Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant by W. Chan Kim, Renée Mauborgne
Last annotated on December 18, 2014
Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant. Instead of dividing up existing—and often shrinking—demand and benchmarking competitors, blue ocean strategy is about growing demand and breaking away from the competition.
Chapter 1 . Creating Blue Oceans
The only way to beat the competition is to stop trying to beat the competition. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space. Products become commodities, and cutthroat competition turns the red ocean bloody. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Red oceans will always matter and will always be a fact of business life. But with supply exceeding demand in more industries, competing for a share of contracting markets, while necessary, will not be sufficient to sustain high performance. Companies need to go beyond competing. To seize new profit and growth opportunities, they also need to create blue oceans.
The reality is that industries never stand still. They continuously evolve. Operations improve, markets expand, and players come and go.
While supply is on the rise as global competition intensifies, there is no clear evidence of an increase in demand worldwide, and statistics even point to declining populations in many developed markets.
the strategic move, and not the company or the industry, is the right unit of analysis for explaining the creation of blue oceans and sustained high performance. A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.
The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. 17 Instead, they followed a different strategic logic that we call value innovation.
Value innovation is the cornerstone of blue ocean strategy. We call it value innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.
Value innovation occurs only when companies align innovation with utility, price, and cost positions.
Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.
Competition-based red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what the academics call the structuralist view, or environmental determinism.
In contrast, value innovation is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view.
Chapter 2. Analytical Tools and Frameworks
Effective blue ocean strategy should be about risk minimization and not risk taking.
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.
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?
The first question forces you to consider eliminating factors that companies in your industry have long competed on. Often those factors are taken for granted even though they no longer have value or may even detract from value. Sometimes there is a fundamental change in what buyers value, but companies that are focused on benchmarking one another do not act on, or even perceive, the change.
The second question forces you to determine whether products or services have been overdesigned in the race to match and beat the competition. Here, companies overserve customers, increasing their cost structure for no gain.
The third question pushes you to uncover and eliminate the compromises your industry forces customers to make. The fourth question helps you to discover entirely new sources of value for buyers and to create new demand and shift the strategic pricing of the industry.
By looking at the alternatives of beer and ready-to-drink cocktails and thinking in terms of noncustomers, Casella Wines created three new factors in the U.S. wine industry—easy drinking, easy to select, and fun and adventure—and eliminated or reduced everything else. Casella Wines found that the mass of Americans rejected wine because its complicated taste was difficult to appreciate. The result was an easy-drinking wine that did not require years to develop an appreciation for.
[yellow tail] changed all that by creating ease of selection. It dramatically reduced the range of wines offered, creating only two: Chardonnay, the most popular white in the United States, and a red, Shiraz. It removed all technical jargon from the bottles and created instead a striking, simple, and nontraditional label featuring a kangaroo in bright, vibrant colors of orange and yellow on a black background.
The simplicity of offering only two wines at the start—a red and a white—streamlined Casella Wines’ business model. Minimizing the stockkeeping units maximized its stock turnover and minimized investment in warehouse inventory. In fact, this reduction of variety was carried over to the bottles inside the cases. [yellow tail] broke industry conventions. Casella Wines was the first company to put both red and white wine in the same-shaped bottle, a practice that created further simplicity in manufacturing and purchasing and resulted in stunningly simple wine displays.
The result is that [yellow tail] appealed to a broad cross section of alcohol beverage consumers. By offering this leap in value, [yellow tail] raised the price of its wines above the budget market, pricing them at $6.99 a bottle, more than double the price of a jug wine. From the moment the wine hit the retail shelves in July 2001, sales took off.
[yellow tail]’s value curve has focus; the company does not diffuse its efforts across all key factors of competition. The shape of its value curve diverges from the other players’, a result of not benchmarking competitors but instead looking across alternatives. The tagline of [yellow tail]’s strategic profile is clear: a fun and simple wine to be enjoyed every day.
A good tagline must not only deliver a clear message but also advertise an offering truthfully, or else customers will lose trust and interest.
[yellow tail], Cirque du Soleil, and Southwest Airlines created blue oceans in very different business situations and industrial contexts. However, their strategic profiles shared the same three characteristics: focus, divergence, and a compelling tagline. These three criteria guide companies in carrying out the process of reconstruction to arrive at a breakthrough in value both for buyers and for themselves.
