Blue Ocean Strategy, by W. Chan Kim and Renée Mauborgne

W. Chan Kim (born in 1951) is a South Korean professor of strategy and management. Renée Mauborgne (born in 1963) is an American professor of strategy. Both are ranked among the most influential management thinkers, having co-authored several bestselling strategy books.

Below are the key lessons from Blue Ocean Strategy:

Red oceans

• Red oceans represent all the industries in existence today, i.e., the known market space.
• In red oceans:
  • Industry boundaries are defined and accepted, and the competitive rules of the game are known.
  • Companies focus on beating competition by grabbing a greater share of existing demand and building a defensible position within the existing industry order.
  • Strategy is often seen as making a choice between creating greater value for customers at a higher cost (“differentiation”) and creating reasonable value at a lower cost (“low cost”).
  • As the market space gets crowded, prospects for profits and growth are reduced, products become commodities, and cutthroat competition turns the red ocean bloody.
• Many books have been written on how to compete in red oceans, from analyzing the economic structure of the industry, to choosing a strategic position of low cost, differentiation or focus, to benchmarking the competition.

Blue oceans

• Blue oceans denote all the industries not in existence today, i.e., the unknown market space.
• In blue oceans:
  • Market boundaries and industry structure are not given, and the rules of the game are waiting to be set.
  • Companies focus on making competition irrelevant by creating a leap in value for buyers and themselves (“value innovation”), and opening new and uncontested market space.
  • The creation of blue oceans is about driving value up for buyers (by raising and creating elements the industry has never offered) while simultaneously driving costs down (by eliminating or reducing some of the factors the industry competes on, and triggering scale economies). As such, companies pursue differentiation and low cost simultaneously.
  • Untapped market spaces are opportunities for highly profitable growth.
• Blue Ocean Strategy aims to provide the practical frameworks to systematically pursue and capture blue oceans.
• To understand the roots of high performance, the authors consider that the company and the industry are not the appropriate unit of analysis (as evidenced by the failure of companies once deemed “excellent” or “visionary”), and suggest focusing instead on “strategic moves”, i.e., the set of managerial actions and decisions involved in making a major market-creating business offering.

The strategy canvas

• The “strategy canvas” below depicts the value propositions of US wine industry players in the late 1990s.
• Players then competed on 7 factors: (1) price per bottle, (2) image (wine medals, enological terms), (3) above-the-line marketing, (4) aging quality, (5) vineyard prestige (estates, chateaux), (6) wine complexity (tannins, oak), and (7) wine range (from Chardonnay to Merlot).
• The c.1,600 US wineries converged in their value curves into premium brand wines on the one hand, and budget wines on the other hand.

• To shift the strategy canvas, benchmarking and traditional customer research typically do not help. You must begin by reorienting your focus:
  • From competitors to alternatives.
  • From customers to noncustomers.
• Looking at the alternatives of beers, spirits, and ready-to-drink cocktails, Casella Wines found that the mass of US adults saw wine as a turnoff (intimidating, pretentious, complex).

The four actions framework

• There are four questions to break the trade-off between differentiation and low cost. The first two yield insights into how to drop your cost structure, while the second two provide insights into how to lift buyer value.
  • Which of the factors that the industry takes for granted should be eliminated? Often those factors are taken for granted although they no longer have value.
  • Which factors should be reduced well below the industry’s standard? Here companies overserve cistomers, increasing their cost structure for no gain.
  • Which factors should be raised well above the industry’s standard? This pushes you to uncover and eliminate compromises customers are forced to make.
  • Which factors should be created that the industry has never offered? This helps you discover entirely new sources of value for buyers.
• By looking at the alternatives of beer and ready-to-drink cocktails and thinking in terms of noncustomers, Casella Wines created three new factors (easy drinking, ease of selection, and fun and adventure) and eliminated or reduced everything else. The wine was sweet and soft in taste, did not require aging and thus working capital, came in two options (Chardonnay and Shiraz), with simple vibrant labels free of technical jargon and same-size bottles. The company offered retail shop employees branded clothing to make them ambassadors.

