Blue Ocean Strategy
Tags: #business #strategy #competition #innovation #marketing #growth #value creation
Authors: W. Chan Kim, Renée Mauborgne, W. Chan Kim, Renée Mauborgne
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Overview
This book offers a practical methodology for creating “blue oceans” of uncontested market space, where companies can thrive away from the bloody competition of “red oceans.” It challenges conventional strategic thinking that focuses on outcompeting rivals in existing markets. Instead, we argue for value innovation, the simultaneous pursuit of differentiation and low cost. This allows companies to create a leap in value for both buyers and themselves, opening up new and uncontested market space.
This book is for managers and executives in any organization seeking to create new growth opportunities and sustain high performance in today’s increasingly competitive market. It introduces a set of analytical tools and frameworks, including the strategy canvas, the four actions framework, and the eliminate-reduce-raise-create grid, that assist companies in systematically formulating and executing blue ocean strategy.
We detail six paths to unlock blue oceans by reconstructing market boundaries: looking across alternative industries, strategic groups, buyer groups, complementary product and service offerings, functional-emotional appeal, and across time. We also address the all-important human aspects of change management, explaining how to build execution into strategy by overcoming key organizational hurdles through tipping point leadership and fair process.
Our research shows that there are no perpetually high-performing companies or industries, but there is a consistent pattern across strategic moves that create blue oceans. Our framework for blue ocean strategy helps managers turn the abstract notion of innovation into a concrete, systematic, and actionable process, allowing companies to build growth and profits in new market space, even in challenging economic times.
Book Outline
1. Creating Blue Oceans
In today’s overcrowded market universe, companies must stop competing head-to-head. Blue ocean strategy provides a systematic approach to make the competition irrelevant by creating new uncontested market space ripe for growth.
Key concept: Red Oceans vs. Blue Oceans: Red oceans are all the industries in existence today – the known market space. Blue oceans are all the industries not in existence today – the unknown market space.
2. Analytical Tools and Frameworks
Strategic moves are the right unit of analysis for explaining the creation of blue oceans and sustained high performance. The strategy canvas and four actions framework are analytical tools that help formulate blue ocean strategies, visually depicting strategic profiles and identifying opportunities for value innovation.
Key concept: The Strategy Canvas: The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space, allowing you to understand where the competition is currently investing, the factors the industry currently competes on, and what customers receive from the existing competitive offerings.
3. Reconstruct Market Boundaries
To reconstruct market boundaries, there are six paths that reduce search risk and create blue oceans. These include looking across alternative industries, strategic groups within industries, the chain of buyers, complementary product and service offerings, the functional-emotional appeal to buyers, and across time.
Key concept: Six Paths Framework: The six paths framework allows companies to systematically create uncontested market space across diverse industry domains. The six paths focus on looking across alternative industries, strategic groups, buyer groups, complementary offerings, the functional-emotional orientation of an industry, and time.
4. Focus on the Big Picture, Not the Numbers
The current strategic planning process keeps companies locked into a red ocean of cutthroat competition. The key to unlocking value innovation is to focus on the big picture and not be submerged in numbers and jargon.
Key concept: Four Step Planning Process: This four-step planning process goes beyond incremental market improvements to create value innovations. Step 1: Visual Awakening - compare your business with your competitors by drawing your as is strategy canvas. Step 2: Visual Exploration - go into the field to explore the six paths to creating blue oceans, observe the distinctive advantages of alternative products and services, and see which factors you should eliminate, create, or change. Step 3: Visual Strategy Fair - draw your to be strategy canvas and get feedback on alternative strategy canvases from customers and noncustomers. Step 4: Visual Communication - distribute your before and after strategic profiles on one page.
5. Reach Beyond Existing Demand
Companies can reach beyond existing demand by focusing on noncustomers before customers, commonalities before differences, and desegmentation before pursuing finer segmentation. This allows businesses to access untapped market potential and maximize the size of their blue oceans.
Key concept: Three Tiers of Noncustomers: First Tier: Soon-to-be noncustomers who minimally purchase an industry’s offering out of necessity and are waiting to jump ship. Second Tier: Refusing noncustomers who consciously choose against your market. Third Tier: Unexplored noncustomers who are in markets distant from yours.
6. Get the Strategic Sequence Right
The proper strategic sequence for creating robust business models includes buyer utility, price, cost, and adoption. This sequential approach helps minimize business model risk by ensuring a commercially viable offering that unlocks exceptional utility for buyers at a strategic price while maintaining profitability for the company.
