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BLUEOCEAN

STRATEGYHow to Create

Uncontested Market Spaceand Make the Competition Irrelevant

W. Chan Kim and Renée MauborgneHARVARD BUSINESS SCHOOL PRESS

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Red Ocean Versus Blue Ocean Strategy

Align the whole system of a firm’s activities in pursuit of differentationAND low cost

Align the whole system of a firm’s activities with its strategic choice of differentation OR low cost

Break the value-cost trade-offMake the value-cost trade-off

Create and capture new demandExploit existing demand

Make the competition irrelevantBeat the competition

Create uncontested market spaceCompete in existing market space

Blue Ocean StrategyRed Ocean Strategy

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Value Innovation:The Cornerstone of Blue Ocean Strategy

Value

Innovation

Costs Decrease

Buyer Value Increases

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Value Inovation:The Cornerstone of Blue Ocean Strategy

• Value Innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers

• Costsavings are made by eliminating and reducing the factors an industry competes on

• Buyer value is lifted by raising and creating elements the industry has never offered

• Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates

• Value innovation is not the same as technology innovation

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Value Inovation:The Cornerstone of Blue Ocean Strategy

Dealing with the value-cost trade-off (i.e. the principle that more buyervalue means higher costs v.v.):

• In Red Ocean Strategies companies make a choice between differentation (customer intimacy, product leadership, operational excellence) and low cost (cost leadership)

• Blue Ocean Strategy defies the dogma of value-cost trade-off. Value Innovation pursues differentation and low cost SIMULTANEOUSLY

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Analytical Tools and Frameworks

Blue Ocean’s Analytical Tools and Frameworks:

1. The Strategy Canvas2. The Four Actions Framework3. The Eliminate-Reduce-Raise-Create Grid4. Three Characteristics of a Good Strategy5. Reading the Value Curves

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Analytical Tools and Frameworks:1. The Strategy Canvas

The Strategy Canvas of the U.S. Wine Industry in the Late 1990s

Price Use of enological Above-the-line Aging Vineyard prestige Wine Wine

terminology and marketing quality and legacy complexity range

distinctions in wine

communication

LOW

HIGH Premium Wines

Budget Wines

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• The Strategy Canvas is both a diagnostic and an action framework• First it captures on the horizontal axis the current state of play in the

known marketspace. It allows you to understand– Where the competition is currently investing– The factors the industry currently competes on in products, services and

delivery• Secondly it captures on the vertical axis the offering level that

buyers receive across all these competing factors• The value curve is a graphic depiction of a company’s relative

performance across its industry’s factors of competition• In the graphic we can see the value curves for Premium Wines and

for Budget Wines

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Analytical Tools and Frameworks:2. The Four Actions Framework

To reconstruct buyer value elements in crafting a new value curve usethe four actions framework.

REDUCEWhich factors should be

reduced well belowthe industry’s standard?

ELIMINATEWhich factors that the Industry

takes for grantedshould be eliminated?

CREATEWhich factors should

be created that the industrynever has offered?

RAISEWhich factors shouldbe raised well above

the industry’s standard?

A newvalue curve

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The Strategy Canvas of the U.S. Wine Industry in the Late 1990s

Price Use of enological Above-the-line Aging Vineyard prestige Wine Wine Easy Ease of Fun and

terminology and marketing quality and legacy complexity range drinking selection adventure

distinctions in wine

communication

LOW

HIGH Premium Wines

Budget Wines

[yellow tail]

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Analytical Tools and Frameworks:3. The Eliminate-Reduce-Raise-Create Grid

•Easy drinking•Ease of selection•Fun and adventure

•Wine complexity•Wine range•Vineyard prestige

CreateReduce

•Price versus budget wines•Retail store involvement

•Enological terminology anddistinctions

•Aging qualities•Above-the-line marketing

RaiseEliminatie

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Analytical Tools and Frameworks:4. Three characteristics of a good strategy

Look at the example of [yellow tail]:

• FOCUSThe company does not diffuse its efforts across all key factors ofcompetition

• DIVERGENCEThe shape of its value curve diverges from that of the other players’,a result of not benchmarking competitors, but instead lookingacross alternatives

• COMPELLING TAGLINEThe tagline of [yellow tail]’s strategic profile is clear:A fun and simple wine to be enjoyed every day

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Analytical Tools and Frameworks:5. Reading the value curves

Embedded in the value curves of an industry is a wealth of strategicknowledge on the current status and future of a business. But how toread the value curves?

