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Blue Ocean Strategy

How to Create Uncontested Market Space and Make the Competition Irrelevant
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KEY CONCEPTS


There will always be a need for companies to compete in the "red oceans" of known market space; but long-term growth opportunities lie in the "blue oceans" of uncontested market space.


Achieving fundamental change in an industry's framework -- its strategy canvas and strategic profile -- requires shifting focus from competitors to alternatives, from customers to noncustomers, and from exploiting existing demand to creating new demand.


At the heart of blue ocean strategy is value innovation -- the simultaneous pursuit of differentiation and low cost.


Remaking market boundaries is necessary to create a blue ocean. To break out of conventional boundaries and achieve differentiation and low cost, companies must look across alternative industries, strategic groups, buyer groups, complementary product and service offerings, the functional or emotional orientation of an industry, and even across time.


The traditional strategic planning process keeps companies stuck in red oceans. Instead of becoming immersed in numbers and operational details, blue ocean strategists must focus on the big picture of buyer value and market opportunity.


To maximize the size of a blue ocean, companies must reach beyond existing demand. This approach challenges conventional wisdom, which prioritizes current buyers over the ocean of non-customers companies can unlock.


Blue ocean strategy must be built in the right sequence: buyer utility, price, cost, and adoption. To succeed, the company must first identify an offering that unlocks exceptional value.


Because blue ocean strategy represents a significant departure from the status quo, executives must be prepared for distinctive execution challenges. Leaders can overcome these hurdles by focusing on the people, acts, and activities that exercise a disproportionate influence on performance.


To create a culture of trust and commitment that motivates people to execute blue ocean strategy, exercising fair process in its creation and roll-out is key.


Blue ocean strategy is premised upon the alignment of the three strategy propositions of value, profit and people in pursuit of both differentiation and low cost.


Organizations should dominate the new market space for as long as possible. When competitors make significant inroads, it is time to create a new blue ocean.


 

INTRODUCTION

In the continual quest for sustainable growth, companies have traditionally focused on the competition. They have fought over the same customers, tried to improve on the same benefits, and hoped to wring profits from a shrinking revenue stream. In Blue Ocean Strategy, professors W. Chan Kim and Renee Mauborgne argue that the key to success is to make the competition irrelevant. They offer a practical, tested analytical framework that innovators in any sector can use to create new, uncontested market space. In this "blue ocean," organizations can take advantage of untapped demand and deliver powerful leaps in value -- both for their customers and for themselves.

 

Summary

Creating Blue Oceans

The market universe has two parts: red oceans and blue oceans. Red oceans are the domain of all existing companies, competing against one another for bigger shares of known demand. Blue oceans make up the world of enterprises that have not yet begun. Here demand is unknown and potential is vast -- for those who understand how to tap into it.

In today's business world, creating blue oceans is more than an opportunity. Increasingly, it is an imperative. Technology has boosted productivity so much that supply outstrips demand in many industries. Globalization is wiping out niche markets and monopolies. Developed countries are experiencing population declines. The result of such forces: commoditization, price wars, and shrinking margins.

How can companies break out of the less and less profitable red oceans? The key is value innovation, a new strategic focus. Instead of trying to beat the competition, value innovators make the competition irrelevant by opening up uncharted (blue) waters. Instead of making conventional tradeoffs between value creation and low price, they pursue both of these goals simultaneously.

In blue oceans, value is created by introducing benefits and/or standards unique in the industry. Cost savings result from eliminating traditional points of competition. As an example, Cirque du Soleil reinvented the concept of a circus. It offered a unique entertainment experience that combined thrills with drama and artistry. While the competition focused on animal shows and star performers, Cirque du Soleil did away with these high cost, low margin elements -- and dramatically increased demand for its product. At the same time, it was able to charge the highest prices in the industry because audiences thought of its shows more as theatre than as circus.

The value innovation/blue ocean strategy discards the conventional view of market boundaries and structures as fixed constraints. Instead, it assumes that these conditions can be reconstructed. The key points of this strategy include:

  1. Creating uncontested market space
  2. Making the competition irrelevant
  3. Creating and capturing new demand
  4. Breaking the value-cost trade off
  5. Aligning the whole system of a firm's activities in pursuit of differentiation and low cost

 

Analytical Tools and Frameworks 

An analytical framework called the "strategy canvas" lies at the heart of value innovation and the creation of blue oceans. Its purpose is to capture the key factors that define existing market space: how the industry competes, where competitors invest, what customers receive from current offerings. With this canvas as a backdrop, an innovator is ready to shift focus from competitors to alternatives, and from customers to noncustomers.

For example, Australian winemaker Casella Wines used a strategy canvas to identify the factors undermining its traditional competitors. Key players were over-delivering on prestige and quality while the vast majority of consumers felt intimidated by the product's complexity and the industry's pretentiousness. Casella identified the blue ocean opportunity: to make a fun, unconventional wine that would appeal to everyone.

