1 Management 377 Competitive Strategy Prof. Rick Smith.

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Management 377Competitive Strategy

Prof. Rick Smith

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Blue Ocean Strategy How to Create Uncontested Market Space and Make the

Competition Irrelevant

By W Chan Kim & Renee Mauborgne

With reference to Leading The Revolution

By Gary Hamel

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Blue Ocean Strategy

• Companies have fought for competitive advantage, battled over market share, and struggled for differentiation since the conception of commerce.• Yet in today’s overcrowded industries, competing head-on results in nothing but a bloody “red ocean” of rivals fighting over a dwindling profit pool.

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Blue Ocean Strategy

• And yet while most companies compete

within such red oceans, , this “boiler-plate”

strategy is increasingly unlikely to create

profitable growth in the future.

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Blue Ocean Strategy

• Some creative thinkers and consultants argue that tomorrow’s leading companies will succeed not by battling competitors, but rather by creating “blue oceans” of uncontested market space ripe for growth.

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Value Innovation

• Strategic moves designed to create powerful leaps in value for both the firm and its buyers.• The intended result is to render rivals obsolete as well as unleashing new demand.

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Blue Ocean Strategy

• Blue Ocean Strategy provides a systematic approach to making the competition “irrelevant.”

Refer to Gary Hamel, strategy consultant and London Business School.

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Blue Ocean Strategy

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

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Blue Ocean Strategy

• It will always be critical to swim successfully in the red ocean by outperforming rivals. • Red oceans will always matter and will continue to be a fact of business life.• Blue oceans denote all the industries not in existence today. This is the unknown market space.

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Blue Ocean Strategy

• BUT with supply exceeding demand in most industries, competing for a share of dwindling markets, while necessary, will not be sufficient to sustain high performance.• Firms need to go beyond competing.• To seize new profit and growth opportunities, they also need to create blue oceans.• Unfortunately, blue oceans are largely uncharted.

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Blue Ocean Strategy

• The dominant focus of strategy work over the past 25 years has been on competition-based red ocean strategies.• The result has been a good understanding of how to compete skillfully in red water from analyzing the underlying structure of an existing industry, to choosing a strategic position of low cost or differentiation or focus, to benchmarking the competition.

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Blue Ocean Strategy

• There have been some discussions about blue ocean strategies; however, there is little practical guidance on how to create them.• Without the usual analytic framework to create blue oceans and effective principles to manage risk, creating blue oceans remains wishful thinking that is viewed as too risky for managers to pursue as strategy.

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The Continuing Creation of Blue Oceans

• Although the term blue oceans is relatively new, their existence is not. They are a feature of business life.• How many of today’s industries were unknown 100 years ago?• Now turn the clock back only 30 years….how many?

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• Now put the clock forward twenty years and ask yourself how many now unknown industries will have appeared by then. If history can be used as a predictor of the future, again the answer is many of them.• The reality is that industries never stand still. They continuously evolve. Operations improve, markets expand, and players come and go.

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• History teaches us that we have hugely underestimated capacity to create new industries and recreate existing ones.

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• Strategy can be described in military terms; e.g., “officers, headquarters, front lines, tactics.• Described this way, strategy is about confronting an opponent and fighting over a given piece of territory that is both limited and constant.

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• Unlike war, however, the history of industry shows us that the market universe has never been constant; rather, blue oceans have continuously been created over time. • This is the “theme” of blue ocean strategy.

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• The number of new industries is ever expanding, -- and the pace is accelerating.

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• Let’s adopt a working definition of an industry as “the group of firms producing products that are close substitutes for each other.” Michael Porter

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The Impact of Creating Blue Oceans

• If we examine company growth in both revenue and profit in a study of business launches for 108firms, we find that 86 percent of the launches were line extensions; i.e., incremental improvements within the red ocean of existing market space.

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• And yet these line extensions accounted for only62% of total revenues and a mere 39% of total profits.• The remaining 14% of the launches were aimedat creating blue oceans.• They generated 38% of the total revenues and61% of the total profits.

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0.39 0.61

0.62 0.38

0.86 0.14

0 0.2 0.4 0.6 0.8 1

The Profit and Growth Consequences of Creating Blue Oceans

Launches within red oceans Launches for creating blue oceans

Business Launch

Revenue Impact

Profit Impact

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• Given that business launches included the totalinvestments made for creating red and blue oceans (regardless of their subsequent revenueand profit consequences, including failures), the performance benefits for creating blue waters areevident. • Introduce Pareto Principle (80-20 rule)80% of the effects are a result of 20% of the causes. Introduce general concept only.

