Blue Ocean Strategy A Case On Redbus Marketing Essay

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1st Jan 1970 Marketing Reference this

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Indian bus service industry was extremely unorganized till recently before redBus emerged and took the industry by its neck and brought a sort of revolution never imagined for such an unorganized industry. This was primarily because the information flow and availability in this industry was very difficult and there was a lot of mismatch. The bus ticket industry was highly fragmented with small players active regionally. All these were small small agents competing against each other. Due to lack of any major player there was not much competition for redBus and hence it was able to create a marketspace for itself through entering the bus ticket industry online. By the time redBus entered the horizon there were settled names both in airline and railway ticket booking industry who were operating online. But even for them it was a huge task to enter bus ticketing industry due to the sheer complexity present in the industry and emulating the online model for bus ticketing industry was perceived to be almost impossible even by these major players in e-commerce. This study deals with how a disruptive model can change the scenario of the complete industry. redBus which at the time of its inception was confined in a small flat of 2 rooms is now a 400 million company with over 400 employees and offices across India. Currently it is the only major player concentrating completely on bus ticketing industry with a market share of over 70%. In this research, I have tried to analyze the bus ticketing industry and how redBus identified the opportunities present in this segment and created a value chain which not only gave them a distinct product but also at competitive cost. It is a perfect example of Blue Ocean strategy where entry of redBus changed the entire landscape of the industry. It revolutionized the way the people buy bus tickets in India. One of the unique bus ticketing system of its kind in the entire world, competitors have leaped in this market but none has received success like redBus. This study further covers how redBus has sustained its competitive advantages and what are the challenges and growth opportunities going forward.

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As the authors of the book Blue Ocean Strategy, W. Kim Chan and Renee Mauborgne say: Although the term blue ocean is new, their existence is not. They have been a part of business transformation in past as well as in present. If we look back in the past say a century ago, How many of today’s industries were then known? The answer will be majority of today’s industries were unknown in their current form. Many industries such as automobiles, aviation, health care, and management consulting were unknown or were just beginning to emerge. Now lets look at the industries 3 decades back. Again, multibillion-dollar industries like mutual funds, computers, mobile phones, smart phones, gas based power plants, discount retail, biotechnology, nanotechnology, express parcel delivery, coffee bars, video games, home videos, and CD player and many other such industries were all non-existent in a practical or popular way.

Similarly, lets turn the clock forward a bit and try to look into the future. Lets say after 30 years or say 50 years how many of the now unknown industries will emerge and will exist. If history is any indicator of things to come in future, the answer is there will be many such industries that we cant even think of right now which will emerge.

This is the reality; industries are dynamic. They never remain the same over a long period of time. They change continuously and evolve. The participants, the process, the market and the operations everything changes. Operations improve, markets evolve and grow, and non-customers become customers. History tells us that we have huge potential to change the existing industries and recreate them and not only that it teaches us that we underestimate our capability to create new ones. To have an idea of how dynamic things can get, the 50-year old Standard Industrial Classification (SIC) system, which was published by the U.S. Census, was substituted by the North America Industry Classification Standard (NAICS) system in 1997. The reason being the number of industry sectors that SIC covered were half the number of sectors that actually existed in 1997. The old SIC system covered only 10 industry sectors. The new NAICS system doubled it to twenty sectors to reflect the emergence of new-age industries. For example earlier the service sector included all that is now fragmented into different specialized industries like IT, healthcare, social assistance, etc. Given that these systems are made to ensure stability, continuity and for keeping standards, such a substitution shows the significance of growth of Blue Ocean industries.

Yet the dominant emphasis of strategists has been on competitive strategies also known as red ocean strategies. Part of the explanation for this is that its roots in military strategy heavily influence corporate strategy. Strategy is about fighting different competitors over the same area of land that is constant and not unlimited. Unlike battles though, the history of industry tells us that the universe of market is unlimited and there is a place for everyone; rather, blue oceans have been always in existence. They have continuously been created. To believe and restrict oneself to red ocean is therefore to accept the constraints that are associated with war-limited piece of land and the need to fight and defeat an opponent to succeed-and to reject the unique strength of the business world: the capacity to create new market universe that is uncontested.

Blue Ocean v/s Competitive Strategy (Red Ocean)

Blue Ocean emphasises the importance of value innovation that can completely negate the competition replacing ‘competitive advantage’ with ‘value innovation’ as the firm’s primary goal thus highlighting the importance of creating demand and exploiting untapped maket rather than risking competition.

There is a debate in the academia and research groups as to which strategy is better suited but all evidences are as case studies on different companies which is not enough to define any one of the two strategies as a clear winner. Rather the two strategies co-exist and should co-exist because a firm on the foundation of Blue Ocean strategy may ultimately have to face competition depending on the imitability of the business model and then before they have more value innovation to differentiate themselves and still remain cost competitive, they must also have a competitive strategy to ensure they do not fall behind of competition.

Research results of researchers like Andrew Burke Andres van Stel and Roy Thurik suggest that the notion that blue ocean makes competition irrelevant may not be true.

When combined, the two provide a more holistic and realistic depiction of economic performance. Thus, in real life the any strategy must be adopted after evaluating the business and market circumstances appropriately as these define the degree of scope for effectiveness of either Blue Ocean or competitive strategy. Furthermore, what emphasis and mix should be given to either form of strategy across short and long-term time horizons is apparent in most innovative companies competing in short term red oceans while significant time and resources are devoted to the long-term goal of developing innovation that creates consumer demand and new markets.

