TLFeBOOK

Blue Ocean Strategy

Blue Ocean

Strategy

How to Create Uncontested Market Space and

Make the Competition Irrelevant

W. Chan Kim

Renée Mauborgne

H A R V A R D   B U S I N E S S   S C H O O L   P R E S S B O S T O N ,   M A S S A C H U S E T T S

Copyright 2005 Harvard Business School Publishing Corporation

All rights reserved

Printed in the United States of America

09  08  07  06  05    5  4  3  2  1

No part of this publication may be reproduced, stored in or introduced into a

retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

Library of Congress Cataloging-in-Publication Data

Kim, W. Chan.

Blue ocean strategy: how to create uncontested market space and make the competition irrelevant / W. Chan Kim, Renée Mauborgne.

p.    cm.

Includes bibliographical references and index. ISBN 1-59139-619-0 (hardcover: alk. paper)

1. New products.  2. Market segmentation.  I. Mauborgne, Renée.  II. Title. HF5415.153.K53    2005

658.8 02—dc22

2004020857

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Publications and Documents in Libraries and Archives Z39.48–1992

To friendship and to our families,

who make our worlds more meaningful

Contents

Preface                                                                                                                         ix

Acknowledgments                                                                                                    xiii

Part One: Blue Ocean Strategy

1

Creating Blue Oceans

3

2

Analytical Tools and Frameworks

23

Part Two: Formulating Blue Ocean Strategy

3

Reconstruct Market Boundaries

47

4

Focus on the Big Picture, Not the Numbers

81

5

Reach Beyond Existing Demand

101

6

Get the Strategic Sequence Right

117

viii                                                        Contents

Part Three: Executing Blue Ocean Strategy

7

Overcome Key Organizational Hurdles

147

8

Build Execution into Strategy

171

9

Conclusion: The Sustainability and Renewal

of Blue Ocean Strategy

185

Appendix A                                                                                 191

Appendix B                                                                                 209

Appendix C                                                                                 213

Notes                                                                                                                         217

Bibliography                                                                                                            223

Index                                                                                                                         231

About the Authors                                                                                                  239

Preface

HI S  IS  A  BOOK  about friendship, about loyalty, about believing in one another. It was because of that friend-

T

ship, and that belief, that we set out on the journey to explore the ideas in this book and eventually came to write it.

We met twenty years ago in a classroom—one the professor, the other the student. And we have worked together ever since, often seeing ourselves along the journey as two wet rats in a drain. This book is not the victory of  an idea but of  a friendship that we have found more meaningful than any idea in the world of business. It has made our lives rich and our worlds more beautiful. We were not alone. No journey is easy; no friendship is filled only with laughter. But

we were excited every day of that journey because we were on a mis- sion to learn and improve. We believe passionately in the ideas in this book. These ideas are not for those whose ambition in life is to get by or merely to survive. That was never an interest of  ours. If you can be satisfied with that, do not read on. But if  you want to make a difference, to create a company that builds a future where customers, employees, shareholders, and society win, read on. We are not saying it is easy, but it is worthwhile.

x                                                            Preface

Our research confirms that there are no permanently excellent

companies, just as there are no permanently excellent industries. As we have found on our own tumbling road, we all, like corpora- tions, do smart things and less-than-smart things. To improve the quality of  our success we need to study what we did that made a positive  difference  and  understand  how  to  replicate  it  systemati- cally. That is what we call making smart strategic moves, and we have found that the strategic move that matters centrally is to cre- ate blue oceans.

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. Instead of dividing up exist- ing—and  often  shrinking—demand  and  benchmarking  competi- tors,  blue  ocean  strategy  is  about  growing  demand  and  breaking away from the competition. This book not only challenges compa- nies but also shows them how to achieve this. We first introduce a set of  analytical tools and frameworks that show you how to sys- tematically  act  on  this  challenge,  and,  second,  we  elaborate  the principles that define and separate blue ocean strategy from compe- tition-based strategic thought.

Our aim is to make the formulation and execution of  blue ocean strategy as systematic and actionable as competing in the red wa- ters of  known market space. Only then can companies step up to the challenge of  creating blue oceans in a smart and responsible way that is both opportunity maximizing and risk minimizing. No company—large or small, incumbent or new entrant—can afford to be a riverboat gambler. And no company should.

