Blue Ocean Strategy (2004) is a business classic that revolutionized the way companies think about market competition. It explains why some businesses can grow uncontested, while the rest tear each other to bits in a hypercompetitive environment.
“The only way to beat the competition is to stop trying to beat the competition.” – Blue Ocean Strategy
If you want to launch a successful business, don’t waste time competing for market share. Instead, focus on creating new value and expanding the current market. If you create new value, you will find yourself in a highly profitable Blue Ocean, where the competition is irrelevant.
Professors W. Chan Kim and Renee Mauborgne studied the launch of 108 businesses across 30 industries over the span of several decades. Their study revealed that when a new business tried to compete with an established business and steal market share, they were substantially less profitable than a new business that avoided competition. Of the 108 businesses, 16 businesses adopted a Blue Ocean strategy by creating a new product category that made the competition irrelevant. Those 16 Blue Ocean businesses took home 61% of the combined profits of all 108 businesses! What’s more, those 16 Blue Ocean businesses went on to dominate their market category for 10-15 years!
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Every business asks themselves the same question: how can we beat out the competition? And almost every business comes up with the same answer: we need to become bigger, better, and faster to outperform our rivals.
But what if your business didn’t have to beat the competition because there wasn’t any? What if you could enjoy unlimited growth without worrying about limited demand? This isn’t some idle fantasy but a strategic approach that a handful of successful businesses have already made reality. How did they do it? And how can your business do the same? This short summary will give you a taste.
“The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order. The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. Instead, they followed a different strategic logic that we call value innovation.” – Blue Ocean Strategy
What is Value Innovation?
Value Innovation is the act of producing an innovative new product at a remarkably low price.
The first step of value innovation is selecting your target audience. Instead of focusing on regular customers within your desired market (existing customers everyone is competing for), focus on the customers on the edge of your market (infrequent customers) and customers in adjacent markets, who either avoid your market or have never heard of your market. In the example below, Casella wines started to process of developing a new wine by focusing on the needs of beer and cocktail consumers.
The next step of value innovation is to look at the typical business model in your market and ask four questions:
- What processes can we ELIMINATE?
- What standards can we REDUCE?
- What standards can be RAISE?
- What standards or processes can we incorporate from adjacent industries to CREATE a new experience?
“Our research has found that rarely do managers systematically set out to eliminate and reduce their investments in factors that an industry competes on. The result is mounting cost structures and complex business models.
The second two factors (raise and create), by contrast, provide you with insight into how to lift buyer value and create new demand. Collectively, they allow you to systematically explore how you can reconstruct buyer value elements across alternative industries to offer buyers an entirely new experience, while simultaneously keeping your cost structure low.”- Blue Ocean Strategy
How Casella Wines achieved Value Innovation
Casella Wines started by asking non-wine drinkers [beer and cocktail drinkers] why they avoid wine. They discovered that most non-wine drinkers thought wine was intimidating and pretentious. These non-wine drinkers said the complexity of wine’s taste was a turnoff. Casella Wines aimed to address the frustrations of these ‘noncustomers’ by creating a wine that was fun, unintimidating, and easy to drink. To achieve this, they implemented the four value innovation action framework:
- They ELIMINATED the wine aging process. Aging wine resulted in a taste that was too complex for nonwine drinkers. By eliminating the aging process they saved money on oak barrels and storage costs.
- They REDUCED their inventory to just two wines, a white Chardonnay and a red Shiraz. By reducing their inventory two wines they had far fewer wines than most wine businesses, and this was a good thing because it made the wine selection process less intimidating for non-wine drinkers.
- They RAISED the freshness and drinkability of the wine by raising their grape selection standards. Raising the drinkability of the wine made it fun to drink for beer and cocktail drinkers.
- They incorporated a few standards from the beer industry to CREATE a new wine experience for nonwine drinkers. They created a wine label that simple and inviting, like most beer bottle labels. It didn’t have the age of the wine and it didn’t have fancy language describing the vineyard or the winemaking process. It had an image of a kangaroo, the name of their wine company, and the origin country of the wine: ‘Australia.’ This simple label made their wine seem less pretentious, and more fun and adventurous.
“Casella Wines created [yellow tail], a wine whose strategic profile broke from the competition and created a blue ocean. Instead of offering wine as wine, Casella created a social drink accessible to everyone: beer drinkers, cocktail drinkers, and other drinkers of nonwine beverages. In the space of two years, the fun, social drink [yellow tail] emerged as the fastest growing brand in the histories of both the Australian and the U.S. wine industries and the number one imported wine into the United States, surpassing the wines of France and Italy. By August 2003 it was the number one red wine in a 750-ml bottle sold in the United States, outstripping California labels.” – Blue Ocean Strategy
Escape your competition by setting sail to a blue ocean.
When you establish a new business, competition can be brutal. Whether you’re selling wine, audio books, or life insurance, the market for a product can only get so big. So you’re left to fight with hundreds of other companies for your share of a limited demand. No surprise that America’s most popular business TV show is called Shark Tank! Markets today are like oceans, swarming with hungry companies ready to kill each other. There’s so much blood in the water, we can call these markets red oceans.
But every once in a while, a company emerges that seems to sail past all the competition. These are businesses that rise fast, grow uncontested, and seem to play by their own rules. What are they doing differently?
Well, instead of fighting over scraps in red oceans, these businesses navigate uncharted territory: blue oceans. You can think of blue oceans as all the markets we haven’t yet discovered, for products and services that don’t yet exist. Demand isn’t limited because demand isn’t there – it has to be created. But this isn’t a handicap, it’s an opportunity. Because if the size of your market isn’t limited, neither are your growth and profits.
