Blue Ocean Strategy

and
Value Innovation
 Fixed mental maps
• There is a pernicious tendency of managers to
build a fixed mental map of the industry in
which they compete
• The focus is on familiar competitors who use
similar techniques to produce similar products
or services for a shared customer base
– These are the ‘usual suspects’
 Strategy is about breaking free
• From an obsession with management tools
• Of industry dogma
• From the industry ‘rules’
• Of the present to create the future
• From tactics
• From sameness
• From hostility to change
 Blue ocean thinking
• Kim and Mauborgne propose
a new approach to strategy
• They question the essence of
Porter-type approaches and
call it red-ocean thinking
– They are critical both of the
idea of industry attractiveness
and the need to choose
between differentiation and
low-cost generic strategies
 Blue oceans
• All the industries not in existence today
 Red oceans
• In red oceans, by comparison, industry
boundaries are defined and accepted; the rules
of the game are known by all
• If you are in a red ocean, you will of course
have to be smart about how to outcompete
rivals
• Kim and Mauborgne, however, are urging us to
imagine blue oceans to enter: red oceans are
becoming increasingly bloody
 Blue ocean thinking

• Kim and Mauborgne, Blue Ocean Strategy

(2005) propose a new approach to strategy
• Their approach is entirely consistent with the
idea of trying to drive markets
• They provide some ideas on how to “break
free”
The creators of Value Innovation
Renee Mauborgne

 First ground-breaking
article in Harvard
Business Review,
January 1997: Value
Innovation: the Strategic
Logic of High Growth
 Regularly featured in
leading business
publications (HBR, WSJ, Chan Kim
FT, NYT)
The Premise Behind Value Innovation

Pushes for a leap in buyer value

While

Aiming to achieve a significant

reduction in a company’s costs
 …..
Reduce
What factors should be
reduced well below the
industry standard?

Eliminate Raise
What factors should be
New Value What factors should be
eliminated that the Curve raised well beyond the
industry has taken for industry standard?
granted?

Create
What factors should be
created that the industry
has never offered?

Source: Kim & Mauborgne

 Factor
Economy Price Standard
X (e ) Food yes
7kg (reduce) Loading 37kg
X (e) Air port service Yes
X ( e) Insurance yes
500 (raise ) Seat 350
Place
 Factor
Big Size Reduce
Album , cd , 18 Song 1usd (create )
song
 Level
Relative

Low
High
E
Fa atin
cil g
i ti
es
Ar
c
Ae hite
st ctu
he
tic ral
s
2 Star
Lo
un
ge
s
Ro
o m
siz
e
Re
Av cep
ail tio
a b ni s
i lit t
y
R
Fu oo
Am rni m
en ture
iti /
es

B
Q u ed
The Factors of Competition a li
ty

Hy
g i en
e
1 Star

Qu
Value Curves in the French Low Budget Hotel Industry

ie t
ne
ss

Pr
ice
 Value Curve for FORMULE 1

High
Raise F 1

Create
2 Star
Relative
Level Reduce
1 Star

Reduce
Eliminate
Low

e
i lit t
s

ss
e
tic ral

ice
a b ni s

Wifi

i en
ge

siz
cil g
es

ne
Q u ed
y

iti /
Am rni m

ty
st ctu
Fa atin

en ture
s

Pr
un

ail tio

g
es
Fu oo

a li
i ti

ie t
Hy
Ae hite

Av cep
Lo

o
he
E

Qu
Ro
c

Re
Ar

The Factors of Competition

Using “Value Curves” to plot relative strategic positioning

Results of FORMULE 1’s Strategy

From ACCOR’s perspective:

Cost per room 15,000 Euro vs. 41,000 Euro
Cost of staff 20-23% of sales vs. 25-35%
Profit Margins > 2x industry average
Occupancy rates > 3x industry average

From customers’ perspective:

Hygiene > average 2* hotel
Bed quality > average 2* hotel
Quietness > average 2* hotel
Price 15 Euro vs. 30 Euro
 The Value Curve
• gives a clear overall view of company’s
strategy.
• instantly illustrates if a company’s strategy
will stand out in the marketplace
• is easy to understand and communicate
• ensures that every employee shares a single
visual reference point for the strategy.
 Lessons
• Identify what is valued most by customers
• Take aim at the mass of customers - seek out
the commonalities in what they value
• “We focus on what unites customers;
customer differences often prevent you from
seeing what’s most important” ( Accor
quote)
 The unit of analysis
• We need to focus on the strategic move
• There is little point going in search of the
perpetually high-performing company
– The In Search of Excellence problem
 Analytical tools
• Kim and Mauborgne outline a series of
analytical tools and frameworks to facilitate
blue-ocean/market driving thinking:
– The strategy canvas
– The four actions framework
– The eliminate-reduce-raise-create grid
 The strategy canvas
• This attempts to capture the principal factors
that presently characterize the way the game
is played in a particular market or industry
• These factors can be ranked high to low
• The strategy canvas reveals the shape of what
Kim and Mauborgne call the ‘value curve’
The US Wine Industry
 The four actions framework
• This framework guides the search for a new
value curve by asking four questions:
– Which of the factors that the industry takes for
granted should be eliminated?
– Which factors should be reduced well below the
industry’s standard?
– Which factors should be raised well above the
industry’s standard?
– Which factors should be created that the industry
has never offered?
 The ERRC grid
• An extension of the four actions
framework is the eliminate-reduce-raise-
create grid
• It is about ‘value innovation’: creating
value for both the organization and for
customers
 The characteristics of good
strategy
• Kim and Mauborgne insist that ‘good’ strategy
has three characteristics:
– The value curve has focus
– The value curve diverges from other players’
– The strategic profile has a clear and compelling
tagline
 Red Ocean versus Blue Ocean Strategy

The imperative for red ocean and blue ocean strategies are
starkly different
Red Ocean Strategy Blue Ocean Strategy

 Compete in existing market space  Create uncontested market space

 Beat the competition
 Exploit existing demand
 Make the value/cost trade off
 Align the whole system/activities with
either differentiation or low cost
 Make the competition irrelevant
 Create and capture new demand
 Break the value/cost trade off
 Align the whole system/activities in
pursuit of differentiation and low cost