Figure summarizes the basic differences between the two strategies

Blue Ocean and White Space

The term white space has been used in business parlance to mean uncharted territory or an underserved market. But as Mark W. Johnson perfectly writes in “Seizing the White Space” the term is the range of potential activities not defined or addressed by the company’s current business model, that is, the opportunities outside its core and beyond its adjacencies that require a different business model to exploit. White space is a subjective valuation: one company’s white space may be another company’s core.

What matters is that it describes activities that lie far outside a firm’s usual way of working and presents a series of unique and perplexing challenges to that organization. It’s an area where, relatively speaking, assumptions are high and knowledge is low, the opposite of conditions in the company’s core space.

The chance to seize a piece of white space presents a tantalizing opportunity. Success here can bring the transformational growth that so many business leaders seek. Yet understandably, a play for the white space feels risky, and often the numbers don’t appear to add up. The market seems too foreign, or core capabilities won’t apply. Some executives, having made one unsuccessful foray, just won’t risk failing again.

Figure above describes the White Space

Source: Seizing the White Space, Mark W. Johnson

Blue Ocean Strategy and Applied Concepts

The 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, while the vertical axis captures the offering level that buyers receive across these entire key competing factors.

There are two purposes that are served here:

It captures the current state of play in known market space, which allows users to clearly see the factors that the industry competes on and where the competition currently invests.

Then, it propels users to action by reorienting focus from competitors to alternatives and from customers to non-customers 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. A strong value curve has focus, divergence as well as a compelling tagline.

Four Action Framework

This framework can also be referred to as the Eliminate-Reduce-Raise-Create Grid. To reconstruct buyer value elements in crafting a new value curve, we use the Four Actions Framework. As shown in the diagram, to break the trade-off between differentiation and low cost and to create a new value curve, the framework poses 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?

By pursuing the first two questions managers gain insight into how to drop their cost structure vis-à-vis competitors. Rarely do they systematically set out to eliminate and reduce their investments in factors that an industry competes on. The result is mounting cost structures and complex business models. The other questions provide insights into how to lift buyer value and create new demand. Collectively, they allow exploring how to reconstruct buyer value elements across alternative industries to offer buyers an entirely new experience, while simultaneously keeping your cost structure low. Eliminating and creating are vital as they push companies to go beyond value maximization exercises with existing factors of competition. They prompt companies to change the factors themselves, hence making the existing rules of competition irrelevant.

Plan-Do-Check-Act (PDCA)

The PDCA Cycle is a checklist of the four stages, which one must go through to get from `problem-faced’ to `problem solved’.

This concept was developed by Walter Shewhart, the pioneering statistician who developed statistical process control in the Bell Laboratories in the US during the 1930’s. It was taken up and promoted very effectively from the 1950s on by the famous Quality Management authority, W. Edwards Deming. Consequently, PDCA cycle is also commonly known as `the Shewhart Cycle’ and ‘the Deming wheel’.

This cycle diagram can be applied in team meetings to take stock of what stage improvement initiatives are at, and to choose the appropriate tools to see each stage through to successful completion.

Here is what we do in each stage:

Plan to improve operations first by finding out what things are going wrong (that is identify the problems faced), and come up with ideas for solving these problems.

Do changes designed to solve the problems on a small scale first. This minimizes disruption to routine activity while testing whether the changes will work or not.

Check whether the small scale changes are achieving the desired result or not. Also, continuously Check nominated key activities (regardless of any experimentation going on) to know what the quality of the output is at all times to identify any new problems.

Act to implement changes on a larger scale if it’s successful on small scale. Also Act to involve other persons (other departments, suppliers, or customers) affected by the changes and whose cooperation is needed to implement them on a larger scale.

If the experiment was not successful, skip the Act stage and go back to the Plan stage to come up with some new ideas for solving the problem and go through the cycle again. Plan-Do-Check-Act describes the overall stages of improvement activity, but how is each stage carried out? This is where other specific quality management, or continuous improvement, tools and techniques come into play. The diagram below lists the tools and techniques that can be used to complete each stage of the PDCA Cycle.

CHAPTER-2 LITERATURE REVIEW

Paper 1:

“Blue Ocean Strategy versus Competitive Strategy: Theory and Evidence.” Burke, Andrew, André van Stel, and Roy Thurik. ERIM Report Series Research in Management (May 2009)

Theme: Empirical analysis of blue ocean strategy versus competitive strategies based on data assembled from 655 retail shops through 41 shop types in the retail industry in Holland.

Summary: This paper addresses the debate surrounding Red Ocean (competitive strategy) v/s Blue Ocean (New Market) strategy. The authors note that Blue Ocean seeks to emphasise the importance of value innovation that can completely negate the competition replacing ‘competitive advantage’ with ‘value innovation’ as the firm’s primary goal thus highlighting the importance of creating demand and exploiting untapped maket rather than risking competition. This results in increased profitability in the industry.

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There is a debate in the academia and research groups as to which strategy is better suited but all evidences are as case studies on different companies which is not enough to define any one of the two strategies as a clear winner. Rather the two strategies co-exist and should co-exist because a firm on the foundation of Blue Ocean strategy may ultimately have to face competition depending on the imitability of the business model and then before they have more value innovation to differentiate themselves and still remain cost competitive, they must also have a competitive strategy to ensure they do not fall behind of competition.

