A red ocean strategy is focused on beating the competition, exploits existing demand, makes the value-cost tradeoff, and aligns the whole system of a firm’s activities with its strategic choice of differentiation OR low-cost.
The blue ocean strategy makes the competition irrelevant. It creates and captures new demand. It breaks the value-cost tradeoff. And, aligns the whole system of a firm’s activities in pursuit of differentiation AND low-cost.
Kim & Mauborgne’s research show that value-innovation is the cornerstone of a blue ocean strategy. For them, this is achieved when there is a simultaneous pursuit of both product differentiation and low cost.
The authors place equal emphasis on value and innovation. Value without innovation incrementally improves value, but is insufficient to make you attract a market. Innovation without value tends to be technology-driven or futuristic, but often shoots beyond what buyers are willing to pay for.
The dominant focus of strategy work over the past 25 years has been on red ocean strategies. The result is increasingly skillful competition in red waters. Most managers can choose a strategic position of low cost or differentiation in this climate.
For these Harvard business professors, the time is critical for creating more blue ocean businesses. Accelerated technology has substantially improved productivity and allowed suppliers to produce an unprecedented array of products and services. The result is that in increasing numbers of industries supply exceeds demand.
Globalization compounds the situation. While supply is on the rise as global competition intensifies, there is no clear evidence of an increase in demand worldwide, and statistics even point to declin-ing populations in many developed markets.
This has caused an accelerated commoditization of products and services, increasing price wars, and shrinking profit margins. The authors affirm that recent industry-wide studies on major American brands confirm this trend.
They give many examples of companies who’ve created blue ocean opportunities. Compaq sold its computer company to HP, then created a blue ocean service company. Cirque du Soleil broke from the red ocean of circus entertainment to create an interactive, highly technology oriented show.Casella Wines created blue ocean market space by identifying the demand of buyers wanting a social drink, Yellow Tail, accessible to everyone. And, the list goes on and on.
Kim and Mauborgne identify 3-characteristics of a good strategy. First, they have focus. Second, divergence (product differentiation). Finally, they have a compelling tagline. Without these qualities, a company’s strategy will likely be muddled, undifferentiated, and hard to communicate with a high cost structure.
For example, Southwest Airlines is focused on speed, friendly service, and frequent point-to-point departures in mid-sized cities. They are divergent in that most industries at the time were hub-and-spoke systems. They have a compelling tag-line – “The speed of a plane at the price of a car – whenever you need it.”
These do not guarantee a blue ocean strategy, unless it is coupled with value curves that always stand apart from others in the same or competing industries.
The author’s contend, “when a company’s value curve lacks focus, its cost structure will tend to be high and its business model com-plex in implementation and execution. When it lacks divergence, a company’s strategy is a me-too, with no reason to stand apart in the marketplace. When it lacks a compelling tagline that speaks to buyers, it is likely to be internally driven or a classic example of innovation for innovation’s sake with no great commercial potential and no natural take-off capability (p. 42).”
To facilitate the process, the authors have designed a useful tool for all businesses, the strategy canvas. A strategy canvas visually orients the management team in what are the comparison values among competitive industries.
To begin the process of identifying blue ocean marketspace, the authors conceived of six paths to reconstruct market boundaries. They suggest that management teams do this by first looking across alternative industries. For example, to sort out their personal finances, people can buy and install financial software, hire a CPA, or simply use paper and pencil. These three are basically substitutes for the others.
Unlike these, alternatives have different functions and forms, but the same purpose. A restaurant has few physical or functional features as a cinema. One provides conversational and eating pleasure, the other visual entertainment. Despite the differences in form and function, both serve the same objective, to enjoy a night out.
In making every purchase decision, buyers implicitly weigh alternatives. Rarely do sellers think consciously about how their customers make tradeoffs across alternative industries.
For K & M, the strategic questions are, “What are the alternative industries to your industry? Why would buyers choose one alternative industry over another?” By focusing on the key factors that lead buyers to trade across alternatives and eliminating or reducing everything else, they create blue oceans.
One of the example of this is Jet Blue. The company saw only two major options for the flight customer – commercial or private. They identified a third option, whereby customers could buy 1/6th of an airplane, then get the comfort and convenience of a private plane with a cost competitive with the commercial industry.
The second path to reconstruct market boundaries is for the management team to look across strategic groups within industries. The oft-used strategy is to find differentiation within the same market. For example, Mercedes,BMW, and Jaguar will all try to find ways to differentiate their product, but will still appeal to the same luxury car buyer.
The authors used Curves as an example of a company who created blue ocean in the fitness industry. At first glance, the industry already looked saturated with the health clubs, sporting programs, and home fitness options. The founder wanted to know what made women trade up or down these options.
As a result, Curves targeted a large group of women who lacked the intrinsic motivation to continue a fitness program, needed group motivation, didn’t want to be seen by men while they are working out, and for whom time was at a premium.
Curves built blue ocean by expanding those strengths, and reducing or eliminating everything else. As a result, it is not competing directly with the other companies in the health industry, and is growing at an alarming rate.
The alternatives in education are few. They are home school, distance learning, private school (day, boarding, or therapeutic), or public school. However, the delivery systems providing the service are legion. The pressing question for looking outside the industry is, “What makes parents and students trade up or down these alternative industries?”
