Blue Ocean Strategy
Statement of the purpose of the book: “Blue Ocean Strategy”
Blue Ocean Strategy (BOS) is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over 100 years (1880-2000) by authors Kim, W. C., Mauborgne, R. BOS is the simultaneous pursuit of differentiation and low cost. The aim of BOS is not to out-perform the competition in the existing industry, but to create new market space or a blue ocean, thereby making the competition irrelevant. BOS offers a set of methodologies and tools to create new market space. While innovation has been seen as a random/experimental process where entrepreneurs and spin-offs are the primary drivers – as argued by Schumpeter and his followers – BOS offers systematic and reproducible methodologies and processes in pursuit of innovation by both new and existing firms. BOS frameworks and tools include: strategy canvas, value curve, four actions framework, six paths, buyer experience cycle, buyer utility map, and blue ocean idea index. These frameworks and tools are designed to be visual in order to not only effectively build the collective wisdom of the company but also to effectively execute through easy communication. BOS covers both strategy formulation and strategy execution. The three key conceptual building blocks of BOS are: value innovation, tipping point leadership, and fair process.
Statement of the purpose of the Journal: “The five competitive forces that shape strategy”
In 1979, a young associate professor at Harvard Business School published his first article for HBR, "How Competitive Forces Shape Strategy." In the years that followed, Michael Porter's explication of the five forces that determine the long-run profitability of any industry has shaped a generation of academic research and business practice. In this article, Porter undertakes a thorough reaffirmation and extension of his classic work of strategy formulation, which includes substantial new sections showing how to put the five forces analysis into practice. The five forces govern the profit structure of an industry by determining how the economic value it creates is apportioned. That value may be drained away through the rivalry among existing competitors, of course, but it can also be bargained away through the power of suppliers or the power of customers or be constrained by the threat of new entrants or the threat of substitutes. Strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weaker. Changes in the strength of the forces signal changes in the competitive landscape critical to ongoing strategy formulation.
Summary of the reading’s content and major conclusions
Why do so many businesses fail even though they have highly competent people with great business plans? Porter (2008) suggests that the business need to be in the right industry. Five competitive forces are mentioned by Porter to have significant impact to the business world. The forces are the most important part of strategy formulation to establish a profitable business.
In today highly competitive business environemtn, Porter believes the top strategic priority is coping with the substitute product. It is similar to the concept of “Blue Ocean” that mentioned from the book: “Blue Ocean Strategy”. The author Kim and Mauborgne highlighted that there is no company in world can be successful forever but it is possible to have temporary success. The existing market with severe competition and market share competitors is called Red Ocean. In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Instead, the authors suggest company should create a new market, a so called Blue Ocean, where competition on and all the negative consequences become irrelevant for a company. The first step towards a Blue Ocean is to go without from benchmarking. To set a company on a strong, profitable growth path in the face of these industry conditions, it won’t work to benchmark competitors and try to outperform them by offering a little more for a little less. Such a strategy may push sales up but will hardly drive a company to open up imcontested market space. It does not provide a substantial competitve advantage.
Kim and Mauborgne believe that value innovation is the result of combining the value creation and innovation. Value innovation forms the basis for a Blue Ocean. Instead of focusing on beating the competition, firms focus on making the competition irrelevant by creating a leap in value for buyers and the company, thereby opening up new and uncontested market space. This approach allows company to achieve both differentiation and low cost at the same time. Value innovation is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition.
This is illustrated by the case of the Cirque du Soleil (Canadian circus group ), which succeeded in creating a new market according to the Blue Ocean principle by simultaneously avoiding in hiring expensive stars in the show ring (cost reduction) and consistently applying the intellectual artistic interpretation of the show (increase in value). By introducing these new factors into its offering, Cirque du Soleil has created more sophisticated shows and it explains why Cirque du Soleil is so successful.
Since Kim and Mauborgen do not discuss much on the Red Ocean competitive strategy, Porter's five Competitive forces will be used to demonstrate the strategy in Red Ocean market.
Forces That Shape Competition in Red Ocean
Threat of entry
Porter (2008) stated: ‘ New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete’. The threat of entry will limit the maximium potential of the profit within an industry. When the threat is intensive, companies must reduce their prices or increase the investment to fight against the competitors. Therefore, the threat of entry eventually dragged down the profitability.
Porter (2008) suggests seven major sources to create barrier for new entry and it is also consistent with Kim and Mauborgne’s aguement that it is very difficult to entry a high competitive Red Ocean market:
Supply-side economies of scale
Firms have significant advantage when products are manufactured at mass volumes. The costs per unit are lower because fixed costs can be shared over more units. More efficient technology can be employed. Better terms can be obtained from suppliers.
Demand-side benefits of scale
These benefits discourage the new entry by reducing the willingness of buyers to purchase from a newcomer and by lowering the price the newcomer can command until it establishs up a bigger base of clients. Buyers often trust established companies more for a crucial product.
Customer switching costs
Switching costs are fixed expenses that buyers have to bear when they change suppliers. Such costs may be due to the need to alter product specifications, retraining of staffs or modify work procedure. The higher the switching costs, the more difficult it is for an entrant to gain buyers.
