Blue Ocean Strategy

Blue Ocean Strategy Plot Summary

Introduction

In today's overcrowded industries, competing head-to-head results in nothing but a bloody "red ocean" of rivals fighting over a shrinking profit pool. Yet some companies have broken free from this destructive competition by creating "blue oceans" - untapped market spaces where competition is irrelevant. The concept of value innovation stands at the heart of this strategic approach, focusing on making the competition irrelevant by creating a leap in value for both buyers and the company itself. This revolutionary perspective challenges traditional strategic thinking that views industry conditions as given and competition as the central focus. Instead, it proposes that market boundaries exist only in managers' minds and can be reconstructed using existing market elements in different ways. By looking across established boundaries of competition, organizations can find insights to open up commercially compelling blue oceans of new market space. The approach provides systematic tools and frameworks that enable companies to pursue blue oceans in a way that minimizes risks while maximizing opportunities.

Chapter 1: The Concept of Blue Ocean Strategy

Blue ocean strategy represents a fundamental shift in strategic thinking about competition and market creation. It distinguishes between two types of market spaces: red oceans and blue oceans. Red oceans symbolize all the industries in existence today—the known market space where industry boundaries are defined and accepted, and competitive rules are well understood. In these crowded markets, companies try to outperform rivals to grab a greater share of existing demand, leading to commoditization and "bloody" competition that turns the ocean red. Blue oceans, by contrast, represent 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. Blue oceans can be created by expanding existing industry boundaries or by building entirely new industries. The essential point is that when companies create blue oceans, they make competition irrelevant because they create new demand rather than fighting over existing customers. The creation of blue oceans is not about technology innovation per se. While technology can be an important factor, what truly defines a blue ocean strategy is value innovation—the simultaneous pursuit of differentiation and low cost. This approach aligns innovation with utility, price, and cost positions. Many companies focus on beating competition through incremental improvements in cost or quality, but this approach keeps them within the boundaries of red oceans. Value innovation occurs when companies align innovation with utility, price, and cost. Historical analysis reveals that blue oceans have been created by both industry incumbents and new entrants, challenging the notion that startups have natural advantages in creating new market spaces. The impact of creating blue oceans has been substantial—in a study of business launches spanning over 100 years, while blue ocean strategies represented only 14% of launches, they generated 38% of total revenues and 61% of total profits. These findings suggest that the strategic move of creating blue oceans has been a key catalyst in driving profitable growth across industries.

Chapter 2: Value Innovation: The Cornerstone Framework

Value innovation is the cornerstone of blue ocean strategy and fundamentally distinguishes it from traditional competitive approaches. Unlike conventional strategic thinking that focuses on beating the competition within established industry parameters, value innovation makes competition irrelevant by creating a leap in value for both buyers and the company. This occurs in the region where a company's actions favorably affect both its cost structure and its value proposition to customers. The framework rejects the traditionally accepted trade-off between value and cost. According to conventional logic, companies can either create greater value for customers at a higher cost or create reasonable value at a lower cost. Value innovation challenges this by pursuing differentiation and low cost simultaneously. For instance, Cirque du Soleil broke this trade-off by eliminating expensive elements of traditional circuses (like animal shows and star performers) while introducing factors from theater (sophisticated themes, artistic music, and dance). The result was a dramatic lowering of costs while enhancing the entertainment value for audiences. Value innovation requires a whole-system approach rather than focusing on individual components. It encompasses the entire system of a company's activities and requires alignment across three key propositions: the value proposition that attracts buyers, the profit proposition that enables the company to make money from its offering, and the people proposition that motivates those working for or with the company to execute the strategy. Without this holistic alignment, innovations may remain disconnected from the core of strategy. The framework operates from what can be called a reconstructionist view of strategy, which sees market boundaries and industry structure as not fixed but reconstructable through the actions and beliefs of industry players. This contrasts with the structuralist view that assumes companies must position themselves optimally within a given industry structure. Companies that create blue oceans typically don't use the competition as their benchmark; instead, they follow a different strategic logic of value innovation that makes conventional approaches obsolete. Real-world examples demonstrate the power of this framework. When Southwest Airlines created a blue ocean in short-haul air travel, it didn't benchmark against other airlines but focused on the alternative of car transportation, offering the speed of air travel with the cost and flexibility of driving. The result was an unprecedented value curve that attracted a mass of buyers who had previously chosen to drive rather than fly.

