By: W. Chan Kim & Renee Mauborgne

Value Innovation Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates.

Costs

Value Innovation

Buyer Value

Value Innovation

Red Ocean Versus Blue Ocean Startegy In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean.

Red Ocean Strategy

Blue Ocean Strategy

Compete in existing market space.

Create uncontested market space.

Beat the competition.

Make the competition irrelevant.

Exploit existing demand.

Create and capture new demand.

Make the value-cost trade-off.

Break the value-cost trade-off.

Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost.

Align the whole system of a firm’s activities in pursuit of differentiation and low cost.

Red Ocean Versus Blue Ocean Strategy Red Ocean Strategy

Blue Ocean Strategy

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

The Six Principles of Blue Ocean Strategy Formulation Principles

Risk factor each principle attenuates

Evaluation principles

Risk factor each principle attenuates

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

Low Price

Wine range Vineyard prestige Use of Above-the-line enological marketing Aging and legacy Wine quality complexity terminology

Strategy Canvas High

Low

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

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 and comply; and it drives companies to scrutinize every factor the industry competes on.

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Reduce

Four Actions Framework Eliminate

Create A New Value Curve

Raise

The Eliminate-Reduce-Raise-Create Grid

Eliminate

Raise

Reduce

Create

Four Steps of Visualizing Strategy The four steps of visualizing strategy builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people’s creativity. The four steps include visual awakening, visual exploration, visual strategy fair, and visual communication. 1.

Visual Awakening

•Compare your business with your competitors’ by drawing your “as is” strategy canvas. •See where your strategy needs to change

2.

Visual Exploration

3.

Visual Strategy Fair

•Go into the field to explore the six paths to creating blue oceans.

•Draw your “to be” strategy canvas based on insights from field observations.

•Observe the distinctive advantages of alternative products and services.

•Get feedback on alternative strategy canvases from customers, competitors’ customers, and noncustomers.

•See which factors you should eliminate, create, or change.

•Use feedback to build the best “to be” future strategy.

4.

Visual Communicatio n

•Distribute your beforeand-after strategic profiles on one page for easy comparison. •Support only those projects and operational moves that allow your company to close the gaps to actualize the new strategy.

Four Steps of Visualizing Strategy 1.

Visual Awakening

2.

Visual Exploration

3.

Visual Strategy Fair

4.

Visual Communication

Pioneer, Settler, Migrator Map A corporate management team pursuing profitable growth can plot the company’s current and planned portfolios on a pioneer-migrator-settler (PMS) map. This strategy can help a company determine which businesses experience the highest and lowest growth and cash flow. These are classified accordingly with the highest growth potential being pioneers, then to migrators, then to the lowest rung, settlers.

Pioneers

Migrators

Settlers

Today

Tomorrow

Pioneer, Settler, Migrator Map Pioneers

Migrators

Settlers

Today

Tomorrow

Three Tiers of Noncustomers There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of customers minimally buy an industry’s offering out of necessity. The second tier of noncustomers refuse to use your industries offerings. The third tier are noncustomers who have never thought of your market’s offerings as an option.

First Tier Your Market

Second Tier

Third Tier

Three Tiers of Noncustomers

Sequence of Blue Ocean Strategy Buyer utility Is there exceptional buyer utility in your business idea?

An important part of blue ocean strategy is to “get the strategic sequence right.” This sequence fleshes out and validates blue ocean ideas to ensure their commercial viability. This can then reduce business model risk. In this model, potential blue ocean ideas must pass through a sequence of buyer utility, price, cost, and adoption. At each step there are only two options: a “yes” answer, in which case the idea may pass to the next step, or “no”. If an idea receives a no at any point, the company can either park the idea or rethink it until you get a yes.

No-- Rethink

Yes

Price Is your price easily accessible to the mass of buyers? No-- Rethink Yes

Cost Can you attain your cost target to profit at your strategic price?

No-- Rethink

Yes

Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Yes

A Commercially Viable Blue Ocean Idea

No-- Rethink

Sequence of Blue Ocean Strategy Buyer utility No-- Rethink

Yes

Price No-- Rethink Yes

Cost No-- Rethink Yes

Adoption No-- Rethink Yes

A Commercially Viable Blue Ocean Idea

Buyer Utility Map The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. The Six Stages of the Buyer Experience Cycle

The Six Utility Levers

Customer Productivity Simplicity

Convenience

Risk

Fun and Image Environmental friendliness

1.

