November 26, 2009

Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne.

Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne.

[It is a very good one with different view to Bz. strategy - comes with ample case study/examples. This is about creating 'blue oceans' or niche market]

Book starts with discussing the Canadian circus company -'Cirque du Soleil's success in creating a blue ocean. Cirque du Soleil succeeded because it realized that to win the future companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition. Blue ocean are defined by untapped market space, demand creation and the opportunity for highly profitable growth. Without going with compete heads-on with theater & circus companies, it created a market by combining some from both these space. By breaking the market boundaries of theater and circus, Cirque du Soleil gained a new understanding not only of circus customers but also of circus non-customers; adult theater customers. This led to a whole new circus concept that broke the value-cost trade-off and created a blue ocean of new market space.

the lasting allure of the traditional circus came down to only three key factors: the tent, the clowns and the classic acrobatic acts such as the wheel-man and short stunts. Cirque du Soleil glamorized the tent, kept clowns but shifted their humor from slapstick to a more enchanting, sophisticated style. Acrobats and other thrilling acts are retained, but their roles were reduced and made more elegant by the addition of artistic flair and intellectual wonder to the acts. By looking across the market boundary of theater, Cirque du Soleil also offered new non-circus factors, such as story line and with it, intellectual richness, artistic music and dance and multiple productions. These factors entirely new creations for the circus industry, are drawn from the alternative live entertainment industry of theater.

By eliminating high-cost factors from regular circus (animals, etc), Cirque du Soleil created a blue ocean by innovating from both Circus & theater space - a differentiation with low-cost strategy. In short, Cirque du Soleil offers the best of both circus and theater and it has eliminated or reduced everything else.

Red Ocean Strategy
Blue Ocean Strategy
Compete in existing market space
Create uncontested market space
Beat the competition
Make the competition irreverent
Exploit existing demand
Create and capture new demand
Make the value-cost trade-off
Break the value-cost trade-off
Align the whole system of a firm's activiti4s with its strategic choice of differentiation or low cost
Align the whole system of a firm's activities in pursuit of differentiation and low cost.

The principles of Blue Ocean Strategy

Formulation principles
Reconstruct market boundaries
Focus on the big picture, not the numbers
Reach beyond existing demand
get the strategic sequence right

Execution principles
Overcome key organizational hurdles
Build execution into strategy

Risk factor each principle attenuates
Search risk
Planning risk
Scale risk
Business model risk

Risk factor each principle attenuates
Organizational risk
Management risk

US wine industry: Another Blue Ocean case study.
US has third largest aggregate consumption of wine worldwide. Yet 420 bn industry is intensely competitive. California wines dominate domestic market, capturing two-thirds of all US wine sales. Even with many new comers in wine market place, US remains stuck at 31st places in world per-capita wine consumption. Top 8 companies produce more than 75% of the wines in US and estimated 1600 other wineries produce the remaining 25%. In short, the US wine industry faces intense competition mounting price pressure, increasing bargaining power on the part of retail and distribution channels and flat demand despite over whelming choice.

In looking at the demand side of the alternatives of beer, spirits and ready-to-drink cocktails, which captured three times as many US consumer alcohol sales as wine, mass of US adults saw wine as turn-off. It was intimidating and pretentious and the complexity of wine's taste created flavor challenge for the average person even though it was the basis on which the wine industry fought to excel.

Strategic Canvas: it is both diagnostic and an action framework for building a compelling blue ocean strategy. In the case of US wine market, there are 7 principal factors.

1. price per bottle of wine
2. An elite, refined image in packaging, including labels announcing the wine medals won, and the use of esoteric enological terminology to stress the art and science of wine making
3. Above-the-line marketing to raise consumer awareness ina crowd market and to encourage distributors and retailers to give prominence to a particular wine house
4. Aging quality of wine
5. The prestige of a wine's vineyard and its legacy
6. The complexity and sophistication of wine's taste, including such things as tannins and oak.
7. A diverse range of wines to cover all varieties of grapes and consumer preferences from Chardonnay to Merlot and so on.

Blue Ocean's Four Action Framework:

1. Which of the factors that the industry takes for granted should be eliminated?
2. Which factors should be reduced well below the industry's standard?
3. Which factors should be raised well above the industry's standard?
4. Which factors should be created that the industry has never offered?

By applying the above framework in US wine industry, Casella Wines [yellow-tales] created a wine whose strategic profile broken from the competition and created a blue ocean. Instead of offering wine as wine, Casella created a social drink accessible to everyone: beer drinkers, cocktail drinkers and other drinkers of non-wine beverages. the wine was soft in taste and approachable like ready-to-drink cocktails. The sweet fruitiness of the wine also kept people's palate fresher , allowing them to enjoy another glass of wine without thinking about it. In line with this simple fruity sweetness, Yellow-tail dramatically reduced or eliminated all the factors the wine industry had long competed on - tannins, oak, complexity and aging. - in crafting fine wine, whether it was for premium or the budget segment. With the need for aging eliminated, the needed working capital for aging wine at Cassella Wine also reduced.

All the other wine bottles looked the same, labels were complicated with enological terminology understandable only to the wine connoisseur or hobbyist and the choice was so extensive that sales clerks at retail shops were at an equal disadvantage in understanding or recommending wine to bewildered potential buyers. Yellow-Tail[Casella Wine] changed all that by creating ease of selection. It removed all the technical jargon from the bottles and created instead a striking simple and nontraditional label.

Eliminate-Reduce-Raise-Create-Grid:- from yellow-tail case study

Enological terminology and distractions
Aging qualities
Price versus budget wines
Retail store involvement

Wine complexity
Wine range
Vineyard prestige
Easy drinking
Ease of selection
Fun and adventure

Eliminate-Reduce-Raise-Create-Grid: - from Cirque du Soleil' case study

Star performers
Animal shows
Aisle concessions sales
Multiple show arenas
Unique venue

Fun and humor
thrill and danger
Refined environment
Multiple productions
Artistic music and dance

Imitation Barriers to Blue Ocean Strategy

Value innovation does not make sense to a company's 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 require significant political, operational and cultural changes
Companies that value-innovate earn brand buzz and a loyal customer following that tends to shun imitators.

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