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The Rising Imperative of Creating Blue Oceans

im per a tive “not to be avoided or evaded”

There are several driving forces behind a rising need “to not avoid” the creation of blue oceans.

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• Accelerated technological advances have substantially improved industrial productivityand have allowed suppliers to produce an unprecedented array of products and services.• This translates into an increasing number of industries in which supply exceeds demand.

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• The trend toward globalization compounds this situation.• As trade barriers between nations are dismantledand as information on products and prices become instantly and globally available, niche markets and havens for monopoly continue to disappear.• And while supply is increasing globally, there is no clear evidence that global demand is increasing.

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• The result of this shift has been acceleratedcommoditization of products and services,increasing price wars, and shrinking profit margins.• Recent studies on major American brands confirm this trend. They indicate that major brands are becoming more similar, and as they become more similar, buyers make their selections based on price.

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• People no longer insist that their laundry detergent be Tide. Nor will they necessarily stick with Crest when Colgate is on sale and vice versa.• In overcrowded industries, differentiation of brands becomes more difficult in both economic upturns and downturns.

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• All of this suggests that the business environmentin which most strategy and management approachesof recent history evolved is increasingly disappearing.• As red oceans become increasingly bloody,management will need to become more sensitiveto blue oceans than the current corps of managersis accustom.

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From Company and Industry to Strategic Move

• So just how can a company break out of the red ocean of bloody competition?• How can it create blue ocean?• Is there a systematic approach to achieve thisand thereby sustain high performance?

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• To understand the roots of high performance,business literature typically uses the company asthe basic unit of analysis.• Authors continually marvel at how companies attain strong, profitable growth with a set of strategic, operational, and organizationalcharacteristics.• Our question….Are there lasting “excellent” or“visionary” firms that continuously outperform themarket and repeatedly create blue oceans?

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• Best selling books such as Good To Great, In Search of Excellence, and Built To Last are now “old” books. But in their glory days, eachbook made the best-seller list. • So what has happened to the companies identifiedas “visionary” firms by Tom Peters and Jim Collins?• Sears Roebuck, Atari, Chesebrough-Ponds,Data General, National Semiconductor, and Fluor?

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• Two-thirds of the firms identified by the authorsas being “visionary” fell from their perch within five years of book publication.• One possible explanation for this highly visibledownward spiral was that much of the successattributed to the strategic management of these referenced firms was really the result of the “industry sector performance rather than the companies themselves.”

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• An example of the previously referencedindustry sector performance that illustrates how afirm allegedly outperforms its competition in Hewlett-Packard (HP).• Jim Collins praises HP for outperforming the market in the long-term.

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• In reality, HP outperformed the market, BUT sodid the entire computer-hardware industry.• What’s more, HP did not even outperform thecompetition within the industry.• And we have all seen the stagnation or decliningperformance of Japanese companies that were once deemed to be revolutionaries.• So what is your interpretation of being brilliantat one moment but running completely amuck the next?

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• The “company” is not the appropriate unit of analysis to explore the roots of high performanceand blue oceans.• In addition, industries are constantly being createdand expanded over time and that industry conditionsand boundaries are not given; individual actors can shape them.• So it appears that neither the company nor the industry is the best unit of analysis in studying the roots of profitable growth.

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• So what is the best unit of analysis as we determine and dissect the roots of profitable growth?

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• Studies indicate that the strategic move and not the company or the industry is the correct unit of analysis for explaining the creation of blue oceansand sustained high performance.• A strategic move is a set of managerial actionsand decisions involved in making a major market-creating offering.

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• Research has been conducted to determine convergence within a given strategic move as wellas across strategic moves. Both blue ocean andred ocean competitors were included in the research.• In doing so, researchers tried to discover commonfactors leading to the creation of blue oceans and the key differences separating those winners fromthe mere survivors and the losers adrift in the redocean.

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• Analysis of more than 30 industries, confirmsthat neither industry nor organizational characteristicsexplain the distinction between the two groups.

