Blue Ocean Strategy
(INSEAD School)
Außenwirtschaft / Internationales Management
SS 2008
AIM Seminararbeit
Submission: April 16
th
, 2008
Dimitar Dimitrov (DD)
Katharina Niciejewska (KN)
2
Table of contents
List of Abbreviations ... - 3 -
Table of Figures ... - 3 -
1. Introduction (DD) ... - 4 -
2. Necessity of strategic management (DD) ... - 5 -
3. Blue Ocean Strategy... - 7 -
3.1. Examples for Blue Ocean Strategy (KN) ... - 7 -
3.2. Analytical Blue Ocean Tools (KN)... - 10 -
3.2.1. First Tool: The Strategy Canvas (KN)... - 10 -
3.2.2. Second Tool: The Four Actions Framework (KN) ... - 12 -
3.2.3. Third Tool: The Eliminate-Reduce-Raise-Create Grid (KN) ... - 14 -
3.2.4. Three Qualities (KN) ... - 14 -
3.3. The six principles of formulating Blue Ocean Strategy ... - 15 -
3.3.1. First Principle: Reconstructing market boundaries (KN) ... - 16 -
3.3.2. Second Principle: Focus on the big picture (KN) ... - 19 -
3.3.3. Third Principle: How to create demand (DD) ... - 20 -
3.3.4. Fourth Principle: Business Model (DD)... - 23 -
3.3.5. Fifth Principle: Overcoming key organizational hurdles (DD)... - 29 -
3.3.6. Sixth Principle: Build Execution into Strategy (KN) ... - 32 -
4. Evaluation and future trends ... - 34 -
4.1. The Helo Effect a critical opinion from McKinsey (KN) ... - 34 -
4.2. Blue Ocean and the future of management (KN) ... - 35 -
4.3. Innovation management and blue ocean strategy (DD) ... - 36 -
4.4. Geographical Differences (DD) ... - 36 -
4.5. Critique of the Blue Ocean Strategy (DD)... - 37 -
5. Conclusion (DD/KN)... - 39 -
Appendix ... - 41 -
References ... - 43 -
Internet Sources ... - 43 -
- 3 -
List of Abbreviations
BCG = Boston Consulting Group
CEO = chief executive officer
e.g. = for example
MIT =Massachusetts Institute of Technology
R & D = Research & Development
Table of Figures
Figure 1: The Strategy Canvas of the U.S. Wine Industry...12
Figure 2: The Strategy Canvas of Yellow Tail...13
Figure 3: Eliminate-Reduce-Raise-Create Grid for Yellow Tail...14
- 4 -
1. Introduction (DD)
In a business context, it is inevitable that one of the main words one would hear is
competition. In a way doing business is like participating in a competition for market
share, profits etc. Even one of the basic theories of trade, the one of Ricardo, speaks
about the competitive advantage and its importance.
But how to become successful in doing business? Does a recipe exist which
guarantees that a business could thrive and be successful? On the one hand one
could argue that business opportunities arise from the environment, lead by an
"invisible hand" and the essentials of doing business are similar to the one centuries
ago and that people do not have substantial influence. On the other hand, others
would argue that the success of a business is predominantly result of the well-
prepared planning and in that way is connected more to the human (merchant's)
abilities rather than to the environment itself.
Surely, the centuries of business history has shown that answering the question what
makes a business successful does not have a clear answer. It would be very shallow
way of thinking to give a simple answer to this question. Surely, the environment
plays an important role for the business but the other way round, doing business is
not a random game. In contrast, only thinking strategically without being in the
appropriate environment and without any resources, it is quite impossible to set up a
successful business.
Furthermore, the business environment is not static but instead very dynamic. As the
time passes by, businesses change and what was true about business success
centuries or even a decades ago, is not true any more. At the same time, it does not
mean that business now and in the past has nothing in common. On the contrary,
nowadays the business and management science is so complex and possesses
sophisticated methodology and tools which help to prove that the strategical way of
thinking in the context of doing business is an essential part of the success of a
company. And even the understanding of business strategy is different because it
could range from simple planning to the application of very complex scientific
business models.
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However, as the business environment changes, so do the business strategies as
well. That's why some of the often considered for true strategies, seem to be out-of-
date with the business reality. For that reason, if a strategy does not work, one has to
check it again.
In a similar way, the book "Blue Ocean Strategy - How to create uncontested market
space and make the competition irrelevant" written by W. Chain Kim and Renée
Mauborgne, both teaching at the worldwide renowned private graduate business
school INSEAD, propose that companies need to change their perspective about the
core of the business success. Considering the dynamic business environment
nowadays, Kim and Mauborgne advise that it is a step to success if one tries to
rethink the idea about business competition. Furthermore, based on a very profound
research conducted over more than twenty years, they develop a strategy about a
shift from the concentration on competition inside existing industries to the creation of
new industry representing uncontested market place.