Big international firms have the strong financial resources to dominate almost any industries. Huge capital is required to be initial fixed facilities, customer credit, inventories and funding the startup losses. Such huge capital requirements in certain industries restrict the number of likely entrants.
Incumbency advantages independent of size
Porter (2008) described that ‘No matter what their size incumbents may have cost or quality advantages not available to potential rivals. These advantages can stem from such sources as proprietary technology, preferential access to the best raw material sources, and preemption of the most favorable geographic locations, established brand identities, or cumulative experience that has allowed incumbents to learn how to produce more efficiently’.
Unequal access to distribution channels
Sometimes access to distribution channels or network can be a big barrier that newcomers must give up distribution channels altogether or create their own. The more restrictive the wholesale or retail networks are and the tougher entry into the industry will be.
Restrictive government policy
Government policy can directly limit or even foreclose entry into certain industries. It can be done by actions like: trade barriers, quota control, licensing requirements and restrictions on foreign investment.
The power of suppliers
Companies depend on the main suppliers, which can obtain more profit that is not able to pass on cost increases in its own prices, for inputs. The suppliers can get more value by increasing prices, lowering quality or services, or transfering costs to other industry players. If a particular industry provides major part of a supplier group's volume or profit, then they will protect the industry through reasonable pricing and invest in R&D and using the lobbying tactic. Companies may face high switching costs in changing suppliers and they can even threaten to go for forward integration strategy into the industry.
The power of buyers
Powerful buyers can obtain more value by forcing down the selling prices. Better quality or more service can be demanded and hence increasing the costs. Customers can have higher bargaining power espeically when the busines enviournments are highly price sensitive or there are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor. Large-volume buyers are particularly powerful in industries with high fixed costs, such as telecommunications equipment, offshore drilling, and bulk chemicals.
The threat of substitutes
A substitute provides the same or a similar function as an industry's product or service by a different means. Electronic mail is a substitute for traditional letter. Videoconferencing is a substitute for phyiscal meeting. The profitablity of an industry will reduce as the threat of substitutes is high or cost of switching to the substitute is low and eventually place a ceiling on the pricing. Today technological advancement brings competitive discontinuities in seemingly unrelated businesses can have major impacts on industry profitability.
Rivalry among existing competitors
Rivalry is especially destructive to profitability of an industry because competition transfers the benefit from an industry to its customer. Price cuts are the short term tactic and easy to implement but it will draw response from competitors immediately. Sustained price competition also trains customers to pay less attention to product features and service. The intensity of rivalry is more intensive if the competitors are powerful or are equal in size. Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period and they commonly have the slack resources required to launch a larger number of total competitive actions. If the Industry growth has slown down, everyone has no choice but to fight for market share.
Blue Ocean Strategy
Creating Blue Oceans
Kim and Mauborgne introduce six principles, which are based on their research, to allow companies systematically maximize the opportunity while simultaneously minimizing the risks of formulating and executing the "Blue Ocean” strategy.
Six principles are related to the chapters in the book:
Chapter 3: The reconstruction of market boundaries minimize the search risk
Chapter 4: The focusing on the big picture and not the numbers reduces the planning risk
Chapter 5: Reaching beyond existing demand decreases the scale risk.
Chapter 6: Attention to the correct strategic sequence reduces the risk of the business model.
Chapter7: By overcoming key organizational hurdles, the organizational risk is reduced.
Chapter8: Finally the management risk is reduced by taking the feasibility of the strategy into account, by including all employees concerned from the beginning.
Analytical Tools and Frameworks
There are a lot of concepts and applications available for strategy development in the competitive situations of a Red Ocean, an impressive array of tools and frameworks have been developed to compete in red oceans, such as the Porter’s five forces for analyzing existing industry conditions but there are no practical tools to excel in blue oceans. Kim and Mauborgne take the initiative to develop a framework for Blue Ocean over a decade of research. They have developed a set of analytical tools and frameworks to make the formulation and execution of blue ocean strategy.
Kim and Mauborgne use the strategy canvas to create the value innovation and formulate the first step towards the creation of a Blue Ocean. The strategy canvas is the central diagnostic and action framework for constructing a successfully blue ocean strategy. The horizontal axis represents the range of factors that the industry competes on and invests in, and the vertical axis captures the offering level that buyers receive across all these key competing factors. The strategy canvas serves two purposes. Firstly, it captures the current state of play in the known market space. Secondly, it helps the company to reorient the focus from competitors to alternatives and from customers to noncustomers of the industry.
Illustration 1: Strategy Canvas, Kim/Mauborgne, p. 32
A value curve can be indicated by connecting these points together and provided comparison of the company‘s own product / service with other competitors. Individual products / services can be identified via the strategic profile.
Kim and Mauborgne suggest that initially the U.S. wine market is divided into two main catalogues: budget wines and premium wines. The premium brand wines offer a high price and present a high level of offering a classic differentiation strategy. Budget wines have the same essential strategic profile. Their price is low, as is their offering across all the key competing factors. These are classic low-cost players. In fact, the value curves of premium and low-cost wines share the same basic shape. The two strategic groups’ strategies march in lockstep, but at different altitudes of offering level.
Within these groups all wines show an uncontested and similar strategic profile. A fundamental change is possible only through moving away from existing customers towards new potential clients. "Yellow Tail" wine has successfully done it.
