Creating a blue ocean

Strategic Management – Spring 2020

SOURCE: memegenerator.com
 BLUE-OCEAN STRATEGY— A SPECIAL KIND OF OFFENSIVE
• According to the authors of “Blue Ocean Strategy”, the business universe is divided into
two oceans:
• An existing market with boundaries and rules in which rival firms compete for
advantage.
• A “blue ocean” market space, where the industry has not yet taken shape, with no
rivals and wide-open long-term growth and profit potential for a firm that can create
demand for new types of products.

SOURCE: © McGraw-Hill Education

 WHAT ARE RED AND BLUE OCEANS?
RED OCEAN BLUE OCEAN

• Red oceans are all the industries in existence • Blue oceans are all the industries not in existence
today – the known market space today – the unknown market space.
• WHY DO WE CALL THEM RED OCEANS? • WHY DO WE CALL THEM BLUE OCEANS?
Cut-throat competition in existing industries Unexplored and untainted by competition, “blue
turns the ocean bloody red. Hence the term “red oceans” are vast, deep and powerful in terms of
ocean” opportunity and growth.
• Red ocean strategy is all about competition. As • Blue ocean strategy creates new demand.
the market space gets more crowded, companies Companies develop uncontested market space
compete fiercely for a greater share of limited rather than fight over a shrinking profit pool.
demand.
• Competing in red oceans is a zero-sum game. A • Creating blue oceans is non-zero-sum. There is
market-competing strategy divides existing ample opportunity for growth that is both
wealth between rival companies. As competition profitable and rapid.
increases, prospects for profit and growth
decline.
SOURCE: blueoceanstrategy.com
 A RECONSTRUCTIONIST VIEW OF STRATEGY
• While competition-based red ocean strategy assumes that an industry’s structural conditions are given and
that firms are forced to compete within them, blue ocean strategy is based on the view that market
boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of
industry players.
• In the reconstructionist world the strategic aim is to create new rules of the game by breaking the existing
value/cost trade-off and thereby creating a blue ocean.
• It involves looking systematically across established boundaries of competition and reordering existing
elements in different markets to reconstruct them into a new market space where a new level of demand is
generated.
• By stimulating the demand side of the economy, blue ocean strategy expands existing markets and creates
new ones.

SOURCE: Kim, W. C. and Mauborgne, R. (2005). Blue ocean strategy: from theory
to practice. California management review, 47(3), 105-121.
 VALUE INNOVATION
• The creation of blue oceans is about driving costs down
while simultaneously driving value up for buyers.
• Because buyer value comes from the utility and price that
the company offers to buyers and because the value to the
company is generated from price and its cost structure,
blue ocean strategy is achieved only when the whole
system of the company's utility, price, and cost activities is
properly aligned.

COST – Cost savings are made by eliminating and reducing

the factors an industry competes on.

BUYER VALUE - Buyer value is lifted by raising and creating

elements the industry has never offered.

SOURCE: Kim, W. C. and Mauborgne, R. (2005). Blue ocean strategy: from theory
to practice. California management review, 47(3), 105-121.
IMAGE: blueoceanstrategy.com
 THREE TIERS OF NONCUSTOMERS
• Tier 1 – “Soon-to-be” are noncustomers who are on the edge of
your current market waiting to jump ship. Currently they are
buyers who purchase your industry offerings out of necessity.
• Tier 2 – “Refusing” noncustomers who consciously choose
against your market. Currently they are buyers who purchase
alternative offerings that serve the same function.
• Tier 3 – “Unexplored” noncustomers who are in a market distant
from yours. Currently they are 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).

SOURCE: blueoceanstrategy.com
 THE 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, which allows users to clearly see the
factors that an industry competes on and invests in, what buyers receive, and what the strategic profiles of
the major players are.
• To fundamentally shift the strategy canvas of an industry, a company must begin by reorienting its strategic
focus from competitors to alternatives, and from customers to noncustomers of the industry.
• The value curve, the basic component of the strategy canvas, is a graphic depiction of a company's relative
performance across its industry's factors of competition.

SOURCE: Kim, W. C. and Mauborgne, R. (2005). Blue ocean strategy: from theory
to practice. California management review, 47(3), 105-121.
 • The horizontal axis on the strategy canvas captures the range of factors that an industry competes on and
invests in, while the vertical axis captures the offering level that buyers receive across all of these key
competing factors.

SOURCE: Kim, W. C. and Mauborgne, R. (2005). Blue ocean strategy: from theory
to practice. California management review, 47(3), 105-121.
IMAGE: blueoceanstrategy.com
DRAWING THE STRATEGY CANVAS
• 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
 THE FOUR ACTIONS FRAMEWORK
• To reconstruct buyer value elements in crafting a new value curve, the authors developed the four actions
framework that asks four key questions to challenge an industry's strategic logic and business model:
1. Which factors that the industry has long competed on should be eliminated ?
2. Which factors should be reduced well below the industry’s standard?
3. Which factors should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered?