• A Blue Ocean Strategy has FOCUS, DIVERGENCE (recognizable in the Strategy Canvas) and a COMPELLING TAGLINE (as a result from the Strategic Profile)

• A Company Caught in the Red Ocean has a value curve that converges with that of the industry’s

• Overdelivery Without Payback indicates that the process of eliminating and reducing competing factors has been ignored

• An Incoherent Strategy consists of independent substrategies with a zig-zag value curve with no rhyme or reason

• Strategic Contradictions occur if competing factors do not support each other but on the contrary are in conflict

• An Internally Driven Company has an ‘inside-out’ perspective that is internally driven instead of an ‘outside-in’ perspective driven by the demand side. Often to be recognized in the use of operational jargon in the strategic canvas

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Formulating Blue Ocean Strategy:The Six Principals of Blue Ocean Strategy

Management riskBuild execution into strategy

Organizational riskOvercome key organizational hurdles

Risk FactorExecution Principles

Business model riskGet the strategic sequence right

Scale riskReach beyond existing demand

Planning RiskFocus on the big picture, not the numbers

Search RiskReconstruct market boundaries

Risk Factor Formulation Principles

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Formulating Blue Ocean Strategy:Principle 1: Reconstruct Market Boundaries

• This principle deals with the search risk• The challenge is to successfully identify commercially compelling

Blue Ocean opportunities• There are six basic approaches to create blue oceans (called the

“six paths framework”)• These paths have general applicability across industry sectors• None of these paths requires special vision or foresight about the

future• All are based on looking at familiar data from a new perspective• To break out of red oceans companies must break out of the

accepted boundaries that define how they compete

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The Six Paths Framework

1. Look across alternative industriesNot only look at direct competitors (same form, same function), but also atsubstitutes (different form, same function) and alternatives (different form,different function, same objective)

2. Look across strategic groups within industriesUnderstand which factors determine customer’s decisions to trade up ordown from one group to another (f.e. small car to big car)

3. Look across the chain of buyersChallenge the industry’s conventional wisdom about which buyer group to target(purchasers, users, influencers)

4. Look across complementary product and service offeringsDefining the total solution buyers seek, can lead to untapped value often hidden incomplementary products and services

5. Look across functional or emotional appeal to buyersIf you compete on emotional appeal, what elements can you strip out to make it functional andv.v.?

6. Look across timeTrends (criteria: decisive to your business, irreversible, clear trajectory) can change the value amarket delivers today to a value it might deliver tomorrow

For each path a strategy canvas can be created

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From Head-to-Head Competition to Blue Ocean Creation

Head-to-Head Competition Blue Ocean Creation

Industry Focuses on rivals within the industry Looks across alternative industries

Strategic Group Focuses on competitive position Looks across strategic groupswithin strategic group within industry

Buyer Group Focuses on better serving the Redefines the industry buyer group buyer group

Scope of product Focuses on maximizing the value of Looks across to complementaryor service offering product and serving offerings within product and service offerings

the bounds of its industry

Functional/emotional Focuses on improving price performance Rethinks the functional-emotionalorientation within the functional-emotional orientation of its industry

orientation of its industry

Time Focuses on adapting to external Participates in shaping trends as they occur external trends over time

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Formulating Blue Ocean Strategy:Principle 2: Focus on the big picture, not the numbers

• This principle deals with the planning risk• Handling the process of creating a strategy canvas• This principle is key to mitigating the planning risk of investing lots of

efforts and lots of time but delivering only tactical red ocean moves• This approach consistently produces strategies that

– unlock the creativity of a wide range of people within an organization– open companies’ eyes to blue oceans– are easy to understand and communicate for effective execution

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Drawing a strategy canvas does three things:1. It shows the strategic profile of an industry by depicting very

clearly the current and the possible future factors that affect competition among industry players

2. It shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically

3. It shows the company’s strategic canvas -or value curve-depicting how it invests in the factors of competition and how it might invest in them in the future

The strategic profile with high blue ocean potential has threecomplementary qualities:1. FOCUS2. DIVERGENCE3. COMPELLING TAGLINE

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The four steps of visualizing strategy

•Distribute your before-and-after strategic profiles on one page for easy comparison

•Support only those projects and operational moves that allow your company to close the gaps to actualize the new strategy

•Draw your “to be”strategy canvas based on the insights from field observations

•Get feedback on alternative strategy canvases from customers, competitors’customers and noncustomers

•Use feedback to build the best “to be”future strategy

•Go into the field to explore the six paths to creating blue oceans

•Observe the distinctive advantages of alternative products and services

•See which factors you should eliminate, create or change

•Compare your business with your competitors’ by drawing your “as is“strategy canvas

•See where your strategy needs to change

4. Visual Communication3. Visual Strategy Fair2. Visual exploration1. Visual awakening

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Visualizing Strategy at the Corporate Level by Using the StrategyCanvas:

• 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 situation for their results?

