BACHELOR OF INNOVATION Creating Blue Oceans BACHELOR OF

BACHELOR OF INNOVATION™ Creating Blue Oceans

BACHELOR OF INNOVATION™ The Book and the Authors © JOHN ABBOTT Prof Chan Kim © JOHN ABBOTT Prof Renee Mauborgne

Accolades BACHELOR OF INNOVATION™ Over 2 million copies sold Translated into over 41 foreign languages – a world record Taught as the major theory of strategy at leading business schools Gives insights to CEOs, Executives, Heads of State and Prime Ministers

BACHELOR OF INNOVATION™

BACHELOR OF INNOVATION™

New Market Space BACHELOR OF INNOVATION™ Red oceans and blue oceans make up market universe Red oceans: all industries in existence = known market space Blue oceans: all industries not in existence = unknown market space

Red Oceans vs. Blue Oceans BACHELOR OF INNOVATION™ Red oceans Industry boundaries defined and accepted Competitive rules of game known Companies try to outperform rivals; cutthroat competition As market space gets crowded, prospects for profit and growth reduced Products become commodities Red ocean strategy is a market-competing strategy Blue oceans Undefined market space, demand creation, opportunity for highly profitable growth Most are created from within red oceans by expanding existing industry boundaries Rules of game waiting to be set Competition irrelevant Blue ocean strategy is a market-creating strategy

The Rising Imperative of Creating Blue Oceans BACHELOR OF INNOVATION™ Supply is exceeding demand in most industries global competition is intensifying Problems: Accelerated commodization of products and services Increasing price wars Shrinking profit margins Red oceans becoming bloodier, need to be concerned with creating blue oceans

The Continuing Creation of Blue Oceans BACHELOR OF INNOVATION™ Blue oceans have been around for some time; a feature of business life Industries never stand still, constantly evolving Significant expansion of blue oceans over years So why the focus on red ocean strategy? Corporate strategy influenced by military strategy Need to create new market space that is uncontested

BACHELOR OF INNOVATION™ The Impact of Creating Blue Oceans

From Company and Industry to Strategic Move BACHELOR OF INNOVATION™ Are there lasting visionary companies that continuously outperform the market and create blue oceans? Found success of these model companies was a result of industry sector performance, not companies themselves Strategic move used as unit of analysis (rather than company or industry) Strategic move: the set of managerial actions and decisions involved in making a major market-creating business offering

Value Innovation: The Cornerstone of Blue Ocean Strategy • Creators of blue oceans follow value innovation • Value Innovation – Equal emphasis on value and innovation – Defies value-cost trade-off of competition-based strategy – Successful value innovation: • Drives down costs while driving up buyers’ value • Uses a whole-system approach • Follows reconstructionist view BACHELOR OF INNOVATION™

Red Ocean Vs. Blue Ocean • Compete in existing market space • Beat the competition • Exploit existing demand • Make the value-cost trade-off • Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost BACHELOR OF INNOVATION™ • Create uncontested market space • Make the competition irrelevant • Create and capture new demand • Break the value-cost trade-off • Align the whole system of a firm’s activities in pursuit of differentiation and low cost

Formulating and Executing Blue Ocean Strategy Six Principles of Blue Ocean Strategy Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Overcome key organizational hurtles Build execution into strategy The remaining chapters will give you the principles and generalized frameworks to succeed in blue oceans BACHELOR OF INNOVATION™

Take Aways Red ocean strategy is a market-competing strategy, while blue ocean strategy is a market-creating strategy As red oceans are becoming bloodier, we need to create more blue oceans “The only way to beat the competition is to stop trying to beat the competition!” BACHELOR OF INNOVATION™

The Six Principles of Blue Ocean Strategy This figure highlights the six principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles attenuate. Formulation Principles Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Evaluation principles Overcome key organizational hurdles Build execution into strategy Risk factor each principle attenuates Search risk Planning risk Scale risk Business model risk Risk factor each principle attenuates Organizational risk Management risk BACHELOR OF INNOVATION™

Points of view BACHELOR OF INNOVATION™ Business often look at the industry from a structuralist (supply) point of view What if we looked at the industry from a reconstructionist (demand) point of view? Market boundaries are not viewed as given, but could be reconstructed to unlock new demand

