Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant

Nonfiction | Book | Adult | Published in 2005

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Summary

Background

Chapter Summaries & Analyses

Part 1

Part 2

Part 3, Chapters 7-9

Part 3, Chapters 10-11

Key Figures

Themes

Index of Terms

Important Quotes

Essay Topics

Tools

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Discussion Questions

Themes

Value Innovation Is at the Core of Blue Ocean Strategy

W. Chan Kim & Renée Mauborgne’s blue ocean model departs from traditional market strategy because it asks businesses who wish to break out of the red waters of bloody competition to redefine the boundaries of the industry. In other words, they should not focus on outcompeting their rivals, but create a product so fundamentally different and attractive as to completely disregard the presence of competitors. To this end, they coined the term “value innovation,” which is defined as the ability to innovate on the utility a product provides its buyers without incurring high costs.

According to traditional market models, this was considered an impossible feat: Businesses locked in breakneck competition could only pursue either differentiation or low costs. On one hand, if they wished to provide additional value to customers and improve their product beyond that of their rivals, they usually did so by investing in costly research and development and running the risk of failing. On the other hand, if they hoped to gain a greater share of the market over their rivals without increasing their costs, they would need to find ways to work more efficiently and reduce the price of the product, since undifferentiated products only appeal to customers if they are cheaper than the rest.

Value innovation allows businesses to bypass these bottlenecks because it disregards the competition entirely by choosing to play on a different field: its product targets nontraditional customers and expands the existing boundaries of the industry. In other words, the value and utility blue ocean products provide buyers is completely different from competitors because they inhabit an uncontested space between industries and innovate on aspects of customer need that industries currently leave unsatisfied. By doing so, they generate new demand and occupy a space that no other business has yet accessed. This, by definition, is the act of capturing blue oceans.

To innovate on value, businesses must first do thorough research and data analysis on the current state of the industry. They must first identify the values along which companies presently compete. For example, typically, the wine industry competes along aspects such as taste complexity, vineyard prestige, and aging process. A significant portion of their resources is poured into maintaining a high standard in these values. However, as competition becomes increasingly fierce and the market saturated, noncustomers to the wine industry might find themselves faced with several barriers to entry. They may not understand the minute differences between brands; they may not have the budget to experiment between products; they may not fully appreciate the differences that taste complexity or vineyard prestige bring about; and they may even dismiss the entire industry as too pretentious. In these instances, value innovation would require the company to attract noncustomers by removing these barriers to entry. For example, instead of investing in further increasing taste complexity, businesses may seek to attract cocktail or beer drinkers by highlighting the social and “fun” aspect of their new wine.

In short, by reducing or cutting their investment in values that are inadequate for capturing noncustomers, businesses looking to expand to blue oceans can reallocate those resources toward innovating on new values that are attractive to these new customers. Value innovation therefore accomplishes the double goal of differentiation and low cost, thereby expanding their operation beyond the traditional boundaries of the industry and completely disregarding their competition.

Successful Blue Ocean Planning Involves Both Data Analysis and Strategic Execution

In Parts 2 and 3 of their book, authors Kim & Mauborgne challenge the idea that pursuing blue oceans is inherently high-risk. While both acknowledge that any instance of innovation incurs some risk, their blue ocean model minimizes the chance of running into problems by promoting a balanced approach that combines research, planning, and execution. More specifically, they ask businesses who wish to be successful in their blue ocean strategy to consider execution strategy as part of their plans from the start—this means that they must anticipate hurdles they will encounter in the execution stage and resolve them before they happen, thus reducing their risk of incurring high costs during the implementation stage.

