Firm Theory Kim Valbum RUC MEA

1
Firm TheoryKim Valbum RUC MEA

• Blue Ocean Strategy
• W. Chan Kim Renée Mauborgne

2
Make the Competition Irrelevant

• Cirque de Soleil is a success by taking in new
  customers, combining cirkus/art/ performance at a
  high price to new customers

3
Value Innovation a cornerstone

• The Simultaneous Pursuit of Differentiation and
  Low Cost
• Value innovation is created in the region where a
  companys actions favorably affect both its cost
  structure and its value proposition to buyers.
• Cost savings are made by 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.

4
Red Ocean Versus Blue Ocean Strategy
5
The Six Principles of Blue Ocean Strategy

• Formulation principles Risk faktor each
• principle attenuates
• Reconstruct market boundaries \/ Search risk
• Focus on the big picture, not the numbers \/
  Planning risk
• Reach beyond existing demand \/ Scale risk
• Get the strategic sequence right \/ Business
  model risk
• Execution principles Risk factor each
• principle attenuates
• Overcome key organizational hurdles \/
  Organizational risk
• Build execution into strategy \/ Management risk

6
The Four Actions Framework
7
Eliminate-Reduce-Raise-Create Grid The case of
Cirque du Soleil

• Eliminate Raise
• Star performers Unique venue
• Animal shows
• Aisle concession sales
• Multiple show arenas
• Reduce Create
• Fun and humor Theme
• Thrill and danger Refined environment
• Multiple productions
• Artistic music and dance

8
Red ocean six assumptions

• Define industry similarly and focus on being best
  
• Look through the lens of accepted strategic
  groups (luxury cars, family cars etc.) and strive
  to stand out
• Focus on the same buyer group
• Define the scope of the products and services
  offered by their industry similarly
• Accept their industrys functional or emotional
  orientation
• Focus on the same point in time and often on
  current competitive threats in formulating
  strategy

9
Blue Ocean path 1 Look Across Alternative
Industries

• A company competes not only with the other firms
  in its own industry but also with companies in
  those other industries that produce alternative
  products or services
• Products and services that have different forms
  but offer the same functionality are often
  substitutes for each other
• Alternatives include products or services that
  have different functions and forms but the same
  purpose

10
Blue Ocean path 2Look Across Strategic Groups
Within Industries

• Blue oceans can often be created by looking
  across alternative industries, so can they be
  unlocked by looking across strategic groups.
• In most industries , the fundamental strategic
  differences among industry players are captured
  by a small number of strategic groups
• The key to creating a blue ocean across existing
  strategic groups is to break out of the narrow
  tunnel vision by understanding which factor
  determine customers decisions to trade up or
  down fron one group to another

11
Blue Ocean path 3Look Across the Chain of
Buyers

• In most industries competitors converge around
  commen definitions buyers (which involve
  purchasers, users, influencers etc.) and target
  customer segments large vs. small customers
  etc.
• 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.

12
Blue Ocean path 4Look Across Complementary

• Product 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 industrys product and
  service offerings
• 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.

13

Blue Ocean path 5Look Across
Functional/Emotional Appeal to Buyers

• Competition tends to converge on an accepted
  notion and on few possible bases of appeal
• Some industries compete on rational appeal and
  some on emotional appeal
• Over time, functionally oriented industries
  become more functionally oriented emotional
  industries become more emotional oriented
• Industries have trained customers in what to
  expect and they answer more for less
• Emotionally oriented industries offer many extras
  that add price, but not functionality customers
  would welcome simpler, lower-priced and
  lower-cost business models
• Functionally oriented industries can stimulate
  new demand by adding a dose of emotion

14
Blue Oecean path 6Look Across Time

• All industries are subject to external trends
  that affect their businesses
• Looking at these trends with the right
  perspective can show how to create blue ocean
  opportunities
• Insights into blue ocean strategy arise from
  business insights into how the trend will change
  value to customers
• Three principals are critical to assessing trends
  across time and to form the basis of a blue ocean
  strategy
• These trends must be decisive to your business
• These trends must be irreversible
• These trends must have a clear trajectory

