BLUE OCEAN

Introduction

Theory proposed by W. Chan Kim and Renee Mauborgne The basic premise behind the theory is that Competing in overcrowded industries will not result in sustainable high performance The real opportunity lies uncontested market space in creating BLUE OCEANS of

Overcrowded industries are those which have large number of competitors and the market players demonstrate high levels of intensive competition. Such industries are compared to RED OCEANS Kim and Mauborgne propose that the best way to drive profitable but sustainable growth is to stop competing in these RED OCEANS

Red Oceans

The market space is known, industry boundaries are defined and accepted Companies continuously try to outperform each other to grab bigger slices of existing demand As the limited market space gets increasingly crowded, growth and profit prospects shrink Products become commoditized Ever more competition turns the water bloody

Characteristics of Blue Ocean and unknown market space where the competition is Uncontested

irrelevant

Inventing and capturing new demand i.e. Demand is CREATED rather than FOUGHT OVER/STOLEN FROM COMPETITORS Converting noncustomers of the industry into customers Offering customers a leap in value while also streamlining costs High profits, speedy growth and long lasting brand equity

Red Versus BlueRed Ocean Strategy Compete in existing Market Space Beat the Competition Exploit existing demand Make the value-cost trade off Align the whole system of companys activities with its strategic choice of differentiation or low cost Blue Ocean Strategy Create Uncontested Market Space Make Competition Irrelevant Create and capture new demand Break the value-cost trade off Align the whole system of companys activities with its strategic choice of differentiation and low cost

Six Paths to Blue Ocean StrategyIndustry Strategic Group From Competing Within Buyer Group Scope of Product or Service Offering Functional-Emotional Orientation of Industry Time To Creating Across

The Six Conventional Boundaries of Competition

Creating Blue Oceans(Four Action Framework)

Creating Blue OceansTo create Blue Oceans, following points should be kept in mind:

Its not necessarily about technology innovation Rather it has more to do with linking the existing technology with what buyers value. Example Compaqs Pro Signia Server Are created from within the red oceans of existing industries Incumbents often create blue oceans within their core businesses Never use the competition as a benchmark Rather make it irrelevant by creating a leap in value for both yourself and your customers. Example Ford Model T, Tata Nano Reduce costs while also offering customers more value

Executing Blue Ocean CreationFormulation Principles Reconstruct Market Boundaries Focus on big Picture, Not the Numbers Reach beyond existing demand Get the strategic Sequence right Formulation Risk Search Risk Planning Risk Scale Risk Business Model Risk

Execution Principles Overcome Key Organizational Hurdles Build Execution into Strategy

Execution Risk Organizational Risk Market Risk

Hurdles to Execution

Case Air Deccan

Air Deccan managed to avoid the red ocean (compete with Indian Airlines, Kingfisher Airlines, Jet Airways and regional airlines such as Paramount Airways) by looking into the factors that industry take for granted and also factors that important to customers With the Four Actions Framework proposed by Blue Ocean Strategy authors, Air Deccan implemented many strategic moves to ensure they are make competitors irrelevant Air Deccans strategic moves led to the creation of Budget airlines industry in India. Examples of the strategic move as follows:

Eliminate: Over the counter booking system Free Food/Beverage on the plane Seating Class booking system

ContReduce : Luxury" facilities provided by Airport Lounge No of attendance service on the plane Seat Quality Raise: Focus on several key destination Increase frequency of flight Create : Online Booking system Point to point travel system

Cont

With this strategic move, Air Deccan was able to focus on factors that really bring value to the customers such as point to point travel system, easy booking system etc This helped Air Deccan to reduce cost and at the same time increase the value to the customers - Value Innovation.

Tools of Blue Ocean Strategy

Fair Process

Builds execution into strategy by creating people's buy-in up front It is exercised in the strategy making process, people trust that a level playing field exists. This inspires them to cooperate voluntarily in executing the resulting strategic decisions There are three mutually reinforcing elements that define fair process Engagement Explanation, and Clarity of Expectation

Whether people are senior executives or shop employees, they all look to these elements

The Strategy factor

In a study of business launches in 108 companies, 86 % of new ventures were found to be line extensions and a mere 14% were aimed at creating new markets or industries The interesting thing in the study was that while the line extensions did account for 62% of the revenues, they resulted in only 39% of the profits The 14% invested in creating new markets and industries delivered 38% of the revenues but a massive 61% of the profits Despite this, many companies are still operating in the Red Oceans. Reason is that corporate strategy is heavily influenced by its roots in military strategy i.e. CEO in headquarters, while troops on the front lines Also, too much focus and attention is, these days, given to Competitive advantage. Companies believe that it is competition which is at the heart of corporate success and failure. Strategies are framed to with an objective to counter competitive threats

Cont1. 2.

Focusing on competition leads to companies ignoring two most crucial and lucrative aspects of strategy:To find and develop markets where there is little or no competition Ways to exploit and protect these markets

For Blue Oceans, Company and industry are the wrong units of analysis There is no consistently excellent company, every company rises and falls over time Similarly, there is no perpetually excellent industry, their relative attractiveness is driven largely by the creation of blue oceans from within them What should be analyzed for Blue Oceans is the strategic motive the set of managerial actions and decisions involved in making a major market-creating business offering. E.g Compaq, though acquired by HP in 2001 made a very smart move in the 1990s which led to the creation of multibillion dollar market in PC servers

Value Innovation

Its the cornerstone of Blue Ocean Strategy Simultaneous pursuit of differentiation and low cost Focuses on making the competition irrelevant by creating a leap of value for buyers and for the company, thereby opening up new and uncontested market space

Value to buyers comes from the offerings utility minus its price, and value to the company is generated from the offerings price minus its cost

Value innovation is achieved only when the whole system of utility, price and cost is aligned

The way forwardGoing forward, Blue Oceans will remain the engine of growth as:

Prospects in most established market spaces red oceans are shrinking rapidly Technological advances have substantially improved industrial productivity, permitting suppliers to produce an unprecedented array of products and services Trade barriers between nations and regions are falling and information on products and prices is now globally and instantly available niche markets and monopoly markets are going to disappear Also, the demand (particularly in developed countries) is not increasing

Cont

Consumer loyalty is falling and it is becoming more and more difficult to differentiate your products from those of competitors The situation has led to commoditization of products and services, instigated price wars and shrunk profits margins According to recent studies, many American brands in a variety of product and service categories have become more and more alike. And as brands become more and more similar, price base their purchase decisions on price