Business strategies: Blue Ocean Strategy

Table of contents

List of Abbreviations

Table of Figures

1. Introduction (DD)

2. Necessity of strategic management (DD)

3. Blue Ocean Strategy
3.1. Examples for Blue Ocean Strategy (KN)
3.2. Analytical Blue Ocean Tools (KN)
3.2.1. First Tool: The Strategy Canvas (KN)
3.2.2. Second Tool: The Four Actions Framework (KN)
3.2.3. Third Tool: The Eliminate-Reduce-Raise-Create Grid (KN)
3.2.4. Three Qualities (KN)
3.3. The six principles of formulating Blue Ocean Strategy
3.3.1. First Principle: Reconstructing market boundaries (KN)
3.3.2. Second Principle: Focus on the big picture (KN)
3.3.3. Third Principle: How to create demand (DD)
3.3.4. Fourth Principle: Business Model (DD)
3.3.5. Fifth Principle: Overcoming key organizational hurdles (DD)
3.3.6. Sixth Principle: Build Execution into Strategy (KN)

4. Evaluation and future trends
4.1. The Helo Effect – a critical opinion from McKinsey (KN)
4.2. Blue Ocean and the future of management (KN)
4.3. Innovation management and blue ocean strategy (DD)
4.4. Geographical Differences (DD)
4.5. Critique of the Blue Ocean Strategy (DD)

5. Conclusion (DD/KN)

Appendix

References

Internet Sources

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Table of Figures

Figure 1: The Strategy Canvas of the U.S. Wine Industry

Figure 2: The Strategy Canvas of Yellow Tail

Figure 3: Eliminate-Reduce-Raise-Create Grid for Yellow Tail

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.

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.

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—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).

The following examples show both forms by listing some companies from various industries who did apply and execute the blue ocean strategy. Kim and Mauborgne studied more than 150 companies and indeed the number of companies who did adopt the blue ocean strategy is much higher. One need only think about all the industries, which did not exist when thinking 30 or 50 years back in time. All the industries like cell phones, coffee-to-go shops, mp3-players or even laptops where blue ocean strategies. But Kim and Mauborgne do not speak about blue ocean companies. Instead they speak about blue ocean "strategic moves", which means: “the set of managerial actions and decisions involved in making a major market-creating business offering” (Mauborgne, The Irish Times, 10.03.2008).

Cirque du Soleil is the first example we are going to look at. It was founded in 1984 by Guy Laliberté, a street performer. In a time when the circus industry was faced decreasing profits and increasing competition from new forms of entertainment, Cirque du Soleil created a Blue Ocean by not focusing on the competitors – other circuses – but by looking beyond the boundaries of the circus industry. Cirque du Soleil was aware of the fact that circuses do not only compare with other circuses but with all kinds of entertainment. So the aim was not to offer a better circus, but to create a new kind of entertainment. Guy Laliberté combined the advantages of the circus with these of the theater and eliminated expensive factors which were not longer wanted by the customers, such as animal shows. With this easy to explain strategy Cirque du Soleil became very successful all over the world (Rajan, New Straits Times, 05.01.2008).

But there are also other examples for innovative strategies which did not developed as well as Cirque du Soleil. One example one can think of is the Concorde. This supersonic airliner, which was introduced in 1976, was retired after 27 years. Although no mistakes in strategy can be found on the first view, one can say that maybe the retirement of this airliner was a result of the fact that this invention came too early in time, so that the world was not ready for this invention yet (www.wikipedia.de).

Smart cars are another example that a blue ocean strategy is not a guaranty for economical success. When Smart was launched in 1998 it was an innovation in the market: a city car that fits twice in a parking spot and spends less benzine than any other car. But its enormous research and development costs had produced billions of deficits to the parent company Daimler. Also the sales numbers stayed far behind the expectations of the investors (www.tagesspiegel.de).

