Blue Ocean Strategy Innovating in a Down Economy

Blue Ocean Strategy: Innovating in a Down Economy IMCNE Annual Conference “A Recession is a Terrible Thing to Waste” May 5, 2009 Jennifer von Briesen Owner & Principal Frontier Strategy, LLC Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 1

Strategy Over the Years Strengths and Weakness analysis, SWOT (HBS, late 60 s) Portfolio approaches (GE, Mc. Kinsey, BCG 60 -70 s) Shareholder value, EVA (80 s-90 s), Michael Porter (mid 80 s) Core Competence, Strategic Intent (Hamel, Prahalad, early 90 s) Profit Zone (Adrian Slywotzky, et al) Disruptive technologies (Clay Christensen, late 90 s) Value Innovation (Chan Kim, Renée Mauborgne, late 90 s). So what’s new about Value Innovation/Blue Ocean Strategy? 2

What Is A Blue Ocean? Red Ocean Blue Ocean • Existing market space • New market space • Industry boundaries are defined and accepted • Companies expand or go across industry boundaries • Cutthroat competition means the water is bloody red • Competition is irrelevant in the blue uncharted water • Growth and profits are restricted • Significant opportunity for profitable growth Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 3

Core Concept The Simultaneous Pursuit of Differentiation (Superior Buyer Value) and Low Cost • Cost Structure Is lowered through eliminating and reducing factors the industry competes on but buyers do not value highly • High sales volume creates scale economies and further cost reduction • Buyer value is increased by raising and creating elements the industry has never offered. Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 4

Key Principle: Reach Beyond Existing Demand Engage the Three Tiers of Non-Customers Tier 2 Tier 3 • Are aware of but don’t use your industry’s offerings. • Have never thought of your market’s offerings as an option. Tier 1 • Soon-to-be non-customers. • In search of better solutions. Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 • “Unexplored” customers who have not been targeted or thought of as potential customers by any player in the industry. 5

Benchmarking Focuses On Beating The Competition • Callaway did not focus on competitors • Launched “Big Bertha” in 1991 • Dominated the market by capturing share from rivals and expanding the total golf club market “World’s Friendliest Driver” • e. g. , attracted non golf playing sports enthusiasts Rather than competing for a share of a contracting market, Value Innovators stimulate the demand side of the economy. 6

Why It’s Important The Sources of Profitable Growth 86% Source: Blue Ocean Strategy by

When Should Blue Ocean Strategy (BOS) Be Used? Best Situations Leadership is committed to investing in innovation for profitable growth and significant cost structure reduction Core business or organization is performing well Strategic, future-focused opportunities are not sacrificed to shortterm priorities Leadership embraces new approaches and non-incremental thinking Leadership believes in the need for a well balanced portfolio of offerings/businesses tied to different growth strategies including Pioneers, not just Settlers and Migrators Will BOS be of value to your clients? Frontier Strategy takes clients through an initial audit/ questionnaire 8

Using BOS for Business Development Think differently about how you position your services in this downturn BOS helps position your functional expertise and services more strategically C-level introductions and conversations Appeal to multiple functions and decision-makers Use Innovation positioning to increase appeal and demand for new project work Corporate innovation isn’t just about new products and top-line revenues, it’s about cost structure and building capabilities too Companies who invest now can make a break from competitors who are hunkering down Plus, connect what you do to a popular, recognized approach for added credibility 9

Using the BOS Toolkit During Projects BOS Methodology includes unique tools that relate to and can be applied to projects in a variety of areas, e. g. , Current situation assessment/audit New product/service development Customer research Competitive analysis Branding Pricing Performance improvement work e. g. , Process re-engineering Organizational transformation Restructuring/new staffing models, etc. Systems and infrastructure New operations and business models 10

Four-Step Blue Ocean Strategy Process 1. Visual Awakening 2. Visual Exploration 3. Visual Strategy Fair • Compare your business with your competitors’ by drawing your “as is” strategy canvas • Go into the field to explore the six paths to creating blue oceans • Draw your “to be” • Distribute your before-and strategy canvas based -after strategic profiles on on insights from field one page for easy observations comparison • See where your strategy needs to change 4. Visual Communication EXPLANATION • Observe the • Get feedback on distinctive advantages alternative strategy of alternative products canvases from • Support only those and services customers, nonprojects and operational customers, and moves that allow your competitors’ company to close the • See which factors you customers gaps to actualize the new should eliminate, strategy. create, or change • Use feedback to build the best “to be” future strategy ENGAGEMENT Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 EXPECTATION CLARITY 11