Research results in this paper suggest that the notion that blue ocean makes competition irrelevant may not be true. To test the superiority of either tools the authors looks at the two strategies from both long term and short term perspectives and outline a theoretical model which suggests that every market will experience new vendors arriving to share the profits that are there on the offering in the industry. Thus the composition of the pie chart of market share will continuously exhibit different set of players with some fading off while others entering the market but only until the saturation point is reached where everyone will break even. Looking at the industry an its players over a period of time in this manner will give us an understanding about whether the new market strategy or the competitive strategy is more viable for the industry. If companies succeed over a long period of time by creating value innovation (new market strategy) as the new companies entered, both the industry profits as well as the firm’s profit will grow steadily and so will the number of vendors in the strategy. On the other hand, if the profitability of the blue ocean firm went down with increasing number of vendors in the industry, it would be an indication of the dominance of the firms that followed competitive strategy over the firms that followed new market (blue ocean) strategy. After studying the complete data from 1982-2000 of 655 retail shops over 41 shop types in the Dutch retail industry and after testing and analyzing the premise the authors concluded for half the shop types, the firm profits were directly proportional to the number of firms while the blue ocean strategy was dominant over a long term with number of vendors and firm profitability rising/falling together over all shop types in the whole period under consideration. The authors also concluded that in short term Red Ocean strategies were at work.

The study highlights that the two strategies co-exist and cross each other throughout the industry life and there is no particular choice that any manager prefers.

Paper 2:

“Synthesizing a Blue Ocean.” Master Thesis. Vester, Daniel. Aalto University, 2012.

Theme: Applicability of New Market strategy frameworks and techniques in the electronic musical instruments industry for innovating new products.

Summary: In this paper, the author targets to show how value innovation could be used in case of an electronic musical instrument company to add value to their product and create new market space. To explain this, he choses to compare the traditional strategies like competitive strategy, Porter’s 5 forces strategy to the blue ocean strategy. Blue ocean strategy is eventually selected for the process of product development of ArturiaMiniBrute, an analogue synthesizer reason being

1) Its attention on constructing new uncontested market space and at the same time targeting lower cost and product differentiation as well; and

2) The ease with which the analytical tools and frameworks in a Blue Ocean strategy could be blended into the product development process and usability of the instrument thus developed.

Blue ocean strategy tools such as the Strategy Canvas, Four Action Framework, Buyer Utility Map and Three Tiers of Noncustomers are applied after quantitative analysis of sales figures in the electronic musical instrument industry for identifying Arturia’s closest competitors in various synthesizer markets and to design the strategy for ArturiaMiniBrute.

The author’s observations and interpretations show that the Blue Ocean Strategy techniques and frameworks can aid electronic musical instrument firms add value to their instruments/products/offerings and create new market space. Subsequently, the author advocates that companies should shift focus from technical features of the musical instrument to the emotional appeal of the musical instrument, and urges that companies should get out of the traditional mindset, challenge established rules of the industry by eliminating factors that have been ignored and not given due importance but which may be of great value to the customer.

Paper 3:

“The Impact of Blue Ocean Strategy in Low-cost Transport.” Å tverková, Hana, Michal ÄŒervinka, and Vlasta Humlová. In 2012 International Conference on Traffic and Transportation Engineering. Belgrade, November 29-30, 2012.

Theme: Applicability of blue ocean strategy theory to Ryanair (air transport industry)

Summary: This paper illustrates how blue ocean strategy can be vital and have an important influence in the low cost aviation sector. The authors chose to analyze the low-cost air transport industry in the European Union. They report that the market is highly competitive and the regional players fight amongst themselves on the base of cost competitiveness. The authors show that a cordial relationship between regional airports and any carrier firm can enable budget airlines to provide distinguished value for airline passengers at a low cost to the companies. The authors also suggests using the case of Ryanair that infrastructure improvement for non-core activities at the smaller airports might be essential to facilitate such relationships between budget airlines and small regional airports.

CHAPTER-3 EXAMPLES OF BLUE OCEAN STRATEGY

iTunes

Apple observed the flood of illegal music file sharing that began in the late 1990s. Music file sharing programs such as Napster, Kazaa, and LimeWire had created a network of Internet savvy music lovers freely, yet illegally, sharing music across the globe. By 2003 more than two billion illegal music files were being traded every month. While the recording industry fought to stop the cannibalization of physical CDs, illegal digital music downloading continued to grow.

With the technology out there for anyone to digitally download music free instead of paying $19 for an average CD, the trend toward digital music was clear. This trend was underscored by the fast growing demand for MP3 players that played mobile digital music, such as Apple’s hit iPod. Apple capitalized on this decisive trend with a clear trajectory by launching the iTunes online music store in 2003.

In agreement with five major music companies-BMG, EMI Group, Sony, Universal Music Group, and Warner Brothers Records-iTunes offered legal, easy-to-use, and flexible à la carte song downloads. iTunes allowed buyers to freely browse two hundred thousand songs, listen to thirty-second samples, and download an individual song for 99 cents or an entire album for $9.99. By allowing people to buy individual songs and strategically pricing them far more reasonably, iTunes broke a key customer annoyance factor: the need to purchase an entire CD when they wanted only one or two songs on it.

iTunes also leapt past free downloading services, providing sound quality as well as intuitive navigating, searching, and browsing functions. To illegally download music you must first search for the song, album, or artist. If you are looking for a complete album you must know the names of all the songs and their order. It is rare to find a complete album to download in one location. The sound quality is consistently poor because most people burn CDs at a low bit rate to save space. And most of the tracks available reflect the tastes of sixteen-year-olds, so although theoretically there are billions of tracks available, the scope is limited.

In contrast, Apple’s search and browsing functions are considered the best in the business. Moreover, iTunes music editors include a number of added features usually found in the record shops, including iTunes essentials such as Best Hair Bands or Best Love Songs, staff favorites, celebrity play lists, and Billboard charts. And the iTunes sound quality is the highest because iTunes encodes songs in a format called AAC, which offers sound quality superior to MP3s, even those burned at a very high data rate.

