BLUE Ocean strategy ch 2 Analytical Tools and Frameworks

1. BLUE Ocean strategych 2 Analytical Tools and Frameworks Team 6 Bryan Fetterman Molly Murdock John Fletcher Reece Macdonald Will Kerlick

2. Analytical Tool and Frameworks • Strategy Canvas • Four Actions Framework • 3 Characteristics of Good Strategy • Reading the Value Curve

3. Strategy Canvas • Strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It serves TWO purposes • 1) Captures the understanding of the range of factors the industry competes and invests in (i.e. price, quality, marketing, differentiation, etc.) • 2) Captures the offering level that buyers receive across these competitive factors

4. Wine Industry Example • Historically, the U.S. wine industry has faced intense competition from domestic and international competitors. The range of factors it competes on are as followed: 1) Price / bottle 2) Image 3) Marketing 4) Aging quality 5) Vineyard prestige and legacy 6) Complexity 7) Wine range (chardonnay, merlot, etc.)

5. Value Curve • The value curve is the basic component of the strategy canvas. It is a graph depiction of a company’s relative performance across its industry’s factors of competition. • A high score indicates that a company offers buyers more or in other words invests more in that competing factor. • In the late 1990s, the value curves for premium and budget wines were essentially straight across in the level of investment for each of the competing factors, just at different price levels.

6. Shifting the Strategy Canvas • Reorient strategic focus from competitors to alternatives and from customers to noncustomers of the industry. • This allows you to redefine the problem the industry focuses on and reconstruct buyer value elements that reside across industry boundaries. • WHAT NOT TO DO: • Offer more for less • Extensive customer research

7. Four Actions Framework • To reconstruct buyer value elements in crafting a new value curve, one should focus on the Four Actions Framework. • Four key questions should be asked to break the barrier between cost leadership and differentiation • 1) Which of the factors that the industry takes for granted should be eliminated? • 2) Which factors should be reduced well below industry standards? • 3) Which factors should be raised well above industry standards? • 4) Which factors should be created that the industry has never offered?

9. Lowering Cost Structure • Eliminate: forces companies to eliminate factors that competitors in industry have long competed on. Often, these factors are taken for granted even though they no longer have value or may even detract from value. • Ex: Yellow Tail eliminated aging qualities and above-the-line-marketing factors. • Reduce: Forces companies to decide whether products or services have been overdesigned in the race to match or beat the competition. • Ex: Yellow Tail- reduced wine complexity, wine range, and vineyard prestige.

10. Lifting Value, Creating Demand • Raise: forces the company to uncover and eliminate the compromises your industry forces customers to make. • Ex: Yellow Tail- increased retail store involvement • Create: helps the company to discover entirely new sources of value for buyers and to create new demand, therefore shifting the strategic pricing of the industry. • Ex: Yellow Tail- instilled new demand by creating ease of selection and easy drinkability.

11. This grid emphasizes the importance that “GOOD is the enemy to GREAT”, in which companies should not be complacent with their value in the industry.

12. Benefits of the ERRC Grid • Pushes companies to pursue differentiation and low cost to break the value/cost tradeoff. • Immediately flags companies that are only focused on raising and creating, thereby lifting their cost structure. • Easily understood by managers creating a high level of engagement in its application. • Drives companies to scrutinize every factor the industry competes on.

13. Yellow Tail Strategy Canvas

14. Results of YT Strategy Canvas • Created new combo of wine characteristics that appealed to mass amounts of alcohol drinkers. • Offered only two wines (chardonnay and merlot). • Captured market share of premium and low cost wine drinkers. • By mid-2003, Yellow Tail’s average annual sales were 4.5 million.

15. Three Characteristics of Good Strategy • 1) Focus • 2) Divergence • 3) Compelling Tagline *Together, these characteristics provide a “litmus test” of the commercial viability of Blue Ocean ideas.

16. Focus • According to Jim Collins’ Good to Great, part of the Black Box is knowing what to do and what not to do, which ties directly into a company’s strategic focus. • Blue Ocean Strategy elaborates on this idea by adding that every strategy needs to have a specific focus on what they plan to do, what they plan not to do, and how they plan to achieve it. • Ex: Southwest Airlines • Friendly service • Speed • Frequent “point-to-point” Departures • No extra investments in meals, lounges, & seating choices. • This allows Southwest to charge cheaper rates, and makes it difficult for other airlines to compete on price.

17. Divergence • What makes our value curve different from others? • With Blue Ocean Strategies, divergence occurs not by benchmarking a companies competitors, but by examining the alternatives that can be taken advantage of. • Reactive Strategies lead to a loss in uniqueness. Southwest Airlines • Point-to-point travel between midsize cities Yellow Tail • Started with only 2 wines (Red & Chardonnay) • Advertised to the average drinker vs. the wine connoisseur

18. Tagline “A good tagline must not only deliver a clear message but also advertise an offering truthfully, or else customers will lose trust and interest.” Southwest Airlines “The speed of a plane at the price of a car—Whenever you need it.” “Ding, you are now free to fly-about the country” “Want to get away!?” Academy Sporting Goods “The Right stuff, the RIGHT price, Academy!’ Dos-Equis “STAY THIRSTY, my Friends!”

19. Reading the Value Curves • The strategy canvas enables companies to see the future in the present. • To achieve this, companies must understand how to read value curves. • Value curves of an industry are embedded with a wealth of strategic knowledge on the current status and future of a business.

20. A Blue Ocean Stategy • Value curves ask, “Does the business deserve to be a winner?” • Three criteria: • Focus • Divergence • Compelling tagline that speaks to the market • If criteria is met, the company is on the right track of defining a good blue ocean strategy.

21. A Blue Ocean Strategy If company’s value curve • Lacks focus- its cost structure will tend to be high and business model complex will lack implementation and execution. • Lacks divergence– a company’s strategy is a me-too, with no reason to stand apart in the marketplace. • Lacks a compelling tagline to buyers– it is likely to be internally driven.

22. A Company Caught in the Red Ocean • When a company’s value curve converges with its competitors, it signals that a company is likely caught within the red ocean of bloody competition. • Company is competing on the basis of cost and quality through explicit and implicit strategies. • This typically signals slow growth, unless by the grace of luck, a company benefits from being in an industry that is growing on its own accord. • When creating a strategy: Alan Wurtzel of Circuit City said, “The number one factor was luck” -Good to Great

23. Overdelivery Without Payback • If a company’s value curve is delivering high levels across all factors, the question is, “Does the company’s market share and profitability reflect these investments?” • If not, the company may be oversupplying the customers. • In order to value-innovate, a firm must conclude which factors should be reduced or eliminated to construct a divergent value curve.

24. An Incoherent Strategy • Independent substrategies are most likely the cause of an incoherent strategy. • These substrategies may make sense individually, but to do provide a clear strategic vision. • Independent substrategies must distinguish a company from the best competitor. • Often a reflection of a company with divisional or functional silos.

25. Strategic Contradictions • Strategic contradictions arise when a company offers a high level on one competing factor while ignoring others that support that factor. • Example: “Investing heavily in making a company’s Web site easy to use but failing to correct the site’s slow speed of operation.”

26. An Internally Driven Company • How does a company label the industry’s competing factors? • Example: “Does it use the word megahertz instead of speed, or thermal water temperature instead of hot water?” • Strategic vision can be built on two perspectives: • Outside-in - driven by the demand side. • Inside-out – operationally driven. • Analyzing the language of the strategy canvas helps a company understand how far it is from creating industry demand.