The eliminate-reduce-raise-create grid

• The grid below forces companies to act on all four questions to create a new value curve:

Three characteristics of a good strategy

• An effective blue ocean strategy has three qualities:
  • Focus. Companies should emphasize only a few factors, and not diffuse their efforts across all key factors of competition. Without focus, the cost structure will tend to be high and the execution complex.
  • Divergence. The value curves of blue ocean strategists stand apart and differentiate their profiles from the industry average, by applying the four actions of eliminating, reducing, raising, and creating. Without divergence, the offering will not stand apart in the marketplace.
  • A compelling tagline. A good strategy should have a clear-cut and compelling tagline, delivering a clear, strong, and authentic message. Without a compelling tagline that speaks to buyers, it is likely to be innovation for innovation’s sake without great commercial potential and natural take-off capability.
• Without these qualities, a company’s strategy will likely be muddled, undifferentiated, hard to communicate, and with a high cost structure.

Reconstructing market boundaries

• Most companies build their strategies on six assumptions, which keep them trapped competing in red oceans:
  • Define the industry similarly and focus on being the best within it.
  • Look at their industry through generally accepted strategic groups and strive to stand out in their own group.
  • Focus on the same buyer group, be it the purchaser, the user, or the influencer.
  • Define the scope of products and services similarly.
  • Accept the industry’s functional or emotional orientation.
  • Focus on the same point in time in formulating strategy.
• To break out of red oceans, companies must reconstruct established market boundaries:

• Look across alternative industries:
  • What are the alternative industries to your industry?
  • Why do customers trade across them?
  • NetJets opened up a blue ocean by offering the best of commercial travel and private jets, and eliminating and reducing everything else.

• Look across strategic groups within industries:
  • What are the strategic groups in your industry?
  • Why do customers trade up for the higher group?
  • Why do they trade down for the lower one?
  • Fitness firm Curves built its offering by drawing on the distinctive strengths of health clubs and home exercize programs, eliminating and reducing else.

• Look across the chain of buyers:
  • What is the chain of buyers in your industry?
  • Which buyer group does your industry typically focus on?
  • If you shifted the buyer group of your industry, how could you unlock new value?
  • Novo Nordisk created a blue ocean in the insulin industry by focusing on users, i.e., patients (ease of use) rather than on influencers, i.e., doctors (insulin purity).
• Look across complementary product and service offerings:
  • What is the context in which your product or service is used?
  • What happens before, during, and after? Can you identify the pain points?
  • How can you eliminate these pain points through a complementary product or service offering?
  • NABI created a blue ocean in the transit bus market by building buses in fiberglass, lowering the life-cycle cost to municipalities while improving design as well as customer and environment friendliness.

• Look across functional or emotional appeal to buyers:
  • Does your industry compete on functionality or emotional appeal?
  • If you compete on emotional appeal, what elements can you strip out to make it functional?
  • If you compete on functionality, what elements can be added to make it emotional?
  • QB House created a blue ocean in the Japanese barbershop industry by shifting from an emotional appeal (long ritual) to a functional appeal (quick and cheap haircut).

• Look across time:
  • What trends have a high probability of impacting your industry, are irreversible, and are evolving in a clear trajectory?
  • How will these trends impact your industry?
  • Given this, how can you open up unprecedented customer utility?
  • Apple, observing the flood of illegal music file sharing in the late 1990s, launched the iTunes online music store in 2003, allowing users to sample songs and purchase them on on individual basis for $0.99.

The typical strategic plan

• Lengthy description of current industry conditions and competition.
• Discussion of how to increase market share, capture new segments, or cut costs.
• Outline of goals and initiatives.
• Full budget.
• Large document prepared by various parts of the organization who often have conflicting agendas and poor communication.

Focus on the big picture (visualizing strategy)

• Visual awakening:
  • Draw your “as is” strategy canvas.
  • See where your strategy needs to change.
  • The picture can highlight defects (e.g., lack of focus, lack of divergence, contradictions, unclear tagline compared to competitors) and thus the need for change (wake-up call).
• Visual exploration:
  • Go into the field to explore the six paths to blue oceans: alternative industries, strategic groups, buyers, complements, emotional / functional, time.
  • Observe the distinctive advantages of alternatives.
  • See the factors you should eliminate, create, or change.
  • You should never outsource your eyes.
  • You should go after customers, noncustomers, users, interview them, see them in action, and look at the complements and alternatives they use.
  • This field research can reveal that the factors most valued by customers are not what you thought.
• Visual strategy fair:
  • Draw your “to be” strategy canvas. Each team should present their proposal, in no more than 10 minutes.
  • Present them to a panel of customers, competitors’ customers, and noncustomers to get feedback. Judges should vote on their favorite strategies, and explain why they picked them and why they did not vote for the others.
  • Use feedback to build the best “to be” strategy. Synthesizing likes and dislikes can reveal that some competitive factors are in fact marginal or only matter if there is a problem with the basics.
• Visual communication:
  • Distribute a one-page picture of your before and after strategy canvas to your employees.
  • Support only the projects that allow you to close the gap from the old to the new value curve.