Generic Strategies vs. Value Innovation Red Ocean Strategy BACHELOR OF INNOVATION™ Blue Ocean (VI) Strategy High V 1 • D V 1 Quality • LC Low High C 1 Low C 1 High Cost Structuralist Reconstructionist Low

Example: A highly competitive Industry BACHELOR OF INNOVATION™ The American Wine Industry

What the industry offers BACHELOR OF INNOVATION™ Premium Wines Budget Wines Polarised Strategic Groups Massive Choice

American Wine Industry BACHELOR OF INNOVATION™ 3 rd largest in world: worth $20 billion Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia Exploding number of new wines – new vineyards in Oregon, Washington, New York Customer base stagnant 31 st in the world in per capita consumption!

American Wine Industry BACHELOR OF INNOVATION™ Top 8 producers had 75% of the market; 1600 had the remaining 25% $ millions spent in marketing - Titanic battles – intense competition Sever price pressure The dominant growth strategy was towards premium wines – more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.

BACHELOR OF INNOVATION™ What wine customers said … “It is too confusing and complex” Wine descriptions and terminology The shopping experience The lack of clear guidance on what to buy and drink Thus, massively intimidating for ‘noncustomers’ (the large majority of the US population who were not wine drinkers)

What are people looking for in a wine? BACHELOR OF INNOVATION™

Segmentation of Market and Brands BACHELOR OF INNOVATION™ Low Involvement Easy Going High Involvement Enjoyers Glass with friends Everyday enjoyment Least care To relax/unwind choosing a wine Stick with limited list of known Not wine brands preferrers Choose in-store Not interested in Price is a strong wine language influencer Influenced by major brand advertising Brand: Demographic: Lindemans M/F: 50/50 Age: 35 -49 Aspirationals Appreciators Image important Wine preferrers (sic) Varietal knowledge Interested in some wine language Enjoy trying new wines Want to discover wine Knowledge of wine regions Frequently buy >$10 wines Join wine clubs Don’t stick to known brands Visit wineries / read wine articles Ideal wine is complex & interesting Rosemount Estate M/F: 30/70; Age: 30 -40 Wolf Blass M/F: 70/30; Age: 35 -50 Connoisseurs Sophisticated drinker Discerning wine tastes Don’t decide in store Have a cellar Less influenced by specials/ promotions Actively pursue wine knowledge Penfolds Age: 40+

Strategy Canvas The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on an invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition. High Premium Wines Budget Wines Low Price Wine range Vineyard prestige Use of Above-the-line enological marketing Aging and legacy Wine quality complexity terminology BACHELOR OF INNOVATION™

Four Steps of Visualizing BACHELOR OF INNOVATION™ 1. Visual Awakening 2. Visual Exploration 3. Visual Strategy 4. Visual Fair Communication • Compare your business with your competitors’ by drawing your “as is” canvas • Go into the field to explore the six paths to creating blue oceans • Draw your “to be” canvas based on insights from field observations • Distribute your before -and-after strategic profiles on one page for easy comparison • Observe the distinctive advantages of alternative products and services • Get feedback on alternative strategy canvases from customers, competitors’ customers, and noncustomers • Support only those projects and operational moves that allow your company to close gaps and actualize the new strategy • See where your strategy needs to change • See which factors you should eliminate, create or change • Use feedback to build the best “to be” future strategy

Four Actions to create a Blue Ocean BACHELOR OF INNOVATION™ Raise What factors should be raised well beyond the industry standard? Eliminate Create What factors should be eliminated that the industry has taken for granted? What factors should be created that the industry has never offered? Reduce What factors should be reduced well below the industry standard?

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid The four actions framework offers an technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered. Eliminate Enological terminology and distinctions Raise Price versus budget wines Retail Store involvement Aging qualities Above-the-line marketing Reduce Wine complexity Create Easy drinking Wine range Ease of selection Vineyard prestige Fun and adventure BACHELOR OF INNOVATION™ Reduce Which factors should be reduced well below industry standards? Eliminate Which of the factors that the industry takes for granted should be eliminated? A New Value Curve Create Which factors should be created that the industry has never offered? Raise Which factors should be raised well above the industry’s standard? The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand comply; and it drives companies to scrutinize every factor the industry competes on.