Key concept: Sequence of Blue Ocean Strategy: Buyer utility: does your offering unlock exceptional utility? Price: Is your price easily accessible to the mass of buyers? Cost: Can you attain your cost target to profit at your strategic price? Adoption: What are the adoption hurdles in actualizing your business idea?
7. Overcome Key Organizational Hurdles
Executing blue ocean strategy requires overcoming key organizational hurdles like cognitive, resource, motivational, and political barriers. Tipping point leadership provides a framework for overcoming these hurdles by focusing on disproportionate influence factors.
Key concept: Tipping Point Leadership: Tipping point leadership focuses on identifying and leveraging the factors of disproportionate influence in an organization. It allows you to overcome the key organizational hurdles to strategy execution fast and at low cost.
8. Build Execution into Strategy
Building execution into strategy necessitates engaging employees and building a culture of trust and commitment. This minimizes management risk and motivates voluntary cooperation, essential for navigating the organizational change required for blue ocean strategy.
Key concept: Three E Principles of Fair Process: Engagement: Involve individuals in strategic decisions by asking for input. Explanation: Explain why final strategic decisions are made as they are to build trust. Expectation clarity: State clear expectations and standards after strategy is set.
9. Conclusion: The Sustainability and Renewal of Blue Ocean Strategy
Creating blue oceans is a dynamic process requiring ongoing monitoring for imitation and adaptation. When a blue ocean becomes red with competition, it is time to value-innovate again and create a new uncontested market space. Sustaining high performance necessitates a shift from a focus on competing to a focus on creating blue oceans.
Key concept: Value Innovation: Value innovation is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy: the value-cost trade-off.
Essential Questions
1. What are blue oceans and red oceans, and why is it important to shift from red oceans to blue oceans?
Blue oceans represent untapped market space, demand creation, and opportunities for highly profitable growth. Red oceans, in contrast, signify all the industries in existence today - the known market space where industry boundaries are defined and accepted, and the competitive rules of the game are known. In red oceans, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the ocean bloody. Companies need to go beyond competing in red oceans and create blue oceans to unlock new profit and growth opportunities.
2. What is value innovation, and how does it create blue oceans?
Value innovation is the simultaneous pursuit of differentiation and low cost, creating a leap in value for both buyers and the company. It’s about making the competition irrelevant by creating and capturing new market space. This is achieved by identifying what customers value across industry and market boundaries, eliminating and reducing factors that the industry takes for granted, raising factors above industry standards, and creating new factors the industry has never offered. Value innovation requires companies to orient their whole system toward achieving this leap in value, making it more than just incremental innovation.
3. What are the six paths to creating blue oceans, and how do they help in reconstructing market boundaries?
There are six paths to reconstruct market boundaries and create blue oceans. Look across alternative industries, not just rivals within your own. Look across strategic groups within your industry. Look across the chain of buyers, from purchasers to users and influencers. Look across complementary product and service offerings, considering what happens before, during, and after your product is used. Look across functional or emotional appeal to buyers, challenging whether products compete on utility or feelings. Finally, look across time, analyzing trends to see how they might change buyer value and your business model. These paths often reveal untapped value and create opportunities for differentiation.
4. What is the strategic sequence for building a commercially viable blue ocean strategy, and how does it mitigate risks?
The strategic sequence involves four key steps: buyer utility, price, cost, and adoption. Start by ensuring your offering unlocks exceptional buyer utility - a compelling reason for people to buy it. Then, set the right strategic price – affordable to the mass of target buyers, allowing them to pay. Next, ensure you can produce your offering at a target cost that allows you to profit at the strategic price. Finally, address adoption hurdles up front, considering potential resistance from employees, partners, or the public.
5. What are the key organizational hurdles in executing a blue ocean strategy, and how can tipping point leadership help overcome them?
Execution often falters due to cognitive, resource, motivational, and political hurdles. To overcome these, focus on tipping point leadership. To shift mindsets (cognitive), make people experience the worst operational problems and listen to disgruntled customers. To overcome limited resources, redistribute resources to ‘hot spots’ (high impact, low resource), reduce ‘cold spots’ (low impact, high resource), and engage in ‘horse trading.’ To motivate key players, spotlight the performance of key influencers (‘kingpins’) using ‘fishbowl management’ and break down the strategic challenge into smaller, actionable targets (‘atomization’). To overcome politics, identify ‘angels’ (those who gain from the change) and ‘devils’ (those who lose), form a coalition with angels to isolate devils, and have a respected insider (‘consigliere’) navigate political minefields.