Customers have been flocking to iTunes, and recording companies and artists are also winning. Under iTunes they receive 65 percent of the purchase price of digitally downloaded songs, at last financially benefiting from the digital downloading craze. In addition, Apple further protected recording companies by devising copyright protection that would not inconvenience users-who had grown accustomed to the freedom of digital music in the post- Napster world-but would satisfy the music industry. The iTunes Music Store allows users to burn songs onto iPods and CDs up to seven times, enough to easily satisfy music lovers but far too few times to make professional piracy an issue.

Today the iTunes Music Store offers more than 8 million songs. iTunes is the largest music retailer in the US with sales exceeding 5 billion songs. Apple’s iTunes has unlocked a blue ocean in digital music, with the added advantage of increasing the attractiveness of its highly successful iPod player.

Strategy Canvas

Curves

Since franchising began in 1995, Curves has grown like wildfire, acquiring more than two million members in more than six thousand locations, with total revenues exceeding the $1 billion mark. A new Curves opens, on average, every four hours somewhere in the world.

What’s more, this growth was triggered almost entirely through word of mouth and buddy referrals. Yet at its inception, Curves was seen as entering an oversaturated market gearing its offering to customers that would not want it, and making its offering significantly blander than the competition’s. In reality, however, Curves exploded the demand in the U.S. fitness industry, unlocking a huge untapped market, a veritable blue ocean of women struggling and failing to keep in shape through sound fitness. Curves built on the decisive advantages of two strategic groups in the U.S. fitness industry – traditional health clubs and home exercise programs – and eliminated or reduced everything else.

At the one extreme, the U.S. fitness industry is awash with traditional health clubs that catered to both men and women, offering a full range of exercise and sporting options, usually in upscale urban locations. Their trendy facilities are designed to attract the high-end health club set. They have a full range of aerobic and strength training machines, a juice bar, instructors, and a full locker room with showers and sauna, because the aim is for customers to spend social as well as exercise time there. Having fought their way across town to health clubs, customers typically spend at least an hour there, and more often two. Membership fees for all this are typically in the range of $100 per month – not cheap, guaranteeing that the market would stay upscale and small. Traditional health club customers represent only 12 percent of the entire population, concentrated overwhelmingly in the larger urban areas. Investment costs for a traditional full-service health club run from $500,000 to more than $1 million, depending on the city center location.

At the other extreme is the strategic group of home exercise programs, such as exercise videos, books, and magazines. These are a small fraction of the cost, are used at home, and generally require little or no exercise equipment. Instruction is minimal, being confined to the star of the exercise video or book and magazine explanations and illustrations.

The question is, What makes women either trade up or down between traditional health clubs and home exercise programs? Most woman don’t trade up to health clubs for the profusion of special machines, juice bars, locker rooms with sauna, pool, and the chance to meet men. The average female nonathelete does not even want to run into men when she is working out, perhaps revealing lumps in her leotards. She is not inspired to line up behind machines in which she needs to change weights and adjust their incline angles. As for time, it has become an increasingly scarce commodity for the average woman. Few can afford to spend one to two hours at a health club several times a week. For the mass of woman, the city center locations also present traffic challenges, something that increases stress and discourages going to the gym.

It turns out that most women trade up to health clubs for one principle reason. When they are at home it’s too easy to find an excuse for not working out. It is hard to be disciplined in the confines of ones home if you are not already a committed sports enthusiast. Working out collectively, instead of alone, is more motivating and inspiring. Conversely, women who use home exercise programs do so primarily for the time saving, lower costs, and privacy.

Curves built its blue ocean by drawing on the distinctive strengths of these two strategic groups, eliminating and reducing 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 have been replaced by a few curtained off changing areas.

The experience in a Curves club is entirely different from that in a typical health club. The member enters the exercise room where the machines (typically about ten) are arranged, not in rows facing a television as in the health club, but in a circle to facilitate interchange amongst members, making the experience fun. 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 build strength and muscle. While exercising, members can talk and support one and other, and the social, nonjudgmental atmosphere is totally different from that of a typical health club. There are few if any mirrors on the wall, and there are no men staring at you. Members move around the circle of machines and aerobic pads and in thirty minutes complete the whole workout. The result of reducing and focusing service on the essentials is that prices fall to around $30 per month, opening the market to the broad mass of women. Curves’ tag line could be ” for the price of a cup of coffee a day you can obtain the gift of health through proper exercise.”

Curves offers the distinctive value at a low cost. Compared with the start-up investment of $500,000 to $1 million for traditional health clubs, start-up investments for Curves are in the range of only $25,000 to $30,000 (excluding a $20,000 franchise fee) because of the wide range of factors the company eliminated. Variable costs are also significantly lower, with personnel and maintenance of facilities dramatically reduced and rent reduced because of the much smaller spaces required: 1,500 square feet in nonprime suburban locations versus 35,000 to 100,000 square feet in prime urban locations. Curves’ low-cost business model makes its franchises easy to afford and explains why they have mushroomed quickly. Most franchises are profitable within a few months, as soon as they recruit on average 100 members. Established Curves franchises are selling in the range of $100,000 to $150,000 on the secondary market.

The result is that Curves facilities are everywhere in most towns of any size in America. Curves is not competing directly with other health and exercise concepts; it has created new blue ocean demand.

