Blue Ocean

Strategy
S.P. Mandali’s Welingkar Institute of
Management Development & Research

MFM 2008 – 11 Semester IV

Mr. Brajesh Agrawal – Roll # 1
Mr. Udayan Bannerjee –Roll # 5
Mrs. Deepa Phansikar – Roll # 36
Mr. Kavish Tantry – Roll # 54
Mr. Jignesh Upadhyay – Roll # 57
Ms. Lorine Vaz – Roll # 59

Submitted on 5th March 2010 to Mrs. Minal

Gupte, Strategic Cost Management
 BLUE OCEAN STRATEGY

In the book, “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the
Competition Irrelevant” the authors, INSEAD business professors W. Chan Kim and Renee
Mauborgne, put forth an interesting argument - rather than accepting the given operating
environment and compete with competitors, a firm could instead employ a re-constructionist
strategy that seeks to reshape the competitive environment. Specifically, to innovate, firms
should break out of the traditional “red ocean” cycle of intense direct competition and sail into
the open “blue ocean” by using a strategy of creating new markets where none existed
previously.

Red Ocean is the known market place (or industries), for which industry boundaries are defined
and accepted, and the competitive rules of the game are known. Companies, here, try to
outperform their rivals to grab a greater share of product or service demand. Profits and growth
are reduced as the market space gets crowded. Products become commodities or niche with
cut throat competition turning the ocean red.

Blue Oceans, in contrast, denote a non-existent industry or an unknown market space, where
competition and demand is created rather than fought over. Competition here is irrelevant
because the rules of the market are not set and there is ample opportunity for rapid growth and
profitability. However, the corner-stone of Blue Ocean Strategy is 'Value Innovation', either in
product, service or delivery, which creates value (not found in the current market)
simultaneously for the buyer and the company.

VALUE INNOVATION

Value Innovation is the foundation of the book ‘Blue Ocean Strategy’. Value innovation is the
simultaneous pursuit of differentiation and low cost. It focuses on making the competition
irrelevant by creating a leap of value for buyers and for the company, thereby opening up new
and uncontested market space. Because value to buyers comes from the offering’s (product /
service) utility minus its price, and because value to the company is generated from the
offering’s (product / service) price minus its cost, value innovation is achieved only when the
whole system of utility, price and cost is aligned.

Blue Ocean Strategy Page 2

Value Innovation is pursuing, value for the customer and at the same time low cost for the
company, thus creating a new blue ocean of market space.

The Basic tools of a Blue Ocean Strategy that a company uses are :-

STRATEGY CANVAS

The strategy canvas is the central diagnostic and action framework for building a compelling
blue ocean strategy i.e it is a graphical representation of the current scenario that a company is
facing with respect to its competition.

The horizontal axis captures the range of factors that the industry competes on and invests in,
and the vertical axis captures the offering level that buyers receive across all these key
competing factors.

The strategy canvas serves two purposes :

• Firstly, it captures the current state of play in the known market space. This allows a
company to understand where the competition is currently investing, the factors that the
industry competes on and what customers receive from the existing competitive

Blue Ocean Strategy Page 3

 offerings on the market.

• Secondly, it propels the company to action by reorienting their focus from competitors to
alternatives and from customers to non-customers of the industry. This helps in gaining
an insight into how the problem that the industry focuses on can be redefined and
thereby the buyer value can be reconstructed.

The value curve is the basic component of the strategy canvas. It is a graphic depiction of a
company's relative performance across its industry's factors of competition.

FOUR ACTIONS FRAMEWORK

A company/firm employs the Four Actions Framework to attempt to break the trade-off between
differentiation and low cost and create a new value curve. There are four key questions to
challenge an industry’s strategic logic and business model:

How the cost structure of an offering can be reduced is arrived at by answering the below
questions :-

1. Which of the factors that the industry takes for granted should be eliminated?
2. Which of the factors should be reduced well below the industry’s standard?

Blue Ocean Strategy Page 4

And, how the buyer value can be lifted and how demand can be created is answered from the
following questions :-

3. Which of the factors should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered?

ERRC Grid

A supplementary analytic to the four actions framework is the Eliminate-Reduce-Raise-Create

Grid which pushes companies to fill the grid with the actions of eliminating and reducing, in
addition to raising and creating.

ELIMINATE RAISE

REDUCE CREATE

The grid gives companies four immediate benefits:

* It pushes companies to simultaneously pursue differentiation and low cost to break the
value-cost trade off.
* It immediately flags companies that are focused only on raising and creating and thereby
lifting the cost structure and often over-engineering products and services - a common
plight in many companies.
* It is easily understood by managers at any level, creating a high level of engagement in
its application.
* Because completing the grid is a challenging task, it drives companies to robustly
scrutinize every factor the industry competes on, making them discover the range of
implicit assumptions the make unconsciously in competing.
THREE CHARACTERISTICS OF A GOOD STRATEGY
Blue Ocean Strategy Page 5
An initial litmus test for a successful blue ocean strategy is focus, divergence and a compelling
tagline.