SOURCE: Kim, W. C. and Mauborgne, R. (2005). Blue ocean strategy: from theory
to practice. California management review, 47(3), 105-121.
 THE ELIMINATE-REDUCE-RAISE-CREATE GRID (ERRC GRID)
• The Eliminate-Reduce-Raise-Create (ERRC) Grid is a simple matrix like tool that drives companies to focus
simultaneously on eliminating and reducing, as well as raising and creating while unlocking a new blue
ocean.
• This analytic tool complements the Four Actions Framework.
• Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor the
industry competes on, making them discover the range of implicit assumptions they make unconsciously in
competing.

SOURCE: Kim, W. C. and Mauborgne, R. (2005). Blue ocean strategy: from theory
to practice. California management review, 47(3), 105-121. and
blueoceanstrategy.com
 CASE: CIRQUE DU SOLEIL
• 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.
• 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.
• 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.
• 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.

VIDEO
SOURCE: Kim, W. C., & Mauborgne, R. (2015). Blue ocean strategy: how to create https://youtu.be/GkF_yStN4pw
uncontested market space and make the competition irrelevant. Expanded
edition. Boston, Massachusetts: Harvard Business Review Press.
 CIRCUS VALUE CURVE

SOURCE: How Cirque du Soleil revolutionized the circus - Blue Ocean Strategy
Example (YouTube)
CIRQUE DU SOLEIL ERRC MATRIX
• Price Eliminate Raise
• Star Performers
• Animal shows
• Aisle concession sales
• Multiple show arenas
• Fun and humor
• Thrill and danger Reduce Create
• Unique venues
• Theme
• Refined environment
• Multiple productions
• Artistic music and dance
 Raise
CIRCUS VALUE CURVE
Create

Reduce

Eliminate

SOURCE: How Cirque du Soleil revolutionized the circus - Blue Ocean Strategy
Example (YouTube)
 TO IMPLEMENT A BLUE OCEAN STRATEGY:
You need to:
• Examine the industry to identify the customer needs that it currently serves and doesn’t serve
• Study the industry’s customers and potential customers for what they really need
• Structure your own offering to focus on customer needs that have yet to be addressed, while minimizing
features that have been overserved.

SOURCE: Kim, W. C., & Mauborgne, R. (2015). Blue ocean strategy: how to create
uncontested market space and make the competition irrelevant. Expanded
edition. Boston, Massachusetts: Harvard Business Review Press.
 May-2010
Blue Ocean vs. Five Forces

• Are you a five-forces disciple or a blue-ocean enthusiast? That is, do you try to dominate existing markets
or look for opportunities to create new ones?
• Both approaches to strategy have their devotees, but to the best of our knowledge, no one before now has
conducted an empirical study comparing the two camps. So we did.
• Looking at entire industries in this way allows you to tell over time whether an innovation strategy or a
competitive strategy is best.
• Our research shows that competition eventually erodes the profits from innovation. But that’s a slow
process, requiring 15 years or so, which suggests that it takes the better part of a generation for the blue-
ocean approach to yield to competitive strategy.
• All this indicates that businesses may want to consider a blend of the two approaches.
• For instance, by slowing down profit erosion with an effective competitive strategy for an existing market,
they can increase the funds available for blue-ocean investments and thus their chances of finding an
untapped market with plenty of consumers.

SOURCE: Burke, A. A., van Stel, A. A., & Thurik, R. A. (2010). Blue ocean vs. five
forces. Harvard Business Review, 88(5), 28-29.
 QUESTIONS?

IMAGE: www.synapsiscreative.com
 Strategic Management
Week 12 announcements
We have a quiz scheduled for Friday April 17th:
• Quiz 11 based on the reading: Kim, W. C., & Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business
Review, 82(10), 76–84.

Our class sessions will be via Webex at our regular class-time. Please be punctual, attendance will be taken.

We will be using the business case from the Harvard Business Review collection. The chosen case is: “Nintendo
Switch: Shifting from Market-Competing to Market-Creating Strategy”.
Please type the link in your browser to access the HBR store  https://hbsp.harvard.edu/import/711486

• Each student must purchase the case individually to comply with

copyright.
• Deadline to purchase case is Sunday April 19th, 2020.
• Without proof of purchase you will not receive a grade in the
activities related to the case. Therefore you could loose the 20%
value in the final grade that is related to this activity.
• Remember, we have to respect copyright and case copies cannot be *This is the purchasing
status as of 12/04/2020

shared between students.

Please check the business news. See you next class.