Chapter 3: The Six Paths to Creating Blue Oceans

Creating blue oceans requires breaking out of the established boundaries that define how companies compete. The six paths framework provides systematic ways to reconsider these boundaries and create uncontested market space. Each path challenges a different fundamental assumption that companies often take for granted in their strategic thinking. The first path involves looking across alternative industries. Rather than focusing solely on competitors within their own industry, companies can gain insights by examining industries that provide different products or services but fulfill the same basic purpose. NetJets created a blue ocean by looking at the alternatives of commercial airlines and full aircraft ownership, offering the convenience of private jets at a fraction of the ownership cost through fractional ownership. This approach helps identify opportunities to draw customers from other industries by addressing their key pain points. The second path requires looking across strategic groups within industries. Strategic groups are clusters of companies within an industry that pursue similar strategies. By understanding why customers trade up or down between groups, companies can break free from competitive convergence. Curves fitness centers did this by combining the key advantages of traditional health clubs (professional equipment, instruction) with the convenience and affordability that appealed to women who wouldn't normally join gyms, creating an entirely new strategic group in the fitness industry. The third path involves redefining the buyer group focus. Most industries converge on a single buyer group—whether purchasers, users, or influencers. By shifting attention to previously overlooked buyer groups, companies can unlock new value. Novo Nordisk revolutionized the insulin industry by shifting focus from doctors (influencers) to patients (users), creating insulin delivery systems that addressed patients' needs for convenience and discretion rather than just medical efficacy. The fourth path examines complementary products and services. Products rarely exist in isolation; their value is often affected by other products or services. By thinking about the total solution buyers seek, companies can identify untapped value. Apple's iTunes succeeded by addressing the complementary challenges of legal downloading, organizing, and playing digital music, not just selling music files or devices separately. The fifth path requires rethinking the functional-emotional orientation of an industry. Some industries compete primarily on price and function, while others compete on feelings. By crossing this divide, companies can discover new market space. The Body Shop created a blue ocean by shifting from the emotional appeal of the cosmetics industry to a functional, no-nonsense approach to beauty products. The sixth path involves looking across time, identifying trends that will fundamentally change an industry's value proposition. The key is not to predict trends but to find insight in how the trend will change value to customers. Amazon identified the growing internet trend and created a blue ocean in book retailing by offering unprecedented selection and convenience that traditional bookstores couldn't match.

Chapter 4: Formulating Blue Ocean Strategy

Formulating an effective blue ocean strategy requires a systematic approach that shifts the focus from competition to creating new market space. The process begins with visualizing strategy using the strategy canvas—a diagnostic and action framework that captures the current state of play in known market space and helps companies understand where the competition is currently investing. This visual tool displays the "value curve" of an industry by showing how companies invest in the factors of competition and what customers receive from existing offerings. The four actions framework serves as the next critical tool in reconstructing buyer value elements. This framework poses four key questions: Which factors should be eliminated that the industry has taken for granted? Which factors should be reduced well below the industry standard? Which factors should be raised well above the industry standard? Which factors should be created that the industry has never offered? By addressing these questions, companies can break the trade-off between differentiation and low cost to create a new value curve. The eliminate-reduce-raise-create grid complements the four actions framework by pushing companies to act on all four questions. This grid helps companies pursue differentiation and low cost simultaneously while challenging them to examine every factor the industry competes on. Companies often focus only on raising and creating, which increases their cost structure, but the grid ensures they also consider eliminating and reducing factors that don't contribute significant value to customers. A successful blue ocean strategy exhibits three essential qualities: focus, divergence, and a compelling tagline. Focus means the strategy doesn't diffuse efforts across all competitive factors. Divergence means the value curve stands apart from competitors rather than converging with them. A compelling tagline delivers a clear message about the offering. Without these qualities, a company's strategy will likely be muddled, undifferentiated, and hard to communicate. The strategic sequence for validating blue ocean ideas follows a specific order: buyer utility, price, cost, and adoption. First, the offering must provide exceptional utility to buyers. Second, it must be priced strategically to attract the mass of target buyers. Third, the company must attain its cost target to profit at the strategic price. Finally, adoption hurdles must be addressed upfront. This sequence minimizes risks associated with business model development and ensures commercial viability.

