Blue Ocean Strategies Overview

Strategy involves standing out from the competition and making choices that give the company a unique and valuable position by offering distinctive products and services. Competitive advantage and profitability can be achieved simultaneously by approaches that create consistent internal synergies and combine a company’s operational activities efficiently. Strategies are formed at various levels of the organization. However, a typical organizational structure incorporates strategies at 3 specific levels: corporate, business and functional (marketing book) (Appendix)

Blue Ocean strategies are a form of business level strategies that enable firms to achieve sustainable competitive advantage by tapping uncontested market space. Developed by INSEAD professors, W. Chan Kim and Renee May, BO strategies were derived from analyzing winners and losers of more than 150 strategic moves across 30 industries, including hotel, cinema, automobile, retail, airlines etc., over the course of several years.

Conventional competitive or red ocean strategies encourage firms to choose between value and differentiation to compete in prevailing markets with clearly defined boundaries and conditions. In red oceans, firms aim to gain market share by exploiting existing demand and overtaking competitors. Ruthless competition in red oceans confines companies to benchmark against competitors, and make incremental improvements that increase costs without increasing revenues or having much impact on demand. This results in a crowded market space, difficulty to differentiate products and services, greater supply than demand, price wars, which turn the ocean bloody and red ensuing a reduction in profit and growth.

Contrastingly in Blue Oceans, firms go beyond industry borders and make the competition extraneous by redefining the industry, creating new demand and profitable growth. This is achieved by filling strategic gaps and targeting markets and opportunities that are not being served. Instead of encouraging firms to build a defensible position in an existing industry, this approach follows a reconstructionist view whereby firms recognize key factors valued by customers within conventional industry borders and reconstruct these factors across market boundaries while concurrently pursuing differentiation and cost leadership.

To provide a quantitative impact of BO strategies, evidence of business launches of 108 companies over the years shows that:

• 86% launches that were incremental improvements within existing industries accounted for only 62% total revenues and 39% profits.
• The remaining 14% launches that created BOs resulted in 38% total revenues and comprised 61% of total profits.

A strategy canvas and four action plans are some primary tools that assist customers with formulating and executing BO strategies to target unexploited opportunities. Value innovation is a key foundation of Blue Ocean thinking which involves eliminating or minimizing factors that the industry competes on and creating factors that were never previously offered by the industry. This enables firms to save costs and drives up their product or service value for customers allowing companies to break the value-cost trade-off. Value Innovation also involves aligning utility, price and cost. The superior product or service value offered by the firms results in high sales volume over time, and further reduced costs due to economies of scale.

It is important to note that most key industries such as automobile, biotechnology, telecommunication, cell phones are a result of blue ocean thinking. Historically, several companies across numerous industries have offered major products and services that opened new market space and generated significant demand. The case of the evolving US automobile industry provides key evidence of BO success.

In 1893 when horse buggies were the primary means of transportation in the US, the Duryea brothers invented the first one-cylinder auto. Following this launch several auto manufacturers entered the market to make conventional automobiles at a time when they were considered an unreliable, and unaffordable luxury. Furthermore, they weren’t expected to become popular in the future, making the industry look small and unattractive by conventional wisdom.

In 1908, Henry Ford went beyond boundaries by introducing the Model T, which was made using preeminent components, and only came in one colour and model. Marketed as reliable and durable, and sold at half price of existing automobiles, it soon captured the mass market with its reputation as a high quality, low priced car. Its price dropped even further over the years and it went on to sell cheaper than the carriage.  As the car was easy to manufacture and highly standardized, Ford used unskilled workers on its assembly line who could build them quickly and efficiently, thereby reducing costs. This allowed the company to charge a reasonable price for its cars, increase its sales, and the size of the automobile industry in the process. While most automakers made expensive automobiles, Ford created a huge BO with its Model T eventually becoming the main mode of transportation.

Following this in 1924 when the car became an essential household item, GM created a BO by launching a line of automobiles that were different to Ford’s basic functional, one colour, single model concept. By appealing to the emotion of the US mass market, its strategy included building fun, exciting, and comfortable cars fit for ‘every purpose’. The range of models offered by GM included different colours and styles that were updated each year thus creating new demand for fashionable cars.  The ease of replaceability of these cars also led to the formation of the used car market and GM eventually surpassed Ford as the leading carmaker.