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• In assessing industry, organizational, and strategicvariables, researchers found that the creation andcapturing of blue oceans were achieved by small and large companies, by young and old managers, by firms in both attractive and unattractive industries, by new entrants as well as established encumbants, by private and public companies, bycompanies in low- and high-tech industries, and by companies of diverse national origins.

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• So analysis failed to find any perpetuallyexcellent company or industry.• But what it did find lurking behind the seeminglyidiosyncratic success stories, however, was a consistent and common pattern across strategic moves for creating and capturing blue oceans.

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Value Innovation: The Cornerstone of Blue Ocean Strategy

• What consistently separated winners from losersin creating blue oceans was their approach to strategy.• The firms caught in the red ocean followed a conventional approach of racing to beat the competition by building a defensible positionwithin the existing industry order.•

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• The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark.• Instead, they followed a different strategic logic that wewill call value innovation.• Value innovation is the cornerstone of blue ocean strategy.• It is called value innovation because we focus on makingour competition irrelevant as opposed to focusing on beating our competition. We can make the competitionirrelevant by creating a leap in value for buyers and your firm thereby opening up new and uncontested market space.

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• Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy:the value-cost trade-off.• It is conventionally believed that firms can either create greater value to customers at a higher cost or create reasonable value at a lower cost.• At this point, strategy is seen as making a choice betweendifferentiation and low cost.• In contrast, those who seek to create blue oceans pursuedifferentiation and low cost simultaneously.

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Costs

Buyer Value

Value

Innovation

The Simultaneous Pursuit of Distribution and Low Cost

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• 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.

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Minimizing Risk and Maximizing Opportunity

• As shown in the previous figure, the creation of blue oceans is aboutdriving costs down while simultaneously driving value up for buyers.• This is how a leap in value for both the company and its buyers isachieved.• Because buyer value comes from the utility and price that the companyoffers to buyers and because the value to the company is generated fromprice and its cost structure, value innovation is achieved only when the whole system of the company’s utility, price and cost activities is properly aligned.• It is this whole-system approach that makes the creation of blue oceansa sustainable strategy. Blue ocean strategy integrates the range of the firm’s functional and operational activities.

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•So is blue ocean strategy inherently more risky?•Any strategy, whether red or blue, involves risk.•But when it comes to venturing beyond the red ocean to

create and capture blue oceans, there are six key risks companies face:

Search riskPlanning riskScope riskBusiness model riskOrganizational riskManagement risk

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• The first four risks revolve around strategy formulationand the latter two around strategy execution

Each of the six principles in Blue Ocean Strategy expressly addresses how to mitigate each of these risks.

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1. The first blue ocean principle – reconstruct market boundaries – addresses the search risk of how to successfully, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities.

2. The second principle – focus on the big picture; not the numbers – tackles how to mitigate the planning risk of investing lots of effort and lots of time but generating only red ocean type moves.

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3. The third principle – reach beyond existing demand – addresses the scope risk of aggregating the greatest demand for the new offering.

4. The fourth principle – get the strategic sequence right – addresses how to build a robust business model to ensure that you make a healthy profit on your blue ocean idea thereby mitigating business model risk.

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5. The fifth principle – overcome key organizational hurdles – addresses how to knock over organizational hurdles in executing a blue ocean strategy addressing organizational risk.

6. The sixth principle – build execution into strategy – tackles how to motivate people to execute blue ocean strategy to the best of their abilities, overcoming management risk.

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These six principles aim to make the formulation and execution of blue ocean strategy as systematic and actionable as competing in the red ocean of existing market space.

In summary, in creating blue oceans, they guide companies in a way that is both opportunity maximizing yet risk minimizing.

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Blue Ocean Strategy is a Dynamic Process

• Blue ocean strategy should not be thought of as a static process. In order to be truly effective, blue ocean strategy must by dynamic.

• Reference to The Body ShopWas highly successful in cosmetics fieldRather than go head-to-head with large competitors, it invented a whole new market

space for natural beauty products.The Body Shop has recently struggled, but that doesn’t diminish the brilliance of its

original strategic move. But there was a problem. The Body Shop didn’t realize that it had made a brilliant strategic move.

Its genius lay in creating a new market space in an intensely competitive industry that historically competed on glamour.

Once it created a blue ocean, the firm focused on mining that new market space.That was okay while few players imitated it, but as more and more competitors

jumped into its blue ocean, the water became red, and The Body Shop became involved in a bruising battle for market share..