The contents of this book are based on more than fifteen years of research, data stretching back more than a hundred years, and a se- ries of  Harvard Business Review articles as well as academic arti- cles  on  various  dimensions  of  this  topic.  The  ideas,  tools,  and frameworks  presented  here  have  been  further  tested  and  refined over the years in corporate practice in Europe, the United States, and Asia. This book builds on and extends this work by providing a narrative  arc  that  draws  these  ideas  together  to  offer  a  unified

Preface                                            xi

framework.  This  framework  addresses  not  only  the  analytic  as-

pects behind the creation of  blue ocean strategy but also the all- important human aspects of  how to bring an organization and its people on this journey with a willingness to execute these ideas in action. Here, understanding how to build trust and commitment, as well  as  an  understanding  of  the  importance  of  intellectual  and emotional recognition, are highlighted and brought to the core of strategy.

Blue ocean opportunities have been out there. As they have been explored, the market universe has been expanding. This expansion, we  believe,  is  the  root  of  growth.  Yet  poor  understanding  exists both in theory and in practice as to how to systematically create and capture blue oceans. We invite you to read this book to learn how you can be a driver of this expansion in the future.

Acknowledgments

E   HAVE   HAD   S I G N I F I CANT   H E L P   in  actualizing this book. INSEAD has provided a unique environ-

W

ment in which to conduct our research. We have benefited greatly from  the  crossover  between  theory  and  practice  that  exists  at INSEAD, and from the truly global composition of our faculty, stu- dent, and executive education populations. Deans Antonio Borges, Gabriel Hawawini, and Ludo Van der Heyden provided encourage- ment  and  institutional  support  from  the  start  and  allowed  us  to closely  intertwine  our  research  and  teaching.  Pricewaterhouse- Coopers (PwC) and the Boston Consulting Group (BCG) have ex- tended the financial support for our research; in particular, Frank Brown and Richard Baird at PwC, and René Abate, John Clarkeson, George Stalk, and Olivier Tardy of BCG have been valued partners. While we had help from a highly talented group of  researchers over  the  years,  our  two  dedicated  research  associates,  Jason Hunter  and  Ji  Mi,  who  have  worked  with  us  for  the  last  several years,  deserve  special  mention.  Their  commitment,  persistent  re- search support, and drive for perfection, were essential in realizing

this book. We feel blessed by their presence.

xiv                                               Acknowledgments

Our colleagues at the school have contributed to the ideas in the

book.  INSEAD  faculty  members,  particularly  Subramanian  Ran- gan and Ludo Van der Heyden, helped us to reflect upon our ideas and  offered  valuable  comments  and  support.  Many  of  INSEAD’s faculty have taught the ideas and frameworks in this book to execu- tive and M.B.A. audiences, providing valuable feedback that sharp- ened  our  thinking.  Others  have  provided  intellectual  encourage- ment  and  the  energy  of  kindness.  We  thank  here,  among  others, Ron  Adner,  Jean-Louis  Barsoux,  Ben  Bensaou,  Henri-Claude  de Bettignies,  Mike  Brimm,  Laurence  Capron,  Marco  Ceccagnoli, Karel  Cool,  Arnoud  De  Meyer,  Ingemar  Dierickx,  Gareth  Dyas, George  Eapen,  Paul  Evans,  Charlie  Galunic,  Annabelle  Gawer, Javier  Gimeno,  Dominique  Héau,  Neil  Jones,  Philippe  Lasserre, Jean-François  Manzoni,  Jens  Meyer,  Claude  Michaud,  Deigan Morris, Quy Nguyen-Huy, Subramanian Rangan, Jonathan Story, Heinz Thanheiser, Ludo Van der Heyden, David Young, Peter Zem- sky, and Ming Zeng.

We have been fortunate to have a network of  practitioners and case  writers  across  the  globe.  They  have  contributed  greatly  in showing how the ideas in this book apply in action and helping to develop case material for our research. Among many people, one deserves special mention: Marc Beauvois-Coladon, who has worked with us from the start and made a major contribution to chapter 4 based on his field experiences practicing our ideas in companies. Among the wealth of others, we would like to thank Francis Gouillart and his associates; Gavin Fraser and his associates; Wayne Morten- sen; Brian Marks; Kenneth Lau; Yasushi Shiina; Jonathan Landrey and his associates; Junan Jiang; Ralph Trombetta and his associ- ates; Gabor Burt and his associates; Shantaram Venkatesh; Miki Kawawa and her associates; Atul Sinha and his associates; Arnold Izsak  and  his  associates;  Volker  Westermann  and  his  associates; Matt  Williamson;  and  Caroline  Edwards  and  her  associates.  We also appreciate the emerging cooperation with Accenture as kicked off with Mark Spelman, Omar Abbosh, Jim Sayles, and their team. Thanks are also due to Lucent Technologies for their support.