Companies can add value for their customers by using the four-action-framework and asking the following four questions:
- Which of the factors tnat me industry takes tor granted should be eliminated?
- Which factors should be reduced well below the industry’s standard?
- Which factors should be raised well above the industry’s standard?
- Which factors should be created that the industry has never offered?
New product / service with high differentiation can be created at a lower cost, the process can keep going by demand and application. Therefore a Blue Ocean can overcome the traditional problem in achieving both differentiation and low cost leadership simultaneously.
The newly created value curve on the strategy canvas has three characteristics:
- Every great strategy has focus, and a firm’s strategic profile, or value curve, should clearly show it. Therefore, it is important to come up a clear focus on the critical key competitive factors
- When a company tries to keep up with the competition’s strategy, it loses its uniqueness. On the other hand, the value curves of blue ocean strategists always stand apart. By applying the four actions of eliminating, reducing, raising, and creating, successful companies differentiate their profiles from the industry’s average profile. So their curves are significantly different from the competitors' curves
- Equip with a good strategy has a clear-cut and compelling tagline, which is a variant of a branding slogan typically used in marketing materials and advertising, for the newly-created strategy profile. For example in Southwest Airlines: "The speed of an airplane at a price of a car journey - whenever you want to travel".
- The Reconstruction of Market Boundaries
Market boundaries must be developed firstly in order to break away from the Red Ocean competition and create a Blue Ocean.
The two authors have identified the Six starting-points:
Path 1: Look across alternative industries
Customers frequently choose unconsciously between different alternatives when making purchasing decisions. For example, customers always consider the difference between taking a flight service and the alternative of transportation like: train, car or coach. If a company just examines its own industry, it will automatically lead to an unhealthy benchmark perspective and not able to think out of the box. Alternative industries mean different form and functionality but the same purpose. Substitutes mean different form but the same functionality or use.
Path 2: Look across strategic groups within industries
The authors recommend identifying all strategic groups within industries. By using the bird‘s-eye view, it is sometimes possible to integrate the strengths of two strategic groups and to come up with a entirely new market. For example, Toyota's Lexus carved out a new blue ocean by offering the quality of the high-end Mercedes, BMW and at a price closer to the lower-end Cadillac and Lincoln.
Path 3: Look across the chain of buyers
In most industries, competitors converge around a common definition of who the target buyer is. Kim and Mauborgne recommend examining the whole customer chain because the purchasers, users and influencers are always different. . Although these three groups may overlap, they often differ. When they do, they frequently hold different definitions of value. To consider alternatives for communicating the product / service and questioning conventional definitions of who can and should be the target buyers, company can often see fundamentally new ways to unlock value. Many industries afford similar opportunities to create blue oceans. By exploring traditional definitions of who can and should be the target buyer, companies can often see fundamentally new ways to unlock value.
Path 4: Look across complementary product and service offerings
Few products and services are used 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 service offerings. Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. Firms should find out the complete solution or package that the customers keen on. Managers need to consider everything that happens before, during and after the use of the products and services. Pain points are quickly found. The company should focus on finding which complementary products and services can cure these pain points.
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 and services but also on one of two possible bases of appeal. 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. Managers should analyze the fundamental orientation of the industry. Even if all other competitors emphasize the use of the product and so follow a functional approach, this does not mean that this is the only way possible. For example the product could be given a unique more emotional touch, thus adding emotional value. (QB House stripped away the emotional service elements of hot towels, shoulder rubs, and tea and coffee with a faster and better hair-cutting experience).
Path 6: Look across Time.
All industries are subject to external trends that affect their business over time. Kim and Mauborgne point out that only a few companies have the ability to forecast external trends that may have significant impact on their business model. However, not every trend is of interest here. Only if it is decisive for the success of one’s own business model and irreversible in its nature following a clear flight path, the company must deal with it. (e.g: Apple which was the first company to react to illegal music exchanges and offered a suitable answer with its iPod-iTunes concept.)
Focusing on the Big Picture, Not the Numbers
Managers often spend the majority of strategic thinking time filling in boxes and running numbers instead of thinking outside the box and developing a clear picture of how to break from the competition. It is the reason why only a few strategic plans come up and lead to the creation of blue oceans or are translated into action. Many executives are paralyzed by the confusion. Too much Information can create a data cemetery and confuse the managers. They do not have a system thinking mind because they often manage their own section well, however, with only a limited knowledge of the big picture. It is important to compile a strategy canvas is a disciplining exercise enabling managers focus on the right direction.
The following three characteristics of a strategy canvas can be used to get an overview of the big picture:
- it shows the strategic profile of an industry
- it shows the strategic profile of current and potential competitors
- it shows the company's current or future strategic profile
Kim and Mauborgne suggest a four step approaches to solve this problem:
Step 1: Visual Awakening:
Managers are often reluctant to change, by insisting to come up a strategy canvas of one’s own company and the competitors, it becomes possible to agree on a common status quo and building on this to identify a common need for change. It serves as a forceful wake-up call for the companies to challenge their existing strategies.