Focus is when a business or product/service offering concentrates on a limited number of key

competitive factors. Focus signals that an offering pursues low cost by not diluting a company's
resources in unnecessary investments. It suggests that a new strategy has a holistic strategic
focus, instead of being a conglomerate of independent tactics. Limiting the number of key
competitive factors also makes the strategy easier to communicate and execute.

Divergence refers to the difference between a company's strategic profile and that of its
competitors'. Specifically, it refers to the divergence between the key competitive factors and
level of investment in these factors of a company's offering relative to its rivals' as visualized on
the strategy canvas. In red oceans, companies' strategies tend to converge; they tend to focus
on the same key competitive factors with marginal differences in price and offering level across
these competing factors. A company practicing blue ocean strategy, in contrast, reconstructs
market boundaries to create a divergent offering from the competition.

Tagline is a phrase that captures the essence of the "to be" strategy in a way that speaks
forcefully to both a company's employees and the target mass of buyers. A blue ocean strategy
has a clear-cut and compelling tagline. A compelling tagline ensures that the strategy makes
senses. It helps customers identify immediately what is offered, and it helps employees identify
what they should concentrate on, thereby, bringing focus to the execution of the strategy.

6 PRINCIPLES OF BLUE OCEAN STRATEGY

As much as the Blue Ocean Strategy is founded on the concept of Value Innovation, it is guided
by 6 main principles. These principles help companies through the formulation and execution of
their Blue Ocean Strategy in a systematic risk minimizing and opportunity maximizing manner.

The first four principles address Blue Ocean Strategy formulation:

1. Reconstruct market boundaries :

This principle identifies the paths by which managers can systematically create
uncontested market space across diverse industry domains, hence attenuating search
risk. It teaches companies how to make the competition irrelevant by looking across the
six conventional boundaries of competition to open up commercially important blue
oceans. It focusses on looking across alternative industries, across strategic groups,
across buyer groups, across complementary product and service offerings, across the
functional-emotional orientation of an industry, and even across time.

2. Focus on the big picture, not the numbers :

Blue Ocean Strategy Page 6

 This principle illustrates how to design a company's strategic planning process to go
beyond incremental improvements to create value innovations. It presents an alternative
to the existing strategic planning process, which is often criticized as a number-
crunching exercise that keeps companies locked into making incremental improvements.
This principle tackles planning risk. Using a visualizing approach that drives managers to
focus on the big picture rather than to be submerged in numbers and jargon, this
principle proposes a four-step planning process whereby you can build a strategy that
creates and captures blue ocean opportunities.

3. Reach beyond existing demand :

To create the greatest market of new demand, managers must challenge the
conventional practice of aiming for finer segmentation to better meet existing customer
preferences. This practice often results in increasingly small target markets. Instead, this
principle shows how to aggregate demand, not by focusing on the differences that
separate customers but by building on the powerful commonalities across non-
customers to maximize the size of the blue ocean being created and new demand being
unlocked, hence minimizing scale risk.

4. Get the strategic sequence right :

This principle describes a sequence which companies should follow to ensure that the
business model they build will be able to produce and maintain profitable growth. When
companies meet the sequence of utility, price, cost and adoption requirements, they
address the business model risk and the blue ocean idea they created will be a
commercially viable one.

The remaining two principles address the execution risks of Blue Ocean Strategy.

5. Overcome key organizational hurdles :

Tipping point leadership shows managers how to mobilize an organization to overcome

the key organizational hurdles that block the implementation of a blue ocean strategy.
This principle deals with organizational risk. It lays out how leaders and managers alike,
can surmount the cognitive, resource, motivational, and political hurdles in spite of
limited time and resources in executing blue ocean strategy.

6. Build execution into strategy :

By integrating execution into strategy making, people are motivated to act on and
execute a blue ocean strategy in a sustained way deep in an organization. This principle
introduces fair process. Because a blue ocean strategy perforce represents a departure
from the status quo, fair process is required to facilitate both strategy making and

Blue Ocean Strategy Page 7

 execution by mobilizing people for the voluntary cooperation needed to execute blue
ocean strategy. It deals with management risk associated with people's attitudes and
behaviors.

6 PATHS TO RECONSTRUCT MARKET BOUNDARIES

Path 1 - Look Across Alternative Industries

Alternative Industries reflect the different choices buyers make across the market universe.
Alternative industries embrace substitutes, that is, products and services that have different
forms but the same functionality or core utility. Cars and buses, for example, are substitutes
because they have the same function: going from one place to another quickly. Alternatives also
embrace products and services that have different functions and forms but the same objective.
For example, cinemas and restaurants are alternatives because they have neither the same
form nor the same function: cinemas provide visual entertainment, while restaurants provide
conversational and gastronomical pleasure. However, cinemas and restaurants have the same
objective: enjoying a night out.

