Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevantby W. Chan Kim
Blue Ocean Strategy is a comprehensive guide for those looking to transform their approach to business success. This will provide you with the necessary tools, lessons, and frameworks to transition from the "red ocean" of intense competition to the "blue ocean" of untapped market potential. By applying the actions in this book, you'll be able to unlock a new demand from noncustomers, achieve strong profitable growth, top the competition, and take your company's success to new heights.
Creating Blue Oceans
To remain successful in the future, companies must adopt a new approach that will help them stand out in this cluttered, crowded market. This approach is known as "creating their own blue oceans," or untapped market spaces with immense potential for growth and profitability.
In research conducted on companies that are consistently outperforming the market, it was discovered that the key to a company's high performance and success is not the company itself or the industry it operates in, but the strategic moves they make.
This is where "value innovation" comes in. It's the cornerstone of the "blue ocean" strategy. And it's all about eliminating and reducing the factors that industries compete on while elevating and introducing new elements that have never been offered before. In other words, it's a new way of thinking about and executing a strategy that results in the creation of a blue ocean, allowing you to break away from the competition.
To effectively implement this strategy, companies must proactively apply the right tools and frameworks while avoiding common pitfalls and misconceptions that may lead to failure.
Redefining the Problem to Create a Blue Ocean
In 2000, the US wine industry faced numerous challenges, including intense competition, price pressure, increasing bargaining power, and flat demand despite a large selection of choices.
To tackle these issues, the industry employed the strategy canvas framework, a visual representation of the industry's current state, to create new, untapped market space.
The strategy canvas is based on the principle of value innovation, which involves enhancing the value provided to customers while simultaneously reducing the cost or low-value aspects of the industry.
Casella Wines utilized this framework to reframe the problem of the wine industry and came up with a new solution: creating a fun, easy-to-drink wine that appeals to everyone.
Here, they created three new factors in the US wine industry—easy drinking, ease of selection, and fun and adventure—by looking at the alternatives of beer and ready-to-drink cocktails and thinking in terms of noncustomers. This allowed them to appeal to a broad cross-section of alcohol-beverage consumers, and the result was an easy-drinking wine that could be enjoyed without needing years of training or expertise.
Actions to take
Maximizing the Size of a Blue Ocean
Companies that create blue oceans have been pioneers in their industries, pushing the value they offer customers to new frontiers. A useful exercise for a corporate management team pursuing profitable growth is to plot the company’s current and planned portfolios on a Pioneer-Migrator-Settler (PMS) map. This map separates the company's offerings into three categories: settlers, migrators, and pioneers.
Settlers are me-too businesses, meaning they offer the same products or services as their competitors and do not differentiate themselves. Migrators are companies that offer better products or services than most of their competitors in the market. Pioneers, on the other hand, are companies that offer new and unique value to customers through innovation.
To maximize the size of the blue ocean, senior executives should get their organizations to shift the balance of their future portfolios toward pioneers.
Actions to take
Reaching Beyond Existing Demands
Companies often focus their efforts on retaining and growing their current customer base to increase sales and profits. However, relying solely on existing customers can lead to a limited market and slow growth.
To tap into new demand and expand their market, companies must look to noncustomers and find commonalities in what they value. This approach opens up a "blue ocean" of untapped demand and offers opportunities for significant growth.
For instance, Callaway Golf identified why sports enthusiasts and people in the country club set were not taking up golf as a sport. The company found that the difficulty of hitting the golf ball was a major barrier to entry.
To solve this problem, they created "Big Bertha" - a golf club with a larger head, which makes it easier for players to hit the ball. The result was a product that attracted not only new customers but also pleased existing golfers, making it a bestseller across the board.
Pret A Manger also looked to noncustomers to create a new market. The company noticed that busy professionals in European cities were opting for quick and healthy lunch options, rather than sit-down meals. To address this problem, Pret A Manger thought of offering fast, fresh, and affordable lunches, eventually creating a new concept in outdoor dining.
By turning to noncustomers and reaching beyond existing demands, they were able to unlock a new mass of customers who support their products. This will not only widen your customer base but will also drive sales and open opportunities for growth.
Actions to take
Getting the Strategic Sequence Right
When developing a blue ocean strategy, companies must follow a specific sequence consisting of the following steps:
1. Buyer Utility: The starting point of the sequence is to unlock exceptional utility for the buyers. If the offering does not provide significant value to the buyers, there is no point in pursuing it further.
