Dhawal Sharma Paul Dinakar Prashant Shekher Rishabh Raj Sumit Kuhar Sudipta Banerjee

Contents

Introduction

What is Blue Ocean Strategy? 

Blue Ocean Strategy Tools, Frameworks and Methodologieso Formulate Blue Ocean Strategyo Execute Blue Ocean Strategy

Blue Ocean Strategic Moves at Cirque du Soleil Other Example: Blue Ocean Strategy Implemented

By HCL

Blue Ocean Strategy

Introduction

When executives develop corporate strategy, they nearly always begin by analyzing the industry or environmental conditions in which they operate. They then assess the strengths and weaknesses of the players they are up against. With these industry and competitive analyses in mind, they set out to carve a distinctive strategic position where they can outperform their rivals by building a competitive advantage. To obtain such advantage, a company generally chooses either to differentiate itself from the competition for a premium price or to pursue low costs. The organization aligns its value chain accordingly, creating manufacturing, marketing, and human resource strategies in the process. On the basis of these strategies, financial targets and budget allocations are set.

The underlying logic here is that a company’s strategic options are bounded by the environment. In other words, structure shapes strategy. This “structuralist” approach has dominated the practice of strategy for the past 30 years. According to it, a firm’s performance depends on its conduct, which in turn depends on basic structural factors such as number of suppliers and buyers and barriers to entry. It is a deterministic worldview in which causality flows from external conditions down to corporate decisions that seek to exploit those conditions.

Even a cursory study of business history, however, reveals plenty of cases in which firms’ strategies shaped industry structure, from Ford’s Model T to Nintendo’s Wii. In this write-up we are going to discuss a theory of strategy, known as blue ocean strategy, that reflects the fact that a company’s performance is not necessarily determined by an industry’s competitive environment.The blue ocean strategy framework can help companies systematically reconstruct their industries and reverse the structure-strategy sequence in their favor.

Blue ocean strategy has its roots in the emerging school of economics called endogenous growth, whose central paradigm posits that the ideas and actions of individual players can shape the economic and industrial landscape. In other words, strategy can shape structure. This approach is called the “reconstructionist.”

While the structuralist approach is valuable and relevant, the reconstructionist approach is more appropriate in certain economic and industry settings. Indeed, today’s economic

difficulties have heightened the need for a reconstructionist alternative. The first task of an organization’s leadership, therefore, is to choose the appropriate strategic approach in light of the challenges the organization faces. Choosing the right approach, however, is not enough. Executives then need to make sure that their organizations are aligned behind it to produce sustainable performance. Most executives understand the mechanics of making the structuralist approach work, so this write-up will focus on how to align an organization behind the reconstructionist approach to deliver high and sustainable performance.

Then the next question that arises what is the right strategic approach for a company.

There are three factors that determine the right approach: the structural conditions in which an organization operates, its resources and capabilities, and its strategic mind-set. When the structural conditions of an industry or environment are attractive and you have the resources and capabilities to carve out a viable competitive position, the structuralist approach is likely to produce good returns. Even in a not-so-attractive industry, the structuralist approach can work well if a company has the resources and capabilities to beat out the competition. In either case, the focus of strategy is to leverage the organization’s core strengths to achieve acceptable risk-adjusted returns in an existing market.

But when conditions are unfavorable and they are going to work against you whatever your resources and capabilities might be, a structuralist approach is not a smart option. This often happens in industries characterized by excess supply, cutthroat competition, and low

profit margins. In these situations, an organization should adopt a reconstructionist approach and build a strategy that will reshape industry boundaries.

Even when an industry is attractive, if existing players are well-entrenched and an organization does not have the resources and capabilities to go up against them, the structuralist approach is not going to produce high performance. In this scenario, the organization needs to build a strategy that creates a new market space for itself.

When structural conditions and resources and capabilities do not distinctively indicate one approach or the other, the right choice will depend on the organization’s strategic mind-set. An organization with an innovative bent and sensitivity to the risks of missing future opportunities will be more successful in adopting a reconstructionist approach. Firms with a bias toward defending current strategic positions and a reluctance to venture outside familiar territory would do better with a structuralist approach.

Now the question that arises is why is this so?

Three Strategic Propositions

Whichever approach is chosen, a strategy’s success hinges on the development and alignment of three propositions: (1) a value proposition that attracts buyers; (2) a profit proposition that enables the company to make money out of the value proposition; and (3) a people proposition that motivates those working for or with the company to execute the strategy. Where the two approaches diverge is in the alignment of the propositions.

Let’s first flesh out our definition of strategy. The value and profit propositions set out the content of a strategy—what a company offers to buyers and how it will benefit from that offering. The people proposition determines the quality of execution. The three strategy propositions correspond to the traditional activity system of an organization: The outputs of an organization’s activities are value for the buyer and revenue for itself, and the inputs are the costs to produce them and the people to deliver them. Hence, we define strategy as the development and alignment of the three propositions to either exploit or reconstruct the industrial and economic environment in which an organization operates.