When trying to reconstruct market boundaries, companies should look across alternative
industries. This is because they are competing not only with products or services from the same
industry: customers make trade-offs across offerings from alternative industries. By focusing on
the key factors that lead buyers to trade across alternative industries and by eliminating or
reducing everything else, a company can create a blue ocean of new market space.

Path 2 - Look Across Strategic Groups Within Industries

Strategic Groups within Industries are groups of companies within an industry that pursue a
similar strategy. Strategic groups can generally be ranked in a rough hierarchical order built on
two dimensions, price and performance. For example in the car manufacturing industry, the
luxury car segment and the economy car segment are two separate strategic groups. When
trying to reconstruct market boundaries, companies should look across strategic groups within
their industry as buyers make trade-offs between offerings from different strategic groups and
not solely on price.

Path 3 - Look Across the Chain of Buyers

Chain of Buyers refers to the different players involved directly or indirectly in the buying
decision. Generally speaking, there are three groups: purchasers, users and influencers.
Although these three groups may overlap, they often differ. For example, a sick child would be
the user of a prescribed medicine, their parent, the purchaser, and the doctor, the influencer.

Blue Ocean Strategy Page 8

However, normally an industry converges on a single buyer group. The pharmaceutical industry,
for example, focuses overwhelmingly on doctors, the influencers. When reconstructing market
boundaries, managers should challenge conventional definitions of who is the target buyer and
look across the chain of buyers. This is because different buyer groups often hold different
definitions of value. Thus, by shifting the focus to other buyer groups companies can often see
new ways to unlock value.

Path 4 - Look Across Complementary Product and Service Offerings

Complementary Products and Services are products and services that indirectly impact the
utility a buyer receives from an offering. Few products and services are used in a vacuum. Yet
managers tend to confine their worldview within the bounds of their industry, without asking
what happens before, during, and after the use of their product or service.

The key is to define the total solution buyers seek when they choose a product or service. For
example, babysitting assistance and parking facilities are two complementary services to movie
theaters. By expanding one's attention to the total solution buyers seek when they choose a
product or service, and by removing the "pain points" that buyers experience before, during or
after the use of their product or service, a company can create a blue ocean of new market
space.

Path 5 - Look Across Functional or Emotional Appeal to Buyers

Emotional Appeal to Buyers refers to the emotional utility a buyer receives in the consumption
or use of a product or service. Competition tends to converge on one of two possible basis of
appeal. Some industries focus principally on price and function largely based on calculations of
utility; their appeal is functional. Other industries compete largely on feelings; their appeal is
emotional. Yet what many companies fail to see is that the appeal of most products or services
is rarely intrinsically one or the other. When companies are willing to challenge the
functional/emotional orientation of their industry, they often find new noncustomer insights. For
example, if one is in an industry that is largely focused on an emotional basis of appeal, ask:
"What are the extras we offer that add to the cost of our product without enhancing
functionality? What if we eliminated or reduced these factors, can we create a simpler,
functional, lower-priced, lower-cost offering that would dramatically raise buyers' value?"

Path 6 – Look Across Time

Look Across Time refers to path six of the Six Paths framework, whereby managers gain
noncustomer insights by shaping external trends to unlock breakthrough value. All industries are
subject to external trends that affect their business over time. Instead of adapting incrementally
and somewhat passively, one can gain insights into how the trend(s) will change value to

Blue Ocean Strategy Page 9

customers and impact their company's business model. By looking across time―from the value
a market delivers today to the value it might deliver tomorrow― managers can actively shape
the future and lay claim to a new blue ocean. In order to assess trends across time, three
criteria are critical: the trend must be decisive to the business, irreversible and have a clear
trajectory.

FOCUS ON THE BIG PICTURE

Visual Awakening / Visual Exploration / Visual Strategy Fair / Visual Communication is the four
step process of the Blue Ocean Strategy methodology.

1. Visual Awakening

The Visual Awakening serves as a wake-up call for companies to challenge their existing
strategy. A common mistake is to discuss changes in strategy before resolving differences of
opinion about the current state of play. Another problem is that managers are often reluctant to
accept the need for change.

In the Visual Awakening stage drawing the PMS Map and "as is" strategy canvas brings home
the need for change quickly and forcefully.

2. Visual Exploration

Blue Ocean Strategy Page 10

During Visual Exploration, teams of managers go out into the field to explore the Six Paths
Framework gathering noncustomer insights. Here they are looking to observe the distinct
differences of alternative products and services to see which factors should be eliminated,
reduced, raised, or created in the company's offerings.