2.

3.

4.

5.

6.

Purchase

Delivery

Use

Supplements

Maintenance

Disposal

Buyer Utility Map The Six Stages of the Buyer Experience Cycle

The Six Utility Levers

Customer Productivity

Simplicity

Convenience

Risk

Fun and Image Environmental friendliness

1.

2.

3.

4.

5.

6.

Purchase

Delivery

Use

Supplements

Maintenance

Disposal

Buyer Experience Cycle A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyer’s experience. Purchase

Delivery

How long does it take to find the product you need?

How long does it take to get the product delivered?

Is the place of purchase attractive and accessible?

How difficult is it to unpack and install the new product?

How secure is the transaction environment?

Do buyers have to arrange delivery themselves? If yes, how costly and difficult is this?

How rapidly can you make a purchase?

Use Does the product require training or expert assistance? Is the product easy to store when not in use? How effective are the product’s features and functions? Does the product or service deliver far more power or options than required by the average user? Is in overcharged with bells and whistles?

Supplements Do you need other products and services to make this product work? If so, how costly are they? How much time do they take? How easy are they to obtain?

Maintenance

Disposal

Does the product require external maintenance?

Does use of the product create waste items?

How easy is it to maintain and upgrade the product?

How easy is it to dispose of the product?

How costly is maintenance?

Are there legal or environmental issues in disposing of the product safely? How costly is disposal?

Buyer Experience Cycle Purchase

Delivery

Use

Supplements

Maintenance

Disposal

Uncovering Blocks to Buyer Utility Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utility map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers. Purchase

Delivery

Use

Supplements

Maintenance

Disposal

Customer Productivity:

In which stage are the biggest blocks to customer productivity?

Simplicity:

In which stages are the biggest blocks to simplicity?

Convenience:

In which stage are the biggest blocks to convenience?

Risk:

In which stage are the biggest blocks to reducing risks?

Fun and Image:

In which stage are the biggest blocks to fun and image?

Environmental Friendliness:

In which stage are the biggest blocks to environmental friendliness?

Uncovering Blocks to Buyer Utility Purchase

Delivery

Customer Productivity: Simplicity:

Convenience:

Risk:

Fun and Image:

Environmental Friendliness:

Use

Supplements

Maintenance

Disposal

Price Corridor of the Mass This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets. Step 1: Identify the price corridor of the mass.

Step 2: Specify a price level within the price corridor.

Three alternative product/service types: Same form

Different form, same function

Different form and function, same objective

High degree of legal and resource protection Difficult to imitate

Price Corridor of the Mass

Mid-level pricing

Some degree of legal and resource protection Low degree of legal and resource protection Easy to imitate

Price Corridor of the Mass Step 1: Identify the price corridor of the mass.

Step 2: Specify a price level within the price corridor.

Three alternative product/service types: Same form

Different form, same function

Different form and function, same objective

High degree of legal and resource protection Difficult to imitate Price Corridor of the Mass

Mid-level pricing

Some degree of legal and resource protection Low degree of legal and resource protection Easy to imitate

Profit Model of Blue Ocean Strategy The profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation. The Strategic Price

The Target Profit

The Target Cost

Streamlining and Cost Innovations

Partnering

Pricing Innovation

Profit Model of Blue Ocean Strategy

Blue Ocean Idea Index The blue ocean idea index is a simple but robust test demonstrating how the sequence of utility, price, cost, and adoption form an integral whole to ensure commercial success through blue ocean strategy.

Philips Motorola Iridium CD-i Utility

Price

Cost

Adoption

DoCoMo I-mode Japan

Is there exceptional utility? Are there compelling reasons to buy your offering?

-

-

Is your price easily accessible to the mass of buyers?

-

-

+

Does your cost structure meet the target cost?

-

-

+

Have you addressed adoption hurdles up front?

-

+/-

+

+

Blue Ocean Idea Index

Utility

Is there exceptional utility? Are there compelling reasons to buy your offering?

Price

Is your price easily accessible to the mass of buyers?

Cost

Does your cost structure meet the target cost?

Adoption

Have you addressed adoption hurdles up front?