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

Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant.

The only way to beat the competition is to stop trying to beat the competition.

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.

Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today.

The market universe has never been constant; rather, blue oceans have continuously been created over time.

86 percent of the launches were line extensions, that is, incremental improvements within the red ocean of existing market space. Yet they accounted for only 62 percent of total revenues and a mere 39 percent of total profits. The remaining 14 percent of the launches were aimed at creating blue oceans. They generated 38 percent of total revenues and 61 percent of total profits.

What separates winners from losers in creating blue oceans is neither bleeding-edge technology nor “timing for market entry.”

An innovation in the production process, for example, may lower a company’s cost structure to reinforce its existing cost leadership strategy without changing the utility proposition of its offering. Although innovations of this sort may help to secure and even lift a company’s position in the existing market space, such a subsystem approach will rarely create a blue ocean of new market space.

Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.

To pursue both value and low cost, you should resist the old logic of benchmarking competitors in the existing field and choosing between differentiation and cost leadership.

There are four key questions to challenge an industry’s strategic logic and business model:

• Which of the factors that the industry takes for granted should be eliminated?
• Which factors should be reduced well below the industry’s standard?
• Which factors should be raised well above the industry’s standard?
• Which factors should be created that the industry has never offered?

When expressed through a value curve, then, an effective blue ocean strategy like [yellow tail]’s has three complementary qualities: focus, divergence, and a compelling tagline. Without these qualities, a company’s strategy will likely be muddled, undifferentiated, and hard to communicate with a high cost structure.

Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.

When a company’s strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness.

A good tagline must not only deliver a clear message but also advertise an offering truthfully, or else customers will lose trust and interest.

When a company’s value curve, or its competitors’, meets the three criteria that define a good blue ocean strategy—focus, divergence, and a compelling tagline that speaks to the market—the company is on the right track.

When a company’s value curve lacks focus, its cost structure will tend to be high and its business model complex in implementation and execution. When it lacks divergence, a company’s strategy is a me-too, with no reason to stand apart in the marketplace. When it lacks a compelling tagline that speaks to buyers, it is likely to be internally driven or a classic example of innovation for innovation’s sake with no great commercial potential and no natural take-off capability.

When a company’s value curve converges with its competitors, it signals that a company is likely caught within the red ocean of bloody competition.

When a company’s value curve on the strategy canvas is shown to deliver high levels across all factors, the question is, Does the company’s market share and profitability reflect these investments?

Are there strategic contradictions? These are areas where a company is offering a high level on one competing factor while ignoring others that support that factor.

Path 1: Look Across Alternative Industries.

Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose. In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously. What are the alternative industries to your industry? Why 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.

What are the strategic groups in your industry? Why do customers trade up for the higher group, and why do they trade down for the lower one?

Path 3: Look Across the Chain of Buyers.

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.

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 so is to think about what happens before, during, and after your product is used. 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 largely on calculations of utility; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional. Companies’ behavior affects buyers’ expectations in a reinforcing cycle. Over time, functionally oriented industries become more functionally oriented; emotionally oriented industries become more emotionally oriented. Emotionally oriented industries offer many extras that add price without enhancing functionality. Functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand. 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? If you compete on functionality, what elements can be added to make it emotional?

Path 6: Look Across Time.

By looking across time—from the value a market delivers today to the value it might deliver tomorrow—managers can actively shape their future and lay claim to a new blue ocean. To form the basis of a blue ocean strategy, these trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory. What trends have a high probability of impacting your industry, are irreversible, and are evolving in a clear trajectory? How will these trends impact your industry? Given this, how can you open up unprecedented customer utility?

The second principle of blue ocean strategy: focus on the big picture, not the numbers.

EFS distributed the one-page picture showing its new and old strategic profiles so that every employee could see where the company stood and where it had to focus its efforts to create a compelling future.

Do your business unit heads lack an understanding of the other businesses in your corporate portfolio? Are your strategic best practices poorly communicated across your business units? Are your low-performing units quick to blame their competitive situations for their results? If the answer to any of these questions is yes, try drawing, and then sharing, the strategy canvases of your business units.

A company’s pioneers are the businesses that offer unprecedented value. These are your blue ocean offerings, and they are the most powerful sources of profitable growth. These businesses have a mass following of customers. Their value curve diverges from the competition on the strategy canvas. At the other extreme are settlers—businesses whose value curves conform to the basic shape of the industry’s. These are me-too businesses. Settlers will not generally contribute much to a company’s future growth. They are stuck within the red ocean.

The potential of migrators lies somewhere in between. Such businesses extend the industry’s curve by giving customers more for less, but they don’t alter its basic shape. These businesses offer improved value, but not innovative value. These are businesses whose strategies fall on the margin between red oceans and blue oceans.

the more an industry is populated by settlers, the greater is the opportunity to value-innovate and create a blue ocean of new market space.

Chief executives should instead use value and innovation as the important parameters for managing their portfolio of businesses. They should use innovation because, without it, companies are stuck in the trap of competitive improvements. They should use value because innovative ideas will be profitable only if they are linked to what buyers are willing to pay for.

To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.

To reach beyond existing demand, think noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.

The first tier of noncustomers is closest to your market. They sit on the edge of the market. They are buyers who minimally purchase an industry’s offering out of necessity but are mentally noncustomers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself.

The second tier of noncustomers is people who refuse to use your industry’s offerings. These are buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them.

The third tier of noncustomers is farthest from your market. They are noncustomers who have never thought of your market’s offerings as an option.

By focusing on key commonalities across these noncustomers and existing customers, companies can understand how to pull them into their new market.

What are the key reasons first-tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to desegment buyers and unleash an ocean of latent untapped demand.

You should not let costs drive prices. Nor should you scale down utility because high costs block your ability to profit at the strategic price.

Because blue ocean strategies represent a significant departure from red oceans, it is key to address adoption hurdles up front.

Unless the technology makes buyers’ lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins. Value innovation is not the same as technology innovation.

The most commonly used lever is that of customer productivity, in which an offering helps a customer do things faster or better.

Where are the greatest blocks to utility across the buyer experience cycle for your customers and noncustomers? Does your offering effectively eliminate these blocks? If it does not, chances are your offering is innovation for innovation’s sake or a revision of existing offerings.

It is increasingly important, however, to know from the start what price will quickly capture the mass of target buyers.

Companies must therefore start with an offer that buyers can’t refuse and must keep it that way to discourage any free-riding imitations.

When exceptional utility is combined with strategic pricing, imitation is discouraged.

A good way to look outside industry boundaries is to list products and services that fall into two categories: those that take different forms but perform the same function, and those that take different forms and functions but share the same overarching objective.

Listing the groups of alternative products and services allows managers to see the full range of buyers they can poach from other industries as well as from nonindustries.