3. Visual Strategy Fair

The penultimate step is the Visual Strategy Fair. Here teams begin to draw their "to be" strategy
canvases based on insights from the Visual Awakening and Visual Exploration stages. The
strategy fair invites senior corporate executives, external constituencies―the kinds of people
met during the teams' field work, including noncustomers and customers of competitors. The
objective is for each team to present their various alternative strategy canvases and gain
feedback to build the best possible "to be" future strategy canvas.

4. Visual Communication

After a lot of work perfecting their "to be" strategy canvases, the last step is to communicate it in
a way that can be easily understood by all employees. This step is called Visual
Communication. This is executed principally by distributing a one-page picture showing the new
and old strategic profiles on the strategy canvas so that every employee can see where the
company stood and where it has to focus its efforts to create a compelling future.

USING THE PIONEER-MIGRATOR-SETTLER MAP

Blue Ocean Strategy Page 11

A useful exercise for a corporate management team pursuing profitable growth is to plot the
company's current and planned portfolios on the pioneer-migrator-settler (PMS) map. For the
purpose of the exercise, settlers are defined as me-too businesses, migrators are business
offerings better than most in the marketplace, and a company's pioneers are the businesses
that offer unprecedented value. These are your blue ocean strategies, and are the most
powerful sources of profitable growth. They are the only ones with a mass following of
customers.

If both the current portfolio and the planned offerings consist mainly of settlers, the company
has a low growth trajectory, is largely confined to red oceans, and needs to push for value
innovation. Although the company might be profitable today as its settlers are still making
money, it may well have fallen into the trap of competitive benchmarking, imitation, and intense
price competition.

If current and planned offerings consist of a lot of migrators, reasonable growth can be
expected. But the company is not exploiting its potential for growth, and risks being
marginalized by a company that value-innovates. In our experience the more an industry is
populated by settlers, the greater the opportunity to value-innovate and create a blue ocean of
new market space.

This exercise is especially valuable for managers who want to see beyond today's performance.

Blue Ocean Strategy Page 12

Revenue, profitability, market share, and customer satisfaction are all measures of a company's
current position. Contrary to what conventional strategic thinking suggests, those measures
cannot point the way to the future; changes in the environment are too rapid. Today's market
share is a reflection of how well a business has performed historically.

Clearly, what companies should be doing is shifting the balance of their future portfolio toward
pioneers. That is the path to profitable growth. The PMS map above depicts this trajectory,
showing the scatter plot of a company's portfolio of businesses, where the gravity of its current
portfolio of twelve businesses, expressed as twelve dots, shifts from a preponderance of settlers
to a stronger balance of migrators and pioneers.

REACH BEYOND EXISTING DEMAND

Typically, to grow their share of a market, companies strive to retain and expand existing
customers. This often leads to finer segmentation and greater tailoring of offerings to better
meet customer preferences. The more intense the competition is, the greater, on average, is the
resulting customization of offerings. As companies compete to embrace customer preferences

Blue Ocean Strategy Page 13

through finer segmentation, they often risk creating too-small target markets.

To maximize the size of their blue oceans, companies need to take a reverse course. Instead of
concentrating on customers, they need to look to noncustomers. And instead of focusing on
customer differences, they need to build on powerful commonalities in what buyers value. That
allows companies to reach beyond existing demand to unlock a new mass of customers that did
not exist before.

Although the universe of noncustomers typically offers big blue ocean opportunities, few
companies have keen insight into who noncustomers are and how to unlock them. To convert
this huge latent demand into real demand in the form of thriving new customers, companies
need to deepen their understanding of the universe of noncustomers.

There are three tiers of noncustomers that can be transformed into customers. They differ in
their relative distance from your market. The first tier of noncustomers is closest to your market.
They sit on the edge of the market. They are buyers who minimally purchase an industry’s
offering out of necessity but are mentally noncustomers of the industry. They are waiting to jump
ship and leave the industry as soon as the opportunity presents itself. However, if offered a leap
in value, not only would they stay, but also their frequency of purchases would multiply,
unlocking enormous latent demand.

The second tier of noncustomers is people who refuse to use your industry’s offerings. These
are buyers who have seen your industry’s offerings as an option to fulfill their needs but have
voted against them.

The third tier of noncustomers is farthest from your market. They are noncustomers who have
never thought of your market’s offerings as an option. By focusing on key commonalities across
these noncustomers and existing customers, companies can understand how to pull them into
their new market.

SEQUENCE OF BLUE OCEAN STRATEGY

Blue Ocean Strategy Page 14

Companies need to build their Blue Ocean Strategy in the sequence of buyer utility, price, cost,
and adoption.

Buyer Utility - Is there exceptional buyer utility in your business idea ??? Does your offering

Blue Ocean Strategy Page 15

unlock exceptional utility? Is there a compelling reason for the mass of people to buy it ??? If
not, then rethink the idea until an affirmative answer. If yes, then advance to the next step.

Price - Is your price easily accessible to the target mass of buyers? Is your offering priced to
attract the mass of target buyers so that they have a compelling ability to pay for your offering ?
If it is not, they cannot buy it. Nor will the offering create irresistible market buzz.