When a company’s value curve looks like a bowl of spaghetti—a zigzag with no rhyme or reason, where the offering can be described as “low-high-low-low-high-low-high”—it signals that the company doesn’t have a coherent strategy. Its strategy is likely based on independent substrategies. These may individually make sense and keep the business running and everyone busy, but collectively they do little to distinguish the company from the best competitor or to provide a clear strategic vision. This is often a reflection of an organization with divisional or functional silos.
Analyzing the language of the strategy canvas helps a company understand how far it is from creating industry demand.
Chapter 3. Reconstruct Market Boundaries
The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. The more that companies share this conventional wisdom about how they compete, the greater the competitive convergence among them.
Path 1: Look Across Alternative Industries
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. Despite the differences in form and function, however, people go to a restaurant for the same objective that they go to the movies: to enjoy a night out. These are not substitutes, but alternatives to choose from. In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously.
Path 2: Look Across Strategic Groups Within Industries
strategic groups. The term refers to a group of companies within an industry that pursue a similar strategy. Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another. 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?
Path 3: 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. A corporate purchasing agent, for example, may be more concerned with costs than the corporate user, who is likely to be far more concerned with ease of use. Similarly, a retailer may value a manufacturer’s just-in-time stock replenishment and innovative financing. But consumer purchasers, although strongly influenced by the channel, do not value these things. But an industry typically converges on a single buyer group. The pharmaceutical industry, for example, focuses overridingly on influencers: doctors. The office equipment industry focuses heavily on purchasers: corporate purchasing departments. And the clothing industry sells predominantly to users. Sometimes there is a strong economic rationale for this focus. But often it is the result of industry practices that have never been questioned. 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?
Path 4: Look Across Complementary Product and Service Offerings
superstores redefined the scope of the services they offer. They transformed the product they sell from the book itself into the pleasure of reading and intellectual exploration, adding lounges, knowledgeable staff, and coffee bars to create an environment that celebrates reading and learning. What is the context in which your product or service is used? What happens before, during, and after? Can you identify the pain points? How can you eliminate these pain points through a complementary product or service offering?
Path 5: Look Across Functional or Emotional Appeal to Buyers
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. When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space. Think of it as a form of wedding registry, except that instead of giving, for example, silverware, Cemex positioned cement as a loving gift. Whereas Cemex’s competitors sold bags of cement, Cemex was selling a dream, with a business model involving innovative financing and construction know-how. Likewise, consider how Starbucks turned the coffee industry on its head by shifting its focus from commodity coffee sales to the emotional atmosphere in which customers enjoy their coffee. Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make it functional? If you compete on functionality, what elements can be added to make it emotional?
Path 6: Look Across Time
business insights into how the trend will change value to customers and impact the company’s business model.
We’re not talking about predicting the future, something that is inherently impossible. Rather, we’re talking about finding insight in trends that are observable today. What trends have a high probability of impacting your industry, are irreversible, and are evolving in a clear trajectory? How will these trends impact your industry? Given this, how can you open up unprecedented customer utility?
Chapter 4. Focus on the Big Picture, Not the Numbers
If you ask companies to present their proposed strategies in no more than a few slides, it is not surprising that few clear or compelling strategies are articulated.
drawing a strategy canvas does three things. First, it shows the strategic profile of an industry by depicting very clearly the factors (and the possible future factors) that affect competition among industry players. Second, it shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically. Finally, it shows the company’s strategic profile—or value curve—depicting how it invests in the factors of competition and how it might invest in them in the future.
As discussed in chapter 2, the strategic profile with high blue ocean potential has three complementary qualities: focus, divergence, and a compelling tagline. If a company’s strategic profile does not clearly reveal those qualities, its strategy will likely be muddled, undifferentiated, and hard to communicate. It is also likely to be costly to execute.
Step 1: Visual Awakening
we’ve found that asking executives to draw the value curve of their company’s strategy brings home the need for change. EFS began the strategy process by bringing together more than twenty senior managers from subsidiaries in Europe, North America, Asia, and Australia and splitting them into two teams.
Step 2: Visual Exploration
Getting the wake-up call is only the first step. The next step is to send a team into the field, putting managers face-to-face with what they must make sense of: how people use or don’t use their products or services. A company should never outsource its eyes. There is simply no substitute for seeing for yourself. Obviously, the first port of call should be the customers. But you should not stop there. You should also go after noncustomers. And when the customer is not the same as the user, you need to extend your observations to the users, as Bloomberg did. You should not only talk to these people but also watch them in action. Identifying the array of complementary products and services that are consumed alongside your own may give you insight into bundling opportunities.
adding on-site childcare services helped fill European cinemas.
