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«W. Chan Kim Renee Mauborgne Chapter One: The blue ocean strategy is best illustrated by the performance of Cirque du Soleil. Created in 1984 by a ...»

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Blue Ocean Strategy

How to Create Uncontested Market Space and

Make the Competition Irrelevant

http://www.blueoceanstrategy.com/

W. Chan Kim

Renee Mauborgne

Chapter One:

The blue ocean strategy is best illustrated by the performance of Cirque du Soleil. Created in 1984 by a

group of street performers, Cirque productions have been seen by almost 40 million people in 90 cities

around the world. In less than 20 years, Cirque du Soleil has achieved revenue levels that took Ringling and Barnham and Bailey (the circus global champions of the circus industry) more than 100 years to attain.

What makes this rapid growth all the more remarkable is that it was not achieved in an attractive industry, but rather, in an industry with declining revenue for potential growth.

Cirque du Soleil’s success was not attained by taking customers from the already shrinking circus industry (which had historically catered to children) but instead, they were successful because they created a new marketplace in which to compete. Their offering appealed to a whole new group of customers – namely, adults and corporate clients that were prepared to pay a price several times as great as traditional circuses for an unprecedented entertainment experience.

Cirque du Soleil succeeded because it realized that 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 on the current playing field. To understand what Cirque du Soleil has achieved, imagine a market universe composed of two sorts of oceans: red oceans and blue oceans. Red oceans represent all of the industries in existence today. This is the known market space. Blue oceans donate all of the industries not in existence today. This is the unknown marketplace.

In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are know. Here, companies try to outperform their rivals to gain a greater share of existing demand. As the market space gets crowded, prospects for profit and growth are reduced. Products become commodities and cutthroat competition turns the red ocean bloody.

Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.

Commentary:

It should be noted that blue ocean strategies are largely uncharted. The dominate focus of strategy work over the past 25 years has been on competition based, red ocean strategies. The result has been a fairly good understanding of how to compete skillfully in red waters – from analyzing the underlying economic structure of an existing industry to choosing a strategic position of low cost, or differentiation.

On the other hand, there is not really an analytic framework to create blue oceans and principles to effectively manage the risk.

Blue ocean strategy focuses on the ability to create new market space where there is no competition and where the demand for the services becomes uncontested.

It should be noted that most new business launches today are launches in the red ocean domain. For example, if you look at The Record, and new business offerings, you continually see new businesses opening up such as hair stylists, massage services and food services. They’re all opening up in the red ocean marketplace. This is just increasing the supply of services and has no impact on demand.

Ultimately, of course, this is what makes all products really commoditized.

On the other hand, if one was to launch a business with a blue ocean strategy and offering services that were not previously offered there is an opportunity to create to whole new demand cycle just like Cirque du Soleil did. Cirque du Soleil created a new market space in the entertainment sector, generating strong, profitable growth as a result. They did it in a declining industry because they were able to build a whole new demand for a service that did not previously exist.

What consistently separated winners from losers in creating blue oceans was their approach to strategy.

The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry. The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. Instead, they followed a different strategic logic that is called ‘Value Innovation.’ Value Innovation is the cornerstone of blue ocean strategy. We call it Value Innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.

Value Innovation is the new way of thinking about, and executing, strategy that results in the creation of a blue ocean and a break from the competition. Importantly, Value Innovation defies one of the most commonly accepted dogmas of competition-based strategy: the value-cost trade off. It is conventionally believed that companies can either create greater value to customers at a greater cost or create reasonable value at a lower cost. Here, a 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.





Cirque du Soleil, again, provides us with a great example of differentiation while coming in at a lower cost. Previously, circuses had to maintain animals, which are costly. Typically they ran 3 rings (or shows) at a time. This meant that they had to have more performers with obvious cost implications. In the Cirque du Soleil offering, they had but one venue for the show and they didn’t need to use animals.

They also didn’t need to use name brand stars but, rather, hired a bunch of gymnasts who, again, were hired at a lower cost. So, in short, not only was Cirque du Soleil able to bring in their production at a lower cost than a normal circus, but they also provided a differentiated offering that appealed to a brand new audience: namely – the corporate and adult audience. Because of this differentiation they were able to charge a higher rate than for a normal circus. The combination then of this higher revenue and lower costs made the venue much more profitable than the circus industry.

–  –  –

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

low cost.

The Six Principles of Blue Ocean Strategy:

1. Reconstruct Market Boundaries

2. Focus on the Big Picture, not the Numbers

3. Reach beyond existing demand

4. Get the Strategic Sequence Right

5. Overcome Key Organizational Hurdles

6. Build Execution in the Strategy Blue Ocean Strategy 3 Chapter Two: Analytic Tools and Frameworks.

The U.S. has the third largest aggregate consumption of wine worldwide. Yet, the $20 Billion industry is intensely competitive. California wines dominate the domestic market, capturing 2/3 of all U.S. wine sales. These wines compete head-to-head with imported wines from France, Italy and Spain. And new world wines from countries such as Chile, Australia and Argentina have been increasing targeting the U.

