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SUBMITTED TO: PROF SHALINI NATH TRIPATHI . FACULTY- MARKETING SUBMITTED BY: PRATEEK SHRIVASTAV [PGDM 2007-09]
JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW
WITH GREAT PLEASURE, WE EXTEND OUR GRATITUDE TOWARDS PROF.
SHALINI NATH TRIPATHI, UNDER WHOSE
VALUABLE GUIDANCE, CONSTANT INTEREST AND ENCOURAGEMENT WE HAVE BEEN ABLE TO COMPLETE THE PROJECT SUCCESSFULLY.
THIS CO-OPERATION IS NOT ONLY USEFUL FOR THIS PROJECT BUT WILL ALSO BE A CONSTANT SOURCE OF INSPIRATION FOR US IN THE FUTURE.
WE ARE ALSO THANKFUL TO ALL THOSE WHO HELPED US CONSTANTLY IN THE PREPARATION OF THIS PROJECT DIRECTLY OR INDIRECTLY.
OBJECTIVE.......................................................................................................................3 BLUE OCEAN STRATEGY..............................................................................................4 IMPLEMENTING BLUE OCEAN STRATEGY..............................................................6
IMPLEMENTATION ........................................................................................................... ...8
SIX PATH FRAMEWORK...............................................................................................11
FOUR ACTIONS UNDER BLUE OCEAN STRATEGY.............................................. ......14
DEVELOPING A BLUE OCEAN STRATEGY ................................................................................15
COMPANIES USING BLUE OCEAN STRATEGY.......................................................16 CONCLUSION.................................................................................................................19 BIBLIOGRAPHY/ WEBLIOGRAPHY...........................................................................21
The objective of our project “Blue Ocean Strategy” is to understand real meaning behind the Blue Ocean and how it is different from the Red Ocean strategy. The project also describe about various steps taken to implement this strategy. Blue Ocean Strategy
describe rather than competing within the confines of existing industry or trying to steal customers from rivals (Red Ocean strategy), uncontested market space should be developed that makes competition irrelevant. Thus project also gives us an idea about creating new market space. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody. Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue Ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. Like the “blue” ocean, it is vast, deep, powerful, in terms of profitable growth, and infinite. In Blue Oceans, demand is created rather than fought over. There is ample opportunity for both growth and profit. ...................... W. Chan Kim
BLUE OCEAN STRATEGY
The metaphor of Red and Blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. 4
Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red ocean is used. Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. The corner-stone of Blue Ocean Strategy is 'Value Innovation'. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. The authors critique Michael Porter's idea that successful businesses are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost. . This idea was originally proposed by Prof. Charles W. L. Hill from Michigan State University in 1988. Prof. Hill claimed that Porter's model was flawed because differentiation can be a means for firms to achieve low cost. Prof. Hill proposed that a combination of differentiation and low cost may be necessary for firms to achieve a sustainable competitive advantage.
Blue Ocean Strategy is a business strategy that promotes a systematic approach "for making the competition irrelevant." A core idea is to create a leap in value for both the
company and its buyers by breaking the differentiation/low cost trade-off and to align product value and profit propositions
IMPLEMENTING BLUE OCEAN STRATEGY
Before implementing Blue ocean strategy it is very important to know the difference between Red and Blue Ocean. The difference can be known by the following table:-
Blue ocean strategists recognize that market boundaries exist only in managers’ minds, and they do not let existing market structures limit their thinking. To them, extra demand is out the re, 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 creating innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost. Under blue ocean strategy, there is scarcely an attractive or unattractive industry because the level of industry attractiveness can be altered through companies’ conscientious efforts. As market structure is changed by breaking the value/cost tradeoff, 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.
Look Across Functional or Emotional Appeal to Buyers When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space. We have observed two common patterns. Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand. Two well-known examples are Swatch, which transformed the functionally driven budget watch industry into an emotionally driven fashion statement, or The Body Shop, which did the reverse, transforming the emotionally driven industry of cosmetics into a functional, no-nonsense cosmetics house. Look Across Complementary Products and Service Offerings Few products and services are used in a vacuum. In most cases, other products and services affect their value. But in most industries, rivals converge within the bounds of their industry’s product and service offerings. Take movie theaters. The ease and cost of getting a babysitter and parking the car affect the perceived value of going to the movies. Yet these complementary services are beyond the bounds of the movie theater industry as it has been traditionally defined. Few cinema operators worry about how hard or costly it is for people to get babysitters. But they should, because it affects demand for their business. Imagine a movie theater with a babysitting service. 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. A simple way to do so is to think about what happens before, during, and after your product is used. Babysitting and parking the car are needed before people can go to the movies. Operating and application software are used along with computer hardware. In the airline industry, ground transportation is used after the flight but is clearly part of what the customer needs to travel from one place to another.