In the 1970s, the Japanese created a new BO by producing small fuel efficient cars by challenging US carmakers and their notion of bigger and better cars. While the big three car manufacturers focused on benchmarking and competing one another, Japanese carmakers changed conventional logic by introducing and offering a new value concept of good quality, compact, and gas efficient cars. Demand for these cars soared further because of the US oil crisis in the 1970s as consumers turned to fuel efficient cars like Honda, Toyota, and Nissan. Apart from reducing the competitiveness of US car makers, this Blue Ocean also challenged their survival.

In 1948, troubled and on the edge of bankruptcy, Chrysler launched the minivan creating another BO in the auto industry. By developing an entirely new type of vehicle, the company provided a middle ground between the car and van. The minivan had the functionality of both, was smaller and easier to handle than a van, and more spacious than a car. This heavily appealed to nuclear families that needed sufficient space to hold important necessities in addition to passengers. By exploiting this untapped market space, the minivan became Chrysler’s bestselling vehicle within the first year, enabling the company to regain its position in the market and earn significant revenues over the next couple of years. This success also led to the SUV boom in the 90s by extending the BO that Chrysler had tapped into.

These examples show how companies that created BOs were able to earn more revenues than industry leaders in a short time span and managed to achieve growth in industries with limited potential that were unattractive according to competition based strategies. The evolution of the auto industry because of Blue Ocean thinking also indicates that auto companies became successful by appealing to new customers and breaking way from the competition instead of poaching customers from competitors.Instead of offering better solutions to given problems, they redefined the problem by offering comfortable and functional cars for reasonable prices thus reinventing user experience. The implementation of these strategies not only challenged the status quo of the automobile industry but also allowed it to positively evolve over the years generating profitable growth in the process.

By creating a whole new concept that broke the value-cost tradeoff and by looking across the market boundaries, the automobile companies offered new critical success factors into their offerings, eliminated or reduced irrelevant factors thereby increasing demand. Invented new forms of transportation by eliminating costly production methods enabled these carmakers to achieve both differentiation and cost

A classic example of a Blue ocean strategy in action is the development of the Yellow Tail wine brand by Australian winemaker Casella Wines. By using the strategy canvas, the company identified 7 key industry factors in the US wine industry:

• Price per bottle of wine
• Premium packaging with labels containing information about wine medals and technical wine terminology to emphasize the art and science of wine making.
• Above the line marketing to increase consumer awareness about the product in the market and encourage distributors and retailers to prioritize their brand over competitors.
• Aging quality of wine
• Prestige and legacy of the wine’s vineyard
• Complexity and sophistication of the wine’s taste
• Diverse range of wines to cover all varieties of grapes and consumer preferences (ex. Chardonnay and Merlot)

 

By plotting the strategic profiles of key players in the industry, Casella recognized that competitors primarily focused on prestige and quality that made the product a lot more complicated. To achieve profitable growth, benchmarking against competitors or offering a little more for a little less wasn’t enough. While these RO strategies may have increased sales, they did not exploit unserved market spaces. Additionally, by observing the demand for wine alternatives such as beer, spirits, etc., that had a larger market share of alcohol sales, Casella saw that the mass market did not like wine too much as it was associated with ostentation and complexity. Buyers didn’t particularly appreciate the complex taste of wine even though that is what the industry was competing on, and instead preferred to drink beers and cocktails that were sweeter and easier to drink.

Thus, the company set out to create a new value curve by changing its strategic focus from competitors to alternatives and from customers to non-customers to create a BO. As an alternative to offering better solutions than its rivals, the company aimed to redefined the problem by reconstructing the critical success factors across the industry and shifting its strategic profile.

It did this by using the four actions framework to answer 4 key questions that defied industry logic and its supplementary eliminate-reduce-raise-create grid to act on these questions (Appendix). This enabled the company to uncover, eliminate and reduce investment in unimportant factors that its competitors contested on such as wine aging, complex terminology and vineyard prestige that was also intimidating to customers. Realizing that these factors were no longer valuable and that there was no gain in making costly changes to its products to beat the competition, Casella used these tools to discover new factors such as easy drinking, ease of selection, and fun and adventure to focus on and fill a strategic gap. This led to the development of the Yellow Tail, a wine brand that broke away from competition and created a Blue Ocean. By offering buyers an entirely new experience, Yellow Tail created new demand and lifted buyer value by diverging from the value curves of its competitors and differentiating itself. Combining the characteristics of both wine and beer, the yellow tail was a fun, non-traditional and easy to drink affordable, social drink that appealed to all sorts of wine and non-wine alcohol drinkers (occasional drinkers, beer and cocktail drinkers, wine aficionados). Being a simple product, the mass market appreciated its uncomplex taste.