Chapter 5: Executing Blue Ocean Strategy

Executing blue ocean strategy successfully requires overcoming four key organizational hurdles that can block effective implementation. The first is the cognitive hurdle—the challenge of waking employees up to the need for a strategic shift. Rather than relying on numbers and reports, effective leaders make people experience the harsh reality firsthand. When Bill Bratton took over the New York Transit Police, he made his officers ride the dangerous subway system themselves rather than just reading crime statistics, creating an undeniable case for change. The second obstacle is limited resources. Instead of seeking more resources, successful leaders concentrate on multiplying the value of existing resources by focusing on "hot spots" (activities with low resource input but high potential performance gains) and defunding "cold spots" (activities with high resource input but low performance impact). They also engage in "horse trading," exchanging underutilized resources across organizational units to fill resource gaps without additional costs. The motivational hurdle presents the third challenge—how to motivate key players to move fast and tenaciously when executing a break from the status quo. Rather than trying to motivate everyone, tipping point leadership focuses on "kingpins"—key influencers who can unlock or block access to key resources. By placing these kingpins in a "fishbowl" where their actions are highly visible, and by breaking large challenges into achievable tasks ("atomization"), leaders can create rapid, positive momentum for change. The fourth hurdle is politics. Every organization has powerful vested interests that resist change. Successful execution requires identifying and leveraging both "angels" (those who have the most to gain from the new strategy) and silencing "devils" (those with the most to lose). Having a politically adept but respected insider (a "consigliere") on the top management team helps navigate potential landmines and build broader coalitions for change. Building execution into strategy from the start is essential for sustainable success. This requires practicing "fair process"—engaging people in strategic decisions that affect them, explaining why final decisions are made, and setting clear expectations about new responsibilities and standards. When people feel their intellectual and emotional contributions are valued, they provide voluntary cooperation rather than mere compliance, creating the foundation for rapid and effective execution.

Chapter 6: Aligning Value, Profit, and People Propositions

For a blue ocean strategy to achieve sustainable high performance, organizations must develop and align three essential strategy propositions: value, profit, and people. The value proposition attracts buyers by offering utility and compelling reasons to purchase. The profit proposition ensures the company can generate sufficient returns through its business model. The people proposition motivates employees and partners to execute the strategy with excellence and commitment. When these three propositions are fully developed and aligned in pursuit of both differentiation and low cost, a company creates a powerful strategic profile that is difficult for competitors to imitate. Comic Relief, the UK charity that created Red Nose Day, exemplifies this alignment perfectly. Its value proposition eliminated the guilt and pity typical of traditional fundraising, replacing them with fun, community involvement, and transparent donation use. Its profit proposition dramatically lowered costs by eliminating expensive fundraising galas and grant writing while leveraging existing retail outlets and volunteer networks. Its people proposition inspired volunteers, corporate sponsors, and celebrities by offering them recognition, publicity, and the joy of participating in a national movement for good. When alignment is missing, even brilliant blue ocean ideas can falter. Tata Nano, despite its compelling value proposition as an affordable car for India's masses and a viable profit proposition through cost innovations, struggled because it failed to secure cooperation from a critical external stakeholder group—the Singur community where manufacturing facilities were to be established. This misalignment in the people proposition dampened the car's initial success despite its innovative concept. The contrast between Napster and Apple's iTunes further illustrates the importance of alignment. Both sought to create blue oceans in digital music, but Napster focused only on its value proposition to users without developing people propositions for record labels or a sustainable profit proposition. Apple, conversely, created aligned propositions across all three dimensions: a compelling value proposition for music lovers, a profit proposition that leveraged its iPod ecosystem, and a people proposition that gave music companies 70% of download revenues, creating a win-win arrangement. This alignment principle extends beyond blue ocean strategy to any high-performing strategy. However, blue ocean strategy is distinctive in requiring alignment around both differentiation and low cost simultaneously, rather than choosing between them. The more strategy propositions are aligned around these dual objectives, the more sustainable the blue ocean becomes, as competitors would need to replicate the entire system rather than just individual elements.

