Blue Ocean Strategy Analytical Tools and Frameworks Team

Blue Ocean Strategy: Analytical Tools and Frameworks Team 6: Jessica Aragon Raynee Bradley John Cayo Kirk Griffith Cole Naylor Jessica Wilson Brandy Wolfe

Chapter 2: Analytical Tools and Frameworks The Strategy Canvas n The Four Actions Framework n The Eliminate-Reduce-Raise-Create Grid n Three Characteristics of a Good Strategy n Reading the Value Curves n

The Strategy Canvas n The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. n 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. n The strategic canvas enables companies to see the future in the present.

The Strategy Canvas of the U. S. Wine Industry in the Late 1990 s • 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

Explaining value curves n n There are more than 1600 wineries that participate in the U. S. wine industry, however from the buyer’s point of view there is enormous convergence in their value curves. When premium brand wines are plotted on the strategy canvas we discover that essentially all of them have the same strategic profile. n n n Budget wines also have the same essential strategic profile. n n n They offer a high price and present a high level of offering across all factors. Their strategic profile follows a classic differentiation strategy. Their price is low, as is their offering across all the key competing factors. They follow a low-cost strategy. The value curves of premium and low-cost wines share the same basic shape. The two strategic groups march in lockstep but at different altitudes of offering level.

Shifting the strategy canvas n n n To shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to noncustomers of the industry. To pursue both value and cost, companies need to resist focusing on just cost leadership and differentiation. Instead they need to focus on alternatives and noncustomers. By doing this companies are able to gain insight into how to redefine the problem the industry faces. Research found that many consumers thought wine was too complex and that beer, spirits, and cocktails, captured three times as many U. S. consumer alcohol sales as wine. Casella Wines decided to make a fun and non traditional wine that was easy to drink for everyone. To achieve this Casella Wines turned to the second basic analytic underlying blue oceans: The four actions framework

The Four Actions Framework n The four actions framework was developed to reconstruct buyer value elements in crafting a new curve.

Creating a new value curve n To break the trade-off between differentiation and low cost and to create a new value curve, there are four key questions to challenge an industry’s strategic logic and business model:

1. Which of the factors that the industry takes for granted should be eliminated? n This question forces you to consider eliminating factors that companies in your industry have long competed on.

2. Which factors should be reduced well bellow the industry’s standard? n This question forces you to determine whether products or services have been over designed in the race to match and beat the competition.

3. Which factors should be raised well above the industry’s standard? n This question pushes you to uncover and eliminate the compromises your industry forces customers to make.

4. Which factors should be created that the industry has never offered? n This questions helps you to discover entirely new sources of value for buyers and to create new demand.

Casella Wines Example n Casella Wines acted on all four actions – eliminate, reduce, raise, and create- to unlock uncontested market space that changed the face of the U. S. wine industry in a span of two years.

Casella Wines n Created yellow tail-broke from the competition and created a blue ocean. n A social drink accessible to everyone. n It offers simplicity: sweet and fruity, red (Shiraz) or white (Chardonay) n They eliminated everything else.

Casella Wines n These actions reduced or eliminated all the factors the wine industry had long competed on. n This also reduced the cost of capital. n It raised value and created new demand.

The Eliminate-Reduce-Raise-Create Grid • Represents the 3 rd tool that is key to the creation of blue oceans • Pushes companies not only to ask all four questions in the four actions frameworks, but also to ACT on all four to create a new value curve • Allows companies to have a full scale view of their industry and their niche within it, while also highlighting new areas for improvement or advancement based on shareholder, customer, employee, and industry demands

The Eliminate-Reduce-Raise-Create Grid The Case of: Yellow Tail Wines Eliminate n. Enological Terminology n. Aging Qualities n. Above-the-line Marketing Reduce n. Wine Complexity n. Wine Range n. Vineyard Prestige Raise n. Price vs. Budget Wines n. Retail Store Involvement Create n. Easy Drinking n. Ease of Selection n. Fun and Adventure

The Eliminate-Reduce-Raise-Create Grid The Case of: Cirque du Soleil Eliminate n. Star Performers n. Animal Shows n. Aisle Concession Sales n. Multiple Show Arenas Raise n. Unique Venue Reduce n. Fun & Humor n. Thrill & Danger Create n. Theme n. Refined Environment n. Multiple Productions n. Artistic Music & Dance

