Kazakhstan Institute of Management, Economics and Strategic Research

KIMEP

Blue Ocean – The Winning Strategy

Course Name: Strategic Management

Instructor : Dr. Bulent Dumlupinar

Group no: 1

Prepared by: (ID, Full Name, mail addressess and contact person)

1. Tatyana Domashenko 20084693; tatyana.domashenko@gmail.com; +7 777 217 17 08

2. Assel Suttubayeva 20084478; assel.suttubayeva@gmail.com

3. Iskhak Sarsembayev 20081701; iskhak124@mail.ru

4. Oibek Mamadaliyev 20083633; ibekmamad@gmail.com

5. Smanov Nurbol 20090259

June 2010
 While creating a corporate strategy any executive starts with analyzing the industry and
environmental conditions in which they operate. They assess internal factors such as: strengths
and weaknesses of the competitors. Bearing in mind all this competitive analysis and situation
within the industry they create a distinctive strategic position, that helps to bit their rivals and
build competitive advantage. According to Porter generic strategy there are two main ways to
choose: either to differentiate itself or to become cost leader. Then the value chain aligns
accordingly, creating manufacturing, marketing and HR strategies, where financial goals and
objectives are set. Pursuing this way, the strategy is limited by the environment.| In other words,
structure shapes strategy. Kim and Maulborgne (2009) determine the above stated strategy as
“structuralist” approach, which has its roots in the structure-conduct-performance paradigm of
industrial organization economics, has dominated the practice of strategy for the past 30 years.
Hence, firm’s performance highly depends on five forces, explained by Porter.
While observing a history of business development one can see a lot of cases in which
firms’ strategies shape industry structure from Ford’s Model T to Nintendo’s Wii. Kim and
Maulborgne for the past fifteen years have been developing a theory of strategy known as Blue
ocean strategy, that reflect the fact that a company’s performance is not necessarily determined
by an industry’s competitive environment. Blue ocean strategy enables company to reconstruct
their industries and reverse the structure strategy sequence in their favor. The main idea of Blue
ocean strategy is that actions of individual players can shape economic and industrial shape. The
authors call this approach “reconstructionist”. This approach is more appropriate in certain
economic and industry settings. Reconstructionist’s strategy proposition aims to deliver both low
cost and differentiation.
The main point is that industry can be divided into two parts, so called Red and Blue
oceans. In Red ocean companies try to bit competitors, seizure bigger slice of existing demand.
When industry becomes increasingly crowded, profit and growth drastically declined, products
commoditized, ever-more-intense competition, turns the water bloody. Kim and Maulborgne
suggest creating Blue oceans - absolutely new market, where the competition is irrelevant. In
Blue ocean conceives and captures new demand and offer customers a leap in value while also
streamlighning your costs. As a result, company gains a sustainable profit, enjoys speedy growth
and brand equity that lasts for decades, while competitors are struggling to catch up.
One of the brightest examples of blue ocean strategy employment is Cirque du Soleil,
founded in 1984 by group of street performers Cirque has staged dozen of productions, seen by
some forty million people in 90 cities around the world. In twenty years, Cirque has achieved
revenues that the most leading circus took more than a century to attain. The overall industry is
in deep decline. There are other forms of entertainment such as sporting events, TV, video,

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computer games that covered a wide audience. Today children are not willing to go to circus
with the reason of computer and video games availability. Animals the integral part of any circus
are a great concern of animal rights groups that declared their statements against use of animals.
So, the industry experiences a steady decline in number of audience and increase in costs.
The question is how Cirque du Soleil increased revenues in that unattractive environment. The
tagline for one of the first Cirque productions is revealing: “We Reinvent the Circus”. Cirque did
not compete within the industry and did not steal customers from other formidable circuses.
Instead, Cirque du Soleil created absolutely new market space that made the competition
irrelevant. It attracted a whole new group of customers who were traditionally non-customers of
the industry-adults and corporate clients, who are ready to pay several times more than the price
of traditional circus ticket for an unprecedented entertainment experience. Cirque combined
circus and theatre while abandoning costly animals and made a new profitable blue ocean within
the circus of new industry.
Surprisingly, creation of blue oceans is not about benchmarking. The creators of blue
ocean strategy, Kim and Maulborgne, followed a different strategic logic that called value
innovation. Value innovation is cornerstone of blue ocean strategy, because instead of focusing
on biting the competition, one must focus on making the competition irrelevant by creating a
leap in value for buyers and a company, thereby opening up new market space. Value innovation
occurs when companies align innovation with utility, price and cost positions.
Turning to the example of Cirque du Soleil we see that it pursues differentiation and low
cost simultaneously by eliminating many of the most costly elements of the circus, it has
dramatically reduce costs’ structure (animal shows: training, medical care, housing
transportation and insurance; star performers and multiple show arenas in the form of three
rings) while offering people intellectual sophistication and artistic richness of the theater the
same time.
Cirque du Soleil reconstructed elements across different alternatives such as theatre, circus,
Broadway shows, ballet and opera, in the end it is simultaneously a little of all of them and none
of any of them in their entirety. It created a blue ocean, a new uncontested market space that as
of yet has no agreed-on industry name.
To create a blue ocean companies should break the tradeoff between differentiation and
low cost and as result create a new value curve. There four key questions to challenge an
industry’s strategic logic – Table 1.

