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Creating Blue Oceans

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The Book and the Authors

JOHN ABBOTT JOHN ABBOTT

Prof Chan Kim Prof Renee

Mauborgne
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Accolades 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
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 New Market Space BACHELOR OF

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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
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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
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Creating Blue Oceans 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 BACHELOR OF
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of Blue Oceans

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
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The Impact of Creating Blue Oceans

 From Company and Industry BACHELOR OF
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to Strategic Move

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 BACHELOR OF
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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
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Red Ocean Vs. Blue Ocean

Compete in existing Create uncontested

market space market space
Beat the competition Make the competition
irrelevant
Exploit existing demand
Create and capture new
Make the value-cost demand
trade-off Break the value-cost
Align the whole system trade-off
of a firms activities Align the whole system of
with its strategic choice a firms activities in
of differentiation or low pursuit of differentiation
cost and low cost
 Formulating and Executing
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Blue Ocean Strategy INNOVATION

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
 Take Aways BACHELOR OF
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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!
 The Six Principles of Blue Ocean Strategy BACHELOR OF
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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 Risk factor each principle

attenuates
Reconstruct market boundaries Search risk
Focus on the big picture, not the Planning risk
numbers Scale risk
Reach beyond existing demand Business model risk
Get the strategic sequence right

Evaluation principles Risk factor each principle

attenuates
Overcome key organizational hurdles Organizational risk
Build execution into strategy Management risk
 Points of view BACHELOR OF
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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 BACHELOR OF
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Red Ocean Strategy Blue Ocean (VI) Strategy

High High

V1 D
V1

Quality Quality

LC

Low Low
High C1 Low High C1 Low
Cost Cost

Structuralist Reconstructionist
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Example: A highly competitive Industry

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The American
Wine Industry
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What the industry offers

Premium Wines Budget Wines

Polarised
Strategic Groups

Massive Choice
 American Wine Industry
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3rd 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

31st in the world in per capita consumption!
American Wine Industry BACHELOR OF
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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.
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What wine customers said

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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 BACHELOR OF

looking for in a wine?

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 Segmentation of Market and Brands
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Low High
Involvement Involvement
Easy Going Enjoyers Aspirationals Appreciators Connoisseurs
Glass with Everyday Image important Want to Sophisticated
friends enjoyment Wine preferrers discover wine drinker
To relax/unwind (sic) Knowledge of Discerning wine
Least care Stick with limited Varietal wine regions tastes
choosing a wine list of known knowledge Frequently buy Dont decide in
brands Interested in >$10 wines store
Not wine Choose in-store some wine Join wine clubs Have a cellar
preferrers Not interested in language Dont stick to Less influenced
wine language Enjoy trying new known brands by specials/
Price is a strong wines promotions
influencer Influenced by Ideal wine is
major brand Visit wineries / complex & Actively pursue
advertising read wine articles interesting wine knowledge

Rosemount
Brand: Lindemans Wolf Blass Penfolds
Estate
Demographic: M/F: 50/50 Age: M/F: 30/70; Age: M/F: 70/30; Age: Age: 40+
35-49 30-40 35-50
 Strategy Canvas BACHELOR OF
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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 companys relative performance across its industrys factors of competition.
High
Premium Wines

Budget Wines

Low
Wine range
Use of Above-the-line Vineyard prestige
Price
enological marketing Aging and legacy Wine
terminology quality complexity
 Four Steps of Visualizing BACHELOR OF
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1. Visual 2. Visual 3. Visual 4. Visual

Awakening Exploration Strategy Fair Communication

Compare your Go into the field to Draw your to be Distribute your

business with your explore the six paths canvas based on before-and-after
competitors by to creating blue insights from field strategic profiles on
drawing your as is oceans observations one page for easy
canvas comparison

Observe the Get feedback on

See where your distinctive advantages alternative strategy Support only those
strategy needs to of alternative products canvases from projects and
change and services customers, operational moves
competitors that allow your
customers, and non- company to close
See which factors customers gaps and actualize the
you should eliminate, new strategy
create or change
Use feedback to build
the best to be future
strategy
Four Actions to create a Blue Ocean
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Raise
What factors
should be raised
well beyond the
industry standard?

