Value Innovation

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Blue Ocean Strategy
By W. Chan Kim Renee Mauborgne
Summary by Jesse Starmer COM 459
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Value Innovation
Value innovation is created in the region where a
companys 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
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Value Innovation
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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 firms activities with its strategic choice of differentiation or low cost. Align the whole system of a firms activities in pursuit of differentiation and low cost.
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Red Ocean Versus Blue Ocean Strategy
Red Ocean Strategy Blue Ocean Strategy





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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 Risk factor each principle attenuates
Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Search risk Planning risk Scale risk Business model risk
Evaluation principles Risk factor each principle attenuates
Overcome key organizational hurdles Build execution into strategy Organizational risk Management risk
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The Six Principles of Blue Ocean Strategy
Formulation Principles Risk factor each principle attenuates

Evaluation principles Risk factor each principle attenuates

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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 companys relative performance across its
industrys factors of competition.
High
Low
Wine range
Above-the-line marketing
Vineyard prestige and legacy
Price
Use of enological terminology
Aging quality
Wine complexity
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Strategy Canvas
High
Low
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Four Actions Framework Eliminate/Reduce/Raise/Cr
eate Grid
Reduce
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.
Which factors should be reduced well below
industry standards?
A New Value Curve
Eliminate
Create
Which factors should be created that the industry
has never offered?
Which of the factors that the industry takes for
granted should be eliminated?
Raise
Which factors should be raised well above the
industrys 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.
Eliminate Enological terminology and distinctions Aging qualities Above-the-line marketing Raise Price versus budget wines Retail Store involvement
Reduce Wine complexity Wine range Vineyard prestige Create Easy drinking Ease of selection Fun and adventure
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Four Actions Framework Eliminate/Reduce/Raise/Cr
eate Grid
Reduce
Four Actions Framework
Eliminate
Create
A New Value Curve
Raise
Eliminate Raise
Reduce Create
The Eliminate-Reduce-Raise-Create Grid
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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 peoples creativity. The four steps
include visual awakening, visual exploration,
visual strategy fair, and visual communication.
Visual Awakening Visual Exploration Visual Strategy Fair Visual Communication
Compare your business with your competitors by drawing your as is strategy canvas. See where your strategy needs to change Go into the field to explore the six paths to creating blue oceans. Observe the distinctive advantages of alternative products and services. See which factors you should eliminate, create, or change. Draw your to be strategy canvas based on insights from field observations. Get feedback on alternative strategy canvases from customers, competitors customers, and noncustomers. Use feedback to build the best to be future strategy. Distribute your before-and-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.
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Four Steps of Visualizing Strategy
Visual Awakening Visual Exploration Visual Strategy Fair Visual Communication

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Pioneer, Settler, Migrator Map
A corporate management team pursuing profitable
growth can plot the companys 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
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Pioneer, Settler, Migrator Map



Pioneers
Migrators
Settlers
Today
Tomorrow
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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 industrys
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 markets offerings as
an option.
Third Tier
Second Tier
First Tier
Your Market
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Three Tiers of Noncustomers
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Sequence of Blue Ocean Strategy
Buyer utility
Is there exceptional buyer utility in your business idea?
No-- Rethink
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.
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?
No-- Rethink
Yes
A Commercially Viable Blue Ocean Idea
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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
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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
1. Purchase
2. Delivery
3. Use
4. Supplements
5. Maintenance
6. Disposal






Customer Productivity
Simplicity
Convenience
The Six Utility Levers
Risk
Fun and Image
Environmental friendliness
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Buyer Utility Map
The Six Stages of the Buyer Experience Cycle
4. Supplements
5. Maintenance
6. Disposal
1. Purchase
2. Delivery
3. Use






Customer Productivity
Simplicity
Convenience
The Six Utility Levers
Risk
Fun and Image
Environmental friendliness
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Buyer Experience Cycle
A buyers 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 buyers
experience.
Purchase
Delivery
Use
Supplements
Maintenance
Disposal
How long does it take to find the product you
need? Is the place of purchase attractive and
accessible? How secure is the transaction
environment? How rapidly can you make a purchase?
How long does it take to get the product
delivered? How difficult is it to unpack and
install the new product? Do buyers have to
arrange delivery themselves? If yes, how costly
and difficult is this?
Does the product require training or expert
assistance? Is the product easy to store when not
in use? How effective are the products 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?
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?
Does the product require external
maintenance? How easy is it to maintain and
upgrade the product? How costly is maintenance?
Does use of the product create waste items? How
easy is it to dispose of the product? Are there
legal or environmental issues in disposing of the
product safely? How costly is disposal?
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Buyer Experience Cycle
Purchase
Delivery
Use
Supplements
Maintenance
Disposal
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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?
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Uncovering Blocks to Buyer Utility
Purchase Delivery Use Supplements Maintenance Disposal
Customer Productivity
Simplicity
Convenience
Risk
Fun and Image
Environmental Friendliness
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Price Corridor of the Mass
This tool helps managers find the right price for
an irresistible offer, which, by the way, isnt
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
Different form and function, same objective
Same form
Different form, same function



High degree of legal and resource
protection Difficult to imitate
Upper-level pricing
Some degree of legal and resource protection
Price Corridor of the Mass
Mid-level pricing
Low degree of legal and resource protection Easy
to imitate
Lower-level pricing
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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
Different form and function, same objective
Same form
Different form, same function



High degree of legal and resource
protection Difficult to imitate
Upper-level pricing
Some degree of legal and resource protection
Price Corridor of the Mass
Mid-level pricing
Low degree of legal and resource protection Easy
to imitate
Lower-level pricing
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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
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Profit Model of Blue Ocean Strategy
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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.

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?
DoCoMo I-mode Japan
Motorola Iridium
Philips CD-i
-
-

-
-

-
-

-

/-
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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?