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by
W. Chan Kim
Think Ford’s Model T in autos, Starbucks in coffee, or Salesforce.com in CRM software. Our research suggests no. It revealed common strategic patterns behind the successful creation of blue oceans. These patterns allowed us to develop underlying analytic frameworks, tools, and methodologies to systematically link innovation to value and reconstruct industry boundaries in an opportunity-maximizing, risk-minimizing way. While luck, of course, will always play a role, as it does with all strategies, these tools—like the strategy canvas,
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Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry
boundaries, most are created from within red oceans by expanding existing industry boundaries, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.
old Standard Industrial Classification (SIC)
A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.
value innovation.
Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating a blue ocean. (For more discussions on this, see appendix B, “Value Innovation: A Reconstructionist View of Strategy.”)
what we call tipping point leadership. Tipping point leadership shows managers how to mobilize an organization to overcome the key organizational hurdles that block the implementation of a blue ocean strategy. It deals with organizational risk.
fair process.
management
risk associated
Effective blue ocean strategy should be about risk minimization and not risk taking.
strategy canvas,
To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to noncustomers of the industry.1
four actions framework. As shown in figure 2-2, to break the trade-off between differentiation and low cost and to create a new value curve, there are four key questions to challenge an industry’s strategic logic and business model: Which of the factors that the industry takes for granted should be eliminated? Which factors should be reduced well below the industry’s standard? Which factors should be raised well above the industry’s standard? Which factors should be created that the industry has never offered?
There is a third tool that is key to creation of blue oceans. It is a supplementary analytic to the four actions framework called the eliminate-reduce-raise-create grid (see figure 2-4).
It is easily understood by managers at any level, creating a high level of engagement in its application. Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor the industry competes on, making them discover the range of implicit assumptions they make unconsciously in competing.
Focus Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.
A Blue Ocean Strategy The first question the value curves answer is whether a business deserves to be a winner. When a company’s value curve, or its competitors’, meets the three criteria that define a good blue ocean strategy—focus, divergence, and a compelling tagline that speaks to the market—the company is on the right track. These three criteria serve as an initial litmus test of the commercial viability of blue ocean ideas. On the other hand, when a company’s value curve lacks focus, its cost structure will tend to be high and its business model complex in implementation and execution.
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A Company Caught in the Red Ocean
Overdelivery without Payback When a company’s value curve on the strategy canvas is shown to deliver high levels across all factors, the question is, Does the company’s market share and profitability reflect these investments? If not, the strategy canvas signals that the company may be oversupplying its customers, offering too much of those elements that add incremental value to buyers. To value-innovate, the company must decide which factors to eliminate and reduce—and not only those to raise and create—to construct a divergent value curve.
Strategic Contradictions Are there strategic contradictions? These are areas where a company is offering a high level on one competing factor while ignoring others that support that factor. An example is investing heavily in making a company’s website easy to use but failing to correct the site’s slow speed of operation. Strategic inconsistencies can also be found between the level of your offering and your price. For example, a petroleum station company found that it offered “less for more”: fewer services than the best competitor at a higher price. No wonder it was losing market share fast.
For example, does it use the word megahertz instead of speed, or thermal water temperature instead of hot water? Are the competing factors stated in terms buyers can understand and value, or are they in operational jargon?
The tools and frameworks introduced here are essential analytics used throughout this book, and supplementary tools are introduced in other chapters as needed. It is the intersection between these analytic techniques and the eight principles of formulating and executing blue oceans that allow companies to break from the competition and unlock uncontested market space. Now we move on to the first principle, reconstructing market boundaries. In the next chapter we discuss the opportunity-maximizing and risk-minimizing paths to creating blue oceans.
THE FIRST PRINCIPLE of blue ocean strategy is to reconstruct market boundaries to break from the competition and create blue oceans. This principle addresses the search risk many companies struggle with. The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. This challenge is key because managers cannot afford to be riverboat gamblers betting their strategy on intuition or on a random drawing. In conducting our research, we sought to discover whether there were systematic patterns for reconstructing market
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We found clear patterns for creating blue oceans. Specifically, we found six basic approaches to remaking market boundaries. We call this the six paths framework. These paths have general applicability across industry sectors, and they lead companies into the corridor of commercially viable blue ocean ideas. None of these paths requires special vision or foresight about the future. All are based on looking at familiar data from a new perspective. These paths challenge the six fundamental assumptions underlying many companies’ strategies. These six assumptions, on which most companies
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Define their industry similarly and focus on being the best within it Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they
play in Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry) Define the scope of the products and services offered by their industry similarly Accept their industry’s functional or emotional orientation Focus o...
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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. They need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time. This gives companies keen insight into how to reconstruct market realities to open up blue oceans. Let’s examine how each of these six paths
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Alternatives are broader than substitutes. Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose.
What are the alternative industries to your industry? Why do customers trade across them? By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, you can create a blue ocean of new market space.
What are the strategic groups in your industry? Why do customers trade up for the higher group, and why do they trade down for the lower one?
Look Across the Chain of Buyers In most industries, competitors converge around a common definition of who the target buyer is. In reality, though, there is a chain of “buyers” who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ. When they do, they frequently hold different definitions of value.
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?5
Some industries compete principally on price and function largely on calculations of utility; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional.
Very important to look at this information !!!
Focus on the Big Picture, Not the Numbers
As previous chapters reveal, drawing a strategy canvas does three things. First, it shows the strategic profile of an industry by depicting very clearly
The process, which builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people’s creativity, has four major steps (see figure 4-1).
