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Blue ocean strategy: How to create uncontested market space and make the competition irrelevant

Bookcover

by W. Chan Kim and Ren?e Mauborgne, Harvard Business School Press, 2005.

Abstract

Many companies compete head-to-head over shrinking profit pools in bloody “red oceans”. Tomorrow’s leading companies will succeed, not by battering competitors, but by creating “blue oceans” of uncontested market space ripe for growth. By pursuing “value innovation”, they will create powerful leaps in value both for the firm and its buyers, making rivals obsolete and unleashing new demand.

(Reviewed by Kevin Barham in October 2005)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

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This book is based on a particularly vivid metaphor. Companies, say the authors, have long engaged in head-to-head competition in search of sustained, profitable growth. In today's overcrowded industries, this results in a bloody "red ocean" of rivals fighting over a shrinking profit pool. While most companies compete within such red oceans, this strategy is increasingly unlikely to create profitable growth in the future.

The authors, both professors at INSEAD, have studied150 strategic moves covering more than 100 years and 30 industries. They conclude that tomorrow's leading companies will succeed, not by battering competitors, but by creating "blue oceans" of uncontested market space ripe for growth. Such strategic moves – which they call "value innovation" – create powerful leaps in value both for the firm and its buyers, making rivals obsolete and unleashing new demand.

Blue oceans have always existed; industries never stand still. History shows that we have a hugely under-estimated ability to create new industries and re-create existing ones. The dominant focus of strategy work, however, has been on competition-based red oceans. This denies the distinctive strength of the business world – the capacity to create new market space that is uncontested.

Creating blue oceans is becoming an imperative. In increasing numbers of industries, supply exceeds demand. The result has been accelerated commoditisation of products and services, price wars, and shrinking profit margins. The business environment in which most strategy and management approaches of the 20th century evolved is rapidly disappearing. Red oceans are becoming increasingly bloody and management will need to be more concerned with blue oceans – although that demands a big change of mindset for many managers.

The authors suggest that the correct unit of analysis is the strategic move, not the company or industry. This is "the set of managerial actions and decisions involved in making a major market-creating business offering". What consistently separates the winners from the losers in their study is the approach to strategy. Red ocean companies race to beat the competition and build defensible positions within the existing industry, exploiting existing demand.

The creators of blue oceans, on the other hand, do not use the competition as their benchmark. Instead, they pursue a strategy of "value innovation" – the "cornerstone of blue ocean strategy" – to create and capture new demand. The focus here is on making the competition irrelevant by creating a leap in value for buyers and the company, thereby opening up new and uncontested market space. Value innovation defies one of the "dogmas" of competition-based strategy: the value-cost trade-off whereby strategy is seen as making a choice between differentiation and low cost. Companies that seek to create blue oceans pursue differentiation and low cost simultaneously.

Analytical frameworks

Because the focus has been on red oceans, blue oceans are largely uncharted and there is little practical guidance on how to create them. The authors set out to fill the gap by providing analytical frameworks and principles that they say will help effectively manage the risk involved.

The Strategy Canvas, for example, is both a diagnostic and action framework that captures the current state of play in the known market space. This helps you understand where the competition is currently investing, the current competitive factors in product, service and delivery, and what customers receive from existing competitive offerings. To shift the strategy canvas of an industry, you have to reorient your strategic focus from competitors to alternatives, and from customers to non-customers of the industry. Instead of offering better solutions than your rivals to existing strategic problems, this gives insights into how to redefine the strategic problem and reconstruct buyer value elements that lie across industry boundaries.

The Four Actions Framework considers four key questions: Which of the factors that the industry takes for granted should be eliminated? Which should be reduced well below the industry's standard? Which should be raised well above the standard? And which new factors should be created that the industry has never offered?

The Eliminate-Reduce-Raise-Create Grid is a matrix that pushes companies to create a new strategic profile or "value curve" by simultaneously pursuing differentiation and low costs. One of its benefits is that it is easily understood by managers at any level, creating a high level of engagement in its application.

Three criteria define a good blue ocean strateg:

  1. Focus: Rather than trying to invest in all the industry's competitive factors, this emphasises only a few factors, making it harder for competitors who invest in all the factors to match them.
  2. Divergence: While reactive strategies tend to share the same strategic profile, the value curves of blue ocean strategies always stand apart. By eliminating, reducing, raising and creating, they differentiate their profiles from the industry's average profile.
  3. A Compelling Tagline: This delivers a clear message and also advertises an offering truthfully (e.g. Southwest Airlines: "The speed of a plane at the price of a car – whenever you need it.")

The book describes the six principles that every company can use to successfully formulate and execute blue ocean strategies and minimise the risks involved:

Reconstruct market boundaries

This is about identifying the opportunity-maximising and risk-minimising paths by which you can systematically create uncontested market space across diverse industry domains, thereby lowering "search risk". The challenge is to identify, out of the "haystack" of possibilities, commercially compelling blue ocean strategies that will make the competition irrelevant. Breaking out of the accepted competitive barriers involves looking across the six conventional boundaries of competition to open up commercially important blue oceans.