To begin executing on the strategy canvas, companies use the "Four Actions Framework," which poses the following questions: 

  1. Which of the factors that the industry takes for granted should be eliminated?
  2. Which factors should be reduced well below the industry's standard?
  3. Which factors should be raised well above the industry's standard?
  4. Which factors should be created that the industry has never offered?

 

After considering these questions, Casella was able to choose a specific direction. It created a new drink called yellow tail, a beverage similar enough to wine to satisfy wine drinkers, but different enough to attract consumers who usually chose beer or cocktails. It was cheaper to make as well as easier to enjoy than anything else on the market. Instead of pushing a bewildering variety of choices, Casella gave buyers one simple product. In two years, it was the fastest growing brand in the history of both the Australian and U. S. wine industries.

The "Eliminate-Reduce-Raise-Create Grid" helps companies to specify how they will act on the four questions they have answered. The grid provides the following benefits:

  1. It pushes the company to simultaneously pursue differentiation and low costs.
  2. It flags companies that are overly focused on raising standards or over-engineering.
  3. It is easily understood by managers at any level.
  4. It drives companies to scrutinize every factor the industry competes on, thus challenging all their previous assumptions.

 

An effective blue ocean strategy, like that pursued by Cirque du Soleil and Casella Wines, has three characteristics: 

  1. Focus: The company's strategic profile should emphasize as few value points as possible. If it overreaches, it will diffuse its efforts and fail to stand out in the minds of consumers.
  2. Divergence: A company loses its uniqueness when it simply tries to beat competitors on their own terms. Successful value innovators diverge from the pack in what they offer to whom.
  3. Compelling Tagline: If a strategy is truly clear and sufficiently simple, it can be expressed in a brief, authentic, and memorable tagline.

 

Without these qualities, the efforts of a potential value innovator can become muddled and overly expensive.

 

Reconstruct Market Boundaries 

Blue ocean strategy begins by reconstructing market boundaries. Across industries, there are six paths that companies can take to lead them beyond traditional expectations and constraints.

Path 1: Look Across Alternative Industries

To develop the broadest perspective on market opportunities, companies should consider not only substitutes for their products (which offer the same functions) but also alternatives to their products (which have different functions serving the same purpose). For example, one movie theatre is a substitute for another, but restaurants are alternatives to movie theaters because they serve the same purpose of giving people an enjoyable night out.

Blue oceans can be created by delivering the advantages of an alternative product while eliminating its conventional points of competition. Home Depot accomplished this result: it brought the expertise of professional home contractors into a hardware store setting while reducing the costs and streamlining the focus of both original industries.

 

Path 2: Look Across Strategic Groups within Industries

Strategic groups are groups of companies within an industry that pursue similar strategies, and can generally be ranked on price and performance (each price increase is associated with more or better performance). Most companies within a strategic group try to outdo each other on the same dimensions. But the key to blue ocean thinking is to identify dimensions with untapped potential.

For example, the Curves women's fitness firm recognized that its customers were dissatisfied both with typical health clubs, where they felt forced to compete with men, and with home exercise programs, which provided insufficient motivation. Instead of trying to create a more female-friendly health club or a more motivating home program, Curves developed something new. Its facilities offered privacy and a nonthreatening atmosphere but also a strong element of mutual support and encouragement. By identifying high-potential improvement dimensions from two strategic groups within the fitness industry, Curves exploded in size and market value.

Value innovation is the cornerstone of blue ocean strategy. We call it value innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.

 

Path 3: Look Across the Chain of Buyers

Competition in most industries converges on a single buyer group: users, purchasers, or influencers. For instance, clothing sellers focus on users, office equipment vendors target corporate purchasing departments, and pharmaceutical firms pursue doctors. But opportunity may lie in questioning these traditional approaches.

Danish insulin producer Novo Nordisk followed this path. While other industry players competed by offering doctors increasingly sophisticated medicine, Novo shifted its focus to patients. Its new product revolutionized healthcare by giving people an easy, convenient alternative to the standard insulin syringe. The NovoPen, a prefilled disposable injection device, successfully transformed the industry landscape as well as the company.

 

Path 4: Look Across Complementary Product and Service Offerings

Untapped value can often be found by redefining products and services as solutions to buyers' problems. This involves thinking about the context in which products are used and the problems people face in using them. Zeneca's Salick cancer centers, for instance, created a blue ocean by combining all the treatments patients might need under one roof, eliminating the hassles of separate appointments and multiple trips.

