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April 2008
Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant; Chan Kim and Renee Mauborgne (Harvard Business School Press, Boston; 2005; ISBN 1-59139-619-0)
Summary
If you ever hear your executives whine about the competition, you will
want to read this book. It is about how a company can do things so
differently that it moves into an entirely different marketplace, even
a different industry. The authors have been called “two of Europe’s
brightest business thinkers,” have written for all the major business
publications, and are distinguished professors at INSEAD.
In Blue Ocean Strategy, they describe the red ocean as where most
companies compete, seeking customers from the same market as their
competitors. Kim and Mauborgne suggest that companies break out of the
red ocean of bloody competition by creating uncontested market space
in the blue ocean that makes the competition irrelevant. Red Ocean
Strategy focuses on existing customers, and has the follow-ing traits:
Red Ocean Strategy
Focus on existing customers
Compete in existing market space
Beat the competition
Exploit existing demand
Make the value-cost trade-off
Align the whole system of a firm’s activities with the strategic choice of differentiation or low cost
Blue Ocean Strategy
Focus on non-customers
Create uncontested market space
Make the competition irrelevant
Create and capture new demand
Break the value-cost trade-off
Align the whole system of a firm’s activities
in pursuit of differentiation and low cost
Successful blue ocean companies include Callaway Golf, NetJets, and
Cirque de Soleil. But companies have been creating blue ocean
strategies for decades. Callaway went after nongolfers intimidated by
the sport, gave them a club head so huge they couldn’t miss the ball,
and won over duffers in the process. NetJets took the speed and
flexibility of the corporate jet and the lower cost of commercial
travel and offered the best of both industries in fractional
“timeshare” jet ownership. Cirque de Soleil redefined the circus by
eliminating the ani-mals, the travel, and the three rings, thereby
appealing to an upscale market looking for entertainment.
Guiding Principles
As you create your blue ocean strategies, be aware of four guiding
principles. The first is to break from the competition and reconstruct
market boundaries. For example: Novo Nordisk looked past the red ocean
of doctors as the market for insulin to the blue ocean of diabetics and
became a diabetic’s care company rather than just a producer of insulin.
The second guiding principle is to focus on the big picture, not the
numbers. As a strategist, I have long tried to convince clients that
when the strategy is right and implemented, the numbers will happen.
The right strategic planning process is critical to developing a good
strategy. Unfortunately, old habits die hard, and planning processes
become mired in the numbers.
The third guiding principle is to reach beyond existing demand.
Historic strategic planning processes encourage focusing on current
markets and further defining niches, thus continuing a red ocean
existence.
To have a profitable and robust strategy, you must follow the fourth
guiding principle: get the strategic sequence right. The right
strategic sequence of buyer utility, price, cost, and adoptions will
ensure commercial viability.
Business models usually start with the cost and build the price
based on how much profit they want to make. Blue ocean strategies
suggest starting with the utility to the customer and then setting the
consumer price and designing the model so that the cost allows the
profit desired. My experience is that companies juggle cost and price,
trying to decide the highest price the market will bear and adding or
subtracting features until they get a nominal product they think they
can sell at the highest profit. Many times they never even get around
to the subject of value to the customer.
How to create Blue Oceans
Value innovation is the cornerstone of blue ocean strategy and is not
new. Porter and others have espoused innovation for decades. What is
new is how Kim and Mauborgne suggest that innovation align with
utility, price, and cost positions while overcoming the execution
hurdles. They decry the value cost tradeoff so common today and provide
useful tools that encourage you to think alternatives instead of
competitors, and noncustomers instead of customers.
One tool is the strategy canvas used to create value. This is a
diagnostic and action oriented chart that plots the current state of
play (low vs. high activity) in the known market against the range of
factors used to compete. The resulting value curve shows where the
competition is currently investing and what they offer buyers. This
creates the current value curve. Once you have created that, look at
each factor and decide which of four primary actions (eliminating,
reducing, increasing, or creating) could be taken to create value to
noncustomers. These actions will dramatically change your value curve.
For example: What factors on the strategy canvas should be
eliminated that don’t add value? Casella Wines eliminated the aging and
tannin qualities, two factors that intimidated customers.
What factors should be reduced below the industry standard to avoid
over delivering? Casella Wines limited their offerings to just one
white wine and one red wine (Yellow Tail) to avoid customer confusion.
What factors should be raised above the industry standard so that
customers won’t have to make compromises? Casella Wines raised the
involvement of Yellow Tail retailers by providing them with Australian
outback clothing, which helped make the wine seem friendly instead of
intimidating.
What factors should be created that are new to the industry? Casella
wines created new customer experiences for wine drinking; easy
drinking, ease of selection, and a sense of fun and adventure.
Characteristics of Blue Ocean Strategy
Once these actions have been taken, look to see if your strategy has
the three characteristics of a good blue ocean strategy. Does it have
focus? Does it diverge from other players? Does it have a good tag
line? Look to alternatives rather than the competition.
For example: SouthWest Airlines chose to look at automobile
transportation, not other airlines, as the alternative for comparison.
By focusing on friendly service, speed, and frequent point-to-point
departures, they were able to price against car transportation. They
diverged by eliminating, reducing, raising, and creating value that
differentiated their profile from the average airline. Their tag line:
“the speed of a plane at the price of a car - whenever you need it,”
was very compelling, and sales took off.
Execution is Key
The final section of the book goes into detail about how to execute the
blue ocean strategy. This is an important section that covers over
coming the organizational hurdles: how to build execution into the blue
ocean strategy, and how to sustain and when to renew the strategy.
How do you get employees to be aware of the need for the new strategy,
abandon the status quo, and jump on the execution wagon? How can you
accomplish each phase without increasing the resources needed? How do
you motivate employees to become enthusiastic supporters rather than
reluctant participants or, worse, saboteurs? Tipping point
leadership—popularized by Malcom Gladwell’s book, The Tipping Point—where
leaders mobilize a company by flipping conventional wisdom on its head,
is necessary to overcome these hurdles quickly at low cost, winning
support for the strategy in the process.
Before people will execute a new strategic plan, their minds and hearts
must align with the new strategy. Then they willingly go beyond
compulsory execution to voluntary cooperation in implementation. Fair
process is vital here. When management has engaged employees in
pertinent aspects of the strategic decision making, explained the
strategic choices, and effectively communicated the new rules of the
game—then employees will judge the process as fair. A blue ocean
strategy successfully implemented provides strong barriers of
imitation, giving a 10- to 15-year lead over the competition.
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