NetJets

Consider NetJets, which created the blue ocean of fractional jet ownership. In just over twenty years NetJets has grown larger than many airlines, with over six hundred and ninety aircraft, operating more than three hundred and seventy thousand flights to more than one hundred fifty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a multibillion-dollar business. NetJets’ success has been attributed to its flexibility, shortened travel time, hassle-free travel experience, increased reliability, and strategic pricing. 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 is corporate travelers. NetJets looked at the existing alternatives and found that when business travelers want to fly, they have two principal 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 a

Indian bus service industry was extremely unorganized till recently before redBus emerged and took the industry by its neck and brought a sort of revolution never imagined for such an unorganized industry. This was primarily because the information flow and availability in this industry was very difficult and there was a lot of mismatch. The bus ticket industry was highly fragmented with small players active regionally. All these were small small agents competing against each other. Due to lack of any major player there was not much competition for redBus and hence it was able to create a marketspace for itself through entering the bus ticket industry online. By the time redBus entered the horizon there were settled names both in airline and railway ticket booking industry who were operating online. But even for them it was a huge task to enter bus ticketing industry due to the sheer complexity present in the industry and emulating the online model for bus ticketing industry was perceived to be almost impossible even by these major players in e-commerce. This study deals with how a disruptive model can change the scenario of the complete industry. redBus which at the time of its inception was confined in a small flat of 2 rooms is now a 400 million company with over 400 employees and offices across India. Currently it is the only major player concentrating completely on bus ticketing industry with a market share of over 70%. In this research, I have tried to analyze the bus ticketing industry and how redBus identified the opportunities present in this segment and created a value chain which not only gave them a distinct product but also at competitive cost. It is a perfect example of Blue Ocean strategy where entry of redBus changed the entire landscape of the industry. It revolutionized the way the people buy bus tickets in India. One of the unique bus ticketing system of its kind in the entire world, competitors have leaped in this market but none has received success like redBus. This study further covers how redBus has sustained its competitive advantages and what are the challenges and growth opportunities going forward.

As the authors of the book Blue Ocean Strategy, W. Kim Chan and Renee Mauborgne say: Although the term blue ocean is new, their existence is not. They have been a part of business transformation in past as well as in present. If we look back in the past say a century ago, How many of today’s industries were then known? The answer will be majority of today’s industries were unknown in their current form. Many industries such as automobiles, aviation, health care, and management consulting were unknown or were just beginning to emerge. Now lets look at the industries 3 decades back. Again, multibillion-dollar industries like mutual funds, computers, mobile phones, smart phones, gas based power plants, discount retail, biotechnology, nanotechnology, express parcel delivery, coffee bars, video games, home videos, and CD player and many other such industries were all non-existent in a practical or popular way.

Similarly, lets turn the clock forward a bit and try to look into the future. Lets say after 30 years or say 50 years how many of the now unknown industries will emerge and will exist. If history is any indicator of things to come in future, the answer is there will be many such industries that we cant even think of right now which will emerge.

This is the reality; industries are dynamic. They never remain the same over a long period of time. They change continuously and evolve. The participants, the process, the market and the operations everything changes. Operations improve, markets evolve and grow, and non-customers become customers. History tells us that we have huge potential to change the existing industries and recreate them and not only that it teaches us that we underestimate our capability to create new ones. To have an idea of how dynamic things can get, the 50-year old Standard Industrial Classification (SIC) system, which was published by the U.S. Census, was substituted by the North America Industry Classification Standard (NAICS) system in 1997. The reason being the number of industry sectors that SIC covered were half the number of sectors that actually existed in 1997. The old SIC system covered only 10 industry sectors. The new NAICS system doubled it to twenty sectors to reflect the emergence of new-age industries. For example earlier the service sector included all that is now fragmented into different specialized industries like IT, healthcare, social assistance, etc. Given that these systems are made to ensure stability, continuity and for keeping standards, such a substitution shows the significance of growth of Blue Ocean industries.

Yet the dominant emphasis of strategists has been on competitive strategies also known as red ocean strategies. Part of the explanation for this is that its roots in military strategy heavily influence corporate strategy. Strategy is about fighting different competitors over the same area of land that is constant and not unlimited. Unlike battles though, the history of industry tells us that the universe of market is unlimited and there is a place for everyone; rather, blue oceans have been always in existence. They have continuously been created. To believe and restrict oneself to red ocean is therefore to accept the constraints that are associated with war-limited piece of land and the need to fight and defeat an opponent to succeed-and to reject the unique strength of the business world: the capacity to create new market universe that is uncontested.

Blue Ocean v/s Competitive Strategy (Red Ocean)

Blue Ocean emphasises the importance of value innovation that can completely negate the competition replacing ‘competitive advantage’ with ‘value innovation’ as the firm’s primary goal thus highlighting the importance of creating demand and exploiting untapped maket rather than risking competition.

There is a debate in the academia and research groups as to which strategy is better suited but all evidences are as case studies on different companies which is not enough to define any one of the two strategies as a clear winner. Rather the two strategies co-exist and should co-exist because a firm on the foundation of Blue Ocean strategy may ultimately have to face competition depending on the imitability of the business model and then before they have more value innovation to differentiate themselves and still remain cost competitive, they must also have a competitive strategy to ensure they do not fall behind of competition.

Research results of researchers like Andrew Burke Andres van Stel and Roy Thurik suggest that the notion that blue ocean makes competition irrelevant may not be true.

When combined, the two provide a more holistic and realistic depiction of economic performance. Thus, in real life the any strategy must be adopted after evaluating the business and market circumstances appropriately as these define the degree of scope for effectiveness of either Blue Ocean or competitive strategy. Furthermore, what emphasis and mix should be given to either form of strategy across short and long-term time horizons is apparent in most innovative companies competing in short term red oceans while significant time and resources are devoted to the long-term goal of developing innovation that creates consumer demand and new markets.

Figure summarizes the basic differences between the two strategies

Blue Ocean and White Space

The term white space has been used in business parlance to mean uncharted territory or an underserved market. But as Mark W. Johnson perfectly writes in “Seizing the White Space” the term is the range of potential activities not defined or addressed by the company’s current business model, that is, the opportunities outside its core and beyond its adjacencies that require a different business model to exploit. White space is a subjective valuation: one company’s white space may be another company’s core.

