Finding clear waters

Leaving behind the intense rivalry of the competitive marketplace sounds like business nirvana, but what is a blue ocean strategy?

by Nick Loney, World Business
Last Updated: 23 Jul 2013

When Henry Ford introduced the Model T on to the automobile market in 1908, he called it a "car for the great multitudes, constructed of the best materials". It was available in only one model and, later, in only one colour, but it was priced at a level that made it affordable to the general public. Before the Model T, carmakers in the US concentrated on building custom-made vehicles for wealthy clients. Instead of competing with them, Ford decided to appeal to the mass market. Although he didn't know it at the time, he had discovered his own personal blue ocean.

The launch of the Model T is perhaps the best known of the 150 or so 'strategic moves' studied in Blue Ocean Strategy, one of the most talked-about management books of recent years, published in February 2005. In its first year the book sold over 1 million copies, making it the fastest-selling title in the history of its publisher, Harvard Business School Press (it has been translated into 32 languages and has been sold in 179 countries). It has turned its authors, W Chan Kim and Renee Mauborgne, into two of the most sought-after management consultants in the world. In December, INSEAD Business School, where Kim and Mauborgne both work, announced that plans are under way for a blue ocean institute, combining teaching and research, that will look for applications of the book within business and beyond.

But the excitement generated by Blue Ocean Strategy has yet to translate into proven practice. On the surface, some of the examples cited in the book seem to provide compelling evidence for the existence of a certain type of business strategy that can indeed provide unlimited market space, free from competition. Yet the companies cited in the book had never heard of 'blue ocean strategy' and might not have accepted the term even if they were familiar with it.

Since the book's publication, firms across the world have studied its six key principles (see box) in the hope of replicating these moves on a consistent basis. If they do, Blue Ocean Strategy may come to be regarded as one of the most influential business publications of all time. If not, it will go down as just another briefly fashionable book with a catchy title.

But what is a blue ocean strategy? According to Kim and Mauborgne, most firms compete in bloody red oceans of intense competition and shrinking profit margins. Red oceans represent all the industries in existence today - the known market space. In red oceans, companies try to outperform their rivals by grabbing a greater share of existing demand. As the market becomes more crowded, the potential for profits and growth is reduced.

Blue oceans, by contrast, are characterised by unknown market space, demand creation and huge potential for growth. The aim of a blue ocean strategy is not to compete with industry rivals for existing customers, but to leave those rivals behind by finding entirely new groups of customers. According to the book, this can be achieved by pursuing what Kim and Mauborgne call 'value innovation'. A typical company, they say, will view value and innovation as separate and mutually exclusive activities: they either aim to create value by doing the things they already do more efficiently and cheaply, or they attempt to mark themselves out from their rivals by innovating, usually at high cost. The problem is that value without innovation will not make a company stand out in the marketplace, while innovation without value often results in products or services that shoot beyond what customers are willing to pay. To find a blue ocean, a company must achieve value creation and innovation at the same time.

To a company facing a daily battle for survival in an intensely competitive market, the image of pure freedom and opportunity will seem too perfect to be true. But the book insists that it is perfectly achievable, provided you are able to identify and execute the correct strategic moves. "Blue ocean thinking can be applied at a corporate level by the CEO, it can be applied at a business level by the president of the division, it can be applied by the product manager. The point is that you remind people that this is the culture in which they operate - this is fundamentally what they are aiming for," says Kim.

After the Model T, one of the clearest examples examined in the book is that of Cirque du Soleil, the Canadian circus company. Established in 1984, Cirque du Soleil's productions have been seen by 40 million people in 90 countries. In less than 20 years, the company achieved a level of revenue that it took Ringling Brothers and Barnum & Bailey more than a century to achieve - and in an industry suffering from long-term decline and seen as having very limited potential for growth.