Corporate strategy

The strategy canvas

• Drawing and sharing the strategy canvas of your business units can help foster understanding, communicate best practices, and stop the blaming of poor results on competition.

The pioneer-migrator-settler (PMS) map

• Pioneers are the businesses that offer unprecedented value.
• Settlers are me-too businesses whose value curve conforms to the basic shape of the industry.
• Migrators lie in between: they give customers more for less, but don’t alter the basic shape of the value curve.
• Senior executives should shift the balance of their future portfolio towards pioneers, but also realize settlers are frequently today’s cash generators.

Reach beyond existing demand

• Companies should challenge two conventional strategy practices:
  • Focus on existing customers.
  • Finer segmentation to accomodate buyer differences.
• To maximize the size of their blue oceans, companies should instead:
  • Look to noncustomers. Callaway, asking why people had not taken golf as a sport, realized that hitting the golf ball was perceived as too difficult, and introduced Big Bertha, a golf club with a large head.
  • Build on commonalities in what buyers value. Callaway also pleased existing golf customers, who had taken for granted that the game ought to be difficult.
• There are three tiers of noncustomers that can be transformed into customers:
  • • The first tier (“soon-to-be noncustomers”) are buyers who buy minimal quantities from your industry out of necessity, but are ready to jump ship if they find a better alternative. Pret A Manger tapped into customers of sit-down restaurants in search of better solutions.
    • The second tier (“refusing noncustomers”) are people who consciously refuse to use your industry’s offerings. JC Decaux unlocked demand for outdoor ads by providing free street furniture to municipalities.
    • The third tier (“unexplored noncustomers”) are people who never thought of your industry’s offerings as an option. The Joint Strike Fighter aimed to build a single airframe in three variants (Navy, Marines, Air Force) that shared 70% of parts.

Get the strategic sequence right

Exceptional utility

• A buyer’s experience can be broken into a cycle of six stages, from purchase to disposal.

• Utility levers are the ways in which companies can unlock exceptional utility for buyers.
• To test for exceptional utility, companies should check whether their offering has removed the greatest blocks to utility across the buyer experience cycle for customers and noncustomers.

Strategic pricing

• Identify the price corridor of the target mass, by looking at the price of substitutes and alternatives. Ford’s Model T was priced against horse-drawn carriages, while Southwest Airlines fares were priced against car rides.
• Determine a price based on legal protection, asset protection, nature of costs, and network externalities. Products with strong patents, and requiring hard-to-imitate assets or capabilities can sustain upper-boundary pricing. Products with low or uncertain patent and asset protection, high fixed costs / low marginal costs, and network externalities warrant mid to lower boundary pricing.

Target costing

• Target cost = strategic price – desired profit.
• Setting target costs this way is usually aggressive.
• The levers to achieve this are as follows:
  • Focus. The challenge is to build a strategic profile that has not only divergence but also focus, which forces the company to strip out costs. Cirque du Soleil eliminated animals and stars, and the Model T only came in one color.
  • Cost innovations, e.g., (1) replace expensive raw materials by unconventional, less expensive ones, (2) eliminate, reduce or outsource high-cost, low value-added activities in your value chain, (3) shift the location of your product or service from prime to low-cost, (4) reduce the number of parts or steps, or (5) digitize activities. To keep its price at $40 while supporting marketing and services, earning a profit and keeping Asian competitors at bay, Swatch set a strict target cost, which it achieved by using plastic instead of metal or leather, reducing the number of parts by 2/3, and developing cheap assembly techniques.
  • Partnering / acquisitions. Partnering can allow you to leverage other companies’ expertise and economies of scale. IKEA partners with 2,000 manufacturers to ensure the lowest cost and fastest production. SAP partnered with Oracle (for its database) and leading consulting firms such as Accenture and Capgemini (for their sales force and implementation team).
  • Changing the pricing model. Examples of pricing innovation include time-share (NetJets), slice-share (mutual funds), and freemium.

Adoption

• Blue ocean ideas threaten the status quo, and may provoke fear and resistance across employees, business partners, and the general public.
• Companies should engage in an open discussion about why the adoption of a new idea is necessary, explain its merits, set clear expectations for its ramifications, describe how the company will address them, show stakeholders that their voices have been heard and that there will be no surprises.