What matters is that it describes activities that lie far outside a firm’s usual way of working and presents a series of unique and perplexing challenges to that organization. It’s an area where, relatively speaking, assumptions are high and knowledge is low, the opposite of conditions in the company’s core space.

The chance to seize a piece of white space presents a tantalizing opportunity. Success here can bring the transformational growth that so many business leaders seek. Yet understandably, a play for the white space feels risky, and often the numbers don’t appear to add up. The market seems too foreign, or core capabilities won’t apply. Some executives, having made one unsuccessful foray, just won’t risk failing again.

Figure above describes the White Space

Source: Seizing the White Space, Mark W. Johnson

Blue Ocean Strategy and Applied Concepts

The 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, while the vertical axis captures the offering level that buyers receive across these entire key competing factors.

There are two purposes that are served here:

It captures the current state of play in known market space, which allows users to clearly see the factors that the industry competes on and where the competition currently invests.

Then, it propels users to action by reorienting focus from competitors to alternatives and from customers to non-customers 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. A strong value curve has focus, divergence as well as a compelling tagline.

Four Action Framework

This framework can also be referred to as the Eliminate-Reduce-Raise-Create Grid. To reconstruct buyer value elements in crafting a new value curve, we use the Four Actions Framework. As shown in the diagram, to break the trade-off between differentiation and low cost and to create a new value curve, the framework poses 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?

By pursuing the first two questions managers gain insight into how to drop their cost structure vis-à-vis competitors. Rarely do they systematically set out to eliminate and reduce their investments in factors that an industry competes on. The result is mounting cost structures and complex business models. The other questions provide insights into how to lift buyer value and create new demand. Collectively, they allow exploring how to reconstruct buyer value elements across alternative industries to offer buyers an entirely new experience, while simultaneously keeping your cost structure low. Eliminating and creating are vital as they push companies to go beyond value maximization exercises with existing factors of competition. They prompt companies to change the factors themselves, hence making the existing rules of competition irrelevant.

Plan-Do-Check-Act (PDCA)

The PDCA Cycle is a checklist of the four stages, which one must go through to get from `problem-faced’ to `problem solved’.

This concept was developed by Walter Shewhart, the pioneering statistician who developed statistical process control in the Bell Laboratories in the US during the 1930’s. It was taken up and promoted very effectively from the 1950s on by the famous Quality Management authority, W. Edwards Deming. Consequently, PDCA cycle is also commonly known as `the Shewhart Cycle’ and ‘the Deming wheel’.

This cycle diagram can be applied in team meetings to take stock of what stage improvement initiatives are at, and to choose the appropriate tools to see each stage through to successful completion.

Here is what we do in each stage:

Plan to improve operations first by finding out what things are going wrong (that is identify the problems faced), and come up with ideas for solving these problems.

Do changes designed to solve the problems on a small scale first. This minimizes disruption to routine activity while testing whether the changes will work or not.

Check whether the small scale changes are achieving the desired result or not. Also, continuously Check nominated key activities (regardless of any experimentation going on) to know what the quality of the output is at all times to identify any new problems.

Act to implement changes on a larger scale if it’s successful on small scale. Also Act to involve other persons (other departments, suppliers, or customers) affected by the changes and whose cooperation is needed to implement them on a larger scale.

If the experiment was not successful, skip the Act stage and go back to the Plan stage to come up with some new ideas for solving the problem and go through the cycle again. Plan-Do-Check-Act describes the overall stages of improvement activity, but how is each stage carried out? This is where other specific quality management, or continuous improvement, tools and techniques come into play. The diagram below lists the tools and techniques that can be used to complete each stage of the PDCA Cycle.

CHAPTER-2 LITERATURE REVIEW

Paper 1:

“Blue Ocean Strategy versus Competitive Strategy: Theory and Evidence.” Burke, Andrew, André van Stel, and Roy Thurik. ERIM Report Series Research in Management (May 2009)

Theme: Empirical analysis of blue ocean strategy versus competitive strategies based on data assembled from 655 retail shops through 41 shop types in the retail industry in Holland.

Summary: This paper addresses the debate surrounding Red Ocean (competitive strategy) v/s Blue Ocean (New Market) strategy. The authors note that Blue Ocean seeks to emphasise the importance of value innovation that can completely negate the competition replacing ‘competitive advantage’ with ‘value innovation’ as the firm’s primary goal thus highlighting the importance of creating demand and exploiting untapped maket rather than risking competition. This results in increased profitability in the industry.

There is a debate in the academia and research groups as to which strategy is better suited but all evidences are as case studies on different companies which is not enough to define any one of the two strategies as a clear winner. Rather the two strategies co-exist and should co-exist because a firm on the foundation of Blue Ocean strategy may ultimately have to face competition depending on the imitability of the business model and then before they have more value innovation to differentiate themselves and still remain cost competitive, they must also have a competitive strategy to ensure they do not fall behind of competition.

