Blue Ocean Strategy, Expanded Edition

Blue ocean strategy makes sense of the strategic paradox many organizations face: the more they focus on coping with the competition, and striving to match and beat their advantages, the more they ironically tend to look like the competition. To which blue ocean strategy would respond, stop looking to the competition. Value-innovate and let the competition worry about you.

Composed 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.

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, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.

Our study shows that 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 companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order.16 The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark.

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.

Those that seek to create blue oceans pursue differentiation and low cost simultaneously.

Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings 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. As shown in figure 1-2, the creation of blue oceans is about driving costs down while simultaneously driving value up for buyers.

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.

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? FIGURE 2-2 The four actions framework

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.

The second question forces you to determine whether products or services have been overdesigned in the race to match and beat the competition.

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.

It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off. It immediately flags companies that are focused only on raising and creating and thereby lifting their cost structure and often overengineering products and services—a common plight in many companies. It is easily understood by managers at any level, creating a high level of engagement in its application. Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor the industry competes on, making them discover the range of implicit assumptions they make unconsciously in competing.

Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.

A good strategy has a clear-cut and compelling tagline.

A good tagline must not only deliver a clear message but also advertise an offering truthfully, or else customers will lose trust and interest.

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.

In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously.

We often abandon this intuitive thinking when we become sellers. Rarely do sellers think consciously about how their customers make trade-offs across alternative industries. A shift in price, a change in model, even a new ad campaign can elicit a tremendous response from rivals within an industry,

What are the alternative industries to your industry? Why do customers trade across them? By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, you can create a blue ocean of new market space.

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?

By looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers.

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?

Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used.

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?

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?

Three principles are critical to assessing trends across time. To form the basis of a blue ocean strategy, these trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory. Many trends can be observed at any one time—for example, a discontinuity in technology, the rise of a new lifestyle, or a change in regulatory or social environments.

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?

FIGURE 3-5 From head-to-head competition to blue ocean creation

And a closer look reveals that most plans don’t contain a strategy at all but rather a smorgasbord of tactics that individually make sense but collectively don’t add up to a unified, clear direction that sets a company apart—let alone makes the competition irrelevant.

Identifying the array of complementary products and services that are consumed alongside your own may give you insight into bundling opportunities.

You need to look at how customers might find alternative ways of fulfilling the need that your product or service satisfies. For example, driving is an alternative to flying, so you should also examine its distinct advantages and characteristics.

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.

The future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee.

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.

All the companies that created blue oceans in our study have been pioneers in their industries, not necessarily in developing new technologies but in pushing the value they offer customers to new frontiers.

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.

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.

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.

Noncustomers tend to offer far more insight into how to unlock and grow a blue ocean than do relatively content existing customers.

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.

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

You should focus on the tier that represents the biggest catchment that your organization has the capability to act on. But you should also explore whether there are overlapping commonalities across all three tiers of noncustomers. In that way, you can expand the scope of latent demand you can unleash. When that is the case, you should not focus on a specific tier but instead should look across tiers.

Companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.

The starting point is buyer utility. Does your offering unlock exceptional utility? Is there a compelling reason for the target mass of people to buy it?

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? If it is not, they cannot buy it. Nor will the offering create irresistible market buzz.

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. When the target cost cannot be met, you must either forgo the idea because the blue ocean won’t be profitable, or you must innovate your business model to hit the target cost.

What are the adoption hurdles in rolling out your idea? Have you addressed these up front?

Blue ocean strategies represent a significant departure from red oceans, it is key to address adoption hurdles up front.

Simplicity, fun and image, and environmental friendliness need little explanation. Nor does the idea that a product might reduce a customer’s financial, physical, or credibility risks. And a product or service offers convenience simply by being easy to obtain, use, or dispose of. The most commonly used lever is that of customer productivity, in which an offering helps a customer do things faster or better.

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, the company is ready to move to the next step.

It is increasingly important, however, to know from the start what price will quickly capture the mass of target buyers.

Companies are discovering that volume generates higher returns than it used to.

The value of a product or service may be closely tied to the total number of people using it.

Strategic pricing addresses this question: Is your 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 is discouraged.

Listing the groups of alternative products and services allows managers to see the full range of buyers they can poach from other industries as well as from nonindustries,

This approach provides a straightforward way to identify where the mass of target buyers is and what prices these buyers are prepared to pay for the products and services they currently use. The price bandwidth that captures the largest groups of target buyers is the price corridor of the target mass.

The second part of the tool helps managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services. That assessment depends on two principal factors. First is the degree to which the product or service is protected legally through patents or copyrights. Second is the degree to which the company owns some exclusive asset or core capability, such as an expensive production plant or unique design competence that can block imitation.

Companies with uncertain patent and asset protection should consider pricing somewhere in the middle of the corridor. As for companies that have no such protection, lower-boundary strategic pricing is advised.

Companies would be wise to pursue mid-to lower-boundary strategic pricing from the start if any of the following apply: Their blue ocean offering has high fixed costs and marginal variable costs. The attractiveness of the blue ocean offering depends heavily on network externalities. The cost structure behind the blue ocean offering benefits from steep economies of scale and scope. In these cases, volume brings with it significant cost advantages, something that makes pricing for volume even more key.