According to Kim and Mauborgne two other types of blue oceans can be differentiated: the first alternative is when a company creates a market and dominates it for a time until imitators see profit opportunity; then it slowly becomes a red ocean. Here an example is the Body Shop, which dominated the blue ocean it had created for more than ten years but now it is facing bloody competition. The reason: it did not build up a new blue ocean strategy when followers came closer. This example shows how important the “strategic move” is for the long-term success of a company (Mauborgne, The Irish Times, 10.03.2008).

The second alternative of a blue ocean is according to Kim and Mauborgne when a company creates a market and dominates it to the point that there is no competitive threat.

Here an example is In-N-Out Burgers. In a time where individuality plays a more and more important role to most of the people and industries try to increase their range of products and services they offer, In-N-Out Burgers, a Californian fast food restaurant chain, offers only three kinds of burgers, chips and soft drinks to its customers. No extras like desserts, chicken burgers, fish or vegetarian meals, which can be found in other fast food restaurants, are listed on the menu of In-N-Out Burgers. Although the very small range of products In-N-Out Burgers is very successful since decades, as it did not focus on the competition but raised the customers' value by focusing on other factors like the freshness of the food, which was so far not a key factor to the fast food industry (www.in-n-out.com).

Another blue ocean example is LG Electronics which has announced: “the launch of its blue ocean management campaign, and it planned to double its sales volume, profit and shareholder benefit by 2010, with 30 per cent of its sales volume and 50 per cent of its profit being derived through blue ocean products” (Ooi, Malaysian Business, 16.04.2006).

But not only industries can build a blue ocean. According to The Business Times Singapore, in a way, Singapore had also applied a blue ocean strategy to achieve the growth it saw in its first 30 years by pursuing low-cost and differentiation simultaneously. But as the neighboring countries are closing the gap by imitating the features and offer lower costs, Singapore needs to devise a new blue ocean strategy to stay ahead (Huifen, The Business Times Singapore, 13.10.2004).

All these examples show that it is not necessary to have a special vision or foresight about the future to build up a blue ocean strategy. Circuses, cars, fast food restaurants and cosmetics companies have already existed when brands like Cirque du Soleil, Smart or The Body Shop were founded. It is only necessary to look on given data from a new perspective. What can also be seen from the examples is that a blue ocean strategy helps to build a strong brand by concentrating not on the competition but on the value raising.

After having looked at some examples of blue ocean strategy some analytic toolkit is going to be described in the following which should help to make the building of a blue ocean strategy as systematic as strategy building is in existing markets.

3.2. Analytical Blue Ocean Tools (KN)

Each strategy has specific tools and frameworks, such as the five forces model for analyzing existing industry (so called red ocean). For the blue ocean strategy Kim and Mauborgne developed a set of analytical tools and frameworks in order to make the formulation and execution of blue ocean as actionable as it is in existing markets (Kim/Mauborgne, 2005, pp. 23-24). In the following the main tools and frameworks are going to be described.

3.2.1. First Tool: The Strategy Canvas (KN)

The Strategy Canvas is a central tool for creating blue ocean. It is a strategy map, a visual representation of the company's strategy vis-à-vis the competition. Kim and Mauborgne explain the Strategy Canvas by using the example of the American wine industry, which, according to them, has seven principal factors, such as the price, the aging quality of wine, the prestige of a wine's vineyard, and others that are all seen as a key to the promotion of wine. This range of factors is the horizontal axis, the market perspective of the Strategy Canvas. The vertical axis shows the offering level that buyers receive across all the key competing factors: from a low level of a certain factor, e.g. low price, to a high level, e.g. high quality.

By graphically pose the current offering of wineries across all given factors the aim is to understand the wineries` strategic profiles, so called value curves. The value curve is the basic component of the strategy canvas. It answers the most important question whether a business deserves to be a winner. When a company's value curve is similar to the value curves of the competitors it indicates that this company is likely caught in a situation of bloody competition. While if a company's value curve shows a high level across all factors, this might be an indicator for an oversupply of factors to the customers. It might be necessary for the company to reduce or eliminate some factors. Another indicator of a noneffective strategy is a “zigzag” form of the value curve. In this case the company does not have a clear strategic vision and can not survive in the long-term view (Kim/Mauborgne, 2005, pp. 41-43).

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