How did Cirque du Soleil do this? By conjuring the trick of simultaneous differentiation and low cost, according to Kim and Mauborgne. At the time of Cirque du Soleil's debut, they say, other circuses were busy benchmarking each other and trying to maximise their share of shrinking demand by tweaking traditional circus acts and paying more for famous performers, leading to higher costs without increased revenues. Looking outside the circus market and into theatre, Cirque du Soleil introduced many non-circus factors into its production, including storyline, sophisticated humour, original music and dance. Out went slapstick, animals and damp tents; in came artistic flair and a more comfortable environment.

By creating a more sophisticated experience, Le Cirque attracted a much broader range of people. It also eliminated many of the most expensive elements of the circus, in particular the animal shows, dramatically reducing its cost structure. At the same time, it realised that by appealing to people who would otherwise be buying tickets for the theatre or ballet, it could raise the price of its tickets substantially above those of other circuses. This combination of lower costs and higher ticket prices helped Le Cirque to sail freely into a blue ocean.

Can blue oceans be found in every industry? Theoretically, the answer is yes, but Kim and Mauborgne concede that they aren't easy to locate. If they were, everybody would find them. Moreover, they say, many firms seeking to pursue blue ocean strategies risk failure because they have over-simplified the book's message or implemented its ideas in the wrong way.

"There are three major misconceptions about the blue ocean strategy," says Kim. "The first is that you can have a blue ocean company or industry - you can't. No company or industry is permanently blue ocean. Companies are only as good as their people and industries will always go up and down." He says that because the vast majority of business books take companies or industries as their 'unit of analysis', many people struggle to break out of that way of thinking and look for blue ocean companies or industries where there are none.

The second misconception is that blue ocean strategy is "about customers", says Kim. "It isn't true - we never said that. People are so accustomed to thinking about competition and customers, they assume that's what we're talking about, but it isn't. We try to look across industries -say, by attracting car drivers on to planes, not competing for existing users."

Mauborgne says that the third mistake is to think the term is just another way of describing innovation. "It's not just innovation," she says. "A lot of blue oceans are smack bang in the middle of a red ocean. Pursuing technological or market innovation without value innovation isn't a blue ocean strategy."

One of the few companies to publicly announce its interest in the book is Nintendo. According to Laurent Fischer, the company's European marketing director, Nintendo has been pursuing blue ocean strategies since it was formed in 1889, but until the publication of Kim and Mauborgne's book lacked a name for what it was doing. "If you look at our history, we've always aimed to open up new markets and create new demand," says Fischer. "It's been the company's approach since day one. Now the blue ocean theory has been formulated, it helps to describe what we are doing."

According to Fischer, in recent years the gaming industry has become an increasingly bloody red ocean. An obsession with technological advances has led to ever more sophisticated games, but this has not created a corresponding increase in demand. Lifestyles have become busier at the same time as the industry has moved towards epic games that take hours to complete. "Development of video gaming has reached its limit in terms of its capacity to attract new audiences," Fischer says. "So we have to find new forms of gaming."

Nintendo has tried to do this by reaching beyond the existing market and appealing to non-gamers. In 2004 it launched the DS, a hand-held console with two screens, one of which is touch-sensitive. The DS has allowed Nintendo to produce simple games that do not require complicated combinations of buttons, such as Nintendogs, Animal Crossing and Brain Games. The popularity of such games boosted sales of the DS to 21 million units worldwide, with high demand coming from unexpected quarters, such as middle-aged users.

The company's latest console is an attempt to build on the success of the DS. Launched in November, the Wii is a fixed console that operates through the television; its controller is simpler than conventional joypads and is fitted with motion detectors to enable hand movements to be translated on screen. The Wii also displays news and weather information from the internet, as well as allowing games from Nintendo's back catalogue to be downloaded.

Nintendo's approach is in contrast to that of rival Sony, which has marketed its new PlayStation 3 as the most technologically advanced gaming system yet. But the PS3's very complexity has pushed up its price and led to technical difficulties. Last autumn Sony announced that its Q3 profits had been wiped out by problems with the PS3, combined with a recall of faulty batteries supplied to other computer makers.