In blue oceans, the water isn’t bloodied by cut-throat competition. It’s deep, clear, and full of undiscovered potential. The blue ocean strategy gives you the methodology and tools to conquer such uncontested markets. The basic tenet is this: It’s true that the space in a certain industry might be limited. But who’s to say that a business can’t create an entirely new industry?
Let’s look at an example of this in action: famous Canadian circus company Cirque du Soleil. With its extraordinary variety shows, Cirque du Soleil has entertained millions of people worldwide. On top of that, it’s made record profits. Not something you would expect from a circus company! How did the company do it?
Well, Cirque du Soleil did two interesting things. First, it got rid of the old circus staple of animal acts. Then, it supplemented its human acts with live music and compelling storylines. The first move reduced costs while the second introduced exciting new elements into the world of circus. In effect, Cirque du Soleil created a blue ocean: it carved out an entirely new market for artistic theater experiences. And people love it.
Lower your costs and differentiate yourself.
Perhaps you find the example of a circus company a bit too eclectic? No problem. There are thousands of other businesses that have successfully implemented a blue ocean strategy. Companies like Ford, Nintendo, Netflix, Nespresso, Yellow Tail, Southwest Airlines, and even The Body Shop. In this section, we’ll take a closer look at how they succeeded.
But first, a few more words about red oceans. In red oceans – industries that are already established – everyone plays by agreed rules. Not so long ago, these rules might have looked something like this: “Movies can be bought or rented.” “Wine needs to have an air of sophistication.” “Air travel is expensive.” But in blue oceans, none of these rules apply. Blue oceans are actively shaped by the actions of the industry players who create them.
Let’s be clear – you don’t need to reinvent the wheel to establish a blue ocean. Often, a few little tweaks are enough to set a product apart from its competitors and create a new market. It’s really quite simple: Take a close look at your industry as it is right now. Then think about which factors you can Raise, Eliminate, Reduce, and Create. Let’s go through these points step-by-step with examples.
Raise. Think about how you can elevate the product quality, price point, or service standards of your industry. Southwest Airlines did this when it became the first US airline to make domestic flights quick, easy, and affordable for everyone.
Eliminate. Consider which aspects of your product or service can be cut completely. Remember how Cirque du Soleil got rid of costly and unethical animal acts? Every industry has some outdated practice they’d be better off abandoning.
Reduce. Look at which production processes, product features or service offers you can reduce. Australian wine brand Yellow Tail, for instance, decided to reduce its focus on prestigious vineyards and the aging process in favor of affordable wines with broad appeal.
Create. Brainstorm what new features you can offer your customers. Netflix is a premium example of this that barely needs an explanation: it was the first company to offer on-demand streaming for movies and TV shows.
Ideally, considering these questions will help you do two things: lower your costs and differentiate your business from the competition. And that’s really all you need to create a blue ocean. Even more so, if your company keeps addressing these four factors – that’s raise, eliminate, reduce, and create –, it will stay one step ahead of the competition at all times.
In this short summary, you’ve learned about the difference between red and blue oceans.
Rather than competing for limited market space, successful businesses often capture new markets with unlimited potential. They’re discovered by raising, eliminating, reducing, and creating industry factors in a way that lowers costs and sets your business apart from the competition.
So, what are you waiting for? Stop swimming with the sharks and set sail.
W. Chan Kim and Renee Mauborgne are Professors of Strategy at INSEAD and Codirectors of the INSEAD Blue Ocean Strategy Institute. They are the authors of the New York Times and #1 Wall Street Journal bestseller, BLUE OCEAN SHIFT and the international bestseller BLUE OCEAN STRATEGY, which is recognized as one of the most iconic and impactful strategy books ever written. Blue Ocean Strategy has sold over 4 million copies, is being published in a record-breaking 46 languages, and is a bestseller across five continents. In 2019, Chan Kim and Renee Mauborgne were named the world’s most influential business thinkers by Thinkers50. They are the recipients of numerous academic and management awards around the world including the Nobels Colloquia Prize for Leadership on Business and Economic Thinking, the Carl S. Sloane Award by the Association of Management Consulting Firms, the Leadership Hall of Fame by Fast Company, and the Eldridge Haynes Prize by the Academy of International Business, among others. They are Fellows of the World Economic Forum and the founders of the Blue Ocean Global Network. For more on these authors and their new book, BLUE OCEAN SHIFT, see blueoceanstrategy.com.
Entrepreneurship, Marketing and Sales, Systems and Planning, Business Management, Leadership and Motivation, Economics, Self Help, Finance, Product Management, Strategic management, Strategy execution, Strategy formulation, Competitive strategy
Table of Contents
Help! My Ocean Is Turning Red ix
Preface to the Original Edition xxi
Part 1 Blue Ocean Strategy
1 Creating Blue Oceans 3
2 Analytical Tools and Frameworks 25
Part 2 Formulating Blue Ocean Strategy
3 Reconstruct Market Boundaries 49
4 Focus on the Big Picture, Not the Numbers 83
5 Reach Beyond Existing Demand 103
6 Get the Strategic Sequence Right 117
Part 3 Executing Blue Ocean Strategy
7 Overcome Key Organizational Hurdles 147
8 Build Execution into Strategy 171
9 Align Value, Profit, and People Propositions 189
10 Renew Blue Oceans 203
11 Avoid Red Ocean Traps 215
Appendix A 225
Appendix B 245
Appendix C 249
About the Authors 285
Stay tuned for book review…