Look Across the Chain of Buyers Individual companies in an industry often target different customer segments—for example, large versus small customers. But an industry typically converges on a single buyer group. The pharmaceutical industry, for example, focuses overridingly on influencers: doctors. The office equipment industry focuses heavily on purchasers: corporate purchasing departments. And the clothing industry sells predominantly to users. Sometimes there is a strong economic rationale for this focus. But often it is the result of industry practices that have never been questioned. Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of new Blue Ocean. 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. Think of Novo Nordisk, the Danish insulin producer that created a blue ocean in the insulin industry…. [Novo Nordisk] saw that it could break away from the competition and create a blue ocean by shifting the industry’s longstanding focus on doctors to the users—patients themselves. In focusing on patients, Novo Nordisk found that insulin, which was supplied to diabetes patients in vials, presented significant challenges in administering. Vials left the patient with the complex and unpleasant task of handling syringes, needles, and insulin, and of administering doses according to his or her needs. Needles and syringes also evoked unpleasant feelings of social stigmatism for patients. And patients did not want to fiddle with syringes and needles outside their homes, a frequent occurrence because many patients must inject insulin several times a day. This led Novo Nordisk to the blue ocean opportunity of NovoPen, launched in 1985. NovoPen, the first user-friendly insulin delivery solution, was designed to remove the hassle and embarrassment of administering insulin.
Look Across Strategic Groups within Industries The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another.
Consider Curves, the Texas-based women’s fitness company. Since franchising began in 1995, Curves has grown like wildfire, acquiring more than two million members in more than six thousand locations, with total revenues exceeding the US$ 1 billion mark. A new Curves opens, on average, every four hours somewhere in the world. What’s more, this growth was triggered almost entirely through word of mouth and buddy referrals. Yet, at its inception, Curves was seen as entering an oversaturated market, gearing its offering to customers who would not want it, and making its offering significantly blander than the competition’s. In reality, however, Curves exploded demand in the U.S. fitness industry, unlocking a huge untapped market, a veritable blue ocean of women struggling and failing to keep in shape through sound fitness. Curves built on the decisive advantages of two strategic groups in the U.S. fitness industry— traditional health clubs and home exercise programs—and eliminated or reduced everything else. Look Across Alternative Industries In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously. Do you need a self-indulgent two hours? What should you do to achieve it? Do you go to movie, have a massage, or enjoy reading a favorite book at a local café? The thought process is intuitive for individual consumers and industrial buyers alike. For some reason, we often abandon this intuitive thinking when we become sellers. Rarely do sellers think consciously about how their customers make trade-offs across alternative industries. A shift in price, a change in model, even a new ad campaign can elicit a tremendous response from rivals within an industry, but the same actions in an alternative industry usually go unnoticed. Trade journals, trade shows, and consumer rating reports reinforce the vertical walls between one industry and another. Often, however, the space between alternative industries provides opportunities for value innovation. Consider NetJets, which created the blue ocean of fractional jet ownership. In less than twenty years NetJets has grown larger than many airlines, with more than five hundred aircraft, operating more than two hundred fifty thousand flights to more than one hundred forty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a
multibillion-dollar business, with revenues growing at 30–35 percent per year from 1993 to 2000. NetJets’ success has been attributed to its flexibility, shortened travel time, hassle free travel experience, increased reliability, and strategic pricing. The reality is that NetJets reconstructed market boundaries to create this blue ocean by looking across alternative industries.
SIX PATH FRAMEWORK
The six convectional boundaries of competition
Industry Strategic group
From Competing within Scope of product and service offering
Functional – emotional orientation of an industry
To Creating across
There are six basic approaches to remaking market boundaries. These approaches are called the six paths framework. These paths have general applicability across industry sectors, and they lead companies into the corridor of commercially viable blue ocean
ideas. None of these paths requires special vision or foresight about the future. All are based on looking at familiar data from a new perspective. These paths challenge the six fundamental assumptions underlying many companies’ strategies. These six assumptions, on which most companies hypnotically build their strategies, keep companies trapped competing in red oceans. Specifically, companies tend to do the following:
Define their industry similarly and focus on being the best within it Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in
Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry)
• • •
Define the scope of the products and services offered by their industry similarly Accept their industry’s functional or emotional orientation Focus on the same point in time—and often on current competitive threats—in formulating strategy
FOUR ACTIONS UNDER BLUE OCEAN STRATEGY
The company should identify which factors should be reduced well below the industry’s standard
The factors the company takes for granted should be eliminated. A NEW VALUE CURVE
The company should create factors that have never been offered.