Chapter 7: Renewing Blue Oceans and Avoiding Red Ocean Traps

Creating a blue ocean is not a static achievement but a dynamic process that requires ongoing renewal as market conditions evolve. Eventually, every blue ocean attracts imitators, and competition intensifies until the ocean turns red. Understanding when and how to renew blue oceans is essential for sustaining profitable growth over time. Several barriers to imitation can prolong the sustainability of a blue ocean strategy. The alignment barrier arises when competitors cannot replicate the integrated system of value, profit, and people propositions. Cognitive and organizational barriers emerge when conventional strategic logic makes the blue ocean move seem irrational or when organizational politics prevent necessary changes. Brand image conflicts can prevent established companies from imitating moves that would invalidate their current business models. Economic barriers like natural monopolies or network effects can also block imitation. Despite these barriers, companies must monitor their strategic position and prepare for renewal. At the individual business level, monitoring value curves on the strategy canvas signals when to value-innovate again. When a company's value curve begins to converge with competitors', it's time to reach for another blue ocean. Salesforce.com exemplifies this approach, having repeatedly renewed its blue ocean in customer relationship management—first with web-based CRM, then with Force.com and AppExchange, and later with Chatter—each time breaking away from increasing competition. For multibusiness firms, renewal requires managing a portfolio of businesses at different stages of development. The pioneer-migrator-settler (PMS) map helps visualize this portfolio, distinguishing between pioneers (blue ocean businesses with high growth potential), migrators (businesses offering improved value but not truly innovative), and settlers (me-too businesses in red oceans). As pioneers eventually become migrators and then settlers, companies must launch new blue ocean initiatives to maintain growth momentum. Avoiding common red ocean traps is crucial for successful renewal. These include mistakenly equating blue ocean strategy with customer orientation (when it actually requires looking at noncustomers), assuming blue oceans must be created outside one's core business, focusing excessively on technology innovation rather than value innovation, or believing that being first to market is essential. Other traps include confusing blue ocean strategy with either differentiation or low-cost strategies alone, when it actually pursues both simultaneously. The most fundamental trap is failing to understand that blue ocean strategy is not about competing better but about making competition irrelevant through value innovation. By systematically challenging industry boundaries and focusing on delivering unprecedented value rather than beating rivals, companies can continue to create and renew blue oceans over time.

Summary

Blue ocean strategy fundamentally transforms our understanding of market creation by showing that industry boundaries exist primarily in managers' minds and can be systematically reconstructed. The essential insight is that companies need not accept existing competitive parameters as given, but can create uncontested market space by pursuing value innovation—the simultaneous achievement of differentiation and low cost that makes competition irrelevant. The strategic impact of this approach extends far beyond individual companies to reshape entire industries and economies. By providing systematic tools and frameworks—from the strategy canvas and four actions framework to the principles of execution—this approach enables organizations to break free from destructive competition and create new demand. In a world of increasingly overcrowded industries and commoditized offerings, the ability to create and renew blue oceans represents perhaps the most powerful path to profitable growth and the key to thriving in tomorrow's business landscape.

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W. Chan Kim

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