Wednesday, April 30, 2014

Blue Ocean Strategy

Recently i came across a new Marketing gimmick word "Blue Ocean Strategy"[BOS] and i started grabbing the details and came to know there is a book titled - "Blue Ocean Strategy - How to create uncontested market space and make the competition irrelevant" written by authors  W. Chan Kim and Renée Mauborgne.
I'm happy to share the brief about this innovative methodology through this blog.

Go Where Profits and Growth are - and where the competition is not! - This phrase is really confusing right ? Wondering how this could be possible ? Yes, i too had the same feeling when i read at the first time and then when i get on to the details of this strategy then i realized that its all about old wine in the new bottle.. haah haan!

W. Chan Kim and Renée Mauborgne, Professors at INSEAD and Co-Directors of the INSEAD Blue Ocean Strategy Institute. Based on a study of 150 strategic moves spanning more than a hundred years and thirty industries, Kim & Mauborgne show that companies can succeed not by battling competitors, but rather by creating ″blue oceans″ of uncontested market space.

These strategic moves create a leap in value for the company, its buyers, and its employees, while unlocking new demand and making the competition irrelevant. The book presents analytical frameworks and tools to foster organization's ability to systematically create and capture blue oceans.

The book is divided into three parts:

1. The first part presents key concepts of blue ocean strategy, including Value Innovation – the simultaneous pursuit of differentiation and low cost – and key analytical tools and frameworks such as the strategy canvas, the four actions framework and the eliminate-reduce-raise-create grid.

Fig-1: 4-Actions Framework

2. The second part describes the four principles of blue ocean strategy formulation. These four formulation principles address how an organization can create blue oceans by looking across the six conventional boundaries of competition (Six Paths Framework), reduce their planning risk by following the four steps of visualizing strategy, create new demand by unlocking the three tiers of non-customers and launch a commercially-viable blue ocean idea by aligning unprecedented utility of an offering with strategic pricing and target costing and by overcoming adoption hurdles.

Fig-2:  6-Principles: Minimizing Risks & Maximizing Opportunities in formulation & executing blue ocean creation.

Fig-3: Six Paths to BOS

The book uses many examples across industries to demonstrate how to break out of traditional competitive (structuralist) strategic thinking and to grow demand and profits for the company and the industry by using blue ocean (re-constructionist) strategic thinking. The four principles are:

  1. how to create uncontested market space by reconstructing market boundaries,
  2. focusing on the big picture,
  3. reaching beyond existing demand and
  4. getting the strategic sequence right.

3. The third and final part describes the two key implementation principles of blue ocean strategy including tipping point leadership and fair process. These implementation principles are essential for leaders to overcome the four key organizational hurdles that can prevent even the best strategies from being executed. The four key hurdles comprise the cognitive, resource, motivational and political hurdles that prevent people involved in strategy execution from understanding the need to break from status-quo, finding the resources to implement the new strategic shift, keeping your people committed to implementing the new strategy, and from overcoming the powerful vested interests that may block the change.

In the book the authors draw the attention of their readers towards the correlation of success stories across industries and the formulation of strategies that provide a solid base to create unconventional success – a strategy termed as “Blue Ocean Strategy”. Unlike the “Red Ocean Strategy”, the conventional approach to business of beating competition derived from the military organization, the “Blue Ocean Strategy” tries to align innovation with utility, price and cost positions.

Fig-4: Profit & Growth Consequences of Creating BOS

The authors ask readers “What is the best unit of analysis of profitable growth? Company? Industry?” – a fundamental question without which any strategy for profitable growth is not worthwhile. The authors justify with original and practical ideas that neither the company nor the industry is the best unit of analysis of profitable growth; rather it is the strategic move that creates “Blue Ocean” and sustained high performance. The book examines the experience of companies in areas as diverse as watches, wine, cement, computers, automobiles, textiles, coffee makers, airlines, retailers, and even the circus, to answer this fundamental question and builds upon the argument about “Value Innovation” being the cornerstone of a blue ocean strategy. Value Innovation is necessarily the alignment of innovation with utility, price and cost positions. This creates uncontested market space and makes competition irrelevant.

Blue Ocean vs. Red Ocean:

Fig-5: Red Vs Blue

Kim and Mauborgne argue that while traditional competition-based strategies (red ocean strategies) are necessary, they are not sufficient to sustain high performance. Companies need to go beyond competing. To seize new profit and growth opportunities they also need to create blue oceans. The authors argue that competition based strategies assume that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what academics call the structuralist view, or environmental determinism. To sustain themselves in the marketplace, practitioners of red ocean strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy. Here, cost and value are seen as trade-offs and a firm chooses a distinctive cost or differentiation position. Because the total profit level of the industry is also determined by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.

Blue ocean strategy, on the other hand, 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. This is what the authors call “re-constructionist view”. Assuming that structure and market boundaries exist only in managers’ minds, practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there, largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation – that is, the creation of innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost. As market structure is changed by breaking the value/cost trade-off, so are the rules of the game. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created. Such a strategy therefore allows firms to largely play a non–zero-sum game, with high payoff possibilities.

I hope this blog is very informative for you and i thank you for sparing your time reading my blog!

Happy Reading!