Can you briefly explain the concept of Blue Ocean Strategy?
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. Like the “blue” ocean, it is untouched, vast and deep in terms of profitable growth.
Blue ocean strategy provides a systematic approach to break out of the red ocean of bloody competition and make the competition irrelevant by reconstructing market boundaries to create a leap in value for both the company and its buyers. Instead of competing in existing industries, blue ocean strategy equips companies with frameworks and analytic tools to create their own blue ocean of uncontested market space. The book, however, tackles not only the challenge of how to create blue oceans, but also the equally important challenge of how to execute these ideas in action in any organization.
How does blue ocean strategy fundamentally differ from red ocean strategy?
Red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within a finite market space. Taking market structure as given, companies are driven to try to carve out a defensible position against the competition in the existing industry terrain. 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.
Such strategic thinking leads firms to divide industries into attractive and unattractive ones and to decide accordingly whether or not to enter. After it is in an industry, a firm chooses a distinctive cost or differentiation position. Here, cost and value are seen as trade-offs. 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.
Under blue ocean strategy, however, the strategic challenge looks very different. Recognizing 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.
Under blue ocean strategy, there is scarcely an attractive or unattractive industry per se because the level of industry attractiveness can be altered through companies’ conscientious efforts. 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.
Are you saying red ocean strategy is no longer useful?
Blue ocean strategy may be perceived as involving high risk. How does blue ocean strategy address the issue of risk?
Each of the six principles in Blue Ocean Strategy expressly addresses how to mitigate each of these risks. The first blue ocean principle – reconstruct market boundaries – addresses the search risk of how to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. The second principle – focus on the big picture, not the numbers – tackles how to mitigate the planning risk of investing lots of effort and lots of time but delivering only tactical red ocean moves. The third principle – reach beyond existing demand – addresses the scope risk of aggregating the greatest demand for a new offering. The fourth principle – get the strategic sequence right – addresses how to build a robust business model to ensure that you make a healthy profit on your blue ocean idea, thereby mitigating business model risk. The fifth principle – overcome key organizational hurdles – tackles how to knock over organizational hurdles in executing a blue ocean strategy addressing organizational risk. The sixth principle – build execution into strategy – tackles how to motivate people to execute blue ocean strategy to the best of their abilities, overcoming management risk.
Hence, as much as blue ocean strategy is about maximizing opportunities it is also about minimizing risk. That is why blue ocean strategy speaks the language of executives. Executives cannot afford to be riverboat gamblers.
Is blue ocean strategy new?
Now put the clock forward twenty years – or perhaps fifty years – and ask yourself how many now unknown industries will likely exist then. If history is any predictor of the future, the answer is many of them. Again, blue oceans have and always will exist. The reality is that industries never stand still. They continuously evolve. Operations improve, markets expand, and players come and go. Yet, as history teaches us, we have a hugely underestimated capacity to create new industries and re-create existing ones. This book not only articulates the existence and importance of blue oceans. Equally, if not more importantly, it provides analytical frameworks and tools that allow companies to create and capture blue oceans in an opportunity maximizing, risk minimizing way.
What makes blue ocean strategy imperative in today’s business environment?
The result is that in more and more industries, supply is overtaking demand. This situation has inevitably hastened the commoditization of products and services, stoked price wars, and shrunk profit margins. According to recent studies, major American brands in a variety of product and service categories have become more and more alike. And as brands become more similar, people increasingly base purchase choices on price. People no longer insist, as in the past, that their laundry detergent be Tide. Nor do they necessarily stick to Colgate when there is a special promotion for Crest, and vice versa. In overcrowded industries, differentiating brands becomes harder both in economic upturns and in downturns.
As products and services increasingly become commodities in overcrowded industries and companies’ profitable growth shrinks, companies are driven to compete principally on cost. One result of this has been the rising exodus of jobs to low cost countries like India and China as companies increasingly engage in outsourcing. While governments may seek to solve the issue of outsourcing through legislation, history teaches us that this is not a long-term solution. The long-term solution to creating jobs is in companies creating compelling products and services that take them out of the vicious cycle of commodity competition. This means moving companies’ products and services from the red ocean to the blue ocean. These issues alone make blue ocean strategy a rising imperative for CEOs.
Why are so many CEOs focused on the red ocean, while the money is increasingly in the blue ocean?
The result has been a fairly good understanding of how to compete skillfully in red waters, from analyzing the underlying economic structure of an existing industry, to choosing a strategic position of low cost or differentiation or focus, to benchmarking the competition. Yet, although some discussions around blue oceans exist, little practical guidance exists to create and capture them. This largely explains why CEOs remain focused on red oceans – it’s the ocean they are familiar with and feel equipped to compete in.
What blue ocean strategy seeks to do is to make the creation and capturing of blue oceans as systematic and actionable as competing in the red waters of known market space. Although blue ocean strategists have always existed, for the most part their strategies have been largely unconscious. Blue ocean strategy seeks to remedy this by not only decoding the pattern and principles behind the successful creation of blue oceans, but also providing the analytical frameworks and tools to act on this insight.
How durable is the advantage associated with a blue ocean strategy and what is the process for defending it?
The first barrier is often cognitive. Competitors are often blocked from imitating because of brand image conflicts, or the blue ocean strategy just does not fit conventional strategic logic. For many years CNN, for example, was ridiculed by the industry as chicken noodle news by established players. The second barrier is organizational. Because imitation often requires companies to make substantial changes to their existing business practices, politics often kick in, delaying for years a company’s commitment to imitate a blue ocean strategy. The third level includes the economic forces of blue oceans. The high volume generated by a value innovation leads to rapid cost advantages, placing potential imitators at an ongoing cost disadvantage.
By heightening these barriers to imitation, companies can defend the blue oceans they created for some time. However, it should be noted that creating a blue ocean is not a static strategy process, but a dynamic one.