COMPANIES have long engaged in head-to-head competition in search of sustained, profitable growth. They have fought for competitive advantage, battled over market share, and struggled for differentiation. Today, many industries have become increasingly overcrowded. On the one hand, globalised production and exchange of goods as well as global flow of information and technology have improved industry productivity. This permits suppliers to produce an unprecedented array of products and services while removing niche markets and monopoly havens, thereby making competition increasingly intense. On the other hand, there is little evidence of any significant increase in demand. In more and more industries, supply is overtaking demand, resulting in hastened commoditisation of products and services, and intensified price wars. Competing head-on in these markets results in nothing but a bloody “red ocean” of rivals fighting over a shrinking profit pool.
PHOTOS: KIM & MAUBORGNE
In their bestselling book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, W. Chan Kim and Renee Mauborgne contend that while most companies focus on competing within such red oceans, this strategy is increasingly unlikely to create profitable growth in the future. Companies need to go beyond competing. To seize new profit and growth opportunities, they need to create “blue oceans” of new market space.
In their book, Kim and Mauborgne propose a strategic logic that challenges everything you thought you knew about the requirements for strategic success. Kim and Mauborgne observe that the market universe is composed of two sorts of oceans: red oceans and blue oceans. 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. This is the unknown market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. 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. Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. They are created either beyond existing industry boundaries or from within red oceans by expanding existing industry boundaries. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.
Based on a study of 150 strategic moves spanning more than 100 years and 30 industries, Kim and Mauborgne set out to understand if there were patterns behind the successful creation of blue oceans. Kim and Mauborgne’s research confirmed there were patterns and that what consistently separated winners from losers in creating blue oceans was their approach to strategy. The companies caught in the red oceans followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order. The creators of blue oceans, on the other hand, followed a different strategic logic called value innovation, which is the cornerstone of blue ocean strategy. Instead of focusing on beating the competition, a value innovator focuses on making the competition irrelevant by creating a leap in value for buyers and the company. This opens up new and uncontested market space.
Value innovation defies one of the most commonly accepted dogmas of competition-based strategy: the value-cost tradeoff. Conventional strategic approaches either try to create greater value for customers at a higher cost, or create reasonable value at a lower cost. Here strategy is seen as making a choice between differentiation and low cost. In contrast, a blue ocean strategy seeks to break the value-cost tradeoff by pursuing differentiation and low cost simultaneously. This is made possible by reordering and reconstructing key factors of competition across market boundaries, thereby opening up blue oceans of profit and growth opportunities.
Kim and Mauborgne further propose that a company achieves value innovation by aligning its: value proposition (utility minus price) by creating an offer that dramatically raises buyer utility at the right price for the mass of the target market, profit proposition (price minus cost) by creating a leap in value for the company itself by making a tidy profit, and people proposition by building execution into strategy. A blue ocean strategic move is achieved through aligning the whole system of a company’s activities in pursuit of differentiation and low cost. This approach anchors blue ocean strategy squarely in the realm of strategy and sets it apart from marketing strategies or innovation studies which usually tackle activities at the sub-system level.
Blue Ocean Strategy provides a systematic approach to making the competition irrelevant. In this frame-changing book, Kim and Mauborgne present a proven analytical framework and the tools for successfully creating and capturing blue oceans. These include the strategy canvas, four actions framework, the six paths to creating blue oceans, and the blue ocean idea index. These are the central tools for creating blue oceans in an opportunity maximising, risk minimising way. The book provides the relevant frameworks and tools for companies to adopt in order to turn brilliant blue ocean ideas into reality. The two major frameworks highlighted here are fair process and tipping point leadership, with which companies may overcome key organisational hurdles and effectively execute blue ocean strategy.
While blue and red oceans have always coexisted in the real business world, companies are generally more familiar with the strategies for competing in red oceans. They have less knowledge and understanding about how to make the competition irrelevant. By observing and decoding historical patterns of industry evolutions and market creations, Kim and Mauborgne make the ingenious and seemingly random moves of blue ocean creation replicable. This helps companies aspiring to break away from the competition and obtain strong profitable growth. And by providing a step-by-step roadmap and a systematic and practical set of frameworks and tools, Blue Ocean Strategy guides companies to maximise opportunities while minimising risks in creating and capturing their blue oceans. Upending traditional thinking about strategy, Blue Ocean Strategy charts “a bold new path to winning the future.”
Copyright © 2012 Singapore Institute of Management