Blue Ocean Strategy
Encyclopedia
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
. The book illustrates what the authors believe is 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.
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.
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 cornerstone 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 Ridderstråle and Nordström. Ridderstråle and Nordström 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.
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 hotel
s, cinema
s, retail stores, airline
s, energy
, costruction, Publishing, 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.
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.
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.
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.
However with just one case study, this hole in their data persists despite the publication of Value Innovation concepts since 1997. Hence, 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 criticizedon 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."
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.
INSEAD
INSEAD is an international graduate business school and research institution. It has campuses in Europe , Asia , and the Middle East , as well as a research center in Israel...
. The book illustrates what the authors believe is 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.
Book layout and highlight
The book is divided into five 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
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
Niche market
A niche market is the subset of the market on which a specific product is focusing; therefore the market niche defines the specific product features aimed at satisfying specific market needs, as well as the price range, production quality and the demographics that is intended to impact...
, 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 cornerstone 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
Michael Porter
Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...
'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
Jonas Ridderstråle
Dr. Jonas Ridderstråle is a Swedish business speaker, thinker and author, best known for the bestselling book Funky Business - Talent Makes Capital Dance. He is currently a visiting professor at Ashridge Business School and IE Business School.- Personal life :Jonas was born in 1966 and is the...
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 Ridderstråle and Nordström. Ridderstråle and Nordström 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 ReviewHarvard Business Review
Harvard Business Review is a general management magazine published since 1922 by Harvard Business School Publishing, owned by the Harvard Business School. A monthly research-based magazine written for business practitioners, it claims a high ranking business readership among academics, executives,...
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 hotel
Hotel
A hotel is an establishment that provides paid lodging on a short-term basis. The provision of basic accommodation, in times past, consisting only of a room with a bed, a cupboard, a small table and a washstand has largely been replaced by rooms with modern facilities, including en-suite bathrooms...
s, cinema
Movie theater
A movie theater, cinema, movie house, picture theater, film theater is a venue, usually a building, for viewing motion pictures ....
s, retail stores, airline
Airline
An airline provides air transport services for traveling passengers and freight. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit...
s, energy
Energy
In physics, energy is an indirectly observed quantity. It is often understood as the ability a physical system has to do work on other physical systems...
, costruction, Publishing, automotive
Automotive industry
The automotive industry designs, develops, manufactures, markets, and sells motor vehicles, and is one of the world's most important economic sectors by revenue....
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 StructureHow Strategy Shapes Structure-Article summary:In this Harvard Business Press article , the co-authors of the Blue Ocean Strategy book, W. Chan Kim and Renée Mauborgne explain the importance of alignment across the three strategy propositions of value, profit and people propositions, regardless of an executive's strategic...
." 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 while traditional competition-based strategies (red ocean strategies) are necessary, they 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
For blue ocean strategy execution
|
Criticisms
While Kim and Mauborgne propose approaches to finding uncontested market space, at the present there are few success stories of companies that applied their theories in advance. One success story that does exist is Nintendo, who first applied the Blue Ocean Strategy to create the Nintendo DS handheld game system which was the first portable gaming system to offer dual screen gaming and a touch screen. In 2006 Nintendo released Wii, which redefined who video games are played by. The 3DS is Nintendo's third endeavour for its blue ocean strategy. Its first two attempts, the Nintendo DS and Wii, were wildly successful, becoming some of the biggest selling platforms in history. Nintendo revealed their Blue Ocean Strategy during an E3 press conference during the hype build-up of the Wii.However with just one case study, this hole in their data persists despite the publication of Value Innovation concepts since 1997. Hence, 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 criticizedon 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
Falsifiability
Falsifiability or refutability of an assertion, hypothesis or theory is the logical possibility that it can be contradicted by an observation or the outcome of a physical experiment...
, that a deductive
Deductive reasoning
Deductive reasoning, also called deductive logic, is reasoning which constructs or evaluates deductive arguments. Deductive arguments are attempts to show that a conclusion necessarily follows from a set of premises or hypothesis...
process was not followed, and that the examples in the book were selected to "tell a winning story."
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
Brand management
Brand management is the application of marketing techniques to a specific product, product line, or brand.The discipline of brand management was started at Procter & Gamble as a result of a famous memo by Neil H...
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
Consumer behaviour
Consumer behaviour is the study of when, why, how, and where people do or do not buy a product. It blends elements from psychology, sociology, social anthropology and economics. It attempts to understand the buyer decision making process, both individually and in groups...
cycle, non-customers, etc.) are not new. Many of these tools are also used by Six Sigma
Six Sigma
Six Sigma is a business management strategy originally developed by Motorola, USA in 1986. , it is widely used in many sectors of industry.Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects and minimizing variability in manufacturing and...
practitioners and proposed by other management theorists.