Research results in this paper suggest that the notion that blue ocean makes competition irrelevant may not be true. To test the superiority of either tools the authors looks at the two strategies from both long term and short term perspectives and outline a theoretical model which suggests that every market will experience new vendors arriving to share the profits that are there on the offering in the industry. Thus the composition of the pie chart of market share will continuously exhibit different set of players with some fading off while others entering the market but only until the saturation point is reached where everyone will break even. Looking at the industry an its players over a period of time in this manner will give us an understanding about whether the new market strategy or the competitive strategy is more viable for the industry. If companies succeed over a long period of time by creating value innovation (new market strategy) as the new companies entered, both the industry profits as well as the firm’s profit will grow steadily and so will the number of vendors in the strategy. On the other hand, if the profitability of the blue ocean firm went down with increasing number of vendors in the industry, it would be an indication of the dominance of the firms that followed competitive strategy over the firms that followed new market (blue ocean) strategy. After studying the complete data from 1982-2000 of 655 retail shops over 41 shop types in the Dutch retail industry and after testing and analyzing the premise the authors concluded for half the shop types, the firm profits were directly proportional to the number of firms while the blue ocean strategy was dominant over a long term with number of vendors and firm profitability rising/falling together over all shop types in the whole period under consideration. The authors also concluded that in short term Red Ocean strategies were at work.

The study highlights that the two strategies co-exist and cross each other throughout the industry life and there is no particular choice that any manager prefers.

Paper 2:

“Synthesizing a Blue Ocean.” Master Thesis. Vester, Daniel. Aalto University, 2012.

Theme: Applicability of New Market strategy frameworks and techniques in the electronic musical instruments industry for innovating new products.

Summary: In this paper, the author targets to show how value innovation could be used in case of an electronic musical instrument company to add value to their product and create new market space. To explain this, he choses to compare the traditional strategies like competitive strategy, Porter’s 5 forces strategy to the blue ocean strategy. Blue ocean strategy is eventually selected for the process of product development of ArturiaMiniBrute, an analogue synthesizer reason being

1) Its attention on constructing new uncontested market space and at the same time targeting lower cost and product differentiation as well; and

2) The ease with which the analytical tools and frameworks in a Blue Ocean strategy could be blended into the product development process and usability of the instrument thus developed.

Blue ocean strategy tools such as the Strategy Canvas, Four Action Framework, Buyer Utility Map and Three Tiers of Noncustomers are applied after quantitative analysis of sales figures in the electronic musical instrument industry for identifying Arturia’s closest competitors in various synthesizer markets and to design the strategy for ArturiaMiniBrute.

The author’s observations and interpretations show that the Blue Ocean Strategy techniques and frameworks can aid electronic musical instrument firms add value to their instruments/products/offerings and create new market space. Subsequently, the author advocates that companies should shift focus from technical features of the musical instrument to the emotional appeal of the musical instrument, and urges that companies should get out of the traditional mindset, challenge established rules of the industry by eliminating factors that have been ignored and not given due importance but which may be of great value to the customer.

Paper 3:

“The Impact of Blue Ocean Strategy in Low-cost Transport.” Å tverková, Hana, Michal ÄŒervinka, and Vlasta Humlová. In 2012 International Conference on Traffic and Transportation Engineering. Belgrade, November 29-30, 2012.

Theme: Applicability of blue ocean strategy theory to Ryanair (air transport industry)

Summary: This paper illustrates how blue ocean strategy can be vital and have an important influence in the low cost aviation sector. The authors chose to analyze the low-cost air transport industry in the European Union. They report that the market is highly competitive and the regional players fight amongst themselves on the base of cost competitiveness. The authors show that a cordial relationship between regional airports and any carrier firm can enable budget airlines to provide distinguished value for airline passengers at a low cost to the companies. The authors also suggests using the case of Ryanair that infrastructure improvement for non-core activities at the smaller airports might be essential to facilitate such relationships between budget airlines and small regional airports.

CHAPTER-3 EXAMPLES OF BLUE OCEAN STRATEGY

iTunes

Apple observed the flood of illegal music file sharing that began in the late 1990s. Music file sharing programs such as Napster, Kazaa, and LimeWire had created a network of Internet savvy music lovers freely, yet illegally, sharing music across the globe. By 2003 more than two billion illegal music files were being traded every month. While the recording industry fought to stop the cannibalization of physical CDs, illegal digital music downloading continued to grow.

With the technology out there for anyone to digitally download music free instead of paying $19 for an average CD, the trend toward digital music was clear. This trend was underscored by the fast growing demand for MP3 players that played mobile digital music, such as Apple’s hit iPod. Apple capitalized on this decisive trend with a clear trajectory by launching the iTunes online music store in 2003.

In agreement with five major music companies-BMG, EMI Group, Sony, Universal Music Group, and Warner Brothers Records-iTunes offered legal, easy-to-use, and flexible à la carte song downloads. iTunes allowed buyers to freely browse two hundred thousand songs, listen to thirty-second samples, and download an individual song for 99 cents or an entire album for $9.99. By allowing people to buy individual songs and strategically pricing them far more reasonably, iTunes broke a key customer annoyance factor: the need to purchase an entire CD when they wanted only one or two songs on it.

iTunes also leapt past free downloading services, providing sound quality as well as intuitive navigating, searching, and browsing functions. To illegally download music you must first search for the song, album, or artist. If you are looking for a complete album you must know the names of all the songs and their order. It is rare to find a complete album to download in one location. The sound quality is consistently poor because most people burn CDs at a low bit rate to save space. And most of the tracks available reflect the tastes of sixteen-year-olds, so although theoretically there are billions of tracks available, the scope is limited.

In contrast, Apple’s search and browsing functions are considered the best in the business. Moreover, iTunes music editors include a number of added features usually found in the record shops, including iTunes essentials such as Best Hair Bands or Best Love Songs, staff favorites, celebrity play lists, and Billboard charts. And the iTunes sound quality is the highest because iTunes encodes songs in a format called AAC, which offers sound quality superior to MP3s, even those burned at a very high data rate.