These first two steps address the revenue side of a company’s business model. They ensure
that you create a leap in net buyer value, where net buyer value equals the utility buyers receive
minus the price they pay for it

Cost - Can you attain your cost target to profit at your strategic price ? Can you produce your
offering at the target cost and still earn a healthy profit margin? Can you profit at the strategic
price - the price easily available to the mass of target buyers ?

It is the combination of exceptional utility, strategic pricing, and target costing that allows
companies to achieve value innovation—a leap in value for both buyers and companies

Adoption - What are the adoption hurdles in actualizing your business idea ? Are you
addressing them up front ? What are the adoption hurdles in rolling out your idea ? Adoption
hurdles include for example, potential resistance to the idea by retailers or partners. If yes, then
you have a commercially viable blue ocean idea.

To assess how the strategy is passing through the 4 stages, testing is done.

BUYER UTILITY MAP/BUYER EXPERIENCE CYCLE

Buyer Utility Map/Buyer Experience Cycle is used to test the exceptional utility of the product or
service

The buyer utility map helps to get managers thinking from the right perspective. It outlines all the
levers companies can pull to deliver utility to buyers as well as the different experiences buyers
can have of a product or service. This lets managers identify the full range of utility propositions
that a product or service can offer.

Blue Ocean Strategy Page 16

A buyer's experience can usually be broken down into a cycle of six distinct stages, running
more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of
specific experiences. Purchasing, for example, includes the experience of browsing
Amazon.com as well as the experience of pushing a shopping cart through Wal-Mart’s aisles.

Cutting across the stages of the buyer’s experience are what we call the levers of utility – the
ways in which companies unlock utility for their customers. Most of the levers are obvious.
Simplicity, fun and image, and environmental friendliness need little explanation. Nor does the
idea that a product could reduce a buyer’s financial or physical risks. And a product or service
offers convenience simply by being easy to obtain and or use. The most commonly used lever –
but perhaps the least obvious- is that of customer productivity. An innovation can increase
productivity by helping them do things faster, better, or in different ways. The financial
information company Bloomberg, for example, makes traders more efficient by offering on-line
analytics that analyze and compare the raw information it delivers.

By locating a new product on one of the 36 spaces of the buyer utility map, managers can
clearly see how the new idea creates a different utility proposition from existing products.
Usually, managers all too often focus on delivering more of the same stage of the buyer’s
experience. That approach may be reasonable in emerging industries, where there’s plenty of
room for improving a company’s utility proposition. But in many existing industries, this

Blue Ocean Strategy Page 17

approach is unlikely to produce a market-shaping blue ocean strategy.

PRICE CORRIDOR

Price Corridor is used to help managers find the right price for an irresistible offer, which need
not be the lower price.

Price Corridor of the Mass is a tool managers can use to determine the right price to unlock the
mass of target buyers. When setting a strategic price for a business or product/service,
managers must evaluate the trade-offs that buyers consider when making their purchasing
decision, as well as the level of legal and resource protection that will block other companies
from imitating their offerings.

The Price Corridor of the Mass is a two-step process:

Blue Ocean Strategy Page 18

1. Identify the price corridor of the mass, i.e. the price range that attracts the mass of target
buyers - Key to determining the strategic price is for managers to understand the price
sensitivities of buyers who will be comparing the new business or product/service with a host of
very different-looking products and services offered outside the group of traditional competitors.
For example, buyers can choose between several movie theaters, but they can also decide to
go to restaurants and bars. Managers should consider two categories of products/services that
are beyond an industry's boundaries in identifying the price corridor of the mass. Those are:
products and services that take different forms but perform the same function; and products and
services that have different forms and functions but serve the same purpose.

2. Next determine how high or low the strategic price should be set within the corridor without
inviting competition from imitation. To do this, a company should consider two sets of factors: 1)
the level of legal and resource protection the new offering has to block imitation; and 2) the
degree to which the company owns some exclusive asset or core capability, such as an
expensive production plant, that can also block imitation. The higher the level of protection
against imitation, the higher the strategic price can be within the price range that still attracts the
mass of target buyers. For example, if the product or service has strong patents and hard-to-
imitate service capabilities one can use upper-boundary strategic pricing to attract the mass of
buyers. On the other hand, if a manager is uncertain about their patent and asset protection
they should consider pricing somewhere in the middle to lower end of the corridor.

PROFIT MODEL OF BLUE OCEAN

Blue Ocean Strategy Page 19
Target costing, the next step in the strategic sequence, addresses the profit side of the business
model.

Strategic Pricing is the systematic process of setting a price that attracts the mass of target
buyers. It involves looking at the alternatives that buyers have when making their purchasing
decisions, as well as at the level of protection that the company's new offering has against
imitation. Many companies first test the waters of a new product or service by targeting novelty-
seeking, price-insensitive customers. Only over time do they drop price to attract the mass of
target buyers. In Blue Ocean Strategy, however, it is critical to take the reverse course by
setting a strategic price from the outset that will attract the mass of target buyers.