ERRC Grid yellow tail BACHELOR OF INNOVATION™

To Be Canvas • Eliminate • Reduce • Raise • Create BACHELOR OF INNOVATION™

Yellow Tail BACHELOR OF INNOVATION™ Only 2 types initially – Chardonnay and Shiraz Fruity, soft on palette, sweet-ish – great for those who had not drunk wine before Same bottle for red and white – low logistics costs Simple vibrant packaging – lower case letters/kangaroo Un-intimidating They were selling “The essence of a great land … Australia” – ie they were not selling the wine Australian clothing for the retail staff – they enthusiastically promoted a wine they could understand.

Value Innovation of [yellow tail] Utility proposition (customers, distributors and retailers) BACHELOR OF INNOVATION™ • Creating of a social drink that is accessible to anyone • Easy drinking, ease of selection, sense of fun and adventure • Limit number of SKUs • Price to move at volume Price proposition • Targeted at the mass of customers • Priced against the alternative (6 -pack) Cost structure • Elimination of working capital tied up in aging wines • Fast product turnover

Results BACHELOR OF INNOVATION™ No 1 imported wine (outsells France and Italy) Fastest growing imported wine in the history of the USA industry New consumers of wine Jug drinkers trade up Premium wine drinkers trade down Industry criticizes them mercilessly at first Now wine press blurb gives it a “best buy” for value; winning wine awards.

The Case of Cirque du Soleil BACHELOR OF INNOVATION™ Cirque du Soleil achieved rapid growth in a declining industry with low profit potential Cirque du Soleil created uncontested new market space that made the competition irrelevant If you don’t know them you can see some at http: //www. youtube. com/watch? v=M 4 l. API 5 BAuk

Example: Cirque du Soleil BACHELOR OF INNOVATION™ Instead of simply trying to outpace the competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual sophistication of theater Because of this, Cirque du Soleil appealed to both circus customers and noncustomers

Example: Cirque du Soleil BACHELOR OF INNOVATION™ Each show, like a theater production, had its own unique theme and storyline This allowed customers to return to the show more frequently They also did away with the traditional highpriced concessions and vendors thereby cutting costs

Example: Cirque du Soleil BACHELOR OF INNOVATION™ Cirque du Soleil effectively combined the best of both the circus and theater while eliminating everything else This allowed them to achieve both differentiation and low cost

Eliminate-Reduce-Raise-Create BACHELOR OF INNOVATION™ Eliminate Raise Star Performers Unique venues Animal shows Aisle concession sales Multiple show arenas Reduce Create Fun and humor Theme Thrill and danger Refined environment

The Strategy Canvas of Cirque du Soleil Eliminate hi Raise Reduce BACHELOR OF INNOVATION™ Create Ringling Brothers offering level Cirque du Soleil Smaller Regional Circus lo Price Animal Shows Star Performers Multiple Show Arenas Aisle Concessions Thrills & Danger Fun & Humor Theme Unique Venue Multiple Productions Refined Viewing Environment Artistic Music & Dance © Kim & Mauborgne 2006

Key Takeaways BACHELOR OF INNOVATION™ Three tiers of non-customers: 1: buyers who purchase your industry offerings out of necessity; will jump ship if given an opportunity. 2: buyers who purchase alternative offerings that serve the same function 3: people who don’t consume even the alternatives to your offerings Non-customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass of buyers, given target costs. Buyers could be not only end-users, but also other participants in a value chain (e. g. distributors)

Comparison of approaches Red Ocean Strategy Blue Ocean Strategy BACHELOR OF INNOVATION™

Exercise • 1. List Factors of Competition • 2. Top 2 or 3 in ERRC Grid Quadrants • Clearly define the group of “non-customer” that you are going after. BACHELOR OF INNOVATION™

BACHELOR OF INNOVATION™ Examples

Exercise 3. Write on Worksheet: left, C right 4. Draw “As Is” 5. Draw “To Be” E BACHELOR OF INNOVATION™

Examples BACHELOR OF INNOVATION™