The six paths focus on looking across:

  • Alternative industries (e.g. Internet vs cell phones)
  • Strategic groups (companies pursuing a similar strategy within an industry such as Mercedes, BMW and Jaguar)
  • Buyer groups (insulin producer Novo Nordisk shifted its focus from doctors to patients)
  • Complementary product and service offerings (e.g. the Philips electric kettle that filters limescale)
  • The functional-emotional orientation of an industry (Swatch transformed the functionally driven watch industry into an emotionally driven fashion statement; The Body Shop did the reverse for cosmetics)
  • Time (working back from a vision of the future to unlock a new blue ocean)

Focus on the big picture

This shows how to design a company's strategic planning process to go beyond incremental improvements to create value innovations. It presents an alternative to the existing "number-crunching" approach that keeps companies locked into making incremental improvements. This principle tackles planning risk. Using the visualising approach of the Strategy Canvas to focus on the big picture, it proposes a four-step planning process for building a strategy for creating and capturing blue ocean opportunities. This starts with visual awakening, and leads on to visual exploration and a "visual strategy fair" in which different teams present their Strategy Canvases. The last step is to visually communicate a one-page picture of the new and old strategic profiles so very employee can see where the company stands and where it has to focus its efforts to create a compelling future.

Reach beyond existing demand

To maximise the size of a blue ocean and create the greatest market of new demand, we have to challenge the conventional strategy practices of focusing on existing customers and ever-finer segmentation to accommodate customer differences. The more intense the competition, the greater is the resulting customisation of offerings but this risks the creation of target markets that are too small.

Instead, companies need to look to "non-customers". Strategies are suggested for attracting three tiers of non-customers – those who make minimum purchases of the industry's offering out of necessity but who are mentally non-customers of the industry; those who refuse to use the industry's offering; and those who have never thought of the industry's offering as an option. Companies should also aggregate demand, not by focusing on the differences that separate customers, but by building on the powerful commonalities across customers. This maximises the size of the blue ocean being created and unlocks new demand – hence minimising "scale risk".

Get the strategic sequence right

It is not enough to maximise the size of the new blue ocean. You must profit from it to create a sustainable win-win outcome. The authors suggest how to design a strategy that allows you not only to provide a leap in value to your buyers, but also to build a robust and viable business model that will produce and maintain profitable growth. This principle addresses business model risk. The strategy should follow the sequence of utility (is there exceptional buyer utility in your business idea?); strategic pricing (is the price affordable for the mass of buyers?); cost (can you attain your cost target?); and adoption (what are the adoption hurdles in implementing your business idea and are you addressing them?).

Various tools are provided including the Buyer Utility Map which helps managers to identify appropriate "utility levers" (such as customer productivity, convenience, fun and image). The Price Corridor of the Mass helps managers find the right price that will attract the mass of buyers with an irresistible offer (and which is not necessarily the lowest price). The Blue Ocean Idea Index provides a final test of the overall strategic sequence before moving from formulation to execution of the new blue ocean strategy.

Overcome organisational hurdles

Companies have a tough time translating thought into action in both red and blue oceans. The main organisational hurdles blocking implementation of a blue ocean strategy are cognitive (waking employees up to the need for a strategic shift); limited resources; motivating key players to break from the past; and politics (i.e. opposition from powerful vested interests).

To surmount these hurdles quickly and at low cost, companies must abandon perceived wisdom on effecting change and turn to "tipping point leadership". This builds on the rarely exploited reality that in every organisation there are people, acts and activities that exercise a disproportionate influence on performance. Mounting a massive challenge does not require massive investments in time and resources. It is about conserving resources and cutting time by identifying and leveraging the factors of disproportionate influence in an organisation.

For example, breaking through the cognitive hurdle can be achieved by making managers and employees come face-to-face with the worst operational problems. Numbers are uninspiring but confronting people directly with poor performance is "shocking and inescapable" and exercises a disproportionate influence on tipping people's cognitive hurdle fast. Likewise, getting managers to listen to their most disgruntled customers firsthand will have much more impact on them than market surveys. [For more on the theory of the tipping point, see the VLRC summary of The Tipping Point by Malcolm Gladwell.]

Build execution into strategy

Ultimately, to implement a blue ocean strategy a company needs to invoke the most fundamental base of action: the attitudes and behaviour of its people throughout the organisation. To build people's trust and commitment deep in the organisation and inspire their voluntary co-operation, companies need to integrate execution into strategy right from the start. This deals with the management risk associated with people's attitudes and behaviours, including distrust, non-cooperation and even sabotage.

Companies need more than carrots and sticks; they need "fair process" in the making and executing of strategy. Because a blue ocean strategy represents a departure from the status quo, fair process facilitates both strategy-making and execution by mobilising people for the voluntary co-operation needed to execute it. The idea of fair process is based on the notion that people care as much about the justice of the process through which an outcome is produced as they do about the outcome itself. When fair process is exercised in strategy-making, people trust that a level playing field exists and they will be inspired to co-operate voluntarily in implementing the resulting strategic decisions.

The three "E principles" of fair process are engagement, explanation and clarity of expectation. Engagement means involving people in the strategic decisions that affect them. Explanation means that everyone should understand why final strategic decisions are made. Expectation clarity requires that after a strategy is set, managers state clearly the new rules of the game. All three criteria are required for fair process.

A final chapter discusses the dynamic aspects of blue ocean strategy and the issues of sustainability and renewal. As the company succeeds in its blue ocean, more companies will eventually jump in. A blue ocean strategy has many barriers to imitation but eventually almost very blue ocean strategy will be imitated. To avoid the trap of competing, you need to monitor the value curve on the Strategy Canvas. This will signal when you need to value-innovate and when not to. When your value curve begins to converge with those of the competition, that is the time to reach out for another blue ocean.

Clearly a book that should be high on every manager's reading list.

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