Customers have been flocking to iTunes, and recording companies and artists are also winning. Under iTunes they receive 65 percent of the purchase price of digitally downloaded songs, at last financially benefiting from the digital downloading craze. In addition, Apple further protected recording companies by devising copyright protection that would not inconvenience users-who had grown accustomed to the freedom of digital music in the post- Napster world-but would satisfy the music industry. The iTunes Music Store allows users to burn songs onto iPods and CDs up to seven times, enough to easily satisfy music lovers but far too few times to make professional piracy an issue.

Today the iTunes Music Store offers more than 8 million songs. iTunes is the largest music retailer in the US with sales exceeding 5 billion songs. Apple’s iTunes has unlocked a blue ocean in digital music, with the added advantage of increasing the attractiveness of its highly successful iPod player.

Strategy Canvas

Curves

Since franchising began in 1995, Curves has grown like wildfire, acquiring more than two million members in more than six thousand locations, with total revenues exceeding the $1 billion mark. A new Curves opens, on average, every four hours somewhere in the world.

What’s more, this growth was triggered almost entirely through word of mouth and buddy referrals. Yet at its inception, Curves was seen as entering an oversaturated market gearing its offering to customers that would not want it, and making its offering significantly blander than the competition’s. In reality, however, Curves exploded the demand in the U.S. fitness industry, unlocking a huge untapped market, a veritable blue ocean of women struggling and failing to keep in shape through sound fitness. Curves built on the decisive advantages of two strategic groups in the U.S. fitness industry – traditional health clubs and home exercise programs – and eliminated or reduced everything else.

At the one extreme, the U.S. fitness industry is awash with traditional health clubs that catered to both men and women, offering a full range of exercise and sporting options, usually in upscale urban locations. Their trendy facilities are designed to attract the high-end health club set. They have a full range of aerobic and strength training machines, a juice bar, instructors, and a full locker room with showers and sauna, because the aim is for customers to spend social as well as exercise time there. Having fought their way across town to health clubs, customers typically spend at least an hour there, and more often two. Membership fees for all this are typically in the range of $100 per month – not cheap, guaranteeing that the market would stay upscale and small. Traditional health club customers represent only 12 percent of the entire population, concentrated overwhelmingly in the larger urban areas. Investment costs for a traditional full-service health club run from $500,000 to more than $1 million, depending on the city center location.

At the other extreme is the strategic group of home exercise programs, such as exercise videos, books, and magazines. These are a small fraction of the cost, are used at home, and generally require little or no exercise equipment. Instruction is minimal, being confined to the star of the exercise video or book and magazine explanations and illustrations.

The question is, What makes women either trade up or down between traditional health clubs and home exercise programs? Most woman don’t trade up to health clubs for the profusion of special machines, juice bars, locker rooms with sauna, pool, and the chance to meet men. The average female nonathelete does not even want to run into men when she is working out, perhaps revealing lumps in her leotards. She is not inspired to line up behind machines in which she needs to change weights and adjust their incline angles. As for time, it has become an increasingly scarce commodity for the average woman. Few can afford to spend one to two hours at a health club several times a week. For the mass of woman, the city center locations also present traffic challenges, something that increases stress and discourages going to the gym.

It turns out that most women trade up to health clubs for one principle reason. When they are at home it’s too easy to find an excuse for not working out. It is hard to be disciplined in the confines of ones home if you are not already a committed sports enthusiast. Working out collectively, instead of alone, is more motivating and inspiring. Conversely, women who use home exercise programs do so primarily for the time saving, lower costs, and privacy.

Curves built its blue ocean by drawing on the distinctive strengths of these two strategic groups, eliminating and reducing 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 have been replaced by a few curtained off changing areas.

The experience in a Curves club is entirely different from that in a typical health club. The member enters the exercise room where the machines (typically about ten) are arranged, not in rows facing a television as in the health club, but in a circle to facilitate interchange amongst members, making the experience fun. 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 build strength and muscle. While exercising, members can talk and support one and other, and the social, nonjudgmental atmosphere is totally different from that of a typical health club. There are few if any mirrors on the wall, and there are no men staring at you. Members move around the circle of machines and aerobic pads and in thirty minutes complete the whole workout. The result of reducing and focusing service on the essentials is that prices fall to around $30 per month, opening the market to the broad mass of women. Curves’ tag line could be ” for the price of a cup of coffee a day you can obtain the gift of health through proper exercise.”

Curves offers the distinctive value at a low cost. Compared with the start-up investment of $500,000 to $1 million for traditional health clubs, start-up investments for Curves are in the range of only $25,000 to $30,000 (excluding a $20,000 franchise fee) because of the wide range of factors the company eliminated. Variable costs are also significantly lower, with personnel and maintenance of facilities dramatically reduced and rent reduced because of the much smaller spaces required: 1,500 square feet in nonprime suburban locations versus 35,000 to 100,000 square feet in prime urban locations. Curves’ low-cost business model makes its franchises easy to afford and explains why they have mushroomed quickly. Most franchises are profitable within a few months, as soon as they recruit on average 100 members. Established Curves franchises are selling in the range of $100,000 to $150,000 on the secondary market.

The result is that Curves facilities are everywhere in most towns of any size in America. Curves is not competing directly with other health and exercise concepts; it has created new blue ocean demand.

NetJets

Consider NetJets, which created the blue ocean of fractional jet ownership. In just over twenty years NetJets has grown larger than many airlines, with over six hundred and ninety aircraft, operating more than three hundred and seventy thousand flights to more than one hundred fifty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a multibillion-dollar business. NetJets’ success has been attributed to its flexibility, shortened travel time, hassle-free travel experience, increased reliability, and strategic pricing. 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 is corporate travelers. NetJets looked at the existing alternatives and found that when business travelers want to fly, they have two principal 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 a

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