EFS sent its managers into the field for four weeks to explore the six paths to creating blue oceans. 6 In this process, each was to interview and observe ten people involved in corporate foreign exchange, including lost customers, new customers, and the customers of EFS’s competitors and alternatives. The managers also reached outside the industry’s traditional boundaries to companies that did not yet use corporate foreign exchange services but that might in the future, such as Internet-based companies with a global reach like Amazon.com.
EFS’s teams were then sent back to the drawing board. This time, though, they had to propose a new strategy. Each team had to draw six new value curves using the six path framework explained in chapter 3. Each new value curve had to depict a strategy that would make the company stand out in its market. By demanding six pictures from each team, we hoped to push managers to create innovative proposals and break the boundaries of their conventional thinking.
For each visual strategy, the teams also had to write a compelling tagline that captured the essence of the strategy and spoke directly to buyers. Suggestions included “Leave It to Us,” “Make Me Smarter,” and “Transactions in Trust.”
Step 3: Visual Strategy Fair
After two weeks of drawing and redrawing, the teams presented their strategy canvases at what we call a visual strategy fair. Attendees included senior corporate executives but consisted mainly of representatives of EFS’s external constituencies—the kinds of people the managers had met with during their field trips, including noncustomers, customers of competitors, and some of the most demanding EFS customers.
In two hours, the teams presented all twelve curves—six by the online group, and six by the offline group. They were given no more than ten minutes to present each curve, on the theory that any idea that takes more than ten minutes to communicate is probably too complicated to be any good. The pictures were hung on the walls so that the audience could easily see them.
After the twelve strategies were presented, each judge—an invited attendee—was given five sticky notes and told to put them next to his or her favorites. The judges could put all five on a single strategy if they found it that compelling. The transparency and immediacy of this approach freed it from the politics that sometimes seem endemic to the strategic planning process.
After the notes were posted, the judges were asked to explain their picks, adding another level of feedback to the strategy-making process. Judges were also asked to explain why they did not vote for the other value curves.
As the teams synthesized the judges’ common likes and dislikes, they realized that fully one-third of what they had thought were key competitive factors were, in fact, marginal to customers. Another one-third either were not well articulated or had been overlooked in the visual awakening phase.
Following the strategy fair, the teams were finally able to complete their mission. They were able to draw a value curve that was a truer likeness of the existing strategic profile than anything they had produced earlier, in part because the new picture ignored the specious distinction that EFS had made between its online and off-line businesses. More important, the managers were now in a position to draw a future strategy that would be distinctive as well as speak to a true but hidden need in the marketplace.
Step 4: Visual Communication
After the future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee. EFS distributed the one-page picture showing its new and old strategic profiles so that every employee could see where the company stood and where it had to focus its efforts to create a compelling future. The senior managers who participated in developing the strategy held meetings with their direct reports to walk them through the picture, explaining what needed to be eliminated, reduced, raised, and created to pursue a blue ocean. Those people passed the message on to their direct reports. Employees were so motivated by the clear game plan that many pinned up a version of the picture in their cubicles as a reminder of EFS’s new priorities and the gaps that needed to be closed.
The new picture became a reference point for all investment decisions. Only those ideas that would help EFS move from the old to the new value curve were given the go-ahead.
Do your business unit heads lack an understanding of the other businesses in your corporate portfolio? Are your strategic best practices poorly communicated across your business units? Are your low-performing units quick to blame their competitive situations for their results? If the answer to any of these questions is yes, try drawing, and then sharing, the strategy canvases of your business units.
Using the Pioneer-Migrator-Settler (PMS) Map
A company’s pioneers are the businesses that offer unprecedented value. These are your blue ocean strategists, and they are the most powerful sources of profitable growth. These businesses have a mass following of customers. Their value curve diverges from the competition on the strategy canvas.
At the other extreme are settlers—businesses whose value curves conform to the basic shape of the industry’s. These are me-too businesses. Settlers will not generally contribute much to a company’s future growth. They are stuck within the red ocean.
The potential of migrators lies somewhere in between. Such businesses extend the industry’s curve by giving customers more for less, but they don’t alter its basic shape. These businesses offer improved value, but not innovative value. These are businesses whose strategies fall on the margin between red oceans and blue oceans.
Chapter 5. Reach Beyond Existing Demand
To achieve this, companies should challenge two conventional strategy practices. One is the focus on existing customers. The other is the drive for finer segmentation to accommodate buyer differences.
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.
