Beating the Competition

Beating the Competition

Blue Ocean Strategy Partial summary of the main concepts presented by: W. Chan Kin and Rene Mauborgne their book Blue Ocean Strategy Copyright 2005 Harvard Business School Publishing Corporation Stop Trying to Beat the Competition To win in the future companies must stop competing with each other the only way to beat the competition is to stop trying to beat the competition The market universe is composed of: red oceans represent all industries in existence today industry boundaries are defined and accepted competitive rules of the game are known firms try to outperform their rivals and grab a greater share of existing demand as market space gets crowded, prospects of profits & growth are reduced products become commodities

competition turns red oceans bloody and blue oceans denote all industries NOT in existence today untapped market space, demand creation & opportunity for profitable growth most are created from within red oceans by expanding existing industry boundaries competition is irrelevant because the rules of the game are waiting to be set Not a New Concept It will always be important to swim in the red oceans by outcompeting rivals BUT New unheard of industries have always appeared and will continue 30 years ago, there were no industries like: mutual funds cell phones biotechnology snowboards coffee bars circus/opera entertainment Industries never stand still they continuously evolve

Most business opportunities are in untapped blue oceans Yet most academic research is based on competition-driven red ocean strategies To focus on the red ocean is to accept constraining factors limited terrain the need to beat a rival to succeed The business world has the capacity to create new uncontested market space Why Now? Accelerated Technological Advances have substantially improved industrial productivity have allowed suppliers to produce an unprecedented array of products/services the result is that supply exceeds demand pushing prices down Globalization Trends compounds the situation Information Technology as info. on products and prices becomes instantly & globally available, niche markets and havens for monopoly continue to disappear Demographics declining populations in many developed markets reduces demand

The result: Accelerated commoditization of products & services Increasing price wars Shrinking profit margins Overcrowded industries Differentiating brands becomes harder in both economic upturns and downturns Where Are The Possibilities? The same company can be brilliant at one moment AND wrongheaded at another Therefore the company is NOT the appropriate unit of analysis for exploring the roots of high performance and blue oceans Industries are constantly being created and expanded over time Therefore industry conditions and boundaries are not given Industry is also NOT the best unit of analysis The strategic move and not the company nor the industry, IS the right unit of analysis for explaining the creation of blue oceans and sustained high performance Value Innovation is the Cornerstone of Blue Ocean Strategy

Authors research showed that what consistently separated winners from losers in creating blue oceans was their approach to strategy Instead of focusing on beating the competition, focus on making the competition irrelevant How? By creating a leap in value for buyers and your company known as Value Innovation opens up new and uncontested market space Value innovation occurs only when companies align innovation with: utility price and cost positions Traditionally strategy is seen as making a choice between differentiation and low cost In contrast, those that seek to create blue oceans, pursue differentiation and low cost simultaneously Value Innovation is the Cornerstone of Blue Ocean Strategy COSTS

VALUE INNOVATION BUYER VALUE The Challenge !!! There is a general belief that the odds of success are lower when companies venture beyond existing industry space How can companies systematically maximize the opportunities while simultaneously minimizing the risks of formulating and executing blue ocean strategy? Effective blue ocean strategy should be about risk minimization and NOT risk taking The Strategy Canvas Captures the current state of play in the known market space Allows you to understand:

where the competition is currently investing the factors the industry currently competes on in products, service & delivery what customers receive from the existing competitive offerings in the market To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives and from customers to non-customers of the industry Key Questions To break the tradeoff between differentiation and low cost And to create a new value curve There are 4 key questions to challenge an industrys strategic logic & business model 1. Which of the factors that the industry takes for granted should be eliminated? Often factors are taken for granted even though they no longer have value or may even detract from value 2. Which factors should be reduced well below the industrys standards? Forces you to determine whether products or services have been over-designed in the race to match and best the competition Companies over-serve customers, increasing their cost structure for no gain

Pursuing the first two questions, gives you insight into how you can drop your cost structure vis--vis competitors 3. Which factors should be raised well above the industrys standards? 4. Which factors should be created that the industry has never offered? The second two factors provide you with insight into how to lift buyer value and create new demand Strategy Canvas for Circuses Factors & Emphasis LOW PRICE STAR PERFORMERS ANIMAL SHOWS AISLE CONCESSIONS MULTIPLE SHOW ARENAS FUN & HUMOR THRILLS & DANGER UNIQUE VENUE

HIGH The Eliminate-Reduce-Raise-Create Grid Of the factors that we have identified that the industry competes on, what can we ELIMINATE RAISE REDUCE CREATE Like the TOWS Matrix, ERRC is a brainstorming tool ERRC Grid for Cirque de Soleil ELIMINATE Star performers