Acknowledgments                                    xv

During the course of  our research, we have met with corporate

executives  and  public  officers  around  the  world  who  generously gave  us  their  time  and  insight,  greatly  shaping  the  ideas  in  this book. We are grateful to them. Among many private and public ini- tiatives  for  putting  our  ideas  into  practice,  the  Value  Innovation Program (VIP) Center at Samsung Electronics and the Value Inno- vation Action Tank (VIAT) in Singapore for the country’s govern- ment  and  private  sectors  have  been  major  sources  of  inspiration and learning. In particular, Jong-Yong Yun at Samsung Electronics and all the Permanent Secretaries of  Singapore Government have been  valued  partners.  Warm  thanks  also  to  the  members  of  the Value Innovation Network (VIN), a global community of  practice on the Value Innovation family of concepts—especially to those we were unable to mention here.

Finally, we would like to thank Melinda Merino, our editor, for her wise comments and editorial feedback, and the Harvard Busi- ness School Publishing team for their commitment and enthusias- tic support. Thanks also to our present and past editors at Harvard Business Review, in particular David Champion, Tom Stewart, Nan Stone,  and  Joan  Magretta.  We  owe  a  great  deal  to  INSEAD M.B.A.’s and Ph.D.’s and executive education participants. Particu- larly,  participants  in  both  Strategy  and  Value  Innovation  Study Group (VISG) courses have been patient as we have tried out the ideas  in  this  book.  Their  challenging  questions  and  thoughtful feedback clarified and strengthened our ideas.

PA R T   O N E

Blue Ocean

Strategy

C H A P T E R   1

Creating Blue Oceans

ONE   TIME   ACCORDION   PLAYER,  stilt-walker,  and  fire- eater, Guy Laliberté is now CEO of  Cirque du Soleil,

A

one of Canada’s largest cultural exports. Created in 1984 by a group of street performers, Cirque’s productions have been seen by almost forty million people in ninety cities around the world. In less than twenty years Cirque du Soleil has achieved a level of revenues that took Ringling Bros. and Barnum & Bailey—the global champion of the circus industry—more than one hundred years to attain.

What makes this rapid growth all the more remarkable is that it was not achieved in an attractive industry but rather in a declining industry in which traditional strategic analysis pointed to limited potential for growth. Supplier power on the part of star performers was  strong.  So  was  buyer  power.  Alternative  forms  of  entertain- ment—ranging from various kinds of  urban live entertainment to sporting events to home entertainment—cast an increasingly long shadow. Children cried out for PlayStations rather than a visit to the traveling circus. Partially as a result, the industry was suffer- ing from steadily decreasing audiences and, in turn, declining rev- enue and profits. There was also increasing sentiment against the

4                                   B L U E   O C E A N   S T R A T E G Y

use of  animals in circuses by animal rights groups. Ringling Bros.

and Barnum & Bailey set the standard, and competing smaller cir- cuses essentially followed with scaled-down versions. From the per- spective  of  competition-based  strategy,  then,  the  circus  industry appeared unattractive.

Another compelling aspect of  Cirque du Soleil’s success is that

it did not win by taking customers from the already shrinking circus industry, which historically catered to children. Cirque du Soleil did not compete with Ringling Bros. and Barnum & Bailey. Instead

it  created  uncontested  new  market  space  that  made  the  competi- tion  irrelevant.  It  appealed  to  a  whole  new  group  of  customers: adults and corporate clients prepared to pay a price several times as  great  as  traditional  circuses  for  an  unprecedented  entertain- ment experience. Significantly, one of  the first Cirque productions was titled “We Reinvent the Circus.”

New Market Space

Cirque du Soleil succeeded because it realized that to win in the fu- ture, companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition.

To  understand  what  Cirque  du  Soleil  has  achieved,  imagine  a market universe 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.1 Here, companies

try to outperform their rivals to grab a greater share of existing de- mand. 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.

Creating Blue Oceans                                  5

Although some blue oceans are created well beyond existing indus-

try boundaries, most are created from within red oceans by expand- ing existing industry boundaries, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.