Where is your locus of attention—on capturing a greater share of existing customers, or on converting noncustomers of the industry into new demand? Do you seek out key commonalities in what buyers value, or do you strive to embrace customer differences through finer customization and segmentation? To reach beyond existing demand, think noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.
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.
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.
What are the key reasons first-tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to desegment buyers and unleash an ocean of latent untapped demand.
What are the key reasons second-tier noncustomers refuse to use the products or services of your industry? Look for the commonalities across their responses. Focus on these, and not on their differences. You will glean insight into how to unleash an ocean of latent untapped demand.
The third tier of noncustomers is the farthest away from an industry’s existing customers. Typically, these unexplored noncustomers have not been targeted or thought of as potential customers by any player in the industry. That’s because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets.
Chapter 6. Get the Strategic Sequence Right
The starting point is buyer utility. Does your offering unlock exceptional utility? Is there a compelling reason for the mass of people to buy it?
setting the right strategic price. Remember, a company does not want to rely solely on price to create demand. The key question here is this: Is your offering priced to attract the mass of target buyers so that they have a compelling ability to pay for your offering?
cost. Can you produce your offering at the target cost and still earn a healthy profit margin? Can you profit at the strategic price—the price easily accessible to the mass of target buyers? You should not let costs drive prices. Nor should you scale down utility because high costs block your ability to profit at the strategic price.
The last step is to address adoption hurdles. What are the adoption hurdles in rolling out your idea? Have you addressed these up front?
Where are the greatest blocks to utility across the buyer experience cycle for your customers and noncustomers? Does your offering effectively eliminate these blocks? If it does not, chances are your offering is innovation for innovation’s sake or a revision of existing offerings. When a company’s offering passes this test, it is ready to move to the next step.
Step 1: Identify the Price Corridor of the Mass
Different form, same function. Many companies that create blue oceans attract customers from other industries who use a product or service that performs the same function or bears the same core utility as the new one but takes a very different physical form.
Different form and function, same objective.
Step 2: Specify a Level Within the Price Corridor
Chapter 7. Overcome Key Organizational Hurdles
But compared with red ocean strategy, blue ocean strategy represents a significant departure from the status quo.
steep. They face four hurdles. One is cognitive: waking employees up to the need for a strategic shift.
The second hurdle is limited resources. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it.
Third is motivation. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo?
The final hurdle is politics. As one manager put it, “In our organization you get shot down before you stand up.”
Break Through the Cognitive Hurdle
Tipping point leadership does not rely on numbers to break through the organization’s cognitive hurdle. To tip the cognitive hurdle fast, tipping point leaders such as Bratton zoom in on the act of disproportionate influence: making people see and experience harsh reality firsthand.
“Seeing is believing.” In the realm of experience, positive stimuli reinforce behavior, whereas negative stimuli change attitudes and behavior.
To tip the cognitive hurdle, not only must you get your managers out of the office to see operational horror, but also you must get them to listen to their most disgruntled customers firsthand. Don’t rely on market surveys.
When you want to wake up your organization to the need for a strategic shift and a break from the status quo, do you make your case with numbers? Or do you get your managers, employees, and superiors (and yourself) face-to-face with your worst operational problems? Do you get your managers to meet the market and listen to disenchanted customers holler? Or do you outsource your eyes and send out market research questionnaires?
Jump the Resource Hurdle
resources, tipping point leaders concentrate on multiplying the value of the resources they have. When it comes to scarce resources, there are three factors of disproportionate influence that executives can leverage to dramatically free resources, on the one hand, and multiply the value of resources, on the other. These are hot spots, cold spots, and horse trading.
Hot spots are activities that have low resource input but high potential performance gains. In contrast, cold spots are activities that have high resource input but low performance impact. In every organization, hot spots and cold spots typically abound. Horse trading involves trading your unit’s excess resources in one area for another unit’s excess resources to fill remaining resource gaps. By learning to use their current resources right, companies often find they can tip the resource hurdle outright.
Jump the Motivational Hurdle
For a new strategy to become a movement, people must not only recognize what needs to be done, but they must also act on that insight in a sustained and meaningful way.
Instead of diffusing change efforts widely, tipping point leaders follow a reverse course and seek massive concentration. They focus on three factors of disproportionate influence in motivating employees, what we call kingpins, fishbowl management, and atomization.
you should concentrate your efforts on kingpins, the key influencers in the organization. These are people inside the organization who are natural leaders, who are well respected and persuasive, or who have an ability to unlock or block access to key resources.