Animal acts Aisle concessions Multiple show arenas REDUCE Fun & humor Thrill & danger RAISE Unique venue CREATE Theme Refined environment Multiple productions Artistic music & dance Strategy Canvas for Cirque de Soleil Factors & Emphasis LOW


SIX BASIC APPROACHES Path 1: Look Across Alternative Industries A company competes not only with other firms in its own industry BUT also with companies in other industries that produce alternative products and services (often considered substitutes) Rarely do sellers think consciously about how their customers make trade-offs across alternative industries By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, .. you can create a blue ocean of new market space e.g. NetJets created an industry between commercial airlines and private jets Timesharing a jet with 15 other companies The Approach - Reconstructing Market Boundaries SIX BASIC APPROACHES Path 2: Look Across Strategic Groups within Industries Strategic groups refers to a group of companies within an industry that pursue

a similar strategy Most companies focus on improving their competitive position within the strategic group To break out of the strategic group you must understand which factors determine customers decisions to trade up or down from one group to another e.g. Curves figured out what women liked and did not like about traditional health clubs and what they liked and did not like about home exercise programs and created an industry by combining and pruning factor from both The Approach - Reconstructing Market Boundaries SIX BASIC APPROACHES Path 3: Look Across The Chain of Buyers In most industries, competitors converge around a common definition of who the target buyer is In reality there is a chain of buyers the purchaser the actual user

influencers These three groups may overlap but they often differ An industry typically converges on a single buyer group Sometimes there is a strong economic rationale for this focus BUT often it is a result of industry practices that have never been questioned By looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers e.g. Reuters and Telerate offered services to the financial industry but sold to the IT Groups. Bloomberg focused its sales pitch to traders and analysts The Approach - Reconstructing Market Boundaries SIX BASIC APPROACHES Path 4: Look Across Complimentary Product & Service Offerings Few products and services are used in a vacuum In most cases, other products and services affect their value Untapped value is often hidden in complementary products and services The key is to define the total solution buyers seek when they choose a product or service Think about what happens before, during and after your product is used

e.g. To go to a movie theatre a couple may need babysitters and parking The Approach - Reconstructing Market Boundaries SIX BASIC APPROACHES Path 5: Look Across Functional or Emotional Appeal to Buyers Some industries compete principally on price and function largely on calculation of utility their appeal is rational Other industries compete largely on feelings their appeal is emotional Yet the appeal of most products or services is rarely intrinsically one or the other Industries have trained customers in what to expect When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space Emotionally oriented industries offer many extras that add price without enhancing functionality Conversely, functionally oriented industries often infuse commodity products with new life by adding a dose of emotion thus stimulating demand

e.g. Swatch transformed the functionally driven budget watch into an emotionally driven fashion statement The Approach - Reconstructing Market Boundaries SIX BASIC APPROACHES Path 6: Look Across Time Most companies adapt incrementally & passively as events unfold They pace their own actions to keep up with the development of trends they track Blue ocean strategy attempts to determine how the trend will: change value to customers and impact the companys business model Three principles are critical to assessing trends across time the trends must be decisive to your business they must be irreversible, and they must have a clear trajectory Ask yourself what the market would look like if the trend were taken to its logical conclusion Identify what must be changed today to unlock a new blue ocean e.g, Apple capitalized on music cannibalization trend by opening the iTunes

online music store providing an easy cheap venue to upload quality music and solve the artists copyright issue Conceiving New Market Space From Head-to-Head Competition toward Blue Ocean Creation Head-to-Head Competition Blue Ocean Creation Focus on rivals within the industry Look across alternative industries Buyer Group Focus on competitive position within strategic

group Look across strategic groups within industry Scope of Offering Focus on better serving the buyer group Redefine the industry buyer group Functional/ Emotional Focus on maximizing value of offerings within bounds of industry

Look across to complementary offerings Time Focus on improving price performance within functional/emotional orientation of industry Rethink the functional/emotional orientation of industry Focus on adapting to external trends as they occur

Participate in shaping external trends over time Industry Strategic Group The Entire Process Develop a strategic canvas that identifies the factors upon which the industry competes Develop an ERRC Grid to redefine the industry factors Reconstruct market boundaries 6 paths Focus on the big picture, not the numbers Reach beyond existing demand Make certain there is enough aggregate demand in your new blue ocean Consider those non-customers who are looking for an alternative Then try to attract non-customers who consciously choose against your market Lastly, look for unexplored non-customers customers in distant industries Get the strategic sequence right Buyer utility Price

Cost Adoption Overcome key organizational hurdles Build execution into strategy Search, plan for, determine the scale and build a business model for risk Environmental risk Organizational risk Management risk Comparing Red Oceans to Blue Oceans 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 firms activities with its strategic choice of differentiation OR low cost Align the whole system of a firms activities in its pursuit of differentiation AND low cost

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