Step 2: Visual Exploration:
Company sends a team into the field and establishes the six paths for creating the Blue Ocean. This capacity should never be outsourced (like outsource its eyes)! By talking to the lost and potential customers, new customers as well as customers of the competition, existing perception and expectation can be identified, new knowledge gained as well as the advantages of alternative products considered. According to Kim and Mauborgne the company is now in a position to decide which factors should be changed, eliminated and created.
Step 3: Visual Strategy Fair:
The strategy walls drawn up the knowledge gained in the second step, which show a possible target state, are now presented to the senior executives. Their feedback and suggestion will be eventually incorporated into the construction of the optimized target strategy. That will help the company to understand which parts of the strategy canvas are critical and which ones can be ignored.
Step 4: Visual communication:
The new strategy can become a scale for investment decisions and can shorten a variety of decision-making processes effectively. The strategy must be clearly communicated company-wide so that it is easily understood by any employee. Another possibility of visualizing strategy at the highest company level appropriately is to plot the company's current and planned portfolios on a Pioneer-Migrator-Settler (PMS) map. Business segments can be divided functionally using a 2x3 matrix into pioneers, migrants and settlers as well as temporally into today and tomorrow. With this the growth potential of the business segment portfolio can be clarified. According to Kim and Mauborgne, striving for a well balanced mix is important and top managers should be doing is getting their organizations to shift the balance of their future portfolio toward pioneers.
Finally, Kim and Mauborgne emphasize that by using the creative strategy acquirement process via canvas, weaknesses of strategic planning can be overcome. Instead of top-down or bottom-up decisions a collective wisdom process (group discussion) is accepted. The process is discursive and not controlled by documentation. The creative component instead of a purely analytical procedure is striking and again, refer to the big picture and not the numbers.
Reaching Beyond Existing Demand
By aggregating the greatest demand for a new product / service, this approach avoid the scale risk - that is the risk of designing a market too small - when creating Blue Ocean. To maximize the size of their blue oceans, companies need to 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. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before. Through a shift in focus, away from existing clients, these mistakes are attenuated. There are two typical mistakes in strategy design that should be avoided: firstly focusing on existing customers, and secondly an ongoing segmentation to do justice to customer wishes (Kim and Mauborgne).
According to Kim and Mauborgne, non-customers can be further classified into three tiers according to their distance from the market.
- The first tier is the group of soon-to-be customers. They sit on the edge of the market and are waiting to jump ship and leave the industry as soon as the opportunity presents itself.
- The second tier consists, of customers who refuse to use your industry’s offerings. These are buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them. If a company has identified the reasons for this decision, it can start working on winning over these group of clients, hence it will help to develop additional market demand.
- Finally there is a third tier of customers is farthest from your market. They never thought of your market’s offerings as an option. By focusing on key commonalities across these noncustomers and existing customers, companies can understand how to pull them into their new market. Kim and Mauborgne regard such unexplored noncustomers as the greatest potential.
Moreover Kim and Mauborgne recommend to examinate the overlapping commonalities by the three tiers. Because the scale of blue ocean opportunities that a specific tier of noncustomers can unlock varies across time and industries, firms should focus on the tier that represents the biggest catchment at the time.
Getting the Strategic Sequence Right
This measure validates Blue Ocean ideas to ensure their commercial viability and to ensure that the company makes a healthy profit on the new market.
Kim and Mauborgne demonstrate a four-step-model which is described as follows:
The starting point is buyer utiity
Company should evaluate its product / service if it can provide customer the remarkable advantage? If no, it will indicate a purely technology driven innovation, which may be insufficient for value innovation. Kim and Mauborgne illustrate the explaination by using the identification of the buyer utility in a 6x6-matrix called "The buyer Utlitity Map". The different utility dimensions of the buyer (customer productivity, simplicity, convenience, risk, fun, environmental friendliness) are listed vertically, the product life cycle (purchase, delivery, use, supplements, maintenance, disposal) is listed horizontally. In combination there are 36 starting-points at which companies can influence buyer utility. Moreover, effective levers hide in the question, which are the greatest hindrances in the respective utility dimensions.
Illustration 2: Buyer utility Map, Kim/Mauborgne, p. 121
The second step: from exceptiponal utility to strategic pricing.
Kim and Mauborgne describe the most suitable price structure to reach the mass of the target buyers,
Two reasons can be mentioned for abstaining from the strategy of maximum absorption of buying power:
First, companies are discovering that volume generates higher returns than it used to. In our knowledge driven economy, the highest expenditure occurs in product research & development and not during the production process. The first CD of Windows Vista costs billions of dollars, however from the second CD onwards the cost is lower and mainly related to the material cost. Therefore an increase in volume will create more profit.
A second reason is related to network externalities.the value of a product or service may be closely tired to the total number of people using it. Either the company can sell millions at once , or it sell nothing at all. Knowledge driven products without patent can be easily imitated. One of the strategy is to increase brand reputation as well as a low price, which stops imitators from free-riding.
In their book Kim and Mauborgne recommend a two-step-process which can help to identify the right price structure and to select an adequate level:
Step1: Identify the Price Corridor of the Mass
Try to identify products and services within the company’s own industry and outside of it. These products and services can be distinguished in two ways. Either they have a different form but the same purpose (Ford‘s Model-T vs. horse coach) or they differ in form and function, but have the same purpose however ( a circus, a bar or a restaurant visit can all have the same aim: to spend a beautiful evening). If one combines price and volume in a graphic, then one can see where the mass of the potential customers lie and their disposition to pay. This is the price corridor where products should be offered. The company need to understand the price sensitivities of those people who will be comparing the new product or service with a host of very different-looking products and services offered outside the group of traditional competitors.