At the heart of motivating the kingpins in a sustained and meaningful way is to shine a spotlight on their actions in a repeated and highly visible way. This is what we refer to as fishbowl management, where kingpins’ actions and inaction are made as transparent to others as are fish in a bowl of water.
the fishbowl gave an opportunity for high achievers to gain recognition for work in their own precincts and in helping others.
Atomization relates to the framing of the strategic challenge—one of the most subtle and sensitive tasks of the tipping point leader. Unless people believe that the strategic challenge is attainable, the change is not likely to succeed.
Knock Over the Political Hurdle
Organizational politics is an inescapable reality of corporate and public life. Even if an organization has reached the tipping point of execution, there exist powerful vested interests that will resist the impending changes.
To overcome these political forces, tipping point leaders focus on three disproportionate influence factors: leveraging angels, silencing devils, and getting a consigliere on their top management team.
Angels are those who have the most to gain from the strategic shift. Devils are those who have the most to lose from it. And a consigliere is a politically adept but highly respected insider who knows in advance all the land mines, including who will fight you and who will support you.
Tipping point leaders, however, also engage one role few other executives think to include: a consigliere.
Challenging Conventional Wisdom
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.
Chapter 8. Build Execution into Strategy
A COMPANY IS NOT ONLY TOP MANAGEMENT, nor is it only middle management. A company is everyone from the top to the front lines. And it is only when all the members of an organization are aligned around a strategy and support it, for better or for worse, that a company stands apart as a great and consistent executor.
This brings us to the sixth principle of blue ocean strategy: To build people’s trust and commitment deep in the ranks and inspire their voluntary cooperation, companies need to build execution into strategy from the start. That principle allows companies to minimize the management risk of distrust, noncooperation, and even sabotage. This management risk is relevant to strategy execution in both red and blue oceans, but it is greater for blue ocean strategy because its execution often requires significant change. Hence, minimizing such risk is essential as companies execute blue ocean strategy. Companies must reach beyond the usual suspects of carrots and sticks. They must reach to fair process in the making and executing of strategy.
The Power of Fair Process
people care as much about the justice of the process through which an outcome is produced as they do about the outcome itself. People’s satisfaction with the outcome and their commitment to it rose when procedural justice was exercised.
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. 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.
Voluntary cooperation is more than mechanical execution, where people do only what it takes to get by. It involves going beyond the call of duty, wherein individuals exert energy and initiative to the best of their abilities—even subordinating personal self-interest— to execute resulting strategies.
The Three E Principles of Fair Process
There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation.
Engagement means involving individuals in the strategic decisions that affect them by asking for their input and allowing them to refute the merits of one another’s ideas and assumptions. Engagement communicates management’s respect for individuals and their ideas. Encouraging refutation sharpens everyone’s thinking and builds better collective wisdom. Engagement results in better strategic decisions by management and greater commitment from all involved to execute those decisions.
Explanation means that everyone involved and affected should understand why final strategic decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their opinions and have made decisions impartially in the overall interests of the company. An explanation allows employees to trust managers’ intentions even if their own ideas have been rejected. It also serves as a powerful feedback loop that enhances learning.
Expectation clarity requires that after a strategy is set, managers state clearly the new rules of the game. Although the expectations may be demanding, employees should know up front what standards they will be judged by and the penalties for failure. What are the goals of the new strategy? What are the new targets and milestones? Who is responsible for what? To achieve fair process, it matters less what the new goals, expectations, and responsibilities are and more that they are clearly understood. When people clearly understand what is expected of them, political jockeying and favoritism are minimized, and people can focus on executing the strategy rapidly.
Emotionally, individuals seek recognition of their value, not as “labor,” “personnel,” or “human resources” but as human beings who are treated with full respect and dignity and appreciated for their individual worth regardless of hierarchical level. Intellectually, individuals seek recognition that their ideas are sought after and given thoughtful reflection, and that others think enough of their intelligence to explain their thinking to them. Such frequently cited expressions in our interviews as “that goes for everyone I know” or “every person wants to feel” and constant references to “people” and “human beings” reinforce the point that managers must see the nearly universal value of the intellectual and emotional recognition that fair process conveys.
When individuals feel recognized for their intellectual worth, they are willing to share their knowledge; in fact, they feel inspired to impress and confirm the expectation of their intellectual value, suggesting active ideas and knowledge sharing. Similarly, when individuals are treated with emotional recognition, they feel emotionally tied to the strategy and inspired to give their all. Indeed, in Frederick Herzberg’s classic study on motivation, recognition was found to inspire strong intrinsic motivation, causing people to go beyond the call of duty and engage in voluntary cooperation.