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• Once a company has created a blue ocean, it should prolong its profit and growth sanctuary by swimming as far as possible in the blue ocean making itself a moving target, distancing itself from potential innovators and discouraging them in the process.

•The aim here is to dominate the blue ocean over imitators for as long as possible. But as other companies’ strategies began to converge on your market, the blue ocean begins to turn red with intense competition. This is when companies need to reach out to create a new blue ocean to break away from the competition again.

•This is where The Body Shop stumbled.

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• Blue ocean strategy is not only a unique strategic methodology intended to create and to capture blue oceans but also how to monitor when it is time to search out and develop a new blue ocean.

• In this way, blue ocean strategy presents a dynamic iterative process to create uncontested market space across time.

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• So who needs a sustainable competitive advantage?

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• Blue ocean strategy is not only a unique strategic methodology intended to create and to capture blue oceans but also how to monitor when it is time to search out and develop a new blue ocean.

• In this way, blue ocean strategy presents a dynamic iterative process to create uncontested market space across time.

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Blue Ocean Strategy is Cirque du Soleil

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Critical issues with CdS:

Recombination Reconstruction

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CdS generated revenues in less than 20 years that it tookRingling Bros. and Barnum & Baily over 100 years to generate.

CdS’s success has resulted from focusing on the demand ; not recombination existing technologies or productive means (often thought of as the supply side.

The basic building blocks for reconstruction are buyer value elements that reside across existing industry boundaries.

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They are not technologies nor methods of production.

By focusing on the supply side, recombination tends to seek an innovative solution to the existing problem.

BUT, in contrast, when looking at the demand side, reconstruction breaks away from the cognitive bounds set by the existing rules of competition.

In fact, we’re focusing on redefining the problem itself.

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CdS is not about offering a better circus by recombining existing knowledge or technologies about acts and performances.

Rather it is about reconstructing existing buyer value elements to create a new form of entertainment that offers the fun and thrill of the circus with the intellectual sophistication of the theater.

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To reconstruct buyer value elements in crafting a new value curve, the four actions framework has been developed

There are four key questions intended to challenge an industry’s strategic logic and business model.

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The Four Actions Framework

Which of the factors that the industry takes for granted should be eliminated?

Which factor should be reduced well below the industry’s standard?

Which factor should be raised well above the industry’s standard?

Which factors should be created that the industry has never offered?

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• The value curve, the basic component of the strategy canvas, is a graphic depiction of a company’s relative performance across its industries factors of competition.

A New

Value

Curve

Reduce

Eliminate Create

Raise

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CdS broke the best practice rule for the circus industry, achieving both differentiation and low cost by reconstructing elements across existing industry boundaries.

So is CdS then really a circus considering all that has been eliminated, reduced, raised, and created? Or is it theater? And if it is theater, then what genre – a Broadway show, an opera, a ballet? It is not clear.

CdS reconstructed elements across these alternatives, and in the end, it is simultaneously a little of all of them yet none of any of them in their entirety.

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Eliminate-Reduce-Raise-Create Grid

Eliminate:

Star performers

Animal shows

Aisle concession sales

Multiple show arenas

Reduce:

Fun and humor

Thrill and danger

Raise:

Unique venue

Create:

Theme

Refined environment

Multiple productions

Artistic music/dance

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Redefining the problem usually leads to changes in the entire system and hence, a shift in strategy, whereas recombination of existing elements may end up finding new solutions to sub-system activities that serve to reinforce an existing strategic position.

Reconstruction reshapes the boundary and the structure of an industry and creates a blue ocean of new market space.

Recombination, on the other hand, tends to maximize technological possibilities to discover innovative solutions.

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Blue Ocean Strategy is Yellowtail

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Eliminate:

Reduce:

Raise:

Create:

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Eliminate:

Reduce:

Raise:

Create:

Enological terminology and distinctions

Aging qualities

Above-the-line marketing

Wine complexity

Wine range

Vineyard prestige

Price versus budget wines

Retail store involvement

Easy drinking

Ease of selection

Fun and adventure

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Blue Ocean Strategy is Southwest

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Eliminate:

Reduce:

Raise:

Create:

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Three Characteristics of a Blue Ocean Strategy

1. Focus2. Divergence3. Compelling tagline

These three characteristics serve as an initial litmus test of the commercial viability of the blue ocean ideas.