Step 2: Specify a Level within the Price Corridor
If the product of the company is patented or the service has trademark, has exclusive properties or has production capacities such as expensive factories that can not easily be copied, then the product can be priced at a high level without inviting competition from imitation products or services.
Company should pursue mid-to-lower-boundary strategy pricing from the start if any of the following apply:
- the product has high fixed and marginal variable costs
- Its attractiveness is based on network externalities
- Their cost structure benefits from steep scale yields, it should be priced at a low level
If the product not belong to either group, a mid price level should be chosen.
According to Kim and Mauborgne, reaching the aimed costs only considers as third priority.
The approach used here can only be the price minus the costs. Companies have three principals levers:
- The first involves streamlining operations and introducing cost innovations from manufacturing to distribution. Can the product’s or service’s raw materials be replaced by unconventional, less expensive ones—such as switching from metal to plastic or outsourced the value creation process to suppliers.
- Secondly, Partnering can provide a way for companies to secure needed capabilities fast and effectively while dropping their cost structure. It allows a company to leverage other firms’ expertise and economies of scale. Partnering includes closing gaps in capabilities through making small acquisitions when doing so is faster and cheaper, providing access to needed expertise that has already been mastered.
- Thirdly, unlimited opportunities can be created through pricing innovations. When the target cost cannot be met despite all efforts to build a low-cost business model, the company should turn to the pricing innovation. When a company’s offering successfully addresses the profit side of the business model, the company is ready to advance to the final step in the sequence of blue ocean strategy. The dominating pricing model within the industry can also be changed by approaches such as renting out, leasing, using of jointly acquired goods or payment with one’s own shares respectively, are conceivable at times.
Before plowing forward and investing in the Blue Ocean, the company must first overcome such fears by educating the fearful. Therefore, the last step remains the putting into action of the strategy, which has to be carried out in close consultation with the companies´ stakeholders: Employees, and business partners and the public are often afraid of changes. All three stakeholders should be involved in the discussion as early and as openly as possible. Otherwise the company will be confronted with considerable resistance which can wreck any strategy.
Overcoming Key Organizational Hurdles
Once a company has developed a Blue Ocean Strategy with a profitable business model, it must execute it. Execution can be challenging and difficult and managers often have a tough time translating strategy into action, same in red or blue oceans.
There are four internal organizational hurdles which the company has to look into (Kim and Mauborgne). They are: consciousness of the employees, restricted resources and motivation. The authors argue that although all firms face different degrees of these hurdles, and many may face only some subset of the four, knowing how to achieve them is key success factor to reducing organizational risk.
The Four Organizational Hurdles to Strategy Execution:
Break Through the Cognitive Hurdles
Managing change is the hardest batter among many turnarounds and corporate transformations. It is difficult to make people aware of the need for a strategic shift and to agree on its causes. It is effective to make known to all the employees about the dynamic changing environment. To tip the cognitive hurdle fast, making people see and experience harsh reality firsthand. People remember and respond most effectively to what they see and experience. Jump the Resources Hurdles
There are three kinds of activities in the previous activity portfolio which can have imbalanced impact.
- Hot spots are activities which have low resources input but high potential performance output gains.
- Cold spots work are activities which need a lot of resources but have a little performance output. It is therefore vital to move resources from cold spots to hot spots.
- Barter deals are ideal for resources, which are not used at the moment and which can be swapped for alternatives that are required urgently. It is a good idea to move resources has a great influence on the progression of the curve on the strategy canvas.
- Jump the Motivational Hurdles
To reach your organization’s goal and execute blue ocean strategy, manager must inform employees to the need for a strategic shift and identify how it can be achieved with limited resources. For a new strategy to become a movement, people must not only recognize what needs to be done, but they must also act on that insight in a sustained and meaningful way. Intensive motivation towards employees can facilitate transformation processes. Kim and Mauborgne suggest three directions to focus on the resources:
Zoom in on Kingpins
Kingpins are the key influencers in the organization. They are natural leaders who are well respected and persuasive. Kingpins have an ability to unlock or block access to key resources. Once the CEO identifies and motivates them, all the rest of employees are touched and changed, this frees an organization from tackling everyone.
Place Kingpins in a Fishbowl
Kim and Mauborgne (2005): ‘At the heart of motivating the kingpins in a sustained and meaningful way is to shine a spotlight on their actions in a repeated and highly visible way. This is what we refer to as fishbowl management, wiiere kingpins’ actions and inaction are made as transparent to others as are fish in a bowl of water. By placing kingpins in a fishbowl in this way you greatly raise the stakes of inaction. Light is shined on who is lagging behind, and a fair stage is set for rapid change agents to shine. For fishbowl management to work it must be based on transparency, inclusion, and fair process’.
Atomize to Get the Organization to Change Itself
Finally the overall result demanded of the strategy gets broken down in small partial results. Atomization relates to the framing of the strategic challenge—one of the most subtle and sensitive tasks of the tipping point leader. Unless people believe that the strategic challenge is achievable, the change is difficult to succeed. Every staff gets a clearly defined objective for which the person is responsible and reachable. Therefore the responsibility for achieving the target is delegated to where it belongs: into the organization.