Nintendo believes its new, less technologically-driven approach marks it out from its competitors. "We're just saying: let's put all our technological know-how into making the games more accessible," says Fischer.

Like Nintendo, US firm Pitney Bowes believes it was pursuing its own version of a blue ocean strategy long before publication of the book. But it acknowledges a debt to Kim and Mauborgne for providing the terminology and helping it to understand its approach. Arun Sinha, Pitney Bowes' chief marketing officer, says: "The book has definitely had an impact on us. It confirmed what we were trying to do and crystallised our ideas."

About four years ago, Pitney Bowes, which designs software and equipment for mailrooms, decided to pursue a high-growth strategy. "We knew we couldn't do that by focusing on areas where we were already operating," says Sinha. "We were already market leader in the core mailroom business, for example, with 80% market share in the US and 60% overseas. So in order to grow at the rate we wanted, we knew we had to find new markets."

Today, 24% ($1.3 billion) of Pitney Bowes' revenue comes from areas that it wasn't involved in four years ago. This has been achieved largely through the work of a unit in the company called the Advanced Concept and Technology Group (ACTG). The ACTG comprises a team of specialists, including ethnographers and designers, which is given a free rein to identify products that will enable the company to enter completely new markets. The core of the ACTG is made up of full-time designers; marketeers and business development specialists are brought in later.

According to Sinha, the ACTG has helped the company develop a range of products in recent years, including StampExpressions, which enables people to design and print their own postage from their desktops, which they then submit to Pitney Bowes for approval. Provided the stamp meets the design standards, users can print as many as they wish to form their own personal postage system. An automated credit card system deposits payments into the account of the United States Postal Service (USPS) for every stamp printed. Before the invention of Stamp Expressions, US citizens had to pay USPS to print individualised stamps for them.

Pitney Bowes' use of a specialist team to drive forward its blue ocean strategy is echoed by the Ford Motor Company, which has launched a strategy called the Piquette Project. Named after Ford's famous Piquette Avenue factory in Detroit, where the Model T was developed, the project was launched in 2005 by then CEO Bill Ford Jr as part of his crusade to rediscover the firm's pioneering spirit.

Ford is reluctant to talk about the project, but it is reported that its goal is to "develop renewable, clean and safe vehicles that would be both socially conscious and provide competitive advantage in the marketplace" - thus appealing to a future generation of environmentally conscious car drivers turned off by gas-guzzling vehicles. According to an article in the Detroit Free Press, Kim and Mauborgne's book was a "major philosophical influence on the project", with copies "circulating briskly among Ford offices".

But the 'strategic moves' that comprise the author's evidence base indicate that finding blue oceans owes a great deal to having the right people in the right company in the right industry at the right time. And although some convince as genuinely blue ocean, others seem merely striking examples of innovation. Mauborgne says that while becoming a 'pure' blue ocean company is impossible, it is possible to form a strategy that will increase your chances of finding blue oceans. "We make clear that blue oceans will never replace red ones - they're complementary," she says. "Your objective is to make sure that your company is not dominated by red ocean settler businesses, but has a few blue ocean pioneers."

But pioneers are never alone in a new place for long before the rest of the tribe catches up. Blue oceans will stay blue only for a finite amount of time before turning red. The experience of Ford, which recently persuaded 38,000 workers to take voluntary redundancy amid falling sales and mounting losses, should leave nobody in any doubt of that.

THE SIX BLUE OCEAN PRINCIPLES

1. Reconstruct market boundaries. The first step in pursuing a blue ocean strategy is to reconstruct market boundaries in order to break free from the competition. But out of the seemingly endless possibilities that exist, which provide the most commercially compelling blue ocean opportunities? The book outlines six basic approaches for an organisation to take to find its market niche.