It will always be important to swim successfully in the red ocean by outcompeting rivals. Red oceans will always matter and will al- ways be a fact of  business life. But with supply exceeding demand in more industries, competing for a share of  contracting markets, while necessary, will not be sufficient to sustain high performance.2

Companies need to go beyond competing. To seize new profit and

growth opportunities, they also need to create blue oceans. Unfortunately, blue oceans are largely uncharted. The dominant

focus of  strategy work over the past twenty-five years has been on competition-based  red  ocean  strategies.3   The  result  has  been  a fairly good understanding of how to compete skillfully in red waters, from analyzing the underlying economic structure of  an existing industry, to choosing a strategic position of low cost or differentia- tion or focus, to benchmarking the competition. Some discussions around blue oceans exist.4  However, there is little practical guid- ance on how to create them. Without analytic frameworks to create blue  oceans  and  principles  to  effectively  manage  risk,  creating blue oceans has remained wishful thinking that is seen as too risky for  managers  to  pursue  as  strategy.  This  book  provides  practical frameworks and analytics for the systematic pursuit and capture of blue oceans.

The Continuing Creation of Blue Oceans

Although the term blue oceans is new, their existence is not. They are a feature of business life, past and present. Look back one hun- dred years and ask yourself, How many of  today’s industries were then unknown? The answer: Many industries as basic as automo- biles, music recording, aviation, petrochemicals, health care, and

6                                   B L U E   O C E A N   S T R A T E G Y

management  consulting  were  unheard  of  or  had  just  begun  to

emerge  at  that  time.  Now  turn  the  clock  back  only  thirty  years. Again, a plethora of multibillion-dollar industries jumps out—mu- tual funds, cell phones, gas-fired electricity plants, biotechnology, discount  retail,  express  package  delivery,  minivans,  snowboards, coffee bars, and home videos, to name a few. Just three decades ago, none of these industries existed in a meaningful way.

Now put the clock forward twenty years—or perhaps fifty years— and  ask  yourself  how  many  now  unknown  industries  will  likely exist then. If history is any predictor of the future, again the answer

is many of them.

The  reality  is  that  industries  never  stand  still.  They  continu- ously  evolve.  Operations  improve,  markets  expand,  and  players come and go. History teaches us that we have a hugely underesti- mated  capacity  to  create  new  industries  and  re-create  existing ones.  In  fact,  the  half-century-old  Standard  Industrial  Classifica- tion (SIC) system published by the U.S. Census was replaced in 1997 by  the  North  America  Industry  Classification  Standard  (NAICS) system. The new system expanded the ten SIC industry sectors into twenty sectors to reflect the emerging realities of new industry ter- ritories.5  The services sector under the old system, for example, is now  expanded  into  seven  business  sectors  ranging  from  informa- tion to health care and social assistance.6  Given that these systems are  designed  for  standardization  and  continuity,  such  a  replace- ment shows how significant the expansion of blue oceans has been. Yet the overriding focus of  strategic thinking has been on com- petition-based red ocean strategies. Part of the explanation for this

is that corporate strategy is heavily influenced by its roots in mili- tary strategy. The very language of  strategy is deeply imbued with military references—chief  executive “officers” in “headquarters,”

“troops” on the “front lines.” Described this way, strategy is about confronting  an  opponent  and  fighting  over  a  given  piece  of  land that  is  both  limited  and  constant.7  Unlike  war,  however,  the  his- tory of  industry shows us that the market universe has never been constant; rather, blue oceans have continuously been created over

Creating Blue Oceans                                  7

time.  To  focus  on  the  red  ocean  is  therefore  to  accept  the  key

constraining factors of  war—limited terrain and the need to beat an enemy to succeed—and to deny the distinctive strength of  the business world: the capacity to create new market space that is un- contested.

The Impact of Creating Blue Oceans

We set out to quantify the impact of creating blue oceans on a com- pany’s growth in both revenues and profits in a study of  the busi- ness launches of  108 companies (see figure 1-1). We found that 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. Given that business launches included the total investments made for creating red and blue oceans (regardless of their subsequent revenue and profit con- sequences, including failures), the performance benefits of  creating

FIGURE  1-1

The Profit and Growth Consequences of Creating Blue Oceans

Business Launch

Revenue Impact

Profit Impact

86%           14%

62%                           38%

39%                                                      61%

Launches within red oceans                                     Launches for creating blue oceans

8                                   B L U E   O C E A N   S T R A T E G Y

blue waters are evident. Although we don’t have data on the hit rate

of success of red and blue ocean initiatives, the global performance differences between them are marked.

