Blue Ocean Strategies (BOS)

M. Akbar

W. Chan Kim and Renee Mauborgne (2005, HBSP)

 Creating Blue Oceans
• Cirque du Soleil was created in 1984 in Canada
• It created revenues in 20 years that surpassed the revenue of two leading
circus companies in 100 years
• In 1984 the circus industry was not very attractive when Cirque entered
• It was a declining industry
• Supplier power of artists was very high
• Entertainment substitutes were cheaper and very large in numbers. Including
Play stations
• The customers were declining and shifting to alternatives
• Competitive rivalry from regional players was intense
• Use of animals was criticized by organized groups
• Cirque entered a very unattractive industry
• Cirque did not focus on existing customers- the children, but instead attracted
corporate clients and adults, who were willing to play higher prices
• The vision was “We Reinvent the Circus’- named as such for first production
 New Market Space
• Cirque understood that the only way to beat the competition is to stop trying
to beat the competition
• Red Oceans represented the traditional markets for children in circus
business- they represent all the businesses today
• Blue Oceans denote all industries that do not exist today- the unknown
market space
• Red Ocean boundaries are defined, rules of the engagements known,
companies try to outperform competition. As it gets crowded, profits
disappear, growth declines, products turn commodities .
• On the other hand blue oceans are defined by untapped market space,
demand creation and high profitable growth, mostly created by expanding
boundaries of the industries like Cirque did
• Competitive engagements are irrelevant and rules are unknown
• The focus of strategy had been on read oceans and not on blue oceans
 The continuing creation of Blue Oceans
• 100 years ago, automobiles, music recording, aviation, petrochemicals,
health care and management consulting were unknown
• 40 years ago, mutual funds, cell phones, gas-fired electricity plants,
biotechnology, discount stores, retail package delivery , minivans,
snowboards, coffee bars and home videos were unknown
• THEY WERE BLUE OCEANS IN THEIR TIME!
• In 1997 NIC was replaced by NAICS to have 20 major divisions as against
previously 10. Service sector has now 7 segments
• But the industry language had been based on competition, although blue
oceans were continuously created- missed the focus on to create new
market space that is uncontested
 The Impact of creating Blue Oceans
based on 108 companies
86% 14%
Business launch

Revenue Impact 62% 38%

39% 61%
Profit Impact

Launches within red oceans Launches for creating Blue Oceans

 Imperatives for creating blue oceans
• Accelerated technological improvement leading to productivity gains
• Oversupply came into being
• Reduction in trade barriers and globalization led to disappearance of
information asymmetry and monopolies and niches
• While supply is increasing demand is not
• This is leading to commoditization, price war and shrinking margins
• Differentiation strategy is becoming difficult to sustain
• Most of traditional strategies developed based on competitive strategies
are disappearing
• Thus imperative to look at blue ocean startegies
 From Company and industry to Strategic Moves
• There are no lasting, excellent or visionary companies
• Nor there are industries which are very attractive
• The lessons from the books like In Search of Excellence, Managing on the
Edge, and Built to Last attest that there companies have no lasting
competitive advantage
• Creative Destruction suggest the outstanding performance of the companies
in the above studies was the result of industry attractiveness rather than
company performance
• Therefore neither company nor industry are the right unit of analysis
• However strategic move is the correct unit of analysis- there are brilliant
strategic moves and there are poor moves by the same company
• A strategic move is the set of managerial actions and decisions involved in
making a major market creating business offering
• Blue oceans were captured by small and large, young and old managers,
companies in attractive and unattractive industries, by new entrants and
incumbents, by private and public, low and high tech industries, and from
diverse nations
 Value Innovation: Cornerstone of BOS
• Instead of beating the competition, make the competition irrelevant by
creating a leap in value for buyers, opening up uncontested markets
• Value without innovation results in incremental improvement
• Innovation without value overshoots beyond what buyers are willing to
pay
• Value innovation occurs when companies align innovation with utility,
price and cost positions
• No trade-off between cost leadership and differentiation. BOS does both
• Circus industry was bringing new animal tamers, famous clowns, which
raised costs substantially without value addition
• Cirque did combine both circus and theatre production: it has eliminated
many costly items and added theatrical themes at low cost
 Value Innovation: BOS
The Simultaneous pursuit of Differentiation and Low cost

Cost

Value
Innovation

Buyer Value
 Red Ocean verses Blue Ocean Strategy
Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space Create uncontested market space

Beat the competition Make the competition irrelevant

Exploit existing demand Create and capture new demand

Make the value-cost trade-off Break the value-cost trade-off

Align the whole system with Align whole system in pursuit of

differentiation or cost leadership differentiation and cost leadership

Cirque created both cost leadership and differentiation and created BOS
 The six principles of BOS and their risks
Formulation principles Risk factor each principle attenuates

Reconstruct market boundaries Search risk

Focus on the big picture , not on the nos. Planning risk

Reach beyond existing demand Scale risk

Get the strategic sequence right Business model risk

Execution principle Risk factor each principle attenuates

Overcome each organizational hurdle Operational risk

Build execution into strategy Management risk

 Analytical Tools and Frameworks
• How do you break out of the red oceans and move into blue ocean?
• Take the example of US Wine industry
• With 8 firms accounting for 75% of market share and 1600 smaller wine
companies , companies from France, Spain and Italy and from Australia,
Argentina and Chile, make it a red ocean industry
• Intense competition, mounting price pressure, power of retailers, flat
demand , despite large variety available , the industry is very unattractive
• How do you open up blue oceans in the industry and find uncontested
market
• We turn to strategy Canvas for guidance
 The strategy canvas
• It is a diagnostic and action framework
• We have to look at the factors on which industry competes and invests