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Southwest Airlines’ strategic profile illustrates how these three qualities underlie the company’s effective strategy in reinventing the short-haul airline industry via value innovation.

Southwest created a blue ocean by breaking the trade-offs customers had to make between the speed of airplanes and the economy and flexibility of auto transportation.

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To achieve this, SWA offered high-speed transport with frequent and flexible departures at prices that were attractive to the mass of buyers.

By eliminating and reducing certain factors of competition and raising others in the traditional airline industry, as well as by creating new factors drawn from the alternative industry of auto transport, SWA was able to offer unprecedented utility for air travelers and achieve a leap in value with a low-cost business model.

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As you have seen, the value curve of SWA differs distinctively from those of its competitors in the strategy canvas. Its strategic profile is a typical example of a compelling blue ocean strategy.

Focus….Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly reflect focus. If we look at SWA’s profile, we can see at once that the company emphasizes only three factors:

Friendly serviceSpeedFrequent point-to-point departures

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Blue Ocean Strategy is Southwest (Focus continued)

These foci have allowed SWA to price against car transportation; it doesn’t incur the costs of in-flight meals, lounges, and assigned seating.

By contrast, SWA’s traditional competitors invest in all the airline industry’s competitive factors, making it much more difficult for them to match SWA’s pricing leadership.

Investing across the board, these companies let their competitors’ moves determine their own agendas. A rather pricy business model.

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Divergence…

When a company’s strategy is planned reactively as it tries to keep up with its competition, it loses its uniqueness. Consider the similarities in most airline meals and business-class lounges. On the strategy canvas, therefore, reactive strategists tend to share the same strategic profile.

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. E.G., SWA pioneered point-to-point travel between mid-size cities; previously the industry operated through hub-and-spoke systems.

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Compelling Tagline…

A good strategy has a clear-cut and compelling tagline. “The speed of a plane at the price of a car – whenever you need it.”

What could SWA’s competitors say?

A good tagline must not only deliver a clear message but also advertise an offering truthfully, or else customers will lose trust and interest.

A good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic tagline.

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Reconstruct Market Boundaries

The first principle of blue ocean strategy is to reconstruct market boundaries in order to break from the competition and create blue oceans.

This principle addresses the “search risk” with which many companies struggle.

The real challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities.

This challenge is key because managers cannot afford to be riverboat gamblers betting their strategy on intuition or on a lottery-type drawing.

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Reconstruct Market Boundaries

There are six fundamental assumptions underlying many companies’ strategies. Specifically, companies tend to do the following:

Define their industry similarly and focus on being the best within it.

Look at their industries through the lens of generally accepted strategic groups (such as luxury autos, economy cars, family vehicles), and strive to standout in the strategic group they play in.

Focus on the same buyer group, be it the purchaser, the user, etc.

Define the scope of the products and services offered by their industry similarity.

Accept their industry’s functional or emotional orientation

Focus on the same point in time—and often on current competitive threats—in formulating strategy

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Reconstruct Market BoundariesThe more that companies share this conventional wisdom about how they compete, the greater the competitive convergence among them.

To break out of red oceans, companies must break out of the accepted boundaries that define how they compete.

Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyer groups, across complimentary product and service offerings, across the functional-emotional orientation of the industry, and even across time.

This gives companies keen insight into how to reconstruct market realities to open up blue oceans.

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Reconstruct Market Boundaries aka Six Paths Framework

There are six basic approaches to remaking market boundaries:

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Path 1. Look Across Alternative Industries

In a broad sense, a company competes not only with the other firms in its own industry but also with firms in other industries that produce alternative products or services. Note that “alternatives” are broader than “substitutes.”

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Path 1. Look Across Alternative Industries (continued)

Products/services can take different forms and perform different functions but serve the same objective. Consider restaurants versus cinemas. Restaurants provide social and gastronomical pleasure. This is a very different experience from the visual entertainment offered by cinemas. Despite the differences in form and function, however, people go to a restaurant for the same objective that hey go to the movies: to enjoy a night out.

These are not substitutes but alternatives to choose from.

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In making purchase decisions, buyers implicitly weigh alternatives, often unconsciously. Do you need a self-indulgent two hours? What should you do to achieve it? Do you go to the cinema, have a massage, or enjoy reading a favorite book at a local café? The thought process is intuitive for individual consumers and industrial buyers alike.