2. Focus on the big picture, not the numbers. Once you know the various paths to creating blue oceans, the next question is how to align your strategic planning process to focus on the big picture. Kim and Mauborgne recommend drawing up a strategy canvas to help understand your current strategic position and to chart your future strategy.

3. Reach beyond existing demand. No company wants to venture beyond red oceans to find itself in a puddle. To maximise the size of the blue ocean, you must reach beyond existing demand. In order do this, you must challenge two conventional strategy practices: first, the focus on existing customers; and, second, the drive for finer segmentation to accommodate buyer differences. Instead of focusing on customers, focus on non-customers. Instead of concentrating on customer differences, seek out powerful commonalities.

4. Get the strategic sequence right. Build a robust business model to ensure that you make a healthy profit from your blue ocean. Kim and Mauborgne argue that companies need to build their blue ocean strategy in the sequence of buyer, utility, price, cost and adoption.

5. Overcome four main organisational hurdles. The first is cognitive: waking employees up to the need for a strategic shift. The second hurdle is limited resources: the greater the shift in strategy, the more resources are assumed to be needed to execute it - but many firms attempt to pursue blue ocean strategies on fewer resources. The third is motivation: how do you motivate your key people to move fast and break from the status quo? The final hurdle is possibly the biggest of all - office politics.

6. Build execution into strategy. The attitudes and behaviour of the people in your organisation will ultimately determine whether your blue ocean strategy is a success. You will have to create a culture of trust and commitment, so that people embrace it of their own accord and go beyond compulsory execution to voluntary cooperation in carrying it out.

THREE BLUE OCEAN STRATEGIC MOVES

Apple II. In 1976, Micro Instrumentation and Telementary Systems unveiled the Altair 8800 personal computer, which Business Week predicted would do for home computing what IBM had done the previous decade for business computing. But the machine was a flop: it had no monitor, no permanent memory, only 256 characters of temporary memory, no software and no keyboard. Sales were extremely low, leading Ken Olsen, president of Digital Equipment, to declare: "There is no reason for any individual to have a computer in their home." Just two years later, the Apple II made Olsen eat his words. Based largely on existing technology, Apple II offered an all-in-one design in a plastic casing, including keyboard, power supply and graphics. Less than two years after its launch, the Apple II was selling at more than 200,000 units a year, with Apple placed on the Fortune 500 list at less than three years old - an unprecedented feat.

(yellow tail). Australian wine-maker Casella Wines launched the [yellow tail] range of wines in 2000, with the explicit intention of appealing to non-wine drinkers abroad. In the space of two years, (yellow tail) emerged as the fastest growing brand in both the US and Australia, and was the number one imported wine into the US. By August 2003, the (yellow tail) Shiraz was the best-selling red wine in the US. How did Casella do it? By looking at the alternatives of beer and ready-to-drink cocktails and thinking in terms of non-customers, Casella concentrated on three factors: easy drinking, easy to select and fun. The company found that the majority of non-wine drinkers rejected wine because beer and cocktails were sweeter and easier to drink. The soft, uncomplicated taste of (yellow tail), combined with its carefully cultivated image as a drink for 'ordinary' people, enabled Casella to create an entirely new market of wine drinkers.

Nickelodeons. In 1895, Thomas Edison developed the projecting kinetoscope, which showed motion pictures on a screen. But clips were only a few minutes long and used as fillers between vaudeville acts and theatre performances. Harry Davis' first nickelodeon theatre, which opened in Pittsburgh in 1905, changed all that. Most live entertainment was too expensive for the average family - tickets for the opera cost $2, while vaudeville cost 50 cents. By contrast, tickets for the nickelodeons were only five cents (hence the name). They were situated in poor neighbourhoods, provided the bare essentials of a screen and benches, and showed slapstick comedies, which had a mass appeal. By 1914, the US had 18,000 nickelodeons, with 7 million daily admissions.

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