Blue Ocean Strategy Since the dawn of the industrial age, companies have engaged in head-to-head competition. They have fought for competitive advantage, battled over market share, and struggled for differentiation. Now imagine instead the prospects for growth if companies could operate with no competitors at all. Kim and Mauborgne challenge everything you thought you knew about the requirements for strategic success, and instead argue that the way to win is to stop competing. The authors introduce the concept of red and blue oceans to describe
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 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. Hence,
the term “red” oceans. By studying 150 strategic moves in over 30 industries spanning more than 100 years, Kim and Mauborgne, set out to find a systematic pattern for achieving high growth that any company could replicate. From Ford’s Model T to Apple’s iPod, they identified 150 strategic moves that had one thing in common. All of them made the competition irrelevant and created an uncontested market space with the limitless potential of a blue ocean.
At present, competing in red oceans dominates the field of strategy in theory and in practice. Part of the reason traces back to the historical foundation of business strategy—war—where territory is defined and limited and opponents compete to protect and enlarge their share of limited and existing terrain. This focus on beating the competition in existing market space was exasperated by the meteoric rise of the Japanese in the 1970s and 1980s. Faced with mounting competition in the global marketplace as, for virtually the first time in corporate history, customers were deserting Western companies in droves, the center of strategic thinking gravitated further towards the competition. A slew of competition-based strategies emerged which argued that competition is at the core of the success and failure of firms, and that competition determines the appropriateness of a firm’s activities that can contribute to its performance. 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. In the red ocean, companies limit their own growth by only seeking customers from the current market. Instead they should look to non-customers outside of the market so they can create a new market space as vast and limitless as a blue ocean. That’s what Callaway Golf did to open up a blue ocean of new demand for golf equipment with “Big Bertha,” a large headed golf club designed for non-golfers who were intimidated by the challenging sport. In the red ocean, companies only question how customers make choices between competitors in the same industry. But companies that create blue oceans understand that customers look across industries to make choices. NetJets understood that corporate customers were faced with choosing between the speed and flexibility of a corporate jet or the better price of business class on a commercial airline. With fractional jet ownership, NetJets offered customers the best of two established industries and created a new industry that now generates billions in revenues. In the red ocean, companies create small markets for their products and services by segmenting customers. But companies that create blue oceans seek out commonalities among all customers that can create mass demand and huge profits. The Joint Strike Fighter Program designed the superior fighter plane for the common use of the Navy, Marines, and the Air Force—three different customer segments which previously purchased their aircraft separately—by thinking in terms of what unites customer segments, not what divides them. While all blue oceans eventually inspire imitators, the unconventional logic of true blue oceans renders competitors obsolete for decades. For example, The Body Shop’s blue ocean of functional cosmetics left competitors paralyzed for over a decade since they were unwilling to give up their models, expensive advertising, and promises of eternal youth.
Blue ocean strategy applies across all types of industries from the typical suspects of consumer product goods to b2b, industrial, pharmaceutical, financial services, entertainment, IT, and even defense. The authors experience further suggests two interesting findings with respect to businesses several steps removed from the final consumer. First, companies in these industries tend to view their businesses as commodity businesses with little room to offer innovative value. This has effectively created a self-fulfilling prophecy in that the more these companies view their businesses as commodities, the more they treat their businesses as such. Secondly, they observed that the more removed companies are from the final customer, the more levers there are to unlock innovative value as every company in that chain can be viewed as a customer. If a company can’t see an opportunity to unlock innovative value for the next direct customer in that chain, there are still opportunities to unlock innovative value for that customer’s customers, and so forth. Whereas blue ocean strategies create new market space and change industry dynamics, they are not necessarily initiated by new entrants to an industry. Kim and Mauborgne found that blue oceans were created by both industry incumbents and new entrants, challenging the lore that start-ups have natural advantages over established companies in creating new market space. In the auto industry, think of GM which created the blue ocean of emotional, stylized cars in the 1920s, or the Japanese which created the blue ocean of small, gas efficient autos in the 70s, or Chrysler which created the blue ocean of minivans in the 80s—all were incumbents. Moreover, the blue oceans made by incumbents were usually within their core businesses. In fact, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters. Blue oceans are right next to you in every industry. Issues of perceived cannibalization or creative destruction for established companies also proved to be exaggerated. Blue oceans created profitable growth for every company launching them, start-ups and incumbents alike. The authors findings are encouraging for executives at the large, established corporations that are traditionally seen as the victims of new market space creation. For what they reveal is that large R&D budgets are not the key to creating new market space. The key is making the right strategic moves. What's more, companies that understand what drives good strategic moves—incumbents or start-ups—will be well placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action, not the size or age of the firm.
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