1. What are blue oceans and red oceans, and why is it important to shift from red oceans to blue oceans?
Blue oceans represent untapped market space, demand creation, and opportunities for highly profitable growth. Red oceans, in contrast, signify all the industries in existence today - the known market space where industry boundaries are defined and accepted, and the competitive rules of the game are known. In red oceans, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the ocean bloody. Companies need to go beyond competing in red oceans and create blue oceans to unlock new profit and growth opportunities.
2. What is value innovation, and how does it create blue oceans?
Value innovation is the simultaneous pursuit of differentiation and low cost, creating a leap in value for both buyers and the company. It’s about making the competition irrelevant by creating and capturing new market space. This is achieved by identifying what customers value across industry and market boundaries, eliminating and reducing factors that the industry takes for granted, raising factors above industry standards, and creating new factors the industry has never offered. Value innovation requires companies to orient their whole system toward achieving this leap in value, making it more than just incremental innovation.
3. What are the six paths to creating blue oceans, and how do they help in reconstructing market boundaries?
There are six paths to reconstruct market boundaries and create blue oceans. Look across alternative industries, not just rivals within your own. Look across strategic groups within your industry. Look across the chain of buyers, from purchasers to users and influencers. Look across complementary product and service offerings, considering what happens before, during, and after your product is used. Look across functional or emotional appeal to buyers, challenging whether products compete on utility or feelings. Finally, look across time, analyzing trends to see how they might change buyer value and your business model. These paths often reveal untapped value and create opportunities for differentiation.
4. What is the strategic sequence for building a commercially viable blue ocean strategy, and how does it mitigate risks?
The strategic sequence involves four key steps: buyer utility, price, cost, and adoption. Start by ensuring your offering unlocks exceptional buyer utility - a compelling reason for people to buy it. Then, set the right strategic price – affordable to the mass of target buyers, allowing them to pay. Next, ensure you can produce your offering at a target cost that allows you to profit at the strategic price. Finally, address adoption hurdles up front, considering potential resistance from employees, partners, or the public.
5. What are the key organizational hurdles in executing a blue ocean strategy, and how can tipping point leadership help overcome them?
Execution often falters due to cognitive, resource, motivational, and political hurdles. To overcome these, focus on tipping point leadership. To shift mindsets (cognitive), make people experience the worst operational problems and listen to disgruntled customers. To overcome limited resources, redistribute resources to ‘hot spots’ (high impact, low resource), reduce ‘cold spots’ (low impact, high resource), and engage in ‘horse trading.’ To motivate key players, spotlight the performance of key influencers (‘kingpins’) using ‘fishbowl management’ and break down the strategic challenge into smaller, actionable targets (‘atomization’). To overcome politics, identify ‘angels’ (those who gain from the change) and ‘devils’ (those who lose), form a coalition with angels to isolate devils, and have a respected insider (‘consigliere’) navigate political minefields.
Key Takeaways
1. Focus on Value Innovation
Value innovation is the cornerstone of blue ocean strategy. Instead of focusing on beating the competition, companies should focus on creating a leap in value for buyers and themselves, thereby opening up new and uncontested market spaces. This is not solely about product innovation; it involves aligning innovation with utility, price, and cost positions across the entire company system to create a sustainable competitive advantage. By focusing on value innovation, companies can escape the trap of competing in overcrowded industries with diminishing prospects for growth and profit.
Practical Application:
An AI product team could apply the four actions framework to design a new AI-powered customer service platform. By eliminating the need for lengthy phone menus and reducing wait times, while raising personalization and creating a seamless omnichannel experience, they could offer a leap in value, attracting noncustomers who currently rely on less efficient or frustrating customer service methods.
2. Look Across Strategic Groups
Most industries contain distinct strategic groups – companies that pursue a similar strategy. By analyzing the factors that lead customers to trade up or down between these groups, companies can gain insights into how to create new value curves that break the existing strategic logic and attract noncustomers. This involves understanding the key commonalities in what buyers value across different strategic groups and eliminating or reducing the factors of competition that are less important to them.
Practical Application:
An AI startup might discover a blue ocean by looking across strategic groups. For example, by combining the sophisticated algorithms of high-end enterprise AI solutions with the user-friendliness and affordability of consumer AI apps, the startup can create a new market space targeting small and medium-sized businesses currently underserved by either group.
3. Look Across the Chain of Buyers
Instead of focusing on a single buyer group, companies can unlock new blue oceans by looking across the chain of buyers: purchasers, users, and influencers. By understanding the distinct needs and value perceptions of each buyer group, companies can reorient their strategic focus and develop offerings that capture new market segments. This may involve shifting the target buyer altogether or creating different value propositions for different buyer groups.