15
From Head-to-head Competition to Blue Ocean
Creation

• Head-to-Head Competition Blue Ocean
  Creation
• Industry Focuses on rivals within its industry
  -gt Looks across alternative industries
• Strategic group Focuses on competitive position
  -gt Looks across strategic groups
• within strategic group within
  industry
• Buyer group Focuses on better serving the
  -gt Redefines the industry buyer
• buyer group group
• Scope of product Focuses on maximizing the value
  -gt Looks across to complementary
• or service of product and service offerings
  product and service offerings
• offering within the bounds of its industry
• Functional- Focuses on improving price
  -gt Rethinks the functional-emotional
• Emotional performance within the
  functional- orientation of its industry
• orientation emotional orientation of its industry
• Time Focuses on adapting to external
  -gt Participate in shaping external
• trends as they occur trends over time

16
The Four Steps of Visualizing Strategy
17
Testing the Growth Potential of a Portfolio of
Businesses
18
The Three Tiers of Noncustomers

• First Tier Soon-to-be noncustomers
• who are on the edge of your market,
• waiting to jump ship
• Second Tier Refusing noncustomers
• who consciously choose against your
• market
• Third Tier Unexplored noncustomers who are in
  markets distant from yours

Third Tier
Second Tier
First Tier
Your market
19
The Sequence of Blue Ocean Strategy
20
The Buyer Utility Map
The Six Stages of the Buyer Experience Cycle
The Six Utility Levers

• 2 3 4
  5 6
• Purchase Delivery Use Supplements
  Maintenance Disposal

Customer productivity Simplicity Convenience Risk
Fun image Environmental friendliness
21
The Buyer Experience Cycle
22
Uncovering the Blocks to Buyer Utility

• Purchase Delivery Use Supplements
  Maintenance Disposal
• Customer Productivity In which stage are the
  biggest blocks to customer productivity?
• Simplicity In which stage are the
  biggest blocks to simplicity?
• Convenience In which stage are the
  biggest blocks to convenience?
• Risk In which stage are
  the biggest blocks to reducing risks?
• Fun and image In which stage are
  the biggest blocks to fun and image?
• Environmental In which stage are the
  biggest blocks to environment
• Friendliness friendliness?

23
The Price Corridor of the Mass
24
The Profit Model of Blue Ocean Strategy

• The Strategic Price
• The Target Profit
• The Target Cost
• Streamlining and Partnering
• Cost Innovations
• Pricing Innovation

25
Blue Ocean Idea (BOI) Index
26
The Four Organizational Hurdles to Strategy
Execution

• Cognitive Hurdle
• An organization wedded
• to the status quo
• Ressource Hurdle Political Hurdle
• Limited resources Opposition from
• powerful vested
• interests
• Motivational Hurdle
• Unmotivated staff

27
Conventional Wisdom vs. Tipping Point Leadership
28
How Fair Process Affects Peoples Attitudes and
Behavior

• Strategy Fair Process
• Formulation Engagement
• Process Explanation
• Expectation clarity
• Attitudes Trust and Commitment
• I feel my opinion counts
• Behavior Voluntary Cooperation
• Ill go beyond the
  call of duty
• Strategy Execution Exceeds Expectation
• Self-initiated

29
The Execution Consequences of the Presence and
Absence of Fair Process in Strategy Making
30
Imitation Barriers to Blue Ocean Strategy

• Value innovation does not make sense to a
  companys conventional logic
• Blue ocean strategy may conflict with other
  companies brand image
• Natural monopoly The market often cannot support
  a second player
• Patents or legal permits block imitation
• High volume leads to rapid cost advantage for the
  value innovator, discouraging followers from
  entering the market
• Network externalities discourage imitation
• Imitation often requires significant political,
  operational, and cultural changes
• Companies that value-innovate earn brand buzz and
  a loyal customer following that tends to shun
  imitators

31
Blue Ocean Strategy

• Dont Compete with Rivals Make Them Irrelevant