Blue Ocean Strategy

Blue Ocean Strategy is a business strategy book first published in 2005 and written by W. Chan Kim and Renée Mauborgne of The Blue Ocean Strategy Institute at INSEAD, one of the top European business schools. The book illustrates the high growth and profits an organization can generate by creating new demand in an uncontested market space, or a "Blue Ocean", than by competing head-to-head with other suppliers for known customers in an existing industry. Based on 15 years of research, the authors used 150 successful strategic moves spanning 120 years of business history and across 30 industries to bring the Blue Ocean Strategy theory to life.

Book layout and highlight

The book is divided into three parts: The first part presents key concepts of blue ocean strategy, including Value Innovation - the simultaneous pursuit of differentiation and low cost - and key analytical tools and frameworks such as the strategy canvas, the four actions framework and the eliminate-reduce-raise-create grid. The second part describes the four principles of blue ocean strategy formulation: how to create uncontested market space by reconstructing market boundaries, focusing on the big picture, reaching beyond existing demand and getting the strategic sequence right. These four formulation principles address how an organization can create blue oceans by looking across the six conventional boundaries of competition (Six Paths Framework), reduce their planning risk by following the four steps of visualizing strategy, create new demand by unlocking the three tiers of noncustomers and launch a commercially-viable blue ocean idea by aligning unprecedented utility of an offering with strategic pricing and target costing and by overcoming adoption hurdles. The book uses many examples across industries to demonstrate how to break out of traditional competitive (structuralist) strategic thinking and to grow demand and profits for the company and the industry by using blue ocean (reconstructionist) strategic thinking. The third and final part describes the two key implementation principles of blue ocean strategy including tipping point leadership and fair process. These implementation principles are essential for leaders to overcome the four key organizational hurdles that can prevent even the best strategies from being executed. The four key hurdles comprise the cognitive, resource, motivational and political hurdles that prevent people involved in strategy execution from understanding the need to break from status quo, finding the resources to implement the new strategic shift, keeping your people committed to implementing the new strategy, and from overcoming the powerful vested interests that may block the change.

In the book the authors draw the attention of their readers towards the correlation of success stories across industries and the formulation of strategies that provide a solid base create unconventional success – a strategy termed as “Blue Ocean Strategy”. Unlike the “Red Ocean Strategy”, the conventional approach to business of beating competition derived from the military organization, the “Blue Ocean Strategy” tries to align innovation with utility, price and cost positions. The book mocks at the phenomena of conventional choice between product/service differentiation and lower cost, but rather suggests that both differentiation and lower costs are achievable simultaneously.

The authors ask readers “What is the best unit of analysis of profitable growth? Company? Industry?” – a fundamental question without which any strategy for profitable growth is not worthwhile. The authors justify with original and practical ideas that neither the company nor the industry is the best unit of analysis of profitable growth; rather it is the strategic move that creates “Blue Ocean” and sustained high performance. The book examines the experience of companies in areas as diverse as watches, wine, cement, computers, automobiles, textiles, coffee makers, airlines, retailers, and even the circus, to answer this fundamental question and builds upon the argument about “Value Innovation” being the cornerstone of a blue ocean strategy. Value Innovation is necessarily the alignment of innovation with utility, price and cost positions. This creates uncontested market space and makes competition irrelevant. The following section discusses the concept behind the book in detail.

Concept

 

The metaphor of red and blue oceans describes the market universe.

Red Oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the ocean bloody. Hence, the term red oceans.

Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored.

The corner-stone of Blue Ocean Strategy is 'Value Innovation'. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. The authors criticize Michael Porter's idea that successful businesses are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.

Educator Charles W. L. Hill proposed this idea in 1988 and claimed that Porter's model was flawed because differentiation can be a means for firms to achieve low cost. He proposed that a combination of differentiation and low cost might be necessary for firms to achieve a sustainable competitive advantage.