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 Table 1
The Four Action Framework

Cirque du Soleil answers the above stated questions as follows: it eliminated several
factors of traditional circuses such as animal shows, star performers, multiple show arenas and
aisle concession sales. In addition, Cirque du Soleil reduced fun, humor, thrill and danger.
Moreover, it raised a new venue and created a theme, refined environment, multiple productions,
artistic music and dance.

FORMULATING BLUE OCEAN STRATEGY

Reconstruct market boundaries
One of the main principles of blue ocean strategy is to reconstruct market boundaries to
break from the competition and create blue oceans. There are six basic approaches to boundaries
reconstruction:
Look across alternative industries. One should not forget that a company competes not
only with the other firms in its own industry, but also with companies in other industries that
produce alternative products or services. Alternatives are much broader than substitutes. The
difference is that substitute is a product or service that has different form that offers the same
functionality or core utility. On the other hand alternatives include products or services that have
different functions and forms, but the same purpose. Like cinema and restaurant, despite the
differences in formal functions, people go to a restaurant with the same objective that they go to
the movies: to enjoy a night out. The space between alternative industries provides opportunities
for value innovation. Consider NetJets, which created blue oceans of fractional jet ownership.

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 The reality is that NetJets reconstructed market boundaries to create this blue ocean by
looking across alternative industries. The most lucrative mass of customers in the aviation
industry are corporate travelers. NetJets revealed that when business travelers want to fly, they
have two principle choices. On the one hand a company’s executives can fly business class or
first class on a commercial airline. On the other hand, a company can purchase its own aircraft to
serve its corporate travel needs. The strategic question is –Why would corporations choose one
alternative industry over another? By focusing on the key factors that lead corporations to trade
across alternatives and eliminating or reducing everything else, NetJets created its blue ocean
strategy.
NetJets offers its customers one sixteenths ownership of an aircraft to be shared with
fifteen other customers, each one entitled to fifty hours of flight time per year. Starting at
$375 000 owners can purchase a share in a $6 million aircraft. Customers get the convenience of
a private jet at the price of a commercial airline ticket. Corporations buy private jets to
dramatically cut total travel time, to reduce the hassle of congested airports, to allow for point-to-
point travel and to gain the benefit of having more productive and energized executives, who can
hit the ground running upon arrival. So NetJets built its distinctive strengths by offering the best
of commercial travel and private jets, eliminating and reducing everything else. NetJets opened
up a multibillion dollar blue ocean wherein customers get the convenience and speed of a private
jet with a low fixed cost and low variable cost of commercial airline travel.
Look across strategic groups within the industries. The key to creating a blue ocean
across existing strategic groups is to break out of this narrow tunnel vision by understanding
which factors determine customers’ decisions to trade up or down from one group to another.
Women’s fitness company Curves built on the decisive advantages of two strategic groups in the
US fitness industry-traditional health clubs and home exercise programs- eliminated or reduced
everything else. Curves has eliminated all the aspects of the traditional health club that are of
little interest to the broad mass of women. Gone are: the profusion of special machines, food,
spa, pool and even locker rooms, which have been replaced by a few curtained-off changing
areas. The QuickFit training system uses hydraulic exercise machines which need no adjusting,
are safe, simple to use and nonthreatening. Specifically designed for women these machines
reduce impact stress and built strength and muscle. Curves’ tagline could be “For the price of the
cup of coffee a day you can obtain the gift of heath through proper exercise”. Startup investment
is very low, only up to $30 000, because of the wide range of factors the company eliminated.
Variable costs are also significantly lower, with personal and maintenance of facilities
dramatically reduced and rent reduced because of the much smaller spaces required. Curves’ low
cost business model also make easy to franchise.

