Blue Ocean Strategy How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renee Mauborgne

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1 Blue Ocean Strategy How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renee Mauborgne Does your company engage in head-to-head competition in search of sustained, profitable growth? Do you fight for competitive advantage, battle over market share or struggle for differentiation? Is your market overrun by companies selling the same products so you resort to price wars to "win" your share of a dwindling consumer base? If this is the case, you're just competing in a bloody "red ocean" of rivals fighting over a shrinking profit pool. After studying 150 strategic moves by companies spanning more than a hundred years and thirty industries, W. Chan Kim and Renee Mauborgne professors at France's INSEAD business school and co-founders of the Value Innovation Institute found that tomorrow's leading companies will not succeed by battling competitors. Instead they will win by creating "blue oceans" of uncontested market space. To Kim and Mauborgne, blue ocean space represents the areas of marketing that have yet to be discovered. They are areas that focus on "value innovation" which renders rivals obsolete and unleashes new demand. Companies that adopt this approach offer customers new reasons to buy, avoid price wars and enjoy increased sales. So, how can you create your own blue ocean? Kim and Mauborgne make the process manageable by providing six key principles for achieving blue ocean success. By exploring the first four principles, you will learn the steps to devise your own blue ocean strategy. Then, with the last two principles, you are given the tools to execute that new strategy. By combining the skills from all six principles and applying them to their individual needs, leaders are given the systematic framework necessary to create a blue ocean strategy. If you are ready to learn how your company can benefit from leaving the bloody overpopulated red ocean market and jumping into the new possibilities of your own blue ocean, read on. FORMULATING YOUR BLUE OCEAN STRATEGY In this section we will discuss the first four principles required to formulate your own blue ocean strategy. They include: reconstructing your "market boundaries" by redefining the main purpose of your product; focusing on the big picture by basing your growth on new demand; reaching beyond your existing demand by turning "non-customers" into customers, and getting your strategy sequence right to ensure problem-free and profitable execution. 1 The Business Source All Rights Reserved

2 Reconstructing Market Boundaries Reconstructing your current market boundaries, i.e., broadening your product's current market, is a critical step in any blue ocean strategy because it opens new areas of demand and spurs growth. In order to reconstruct your market boundaries, you need to look beyond the traditional function of your product and think of new ways to repackage your product to add value and attract new customers. Begin by asking yourself a few questions about your current product or service. What alternatives to your product are available and what need influences people to choose the other product? For example, if you run a day spa, ask why some customers prefer to purchase products and pamper themselves at home. Price? Convenience? Modesty? Then create a value-added innovation that meets those needs, like spa product bundles with instructional DVDs, or at-home spa treatment appointments. Next, ask yourself what other groups of consumers you could be selling to. Do you currently sell to affluent customers? If so, explore adding a lower-priced alternative product that would appeal to the middle-class. Consider new target markets. If you produce software for professional accountants, can you modify the software to tap into the market of inexperienced individuals who like to track their finances at home? This new market could result in increased sales and growth for two reasons. First, the market of professional accountants is limited, whereas the "person in need of accounting advice" market is vast. And second, the number of variations to the software that you can offer professional accountants is restricted because this profession is forced to adhere to an industry standard, whereas the variations for individual software can be as limitless as the needs those individuals possess. Also, try offering complimentary services. For example, let's say that you run a restaurant. Instead of looking at your competitor's menu and pricing for ideas, try looking at why consumers choose to eat at home instead. One reason for couples with small children may be that they can't find a sitter. Offering a free onsite daycare or even coupons for a nearby hourly daycare center could create a new base of customers. Next, question your customer's reason for buying. Does your product sell on an emotional or functional level? Jewelry, for example, usually sells on an emotional level. Consumers buy it for the look, feel, and perceived affluence the piece affords them. But, imagine if you could merge the emotional influence of jewelry with a functional influence. By combining the prestige and beauty of your pieces with the functionality of handbag straps, briefcase latches, or belts, you could increase your current consumer base and begin competing in an untapped "blue ocean" market space. Focus on the Big Picture, Not on the Numbers 2 The Business Source All Rights Reserved

3 Once you have chosen an area to pursue based on answers to the research questions posed above, you need to determine how you will implement the plan and create your own blue ocean. According to Kim and Mauborgne, too many companies focus on the numbers (i.e. the cost of marketing and the projected profit margins) and only make changes that keep them competing in the usual red markets. To create a strategy that leads to blue oceans, companies need to focus on the big picture and create their plan around "value innovation" i.e., strategic moves which create powerful leaps in value. To illustrate this process, the authors use their "Eliminate, Raise, Reduce, and Create Grid." With this process, companies can focus on ways to eliminate the unneeded extras from their product, raise the value of the product, reduce the costs of producing it, and create new value and customer interest. Cirque du Soleil provides an excellent example of the process. According to the authors, Cirque du Soleil opened a blue ocean market by taking their focus away from improving the numbers associated with running a circus and, instead, focused on adding value to circus goers. Simply put, they stopped trying to cut costs while outdoing their competition and instead, devoted their strategy to increasing value. Cirque du Soleil eliminated star performers, animal shows, multiple show arenas, and aisle concession stands because their research indicated that these features didn't increase sales or impress customers during the buying process they only increased operating costs. What did increase sales was raising the uniqueness of their product by creating distinctive Vegas-style acts that gave consumers a new and enticing reason to attend the circus. Next, they reduced the standard entertainment expectations of the circus by removing cheap thrills and over-done danger stunts because their research indicated a decline in consumer interest of such displays. Cirque du Soleil opted instead to create an intellectual theme by adding a story line to the show, a refined environment by focusing on drama as opposed to slap-stick humor, varied performances where each show contained a new theme, and artistic music and dance. Combined, these four steps raised the entertainment value of their circus and created an entirely new experience for customers. It also made them massively successful. Reach Beyond Demand Focus on finding "non-customers." There has to be a reason why consumers choose not to purchase your product. The rewards for finding the reason(s) are all important, as they will uncover your new blue ocean. Does your product cost too much? Is it inconvenient to purchase? Is there a similar product that includes more value for the same price? 3 The Business Source All Rights Reserved