Knock over the Political Hurdle
Organizational politics happens when employees use certain tactics for self-serving behaviors to gain self-interests, advantages, and benefits at the expense of others and sometimes contrary to the interests of the entire organization or work unit. Perceptions of politics also vary with the perceiver’s position and personal characteristics. Employees who feel they have less control over their work environment also have higher perceptions that the organization is political. Managers should not be fighting alone. Manager should identify the detractors and supporters and strive - forget the middle - to create a win-win outcome for both. Kim and Mauborgne (2005): ‘To overcome these political forces, tipping point leaders focus on three disproportionate influence factors: leveraging angels, silencing devils, and getting a consigliere on their top management team. Angels are those who have the most to gain from the strategic shift. Devils are those who have the most to lose from it. And a consigliere is a politically adept but highly respected insider who knows in advance all the land mines, including who will fight you and who will support you’.
Build Execution into Strategy
To build people’s trust and commitment deep in the ranks and inspire employees’ voluntary cooperation, companies need to build execution into strategy from the start. That principle allows companies to minimize the management risk of distrust, noncooperation, and even sabotage. Firms can obtain the confidence and dedication of the staffs from all levels.
This is only possible through a fair process, according to Kim and Mauborgne.
This consists of several elements:
Fair process is the managerial expression of procedural justice theory. From a formal perspective there should be process justice. Only when everybody seek for a win-win out-involved is convinced that there are the same rules for everyone, then everyone come for everybody can also be convinced to commit himself, to cooperate willingly and in the case of doubt to leave personal interest behind for the common good. This inspires them to cooperate voluntarily in executing the results strategic decisions.
Another important component is consisting of commitment, explanation and clarity of anticipation, is the Three- E-Process.
- Engagement means involving employees in the strategic decisions and underlines the participative character of the method which increases the shared points of view, according to Kim and Mauborgne.
- Explanation means that every employee involved and affected should understand why final strategic decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their suggestions and have made decisions fairly in the overall interests of the company.
- Expectation clarity requires that after a strategy is set, managers state clearly the new rules of the game. Specific goals communicate more precise performance expectations, so employees can direct their effort more emciently and reliably. Although goals should be challenging, employees should know up front what standards they will be judged by and the penalties for failure and also need to be committed to accomplishing goals. To achieve fair process, it matters less what the new goals, expectations, and responsibilities are and more that they are clearly understood.
People seek recognition at an emotional level. Managers should recognize and praise sincerely the achievements of all the employees at all levels because they deserve recognition. Firm should publicly thank the staffs for particularly well handling a situation or customer. Many good managers practice a formal recognition program, such as "Best employee of the month." On the other hand, if individuals are not treated as though their knowledge is valued, they will feel intellectual indignation and will not share their ideas and expertise; rather, they will hoard their best thinking and creative ideas, preventing new insights from seeing the light of day.
Sustainability and Renewal
Initially a Blue Ocean strategy brings created considerable barriers to imitation. Competitors does not want to signal an invalidation of their current business models by adapting the new business practice. However, any successful newly created market (Blue Ocean), will sooner or later attract new and change color thus to red (Red Ocean). The followings are some of the considerations:
From a conventional strategical perspective, value innovation makes little sense at first and traditional players purposely reject the new business model. Things which others do not take seriously protect them from imitation automatically (e.g. CNN).
Good branding and effective marketing strategy can also be effective entry barriers. The Body Shop made a name for itself due to the weaknesses of the cosmetics industry inherent in the system. These could have only imitated the concept by giving up their identity to date.
Such a barrier can also be found in a monopoly. The first megaplex cinema in Brussels has been blocking the competitor from entering into the market for a long time purely because of its size.
Patents, Copyright, Trademark, Trade secret can help to prevent imitation.
Wal-Mart has successfully used the economic of scales strategy and provide the fast cost advantages that arise from a high sales volume, it prevents the imitation of third parties.
Network externalities can create a huge market entry barrier. Every new eBay customer makes it less attractive for fellow auctioneers to create an alternative auction house.
Company need to make major changes to their existing business model in order to imitate others and often seems to be unattractive. Only some manage the difficult processes to accomplish such a change.
Company create a new market (Blue Ocean) can rapidly acquire customer loyalty and market shares, they can gain comprehensive experience, such benefits become a deterrent to imitators. Even with marketing budgets worth a few million, customers can not be easily persuaded to change to imitators. Moreover, from a systemic perspective it can be said that it is a complex process which cannot simply be imitated just like that.
Many people ask this question: When is the right time to tackle a new value innovation and create the Blue Ocean? Kim and Mauborgne suggest doing this only when one’s own value curve converges with the one of the competition. If the current offering is still generating a huge profit, there is no urgent need to create another Blue ocean market. However, as long as the value curve shows focus, differentiability and a clear advertising message this should cease. The current income should if possible be enlarged, deepened and stretched. This can happen by optimization of the underlying business processes and through geographical expansions. The Blue Ocean should be swum through in its entirety.