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 Look across the Chain of Buyers. Typical industry concentrates on a single group of
buyers. The pharmaceutical industry mostly focused on influencers: doctors. Clothing industry
sells to users. Challenging an industry wisdom about which buyer group to target can lead to the
discovery of a new blue ocean. The Danish insulin producer, Novo Nordisk, created a blue ocean
in the insulin industry. The importance of doctors in affecting the insulin purchasing decision of
diabetics made doctors the target buyer group of the industry. Novo Nordisk decided to focus not
on doctors but on the users - patients themselves. The difficulties of handling syringes, needles
and insulin as well as injection itself lead Novo Nordisk to a blue ocean opportunity of NovoPen.
The NovoPen contained an insulin cartridge that allowed patients to easily carry, in one
self-contained unit roughly a week’s worth of insulin. It enables patients to control dozing and
administer insulin. Patients could take the pen with them an inject insulin with ease and
convenience. Novo Nordisk’s blue ocean strategy shifted the industry landscape and transformed
the company from an insulin producer to a diabetes care company.
Look across complimentary products and service offerings. Untapped value is often
hidden in complimentary products and services. The key is to define the total solution buyers
seek when they choose a product or service. Simple way to do so is to think about what happens
before, during and after your product is used.
Experiencing the decline in UK sales Phillips found out that the biggest issue the British
had the brewing tea was not in the kettle itself but in the complimentary product of water, which
had to be boiled in the kettle. The issue was the lime scale found in tap water. The lime scale
accumulated in kettles as the water was boiled and later found its way into the freshly brewed
tea. The phlegmatic British typically took a tea spoon and want fishing to capture the off-putting
lime scale before drinking home - brewed tea. To the kettle industry, the water issue was not its
problem it was the problem of another industry – the public water supply. Phillips electronics
alone came with a tea kettle that turned the red oceans blue. The kettles of Phillips have a mouth
filter that effectively capture lime scale as the water was poured. Phillips experienced a strong
growth as people began replacing old kettles with the new filtered once.
Look across Functional and Emotional appeal to Buyers. Some industries compete
principally on price and function largely on utility calculation; as a result their appeal is rational.
However, some industries prefer largely competition on feelings, hence their appeal is emotional.
Consequently, companies’ behavior affects buyers’ expectations in reinforcing period. In another
words, functionally oriented industries can often infuse commodity products with new life start
by adding a drop of emotion, which can stimulate new demand.
Cemex, the world’s largest cement producer, created a blue ocean by shifting the
orientation of its industry from functional to emotional (gift of dreams), which is called the

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Patrimonio Hoy program, launched in 1998, on the basis of which they started a traditional
Mexican system of tandas – traditional community saving scheme, where 10 individuals (for
instance) contribute 100 pesos per week during 10 weeks. In the 1st week, the money is drawn to
see who wins 1,000 pesos ($93) in each of ten week. Usually in traditional tandas, the winner
would spend the gift money on important festive or religious event (marriage, baptism),
however, in Patrimonio Hoy, the supertanda is directly forwarded to building additional room
with cement. For instance, instead of giving silver wear Cemex positioned cement as a loving
gift. As a result the winner of supertanda did not receive the total sum in pesos, but received the
equivalent building material to complete a full new room. Moreover, Cemex complemented the
winning with cement delivery to winner’s house, provided him with technical adviser, who
maintained a relationship with the participants during project period.
Since the company launched this new and extraordinary emotional orientation of Cemex
cement with its financing and technical services, demand for cement has been dramatically
increased. Supertanda dropped Cemex’s cost structure via lower inventory costs, smoother
production runs, guaranteed sales that lowered capital costs. In general, Cemex created a blue
ocean of emotional cement that achieved differentiation at low cost.
Look across time. All industries are liable to trends that affect their businesses over time.
The key into blue ocean strategy usually comes from projecting the trend itself. In order to be
formed the basis of blue ocean strategy, trends must be decisive to your business, they must be
irreversible and have a clear route. Many trends can be applied and observed at any time, for
instance discontinuity in technology, rise of new lifestyle or change in regulatory system. But
only one or two may have a decisive impact on a particular business.
Let’s consider the example of Cisco System, which created a new market space by
thinking across time trends. It started with a strong-willed and irrevocable trend that had a clear
path: the growing demand for high-speed data exchange. The world was constrained by slow
data rates and inconsistent computer networks. Cisco created breakthrough value for customers
via offering designed products as routes, switchers and other networking devices, providing fast
data exchanges in the Internet environment. Today, more than 80% of all Internet traffic goes
through Cisco’s products, and its growth margins are in the range of 60% in a new market space.
EXECUTING BLUE OCEAN STRATEGY
One of the most important elements in the blue ocean strategy is jumping of the resource
hurdle. Often it occurs when management change strategic shift. In this case leaders of company
should realize the abilities of the company and decide which approach they will use. There are
three of them: hot spot, cold spot and horse trading. Hot spots are activities that need low
resources but high performance, cold spot are activities that high level of resource input but low

