Creating Blue Oceans The only way to beat the competition is to stop trying to beat the competition. A market universe consists of two sorts of oceans: red oceans and blue oceans. 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.
In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.
Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.
About one hundred years back, how many of today's industries were known? Many industries as basic as automobiles, music recording, aviation, petrochemicals, health care, and management consulting were unheard of or had just begun to emerge at that time. Just four decades back, mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail, express package delivery, minivans, snowboards, coffee bars, and home videos, to name a few did not exist in a meaningful way.
The creators of blue oceans, do not use the competition as their benchmark. Instead, they follow a different strategic logic called value innovation. Value innovation places equal emphasis on value and innovation. Value without innovation tends to focus on value creation on an incremental scale, something that improves value but is not sufficient to make a company stand out in the marketplace. Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for.
The six principles
Reconstruct market boundaries
Focus on the big picture, not numbers
Reach beyond existing demand
Get the strategic sequence right
Overcome key organizational hurdles
Build execution into strategy
Changing the rules of the game
To fundamentally shift the strategy canvas of an industry, companies must begin by reorienting the strategic focus from competitors to alternatives, and from customers to non customers of the industry.
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?
Reconstructing Market Boundaries 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. When companies are willing to challenge the functional, emotional orientation of their industry, they often find new market space. There are two common patterns. Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that customers would welcome.
Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand. Swatch, transformed the functionally driven budget watch industry into an emotionally driven fashion statement. The Body Shop, did the reverse, transforming the emotionally driven industry of cosmetics into a functional, no-nonsense cosmetics house.
Strategy Canvas 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 depicting how it invests in the factors of competition and how it might invest in them in the future.
Going beyond existing demand Going beyond existing demand is a key component of achieving value innovation. 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.
Instead of concentrating on customers, companies need to look to noncustomers. And instead of focusing on customer differences, companies 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. To reach beyond existing demand, think noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.
Non Customers The first tier of non-customers is closest to the 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 non-customers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself. However, if offered a leap in value, not only would they stay, but also their frequency of purchases would multiply, unlocking enormous latent demand.
The second tier of non-customers is people who refuse to use the industry's offerings. These are buyers who have seen the industry's offerings as an option to fulfill their needs but have voted against them. The third tier of non-customers is farthest from the market. They are non-customers who have never thought of the market's offerings as an option. By focusing on key commonalities across these non-customers and existing customers, companies can understand how to pull them into their new market. It is the combination of exceptional utility, strategic pricing, and target costing that allows companies to achieve value innovation, a leap in value for both buyers and companies.
Attracting Customers Many companies fail to deliver exceptional value because they are obsessed by the novelty of their product or service, especially if new technology plays a part in it. Unless the technology makes buyers' lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins. The price set must not only attract buyers in large numbers but also retain them. Strategic pricing addresses this question: Is the offering priced to attract the mass of target buyers from the start so that they have a compelling ability to pay for it? When exceptional utility is combined with strategic pricing, imitation becomes difficult.
Conclusion A blue ocean strategy brings with it considerable barriers to imitation. More often than not, a blue ocean strategy will go without credible challenges for ten to fifteen years. As rivalry intensifies and total supply exceeds demand, bloody competition commences and the ocean will turn red. As competitors’ strategies converge towards them, companies should begin reaching out for another value innovation to create a new blue ocean.
This presentation is based on the best selling book, “ Blue Ocean Strategy” by Chan Kim and Renee Mauborgne.