Practical Application:
A team developing an AI-powered educational tool might identify parents and teachers as distinct buyer groups within the education market. By shifting their focus from just selling to schools (purchasers) to directly engaging parents (influencers) through online communities and personalized learning recommendations, they can unlock new demand and create a blue ocean.
4. Look Across Time
By looking across time and identifying key trends that are decisive, irreversible, and have a clear trajectory, companies can anticipate how those trends will change value to customers and how the company’s business model will need to adapt. This is not about predicting the future, but about gaining insight into how trends will shift the industry landscape and create opportunities for new market spaces. By thinking about what the market would look like if the trend were taken to its logical conclusion, and then working backward to the present, organizations can develop a proactive strategy for creating and capturing a blue ocean before the trend fully materializes.
Practical Application:
An AI company can apply the principle of looking across time to anticipate how the growing trend of data privacy concerns will impact buyer value and their business model. Instead of just focusing on complying with current regulations, they could proactively develop privacy-preserving AI technologies that offer customers greater control and security over their data, thus creating a new blue ocean of trusted AI solutions.
1. Focus on Value Innovation
Value innovation is the cornerstone of blue ocean strategy. Instead of focusing on beating the competition, companies should focus on creating a leap in value for buyers and themselves, thereby opening up new and uncontested market spaces. This is not solely about product innovation; it involves aligning innovation with utility, price, and cost positions across the entire company system to create a sustainable competitive advantage. By focusing on value innovation, companies can escape the trap of competing in overcrowded industries with diminishing prospects for growth and profit.
Practical Application:
An AI product team could apply the four actions framework to design a new AI-powered customer service platform. By eliminating the need for lengthy phone menus and reducing wait times, while raising personalization and creating a seamless omnichannel experience, they could offer a leap in value, attracting noncustomers who currently rely on less efficient or frustrating customer service methods.
2. Look Across Strategic Groups
Most industries contain distinct strategic groups – companies that pursue a similar strategy. By analyzing the factors that lead customers to trade up or down between these groups, companies can gain insights into how to create new value curves that break the existing strategic logic and attract noncustomers. This involves understanding the key commonalities in what buyers value across different strategic groups and eliminating or reducing the factors of competition that are less important to them.
Practical Application:
An AI startup might discover a blue ocean by looking across strategic groups. For example, by combining the sophisticated algorithms of high-end enterprise AI solutions with the user-friendliness and affordability of consumer AI apps, the startup can create a new market space targeting small and medium-sized businesses currently underserved by either group.
3. Look Across the Chain of Buyers
Instead of focusing on a single buyer group, companies can unlock new blue oceans by looking across the chain of buyers: purchasers, users, and influencers. By understanding the distinct needs and value perceptions of each buyer group, companies can reorient their strategic focus and develop offerings that capture new market segments. This may involve shifting the target buyer altogether or creating different value propositions for different buyer groups.
Practical Application:
A team developing an AI-powered educational tool might identify parents and teachers as distinct buyer groups within the education market. By shifting their focus from just selling to schools (purchasers) to directly engaging parents (influencers) through online communities and personalized learning recommendations, they can unlock new demand and create a blue ocean.
4. Look Across Time
By looking across time and identifying key trends that are decisive, irreversible, and have a clear trajectory, companies can anticipate how those trends will change value to customers and how the company’s business model will need to adapt. This is not about predicting the future, but about gaining insight into how trends will shift the industry landscape and create opportunities for new market spaces. By thinking about what the market would look like if the trend were taken to its logical conclusion, and then working backward to the present, organizations can develop a proactive strategy for creating and capturing a blue ocean before the trend fully materializes.
Practical Application:
An AI company can apply the principle of looking across time to anticipate how the growing trend of data privacy concerns will impact buyer value and their business model. Instead of just focusing on complying with current regulations, they could proactively develop privacy-preserving AI technologies that offer customers greater control and security over their data, thus creating a new blue ocean of trusted AI solutions.
Suggested Deep Dive
Chapter: Chapter 3: Reconstruct Market Boundaries
This chapter introduces the six paths framework, a valuable tool for AI product engineers to identify potential blue oceans within the AI landscape. It provides a structured approach to expand market boundaries and explore opportunities for value innovation that may not be immediately apparent within traditional industry definitions.
Memorable Quotes
Chapter 1: Creating Blue Oceans. 4
To win in the future, companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition.
