What is the cornerstone of blue ocean strategy?

Key Concepts

Blue oceans, defined

“The only way to beat the competition is to stop trying to beat the competition.” (p. 22)

“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.” (p. 22)

“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 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.” (p. 22)

“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.” (p. 22)

Value Innovation: The Cornerstone of Blue Ocean Strategy

“What consistently separated winners from losers in creating blue oceans was their approach to strategy. 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.17 Instead, they followed a different strategic logic that we call value innovation. Value innovation is the cornerstone of blue ocean strategy. 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.” (p. 30)

“Value without innovation tends to focus on value creation on an incremental scale, something that improves value but is not sufficient to make you stand out in the marketplace.18 Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for.” (p. 30)

“Value innovation occurs only when companies align innovation with utility, price, and cost positions.” (p. 30)

The Four Actions Framework for finding a blue ocean strategy

“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?” (p. 47)

“It is by pursuing the first two questions (of eliminating and reducing) that you gain insight into how to drop your cost structure vis-à-vis competitors.” (p. 48)

“The second two factors, by contrast, provide you with insight into how to lift buyer value and create new demand. Collectively, they allow you to systematically explore how you can reconstruct buyer value elements across alternative industries to offer buyers an entirely new experience, while simultaneously keeping your cost structure low. Of particular importance are the actions of eliminating and creating, which push companies to go beyond value maximization exercises with existing factors of competition. Eliminating and creating prompt companies to change the factors themselves, hence making the existing rules of competition irrelevant.” (p. 48)

“Three Characteristics of a Good Strategy”

Focus

“Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.” (p. 56)

Divergence

“When a company’s strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness.” (p. 58)

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. In fact, a good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic tagline.” (p. 58)

Assumptions that hold companies back from breaking out of the red ocean

“These six assumptions, on which most companies hypnotically build their strategies, keep companies trapped competing in red oceans. Specifically, companies tend to do the following: 

• “Define their industry similarly and focus on being the best within it (p. 66)

• “Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in (p. 66)

• “Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry) (p. 66)

• “Define the scope of the products and services offered by their industry similarly (p. 66)

• “Accept their industry’s functional or emotional orientation (p. 66)

• “Focus on the same point in time—and often on current competitive threats—in formulating strategy” (pp. 65-6)

Paths to blue ocean strategies

Path 1: Look Across Alternative Industries

“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.” (p. 72)

Path 2: Look Across Strategic Groups within Industries

Path 3: Look Across the Chain of Buyers

“Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of a new blue ocean. 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.” (p. 77)

Path 4: Look Across Complementary Product and Service Offerings

“A simple way to do so is to think about what happens before, during, and after your product is used.” (p. 81)

Path 5: Look Across Functional or Emotional Appeal to Buyers

“We have observed 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.” (p. 84)

Path 6: Look Across Time

“But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise from business insights into how the trend will change value to customers and impact the company’s business model. By looking across time—from the value a market delivers today to the value it might deliver tomorrow—managers can actively shape their future and lay claim to a new blue ocean.” (p. 89)

“Overcoming the Limitations of Strategic Planning”

“Managers often express discontent, either explicitly or implicitly, with existing strategic planning—the core activity of strategy. To them, strategic planning should be more about collective wisdom building than top-down or bottom-up planning. They think that it should be more conversational than solely documentation-driven, and it should be more about building the big picture than about number-crunching exercises. It should have a creative component instead of being strictly analysis-driven, and it should be more motivational, invoking willing commitment, than bargaining-driven, producing negotiated commitment.” (p. 114)

“We believe the four-step process proposed here goes a long way to correct this situation. By being built around a picture, it addresses many of managers’ discontents with existing strategic planning and yields much better results. As Aristotle pointed out, ‘The soul never thinks without an image.’” (p. 114)

“Reach Beyond Existing Demand” to non-customers

First-Tier Noncustomers

“These soon-to-be noncustomers are those who minimally use the current market offerings to get by as they search for something better.” (p. 119)

“The lesson: noncustomers tend to offer far more insight into how to unlock and grow a blue ocean than do relatively content existing customers.” (p. 120)

Second-Tier Noncustomers

“These are refusing noncustomers, people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. Their needs are either dealt with by other means or ignored. Harboring within refusing noncustomers, however, is an ocean of untapped demand waiting to be released.” (p. 121)

Third-Tier Noncustomers

“The third tier of noncustomers is the farthest away from an industry’s existing customers. 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 have somehow always been assumed to belong to other markets.” (p. 123)

“Overcome Key Organizational Hurdles”

“Managers have assured us that the challenge is steep. They face four hurdles. One is cognitive: waking employees up to the need for a strategic shift.” (p. 156)

“The second hurdle is limited resources. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it. But resources were being cut, and not raised, in many of the organizations we studied.” (p. 156)

“Third is motivation. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo? That will take years, and managers don’t have that kind of time.” (p. 156)

“The final hurdle is politics. As one manager put it, ‘In our organization you get shot down before you stand up.’” (p. 156)

“Build Execution into Strategy” by running a fair process

“People’s minds and hearts must align with the new strategy so that at the level of the individual, people embrace it of their own accord and willingly go beyond compulsory execution to voluntary cooperation in carrying it out.” (p. 178)

“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.” (p. 179)

“Fair process is our managerial expression of procedural justice theory. As in legal settings, fair process builds execution into strategy by creating people’s buy-in up front. When fair process is exercised in the strategy-making process, people trust that a level playing field exists. This inspires them to cooperate voluntarily in executing the resulting strategic decisions.” (p. 181)

“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. Engagement communicates management’s respect for individuals and their ideas.” (p. 183)

“Explanation means that everyone involved and affected should understand why final strategic decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their opinions and have made decisions impartially in the overall interests of the company.” (p. 183)

“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? To achieve fair process, it matters less what the new goals, expectations, and responsibilities are and more that they are clearly understood.” (p. 183)

Quotables

“Instead of dividing up existing—and often shrinking—demand and benchmarking competitors, blue ocean strategy is about growing demand and breaking away from the competition.” (p. 15)

“In drawing the strategy canvas, how does a company label the industry’s competing factors? For example, does it use the word megahertz instead of speed, or thermal water temperature instead of hot water? Are the competing factors stated in terms buyers can understand and value, or are they in operational jargon? The kind of language used in the strategy canvas gives insight as to whether a company’s strategic vision is built on an “outside-in” perspective, driven by the demand side, or an “inside-out” perspective that is operationally driven. Analyzing the language of the strategy canvas helps a company understand how far it is from creating industry demand.” (p. 63)

“Our research reveals that most companies’ strategic planning process keeps them wedded to red oceans. The process tends to drive companies to compete within existing market space.” (p. 94)

“Don’t rely on market surveys. To what extent does your top team actively observe the market firsthand and meet with your most disgruntled customers to hear their concerns? Do you ever wonder why sales don’t match your confidence in your product? Simply put, there is no substitute for meeting and listening to dissatisfied customers directly.” (p. 163)

“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.” (p. 164)

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