The Rising Imperative of Creating Blue Oceans

There are several driving forces behind a rising imperative to create blue oceans. Accelerated technological advances have substantially improved industrial productivity and have allowed suppliers to pro- duce an unprecedented array of  products and services. The result

is  that  in  increasing  numbers  of  industries,  supply  exceeds  de- mand.8  The  trend  toward  globalization  compounds  the  situation. As trade barriers between nations and regions are dismantled and as information on products and prices becomes instantly and glob- ally available, niche markets and havens for monopoly continue to disappear.9  While supply is on the rise as global competition inten- sifies, there is no clear evidence of  an increase in demand world- wide,  and  statistics  even  point  to  declining  populations  in  many developed markets.10

The  result  has  been  accelerated  commoditization  of  products and services, increasing price wars, and shrinking profit margins. Recent  industrywide  studies  on  major  American  brands  confirm this trend.11  They reveal that for major product and service cate- gories, brands are generally becoming more similar, and as they are becoming more similar people increasingly select based on price.12

People no longer insist, as in the past, that their laundry detergent be Tide. Nor will they necessarily stick to Colgate when Crest is on sale, and vice versa. In overcrowded industries, differentiating brands becomes harder in both economic upturns and downturns.

All this suggests that the business environment in which most strategy  and  management  approaches  of  the  twentieth  century evolved is increasingly disappearing. As red oceans become increas- ingly bloody, management will need to be more concerned with blue oceans than the current cohort of managers is accustomed to.

Creating Blue Oceans                                  9

From Company and Industry to Strategic Move

How can a company break out of  the red ocean of  bloody competi- tion?  How  can  it  create  a  blue  ocean?  Is  there  a  systematic  ap- proach to achieve this and thereby sustain high performance?

In search of  an answer, our initial step was to define the basic unit of  analysis for our research. To understand the roots of  high performance, the business literature typically uses the company as the basic unit of  analysis. People have marveled at how companies attain strong, profitable growth with a distinguished set of  strate- gic, operational, and organizational characteristics. Our question, however,  was  this:  Are  there  lasting  “excellent”  or  “visionary” companies  that  continuously  outperform  the  market  and  repeat- edly create blue oceans?

Consider, for example, In Search of  Excellence and Built to Last.13

The bestselling book In Search of  Excellence was published twenty years ago. Yet within two years of  its publication a number of  the companies surveyed began to slip into oblivion: Atari, Chesebrough- Pond’s,  Data  General,  Fluor,  National  Semiconductor.  As  docu- mented in Managing on the Edge, two-thirds of the identified model firms in the book had fallen from their perches as industry leaders within five years of its publication.14

The book Built to Last continued in the same footsteps. It sought

out the “successful habits of visionary companies” that had a long- running track record of superior performance. To avoid the pitfalls of  In Search of  Excellence, however, the survey period of  Built to Last was expanded to the entire life span of the companies while its analysis  was  limited  to  firms  more  than  forty  years  old.  Built  to Last also became a bestseller.

But again, upon closer examination, deficiencies in some of  the visionary companies spotlighted in Built to Last have come to light. As illustrated in the recent book Creative Destruction, much of the success attributed to some of  the model companies in Built to Last was  the  result  of  industry  sector  performance  rather  than  the

10                                 B L U E   O C E A N   S T R A T E G Y

companies  themselves.15  For  example,  Hewlett-Packard  (HP)  met

the criteria of  Built to Last by outperforming the market over the long term. In reality, while HP outperformed the market, so did the entire computer-hardware industry. What’s more, HP did not even outperform the competition within the industry. Through this and other examples, Creative Destruction questioned whether “visionary” companies that continuously outperform the market have ever ex- isted. And we all have seen the stagnating or declining performance of the Japanese companies that were celebrated as “revolutionary” strategists in their heyday of the late 1970s and early 1980s.

If  there is no perpetually high-performing company and if  the same company can be brilliant at one moment and wrongheaded at another, it appears that the company is not the appropriate unit of analysis in exploring the roots of high performance and blue oceans. As discussed earlier, history also shows that industries are con- stantly  being  created  and  expanded  over  time  and  that  industry conditions  and  boundaries  are  not  given;  individual  actors  can shape them. Companies need not compete head-on in a given indus- try space; Cirque du Soleil created a new market space in the enter- tainment sector, generating strong, profitable growth as a result. It appears, then, that neither the company nor the industry is the best

unit of analysis in studying the roots of profitable growth. Consistent  with  this  observation,  our  study  shows  that  the

strategic move, and not the company or the industry, is the right unit of analysis for explaining the creation of blue oceans and sus- tained high performance. A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering. Compaq, for example, was acquired by Hewlett- Packard in 2001 and ceased to be an independent company. As a re- sult, many people might judge the company as unsuccessful. This does not, however, invalidate the blue ocean strategic moves that Compaq  made  in  creating  the  server  industry.  These  strategic moves not only were a part of the company’s powerful comeback in the mid-1990s but also unlocked a new multibillion-dollar market space in computing.