If the answer to any of these questions is yes, try drawing, andthen sharing, the strategy canvases of your business units.

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Visualizing Strategy at the Corporate Level by Using the Pioneer-Migrator-Settler (PMS) Map:

• Pioneers are blue ocean business units. Their value curve diverges from the competition on the strategy canvas.

• Settlers are stuck in the red ocean and are me-too businesses. Their value curves conform to the basic shape of the industry’s.

• Migrators are businesses whose strategies fall on the margin between red oceans and blue oceans

Chief executers should use VALUE and INNOVATION as theimportant parameters for manageing their portfolio of businesses

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Visualizing Strategy at the Corporate Level by Using thePioneer-Migrator-Settler (PMS) Map

Testing the Growth Potential of a Portfolio of Businesses

Pioneers

Migrators

Settlers

Today Tomorrow

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Formulating Blue Ocean Strategy:Principle 3: Reach Beyond Existing Demand

• This principle deals with the scale risk• How do you maximize the size of the Blue Ocean you are creating?• You should challenge two conventional strategy practices:

– One is to focus on existing customers– The other is the drive for finer segmentation to accommodate buyer

differences • To reach beyond existing demand you should:

– Think noncustomers before customers– Commonalities before differences– Desegmentation before pursuing finer segmentation

• Get keen insight in who noncustomers are and how to unlock them

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The Three Tiers of Noncustomers

First Tier: “Soon-to-be” noncustomerswho are at the edge of your marketwaiting to jump ship

Second Tier: “Refusing”noncustomers who consciouslychoose against your market

Third Tier: “Unexplored” non-customers who are in markets distant from yours

YourMarket

FirstTier

SecondTier

ThirdTier

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• The scale of blue ocean opportunities that a specific tier of noncustomers can unlock varies across time and industries

• Focus on the tier that represents the biggest catchment at the time: the rule here is go for the largest catchment

• Explore whether there are overlapping commonalities across all three tiers of noncustomers

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Formulating Blue Ocean Strategy:Principle 4: Get the Strategic Sequence Right

• This principle deals with business model risk• It discusses the strategic sequence of fleshing out and validating

blue ocean ideas to ensure their commercial viability• The sequence consists of (assessing) buyer utility, price, costs and

adoption• Its goal is to dramatically reduce business model risk

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The Sequence of Blue Ocean Strategy

Yes

No-RethinkIs there exceptional buyer

utility in your business idea?

A. Buyer Utility

Is your price easy accessible to the mass of

buyers?

B. Price

No-Rethink

Can you attain your cost target to profit at your

strategic price?

C. Cost

Yes

What are the adoption hurdles in actualizing

your business idea? Are you addressing them up

front?

D. Adoption

No-Rethink

No-Rethink

Yes

A CommerciallyViable

Blue Ocean Idea

Yes

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A. Buyer Utility: The Buyer Utility MapThe Six Stages of the Buyer Experience Cycle

1. 2. 3. 4. 5. 6. Purchase Delivery Use Supplements Maintenance Disposal

CustomerProductivity

Simplicity

Convenience

Risk

Fun andImage

Environmentalfriendliness

The

Six

Util

ity L

ever

s

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B. Strategic Pricing: The Price Corridor of the Mass• Determine the price that will quickly capture the mass of target

buyers, because:– Volume generates higher returns than it used to– To a buyer the value of a product or service my be closely tied to the

total number of people using it• Excludability of a good or service highly influences the price• A good is excludable if the company can prevent others of using it

because of limited access or legal protection• Lack of excludability reinforces the risk of free riding• When exceptional utility is combined with strategic pricing imitation

is discouraged

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B. Strategic Pricing: The Price Corridor of the MassStep 1: Identify the price corridor of the mass Step 2: Specify a price level within the price corridor

Three alternative product/service types:Same Different form, Different form and form same function function, same objective

Size of circle is proportional to numberof buyers that product/service attracts

Price CorridorOf the Mass

Low degree of legalAnd resource protection

Easy to imitate

Some degree of legaland resource protection

High degree of legal andresource protectionDifficult to imitateUpper-level pricing

Mid-level pricing

Lower-level pricing

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C. Target Costing• A company should start with the strategic price and then deduct its desired

profit margin from the price to arrive at the target costs• Price-minus costing (and not cost-plus pricing) to arrive at a cost structure

that is both profitable and hard for potential followers to match• Target costing is usually aggressive, because the choices on FOCUS and