Target Costing is the process of actively searching for ways to minimize an offering's costs to

Blue Ocean Strategy Page 20

meet the predetermined strategic price and profit margin. Many companies take the reverse
path: looking at their product's cost, they add their desired margin to create their price. This
usually leads to a price that is not attractive to the mass of target buyers. Here, price-minus
costing, and not cost-plus pricing, is essential if one is to arrive at a cost structure that is both
profitable and hard for potential followers to match. Target costing for companies executing a
Blue Ocean Strategy is therefore generally more aggressive, because it forces companies to
find innovative ways to reduce their costs. Part of the challenge of meeting the target cost is
addressed in building a strategic profile that has focus, i.e. by reducing or eliminating key
competitive factors the industry has taken for granted.

BLUE OCEAN IDEA (BOI) INDEX

Blue Ocean Idea (BOI) Index is a simple yet robust tool to verify if a new business idea meets
the criteria of a Blue Ocean Strategy. Often, companies believe that a great idea is enough to
generate a commercial success. Of course, great ideas must create a significant leap in buyer
utility. But the offering must also be priced so that it is within the reach of the mass of target
buyers, while at the same time guaranteeing a handsome profit to the company by reducing its
cost structure. Managers must also ensure that before executing the strategy, they have
addressed any adoption hurdles ― fears and resistance coming from employees, business
partners, or the general public in response to the change created by the new business idea.

In this perspective, the Blue Ocean Idea index tests the following four criteria, in that order:

1. Does the new offering provide exceptional utility?

2. Is the price easily accessible to the mass of target buyers?
3. Does the cost structure meet the target cost?
4. Are adoption hurdles addressed up front?

If the answer is no at any step, it is important to return to the previous step until the answer is
yes to each question.

4 ORGANIZATIONAL HURDLES TO STRATEGY EXECUTION

Once a company has developed a blue ocean strategy with a profitable business model, it must
execute it. The challenge of execution exists, of course, for any strategy. Companies, like
individuals, often have a tough time translating thought into action whether in red or blue
oceans. The challenges managers face are steep. They face four hurdles:

Blue Ocean Strategy Page 21

A cognitive hurdle :- Waking employees up to the need for a strategic shift. Red oceans may
not be the paths to future profitable growth, but they feel comfortable to people and may have
even served an organization well until now, so why rock the boat?

Limited resources :- The greater the shift in strategy, the greater it is assumed are the
resources needed to execute it. But many companies find resources in notoriously short supply.

Motivation :- How do you motivate key players to move fast and tenaciously to carry out a
break from the status quo?

Politics :- As one manager put it, “In our organization you get shot down before you stand up.”

Although all companies face different degrees of these hurdles, and many may face only some
subset of the four, knowing how to triumph over them is key to attenuating organizational risk.

To achieve this effectively, however, companies must abandon perceived wisdom on effecting
change. Conventional wisdom asserts that the greater the change, the greater the resources
and time you will need to bring about results. Instead, you need to flip conventional wisdom on
its head using what we call tipping point leadership. Tipping point leadership allows you to
overcome these four hurdles fast and at low cost while winning employees’ backing in executing

Blue Ocean Strategy Page 22

a break from the status quo.

The conventional theory of organizational change rests on transforming the mass. So change
efforts are focused on moving the mass, requiring steep resources and long time frames —
luxuries few executives can afford. Tipping point leadership, by contrast, takes a reverse
course. To change the mass it focuses on transforming the extremes: the people, acts, and
activities that exercise a disproportionate influence on performance. By transforming the
extremes, tipping point leaders are able to change the core fast and at low cost to execute their
new strategy.

The key questions answered by tipping point leaders are as follows: What factors or acts
exercise a disproportionately positive influence on breaking the status quo? On getting the
maximum bang out of each buck of resources? On motivating key players to aggressively move
forward with change? And on knocking down political roadblocks that often trip up even the best
strategies? By single-mindedly focusing on points of disproportionate influence, tipping point
leaders can topple the four hurdles that limit execution of blue ocean strategy. They can do this
fast and at low cost.

POWER OF FAIR PROCESS

What is fair process? Fair process builds execution into strategy by creating people's buy-in up
front. When fair process is exercised in the strategy making process, people trust that a level
playing field exists. This inspires them to cooperate voluntarily in executing the resulting
strategic decisions.

There are three mutually reinforcing elements that define fair process: engagement,
explanation, and clarity of expectation. Whether people are senior executives or shop
employees, they all look to these elements. We call them the three Ε principles of fair process.

