Companies have long engaged in head-to-head competition in search of sustained, profitable growth. They have fought for competitive advantage, battled over market share, and struggled for differentiation.Yet in today’s overcrowded industries, competing head-on results in nothing but a bloody “red ocean” of rivals fighting over a shrinking profit pool. In a book that challenges everything you thought you knew about the requirements for strategic success, W. Chan Kim and Renée Mauborgne contend that while most companies compete within such red oceans, this strategy is increasingly unlikely to create profitable growth in the future.
Based on a study of 150 strategic moves spanning more than a hundred years and thirty industries, Kim and Mauborgne argue that tomorrow’s leading companies will succeed not by battling competitors, but by creating “blue oceans” of uncontested market space ripe for growth. Such strategic moves—termed “value innovation”—create powerful leaps in value for both the firm and its buyers, rendering rivals obsolete and unleashing new demand.
Blue Ocean Strategy provides a systematic approach to making the competition irrelevant. In this frame-changing book, Kim and Mauborgne present a proven analytical framework and the tools for successfully creating and capturing blue oceans. Examining a wide range of strategic moves across a host of industries, Blue Ocean Strategy highlights the six principles that every company can use to successfully formulate and execute blue ocean strategies. The six principles show how to reconstruct market boundaries, focus on the big picture, reach beyond existing demand, get the strategic sequence right, overcome organizational hurdles, and build execution into strategy.
Upending traditional thinking about strategy, Blue Ocean Strategy charts a bold new path to winning the future.
Value InnovationValue Innovation is the cornerstone of blue ocean strategy. Value innovation is the simultaneous pursuit of differentiation and low cost. Value innovation focuses on making the competition irrelevant by creating a leap of value for buyers and for the company, thereby opening up new and uncontested market space. Because value to buyers comes from the offering’s utility minus its price, and because value to the company is generated from the offering’s price minus its cost, value innovation is achieved only when the whole system of utility, price and cost is aligned.
In the Blue Ocean Strategy methodology, the Four Actions Framework and ERRC grid assist managers in breaking the value-cost trade off by answering the following questions:
What factors can be eliminated that the industry has taken for granted?
What factors can be reduced well below the industry’s standard?
What factors can be raised well above the industry’s standard?
What factors can be created that the industry has never offered?
Red Ocean vs Blue Ocean
Strategy Canvas
The strategy canvas is the central diagnostic and action framework for building a compelling blue ocean strategy. The horizontal axis captures the range of factors that the industry competes on and invests in, and the vertical axis captures the offering level that buyers receive across all these key competing factors.
The strategy canvas serves two purposes:
Firstly, it captures the current state of play in the known market space. This allows you to understand where the competition is currently investing and the factors that the industry competes on.
Secondly, it propels you to action by reorienting your focus from competitors to alternatives and from customers to noncustomers of the industry.
The value curve is the basic component of the strategy canvas. It is a graphic depiction of a company's relative performance across its industry's factors of competition.
As you can see on the diagram above, what makes a good value curve is focus, divergence as well as a compelling tagline.
4 Actions FrameworkTo reconstruct buyer value elements in crafting a new value curve, we use the Four Actions Framework. As shown in the diagram above, 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?
ERRC Grid
The Eliminate-Reduce-Raise-Create Grid (ERRC) is complementary with the four actions framework. It pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve, essential for unlocking a new blue ocean. By driving companies to fill in the grid with the actions of eliminating and reducing as well as raising and creating, the grid gives companies four immediate benefits:
It pushes them to simultaneously pursue differentiation and low cost to break the value-cost trade off.
It immediately flags companies that are focused only on raising and creating and thereby lifting the cost structure and often overengineering products and services - a common plight in many companies.
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 the make unconsciously in competing.
Pioneer-Migrator-Settler MapA useful exercise for a corporate management team pursuing profitable growth is to plot the company's current and planned portfolios on the pioneer-migrator-settler (PMS) map. For the purpose of the exercise, settlers are defined as me-too businesses, migrators are business offerings better than most in the marketplace, and a company's pioneers are the businesses that offer unprecedented value. These are your blue ocean strategies, and are the most powerful sources of profitable growth. They are the only ones with a mass following of customers.
If both the current portfolio and the planned offerings consist mainly of settlers, the company has a low growth trajectory, is largely confined to red oceans, and needs to push for value innovation. Although the company might be profitable today as its settlers are still making money, it may well have fallen into the trap of competitive benchmarking, imitation, and intense price competition.
If current and planned offerings consist of a lot of migrators, reasonable growth can be expected. But the company is not exploiting its potential for growth, and risks being marginalized by a company that value-innovates. In our experience the more an industry is populated by settlers, the greater the opportunity to value-innovate and create a blue ocean of new market space.
This exercise is especially valuable for managers who want to see beyond today's performance. Revenue, profitability, market share, and customer satisfaction are all measures of a company's current position. Contrary to what conventional strategic thinking suggests, those measures cannot point the way to the future; changes in the environment are too rapid. Today's market share is a reflection of how well a business has performed historically.
Clearly, what companies should be doing is shifting the balance of their future portfolio toward pioneers. That is the path to profitable growth. The PMS map above depicts this trajectory, showing the scatter plot of a company's portfolio of businesses, where the gravity of its current portfolio of twelve businesses, expressed as twelve dots, shifts from a preponderance of settlers to a stronger balance of migrators and pioneers.