Unless a company creates a complete set of consistent propositions, it is unlikely to produce a high-performing and sustainable strategy. If, for instance, the value and profit propositions are strong, but the people proposition doesn’t motivate employees or other constituencies,

the organization may experience temporary but unsustainable success. This is the classic case of execution failure. Likewise, an organization that offers a motivating people proposition but lacks a strong value or profit proposition will find itself mired in poor performance. This is formulation failure.

Each proposition may need to address more than one group of stakeholders, as when successful strategy execution rests on the buy-in of not only an organization’s employees but also groups outside it, such as supply chain partners. Similarly, a company in a business-to-business industry may have to formulate two value propositions: one for the customer and another for the customer’s customers.

Now let’s consider where the two approaches diverge. Under the structuralist approach, an organization’s entire system of activities, and thus its strategy propositions, needs to be aligned with the distinctive choice of pursuing either differentiation or low cost, each being an alternative strategic position in an industry. A strategy is unlikely to be successful, for instance, if the value and profit propositions are aligned around differentiation but the people proposition is targeted at low cost. Under a reconstructionist strategy approach, high performance is achieved when all three strategy propositions pursue both differentiation and low cost. This alignment in support of differentiation and low cost enables a company to open new market space by breaking the existing value-cost trade-off. It allows strategy to shape structure. It is also alignment that leads to more sustainable strategy, for either approach. While one or two strategy propositions can be imitated, imitating all three, especially the people proposition, is difficult.It is thus the responsibility of an organization’s top executives to make sure that each proposition is fully developed and all three are aligned.

What is Blue Ocean Strategy?  Some facts

BOS is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over 100 years (1880-2000).

BOS is the simultaneous pursuit of differentiation and low cost.

The aim of BOS is not to out-perform the competition in the existing industry, but to create new market space or a blue ocean, thereby making the competition irrelevant.

While innovation has been seen as a random/experimental process where entrepreneurs and spin-offs are the primary drivers – as argued by Schumpeter and his followers – BOS

offers systematic and reproducible methodologies and processes in pursuit of blue oceans by both new and existing firms.

BOS frameworks and tools include: strategy canvas, value curve, four actions framework, six paths, buyer experience cycle, buyer utility map, and blue ocean idea index.

These frameworks and tools are designed to be visual in order to not only effectively build the collective wisdom of the company but also allow for effective strategy execution through easy communication.

BOS covers both strategy formulation and strategy execution.

The three key conceptual building blocks of BOS are: value innovation, tipping point leadership, and fair process.

While competitive strategy is a structuralist theory of strategy where structure shapes strategy, BOS is a reconstructionist theory of strategy where strategy shapes structure.

As an integrated approach to strategy at the system level, BOS requires organizations to develop and align the three strategy propositions: value proposition, profit proposition and people proposition.

Value Innovation

Value Innovation is the cornerstone of blue ocean strategy. Value innovation is the simultaneous pursuit of differentiation and low cost. Value innovation 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 utility minus its price, and because value to the company is generated from the

offering’s price minus its cost, value innovation is achieved only when the whole system of utility, price and cost is aligned.

In the Blue Ocean Strategy methodology, the Four Actions Framework and ERRC grid assist managers in breaking the value-cost tradeoff by answering the following questions:

What factors can be eliminated that the industry has taken for granted?

What factors can be reduced well below the industry’s standard?

What factors can be raised well above the industry’s standard?

What factors can be created that the industry has never offered?

Blue Ocean Strategy Tools, Frameworks and Methodologies

What blue ocean strategy seeks to do is to make the creation and capturing of blue oceans as systematic and actionable as competing in the red waters of known market space. For although blue ocean strategists have always existed, for the most part their strategies have been largely unconscious. Blue ocean strategy seeks to remedy this by not only decoding the pattern and principles behind the successful creation of blue oceans, but also providing the analytical frameworks and tools to act on this insight.

Formulate Blue Ocean Strategy

Blue Ocean Strategy formulation is a structured and rigorous process. The participants in the series of formulation workshops are some of the company's key employees, selected using careful criteria, working in groups to develop strategic options. The approach is based on the building execution into strategy formulation principle of BOS and it leverages on the employees' best knowledge of the industry and company and on their role in executing the strategy. Our role is to facilitate the process and to bring new angles into the thinking process, based on our experience across several industries and sectors. BOS formulation is therefore a structured, collaborative, visual, experiential and explorational process. 

The typical architecture of a Blue Ocean Strategy initiative consists of a series of four workshops, with field work in between, as you can see in the following picture.

Red Ocean vs Blue Ocean

Strategy Canvas

The strategy canvas is the central diagnostic and action framework for building a compelling blue ocean strategy. 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 you to understand where the competition is currently investing and the factors that the industry competes on.

Secondly, it propels you to action by reorienting your focus from competitors to alternatives and from customers to noncustomers of the industry.

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.

As you can see on the diagram above, what makes a good value curve is focus, divergence as well as a compelling tagline.

4 Actions Framework

To reconstruct buyer value elements in crafting a new value curve, we use the Four Actions Framework. As shown in the diagram above, to break the trade-off between differentiation

and low cost and to create a new value curve, there are four key questions to challenge an industry's strategic logic and business model:

Which of the factors that the industry takes for granted should be eliminated?