Employees

• Before companies go public with an idea and set out to implement it, they should make a concerted effort to:
  • Communicate to employees that they are aware of the threats posed by the execution of the idea.
  • Work with employees to find ways of defusing the threats so that everyone in the company wins, despite shifts in people’s roles, responsibilities, and rewards.
• To achieve its transformation from DVD-by-mail to video streaming provider, Netflix put great emphasis on engaging employees on the necessity of the shift, explaining what this means to them, making sure they understand the leveers that drive video-streaming.

Business partners

• Potentially even more damaging than employee disaffection is the resistance of partners who fear that their revenue streams or market positions are threatened by a new business idea.
• When developing AcceleratedSAP (ASAP), a method for faster and lower-cost implementation of SAP, it convinced its consulting firm partners that they stood to gain more by cooperating, as (1) they would gain access to small and midsized companies, more than offsetting lost revenus from larger companies, and (2) would address customers’ concerns.

The general public

• Opposition to a new business idea can also spread to the general public, especially if the idea threatens established social or political norms.
• Monsanto, which makes genetically modified crop seeds, did not proactively educate environmental groups and the public.

The blue ocean idea (BOI) index

• The BOI index provides a simple test of the potential commercial success, addressing (1) Utility, (2) Price, (3) Cost, and (4) Adoptoin.

Overcoming organizational hurdles

• Managers face four hurdles:
  • Waking up employees to the need for a shift.
  • Limited resources.
  • Motivation.
  • Politics.

• To overcome organizational hurdles, companies should practice tipping point leadership, which builds on the fact there are people, acts, and activities that exercise a disproportionate influence on performance.
  • Make people experience harsh reality and listen to disgruntled customers firsthand.
  • Concentrate resources on hot spots (low resources but high potential gains), free resources from cold spots (high resources but low impact), and engage in horse trading (trade resources you don’t need for others you do need).
  • Focus on kingpins (key influencers), place them in a fishbowl (e.g., biweekly review meetings to shine light on high achievers and poor performers, and allow them to compare notes), and break the challenge into bite-size atoms that managers at different levels can relate to.
  • Secure a consigliere (senior insider who knows the land mines, including who will fight you and who will support you), isolate your devils (detractors) by building a coalition with your angels (supporters) and counterarguments to all their angles of attack.

Build execution into strategy, using fair process

• A company needs to invoke the most fundamental base of action: the attitudes and behavior of its people deep in the organization.
• You must create a culture of trust and commitment that motivates people to execute the agreed strategy—not to the letter, but to the spirit.
• Fair process (i.e., procedural justice) is defined by three elements:
  • Engagement: involving indivisual in the strategic decisions that affect them by asking for their input, and allowing them to refute the merits of ideas and assumptions.
  • Explanation: everyone invovled should understand why final decisions are made as they are.
  • Expectation clarity: employees should know the rules of the game, i.e., what is expected of them, the standards by which they will be judged and the penalties for failure.

Alignment of value, profit, and people propositions

• Three propositions are essential to the success of strategy:
  • The value proposition: develop an offering that attracts buyers.
  • The profit proposition: create a business model that enables the company to make money out of its offering.
  • The people proposition: motivate people that work for or with the company to execute the strategy, by overcoming organizational hurdles, winning people’s trust with fair process, and setting aligned and fair incentives.
• Creating alignment is the responsibility of top executives.
• Imitating all three propositions is difficult, especially the people proposition (human relationships take time to cultivate).
• To produce a high-performing and sustainable blue ocean strategy, you need to ask the following questions:
  • Are your three strategy propositions aligned in pursuit of differentiation and low cost?
  • Have you identified all the key stakeholders, including external ones on which the effective execution of your blue ocean strategy will depend?
  • Have you developed compelling people propositions for each of these to ensure they are motivated and behind the execution of your new idea?
• Napster and iTunes offer contrasting examples in the digital music industry:
  • Napster had the first-mover advantage, but failed to agree on a revenue-sharing model with record labels, i.e., to align its external people proposition to support the compelling value it unlocked.
  • Apple created a win-win proposition for itself (30% of revenues + iPod sales) and its business partners (70% of revenues), and thus alignment of value, profit, and people proposition.

Renew blue oceans

Barriers to imitation

• A blue ocean strategy brings considerable barriers to imitation.