The observed pattern of thought and behavior can be summarized as follows. If individuals are not treated as though their knowledge is valued, they will feel intellectual indignation and will not share their ideas and expertise; rather, they will hoard their best thinking and creative ideas, preventing new insights from seeing the light of day. What’s more, they will reject others’ intellectual worth as well. It’s as if they were saying, “You don’t value my ideas. So I don’t value your ideas, nor do I trust in or care about the strategic decisions you’ve reached.”
Similarly, to the extent that people’s emotional worth is not recognized, they will feel angry and will not invest their energy in their actions; rather, they will drag their feet and apply counter-efforts, including sabotage,
When people have trust, they have heightened confidence in one another’s intentions and actions. When they have commitment, they are even willing to override personal self-interest in the interests of the company.
Commitment, trust, and voluntary cooperation allow companies to stand apart in the speed, quality, and consistency of their execution and to implement strategic shifts fast at low cost.
The exercise of fair process gets around this dilemma. By organizing the strategy formulation process around the principles of fair process, you can build execution into strategy making from the start. With fair process, people tend to be committed to support the resulting strategy even when it is viewed as not favorable or at odds with their perception of what is strategically correct for their unit. People realize that compromises and sacrifices are necessary in building a strong company. They accept the need for short-term personal sacrifices in order to advance the long-term interests of the corporation. This acceptance is conditional, however, on the presence of fair process.
Chapter 9. Conclusion: The Sustainability and Renewal of Blue Ocean Strategy
CREATING BLUE OCEANS is not a static achievement but a dynamic process. Once a company creates a blue ocean and its powerful performance consequences are known, sooner or later imitators appear on the horizon. The question is, How soon or late will they come?
Barriers to Imitation
a blue ocean strategy will go without credible challenges for ten to fifteen years,
A value innovation move does not make sense based on conventional strategic logic.
Brand image conflict prevents companies from imitating a blue ocean strategy.
Natural monopoly blocks imitation when the size of a market cannot support another player.
Patents or legal permits block imitation.
The high volume generated by a value innovation leads to rapid cost advantages, placing potential imitators at an ongoing cost disadvantage.
Network externalities also block companies from easily and credibly imitating a blue ocean strategy,
Because imitation often requires companies to make substantial changes to their existing business practices, politics often kick in, delaying for years a company’s commitment to imitate a blue ocean strategy.
When a company offers a leap in value, it rapidly earns brand buzz and a loyal following in the marketplace. Even large advertising budgets by an aggressive imitator rarely have the strength to overtake the brand buzz earned by the value innovator.
When to Value-Innovate Again
Eventually, however, almost every blue ocean strategy will be imitated. As imitators try to grab a share of your blue ocean, you typically launch offenses to defend your hard-earned customer base. But imitators often persist. Obsessed with hanging on to market share, you may fall into the trap of competing, racing to beat the new competition. Over time, the competition, and not the buyer, may come to occupy the center of your strategic thought and actions. If you stay on this course, the basic shape of your value curve will begin to converge with those of the competition.
To avoid the trap of competing, you need to monitor value curves on the strategy canvas. Monitoring value curves signals when to value-innovate and when not to. It alerts you to reach out for another blue ocean when your value curve begins to converge with those of the competition.
As rivalry intensifies and total supply exceeds demand, bloody competition commences and the ocean will turn red.
Because blue and red oceans have always coexisted however, practical reality demands that companies succeed in both oceans and master the strategies for both. But because companies already understand how to compete in red oceans, what they need to learn is how to make the competition irrelevant.
Appendix A. A Sketch of the Historical Pattern of Blue Ocean Creation
There is no permanently excellent industry. The attractiveness of all industries rose and fell over the study period.
There are no permanently excellent companies. Companies, like industries, rose and fell over time.
A key determinant of whether an industry or a company was on a rising trajectory of strong, profitable growth was the strategic move of blue ocean creation.
Blue oceans were created by both industry incumbents and new entrants, challenging the lore that start-ups have natural advantages over established companies in creating new market space. Moreover, the blue oceans created by incumbents were usually within their core businesses.
The Model T
Although it came in only one color (black) and one model, the Model T was reliable, durable, and easy to fix. And it was priced so that the majority of Americans could afford one. In 1908 the first Model T cost $850, half the price of existing automobiles. In 1909 it dropped to $609, and by 1924 it was down to $290.