S. market. With the supply of wines increasing from Oregon, Washington and New York State, and with newly mature vineyard plantings in California, the number of wines has exploded. Yet, the U.S.

consumer has essentially remained stagnant. The U.S. remains at 31st place in the world per capita wine consumption.

The intense competition has fueled on-going industry consolidation. The top 8 companies produce more that 75% of the wine in the U.S. and the estimated 1,600 other wineries produce the reaming 25%. The dominance of a few players allows them to leverage distributors to gain shelf space and put millions of dollars into above the line marketing budgets. Titanic battles are being fought for retail and distribution space. It’s no surprise that weak, poorly run companies are increasingly being swept aside. Downward pressure on wine prices has set in.

In short, the U.S. wine industry faces intense competition, mounting price pressure, increasing bargaining power on the part of retail and distribution channels and flat demand despite overwhelming choice.

Following conventional strategic thinking, the industry is hardly attractive. For strategists, the critical question is, “How do you break out of the red ocean of bloody competition to make the competition irrelevant?” To address these questions, we turn to the strategy canvas and analytic framework that is central to Value Innovation and the creation of blue oceans.

Strategy Canvas

In the case of the U.S. wine industry there are 7 principle factors:

• Price per bottle of wine

• An elite, refined image and packaging, including labels, announcing the wine medals won, and the use of esoteric enological terminology to stress the art and science of wine making

• Above the line marketing to raise consumer awareness in a crowded market and to encourage distributors and retailers to give prominence to a particular wine house

• Aging of quality wine

• The prestige of a wine’s vineyard and its legacy

• The complexity and sophistication of wine’s taste, including such things as tannins, and oak

• A diverse range of wines to cover all variety of grapes and consumer preferences from chardonnay to merlot, etc.

–  –  –

So what we see from the above strategy canvas are value curves of either budget wines or premium wines.

There are lots and lots of players in both of these segments. So, the wine industry in the U.S. was either benchmarked as a premium wine or a budget wine and the marketplace decided whether they were in the premium wine buying business or the budget wine buying business and from there everyone pretty much looked the same. Furthermore, if you did not fit into either a premium wine drinker or a budget wine drinker, then you went to alternative alcoholic beverages and avoided the wine industry in its entirety. In the case of the U.S. wine industry, the consumer had to choose between prestige wines or low cost wines and then had to go through the complexity of trying to figure out which wine they should buy. The wine makers complicated the purchase even further by advertising the personality of their wine, the characteristics of the soil the grapes were grown in, the tannins, oak, aging processes, etc. In other words, if you weren’t a student of all this, you’d get confused and take a pass on purchasing.

Casella Wines of Australia shifted the strategy canvas of the U.S. wine industry. They redefined, through their blue ocean strategy, a wine that was fun to drink and easy to buy. They discovered that by coming out with a new offering, which was non-traditional and fun, they appealed to the 3 times as many U.S.

consumers who had avoided wine and instead purchased beer, spirits and ready to make cocktails. In other words, they captured a whole new market of wine drinkers. They found out that those 3 times as many consumers found that the purchasing of wine to be intimidating, pretentious and complex. Thus, Casella Wines shifted the strategy canvas of the wine industry in such a way that they stayed away from strategically focusing on competitions while, at the same time, appealing to non-customers.

–  –  –

The first question forces you to consider eliminating factors that companies in your industry have long competed on. Often those factors are taken for granted even though they no long have value or may even detract from value. Sometimes there is a fundamental change in what buyers value, but companies that are focused on benchmarking one another do not act on or even perceive the change.

The second question forces you to determine whether products or services have been over-designed in the race to match and beat the competition. Here, companies over serve customers, increasing their cost structure for no gain.

The third question pushes you to uncover and eliminate the compromises your industry forces your customers to make.

The fourth question helps you to discover entirely new sources of value for buyers and to create new demand and shift the strategic pricing of the industry.

It is by pursuing the first two questions (eliminating and reducing) that you gain insight on how to drop your cost structure vis-à-vis competitors.

Commentary:

The second two factors (i.e. eliminating compromises that your industry forces customers to make and discovering new sources of value for buyers) provide you with insight into how to lift buyer value and create new demand.

Collectively the four questions allow you to systematically explore how you can reconstruct buyer value elements across alternative industries to offer buyers an entirely new experience while simultaneously keeping your cost structure low.



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