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BLUE
OCEAN
STRATEGY
How to Create
Uncontested Market Space
and Make the Competition Irrelevant

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  • 1. BLUE OCEAN STRATEGY How to Create Uncontested Market Space and Make the Competition Irrelevant W. Chan Kim and Renée Mauborgne HARVARD BUSINESS SCHOOL PRESS 1
  • 2. Red Ocean Versus Blue Ocean Strategy Align the whole system of a firm’s activities in pursuit of differentation AND 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 2
  • 3. Value Innovation: The Cornerstone of Blue Ocean Strategy Value Innovation Costs Decrease Buyer Value Increases 3
  • 4. 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 4
  • 5. Value Inovation: The Cornerstone of Blue Ocean Strategy Dealing with the value-cost trade-off (i.e. the principle that more buyer value 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 5
  • 6. Analytical Tools and Frameworks Blue Ocean’s Analytical Tools and Frameworks: 1. The Strategy Canvas 2. The Four Actions Framework 3. The Eliminate-Reduce-Raise-Create Grid 4. Three Characteristics of a Good Strategy 5. Reading the Value Curves 6
  • 7. 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 7
  • 8. Analytical Tools and Frameworks: 1. The Strategy Canvas • 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 8
  • 9. Analytical Tools and Frameworks: 2. The Four Actions Framework To reconstruct buyer value elements in crafting a new value curve use the four actions framework. REDUCE Which factors should be reduced well below the industry’s standard? ELIMINATE Which factors that the Industry takes for granted should be eliminated? CREATE Which factors should be created that the industry never has offered? RAISE Which factors should be raised well above the industry’s standard? A new value curve 9
  • 10. 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 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] 10
  • 11. 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 and distinctions •Aging qualities •Above-the-line marketing RaiseEliminatie 11
  • 12. Analytical Tools and Frameworks: 4. Three characteristics of a good strategy Look at the example of [yellow tail]: • FOCUS The company does not diffuse its efforts across all key factors of competition • DIVERGENCE The shape of its value curve diverges from that of the other players’, a result of not benchmarking competitors, but instead looking across alternatives • COMPELLING TAGLINE The tagline of [yellow tail]’s strategic profile is clear: A fun and simple wine to be enjoyed every day 12
  • 13. Analytical Tools and Frameworks: 5. Reading the value curves Embedded in the value curves of an industry is a wealth of strategic knowledge on the current status and future of a business. But how to read 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 13
  • 14. 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 FactorFormulation Principles 14
  • 15. 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 15
  • 16. Formulating Blue Ocean Strategy: Principle 1: Reconstruct Market Boundaries The Six Paths Framework 1. Look across alternative industries Not only look at direct competitors (same form, same function), but also at substitutes (different form, same function) and alternatives (different form, different function, same objective) 2. Look across strategic groups within industries Understand which factors determine customer’s decisions to trade up or down from one group to another (f.e. small car to big car) 3. Look across the chain of buyers Challenge the industry’s conventional wisdom about which buyer group to target (purchasers, users, influencers) 4. Look across complementary product and service offerings Defining the total solution buyers seek, can lead to untapped value often hidden in complementary products and services 5. Look across functional or emotional appeal to buyers If you compete on emotional appeal, what elements can you strip out to make it functional and v.v.? 6. Look across time Trends (criteria: decisive to your business, irreversible, clear trajectory) can change the value a market delivers today to a value it might deliver tomorrow For each path a strategy canvas can be created 16
  • 17. Formulating Blue Ocean Strategy: Principle 1: Reconstruct Market Boundaries 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 groups within 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 complementary or 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-emotional orientation 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 17
  • 18. 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 18
  • 19. Formulating Blue Ocean Strategy: Principle 2: Focus on the big picture, not the numbers 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 three complementary qualities: 1. FOCUS 2. DIVERGENCE 3. COMPELLING TAGLINE 19
  • 20. Formulating Blue Ocean Strategy: Principle 2: Focus on the big picture, not the numbers 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 20
  • 21. Formulating Blue Ocean Strategy: Principle 2: Focus on the big picture, not the numbers Visualizing Strategy at the Corporate Level by Using the Strategy Canvas: • 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, and then sharing, the strategy canvases of your business units. 21
  • 22. Formulating Blue Ocean Strategy: Principle 2: Focus on the big picture, not the numbers 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 the important parameters for manageing their portfolio of businesses 22
  • 23. Formulating Blue Ocean Strategy: Principle 2: Focus on the big picture, not the numbers Visualizing Strategy at the Corporate Level by Using the Pioneer-Migrator-Settler (PMS) Map Testing the Growth Potential of a Portfolio of Businesses Pioneers Migrators Settlers Today Tomorrow 23
  • 24. 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 24
  • 25. Formulating Blue Ocean Strategy: Principle 3: Reach Beyond Existing Demand The Three Tiers of Noncustomers First Tier: “Soon-to-be” noncustomers who are at the edge of your market waiting to jump ship Second Tier: “Refusing” noncustomers who consciously choose against your market Third Tier: “Unexplored” non- customers who are in markets distant from yours Your Market First Tier Second Tier Third Tier 25