Eliminate Create
What factors What factors should
should be be created that the
eliminated that the industry has never
industry has taken offered?
for granted?

Reduce
What factors
should be reduced
well below the
industry standard?
 Four Actions Framework +
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Eliminate/Reduce/Raise/Create Grid INNOVATION

Reduce
The four actions framework offers an technique Which factors should be
that breaks the trade-off between reduced well below
industry standards?
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 Eliminate A Create
Which of the factors New Which factors should be
be eliminated; what factors need to be reduced Value created that the industry
that the industry takes
below industry standards; what factors need to for granted should be Curve has never offered?
be raised above industry standards; and what eliminated?
should be created that the industry has never Raise
offered. Which factors should
be raised well above
the industrys standard?

Eliminate Raise The eliminate-reduce-raise-create grid pushes

Enological terminology and Price versus budget wines
companies not only to ask all four questions in the
distinctions four actions framework but also to act on all four
to create a new value curve. By driving
Retail Store involvement
Aging qualities
companies to fill in the grid with the actions of
eliminating, reducing, raising, and creating, the
grid provides four immediate benefits: it pushes
Above-the-line marketing them to simultaneously pursue differentiation and
Reduce Create low costs; identifies companies who are only
Wine complexity Easy drinking raising and creating thereby raising costs; makes
it easier for managers to understand and comply;
and it drives companies to scrutinize every factor
Wine range Ease of selection
the industry competes on.
 ERRC Grid yellow tail BACHELOR OF
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The Case of yellow tail

Eliminate Raise

Enological terminology & distractions Price versus budget wines

Aging qualities Retain store involvement
Above-the-line marketing

Reduce Create

Wine complexity Easy drinking

Wine Range Ease of selection
Vineyard prestige Fun & adventure
 To Be Canvas BACHELOR OF
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Eliminate

Reduce

Raise

Create
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Yellow Tail 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] BACHELOR OF
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Creating of a social drink that is accessible to

anyone
Utility proposition
Easy drinking, ease of selection, sense of fun and
(customers, distributors and adventure
retailers) Limit number of SKUs
Price to move at volume

Price proposition Targeted at the mass of customers

Priced against the alternative (6-pack)

Elimination of working capital tied up in aging wines

Cost structure Fast product turnover
 Results BACHELOR OF
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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
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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 dont know them you can see some at
http://www.youtube.com/watch?v=M4lAPI5BAuk
 Example: Cirque du Soleil BACHELOR OF
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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 the theater
Because of this, Cirque du Soleil appealed to
both circus customers and noncustomers
 Example: Cirque du Soleil BACHELOR OF
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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 high-
priced concessions and vendors thereby
cutting costs
 Example: Cirque du Soleil BACHELOR OF
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Cirque du Soleil effectively combined the best

of both the circus and the theater while
eliminating everything else
This allowed them to achieve both
differentiation and low cost
 Eliminate-Reduce-Raise-Create BACHELOR OF
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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
Multiple productions
Artistic music and dance
 The Strategy Canvas BACHELOR OF
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of Cirque du Soleil

Eliminate Reduce Raise Create

hi
Ringling Brothers

Cirque du Soleil
offering level

Smaller Regional Circus

lo
Animal Shows Multiple Show Theme Multiple
Price Thrills & Danger
Arenas Productions
Star Performers Aisle Concessions Fun & Humor Unique Venue Refined Viewing Artistic Music
Environment & Dance
Kim & Mauborgne 2006
 Key Takeaways BACHELOR OF
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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 dont 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 BACHELOR OF
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Red Ocean Strategy Blue Ocean Strategy

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