DIVERGENCE in the strategic profile makes a company strip out costs• To hit the cost target there three principal levers:

– Streamlining operations and introducing cost innovations from manufacturing to distribution

– Partnering provides a way to secure needed capabilities fast and effectively while dropping the cost structure

– Pricing innovation: changing the pricing model of the industry (NOT the level of the strategic price), f.e. time-share, slice-share, equity interest

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The Strategic Price

Pricing Innovation

The Target Cost

PartneringStreamlining and

Cost Innovations

The Target Profit

B. Strategic Pricing and C. Target costing

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D. Adoption• A Blue Ocean Strategy almost always threatens the status quo• It may provoke fear and resistance among the stakeholders• Overcome such fears by educating the fearful• There three main stakeholders:

– The Employees– The Business partners– The general public

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The Blue Ocean Idea Index (BOI)

++/--Have you addressed adoption hurdles up front?

Adoption

+--Does your cost structure meet the target cost?

Cost

+--Is your price easy accessible to the mass of buyers?

Price

+--Is there exceptional utility? Are there compelling reasons to buy your offering?

Utiliy

DoCoMoi-mode

MotorolaIridium

PhilipsCD-I

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Executing Blue Ocean Strategy:Principle 5: Overcome Key Organizational Hurdles

• This principle deals with the organizational risk• Becomes relevant in the execution phase• Blue Ocean Strategy represents a significant departure from the status quo.• It hinges on a shift from convergence to divergence in value curves at lower

costs.• Four hurdles can be distinguished:

– Cognitive hurdle: waking employees up for the need for a strategic shift– Limited resources hurdle: while resources are being cut, the need for resources

because of the strategic shift tend to increase– Motivation hurdle: how to motivate key players to move fast and tenaciously to

carry out a break from the status quo?– Political hurdle: How not to get shot down before standing up?

• Flip conventional wisdom on its head and use tipping point leadership

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The Four Organizational Hurdles to Strategy Execution

1. Cognitive Hurdle

An organization

wedded to the

status quo

3. Motivational Hurdle

Unmotivated

Staff

2. Resource Hurdle

Limited Resources

4. Political Hurdle

Opposition from

powerful vested

interests

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The Pivotal Leader: Disproportionate Influence Factors• Fundamental changes can happen quickly when the beliefs and

energies of a critical mass of people create an epidemic movement toward an idea

• Key is concentration not diffusion• Tipping point leadership builds on people, acts and activities that

exercise a disproportionate influence on performance• It is about conserving resources and cutting time by focusing on

identifying and than leveraging the factors of disproportionate influence in an organization

• This way tipping point leaders can topple the four hurdles that limit the execution of a blue ocean strategy

• It can be done fast and at low cost

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1. Break Through the Cognitive Hurdle• Ride the “Electric Sewer”

Employees must come face-to-face with the worst operational problems,which is shocking and inescapable, but actionable. This direct experienceexercises a disproportionate influence on tipping people’s cognitivehurdle fast. Showing the worst reality to your superiors can also shift theirmindset fast

• Meet with disgruntled customersGet your employees and managers to listen to their most disgruntledcustomers at first hand. There is no substitute for meeting and listening todissatisfied customers directly.

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2. Jump the Resource Hurdle• Redistribute Resources to Hot Spots

Hot Spots are activities that have low resource input, but high potentialperformance gains.

• Redirect Resources from Cold SpotsCold Spots are activities that have high resource input, but lowperformance impact

• Engage in Horse TradingHorse trading involves trading your unit’s excess resources in one area foranother unit’s excess resources to fill remaining resource gaps.

It is not about getting more resources but instead on concentrating onmultiplying the value of the available resources

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3. Jump the Motivational Hurdle• Zoom in on kingpins

To trigger an epidemic movement of positive energy, concentrate on theKingpins, the key influencers of the organization. As with kingpins inbowling, when you hit them straight on, all the other pins come topplingdown.

• Place Kingpins in a FishbowlFishbowl management makes kingpin’s actions and inaction astransparent to others as are fish in a bowl of water. Light is shined on whois lagging behind, and a fair stage is set for rapid change agents to shine. For this approach to work it must be based on transparency, inclusion andfair process.

• Atomize to Get the Organization to Change ItselfAtomization relates to the framing of the strategic challenge, becausepeople need to believe that it is attainable. To accomplish this break the strategicchallenge into bite-size atoms that people at different levels can relate to.