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performance impact and horse trading involves trading your unit`s excess in one area for another
unit1s excess resources to fill remaining resource gaps. When it comes scarce of resources
management could use any of them in order to jump the resource hurdle.
Example for hot spot was done by Mr. Bratton chief of New York City Transit Police. To
make safe subways in New York City Mr. Bratton had to have an officer in every subway line
and patrol every entrance and exit. But it was impossible because of lack of officers. Then he
analyzed all subways and determined subways where the rate of crime is high. So Mr. Bratton
targeted in hot spots. Officer more focused on those subways where possibility of occurring of
crime is high. And crime came trembling down while the size of the police officers remained
constant.
Also company can face to face with such kind of problems like motivation hurdle. Blue
ocean strategy offers us to jump the motivational hurdle by their approach. There are also three
focus factors of disproportionate influence in motivating employees, what they call kingpins,
fishbowl management and aromatization. Kingpins is the approach where paying role
concentrating on key influencers in the organization who are natural leaders, who are well
respected and persuasive. Fishbowl is another way to motivate; here is only one person who is in
fair stage, to be more effective in fishbowl management it must be on transparency, inclusion
and fair process. Atomization relates to the plan of the strategic challenge, in this approach key
point is the player is not or two three people payers are all of the members of the organization.
Mr. Bratton used this approach to give sense that not only the chief of the Police Department
responsible for crimes but all officers also. In this way, responsibility for executing Bratton`s
blue ocean strategy shifted from him to each of the NYPD`s thirty-six thousand officers.
According to the research of writers was shown that fair process is a key variable that
distinguish successful Blue Ocean moves from those that failed. There are three E principles of
fair process: engagement, explanation and clarity of expectation. Engagement is activity where
involved individuals in the strategic decisions which affect to be more efficiently of their task.
Explanation means that every person will be involved and affected should understand why final
strategic decisions are made as they are. This approach allows employee to trust managers.
Expectation clarity principle`s logic stand on that after setting a strategy managers explain
clearly the new rules of the game. It helps to answer questions like who is responsible, what are
the new target what are the goal etc. what is the relationship between Blue Ocean Strategy and
fair process? When people have trust, they have good confidence in one another`s intentions and
actions. When they have commitment, they are even willing to override personal self-interest in
the interests of the company. Every company`s managers agree that this intangible capital is
important substance of their success.

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THREE STRATEGY PROPOSITIONS
No matter what approach the company chooses, structualist or reconstructualist, the secret
is that a strategy’s success directly depends on the development and alignment of three
propositions 1) Value propositions that attracts buyers; 2) Profit propositions that allows the
company to earn money out from the value proposition; 3) People proposition that motivates
those working for or with the organization to execute the strategy.
The value and profit propositions determine the content of a strategy – what a company
offers to buyers and how buyers will benefit from that offering. The people proposition
determines the quality of execution. Reconstructualist approach or blue oceans based on the
alignment of all three strategy propositions in pursuit of both differentiation and low cost. To be
successful organization’s leadership should develop a full set of properly aligned strategy
propositions.
Here is an example of how to align the three propositions so that the strategy can get shape
structure which was highlighted at the
city-state of Dubai.
As for Dubai’s value proposition-
its targeted foreign investors whose
money intensified the state’s economic
development. Value proposition started
with dozen world class free zones with
indomitable motives for investors. In
order to achieve differentiation, the
government allows 100% foreign
ownership and free repatriation zone of capital and profits. To decrease foreign investors’ costs,
no import or re-export is charged. The corporate tax rate is zero for the first 15-50 years of
operations and can be extended.
Also, Dubai has expedited its registration processes, allowing companies to receive license
for business conducting in a half hour. Moreover, all documentation is n English, and the
emirate’s transparent legal system is based on British law. In addition Dubai offers world-class
airways and shipping services in order to make the logistics more efficient.
Regarding profit proposition-allowed the government to get benefit and extra revenues
from the investors. Dubai provides negligible corporate and personal taxes at the same time
generate its revenue by finding differentiated ways of generating revenues while lowering its
costs structure. Instead of attaining conventional income channels, which would prevent foreign
investors, the government has invested in the infrastructure that encourage the investors’