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But for some reason, we abandon this intuitive thinking when we become sellers. Rarely do sellers think consciously about how their customers make trade-offs across alternative industries. A shift in price, a model change, even a new ad campaign can elicit a tremendous response from rivals within an industry, but the same actions in an alternative industry usually go unnoticed.

There are vertical walls between industies such as trade journals, trade shows, and consumer rating reports. Often, however, the space between alternative industries provides opportunities for value innovation.

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Lecture notes only….NetJets; fractional jet ownership; Berkshire Hathaway; revenue growth of 30-35%Success due to its flexibility, shortened travel time, hassle-free travel, high reliability, and strategic pricing. NetJets reconstructed market boundaries to create this blue ocean by looking across alternative industries.

http://www.netjets.com/

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Path 2. Look Across Strategic Groups Within Industries

Just as blue oceans can often be created by looking across alternative industries, so can they be unlocked by looking across strategic groups. This term refers to a group of companies within an industry that pursue a similar strategy.

In most industries, the fundamental strategic differences among industry players are captured by a small number of strategic groups.

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Path 2. Look Across Strategic Groups Within Industries (cont)

Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. Each jump in price tends to bring a corresponding jump in some dimensions of performance. Most companies focus on improving their competitive position within a strategic group. Mercedes, BMW, and Jaguar, for example, focus on outcompeting one another in the luxury car segment just as economy car makers focus on excelling over one another in their strategic group. But neither strategic group pays any attention to what the other is doing because from a supply vantage point they do not seem to be competing.

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The key to creating blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another.

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Path 3. Look Across the Chain of Buyers

In most industries, competitors converge around a common definition of who the target buyer is. In reality though, there is a “chain” of buyers who are directly or indirectly involved in the buying decision. The purchasers may differ from the actual users, and in some cases there are important influencers as well.

Although these three groups may overlap, they often differ. They often differ because they hold different definitions of value. A purchasing agent may be far more concerned with cost than the corporate user who is likely to be more concerned with ease of use. Similarly, a retailer may value a manufacturer’s JIT stock replenishment and innovative financing.

But consumer purchasers, although strongly influenced by the channel, do not value these things.

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Individual companies in an industry often target different customer segments – for example, large versus small customers. But an industry typically converges on a single buyer group. For example:

Industry Focuses on Pharmaceuticals Influencers (Physicians) Office Equipment Purchasers (Corp Purchasing Dept) Clothing Users

Sometimes there is a strong economic rationale for this focus, but often it is the result of industry practices that have never been questioned.

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Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of new blue ocean. By looking across different buyer groups, companies can gain new insights into how to redesign their value curves to focus on the previously overlooked set of buyers.

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Path 4. Look Across Complementary Product/Service Offerings

Few products/services are applied in a vacuum. In most cases, other products and services affect their value. But in most industries, rivals converge within the bounds of their industry’s product and services offerings.

Let’s look at movie theaters. The ease and cost of getting as babysitter and parking your car affect the perceived value of going to the movies. Yet these complementary services are beyond the bounds of the movie theater industry as it has been traditionally defined.

Few cinema operators worry about how hard or costly it is for parents to get babysitters. But they should because it affects the demand for their business.

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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/service. A simple way to do so is to think about what happens before, during, and after your product is used. E.G.; Babysitting and parking are needed before people can go to the movies. In the airline industry, ground transportation is used after the flight but is obviously part of what the customer needs to travel from one place to another.

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Path 5. Look Across Functional or Emotional Appeal to Buyers

Competition in an industry tends to converge not only on an accepted notion of the scope of its products/services but also on one of two possible bases of appeal. Some industries compete principally on price and function largely on calculations of utility; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional.

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Path 5. Look Across Functional or Emotional Appeal to Buyers (cont)

And yet the appeal of most products or services is rarely intrinsically one or the other. Rather it is usually a result of the way companies have competed in the past, which has unconsciously educated consumers on what to expect. Companies’ behaviors affect 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 on what to expect. When surveyed, they echo back: more of the same for less.

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When firms are willing to challenge the functional-emotional orientation of their industry, they often find new market space. Two common patterns have been observed. Emotionally oriented industries offer many extras that add price without bolstering functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that consumers 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.

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Path 6. Look Across Time

All industries are subject to external trends that affect their business over time. Think of the rapid rise of the Internet or the global movement toward protecting the environment. Looking at these trends with the right perspective can show you how to create blue ocean opportunities.