• Alignment barrier: the alignment of the three propositions (value, profit, and people) into an integral system around both differentiation and low cost.
• Cognitive and organizational barrier: imitation requires substantial changes, which may go against conventional industry wisdom, trigger internal politic issues, or other operational barriers.
• Brand barrier: brand image may prevent companies from imitating, especially if doing so could signal an invalidation of their current business model; also, value innovation earns blue ocean companies a brand buzz and loyal following.
• Economic and legal barrier: imitation can be discouraged or blocked by economic barriers (size of the market, economies of scale, network externalities) and legal barriers (patents, legal permits).

Renewal at the individual business level

• Eventually almost every blue ocean strategy will be imitated. To avoid the trap of competing, renewal is needed.
• Monitoring value curves signals when to value-innovate and when not to:
  • When a company’s value curve still has focus, divergence, and a compelling tagline, it should focus on lengthening, widening, and deepening its rent stream through operational improvements and geographical expansion to achieve maximum economies of scale and market coverage.
  • As competitors’ value curves converge, companies should begin reaching out for another value innovation to create a new blue ocean.
  • Salesforce.com did this by launching Force.com (a cloud-based development tool to create add-on applications), AppExchange (a web-based applicaitons marketplace), and Chatter (a private social network).

Renewal at the corporate level

• By plotting the corporate portfolio as pioneers, migrators, and settlers on the dynamic PMS map, executives can see at a glance where the gravity of its current portfolio of businesses is, how this has shifted over time, and when there is a need to create a new blue ocean to renew the portfolio.

Avoid red ocean traps

• The belief that blue ocean strategy is a customer-oriented strategy that’s about being customer led. A blue ocean strategist gains insights about reconstructing market boundaries not by looking at existing customers, but by exploring noncustomers, why they refuse to patronize an industry, what are the pain points and points of intimidation.
• The belief that to create blue oceans, you must venture beyond your core business. Blue oceans can just as easily and more readily be created in the company’s existing core businesses.
• The misconception that blue ocean strategy is about new technologies. A blue ocean strategic move is not about technology innovation per se. Value innovation, not technology innovation, is what opens up commercially compelling new markets.
• The belief that to create a blue ocean, you must be first to market. Blue ocean strategy is not about being first to market. Rather it’s about being first to get it right by linking innovation to value. While speed may be important, even more important is linking innovation to value.
• The misconception that blue ocean strategy and differentiation strategy are synonymous. Under traditional competitive strategy, differentiation is achieved by providing premium value at a higher cost to the company and at a higher price for customers. Blue ocean strategy, by contrast, is about breaking the value-cost trade-off to open up new market space, i.e., about pursuing differentiation and low cost simultaneously.
• The misconception that blue ocean strategy is a low-cost strategy that focuses on low pricing. Instead of focusing on low cost per se, it seeks to create a leap in buyer value at a lower cost. Further, a blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing. The key here is not to pursue pricing against the competition but to pursue pricing against substitutes and alternatives that are currently capturing the noncustomers of your industry.
• The belief that blue ocean strategy is the same as innovation. Value innovation, not innovation per se, is the singular focus of blue ocean strategy. Simply creating something original and useful through innovation is not enough. To capture a commercially compelling blue ocean, companies need a strategy that can align their value, profit, and people propositions in pursuit of both differentiation and low cost.
• The belief that blue ocean strategy is a theory of marketing. Blue ocean strategy tools can be helpful in developing a value proposition. But sustainable success can only be achieved when the value proposition is supported by key internal and external people, and complemented by a strong profit proposition.
• The belief that blue ocean strategy is a niche strategy. While the field of marketing has placed significant emphasis on finer segmentation to effectively capture niche markets, blue ocean strategy works in the reverse direction. It is more about desegmenting markets by focusing on key commonalities across buyer groups to open up and capture the largest catchment of demand.
• The belief that blue ocean strategy sees competition as bad when in fact it can be good for companies. Blue ocean strategy does not see competition as bad. However, unlike traditional economic thought, it does not see competition as always good. When supply exceeds demand, he intensity of competition tends to have deleterious effects on the profitable growth of organizations, as more and more firms fight to win a slice of a given pool of customers, triggering intense price pressure, razor-thin margins, commoditization of offerings, and slower growth.
• The belief that blue ocean strategy is synonymous with creative destruction or disruption. Blue ocean strategy is about redefining the problem itself, which tends to create new demand or an offering that often complements rather than displaces existing products and services.