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4. Knock over the Political Hurdle• Secure a Consigliere on your Top Management Team

Tipping point leaders engage one role few other executives think toInclude: a Consigliere. A Consigliere is a politically adept but highlyrespected insider who knows in advance all the landmines, including whowill fight you and who will support you.

• Leverage Your Angels and Silence Your Devils– Who are my devils? Who will fight me? Who will lose the most by the

future blue ocean strategy?– Who are my angels? Who will naturally align with me? Who will gain the

most by the strategic shift?– Identify your detractors and supporters (forget the middle) and strive to

create a win-win outcome for both– Move quickly to isolate your detractors by building a broader coalition

with your angels before a battle begins.– In this way you will discourage the war before it has a chance to start or

to gain steam.

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Conventional Wisdom Versus Tipping Point Leadership

Mass of employees

Extremes Extremes

Company

Theory of organization change rest on transforming the mass. So change efforts

are focused on moving the mass, requiring steep resources and long time frames

Company

To change the mass, focus on the extremes – people, acts and activities that

exercise a disproportionate influence on performance to achieve a strategic shift at low cost

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Executing Blue Ocean Strategy:Principle 6: Build Execution into Strategy

• This principle deals with management risk• Invoke the most fundamental base of action: the attitudes and

behavior of people deep in the organization• Create a culture of trust and commitment that motivates people to

execute the agreed 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

• This minimizes the risk of distrust, noncooperation and even sabotage

• Research shows that Fair Process is a key variable that distinguishes successful blue ocean strategic moves from those that failed

• The presence or absence of Fair Process can make or break a company’s best execution efforts

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The Three E Principles of Fair Process1. Engagement

– Involving all individuals in strategic decisions that effect them– Engagement reflects management’s respect for individuals and their

ideas– Encouraging refutation sharpens everyone’s thinking and builds

better collective wisdom2. Explanation

– Explanation allows employees to trust managers’ intentions even if their own ideas have been rejected

3. Expectation Clarity– What are the goals of the new strategy? What are the new targets

and milestones? Who is responsible for what?– By what standards will employees be judged and the penalties for

failureTaken together, these three criteria collectively

lead to judgments of fair process

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How Fair Process Affects People’s Attitudes and Behavior

StrategyFormulationProces

Attitudes

Behavior

StrategyExecution

Fair Process

Engagement

Explanation

Expectation Clarity

Trust and

Commitment

“I feel my

opinion counts”

Voluntary

Cooperation

“I’ll go beyond

the call of duty”

Exceeds

Expectations

Self-initiated

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The Execution Consequences of the Presence and Absence of Fair Process in Strategy Making

Fair

Process

Violation of

Fair Process

Intellectual

And Emotional

Recognition

Intellectual

And Emotional

Indignation

Distrust and

Resentment

Trust and

Commitment

Refusal to

Execute

Strategy

Voluntary

Cooperation

in Strategy

Execution

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Conclusion: The Sustainability and Renewal of Blue Ocean Strategy

Sustainability: Imitation Barriers to Blue Ocean Strategy• Value Innovation does not make sense to a company’s conventional

logic• Blue Ocean Strategy may conflict with other companies’ brand

image• Natural Monopoly: The market often cannot support another player• Patents or legal permits block imitation• High volume leads to rapid cost advantage for the value innovator,

discouraging followers from entering the market• Network externalities discourage imitation• Imitation often requires significant political, operational and cultural

changes• Companies that value-innovate earn brand buzz and a loyal

customer following that tends to shun imitators

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Conclusion: The Sustainability and Renewal of Blue Ocean Strategy

Renewal: When to Value-Innovate Again?• Eventually, almost every blue ocean strategy will be imitated• Staying on this course, the basic shape of your value curve will

begin to converge with those of the competition• To avoid the trap of competition, you need to monitor value curves

on the strategy canvas• That also keeps you from pursuing another blue ocean when there

is still a huge profit stream to be collected from your current offering• Remember the criteria: focus, divergence and a compelling tagline• The aim is to dominate the blue ocean over your imitators for as

long as possible• However, as rivalry intensifies and total supply exceeds demand,

bloody competition commences and the ocean will turn red• Value curve convergence is the main indicator for a blue ocean

turning into a red ocean

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This summary has been made by G.J.M.ZwerinkAugust 2008

Email [email protected]

BLUEOCEAN

STRATEGY(BOSTON 2005)

How to CreateUncontested Market Space

and Make the Competition Irrelevant

W. Chan Kim and Renée MauborgneHARVARD BUSINESS SCHOOL PRESS

ISBN 1-59139-619-0

50