 

Path 5: Look Across Functional or Emotional Appeal to Buyers

In most industries, competition is focused either on function or emotion. But many products have a dual functional/emotional appeal that can break new ground for companies willing to pursue it. In an emotionally oriented industry, stripping away attributes that are costly but functionally meaningless may result in a cheaper, easier-to-use product. In a functionally oriented industry, a bit of emotion can add excitement and distinctiveness to what would otherwise be a boring commodity.

 

Path 6: Look Across Time

The red-ocean approach to emerging trends is to watch them and adapt incrementally (or attempt to resist) the ways they change the marketplace. The blue-ocean approach is to ask how the trends are likely to affect consumer value and the company's business model -- then proactively take steps to ride the waves.

For example, Apple took note of the flood of illegal music file sharing in the 1990s. While the recording industry fought the trend, Apple took advantage of it by launching iTunes, the first digital music store, in 2003. By offering dependable quality along with searching and browsing functions, the company reduced the appeal of illegal downloading and sold over 700,000 songs in its first year.

 

Focus on the Big Picture, Not the Numbers

The traditional strategic planning process is mired in operational and tactical details that leave companies stuck in red oceans. To envision a bigger picture, innovators start with a strategy canvas. This planning tool depicts the factors that affect competition, the profile of existing competitors, and how the company might shift its own value curve through strategic investments.

There are four steps in drawing and discussing a strategy canvas:

 

Step 1: Visual Awakening

  1. Compare one's business with the competition by drawing an "as is" strategy canvas.
  2. See where current strategy needs to change.

 

The goal here is to clarify the current state of play. This gets everyone on the same page and serves as a wakeup call for managers who are reluctant to change.

 

Step 2: Visual Exploration

  1. Go into the field to explore the six paths to creating blue oceans.
  2. Observe the distinctive advantages of alternative products and services.
  3. See which factors should be eliminated, created, or changed.

 

There is no substitute for managers seeing for themselves what can be done and what needs to be done to create a blue ocean. Field research is the best way to challenge old assumptions and gain insight into new realities.

 

Step 3: Visual Strategy Fair

  1. Draw a "to be" strategy canvas based on insights from field observations.
  2. Get feedback on alternative strategy canvases from customers, competitors' customers, and noncustomers.
  3. Use feedback to build the best "to be" future strategy.

 

After managers develop a set of strategy alternatives based on the previous two steps, they present these "to be" proposals to senior executives. The executives act as judges, providing another level of feedback which is then synthesized and incorporated into a final canvas.

 

Step 4: Visual Communication

  1. Distribute before-and-after strategic profiles on one page for easy comparison.
  2. Support only those projects and operational moves that allow your company to close the gaps to actualize the new strategy.

 

The last step in choosing a future strategy is to communicate it -- and the reasoning behind it -- clearly enough so that it can be understood by all employees. It can then become a meaningful reference point for all future investment and operational decisions.

Of course, numbers and tactics will need to be introduced into the new strategic framework. But when managers start with the big picture, they can more effectively fill in the right details to create a blue ocean.

 

Reach Beyond Existing Demand 

A major component of value innovation is to maximize demand by reaching beyond existing customers. This means seeking ways to attract noncustomers; prioritizing buyer commonalities over differences; and aggregating groups of customers instead of dividing them into ever-smaller segments.

There are three types, or tiers, of noncustomers. In the first tier are those who buy current products but are dissatisfied and will readily switch to something better. Though they may differ on some dimensions, the key to converting these "soon- to-be" noncustomers is to focus on what they have in common. British fast food chain Pret-A-Manger took this approach by offering restaurant-quality, affordable meals served fast in a uniquely attractive setting. The company succeeded in aggregating demand across huge numbers of people who wanted food that was delicious and convenient as well as relatively cheap.

In the second tier are "refusing" noncustomers, who either find current products unacceptable or cannot afford them. They can be won over by understanding the factors that turn them away from existing offerings. For example, JCDecaux, a French outdoor advertising vendor, realized that many companies refused to buy billboard or bus-panel space because these ads were both transitory and expensive. So JCDecaux invented the concept of low-cost advertising on street furniture, like benches and street lights. Former "refusers" flocked to this new option, which was both stationary -- giving people more time to read the copy -- and affordable.

In the third tier of noncustomers are the "unexplored." The industry has always ignored them because they are assumed to be loyal to other markets. For instance, manufacturers of oral care products traditionally thought of tooth whitening as a service available and sought only from dentists. But after careful study of the need, they realized it was possible to deliver high quality, low cost solutions that unleashed a vast new ocean of demand among the formerly "unexplored."

 

Get the Strategic Sequence Right 

Companies need to build a blue ocean strategy on the right foundations. But it is equally important to pursue goals in the right sequence: buyer utility, price, cost, and adoption.