While previously retailers offered several wine varieties that were overwhelming for average customers who found it difficult and tiring to make a selection, the Yellow tail, however, made it easier for buyers by offering only to selections: Chardonnay white wine and Shiraz red wine, thereby streamlining its business model and minimizing inventory costs. Breaking industry convention by offering both wines in same shaped bottles allowed the firm to simplify its manufacturing process and significantly save on costs. Moreover, Casella made easy drinking wine that did not require years to develop thus allowing it to reduce costs further. Simplified packaging with bright eye catching colors and nontraditional labels made the product approachable for buyers as it was easy to understand and select. Whereas large companies invested heavily in marketing to develop their brand, Yellow Tail required no expensive promotional campaigns to poach sales from competitors, and expand the market by attracting non-wine drinkers.

By adopting BO thinking, Casella was therefore able to achieve profitable growth through differentiation and cost leadership, become the fastest growing brand in the US and Australia within 2 years, and overtake French and Italian wines. By 2003, it eventually became the bestselling red wine in the US.

Appendix

Strategy Levels

Corporate strategy defines a company’s holistic growth and management direction pertaining to its various businesses, products and services. Business strategies, on the other hand, are established at the divisional levels and typically focus on enhancing the strategic business unit’s competitive position in its industry. Functional strategies aim to maximize resource productivity and are typically set by functional departments within each SBU to improve competencies and performance. (marketing book). The profitability of a company depends on three primary factors which include the price of a company’s products, the perceived value and attributes of a firm’s products or services such as performance, design, quality and after sales, and the costs of creating this value (slides)

Blue Ocean Strategy Canvas

Strategy Canvas allows firms to identify key success factors in its market that are important to customers and hence provide competitive advantage or disadvantage.  By allowing the firm to assess the current situation in its market space and comprehend the factors that competitors invest in, the firm is able to analyse itself in relation to its existing competitors based on key competing factors explore routs to new market space and determine how to convert non-customers into customers by looking at the big picture. Depicted in a graphic form, the horizontal axis represents the range of factors while the vertical axis show the level at which these key factors are offered. The value curve, a key component of the canvas graphically plots the relative performance of companies in the known market space across the range of factors. This tool therefore enables firms to minimize competition and risk and maximize opportunity.

By having a drastically different value curve, a firm can create value innovation which involves tapping into new market by creating new factors where the customer’s requirements were previously not served. In addition, the firm can also surpass performance on industry factors where competitors are not doing very well.

Graph plots strategic profiles sing vlue curve of key competing fctors for companies within an industry.

Strategic Canvas of the wine Industry

Wineries across the industry focused on these factors to promote their brand as a unique beverage to wine connoisseurs, and be the first brand to come to consumers’ minds for special occasions. Despite the numerous offerings, the graph shows a convergence in the value curves of the competitors across the industry from the market’s perspective. Premium brand wines had the same strategic profile of high price, high quality, etc., followed a classic differentiation strategy, and were viewed by customers as different from budget wines in the same way. Similarly, budget wines also essentially had an identical strategic profile of low price, low quality across key industry factors, and were primarily seen as low cost players. Furthermore, the canvas depicts that the value curves of both wine categories have a basic shape that indicates the strategies used by these wine groups are very similar but at ‘different altitudes of offering levels.’

Eliminate-reduce-raise-create grid yellow tail

Grid filled in with action sof eliminating, reducing, raising and creating.

Extra stuff

Breakaway from competition

BOs show how to align 3 strategy propositions of value, profit and people. Dveleop products and service sthat attracts buyers, enables the company to make a profit; motivate the people working for or with the company to execute the strategy. Alignment of these 3 propositions according to BOS ensure sorg takes a holistic approach to the formulation and execution of strategy.

By appealing to a whole new group of customers they  were bale to break away from the competition by offering and unprecedented product experiences and reinventing user experience

Offered unprecedented utility, CDS created and invented new form of live entertainment- very different from traditional transportation means and at the same time eliminated many costly production methods and dramatically reduces cost structure, achieveing both differentiation and low cost