In Chapters 3-6, Kim & Mauborgne provide readers with several tools to analyze their own organization’s structure and value curves. These chapters serve as a guide for companies to assess the current state of their organization. They not only provide specific tools (such as the strategy canvas and the pioneer-migrator-settler map) to aid in the visualization of the state of the industry and the organization’s structure, but they also underline the importance of doing field research to get the most accurate reading possible before planning for change. In Chapter 4, Kim & Mauborgne specifically ask businesses not to outsource their eyes, instead forcing their managers to step onto the field and speak to customers directly. This not only prevents unnecessary risk but can also help convince the executives of the desirability of changing their strategy. From the onset, the blue ocean model proposed by Kim & Mauborgne has built-in measures to ensure the highest rate of success; their insistence on vigilance and rigor at every step of the way helps significantly reduce the risks typically associated with any attempt at innovation.

Similarly, in Part 3, they help companies reduce risk by addressing common execution hurdles that businesses encounter when putting into practice new market strategies. Whereas implementation is a separate step from planning in typical red ocean competition (mainly because the rules of the industry are known and respected in red ocean spaces), the authors insist that blue ocean strategy must approach execution as part of the planning process. From their observations of hundreds of companies over the past decade, they have realized that even the most impeccable plans can go awry if the companies do not consider the people proposition—the idea that their employees or partners might work against them.

For example, if executives fail to communicate the new strategy to their employees, the actual marketing stage might be less than effective at promoting the product or highlighting its buyer value. Even worse, if employees mistakenly believe that this new direction could cost them their livelihood, they may actively work to sabotage the process. Similarly, partners who do not feel valued with the new strategy might seek to miss deadlines or deliver less-than-adequate work. While some of these problems might be quickly resolved, others might create deep problems that affect the success of the strategy. In other words, poor execution of even the best plans may ultimately still result in failure. Taking the time to consider how a plan is implemented is therefore crucial to reducing risk. Kim & Mauborgne conclude that good data analysis and strategic execution are both crucial parts of the planning process, and taken together, can help significantly reduce risk in pursuing blue ocean spaces.

A Company’s Long-Term Success Lies in Knowing When to Renew Their Blue Ocean Strategies

One of the key revisions of the 2015 edition of the book is the added chapter on renewing blue ocean strategy. It addresses a key criticism the book received upon its first publication: experts were divided on the topic of time horizons. Some argued that new innovations typically take time to reach and be adopted by the public, no matter how much buyer value they bring or how easy they are to use. In other words, new markets and new demand typically take time to form and stabilize. For example, even some of the most influential platforms, such as Twitter or Facebook, took years to build their user base and gain prevalence. As a result, these experts claim that the blue ocean model should be considered a long-term strategy framework, rather than a short one. The successful implementation of this model therefore only achieves exponential growth over a longer period.

Other experts, however, argued the opposite: that a successful implementation of the blue ocean strategy would bring about short-term profit, because as time passes, businesses will eventually find their ways into the market, thereby creating competition and turning blue oceans red. This seems to be an opinion the authors share in this revised edition of Blue Ocean Strategy. According to Kim & Mauborgne’s observations in Chapter 10, even with strong barriers to entry, firms can typically only hold their monopoly over blue waters for 15 years. To stay relevant for longer, organizations needed to invest time renewing their blue ocean strategies.

This discrepancy in time horizons raises the question of when, exactly, blue ocean models should be renewed. To address this, Kim & Mauborgne ask readers to refer to the pioneer-migrator-settler (PMS) map. Their observation of the world’s most successful and lasting companies reveal that they all typically take a balanced approach to their product line: they have a variety of pioneer, migrator, and settler products, where pioneers are in blue ocean spaces, settlers are in red, and migrators are somewhere in between. In the tech industry, for instance, pioneers are the newest additions in a product line, whereas settlers tend to be older iterations. Kim & Mauborgne therefore revised the book to reflect their opinion on the matter: They believe their blue ocean model to be a relatively short-term growth framework. To remain relevant in the future, businesses therefore need to stay vigilant of the state of the industry. When their pioneer products turn into migrators, and their migrators into settlers, when their profit margins begin shrinking, or when too many imitators begin overcoming barriers to entry, the time is ripe for renewing blue ocean strategies.