To deliver exceptional buyer utility, companies can choose among six "utility levers." These include customer productivity, simplicity, convenience, risk reduction, fun and image, and environmental friendliness. The key to maximizing the effectiveness of the levers is to use them to remove the biggest blocks to customer utility that are associated with current offerings.

Setting the right strategic price is critical to attracting new customers in large numbers. The need to build sales volume quickly is more important than in the past; many groundbreaking products are knowledge-based, thus incurring heavy upfront research and development costs that must be recouped as fast as possible. Also, a new offering that combines exceptional utility with an attractive price is hard for competitors to imitate.

But the lowest price is not always the best price. Blue-ocean innovators look to other industries to understand what buyers expect to pay for products that have a different form but the same function. Once the company knows its strategic price, it should deduct the desired profit margin from the price to arrive at target cost. It can then use three cost levers to hit the target: 

  1. Streamlining operations and introducing cost innovations from manufacturing to distribution.
  2. Partnering with other companies to leverage their expertise and economies of scale.
  3. Changing the pricing model of the industry; for example, from purchase to rental, leasing, or time-share.

 

Innovators must educate their employees, business partners, and the general public about their blue ocean idea to help ensure adoption. This can be accomplished by explaining the merits of the idea, setting clear expectations, and addressing how the company will address any negative ramifications.

 

Overcome Key Organizational Hurdles 

Because successful execution of a blue ocean strategy means departing from the status quo, the process can engender employee suspicion and resistance. This poses four challenges:

1. Breaking through the cognitive hurdle. It is not easy to make the case for change, particularly to employees who are threatened by it. One approach is to force naysayers to come face-to-face with the shortcomings of the status quo by actually experiencing the problems and/or talking directly to disgruntled customers.

 

2. Jumping the resource hurdle. Instead of trying to get more resources, innovators focus on leveraging and/or multiplying the value of resources they already have. This involves:

  1. Redistributing resources to hot spots, which have low resource input but high performance potential.
  2. Redirecting resources from cold spots, which have high resource consumption but low impact.
  3. Horse trading, where resources in one unit are traded to another to fill in resource gaps.

 

3. Jumping the motivational hurdle. Grand strategic visions often fail to motivate the mass of employees. It is more effective to focus on key influence factors:

  1. Concentrate on persuading kingpins, the organization's most respected opinion leaders.
  2. Place kingpins in a fishbowl: in other words, shine a spotlight on their actions to enable change agents to stand out.
  3. Atomize the strategic challenge, breaking it down into small pieces that people can relate to and that seem attainable.
  4. Include a "consigliere," a politically adept insider, on the top management team.
  5. Identify and leverage the support of "angels," those who have the most to gain from blue-ocean efforts and are naturally aligned with change agents.
  6. Identify and isolate "devils," those who have the most to lose and will fight hardest to block change.

 

4. Knocking over the political hurdle. Organizational politics can stymie the best-laid strategic plans. There are effective ways to avoid this:

  1. Include a "consigliere," a politically adept insider, on the top management team.
  2. Identify and leverage the support of "angels," those who have the most to gain from blue-ocean efforts and are naturally aligned with change agents.
  3. Identify and isolate "devils," those who have the most to lose and will fight hardest to block change.

 

Build Execution into Strategy

Removing the obstacles to execution of blue ocean strategy is necessary but it is not sufficient. To realize the full promise of innovation, it must be willingly and sincerely embraced by all the members of the organization. Building execution into strategy from the start is important as a way to win people's trust and cooperation. The success of this approach depends on fair process.

Fair process is based on three "E Principles:" engagement, explanation, and clarity of expectation. These principles are relevant at every organizational level, from shop floor to C-suite.

  1. Engagement: This is a means for management to communicate respect for individuals' ideas and opinions. It involves asking employees for their input and giving them opportunities to debate the merits of different ideas.
  2. Explanation: The goal of explanation is to ensure that everyone affected by a strategic decision understands why it was made. With that understanding, employees can trust their managers' intentions even if they disagree with a specific change.
  3. Expectation clarity: This requires management to state clearly what new standards employees must meet, how they will be penalized for failure, and who will be responsible for what. The exact nature of the new policies matters less than making sure everyone understands them.

 

The motivational power of fair process is linked to intellectual and emotional recognition theory, which suggests that people seek to be recognized for their individual worth. When they believe that their intellectual value is appreciated, they are willing to share their knowledge. When they feel an emotional connection to the strategy, they are inspired to go beyond the call of duty in order to bring it to fruition.

 

The Sustainability and Renewal of Blue Ocean Strategy

Inherent in blue ocean strategy are significant barriers to imitation. Over time, however, most innovations will be imitated. The key to long-term sustainability and renewal is to dominate the new market space for as long as possible, while continually monitoring the strategy canvas. When an innovator's value curve begins to converge with that of the competition, it is time to create more blue oceans.

 

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