To maximize the profit potential of a blue ocean idea, a company should start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost.

Partnering, however, provides a way for companies to secure needed capabilities fast and effectively while dropping their cost structure. It allows a company to leverage other companies’ expertise and economies of scale. Partnering includes closing gaps in capabilities through making small acquisitions when doing so is faster and cheaper, providing access to needed expertise that has already been mastered.

Sometimes, however, no amount of streamlining and cost innovation or partnering will make it possible for a company to deliver its target cost. This brings us to the third lever companies can use to make their desired profit margin without compromising their strategic price: changing the pricing model of the industry.

In educating these three groups of stakeholders—your employees, your partners, and the general public—the key challenge is to engage in an open discussion about why the adoption of the new idea is necessary. You need to explain its merits, set clear expectations for its ramifications, and describe how the company will address them. Stakeholders need to know that their voices have been heard and that there will be no surprises.

They face four hurdles. One is cognitive: waking employees up to the need for a strategic shift. Red oceans may not be the paths to future profitable growth, but they feel comfortable to people and may have even served an organization well until now, so why rock the boat?

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.”

Messages communicated through numbers seldom stick with people.

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.

To break the status quo, employees must come face-to-face with the worst operational problems.

To tip the cognitive hurdle, not only must you get your managers out of the office to see operational horror, but you also must get them to listen to their most disgruntled customers firsthand. Don’t rely on market surveys.

How do you get an organization to execute a strategic shift with fewer resources? Instead of focusing on getting more 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.

Leaders need to free up resources by searching out cold spots.

Are you allocating resources based on old assumptions, or do you seek out and concentrate resources on hot spots? Where are your hot spots? What activities have the greatest performance impact but are resource starved? Where are your cold spots? What activities are resource oversupplied but have scant performance impact? Do you have a horse trader, and what can you trade?

To trigger an epidemic movement of positive energy, however, you should not spread your efforts thin. Rather, 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.

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.

To knock down the political hurdles, you should also ask yourself two sets of questions: 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?

Don’t fight alone. Get the higher and wider voice to fight with you. Identify your detractors and supporters—forget the middle—and strive to create a win-win outcome for both. But move quickly. 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 gain steam.

Key to winning over your detractors or devils is knowing all their likely angles of attack and building up counterarguments backed by irrefutable facts and reason.

The more removed people are from the top and the less they have been involved in the creation of the strategy, the more this trepidation builds.

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.

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.

Explanation means that everyone involved and affected should understand why final strategic decisions are made as they are.

An explanation allows employees to trust managers’ intentions even if their own ideas have been rejected.

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?

Recognition was found to inspire strong intrinsic motivation, causing people to go beyond the call of duty and engage in voluntary cooperation.

For any strategy to be successful and sustainable, an organization must develop an offering that attracts buyers; it must create a business model that enables the company to make money out of its offering; and it must motivate the people working for or with the company to execute the strategy.

Executives with a strong functional bias typically cannot successfully fulfill this important role because they tend to focus on a part, not the whole, of the three strategy propositions, hence missing the alignment.

Imitation barriers to blue ocean strategy

When a company’s value curve still has focus, divergence, and a compelling tagline, it should resist the temptation to value-innovate the business again and instead should focus on lengthening, widening, and deepening its rent stream through operational improvements and geographical expansion to achieve maximum economies of scale and market coverage. It should swim as far as possible in the blue ocean, making itself a moving target, distancing itself from early imitators, and discouraging them in the process. The aim here is to dominate the blue ocean over imitators for as long as possible.

Red Ocean Trap One: The belief that blue ocean strategy is a customer-oriented strategy that’s about being customer led. A blue ocean strategist gains insights about reconstructing market boundaries not by looking at existing customers, but by exploring noncustomers. When organizations mistakenly assume that blue ocean strategy is about being customer led, they reflexively focus on what they’ve always focused on: existing customers and how to make them happier.

When companies mistakenly assume blue ocean strategy hinges on new technologies, their organizations tend to push for products or services that are either too out there, too complicated, or lacking the complementary ecosystem needed to open up a new market space.

Organizations that mistakenly assume blue ocean strategy is about being first to market all too often get their priorities wrong. They inadvertently put speed before value. While speed is important, speed alone will not unlock a blue ocean.

No company should rest easy until it achieves value innovation.

Differentiation is a strategic choice that reflects the value-cost trade-off in a given market structure. Blue ocean strategy, by contrast, is about breaking the value-cost trade-off to open up new market space. It is about pursuing differentiation and low cost simultaneously.

When companies mistakenly assume that blue ocean strategy is synonymous with differentiation, they all too often miss the and-and of blue ocean strategy. Instead they tend to focus on what to raise and create to stand apart and pay scant heed to what they can eliminate and reduce to simultaneously achieve low cost.

Value innovation, not innovation per se, is the singular focus of blue ocean strategy. Simply creating something original and useful through innovation is not enough to create and capture a blue ocean, even if the innovation wins the company accolades and its researchers a Nobel Prize. To capture a commercially compelling blue ocean, companies need a strategy that can align their value, profit, and people propositions in pursuit of both differentiation and low cost.