Authors: W. Chan KIM AND Renee MAUBORGNE
How do I stand out from competitors? How do I stimulate demand in an overcrowded industry? How do I capture maximum value for my business? How do I create a valuable and profitable niche in the market? Over the years, business leaders have tried to answer these questions by formulating various strategies and frameworks.
Chan Kim and Renee Mauborgne attempt to answer these questions by dividing the market into two “oceans”: the Red Ocean and the Blue Ocean. The Red Ocean represents all the industries in existence today. It is a known market space with defined competitive rules. Companies try to outperform their rivals for a greater share of existing demand. The market space is crowded so profits and growth are reduced. The Blue Ocean, on the other hand, stands for all industries not in existence today. This unknown market space is defined by untapped demand creation and the opportunity for highly profitable growth.
To thrive, businesses need to leave the Red Ocean and create a Blue Ocean. To win, businesses need to stop competing with each other. The only way to beat the competition is to stop trying to beat the competition by creating an uncontested market space that makes competition irrelevant.
The idea of Blue Ocean isn’t to say that Red Oceans should be ignored. It is still necessary to swim successfully in the Red Ocean, understand the game’s rules, and play by them. However, when supply outperforms demand, competing will not be sufficient to sustain high performance. Businesses will need to go beyond competing.
How can a Blue Ocean Strategy be created?
Through
A. Value Innovation
B. The Four Actions Framework
C. The Six Paths Framework
A. Value Innovation
This strategic logic places equal emphasis on value and innovation. It departs from one of the most commonly accepted competition-based strategies: the value-cost trade-off. Those who want to create blue oceans pursue differentiation (value) and low cost. Value innovation is achieved when the company’s utility, price, and cost activities are properly aligned.
B. The Four Actions Framework
This considers some of the factors upon which an industry competes. To create a new value curve, there are four key questions to challenge an industry’s business model:
- Which factors does the industry take for granted that can be eliminated?
- Which factors should be reduced well below the industry’s standard? (Reduction)
- Which factors should be raised well above the industry’s standard? (Improvement)
- Which factors should be created that the industry has never offered? (Creation)
This framework pushes businesses to simultaneously pursue differentiation and low cost to break the value-cost trade-off. It also helps to flag those focused only on raising and creating value, thus lifting their cost and often over-engineering products and services.
C. The Six Paths Framework
To create the Blue Ocean, businesses must reconstruct market boundaries. There are six paths to reconstructing market boundaries. Most businesses tend to do the following:
- Define their industry similarly and focus on being the best within it.
- Look at their industry through the lens of generally accepted strategic groups (such as luxury cars, economy cars, and family vehicles) and strive to stand out within their group.
- Focus on the same buyer group.
- Define the scope of products and services in their industry in a similar way.
- Accept their industry’s functional or emotional orientation.
- Focus on the same point in time — often on current competitive threats — when formulating strategy.
The more companies share this conventional wisdom about how they compete, the greater their competitive similarities. However, companies must break out of the accepted boundaries to break out of red oceans.
Path 1: Look Across Alternative Industries
In a broad sense, a business competes not only with the firms in its industry but also with those in other industries that produce alternative products or services. Alternatives are broader than substitutes. Products or services that have different forms but offer the same functionality are substitutes for each other. In contrast, products or services with different functions and forms but the same purpose are alternatives. In making purchase decisions, buyers unconsciously weigh alternatives. For instance, the alternative to having a night out in a restaurant is going to the cinema. They have different forms and different functions, but the same recreational purpose.
Businesses rarely think about how their customers make tradeoffs across alternative industries. The space between alternative industries provides opportunities for value innovation.
Ask the following questions: What are the alternative industries to your industry? What 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.
Path 2: Look Across Strategic Groups Within Industries
The term refers to a group of businesses within an industry that pursue a similar strategy. Strategic groups can generally be grouped into price and performance. Each jump in price brings a corresponding jump in some dimensions of performance.
Most businesses focus on improving their competitive position within a strategic group without paying heed to what the other is doing because, from a supply point of view, they do not compete.
The key to creating a blue ocean across existing strategic groups is to break out of this by understanding which factors determine customers’ decisions to trade up or down from one group to another.
Path 3: Look Across The Chain of Buyers
In most industries, competitors converge around a standard definition of who the target buyer is. However, the reality is that there is a chain of buyers who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users (Customers v. Consumers); in some cases, they are important influencers.
Businesses in an industry often target a particular buyer segment. Challenging an industry’s conventional wisdom about which buyer group to target can lead to discovering a new blue ocean.
Important questions: What is the chain of buyers in your industry? Which buyer group does your industry typically focus on? If you shifted the buyer group of your industry, how could you unlock new value?
Path 4: Look Across Complementary Product And Service Offerings
Few products and services are used in a vacuum. In most cases, other products and services affect their value. Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. A simple way to do this is to think about what happens before, during, and after your product or service is used.
Important Questions: What is the context in which your product or service is used? What happens before, during, and after? Can you identify the pain points? How can you eliminate these pain points through a complementary product or service offering?
Path 5: Look Across Functional or Emotional Appeal To Buyers
Some industries compete principally on price and function on utility; their appeal is rational. Others compete primarily on feelings; their appeal is emotional. Yet, the appeal of most products or services is rarely intrinsically one or the other.
When companies are willing to change the functional-emotional orientation of their industry, they often find new market space. Usually, Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a simpler, lower-priced, lower-cost business model. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in doing so, can stimulate new demand.
Important questions: Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make it functional? What elements can be added to make it emotional if you compete on functionality?
Path 6: Look Across Time
All industries are subject to external trends that affect their businesses over time. Looking at these trends from the proper perspective can reveal how to create a blue ocean. By looking across time, from the value a market delivers today to the value it might provide tomorrow, businesses can actively shape the future and lay claims to a new blue ocean.
Important questions: what trends have a high probability of impacting your industry? Are they decisive to your business, irreversible, and evolving in a clear trajectory? How will these trends affect your industry? Given this, how can you open up unprecedented customer utility?
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