Factors, Not Forces
Porter (2008): ‘Industry structure, as manifested in the strength of the five competitive forces, determines the industry's long-run profit potential because it determines how the economic value created by the industry is divided - how much is retained by companies in the industry versus bargained away by customers and suppliers, limited by substitutes, or constrained by potential new entrants’.
The followings are the common mistakes:
Industry growth rate
Thinking a fast-growing industry that always attractive is a common mistake. Growth may reduce the impact of rivalry, because an expanding pie offers opportunities and profitability for all competitors. But fast growth with low entry barrier often draw in newcomers and fast growing market may give suppliers in a powerful position.
Technology and innovation
Not all advanced technologies or innovations can make an industry attractive. Traditional, boring and low-tech-industry with high switching costs, price-insensitive buyers or high entry barriers are often far more attractive and profitable than the hot industries.
It is important to find out the influence of government toward the competition and analyze how specific government policies and regulations can affect the five competitive forces. Bureacratic government structure that operates at too many unnecessary of levels with confusing policies seriously affects the business environemnt in many ways.
Complementary products and services
Porter (2008): ‘Complements are products or services used together with an industry's product. Complements arise when the customer benefit of two products combined is greater than the sum of each product's value in isolation. Computer hardware and software, for instance, are valuable together and worthless when separated. Complements can be important when they affect the overall demand for an industry's product. Identifying complements is part of the analyst's work. The strategic significance of complements will be best understood through the lens of the five forces’.
Changes in Industry Structure
As industry structure is often undergoing humble adjustment and sometimes it can change rapidly, shifts in structure may trigger internally or externally. They can improve the industry's profitability or reduce it. They may be due to the changes in buyer’s needs and perference or technology.
Critique of the reading, noting its strengths and weaknesses
Strenghts of “Blue Ocean Strategy”:
“Blue Ocean Strategy“ can lead to organizational excellence. The four steps showing strategy development, succeed in demonstrating an step by step process of self-creation. Self-awareness is done in focusing on what one is not doing currently. The process of putting strategy into execution is also clearly described in-depth. Under the heading of tipping-point-leadership and fair-process a description of what systemic process moderation stands for: an operative focus on the realities and conditions of social systems. The original value of Blue Ocean Strategy can be found in the four chapters discussing strategy development. It is impressive, how Kim and Mauborgne radically blow up the ruling paradigm of Red Ocean contest. It is attempted to identify all levers trying to attach themselves to the system and to make these utilizable according to the Blue Ocean.
The reconstruction of market boundaries (III) may be considered as the most innovative methodology trying to expand market boundaries systematically and to target the markets creatively in a new way:
- Look across alternative industries: Substitutes (different form, same function, same utility) and alternatives (different function, same purpose)
- Look across strategic groups within industries: Groups determined by price and performance
- Look across the chain of buyers: purchasers, influencers, users.
- Look across complementary product and service offering: before, during and after product use
- Look across functional or emotional appeals to buyers: rational or emotional
- Look across times: monitor external trends
Focusing on the big picture and not the numbers (IV) is creating a new, worthwhile self-image of the company:
- Visual awaking: See what is, recognise yourself
- Visual exploration: Make yourself see more!
- Visual Strategy Fail: From could be via feedback to should be
- Visual Communication: Distribute the new picture
Reaching beyond existing demand (V) is an remarkable strategy to expand target markets:
- On the edge of the market, lacking a little bit of encouragement to become customers.
- Market objectors, who are consciously not entering in the market.
- Unrecognized consumers, who know nothing at all about a market supply
Getting the strategic sequence right (VI) is then the last important factor to be considered and also need to take the customer benefit into account. Managers have to plan for the new pricing and costing structure:
- Buyer utility Map - Investigating customer benefit
- Price Structure - Exploring price sensitivity and scale reactions
- Cost Structure - Dare to introduce cost innovation beyond cost cutting
On the whole it remains challenging to identify a suitable entry level for the implementation of “Blue Ocean Strategy“.
Weakness of “Blue Ocean Strategy”:
When the authors use the “Blue Ocean” to represent the uncontested market space, such metaphor can be confusing and does not clearly explain the in-depth definitation of “Blue Ocean” is.
Kim and Mauborgne shoud have put in more explanation and enrich the reader’s thinking about the definition of the “Blue Ocean” instead of as uncontested market space, a new market. In fact, every firm in the world should have known the importancy of moving to the new market and leaving the competition behind. It is not a brand new idea, except Kim and Mauborgne used the new metaphor “Blue Ocean” to describe such market. The really challenging is how to nuture such creativity and out-of-the-box thinking skill.
The authors mentioned that they have studied more than one hundred fifty strategic moves made from 1880 to 2000 and tried to discover the common factors leading to the creation of blue oceans.
The readers are very eager to know the finding from the study. Then Kim and Mauborgne (2005) stated: ‘The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. Instead they followed a different strategic logic that we call value innovation. We call it value innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company’. It is similar as ‘Differentiation strategy’. Porter also mentioned ‘Threat of New Entrants’ and ‘Threat of Substitute Products or Services in his five competitive forces theory. Kim and Mauborgne are smart to re-package the existing concept into new metaphore ‘Blue Ocean’ but they are not the inventor of the idea.