High
Premium Wine: differentiation

Budget wines: cost leadership

Low
Wine Aging Vineyard Wine
Above the Wine taste
Price Communica quality prestige range
line marketing Complexity
tion
 Competitive strategies

• Cost leadership: all seven parameters are on the lower side

• Differentiation: High price, distinct wine communication, above
the line marketing, aging quality, vineyard prestige/season/soil, wine ,
multi-flavored tastes complexity, variety of wines

• Casella Wines: How to make fun and non-traditional wine that is

easy to drink for everyone. 3/4th of the US alcoholic drinkers saw wine as a
turn off. It was intimidating and pretentious, traditional wine presented
taste challenges for average American. It decided to redraw the industry
boundary for BOS. It created ‘yellow tail brand’
• It turned to the four action framework
 The Four Action Framework: ERRC

Reduce
below the
industry
standard

Eliminate Create
Which factors A NEW Factors
should be VALUE never
eliminated offered by
CURVE industry

Raise
•Eliminate and Reduce help to reduce cost Factors to be
•Create and raise help create value raised above
•These combine develop low cost and industry
differentiation strategies standard
•Combination helps value innovation
 The strategy canvas of yellow tail

High
Premium Wine: differentiation

Budget wines: cost leadership

Yellow tail
Low
Wine Aging Vineyard Wine
Above the Wine taste
Price Communica quality prestige range
line marketing Complexity
tion
Easy drinking
Ease of selection
Fun &adventure
The Eliminate-Reduce-Raise-Create Grid

ELIMINATE RAISE
Enological terminology & distinctions Price vs budget wines
Aging qualities Retail store involvement
Above the line marketing

REDUCE CREATE
Wine complexity Easy drinking
Wine range Ease of selection
Vineyard prestige Fun and adventure
Three characteristics of Good Strategy
• Southwest created value innovation by removing tradeoffs
between speed And the economy& flexibility of car transport
• It offered high speed with frequent and flexible departures at
prices attractive to mass buyers
• It represent a blue ocean strategy
 The strategy canvas for Southwest Airlines

High Southwest Airline

Average Airline

Car Transport
Low
Seating Hub
Friendly Speed
Price Meals Lounges Class connectivit
service
choices y

Frequent
Point-to-point
services
 Three Characteristics: Focus
• Southwest airlines focused on 3 factors: friendly service,
speed, frequent point-to-point departures
• Other airlines focus on more factors and thus increase cost
structure and thus have costly business model
• Cirque mainly focus on themes, refined environment, multiple
productions and artistic music and dance
• Yellow tail focused on easy drinking, ease of selection and fun
& adventure
 Three Characteristics: Divergence
• If strategy benchmarked with competition, no uniqueness is
left
• Reactive strategies represent the same strategic profile. All
airlines have same value curve
• The value curve of blue ocean strategies are different: Cirque
with circus, yellow tail with wine industry, and southwest with
airlines
• Southwest covered point-to-point flights between midsized
cities whereas the other airlines followed hub-and-spoke
model
 Three Characteristics: Compelling tagline
• Good strategy has clear and compelling tagline, ‘The speed of a plane at
the price of a car- whenever you need it’ Southwest Airline
• How do you convey the tagline of other airlines?? How to advertise??

• Compare the value curves of Cirque de Soleil on the next page and their
new value offering as compared to circus industry competitors
 The strategy canvas Cirque de Soleil

Cirque du Soleil
High Ringling, Barnum circuses

Similar regional circus

Low
Star Aisle Multiple Fun and Thrill and Unique
Price show venue
performers concessions humor danger
arenas
Refined environment
Theme Multiple productions
Artistic music and dance
 Reconstruct Market Boundaries: Six Paths
Framework
• Look across alternative industries: Restaurants and cinemas- to enjoy night out-
different functionalities but same objectives: NetJet Fractional model
• Look across Strategic groups within industries: Curves fitness centers at low cost
franchisee model- Trades clubs and home exercise
• Look across the chain of buyers: Shifted insulin form doctors to users by inventing
NovoPen by Novo Nordisk in 1985, followed by Novolet and Innovo pens; purchasers-
users- influencers- change the focus
• Look across complementary product and service offerings: Movie goer couple
need baby sitter and good parking place- it affect demand for tickets- what happen before
, during and after the product is used: NABI used Fibre glass bodies to reduce cost and
improve the look and feel- initial and life cycle cost-benefit must be considered
• Look across functional or emotional appeal to buyers: QB house Japanese
haircutting saloon
• Look across time: Apple saw illegal music downloading and came up iTunes
 From Competitive to Blue Ocean Creation
Head-to-Head Competition Blue Ocean
Industry Focuses on rivals within its Looks across alternative
industry industries
Strategic groups Focuses on competitive Looks across strategic
position within strategic group groups within industry

Buyer group Focuses on better serving the Redefine the industry

buyer groups buyer group
Scope of product and Focuses on maximizing the Looks across to
service offering value of product and service complementary product
offerings within the bounds of and service offering
its industry

Functional-emotional Focuses on improving price Rethinks the functional-

orientation performance within the emotional orientation of its
functional-emotional industry
orientation of its industry

Time Focuses on adapting to Participates in shaping

external trends as they occur external trends over time