Ford’s success was underpinned by a profitable business model. By keeping the cars highly standardized and offering limited options and interchangeable parts, Ford’s revolutionary assembly line replaced skilled craftsmen with ordinary unskilled laborers who worked one small task faster and more efficiently, cutting the time to make a Model T from twenty-one days to four days and cutting labor hours by 60 percent.
Sales of the Model T exploded. Ford’s market share surged from 9 percent in 1908 to 61 percent in 1921, and by 1923, a majority of American households owned an automobile.6 Ford’s Model T exploded the size of the automobile industry, creating a huge blue ocean.
In contrast to Ford’s functional, one-color, single-model strategy, GM introduced “a car for every purse and purpose”—a strategy devised by chairman Alfred Sloan to appeal to the emotional dimensions of the U.S. mass market, or what Sloan called the “mass-class” market.
Whereas Ford stuck with the functional “horseless carriage” concept of the car, GM made the car fun, exciting, comfortable, and fashionable. GM factories pumped out a broad array of models, with new colors and styles updated every year. The “annual car model” created new demand as buyers began to trade up for fashion and comfort. Because cars were replaced more frequently, the used car market was also formed.
Demand for GM’s fashionable and emotionally charged cars soared. From 1926 to 1950, the total number of cars sold in the United States increased from two million to seven million a year, and General Motors increased its overall market share from 20 percent to 50 percent, while Ford’s fell from 50 percent to 20 percent.
Following GM’s surging success, Ford and Chrysler jumped into the blue ocean GM had created,
Small, Fuel-Efficient Japanese Cars
In the 1970s, the Japanese created a new blue ocean, challenging the U.S. automobile industry with small, efficient cars. Instead of following the implicit industry logic “the bigger, the better” and focusing on luxuries, the Japanese altered the conventional logic, pursuing ruthless quality, small size, and the new utility of highly gasefficient cars.
The Japanese car producers had been so effective at creating and capturing this blue ocean that the U.S. automakers found it hard to make a real comeback; their competitiveness and long-run viability were thrown into serious question by industry experts across the world.
A beleaguered Chrysler, on the edge of bankruptcy, unveiled the minivan, creating a new blue ocean in the auto industry. The minivan broke the boundary between car and van, creating an entirely new type of vehicle.
The success of the minivan ignited the sports utility vehicle (SUV) boom in the 1990s, which expanded the blue ocean Chrysler had unlocked.
The Computer Industry
The U.S. computer industry traces back to 1890, when Herman Hollerith invented the punch card tabulating machine to shorten the process of data recording and analysis for the U.S. census.
Hollerith sold the company, which was then merged with two other companies to form CTR in 1911.
The Tabulating Machine
CTR turned to Thomas Watson, a former executive at National Cash Register Company, for help.
Under Watson, CTR’s tabulators were simplified and modularized, and the company began to offer on-site maintenance and user education and oversight.
Watson decreed that tabulators would be leased and not sold, an innovation that helped establish a new pricing model for the tabulating machine business.
Within six years, the firm’s revenues more than tripled.14 By the mid-1920s, CTR held 85 percent of the tabulating market in the United States. In 1924, to reflect the company’s growing international presence, Watson changed CTR’s name to International Business Machines Corp. (IBM).
The Electronic Computer
Watson Jr. realized the role electronic computers could play in business and pushed IBM to meet the challenge.
In 1953, IBM introduced the IBM 650, the first intermediatesized computer for business use. Recognizing that if businesses were going to use the electronic computer, they wouldn’t want a complicated machine and would pay only for the computing power they would use, IBM had made the IBM 650 much simpler to use and less powerful than the UNIVAC, and it priced the machine at only $200,000, compared with the UNIVAC’s $1 million price tag.
IBM’s expansion of the blue ocean was greatly accentuated in 1964, with the introduction of the System/360, the first large family of computers to use interchangeable software, peripheral equipment, and service packages. It was a bold departure from the monolithic, one-size-fits-all mainframe.
Later, in 1969, IBM changed the way computers were sold. Rather than offer hardware, services, and software exclusively in packages, IBM unbundled the components and offered them for sale individually. Unbundling gave birth to the multibillion-dollar software and services industries. Today, IBM is the world’s largest computer services company, and it remains the world’s largest computer manufacturer.
The Personal Computer
Yet in 1978, when the major computer manufacturers were intent on building bigger, more powerful machines for the business market, Apple Computer, Inc., created an entirely new market space with its Apple II home computer.
Two years earlier, Micro Instrumentation and Telemetry Systems (MITS) had unveiled the Altair 8800.