The globalization that is often seen as a double-edged sword has caused a massive change in today business environment. It brings the opportunities and challenges, advantages and disadvantages to the business environment. There are a lot of factors affect it such as economic environment, the political / legal environment and the cultural environment.
Kim and Mauborgne suggested by following the six- path strategy, firms can be very successful but I belive in the real life, business has must more uncertainty and complicated. The author did not mention about such uncertainty and the assumption of their theory.
Blue Ocean Strategy does not address the real world problem. It is very difficult or often impossible for a huge company to reinvent or restructure itself and move to totally different direction. Many business consultants still believe company should leverage on their existing competitive advantage instead of become first mover or pioneer of new market. In fact, creativity and risk taking are the key factors but Blue Ocean does not mentioned in-depth.
The reading’s implications for management practice
Implications for Porter’s Five Forces Strategy
Porter (2008) described that it is important to understand the forces that shape industry competition because it is the first step in designing strategy. The forces reflect the most critical aspects of the competitive environment. Baseline can be created for sizing up a company's strengths and weaknesses. The company can move towards fruitful possibilities for strategic implementation and cope with the current competitive forces as well as anticipate the possible shifts in the forces.
The best strategies cover the following possibilities.
Positioning the company
The five forces framework allows companies to thoroughly analyze entry and exit. Strategy can use to establish firewalls against the competitive forces or locating the weakest forces in a partcular industry. A firm must find out the full potential of the business. To consider a new business venture, managers can use the framework to identify an industry with a good future that is reflected in their corporate’s merging and acquisition plan.
Exploiting industry change
Industry changes create the opportunity to achieve and seize promising new market if the manager has a clear picture of the competitive forces and their foundations. When industry structure is fresh, new and promising competitive positions may appear. Man visionary leaders can capitalize new market and they understand the structural changes often come up with new needs and new ways to serve existing clients.
Shaping industry structure
Some companies have the capability to shape industry structure and are able to lead its industry toward new directions of competing that alter the five forces for the better. Since the inventor has already fimilar with in the new way of doing that they have innovated, forcing the competitors to follow the same way will provide significant competitive advantage to the inventor.
An industry's structure can be reshaped in two aspects:
To capture more profits for industry rivals, the main objective is to minimize profits that shared by suppliers, buyers, and substitutes. To neutralize the power of supplier, manager can set up an open standard or specification so that all the spare parts can be universally produced. To control customer’s bargaining power, value added services can be integrated so that buyers' switching costs will be increased. Increasing the R&D burdget and establishing better branding, it can scare off entrants. To lower the threat of substitutes, managers can incorporate better value into the product and service through new features or wider product accessibility.
There is a weakness to shape industry structure. Firms may trigger new kinds of competition that no guarantee can win because of the pressures to gain market share. Managers, who just want to improve their competitive advantage and may become enamor of innovation, ignore the long term benefit of the industry.
Expanding the profit pool
When overall demand grows, the industry's quality level rises, intrinsic costs are reduced, or waste is eliminated, the pie expands. The total pool of value available to competitors, suppliers, and buyers grows. The total profit pool expands, for example, when channels become more competitive or when an industry discovers latent buyers for its product that are not currently being served. When soft-drink producers rationalized their independent bottler networks to make them more efficient and effective, both the soft-drink companies and the bottlers benefited. Overall value can also expand when firms work collaboratively with suppliers to improve coordination and limit unnecessary costs incurred in the supply chain. This lowers the inherent cost structure of the industry, allowing higher profit, greater demand through lower prices, or both. Or, agreeing on quality standards can bring up industry-wide quality and service levels, and hence prices, benefiting rivals, suppliers, and customers.
Expanding the overall profit pool creates win-win opportunities for multiple industry participants. It can also reduce the risk of destructive rivalry that arises when incumbents attempt to shift bargaining power or capture more market share. However, expanding the pie does not reduce the importance of industry structure. How the expanded pie is divided will ultimately be determined by the five forces. The most successful companies are those that expand the industry profit pool in ways that allow them to share disproportionately in the benefits.
Defining the industry
The five competitive forces also hold the key to defining the relevant industry (or industries) in which a company competes. Drawing industry boundaries correctly, around the arena in which competition actually takes place, will clarify the causes of profitability and the appropriate unit for setting strategy. A company needs a separate strategy for each distinct industry. Mistakes in industry definition made by competitors present opportunities for staking out superior strategic positions. (See the sidebar "Defining the Relevant Industry.")’
Implication of Blue Ocean Strategy
As blue ocean strategy represents a significant departure from the status quo, managers typically face four hurdles to execution: first, cognitive: waking employees up to the need for a strategic shift; second, limited resources: the greater the shift in strategy, the greater the resources needed to execute it; third, motivation: inspire key players to move fast and tenaciously to carry out a break from the status quo; and fourth, organizational politics.
Leaders must identify and effectively deal with internal opponents to change.
Originality/value – Provides a unique overview of value innovation management, its principles, tools, and techniques.
Complete Book and Journal Reference
Kim, W. C., Mauborgne, R. (2005): Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant, US: Harvard Business Shool Publishing Corporation
Porter, M.E. (2008): ‘The five competitive forces that shape strategy’, Harvard Business Review. Boston: Vol. 86, Iss. 1:78.