms in its own industry but also with companies in those other industries that produce alternative products or services.

Substitutes: products having different forms but offering the same functionality/core utility

Alternatives: products having different functions/forms but the same purpose

- sellers rarely consider how their customers make trade offs across alternative industries. A shift in price, change in model, even a new ad campaign can licit a tremendous response from rivals within an industry, but the same actions in an alternative industry usually go unnoticed.

- Many companies focus on delivering the most sophisticated technology instead of delivering exceptional value, leading to building overcomplicated offerings that miss the key commonalities valued by the mass of people.

- NetJets

- What are the alternative industries to your industry?
- Why do customers trade across them?

2) Look Across Strategic Groups Within Industries

a. Strategic groups are generally ranked by price & performance; each jump in price tends to bring a corresponding jump in some dimensions of performance.

b. Most companies focus on improving their competitive position within a strategic group. (ex. Luxury cars compete with luxury cars, economy with economy. Curves). Neither strategic group tend to heed what other strategic groups are doing because from a supply point of view they do not seem to be competing

c. Break out of this narrow vision by understanding which factors determine customers’ decisions to trade up or down from one group to another

i. Champion prefab houses
ii. Curves, Sony walkman,

d. What are the strategic groups in your industry?
e. Why do customers trade up for the higher group, and why do they trade down for the lower one?

3) Look Across the Chain of Buyers

a. Most competitors converge around a common definition of who the target buyer is.

b. Purchasers of the product may differ from actual users
c. In some cases there are important influencers.
d. These groups may overlap or differ, and they frequently hold different definitions of value

e. An industry typically converges on a single buyer group
f. 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 (pharmaceutical companies vs. insulin users)
i. Bloomberg focused on users
ii. Novo Nordisk

- What is the chain of buyers in your industry?
- Which buyer group does your industry typically focus on?
- If you shifted the buyer group to your industry, how could you unlock new value?

4) Look Across Complementary Product & Service Offerings

a. In most cases other products/services affect their value.

b. Untapped value is often hidden in complementary products/services. They key is to define the total solution buyers seek when they choose a product or service. Think about what happens before, during and after your product is used. (movies & babysitters)

c. Buses & maintenance – the transit bus industry did not have to be a commodity price driven industry, but bus companies, focusing on selling buses at the lowest possible price, had made it that way.

d. Buses were normally made from steel (heavy, corrosive, hard to repair). NABI adopted fibreglass – cut costs of maintenance by being corrosion free, body repairs faster, cheaper, easier because fibreglass does not require panel replacements for dents & accidents; damaged parts are cut out & new fibreglass materials are easily soldered. Light weight cut fuel consumption, more environmentally friendly, required lower powered engines & fewer axles, resulting in lower manufacturing costs & more space inside the bus

- What is the context in which your product or service is used?
- What happens before, during & after?
- Can you identify the pain points?
- How can you eliminate these pain points through a complementary product/service offering?

5) Look Across Functional or Emotional Appeal to Buyers

a. Competition tends to converge on one of 2 possible bases of appeal.

b. Some industries compete principally on price, and function largely on calculations of utility; their appeal is rational.

c. Other industries compete largely on feelings; their appeal is emotional.

d. The appeal of most products is rarely intrinsically one or the other. It is usually a result of the way companies have competed in the past, which has unconsciously educated consumers on what to expect. Companies’ behaviour affects buyers expectations in a reinforcing cycle. Over time, functionally oriented industries become more functionally oriented; emotionally oriented industries become more emotionally oriented. No wonder market research rarely reveals new insights into what attracts customers. Industries have trained customers in what to expect. They surveyed they echo back “more of the same for less.”

e. 2 common patterns:

i. 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 customers would welcome

ii. functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion

1. ex. Swatch

2. The Body Shop – transformed the emotionally driven industry of cosmetics into a functional, no nonsense cosmetics house

3. QB House (Japan) – moved away from 1 hour ritual [$27 - $45] to basic cuts in 10 min. [$9], raising the hourly revenue per barber nearly 50%, lower staff costs & less required retail space per barber

4. Cemex (Mexico) – shifted the orientation of its industry from functional to emotional. In Mexico cement was typically sold to the average do it yourselfer in an unattractive market with more noncustomers than customers. Few additions built as most families spent $ on community festivals/celebrations. Contributing to these events distinguished oneself in the community; not was a sign of arrogance/disrespect.

a. Therefore most of the poor had insufficient savings to purchase building materials, even though having a cement house is a Mexican’s dream.

b. Cemex launched Patrimonio Hoy. 10 people contribute 100 pesos/wk for 10 weeks. Each week a draw is made to see who wins the $1000 pesos in each of the 10 weeks, so all participants win once and receive enough to make a large purchase.

c. Instead of spending the winnings on a celebration, it is directed towards building room additions with cement. Cemex positioned cement as a loving gift.

d. Cemex set up a building materials club winner would receive the winnings not in pesos but the equivalent in building materials to complete an entire new room, delivery included, construction classes on how to, and a technical advisor who maintained relations through the project.

e. Competitors sold bags of cement; Cemex sells a dream, with innovative financing & construction know how.

f. They also through small festivities for the town when a room is finished to reinforce the happiness brought to the people & tradition

g. 20% more families are building additional rooms; families are now planning 2-3 more rooms than before; Cemex experiences 15% monthly growth, selling cement at higher prices. It has tripled cement consumption by do it yourselfers.

h. Predictability of cement quantities to be sold through this program has dropped their cost structure via lower inventory costs, smother production runs, & guaranteed sales (lowering the cost of capital). Social pressure makes defaults on payment low.

5. Pfizer with Viagra
- shifted the focus from medical treatment to lifestyle enhancement

6. Relationship businesses (insurance, banking, investing) have relied heavily on emotional bond between broker & client, and are ripe for change
- customers do not need hand holding & emotional comfort traditionally provided if the company does a better job of paying claims rapidly & eliminating complicated paperwork.
- Direct Line uses information technology to improve claims handling & passes saving on to customers through lower insurance premiums
- Vanguard Group (index funds) and Charles Schwab (brokerage services) are doing the same in the investment industry transforming emotionally oriented businesses based on personal relationships into high performance, low cost functional businesses

Does your company compete on emotional appeal, what elements can you strip out to make it functional?
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?

6) Look Across Time

- external trends affect businesses over time (environmental movement, internet, Lean philosophy)

Traditional companies:
- ask in which direction a technology will evolve, how it will be adopted, & whether it will be scalable.

Blue Ocean Strategy:
- ask how the trend will change value to customers and impact the company’s business model

By looking across time at what value a market delivers today to the value it might deliver tomorrow firms can shape their future. Finding insight in trends observable today.

3 Principles to assessing trends across time

Trends must
1. be decisive to your business
2. be irreversible
3. have a clear trajectory

Working backwards from the future vision, identify what must be changed today to unlock the new water.

Apple & music sharing over the internet.
They also removed the key customer annoyance of having to buy the whole cd.

Cisco identified growing demand for high speed data exchange. 80% of all internet traffic today flows through Cisco products.

CNN – 1st real time news network
Sex in the City – acted on trend of increasingly urban & successful women struggling to find love & marry later in life

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?
How can you open up unprecedented customer utility?