Many others have proposed similar strategies. For example, Swedish educators Jonas Ridderstråle and Kjell Nordström in their 1999 book Funky Business follow a similar line of reasoning. For example, "competing factors" in Blue Ocean Strategy are similar to the definition of "finite and infinite dimensions" in Funky Business. Just as Blue Ocean Strategy claims that a Red Ocean Strategy does not guarantee success, Funky Business explained that "Competitive Strategy is the route to nowhere". Funky Business argues that firms need to create "Sensational Strategies". Just like Blue Ocean Strategy, a Sensational Strategy is about "playing a different game" according to Ridderstrale and Nordstrom. Ridderstrale and Nordstrom also claim that the aim of companies is to create temporary monopolies. Kim and Mauborgne explain that the aim of companies is to create blue oceans, that will eventually turn red. This is the same idea expressed in the form of an analogy. Ridderstråle and Nordström also claimed in 1999 that "in the slow-growth 1990s overcapacity is the norm in most businesses". Kim and Mauborgne claim that blue ocean strategy makes sense in a world where supply exceeds demand.

Preceding work

 

The contents of the book are based on research and a series of Harvard Business Review articles as well as academic articles on various dimensions of the topic.

Kim and Mauborgne studied about one hundred fifty positions made from 1880-2000 in more than thirty industries and closely examined the relevant business players in each . They analyzed the winning business players as well as the less successful competitors. Studied industries included hotels, cinemas, retail stores, airlines, energy, computers, broadcasting, construction, automotive and steel. They searched for convergence among the more and less successful players. Divergence across the two groups was also studied to discover the common factors leading to strong growth and the key differences separating those winners from the mere survivors and the losers. Kim and Mauborgne defined a consistent and common pattern across all the seemingly idiosyncratic success stories and first called it value innovation, and then Blue Ocean Strategy.

Research results were first published in 1997 in a Harvard Business Review article by Kim and Mauborgne titled "Value Innovation: The Strategic Logic of High Growth". The ideas, tools and frameworks were tested and refined over the years in corporate practice in Europe, the United States and Asia and presented in the following eight additional articles, before being published in the form of a book in 2005.

1997. "Value Innovation - The Strategic Logic of High Growth". Harvard Business Review 75, January-February, 103-112.

1998. Procedural Justice, Strategic Decision Making and the Knowledge Economy." Strategic Management Journal, April.

1999. "Creating New Market Space." Harvard Business Review 77, January-February, 83-93.

1999. "Strategy, Value Innovation, and the Knowledge Economy." Sloan Management Review 40, no.3, Spring.

2000. "Knowing a Winning Business Idea When You See One." Harvard Business Review 78, September-October, 129-141.

2002. "Charting Your Company's Future." Harvard Business Review 80, June, 76-85.

2003. "Tipping Point Leadership." Harvard Business Review 81, April, 60-69.

2004. "Blue Ocean Strategy." Harvard Business Review, October, 76-85.

The name "Blue Ocean Strategy" was introduced in the Harvard Business Review article published in October 2004. The book builds on and extends the work presented in these articles by providing a narrative arc that draws all these ideas together to offer a unified framework for creating and capturing blue oceans.

Subsequent Work

 

2009. "How Strategy Shapes Structure." Harvard Business Review, September, p73-80.

In this latest HBR article, Kim and Mauborgne present the importance of alignment across the value, profit and people propositions regardless of whether one takes the structuralist (traditional competitive) or the reconstructionist (blue ocean) approach to strategy.

Blue Ocean Strategy vs. Competition Based Strategies

 

Kim and Mauborgne argue that traditional competition-based strategies (red ocean strategies) while necessary, are not sufficient to sustain high performance. Companies need to go beyond competing. To seize new profit and growth opportunities they also need to create blue oceans.

The authors argue that competition based strategies assume that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what academics call the structuralist view, or environmental determinism. To sustain themselves in the marketplace, practitioners of red ocean strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy. Here, cost and value are seen as trade-offs and a firm chooses a distinctive cost or differentiation position. Because the total profit level of the industry is also determined exogenously by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.

Blue ocean strategy, on the other hand, is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. This is what the authors call “reconstructionist view”. Assuming that structure and market boundaries exist only in managers’ minds, practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there, largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation—that is, the creation of innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost. As market structure is changed by breaking the value/cost tradeoff, so are the rules of the game. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created. Such a strategy therefore allows firms to largely play a non–zero-sum game, with high payoff possibilities.