Blue Ocean Strategy Core Tools (1) Pioneer-Migrator-Settler Map Finding the most promising possibilities for growth across a portfolio of service offerings (2) Strategy Canvas and Value Curves Graphically depicting how a company configures its offerings to deliver customer benefits relative to other industry players (3) Six Paths and Four Actions Frameworks for discovering new ideas which can lead to future value curves 12 Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005

Drawing the Strategy Canvas Example Strategy Canvas: Curves Customer: Consumer • Decide the relevant market and offering scope to draw • Focus on the buyer/customer • Put Price as the first factor of competition and rate it on an absolute value basis • Carefully identify and discuss the factors and agree on definitions • Try to streamline and simplify for visual clarity • Group related factors • Group similar competitors • Reorder the factors • Draw multiple potential to-be value curves and test them 13

Four Actions for Creating New Value Curves Source: Blue Ocean Strategy by W. Chan

Example 1: Southwest Relative Offering Level High Average Airlines Southwest e. g. US Airways Tagline: “The speed of a plane at the price of a car – whenever you need it. ” Car Low Price Meals Lounges Seating Class Choices Hub Connectivity Friendly Service Speed Key Elements of Product, Service and Delivery Frequent Point-to. Point Departures Southwest’s Value Curve Shows Its Blue Ocean Strategy Characteristics of Focus, Divergence and a Compelling Tagline. Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 15

Example 2: Net. Jets “The convenience of a private jet at the price of a commercial airline ticket. ” Relative Offering Level High Private Jet (Corporate Travel) Net. Jets Commercial Airlines (First & Business Class) Low Price (fixed purchase plus variable price per flight) East of travel Need for Deadhead Speed of total Flexibility and customers to (incl. check-in, costs travel time Reliability manage aircraft customs, etc. ) (aircraft mgmt. and admin. ) Key Elements of Product, Service and Delivery In-flight service Focus on the key factors that lead buyers to trade across industries and eliminate or reduce everything else. Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 16

Example 3: Joint Strike Fighter (F-35) High Relative Offering Level JSF (F-35) Air Force (F-22) Low Price Design Weapons Mission Customization customization Customization Agility Stealth Maintainability Durability Counter. STOVL measures Key Elements of Product, Service and Delivery The JSF Program Offered A Superior Fighter Plane For All Three Branches At A Lower Cost. Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 17

Defense Aerospace Industry Traditional View: Three Branches With Unique Needs For Planes Air Force Navy Lightweight Two engines Marines STOVL (Short Take Off Vertical Landing) Integrated avionics Two seats Lightweight Stealth Large wings Short wings Supercruise engine Durability Countermeasures Long-distance Agility Maintainability Air-air armaments Large/flexible weapons payloads Fixed internal weapons payload Air-air and air-ground armaments Air-ground armaments Design customization Weapons customization Electronic warfare An aircraft built for every mission Source: Blue Ocean Strategy by W. Chan Kim & Renée Mauborgne © 2005 Mission customization The JSF eliminated or reduced all existing competing factors other than those shaded yellow. It questioned these differences and found the key commonalities across the three branches. 18

3 Things You Can Do Tomorrow 1. Think about non-customers in your business and in your clients’ industries. • Who are the untapped “soon-to-be”, “refusing”, and “unexplored” noncustomers? • Create at least one hypothesis about their needs that could be a Blue Ocean opportunity. 2. Draw an “As Is” Strategy Canvas for your client’s organization (with value curves for you and other industry competitors/alternatives) and assess opportunities and threats. Does your value curve have focus, divergence and a compelling tagline? 3. Start investigating your industry regarding the cost drivers and offering levels on each of the factors of competition that you identified on your Strategy Canvas. What factors can be reduced, eliminated, raised and created to create a new value curve? 19

“There exist limitless opportunities in every industry. Where there is an open mind, there will always be a frontier. ” Jv. B@Frontier. Strategy. com (508) 561 -0852 Charles Kettering 20