The company should identify which factors should be raised above industry’s standard
DEVELOPING A BLUE OCEAN STRATEGY
Creating New Market Space If we do operate in an existing market that is highly competitive (red ocean), then that is not necessary a bad thing but we believe it is vital to eliminate potential risk (competing in a Red Ocean) and begin to identify how we can create uncontested market space(blue ocean)and make the competition irrelevant. Thinking Beyond Existing Boundaries Consider being unconventional during our strategic planning process. Challenge yourself; Challenge the performance of your existing services, products and delivery systems. Too many organizations become complacent and fail to innovate themselves. Identifying Non-Customers There are customers out there who are not showing up on our radar screen. Capitalize on existing demand but ensure you leave no stone unturned in exploring ways to create new customers. Who should be your next customer? Who will be your customers in three to five years time? What do you need to do to make them customers? Challenging the Industry Cost The industry we operate in has a degree of over capitalizations that is not adding value and is simply not needed by your customers. Whether that is in product, service or delivery systems. You need to identify these areas and eliminate them from your value proposition. Ultimately, we need to be the leader in driving down the industry cost.
COMPANIES USING BLUE OCEAN STRATEGY
Value Innovation is Samsung’s core tool for product development and played a significant role in helping Samsung become the world’s top consumer electronics company. Last year there were 2,000 employees working in cross-functional teams on 90 Value Innovation projects at Samsung, and no product is introduced to the market without first getting a Value Innovation Certificate. In 2003 the Digital Media unit launched 40 new products using the VI process, and its first quarter profits were 50 times higher than that of the same period the previous year.
In 1991 trade with the Soviet Union, Finland’s and Nokia’s largest market,
collapsed overnight. At the time the company’s core activities were paper and rubber products. By 1994 Nokia was selling off its industrial divisions and was listed on NYSE as the world’s premier supplier of mobile phones, which was just a small, peripheral division three years earlier.
Between 1991 and 1993 IBM recorded losses of USD 16 Billion and the future
was looking grim to say the least. In 1993 Lou Gerstner became CEO, the first company leader who was not from within the company, in fact not even from within the industry. He completely re-oriented the company’s focus from technology driven to customer solution driven, so that by 2001 $35 Billion of $86 Billion total sales were from the newly created Global Services. This radical shift in company culture and orientation is widely accredited with IBM’s exemplary recovery to growth and healthy profitability.
CJ-GLS: CJ-GLS is a latecomer in the logistics industry, and its resources, such as the
number of trucks and warehouses, are relatively small in comparison to those of established companies. But, it has achieved a distinct competitive advantage through innovative information technology (i.e., RFID—radio frequency identification), which 16
has enabled it to create an uncontested market space, electronic logistics business. One remarkable fact about CJ-GLS is that its swift growth comes not from attracting competitors’ customers from the existing Red Ocean market but from creating a Blue Ocean market (3PL market), which previously existing incumbents ignored, and also from constructing a new business model founded on a RFID-based, ubiquitous-oriented 3PL system. Analyzed through a Four Actions Framework and characterized as Blue Ocean, this case study provides valuable information on how a company reinforces its competitive advantage from the Red Ocean while it transitions into a Blue Ocean by utilizing advanced information communication technologies.
Apple computers invented a new market with the iPOD digital music player.
The company’s idea was to create a portable music player so people could listen to it anywhere. Apple has sold more than 10 million music players, adding $6.2 billion to the company’s revenue.
Whirlpool: Whirlpool’s front-loading washer-dryer combo called the Duet, which the
company introduced to a well-saturated market in 2001. The Duet was tagged at US$ 2,300, vs. US$ 600 a pair for most existing models, yet it became a sensation. Because the Duet had features never seen before: It could wash big loads yet used very little water and electricity, and cleaned better. It could also handle silks, lace, and comforters. But best of all, it inspired real affection among women. They said that it changed their lives because it saves them time and gave back some of their freedom, doing laundry in record time.
Stokke: Norwegian furniture company Stokke entitled 'Hotweels' from Fast Company
(May 2005). When Stokke introduced the Xplory baby stroller in the U.S., priced at a hefty US$ 749, it sold in the first nine weeks what it had planned to sell over six months. Because it offers a package of unprecedented attributes: It’s flexible design makes life easier for parents by allowing the seat to be raised to eye-level, to face either forward or backward, and enabling the stroller to navigate any terrain. It’s flashy, futuristic form creates a strong emotional bond.