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 activities, such as shipping,
transport, tourism, aviation, real
estate development and
telecommunications. These kinds
of investments allowed the
government to directly profit from
its unique, low-cost value
proposition. Dubai’s profit
proposition has not been just
differentiate- economic
development and government profitability are reinforced by the simultaneous activities for low
cost provision.
In Dubai, expatriates always remain expatriates; over 80% of its growing population is now
foreign. On the top of everything Dubai doesn’t need its own military, diplomatic corps or
monetary agency. Abu Dhabi, the UAE capital and owner of huge oil reserves, bear most of the
costs of maintaining the federal government. The above stated factors have been combined to get
a profit proposition that breaks the existing value-cost trade-off.
Dubai’s people proposition has encouraged its citizens and its external partners - foreign
expatriates - to buy country’s value and profit propositions and support its strategy. Dubai has
become a cosmopolitan state with more than 1 mln people over 100 countries all over the world.
Many of them from West and Asia. The people proposition comprises both economic and
emotional factors, due to bringing value to people or to get significant costs to their livelihoods.
The citizens of Dubai have access to a generous social security system and virtually
guaranteed governmental job. They obtain an extensive state support including medical care,
sickness and maternity benefits, child care, free or subsidized education, unemployment benefits
and etc, all which fully improved citizens’ lives. At the same time government takes
measurements to preserve and save Dubai’s culture and heritage via promoting virtual
boundaries between citizens and foreigners. Citizens receive free plots of land from the
government with interest free loans or grants to built homes on city’s border. Dubai differentiates
itself from developing countries like China and India, by allowing foreigners completely own
their properties. Consequently, Dubai’s people proposition has offered foreign talent a rich and
unique experience at low cost.

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 As Dubai’s case illustrates,
aligning the three strategy
propositions creates reinforcing
synergies. With a compelling low-
cost and differentiated value
proposition, Dubai has attracted
foreign businesses, and in serving
them has found new and lucrative
ways of making money. And
because its value and people
propositions have attracted foreigners in such numbers, Dubai has been able to create a
cosmopolitan environment that is an appealing holiday destination and residence in its own right.
Finally, the profit proposition has allowed Dubai to reduce government overhead and use its
business revenues to both reinvest in the businesses, thereby giving foreign investors more
reason to go there, and provide its own citizens a quality of life their ancestors could not have
imagined. Of course, these synergies can be weakened by an external shock like today’s global
financial crisis. But if and when Dubai succeeds in recovering from the downturn, they will
regain strength.
IMPORTANCE OF STRATEGIC ALIGNMENT
Here is a bright example of Apple, which launched the iTunes Music Store in 2003 and in
five years time became the number one music seller in America. iTunes offered a compelling
value proposition - its online music store allowed buyers to browse more than 200,000 songs,
including exclusive tracks, listen to 30-second samples and download individual song for 99
cents or full album for $9.99. Moreover, Tunes guaranteed high sound quality along with
navigation, search and browsing functions. However, Apple didn’t stop there it created an
attractive value proposition for five major music companies such as BMG, Universal Music
Group, Warner Bros and etc.
The alignment across iTunes’s value, profit and people propositions not only leaded in a
new era of music but is sufficiently hard to imitate that up to day no other online music store has
been able to establish a firm’s base in the industry. Apple is one of the brightest examples of blue
oceans strategy utilization.
Competing in overcrowded industries is no way to sustain high performance. The real
opportunity is to create blue oceans of uncontested market space.
W. Chan Kim and Renee Mauborgne (2004) – Blue Ocean Strategy

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