As the book is written in a way which is very light to digest, with a catching
metaphoric title, it has become a best seller for a very short time and even more
copies of it have been sold in comparison with the book about Balanced Scorecard.
For that reason, the aim of this term paper is primarily to explain the basic concept of
the blue ocean strategy, present the tools used in the creation of such an
uncontested market and illustrate it with examples from the real business life.
However, as much as the given resources allow, a critical evaluation of the blue
ocean strategy and its relevance to a company's business nowadays is also built in
the term paper.
2. Necessity of strategic management (DD)
In order to be able to understand what is behind the concept of the blue ocean
strategy, it is very important that one has the minimum framework of basic terms and
definitions on strategic management. For that reason, it is necessary to give an
answer to the question what does strategy mean in the context of a company and
why is the strategic management so important for the success of a company.
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To begin with, Strategic Management is being defined set of managerial decisions
and actions that determine the performance of a corporation on along-term basis. It
includes environmental scanning (both internal and external), strategy formulation
(strategic or long-range planning), strategy implementation and evaluation and
control. "The study of strategic management, therefore, emphasizes the monitoring
and evaluating of external opportunities and threats in light of a corporation's
strengths and weaknesses" (Wheelen/Hunger, p.4). And if, strategic management
was more of use to the large corporations in the past but this trend is shifting now
and nowadays different types of organizations are paying serious attention to it in
order to be competitive in the existing (business) environment.
Wheelen and Hunger (2008, p.4) propose that in order to establish strategic
management in an organization, it goes through four different phases, the so called
"phases of strategic management" which are the basic financial planning, forecast-
based planning, externally oriented (strategic) planning and the last phase is the
strategic management. According to them the strategic management means that the
top management involves the lower management level in the strategic planning
process in order to implement strategic thinking at all levels of the organization. They
also add that the main aim here is not to forecast the future in details, but more
important is to have in mind different scenarios and possible strategies in case they
occur in the future. Moreover, in such a way the picture of a learning organization
appears, which sets as a condition that companies must become more open towards
changes and use the knowledge they acquire permanently in order to adapt and
improve all the time (ibid, p.9).
Concerning the necessity of strategy, the leading business strategist Michael Porter,
says, that in the reality is hard and although a company can not prevent the case that
the competitors copy its improvements and products, by selecting the right strategy it
could manage to set its own strategic position in the market, not easy to be copied,
which makes it differ from the rest. As he writes, what could be copied and imitated is
the operational effectiveness and that the operational effectiveness is not strategy,
although managers often can not differentiate both but the operational effectiveness
is as Porter defines it "performing similar activities better than the rivals perform
them" and on the other hand is what one derives from the strategic management--
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this is the strategic positioning meaning "performing different activities from rivals' or
performing similar activities in different ways" (Porter & Christensen, 1996, p.62). To
go on, talking about strategy, Kim and Mauborgne also define the term in their book
as they write that "a strategic move is the set of managerial actions and decisions
involved in major market-creating business offering". In that way they want to stress
manifold the importance of the strategy, independent from looking into industries or at
companies, as they differentiate successful and profitable companies from
unsuccessful ones (Kim/Mauborgne, 2005, p.10).
3. Blue Ocean Strategy
,,When Blue Ocean Strategy was first published in 2000, many companies started
looking for innovation strategies that simply "make the competition irrelevant." But, as
Jeffrey Phillips writes, swimming in the blue oceans requires much more than having
just another strategy. "(www.samsung.com/digitallmagazine)
In a time of global competition, glut, instant communication and mass production
consumers prefer products that offer a higher value proposition over low costs or
extensive features (www.samsung.com/digitallmagazine). For this reason the Blue
Ocean Strategy focuses on developing strategy in new, nonexistent markets.
W. Chan Kim and Renée Mauborgne argue in their bestseller book that competing in
overcrowded industries is no way to maintain brilliant achievement. In their opinion
the real opportunity is to create uncontested market space and make competition
irrelevant.
In the following the concepts of the blue ocean strategy are going to be explained to
the reader as well as its relevance to businesses.
3.1. Examples for Blue Ocean Strategy (KN)
According to Kim and Mauborgne there are two ways to create blue oceans: one is to
launch completely new industries and the other is the more common form to create a
blue ocean within a red ocean by expanding the boundaries of an existing industry
(www.12manage.com).
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