Buyer Experience Cycle / Buyer Utility MapThe buyer utility map helps to get managers thinking from the right perspective. It outlines all the levers companies can pull to deliver utility to buyers as well as the different experiences buyers can have of a product or service. This lets managers identify the full range of utility propositions that a product or service can offer. Let’s look at the map’s dimension in detail.
The six stages of the buyer experience cycle. A buyer's experience can usually be broken down into a cycle of six distinct stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. Purchasing, for example, includes the experience of browsing Amazon.com as well as the experience of pushing a shopping cart through Wal-Mart’s aisles.
The six utility levers. Cutting across the stages of the buyer’s experience are what we call the levers of utility – the ways in which companies unlock utility for their customers. Most of the levers are obvious. Simplicity, fun and image, and environmental friendliness need little explanation. Nor does the idea that a product could reduce a buyer’s financial or physical risks. And a product or service offers convenience simply by being easy to obtain and or use. The most commonly used lever – but perhaps the least obvious- is that of customer productivity. An innovation can increase productivity by helping them do things faster, better, or in different ways. The financial information company Bloomberg, for example, makes traders more efficient by offering on-line analytics that analyze and compare the raw information it delivers.
By locating a new product on one of the 36 spaces of the buyer utility map, managers can clearly see how the new idea creates a different utility proposition from existing products. In our experience, managers all too often focus on delivering more of the same stage of the buyer’s experience. That approach may be reasonable in emerging industries, where there’s plenty of room for improving a company’s utility proposition. But in many existing industries, this approach is unlikely to produce a market-shaping blue ocean strategy.
3 Tiers of NoncustomersTypically, to grow their share of a market, companies strive to retain and expand existing customers. This often leads to finer segmentation and greater tailoring of offerings to better meet customer preferences. The more intense the competition is, the greater, on average, is the resulting customization of offerings. As companies compete to embrace customer preferences through finer segmentation, they often risk creating too-small target markets.
To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.
Although the universe of noncustomers typically offers big blue ocean opportunities, few companies have keen insight into who noncustomers are and how to unlock them. To convert this huge latent demand into real demand in the form of thriving new customers, companies need to deepen their understanding of the universe of noncustomers.
There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of noncustomers is closest to your market. They sit on the edge of the market. They are buyers who minimally purchase an industry’s offering out of necessity but are mentally noncustomers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself. However, if offered a leap in value, not only would they stay, but also their frequency of purchases would multiply, unlocking enormous latent demand.
The second tier of noncustomers is people who refuse to use your industry’s offerings. These are buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them.
The third tier of noncustomers is farthest from your market. They are noncustomers who have never thought of your market’s offerings as an option. By focusing on key commonalities across these noncustomers and existing customers, companies can understand how to pull them into their new market.
Sequence of Blue Ocean StrategyCompanies need to build their Blue Ocean Strategy in the sequence of buyer utility, price, cost, and adoption. Have you got the strategic sequence right? Click on the picture on the left to find out the process.
4 Hurdles to ExecutionOnce a company has developed a blue ocean strategy with a profitable business model, it must execute it. The challenge of execution exists, of course, for any strategy. Companies, like individuals, often have a tough time translating thought into action whether in red or blue oceans.
The challenges managers face are steep. They face four hurdles:
A cognitive hurdle. waking employees up to the need for a strategic shift. Red oceans may not be the paths to future profitable growth, but they feel comfortable to people and may have even served an organization well until now, so why rock the boat?
Limited resources. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it. But many companies find resources in notoriously short supply
Motivation. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo?
Politics. As one manager put it, “In our organization you get shot down before you stand up.”
Although all companies face different degrees of these hurdles, and many may face only some subset of the four, knowing how to triumph over them is key to attenuating organizational risk.
To achieve this effectively, however, companies must abandon perceived wisdom on effecting change. Conventional wisdom asserts that the greater the change, the greater the resources and time you will need to bring about results. Instead, you need to flip conventional wisdom on its head using what we call tipping point leadership. Tipping point leadership allows you to overcome these four hurdles fast and at low cost while winning employees’ backing in executing a break from the status quo.
The key questions answered by tipping point leaders are as follows: What factors or acts exercise a disproportionately positive influence on breaking the status quo? On getting the maximum bang out of each buck of resources? On motivating key players to aggressively move forward with change? And on knocking down political roadblocks that often trip up even the best strategies? By single-mindedly focusing on points of disproportionate influence, tipping point leaders can topple the four hurdles that limit execution of blue ocean strategy. They can do this fast and at low cost.
Three ε Principles of Fair ProcessWhat is fair process? Fair process builds execution into strategy by creating people's buy-in up front. When fair process is exercised in the strategy making process, people trust that a level playing field exists. This inspires them to cooperate voluntarily in executing the resulting strategic decisions.
There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation. Whether people are senior executives or shop employees, they all look to these elements. We call them the three Ε principles of fair process.
Conventional Wisdom vs Tipping Point Leadership
The conventional theory of organizational change rests on transforming the mass. So change efforts are focused on moving the mass, requiring steep resources and long time frames — luxuries few executives can afford. Tipping point leadership, by contrast, takes a reverse course. To change the mass it focuses on transforming the extremes: the people, acts, and activities that exercise a disproportionate influence on performance. By transforming the extremes, tipping point leaders are able to change the core fast and at low cost to execute their new strategy.