  • 26. Formulating Blue Ocean Strategy: Principle 3: Reach Beyond Existing Demand • 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 26
  • 27. 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 27
  • 28. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right The Sequence of Blue Ocean Strategy Yes No-Rethink Is 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 Commercially Viable Blue Ocean Idea Yes 28
  • 29. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right A. Buyer Utility: The Buyer Utility Map The Six Stages of the Buyer Experience Cycle 1. 2. 3. 4. 5. 6. Purchase Delivery Use Supplements Maintenance Disposal Customer Productivity Simplicity Convenience Risk Fun and Image Environmental friendliness TheSixUtilityLevers 29
  • 30. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right 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 30
  • 31. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right B. Strategic Pricing: The Price Corridor of the Mass Step 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 number of buyers that product/service attracts Price Corridor Of the Mass Low degree of legal And resource protection Easy to imitate Some degree of legal and resource protection High degree of legal and resource protection Difficult to imitateUpper-level pricing Mid-level pricing Lower-level pricing 31
  • 32. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right 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 32
  • 33. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right The Strategic Price Pricing Innovation The Target Cost PartneringStreamlining and Cost Innovations The Target Profit B. Strategic Pricing and C. Target costing 33
  • 34. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right 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 34
  • 35. Formulating Blue Ocean Strategy: Principle 4: Get the Strategic Sequence Right 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 DoCoMo i-mode Motorola Iridium Philips CD-I 35
  • 36. 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 36
  • 37. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 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 37
  • 38. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 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 38
  • 39. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 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 experience exercises a disproportionate influence on tipping people’s cognitive hurdle fast. Showing the worst reality to your superiors can also shift their mindset fast • Meet with disgruntled customers Get your employees and managers to listen to their most disgruntled customers at first hand. There is no substitute for meeting and listening to dissatisfied customers directly. 39
  • 40. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 2. Jump the Resource Hurdle • Redistribute Resources to Hot Spots Hot Spots are activities that have low resource input, but high potential performance gains. • Redirect Resources from Cold Spots Cold Spots are activities that have high resource input, but low performance impact • Engage in Horse Trading Horse trading involves trading your unit’s excess resources in one area for another unit’s excess resources to fill remaining resource gaps. It is not about getting more resources but instead on concentrating on multiplying the value of the available resources 40
  • 41. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 3. Jump the Motivational Hurdle • Zoom in on kingpins To trigger an epidemic movement of positive energy, concentrate on the Kingpins, the key influencers of the organization. As with kingpins in bowling, when you hit them straight on, all the other pins come toppling down. • Place Kingpins in a Fishbowl Fishbowl management makes kingpin’s actions and inaction as transparent to others as are fish in a bowl of water. Light is shined on who is 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 and fair process. • Atomize to Get the Organization to Change Itself Atomization relates to the framing of the strategic challenge, because people need to believe that it is attainable. To accomplish this break the strategic challenge into bite-size atoms that people at different levels can relate to. 41
  • 42. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 4. Knock over the Political Hurdle • Secure a Consigliere on your Top Management Team Tipping point leaders engage one role few other executives think to Include: a Consigliere. A Consigliere is a politically adept but highly respected insider who knows in advance all the landmines, including who will 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. 42
  • 43. Executing Blue Ocean Strategy: Principle 5: Overcome Key Organizational Hurdles 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 43
  • 44. 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 44
  • 45. Executing Blue Ocean Strategy: Principle 6: Build Execution into Strategy The Three E Principles of Fair Process 1. 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 wisdom 2. 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 failure Taken together, these three criteria collectively lead to judgments of fair process 45
  • 46. Executing Blue Ocean Strategy: Principle 6: Build Execution into Strategy How Fair Process Affects People’s Attitudes and Behavior Strategy Formulation Proces Attitudes Behavior Strategy Execution 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 46
  • 47. Executing Blue Ocean Strategy: Principle 6: Build Execution into Strategy 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 47
  • 48. 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 48
  • 49. 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 49
  • 50. This summary has been made by G.J.M.Zwerink August 2008 Email g.zwerink@home.nl BLUE OCEAN STRATEGY (BOSTON 2005) How to Create Uncontested Market Space and Make the Competition Irrelevant W. Chan Kim and Renée Mauborgne HARVARD BUSINESS SCHOOL PRESS ISBN 1-59139-619-0 50