The Eliminate-Reduce-Raise-Create Grid Four Immediate Benefits: 1. 2. 3. 4. Pushes to simultaneously pursue differentiation and low costs to break the value-cost trade-off Immediately flags companies that are focused only on raising and creating, and thereby lifting cost structure which often leads to over engineering products and services Easily understood by managers at any level, thus creating a high level of engagement in its application Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor in the industry competes on, making them discover the range of implicit assumptions they make unconsciously when competing

3 Characteristics of a Good Strategy Focus - Divergence - Compelling Tagline -

Focus n The company does not diffuse its efforts across all key factors of competition n Value curve should clearly show it

Divergence n The shape of the value curve diverges from that of the competition n The value curve of blue ocean strategies always stand apart

Compelling Tagline n Good strategy has a clear-cut and compelling tagline n Must deliver clear message and advertise and offering truthfully

Southwest Airlines n Focus: emphasized only 3 factors – friendly service, speed, and frequent point-to-point departures. n Divergence: pioneered point-to-point travel between mid-sized cities n Compelling tagline: could be something like “The speed of a plane at the price of a carwhenever you need it. ”

Cirque du Soleil n Set itself apart by applying noncircus themes, multiple productions, refined watching environment, and artistic music and dance.

Reading the Value Curve n The value curve can reveal strategic knowledge on the current and future status of an industry. n Provide insight Revealing Factors: n n n A Blue Ocean Strategy Company Caught in the Red Ocean Overdelivery Without Payback Incoherent Strategy Strategic Contradictions Internally or Externally Driven ✕

Reading the Value Curve cont’d A Blue Ocean Strategy n Q: Does a business deserve to be a winner? n Right Track: Focus, Divergence, and a Compelling Tagline. *Initial test of commercial viability of blue ocean ideas Ex: n Wrong Track: Lack of Focus – High cost structure/Complex business model n Lack of Divergence – Strategy is “me-too” with no reason to stand apart. n Lack of Compelling Tagline – Internally driven with no great commercial potential or takeoff capability. n n Ex: (i. e. innovation for innovations sake) *Europe

Reading the Value Curve cont’d Company Caught in the Red Ocean n Q: Does the value curve converge with competitors? n n n Yes = Strategy tends to be trying to outdo competition on cost or quality. Signals slow growth or luck if the business is in an industry that is growing. Divergence: Overdelivery Without Payback n Q: Does the company’s market share and profitability reflect these investments? n n Oversupplying customers with value adding elements. *Premium wines Solution: Value-Innovate to create divergence. n n Eliminate and reduce NOT raise and create. [yellow-tail]

Reading the Value Curve cont’d Incoherent Strategy • Q: Does the value curve look like a zig-zag with no rhyme or reason? (Low-High-Low-High) – Independent Substrategies • Reflection of an organization with divisional or functional silos. • Although they may keep businesses running, collectively they do little to distinguish the company from competitors or provide a clear vision. Strategic Contradictions • Q: Are there strategic contradictions? – Areas where a company is offering a high level on one competing factor while ignoring others that support that factor. • Ex: Investing heavily in making a company’s website easy to use, but failing to correct the site’s slow speed of operation. • Ex: Petroleum Station Company “offering less for more” – Fewer services than competitors at a higher price. • Ex: *Price and range of lumberyards, while offering consumer classes.

Reading the Value Curve cont’d An Internally Driven Company n Q: How does a company label the industry’s competing factors? n i. e. megahertz vs. speed (or) thermal water temperature vs. hot water *Comparable to writing with an active voice using short, simple sentences. n Q: Are the competing factors stated in terms buyers can understand value, or operational jargon? n n n Outside in (driven by demand) Inside out (operationally driven) Analyzing the language helps a company understand how far it is from creating industry demand.

Summary n The Strategy Canvas n Four Actions Framework n n Eliminate, reduce, raise, and create Eliminate-Reduce-Raise-Create Grid n Supplementary analytic to the four actions framework

Summary cont’d n Three Characteristics of a Good Strategy n n Focus, Divergence, Compelling Tagline Reading the Value Curves A Company Caught in the Red Ocean n Overdelivery Without Payback n An Incoherent Strategy n Strategic Contradictions n An Internally Driven Company n

References “About curves. ” Curves. com. 25 January 2009. <http: //www. curves. com>. Lasher, Lemuel. “Blue Ocean Strategy. ” CSC. com. 25 January 2009. <http: //www. csc. com/cscworld/072005/dep/br 001. ht ml>. Mendonza, Morice. “In search of blue oceans: AOL (Europe). ” Knowledge. insead. edu. 25 January 2009. <http: //knowledge. insead. edu/aoleurope. cfm>.