W . Chan Kim is The Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management at INSEAD. He was Professor at the University at Michigan Business School. He has served as a board member as well as an adviser for a number of multinational corporations in Europe, the United States, and Pacific Asia. He has published numerous articles on strategy and managing the multinational.
Renée Maoborgne is the INSEAD distinguished Fellow and a professor of strategy and management at INSEAD in Fontainebleau, France, and Fellow of the World Economic Forum. She has published numerous articles on strategy and the multinational.
The two of them are the winners of the Eldridge Haynes Prize, awarded by the Academy of International Business and the Eldridge Haynes Memorial Trust of Business International, for the best original paper in the field of international business.
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. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowed, 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. Although some blue oceans are created well beyond existing industry boundaries, most are created 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.
Logic of Blue Ocean Strategy is so called value innovation and is the cornerstone of Blue Ocean Strategy.
Value innovation places equal emphasis on value and innovation. It is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy: The value-cost trade-off. à It is conventionally believed that companies can either create greater value to the customers at 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 , those that seek to create blue oceans pursue differentiation and low cost simultaneously.
Now turn the clock back only thirty years, How many industries of today's industries were then unknown? Mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail, snowboards and coffee bars to name a few.
Reconstruct Market Boundaries
The first principle of Blue Ocean Strategy is to reconstruct market boundaries to break from the competition and create blue oceans.
The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities.
This challenge is key because managers cannot afford betting their strategy on intuition or on a random drawing.
There are a clear pattern for creating blue oceans, with six basics approaches to remarking market boundaries: The six paths framework
In the first path companies in the red ocean define their industry similarly and focus on being the best within it. But to create new market space companies must look across alternative industries because a company competes not only with the other firms in its own industry, but also with companies in those other industries that produce alternative products and services.
The second path: The next boundary is the strategic group. A strategic group is companies within an industry that pursue a similar strategy.
The key in creating new market space is to understand what factors determine buyers´ decision to switch from one strategic group to another.
The third path: In most industries, competitors converge on the definition of the target buyer. In the reality, though, there is a chain of buyer who directly or indirectly involved in the buying decision: the purchaser, the user, for example.
But by looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers.
The fourth path: In the red ocean: few products and services are used in a vacuum. In most cases, other products and services affect their value. But companies can create new market space by focusing on the complements that detract from the value of their product or service.
The fifth path: Competition in an industry tends to converge around two bases of appeal:
-Some industries compete principally on price and function, their appeal is rational. Other industries compete largely on feelings, their appeal is emotional.
Companies can find new market spaces when they are willing to challenge the functional-emotional orientation of their industry.
The sixth path: All industries are subject to external trends that affect their business over time. Firms tend to pace their own thinking to keep up with the development of the trends they are tracking.
By finding insights trends that are observable today, firms can unlock innovation that creates new market spaces
- Instead of concentration 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.
- There are three types of noncustomer that can be transformed into customers. They differ in their relative distance from the market.
-The first of noncustomers is closest to the market. They are buyers who nominally purchase an industry's offering out of necessity, but are mentally noncustomers of the industry.
-The second type of noncustomers is people who refuse to use the industry's offerings. These are buyers who have seen the industry's offerings as an option to fulfill their needs but have voted against them.
-The third type of noncustomers is farthest from the market. They are noncustomers who have never thought of the market´s offerings as an option.
You must look at each of the three types of noncustomers to understand how you can attract them and expand the own blue ocean.
You must look at each of the three types of noncustomers to understand how you can attract them and expand the own blue ocean.
- This brings us to the fourth principle of the Blue Ocean Strategy: Get the strategic sequence right.
- As shown in this figure, companies need to build their Blue Ocean Strategy in the sequence of buyer utility, price, cost, and adoption.
The starting point is buyer utility. Does your offering unlock exceptional utility?
Is there a compelling reason for the mass of people to buy it?
Absent this, there is no Blue Ocean potential to begin with. Here there are only two options. Park the idea, or rethink it until you reach an affirmative answer.
When you clear the exceptional utility bar, you advance to the second step: setting the right strategic price. Remember a company does not want to rely on price to create demand. The key question her is this: Is your offering priced to attract the mass of target buyers so that they have a compelling ability to pay for your offering? If it is not, they cannot buy it. Nor will the offering create irresistible market buzz.
These two steps address the revenue side of a company's business model.
Securing the profit side bring the third element: cost.
Can you produce your offering at the target cost and still earn a healthy profit margin? Can you profit at the strategic price-the price easily accessible to the mass of target buyers? 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. When the target cost cannot be met, you must either forgo the idea because the Blue Ocean won't be profitable, or you must innovate your business model to hit the target cost. It is the combination of exceptional utility, strategic pricing, and target costing that allows companies to achieve value innovation-a leap in value for both buyers and companies.
The last step is to address adoption hurdles.
What are the adoption hurdles in rolling out your idea? Have you addressed these up front? The formulation of Blue Ocean Strategy is complete only when you address adoption hurdles in the beginning to ensure the successful actualization of your idea. Adoption hurdles include, for example, potential resistance to the idea by retailers or partners. Because Blue Ocean Strategies represent a significant departure from red oceans, it is key to address adoption hurdles up front.