2. Strategic Pricing: Once the buyer utility has been established, the next step is to set the right price for the offering. The goal is to secure a healthy profit margin.
3. Cost: If the company can produce the offering at the target cost and still earn a reasonable profit, the next step is to focus on cost optimization.
4. Adoption: The final step is to address any hurdles that might affect the adoption of the offering.
In essence, companies need to ensure that they create a leap in net buyer value, where net buyer value equals the utility buyers receive minus the price they pay for it. It is the combination of exceptional utility, strategic pricing, and target costing that allows companies to achieve value innovation—a leap in value for both buyers and companies.
To get around the technology trap, the starting point is to create a strategic profile that passes the initial litmus test of being focused, being divergent, and having a compelling tagline that speaks to buyers.
The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service.
Actions to take
Overcoming Key Organizational Hurdles
Bill Bratton was appointed police commissioner of New York City when the city was veering towards anarchy. Despite having a frozen budget and a demoralized workforce, Bratton was able to turn New York City into the safest large city in the US in less than two years. He achieved this by using "tipping point" leadership.
Tipping point leadership is the key to overcoming the four key hurdles that may prevent organizations from executing the blue ocean strategy. These hurdles include cognitive, resource, motivational, and political barriers.
Basically, this approach builds on the rarely exploited corporate reality that in every organization, there are people, acts, and activities that exercise a disproportionate influence on performance. Instead of relying on numbers to tip the cognitive hurdle, they make people experience the need for change in two ways: by making them see and experience harsh reality firsthand and by inspiring a fast change in mindset that is internally driven by people’s own accord.
Research in neuroscience and cognitive science shows that people remember and respond most effectively to what they see and experience. Positive stimuli reinforce behavior, whereas negative stimuli change attitudes and behavior. Experiences that don’t involve touching, seeing, or feeling actual results, such as being presented with an abstract sheet of numbers, are shown to be non-impactful and easily forgotten.
Actions to take
Building Execution into Strategy
When it comes to executing a successful strategy, a company needs all its members to be motivated and engaged. And that's where "fair process" comes in. This management concept, based on procedural justice theory, aims to create buy-in from employees from the get-go.
When employees feel that their contributions are valued and respected, it inspires them to go above and beyond what's required, even sacrificing their own self-interests for the success of the company.
While traditional incentives like money and power can help motivate employees to a certain extent, they can only do so much. If you want to truly build trust, commitment, and voluntary cooperation among employees, you need to incorporate a fair process into your management practice. By doing so, you'll be able to successfully integrate execution into strategy-making and motivate employees to make short-term sacrifices for long-term gains.
Actions to take
Aligning Value, Profit, and People Propositions for a Successful Strategy
For any strategy to be successful and sustainable, an organization must develop an offering that attracts buyers, create a profitable business model, and motivate their employees to execute the strategy. If these three elements are not fully integrated and aligned, the strategy is likely to experience short-lived success or failure.
The three strategy propositions - value proposition, profit proposition, and people proposition - provide an organizing framework to ensure an organization is taking a holistic approach to the formulation and execution of strategy. Strategic alignment is the responsibility of an organization’s top executives.
Under the “red ocean” strategy, an organization’s three strategy propositions need to be aligned with the distinctive choice of pursuing either differentiation or low cost within given industry conditions. Under the “blue ocean” strategy, on the other hand, an organization achieves high performance when all three strategy propositions pursue both differentiation and low cost.
Actions to take
Executing the Blue Ocean Strategy Successfully
The blue ocean strategy is a method of creating new market space by focusing on noncustomers and understanding its three tiers:
1. "Soon-to-be" customers - are closest to the market. They are the ones who minimally purchase your offerings out of necessity but are not regular customers in the industry.
2. Refusing customers - those who were exposed to your offerings before but decided not to buy.
3. Unexplored customers - the farthest from your market. They have never considered your offering as an option.
To succeed in creating an uncontested market space, you must focus on creating value for buyers while capturing value in return. In other words, you need to strategize how you can perform value innovation rather than just cost reduction, which could lead to a race to the bottom in pricing.
Monitoring the value curve is also crucial for avoiding competition at the individual business level and identifying opportunities for future growth. Companies can also achieve economies of scale and market coverage by expanding their operations and geographic reach.
Ultimately, companies with a diverse portfolio of businesses need to maintain a healthy balance between pioneers for future growth and migrators and settlers for cash flow at a given point in time.