For the third path to reconstructing market boundaries, the authors argue that companies should look across the chain of buyers. Typically an industry will converge on a single buyer group. By challenging an industry’s conventional wisdom about which buyer group to target a blue ocean may be discovered. By questioning conventional definitions of who can and should be the target buyer, companies can often see fundamentally new ways to unlock value.
As such Kim & Mauborgne call on leaders to ask the critical questions, “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?”
The fourth path to reconstruct market boundaries is to look across complementary product and service offerings. The authors contend, the key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used.
One of the companies the authors highlight is NABI, a Hungarian bus manufacturing company. For years, the industry competed on the premise that the lowest purchase price will win municipality bidding. As a result, the design, parts, etc., were driven down to shoddy manufacturing. NABIidentified that it was the cost of maintaining the buses that were of primary importance.
As a result, they were able to justify the increased cost by greatly increasing the design, parts, etc., to capitalize on future maintenance costs. As a result, they created blue ocean market space of $1 billion in orders, and is touted as one of the 30 most successful companies in the world.
In education, complementary products and services include; textbook designers and publishers, curriculum designers, research centers, regional support centers, consultants, tutoring services, testing centers, technology delivery and support companies, facilities designers, manufacturers, finance providers, distributors of all kinds, et al. These all play critical roles in the educational delivery system. To create a blue ocean market, management must look across this terrain for burgeoning opportunities, and create value-innovation.
The fifth path to reconstruct market boundaries calls for the management team to look across functional or emotional appeal to buyers. The key questions are, “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?”
The sixth path is to look across time. Here the authors assert that key insights into blue ocean strategy rarely come from projecting the trend itself. Instead, they arise from business insights into how the trend will change value to customers and impact the company’s business model.
For example, Apple observed the flood of illegal music file sharing that began in the 1990s with Nap-ster, etc. While the music industry fought to stop the cannibalizing of CDs, illegal digital music down-loading continued to grow.Apple, on the other hand, developed the iPod and iTunes, to capitalize on this ever-increasing demand.
The authors then press us to con-sider, “What trends have a high probability of impacting your in-dustry, 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?”
The authors challenge managers that once they have reframed the market terrain, conceive of new market space by focusing on the big picture, rather than the numbers.
To do this, they offer a few tools. The management team should draw up a strategy canvas. They must first avoid the common mistake of discussing changes in strategy before resolving differences about the current state. Then, there must be an accurate assessment of what are the competitive factors.
Step 2 and 3 are conventional marketing strategies. Send a team into the field, putting managers face-to-face with how people use or don’t use their products or services. K & M contend that a company should never outsource its eyes. Next, conduct a meeting of stakeholders broken into groups who go through a vetting process to identify the critical value curves.
Step 4 is to create visual communication. K & M suggests showing before and after strategy canvases, explaining what needs to be eliminated, reduced, raised, and created to pursue a blue ocean.
Next, the authors convey that a major error on the part of company leaders is, they concentrate most of their marketing information on current and ex-customers. They rarely interact with noncustomers. Noncustomers tend to offer far more insight into how to unlock and grow a blue ocean than relatively content existing customers.
K & M contend that to create new demand, and thus blue oceans, managers have to understand the terrain of the noncustomer. These actually fall into three tiers. The 1st tier is those noncustomers closest to your market. They are rare buyers, who only purchase out of absolute necessity from you. They are waiting to jump ship at the first opportunity. However, if provided a leap in value, not only would they stay, but also their frequency of purchases would multiply.
A success in attracting 1st tiers was Pret A Manger. They created blue ocean demand when they discovered that the sit-down restaurant industry continued on a steady decline because noncustomers now wanted healthier food, faster, and as cheap.
The 2nd tier is those who have seen what you offer, but refuse to use it. These refuse because either they find the product unacceptable or cannot afford it. To address these issues, Callaway Golf created the Big Bertha golf club and unleashed a blue ocean of new golf enthusiasts, as they found that country clubbers had rejected golf because it was too hard to consistently hit the ball.
The 3rd tier is farthest from your market. They are noncustomers who have never thought of your market’s offerings as an option. They are unexplored because their needs and the business opportunities associated with them have somehow always been linked with other markets.
To market education, the Academy should find out how our noncustomers view us. What are the critical needs these respective tiers have, and what business opportunities are available in addressing those needs.
To begin the process of implementing a blue ocean market plan, the authors conceived of what they term a “four quadrant framework.”
What to eliminate, reduce, raise, and create. When a company’s value curve lacks focus, its cost structure will tend to be high. It will try to do too many things, many that have no impact on the bottom line whatsoever.
The management team must first identify the things that need to be eliminated. Other aspects of the business need to be reduced. There may be a whole support system that needs to be outsourced.
Managers should reduce the part of the business that isn’t providing sufficient impact to the overall value of the company to warrant the size of the investment. For example, the authors noted Casella Wines reduced wine complexity, range, and vineyard prestige. While at the same time, they raised prices verses budget wines, and retail store involvement.
Cirque du Soleil reduced fun and humor, thrill and danger, in exchange for raising a unique venue by creating a cogent theme, refined environment, multiple productions, and artistic music and dance.
Thus both companies created a thoroughly unique product, thus blue ocean marketspace. In other words, they now had a product where there was little to no competition or substitute goods, with significant value innovation.
The last major section of the book, entitled Executing Blue Ocean Strategy, provides a blueprint for implementing the strategies detailed in the book. This section alone is worth the price of the book.
Published one time for exclusively educational purposes. Resource for the compendium provided by Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne (Harvard Business School Press, Boston, MASS, 2005).