Most companies adapt incrementally and somewhat passively as events unfold. Whether it’s the emergence of new technologies or major regulatory changes, managers tend to focus on projecting the trend itself, i.e.; they ask in which direction a technology will evolve, how it will be adopted, whether it will become scalable. They pace their own actions to keep up with the development of the trends they’re tracking.

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Path 6. Look Across Time (continued)

But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise from business insights into how the trend will change value to customers and impact the firm’s business model. By looking across time – from the value a market delivers today to the value it might deliver tomorrow – managers can actively shape their future and lay claim to a new blue ocean. Looking across time is perhaps more difficult than the previous five approaches I’ve presented, but it can be made subject to the same disciplined approach. We’re not talking about predicting the future, something that is inherently impossible. Rather, we’re into finding insight in trends that are observable today.

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Three principles are critical to assessing trends across time. To form the basis for a blue ocean strategy, these trends must be decisive in a business, they must be irreversible, and they must have a clear trajectory. But beware, it may be possible to see a trend or major event without being able to predict a direction.

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In 1998, for example, the mounting Asian crisis was an important trend certain to have a big impact on financial services. But it was impossible to predict the direction that trend would take, and therefore it would have been a risky enterprise to envision a blue ocean strategy that might result from it. In contrast, the euro has been evolving along a constant trajectory as it has been replacing Europe’s multiple currencies. It is a decisive, irreversible, and clearly developing trend in financial services upon which blue oceans can be created as the European Union continues to enlarge.

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Having identified a trend of this nature, we can then look across time and ask ourselves what the market would be like if the trend were taken to its logical conclusion. Working back from that vision of a blue ocean strategy, we can begin to identify what must be changed today to unlock a new blue ocean.

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Focus on the Big Picture; Not the Numbers

• You are now familiar with the paths to creating blue oceans.

• So how do we align the strategic planning process to focus on the big picture and apply these ideas in drawing a company’s strategy canvas to arrive at a blue ocean strategy?

• This can be a major challenge. Why? Research indicates that mostcompanies’ strategic planning processes perpetuate red oceans.

• In other words, the process tends to drive companies to competeWithin existing market space.

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• Think of a typical strategic plan.

• It starts with a lengthy description of current industry conditionsand the competitive situation.

• Next is a discussion of how to increase market share, capture new segments, cut costs, followed by an outline of numerous goals and Initiatives.

• A full budget is attached as are lavish graphs and spreadsheets.

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• The process usually culminates in the preparation of a bulky documentculled from a mishmash of data provided by people from various parts of the organization who have conflicting agendas and poor communications.

• In this process, managers spend the majority of strategic thinking timefilling in boxes and running numbers instead of thinking blue ocean and developing a clear picture on how to break from the competition.

• Students can see why very few strategic plans lead to the creation of blue oceans or are translated into actions. Executives are paralyzed bythis muddle.

• Few employees even know what the strategy is.

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• A closer look reveals that most plans don’t include a strategy at all but rather a smorgasbord of tactics that individually make sense but collectivelydon’t add up to a unified clear direction that sets the company apart – letalone makes the competition irrelevant.

• Researchers and consultants have found that drawing a strategy canvas not only visualizes a company’s current strategic position in the marketplacebut also helps to chart its future strategy.

• By building a firm’s strategic planning process around a strategy canvas,a company and its managers focus their main attentions on the big picture rather than becoming immersed in numbers and jargon and getting caughtup in operational details.

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• As previously pointed out, drawing a strategy canvas does three things:

• First, it shows the strategic profile of an industry by depicting very clearly the factors (and the possible future factors) that affect competition amongindustry players.

• Second, it shows the strategic profile of current and potential competitors,identifying which factors they invest in strategically.

• Finally, it shows the company’s strategic profile – or value curve –depicting how it invests in the factors of competition and how it might invest in them in the future.

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• As also pointed out, the strategic profile with high blue ocean potential has three complementary qualities: focus, divergence, and a compellingtagline.

• If a firm’s strategic profile does not clearly reveal those qualities, its strategy is likely to be muddled, undifferentiated, and hard to communicate.

• It is also likely to be costly to execute.

1 Management 377 Competitive Strategy Prof. Rick Smith.

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Transcript of 1 Management 377 Competitive Strategy Prof. Rick Smith.