4 Consider the example from above. Cirque du Soleil determined that customers were tired of the standard circus act and when faced with a night out were choosing venues such as live musical entertainment or dinner shows. In order to reel in these non-customers, Cirque du Soleil changed their offering to meet a broader consumer demand. Perfect Your Sequence Once you have created a blue ocean strategy, you need to determine if the strategy is commercially viable. Ask yourself these three questions: 1. Is there a compelling reason for consumers to buy this new product? 2. Is the price affordable for the majority of consumers? 3. Can we realistically produce the product at a cost that leaves room for adequate profits? If you answer no to any of these questions, you will need to rework your strategy. But if you answered yes to all you are ready to move to the last two principles. EXECUTING YOUR BLUE OCEAN STRATEGY The final two principles, overcoming hurdles and executing your strategy, essentially happen simultaneously. In order to execute your new strategy, you need to identify potential hurdles and plan ways to overcome those hurdles as you execute. According to the authors, the four main hurdles faced by any company contemplating change are: convincing others of the need for change, dealing with limited resources, fighting lack of motivation and dealing with organizational politics. These are the key items you need to plan for when building your execution strategy. Convincing others of the need for change is easier if you demonstrate the need for that change through actions as opposed to explanations. Instead of just talking about problems, offer those who need the most convincing a chance to experience the difficulties first-hand. For example, if the numbers show that wholesale sales are decreasing, ask managers (not sales staff) to contact the wholesalers personally. This way, the managers can hear for themselves what problems the wholesalers are facing and what those wholesalers wish your company could do about them. To overcome the resource hurdle, look to areas where resources are currently being underutilized. For example, if an invitation printing company wanted to launch a new type of wedding invitation in order to meet an untapped consumer demand, they may face the hurdle of financing the printing equipment for this product. They could save start-up costs, however, by reallocating the use of current equipment. In this instance, the printing company could use the printing presses from other invitation departments during off hours. 4 The Business Source All Rights Reserved

5 By utilizing the other presses when they are not in use, the printing company could delay their purchase and avoid a financial pinch during the execution phase of their strategy and then purchase the new equipment with profits from the new invitation line. In order to overcome motivation hurdles, the authors suggest using "The Three E's" process. This process, which focuses on "Engaging" employees in the strategy, "Explaining" the strategy correctly, and making "Expectations" clear, can be used to gain employee support, build company-wide trust, and ensure successful strategy execution. Engage all employees in the plan. This step will open the lines of communication and help individuals feel respected for their opinions and ideas. For example, the printing company executives could ask each employee stationed on the presses how they feel about sharing presses and adding shifts. Explain the strategy so that people understand it and want to jump onboard. Taking the time for extended explanations may seem like a hindrance, however this added step could go a long way towards gaining the trust and support of everyone involved. Individuals feel validated, their concerns are put to rest, and their trust in the strategy deepens. For example, if you find that the print staff is disgruntled with the new strategy, arrange a meeting where all concerns and questions can be raised. During the meeting, be sure to address how the strategy will affect each of the employees, putting emphasis on what they personally have to gain from the change. State expectations in detail. People accept change better when they know exactly what is expected of them. In the case of the printing company, instead of stating the new blue ocean goals as: "We want to produce, market, and sell 2 million pieces from our new invitation line in the first quarter," company executives should detail expectations. They could say that the marketing department's job was to create two new ad campaigns, the printing department was to add two new shifts within six months to cover production, and the salespeople are to be given achievable sales goals for each month. By explaining the execution, the company takes the fear out of the change. Next, in order to knock over any political hurdles to your plan, you need to avoid the time-consuming mistake of trying to win over each individual personally, and instead concentrate your efforts on the most influential supporters and detractors. Start with an influential supporter, such as the CEO or a major production head and capitalize on their support of the plan by asking them to share their thoughts at departmental meetings. Not only will this approach help cement the support you already have, but it can also help stop negativity before it spreads. Using the aforementioned printing company and their plan to add a second shift as an example, if an unsupportive person in the company was speaking to the press operators about the negatives of this change, the CEO or production head could use the meeting as a platform to refute the negatives that have been spread and to offer facts about the positive aspects of the plan in order to regain support. 5 The Business Source All Rights Reserved

6 Next, zero in on your biggest detractor. Before facing them, examine their probable arguments and come prepared with fact-based, reasonable counterarguments. If you can show your detractor, with facts, why the new way is the best way, they will grudgingly have to come onboard. Lastly, utilize a point person, a highly respected insider, on your team. For example, when you build your team of blue ocean executives you will, of course, want individuals from marketing, operations and finance, but you also need to include the CEO or another senior executive in order to add credibility and authority. By doing so, you can harness the knowledge, influence and clout that this person holds and use their skills to mediate problems and increase support. Conclusion The key to creating your own blue ocean is to concentrate on value and innovation and not on beating the competition in bloody price wars. So, begin today by applying these six principles to your marketing strategy and soon your company will be swimming, unfettered, in its own blue ocean. 6 The Business Source All Rights Reserved