Which factors should be reduced well below the industry's standard?

Which factors should be raised well above the industry's standard?

Which factors should be created that the industry has never offered?

ERRC Grid

The Eliminate-Reduce-Raise-Create Grid (ERRC) is complementary with the four actions framework. It pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve, essential for unlocking a new blue ocean. By driving companies to fill in the grid with the actions of eliminating and reducing as well as raising and creating, the grid gives companies four immediate benefits:

It pushes them 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 overengineering 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 they make unconsciously in competing.

Pioneer-Migrator-Settler Map

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. 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.

Buyer Experience Cycle / Buyer Utility Map

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. Let’s look at the map’s dimension in detail.

The six stages of the buyer experience cycle. 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.

The six utility levers. 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. In our experience, 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 approach is unlikely to produce a market-shaping blue ocean strategy.

3 Tiers of Noncustomers

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 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.

Execute Blue Ocean Strategy

We are highly motivated by results: producing successful Blue Ocean Strategy stories. That is why we are directly interested in the successful execution of your strategy.

The result of the BOS formulation process is a strategic option that is divergent, focused and compelling. A successful execution transforms a Blue Ocean idea into a Blue Ocean Strategy. Our team has the tools and experience to assist you in this stage, to ensure the successful execution of your strategy.

Sequence of Blue Ocean Strategy

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

4 Hurdles to 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:

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 a break from the status quo.

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.

Three Principles 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. The three Ε principles of fair process.

Conventional Wisdom vs Tipping Point Leadership

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.

Blue Ocean Strategic Moves at Cirque du Soleil

A one time accordion player, stilt-walker, and fire-eater, Guy Laliberté is now CEO of Cirque du Soleil, one of Canada’s largest cultural exports. Created in 1984 by a group of street performers, Cirque’s productions have been seen by almost forty million people in ninety cities around the world. In less than twenty years Cirque du Soleil has achieved a level of revenues that took Ringling Bros. and Barnum & Bailey—the global champion of the circus industry—more than one hundred years to attain.

What makes this rapid growth all the more remarkable is that it was not achieved in an attractive industry but rather in a declining industry in which traditional strategic analysis pointed to limited potential for growth. Supplier power on the part of star performers was strong. So was buyer power. Alternative forms of entertainment —ranging from various kinds of urban live entertainment to sporting events to home entertainment—cast an increasingly long shadow. Children cried out for PlayStations rather than a visit to the traveling circus. Partially as a result, the industry was suffering from steadily decreasing audiences and, in turn, declining revenue and profits. There was also increasing sentiment against the use of animals in circuses by animal rights groups. Ringling Bros. and Barnum & Bailey set the standard, and competing smaller circuses essentially followed with scaled-down versions. From the perspective of competition-based strategy, then, the circus industry appeared unattractive.

Another compelling aspect of Cirque du Soleil’s success is that it did not win by taking customers from the already shrinking circus industry, which historically catered to children. Cirque du Soleil did not compete with Ringling Bros. and Barnum & Bailey. Instead it created uncontested new market space that made the competition irrelevant. It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price several times as great as traditional circuses for an unprecedented entertainment experience. Significantly, one of the first Cirque productions was titled “We Reinvent the Circus.”

Strategy Canvas

It is clear that the circus industry's strategy and the Cirque du Soleil's strategy are completely different. Cirque du Soleil comes with a strategic offering that goes against the industry's traditional logic, but it turns out that it has a great success! These differences are not random - rather they follow a clear pattern: some elements are eliminated or reduced (as an effect, the company's cost structure is reduced), while other elements are raised or created (therefore raising significantly the value that buyers receive). This simultaneous pursuit of differentiation and low-cost is called Value Innovation - the cornerstone of Blue Ocean Strategy.

Blue Ocean Strategy Implemented By HCL :

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.

1) 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.

2) Remote infrastructure management (RIM) was the second. The off-shorable market was $ 100 billion, of which India's share was less than $ 1 billion.

3) Third the $100-bi]lion enterprise applications market. Of this, SAP servicesmarket was $26bilion; about $7.3 billion of it off-shorable. Indian ITs share was $1.5 billion.

4) 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, 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, and 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. 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. 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.

Strategy Canvas of HCL:

HCL became aware that application outsourcing, software development and BPO industries were intensely competitive, their margins were low and offerings commoditized. Therefore, HCL organized its priorities according to four-action framework.

Four- Action Framework of HCL:

Key points:

1) Elimination of pure application based outsourcing business.

2) Reduction of software and BPO segments.

3) Raising of multi service deals and the focus on upstream value chain activities.

By creating collaborative outsourcing, whereby client companies could select outsourcing criteria, and by focusing on information management systems, HCL was able to enter previously unexplored business segments and thus swim in its own Blue Ocean.

References

Blue Ocean Strategy by Renée Mauborgne , W. Chan Kim.

“Blue Ocean vs. Five Forces” Harvard Business Review, May 2010"How Strategy Shapes Structure," by W. Chan Kim and Renée Mauborgne, Harvard Business Review, September, 2009.