Engagement - means involving individuals in the strategic decisions that affect them by asking
for their input and allowing them to refute the merits of one another's ideas and assumptions.
Engagement communicates management's respect for individuals and their ideas. Encouraging
refutation sharpens everyone's thinking and builds better collective wisdom. Engagement
results in better strategic decisions by management and greater commitment from all involved to
execute those decisions.

Explanation - means that everyone involved and affected should understand why final strategic
decisions are made as they are. An explanation of the thinking that underlies decisions makes
people confident that managers have considered their opinions and have made decisions
impartially in the overall interests of the company. An explanation allows employees to trust
manager's intentions even if their own ideas have been rejected. It also serves as a powerful
feedback loop that enhances learning.

Blue Ocean Strategy Page 23

Expectation clarity - requires that after a strategy is set, managers state clearly the new rules of
the game. Although the expectations may be demanding, employees should know up front what
standards they will be judged by and the penalties for failure. When people clearly understand
what is expected of them, political jockeying and favoritism are minimized, and people can focus
on executing the strategy rapidly.

Taken together, these 3 criteria collectively lead to judgments of fair process. This is important
because any subset of the three does not create judgments of fair process.

CASE STUDIES

Case Study # 1 : SmartPen

Background :-

The Livescribe Pulse Smartpen was launched in 2007 in the US. The Pulse Smartpen is a
computer in a pen. It captures audio and synchronizes this to what you are writing. The Pulse
Smartpen has won international acclaim including Macworld 2009 Best of Show Award.

Smartpen is an Australian business that sells the Livescribe Pulse Smartpen. Smartpen was the
first reseller to offer Livescribe for sale in Australia. Smartpen has no retail presence and is a
pure online store.

The Problem :-

Competition started shortly after Smartpen launched online sales. It was announced that the
Pulse Smartpen would also be sold through Officeworks, a national retail office supplies chain.
Officeworks could spend more on above the line marketing and could also out-discount
Smartpen. Also Officeworks had the retail presence to better capture impulse buyers.

Smartpen wasn’t in a position to compete on the traditional ‘red ocean’ terms. It decided to use
Blue Ocean Strategy and focus on value innovation rather than head to head competition. It
decided to save costs by eliminating and/or reducing the barriers for non-customers. Also, it
decided to lift value by raising or creating elements which the industry had not offered.

Smartpen followed the below core Strategy steps

1. Visual Awakening
2. Visual Awareness
3. Socialising the Strategy (Strategy Fair)
4. Execution of the Strategy

Blue Ocean Strategy Page 24

Visual Awakening
Smartpen created As-Is strategy canvas where it compared itself with Officeworks and came to
the following conclusions :
• Smartpen had little opportunity to differentiate.
• Officeworks controlled 2 factors that could most damage Smartpen’s ability to remain in
the market – Retail location and Above the line advertising.

Visual Exploration
As Smartpen transitioned into the exploration stage, time was spent on the Six Paths Analysis –
looking across alternate industries, groups, products and services. The analysis identified
• Apple stores – how they harness desire and enthusiasm
• In business, who spends a lot of time taking notes or minutes ?
• How do the sub groups of educators work and communicate

From this study, a number of new customer segments were identified -

1st tier – University students & business users.

2nd tier – Teachers & Academics.
3rd tier – Pre-university students & students with learning disabilities.

Focus shifted as to what barriers existed for these non-customers. Smartpen took the feedback
from the non-customers. Non-customers were interested to know - what did the product do, how
they could buy it, how it would help in their jobs.

Visual Awareness
Smartpen came up with the below Four Action Framework

ELIMINATE
REDUCE
Above the line advertising

RAISE CREATE
Price Social Media Profile
Product Range Purchase Order Options
Post-sales support Multi-channel communications

Blue Ocean Strategy Page 25

 Visual Strategy Creation – To Be canvas

Through a series of iterations, a To Be Strategy Canvas was developed where the main focus
was on product range, post-sales support, product knowledge, multi-channel communications,
updates & news, and flexible purchase terms.

Strategy Fair
The To-Be Strategy Canvas was successfully validated with all stakeholders. Execution of the
strategy involved two things :

1. Changes to the core Smartpen site.

2. Development & execution of a social media strategy

Creating the Blue Ocean

The Blue Ocean for non-customers was in the social sphere - using social technologies to
remove the barriers for these non-customers so that they could become customers. To do this,
Smartpen focused on a social media strategy that would allow it to connect with these non-
customers.
At the core of the strategy were principles like :

1. Listening – initially passive but soon conversational listening.

2. Be in their social space – go out to their worlds and contribute
3. Help everyone – even if they didn’t purchase from Smartpen, help them anyway.
4. Encourage Innovation – encourage users to innovate; crowdsource how and where the
product could be developed.
5. Be Patient – being social builds loyalty. It won’t happen overnight but it will happen