Yet MITS did not create a blue ocean. Why? The machine had no monitor, no permanent memory, only 256 characters of temporary memory, no software, and no keyboard.
Based largely on existing technology, the Apple II offered a solution with an all-in-one design in a plastic casing, including the keyboard, power supply, and graphics, that was easy to use. The Apple II came with software ranging from games to businesses programs such as the Apple Writer word processor and the VisiCalc spreadsheet, making the computer accessible to the mass of buyers.
Apple changed the way people thought about computers. Computers were no longer products for technological “geeks”; they became, like the Model T before them, a staple of the American household.
By creating a standardized operating system for which outsiders could create the software and peripheral components, IBM was able to keep its cost and price low while offering customers greater utility. The company’s scale and scope advantages allowed it to price its PC at a level accessible to the mass of buyers.
Compaq PC Servers
In 1992, Compaq changed all that by effectively creating the blue ocean of the PC server industry with its launch of the ProSignia, a radically simplified server that was optimized for the most commonly used functions of file and printer sharing.
In the mid-1990s, Dell Computer Corporation created another blue ocean in the computer industry. Traditionally, computer manufactures competed on offering faster computers having more features and software. Dell, however, challenged this industry logic by changing the purchasing and delivery experiences of buyers. With its direct sales to customers, Dell was able to sell its PCs for 40 percent less than IBM dealers while still making money.
Direct sales further appealed to customers because Dell offered unprecedented delivery time.
As with the auto industry, the blue oceans in the computer industry were not unleashed by technology innovations per se but by linking technology to elements valued by buyers. As in the case of the IBM 650 and the Compaq PC server, the value innovation often rested on simplifying the technology. We also see industry incumbents—CTR, IBM, Compaq—launching blue oceans as much as we see new entrants, such as Apple and Dell. Each blue ocean has reinforced the originating company’s standing brand name and has led to a surge not only in its profitable growth but in the profitable growth of the computer industry overall.
Appendix B. Value Innovation
The structuralist view of strategy has its roots in industrial organization (IO) economics. 1 The model of industrial organization analysis proposes a structure-conduct-performance paradigm, which suggests a causal flow from market structure to conduct and performance. Market structure, given by supply and demand conditions, shapes sellers’ and buyers’ conduct, which, in turn, determines end performance. 2 Systemwide changes are induced by factors that are external to the market structure, such as fundamental changes in basic economic conditions and technological breakthroughs.
The reconstructionist view of strategy, on the other hand, is built on the theory of endogenous growth. The theory traces back to Joseph A. Schumpeter’s initial observation that the forces that change economic structure and industry landscapes can come from within the system. 4 Schumpeter argues that innovation can happen endogenously and that its main source is the creative entrepreneur. 5 Schumpeterian innovation is still black-boxed, however, because it is the product of the ingenuity of entrepreneurs and cannot be reproduced systematically.
These two views—the structuralist and the reconstructionist— have important implications for how companies act on strategy. The structuralist view (or environmental determinism) often leads to competition-based strategic thinking. Taking market structure as given, it drives companies to try to carve out a defensible position against the competition in the existing market space. To sustain themselves in the marketplace, practitioners of strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy.
Such strategic thinking leads firms to divide industries into attractive and unattractive ones and to decide accordingly whether or not to enter. After it is in an industry, a firm chooses a distinctive cost or differentiation position that best matches its internal systems and capabilities to counter the competition. 7 Here, cost and value are seen as trade-offs. Because the total profit level of the industry is also determined exogenously by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.
To reconstructionist eyes, however, the strategic challenge looks very different. Recognizing that structure and market boundaries exist only in managers’ minds, practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there, largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation—that is, the creation of innovative value to unlock new demand. With this new focus in mind, firms can hope to accomplish the journey of discovery by looking systematically across established boundaries of competition and reordering existing elements in different markets to reconstruct them into a new market space where a new level of demand is generated.
In the reconstructionist view, there is scarcely any attractive or unattractive industry per se because the level of industry attractiveness can be altered through companies’ conscientious efforts of reconstruction. As market structure is changed in the reconstruction process, so are best-practice rules of the game. Competition in the old game is therefore rendered irrelevant. By stimulating the demand side of the economy, the strategy of value innovation expands existing markets and creates new ones. Value innovators achieve a leap in value by creating new wealth rather than at the expense of competitors in the traditional sense. Such a strategy therefore allows firms to largely play a non–zero-sum game, with high payoff possibilities.