Tools and Frameworks

 

Blue Ocean Strategy has introduced a number of practical tools, methodologies and frameworks to formulate and execute blue ocean strategies, attempting to make creation of blue oceans a systematic, repeatable process. Some of these are listed below:

Summary of Blue Ocean Strategy Frameworks, Tools and Methodologies

For blue ocean strategy formulation

The Strategy Canvas

The initial litmus test for BOS: focus, divergence, compelling tagline

The Four Actions Framework

Eliminate-Reduce-Raise-Create Grid

The Six Paths Framework

Buyer Utility Map

Buyer Experience Cycle

Price Corridor of the Mass model

Four Steps of Visualizing Strategy Process

Pioneer-Migrator-Settler Map

Three Tiers of Noncustomers Framework

The Sequence of Blue Ocean Strategy

For blue ocean strategy execution

Tipping Point Leadership

Four Key Organizational Hurdles:

Riding the "Electric Sewer" to break the Cognitive Hurdle

Redirecting from cold spots to hot spots and horse trading to overcome the Resource Hurdle

Placing Kingpins in a Fishbowl and atomize the change to jump over the Motivational Hurdle

Leverage your angels and consigliere to overcome the Political Hurdle

3 E principles of Fair Process: engagement, explanation, clarity of expectations

Criticisms

 

While Kim and Mauborgne propose approaches to finding uncontested market space, at the present there are few if any success stories of companies that applied their theories. This hole in their data persists despite the publication of Value Innovation concepts since 1997. A critical question is whether this book and its related ideas are descriptive rather than prescriptive. The authors present many examples of successful innovations, and then explain from their Blue Ocean perspective - essentially interpreting success through their lenses.

The research process followed by the authors has been criticized on several grounds. Criticisms include claims that no control group was used, that there is no way to know how many companies using a Blue Ocean Strategy failed and the theory is thus unfalsifiable, that a deductive process was not followed, and that the examples in the book were selected to "tell a winning story."

A whole chapter of the book explaining what the authors call "Tipping Point Leadership" is based on a conclusion that the drop in crime in New York City was caused by a change in policies, actions, and leadership. However, according to the book Freakonomics, crime rates dropped due to an increase in abortion rates a generation earlier. Crime rates fell simultaneously in cities other than New York that had not applied what the authors call Tipping Point Leadership.

Brand and communication are taken for granted and do not represent a key for success. Kim and Maubourgne take the marketing of a value innovation as a given, assuming the marketing success will come as a matter of course.

It is argued that rather than a theory, Blue Ocean Strategy is an extremely successful attempt to brand a set of already existing concepts and frameworks with a highly "sticky" idea. The blue ocean/red ocean analogy is a powerful and memorable metaphor, which is responsible for its popularity. This metaphor can be powerful enough to stimulate people to action. However, the concepts behind the Blue Ocean Strategy (such as the competing factors, the consumer cycle, non-customers, etc.) are not new. Many of these tools are also used by Six Sigma practitioners and proposed by other management theorists.

References

 

1. Kim and Mauborgne. Blue Ocean Strategy. Harvard Business School Press. 2005.

2. "A conversation with W.Chan Kim and Renee Mauborgne". INSEAD. 2005. http://www.insead.edu/alumni/newsletter/February2005/Interview.pdf. Retrieved 2008-12-31.

3. "Value Innovation: The Strategic Logic of High Growth". Harvard Business Review (Boston: Harvard Business School Press): 103–112. January - February 1997.

4. "Blue Ocean Strategy". Harvard Business Review (Boston: Harvard Business School Press): 76–85. October 2004.

5. Towards the Blue Oceans. CEEMAN Interview with Professor Kim

6. Kim, Chan (2005). Blue Ocean Strategy. Boston: Harvard Business School Press. p. 210.

7. Kim, Chan (2005). Blue Ocean Strategy. Boston: Harvard Business School Press. p. 211.

8. Pollard, Wayne E. (2005-12-01). "Blue Ocean Strategy's Fatal Flaw". CMO Magazine.

9. "Multiple Critiques of Blue Ocean Strategy". 2007

10. Levitt, Stephen D. (2005). Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. New York: Harper Collins. pp. 117–118.

External links

 

http://www.blueoceanstrategy.com/index.php