Netjets: NetJets, which created the blue ocean of fractional jet ownership. In less than
twenty years NetJets has grown larger than many airlines, with more than five hundred aircraft, operating more than two hundred fifty thousand flights to more than one hundred forty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a multibillion-dollar business, with revenues growing at 30–35 percent per year from 1993 to 2000. NetJets’ success has been attributed to its flexibility, shortened travel time, hassle free travel experience, increased reliability, and strategic pricing. The reality is that NetJets reconstructed market boundaries to create this blue ocean by looking across alternative industries.
Other companies using Blue Ocean Strategy are:
• • • • • • Cirque du Soleil (the circus reinvented for the entertainment market). Starbucks (coffee as low-cost luxury for high-end consumers). EBay (online auctioning). Sony (the Walkman - personal portable stereos). Cars: Japanese fuel-efficient autos (mid-70s) and Chrysler minivan Dell (mid-1990s).
Blue Ocean Strategy is a portfolio of inter-related concepts and methodology allowing companies to breakaway from head-on competition in order to create and maintain uncontested market spaces of high customer value. The portfolio includes the whole leadership gamut from Strategy Formation, Strategy Implementation, Organizational Change and Staff Motivation. Value Innovation is the first component of BOS, and provides the strategy formation framework. Value Innovation is a highly pragmatic, visual methodology that allows companies to challenge industry boundaries and taken for granted assumptions and in the process discover highly distinctive and successful strategies. Value Innovation sets the stage for the rest of the Blue Ocean Strategy concepts. Blue Ocean Strategy is the most influential new concept in management strategy, whose exciting premise is that companies can rearrange conventional factors of competition in order to create a leap in customer value. In the process, companies make their competition irrelevant and discover unoccupied market space (hence the shift from a bloody, confined red sea to an expansive blue ocean).
The strategy outlines the premise, research, success examples and the so-called ‘Value Innovation’ framework, which allows companies to create Blue Ocean Strategies and in the process achieve:
High-impact, customer-based innovations. Significant increase in speed to market, from idea formation to market introduction. Significant decrease in development and operational costs. An innovation-focused and duly motivated organization.
BLUE OCEAN STRATEGY seeks to make the creation and capturing oceans as systematic and actionable as competing in the red waters of known market space. For
although blue ocean strategists have always existed, for the most part their strategies have been largely unconscious. Blue ocean strategy seeks to remedy this by not only decoding the pattern and principles behind the successful creation of blue oceans, but also providing the analytical frameworks and tools to act on this insight. A blue ocean is created in the region where a company's actions favorably affect both its cost structure and it value proposition to buyers. Cost savings are made from 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. Blue and red oceans have always coexisted. Practical reality, therefore, demands that companies understand the strategic logic of both types of oceans. At present, however, competing in red oceans dominates the field of strategy in theory and in practice. Part of the reason traces back to the historical foundation of business strategy—war—where territory is defined and limited and opponents compete to protect and enlarge their share of limited and existing terrain. This focus on beating the competition in existing market space was exasperated by the meteoric rise of the Japanese in the 1970s and 1980s. Faced with mounting competition in the global marketplace as, for virtually the first time incorporate history, customers were deserting Western companies in droves, the center of strategic thinking gravitated further towards the competition. A slew of competitionbased strategies emerged which argued that competition is at the core of the success and failure of firms, and that competition determines the appropriateness of a firm’s activities that can contribute to its performance. 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 or focus, to benchmarking the competition. Yet, although some discussions around blue oceans exist, little practical guidance exists to create and capture them.
• • • • • • • • • www.feedblitz.com, “Creating Blue Oceans” 26 november2006. www.12manage.com, “Blue Ocean strategy” 4 june2007. www.wikipedia.com www.gamasutra.com, “Nintendo’s Kaplan Discusses 'Blue Ocean' Strategy” February 9, 2006. www.sciencedirect.com, “A strategy for third-party logistics systems: A case analysis using the blue ocean strategy” 24 May 2007. www.emergic.org, “TECH TALK: Blue Ocean Strategy” May 1, 2006. www.blueoceanstrategy.com, “How we can develop a Blue Ocean Strategy for your organization” January2007. Blue Ocean strategy by W Chan Kim and Renee Mourbogne Harward Business Review, “A Conversation with W. Chan Kim and Renee Mauborgne authors of BLUE OCEAN STRATEGY”
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