Chapter 1: Creating Blue Oceans. 12
Value innovation places equal emphasis on value and innovation. Value without innovation tends to focus on value creation on an incremental scale… Innovation without value tends to be technology-driven… Value innovation occurs only when companies align innovation with utility, price, and cost positions.
Chapter 3: Reconstruct Market Boundaries. 47
To break out of red oceans, companies must break out of the accepted boundaries that define how they compete. Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans.
Chapter 4: Focus on the Big Picture, Not the Numbers. 81
Focus on the big picture, not the numbers.
Chapter 8: Build Execution into Strategy. 175
Fair process is our managerial expression of procedural justice theory. As in legal settings, fair process builds execution into strategy by creating people’s buy-in up front.
Chapter 1: Creating Blue Oceans. 4
To win in the future, companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition.
Chapter 1: Creating Blue Oceans. 12
Value innovation places equal emphasis on value and innovation. Value without innovation tends to focus on value creation on an incremental scale… Innovation without value tends to be technology-driven… Value innovation occurs only when companies align innovation with utility, price, and cost positions.
Chapter 3: Reconstruct Market Boundaries. 47
To break out of red oceans, companies must break out of the accepted boundaries that define how they compete. Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans.
Chapter 4: Focus on the Big Picture, Not the Numbers. 81
Focus on the big picture, not the numbers.
Chapter 8: Build Execution into Strategy. 175
Fair process is our managerial expression of procedural justice theory. As in legal settings, fair process builds execution into strategy by creating people’s buy-in up front.
Comparative Analysis
Compared to other strategy classics like Porter’s “Competitive Strategy” or “Competitive Advantage,” “Blue Ocean Strategy” offers a distinctly different perspective. While Porter emphasizes positioning within existing industry structure and choosing between differentiation or cost leadership, we focus on creating new market spaces altogether, thereby making the competition irrelevant. Similar to Clayton Christensen’s “The Innovator’s Dilemma,” we recognize the disruptive power of innovation, but unlike Christensen, we don’t limit it to technological innovations. Value innovation, the cornerstone of our theory, encompasses both technology and value for the customer, broadening the scope of innovation to include changes in the entire business model and offering as a whole. A key agreement with other innovation literature, however, is the recognition of the importance of execution and creating a culture of trust and commitment among employees, a theme we delve deeper into with the introduction of Fair Process and Tipping Point Leadership.
Reflection
“Blue Ocean Strategy” presents a compelling alternative to traditional competitive thinking, encouraging a proactive approach to market creation rather than reactive responses to existing competition. While the framework and tools are valuable, a skeptical reader might question the feasibility of consistently creating blue oceans in every industry and the long-term sustainability of these oceans once discovered. The book’s strength lies in its actionable framework and real-world examples, offering a structured approach to innovation that many companies find lacking. However, it might benefit from further exploration of the complexities and challenges involved in implementing blue ocean strategies in rapidly evolving markets, especially in the context of current technological disruptions like those driven by AI. The book’s core principles, nonetheless, remain relevant and essential for any organization seeking to create new growth opportunities in the age of AI, where understanding and creating new value for customers is more critical than ever.
Flashcards
What is value innovation?
Simultaneous pursuit of differentiation and low cost, making the competition irrelevant.
What are blue oceans?
Untapped market space, demand creation, and opportunity for highly profitable growth.
What are red oceans?
Known market space, existing demand, and cutthroat competition.
What is a strategic move?
A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.
What is a value curve?
A graphic depiction of a company’s relative performance across its industry’s factors of competition.
What are the four actions of the four actions framework?
Eliminate, reduce, raise, create.
What is the strategic sequence?
Buyer utility, price, cost, and adoption.
What are the three tiers of noncustomers?
Soon-to-be, refusing, and unexplored.
What are the two execution principles?
Overcome key organizational hurdles; build execution into strategy.
What is value innovation?
Simultaneous pursuit of differentiation and low cost, making the competition irrelevant.
What are blue oceans?
Untapped market space, demand creation, and opportunity for highly profitable growth.
What are red oceans?
Known market space, existing demand, and cutthroat competition.
What is a strategic move?
A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.
What is a value curve?
A graphic depiction of a company’s relative performance across its industry’s factors of competition.
What are the four actions of the four actions framework?
Eliminate, reduce, raise, create.
What is the strategic sequence?
Buyer utility, price, cost, and adoption.
What are the three tiers of noncustomers?
Soon-to-be, refusing, and unexplored.
What are the two execution principles?
Overcome key organizational hurdles; build execution into strategy.