Social media Strategy

Principles  Listen & Learn Engage. Dialogue Encourage Innovation

Listen to the Capture innovative uses
Goal community and Go into the social world and engage of the Livescribe
learn from them Smartpen
Smartpen contributes advice and
Tools like
knowledge in specific social networks By engaging with users
Google Alerts,
and forums. It is quite diligent about not through Twitter, blog and
Twitter and
trying to sell. If Smartpen can’t meet the Facebook, Smartpen
Strategy Scout labs were
immediate need of the customer, it captures examples of how
used to listen to
sends the customer to where they can the Smartpen is being
the
go to satisfy their need even if it is to used
conversation
the competitor

Blue Ocean Strategy Page 26

Summary :
Smartpen needed to compete against a major legacy retailer for sales of the Livescribe Pulse
Smartpen. Smartpen used Blue Ocean strategy to identify non-customers and the barriers that
prevented them from becoming customers. Social media provided the means to capture these
non-customers and create a blue ocean outcome.

Case Study # 1 : HCL Technologies

Vineet Nayar, CEO of $1.5 billion IT services company HCL Technologies Ltd, attributes the
company’s transformation to Blue Ocean Strategy.

Nayar maintains it’s very easy to create blue oceans of uncontested market space ripe for
growth for product companies, predominantly because they are innovation driven. So it is good,
he says, for companies for example that sell computers, such as Apple and Samsung, or sell
cars like Toyota.

But he adds it’s very difficult for services-related companies where innovation is not necessarily
the end product.

In 2005, all the IT companies were 90% applications development and maintenance (ADM) and
HCL was a small player. It would have failed if they had fought on ADM. Instead HCL came out
with their Blue Ocean strategy of identifying distinct markets.

It identified four gaps. The first was the $ 15 billion engineering services—India's share was only
$1.3 billion— which was expected to be $90 billion by 2010. Remote infrastructure management
(RIM) was the second. The offshorable market was $ lOO billion, of which India's share was
less than $ 1 billion. Third the $100-bi]lion enterprise applications market. Of this, SAP services
market was $26bilion; about $7.3 bilion of it offshorable. Indian ITs share was $1.5 billion. The
fourth was platform-based BPO. There was a capability gap in India to address the SAP market,
so HCL started searching for acquisition opportunities.

HCL Technologies decided that not only did it have to be in a different business to its
competitors, it also had to deliver its business differently.

HCL Technologies switched its focus to value from concentrating on volume.

Another move was that the company decided to put employees, not customers, first – because
employees are the product that customers are buying.

A further radical overhaul was linked to the accountability of the CEO. Instead of a ‘command
and control’ form of leadership, Nayar adopted a democratic model, where employees remain
accountable to the organisation, which he believes is more productive.

HCL Technologies has also aimed to make the firm as transparent as possible – so much so,

Blue Ocean Strategy Page 27

that Nayar is confident that if his employees change jobs they will not find anything to match it.

In short, the company’s Blue Ocean Strategy was that it concentrated not on the end product,
but on the way it conducted its business. The result was that it evolved as a value-focused
company that was completely different to its competitors.

HCL Technologies, then bagged the Rs 1,500-crore contract from DSG International, had
worked out a three-pronged strategy in July 2005 to procure big-ticket deals in the international
market.

"We conceptualised what we call the `Blue ocean' strategy and created uncontested market
spaces. HCL recognised the application outsourcing business was being increasingly
commoditised and that it was coming under pricing pressure," Mr Vineet Nayar, President, said.

HCL then decided to chase large deals that would bring a significant transformation, to move up
the value chain, and go for multi-service deals with application and infrastructure components.

"Based on this strategy, we went about transforming HCL internally, and that has resulted in
deals like Autodesk and EXA," he said. For the DSG International deal, 10 participants,
including frontline Indian IT vendors, put in the Request for Proposals (RFPs). Three vendors —
HCL Tech and two global companies — were short-listed and at the end of nine months the
contract came to HCL Tech.

According to Mr Kevin O'Byrne, Group Finance Director of DSG international, "We have
selected HCL Tech on the basis of its breadth of experience, partnership approach and the
transparency in its cost models."

"In the last six months alone, this is the fourth large co-sourcing deal being announced by HCL
— with this being the largest so far this year. We are happy to have DSG international as one of
our top four customer relationships," Mr Shiv Nadar, Chairman and CEO, HCL Technologies,
said.

According to Nayar, HCL Technologies’ market capitalisation has doubled since it adopted Blue
Ocean thinking. The company is among the fastest growing IT services companies today. And,
Nayar says, its stock is one of the best performing in India’s information technology sector.

CONCLUSION
The authors, Kim and Mauborgne argue that the blue ocean strategy is more profitable. Of 108
companies they studied, the authors state that 86% of business expansion came from existing
competitive business. This type of expansion produced 62% of total revenues but only 39% of
total profits. Blue ocean businesses almost reverse the figures: their expansions accounted for
38% of total revenues and 61% of total profits.

Blue Ocean Strategy Page 28