Creating Blue Oceans                                11

Appendix A, “A Sketch of  the Historical Pattern of  Blue Ocean

Creation,” provides a snapshot overview of the history of three rep- resentative U.S. industries drawn from our database: the auto in- dustry—how we get to work; the computer industry—what we use at work; and the cinema industry—where we go after work for en- joyment.  As  shown  in  appendix  A,  no  perpetually  excellent  com- pany or industry is found. But a striking commonality appears to exist across strategic moves that have created blue oceans and have led to new trajectories of strong, profitable growth.

The strategic moves we discuss—moves that have delivered prod- ucts and services that opened and captured new market space, with

a  significant  leap  in  demand—contain  great  stories  of  profitable growth as well as thought-provoking tales of  missed opportunities by companies stuck in red oceans. We built our study around these strategic moves to understand the pattern by which blue oceans are created and high performance achieved. We studied more than one hundred fifty strategic moves made from 1880 to 2000 in more than thirty  industries,  and  we  closely  examined  the  relevant  business players in each of  these events. Industries ranged from hotels, the cinema, retail, airlines, energy, computers, broadcasting, and con- struction to automobiles and steel. We analyzed not only winning business  players  who  created  blue  oceans  but  also  their  less  suc- cessful competitors.

Both within a given strategic move and across strategic moves, we  searched  for  convergence  among  the  group  that  created  blue oceans and within less successful players caught in the red ocean. We  also  searched  for  divergence  across  these  two  groups.  In  so doing, we tried to discover the common factors leading to the cre- ation of  blue oceans and the key differences separating those win- ners from the mere survivors and the losers adrift in the red ocean. Our analysis of more than thirty industries confirms that neither industry nor organizational characteristics explain the distinction between the two groups. In assessing industry, organizational, and strategic variables we found that the creation and capturing of blue oceans were achieved by small and large companies, by young and

12                                 B L U E   O C E A N   S T R A T E G Y

old managers, by companies in attractive and unattractive indus-

tries, by new entrants and established incumbents, by private and public companies, by companies in low- and high-tech industries, and by companies of diverse national origins.

Our analysis failed to find any perpetually excellent company or industry. What we did find behind the seemingly idiosyncratic suc- cess stories, however, was a consistent and common pattern across strategic moves for creating and capturing blue oceans. Whether it was Ford in 1908 with the Model T; GM in 1924 with cars styled to appeal to the emotions; CNN in 1980 with real-time news 24/7; or Compaq,  Starbucks,  Southwest  Airlines,  or  Cirque  du  Soleil—or, for that matter, any of the other blue ocean moves in our study—the approach to strategy in creating blue oceans was consistent across time regardless of  industry. Our research also reached out to em- brace famous strategic moves in public sector turnarounds. Here we found a strikingly similar pattern.

Value Innovation: The Cornerstone of Blue Ocean Strategy

What consistently separated winners from losers in creating blue oceans  was  their  approach  to  strategy.  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.16  The creators of  blue oceans, surprisingly, didn’t use the competition as their benchmark.17  Instead, they followed a different strategic logic that we call value innovation. Value inno- vation is the cornerstone of blue ocean strategy. We call it value in- novation because instead of  focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.

Value  innovation  places  equal  emphasis  on  value  and  innova- tion. Value without innovation tends to focus on value creation on

Creating Blue Oceans                                13

an incremental scale, something that improves value but is not suf-

ficient to make you stand out in the marketplace.18 Innovation with- out  value  tends  to  be  technology-driven,  market  pioneering,  or futuristic, often shooting beyond what buyers are ready to accept and pay for.19  In this sense, it is important to distinguish between value innovation as opposed to technology innovation and market pioneering. Our study shows that what separates winners from los- ers in creating blue oceans is neither bleeding-edge technology nor

“timing for market entry.” Sometimes these exist; more often, how- ever,  they  do  not.  Value  innovation  occurs  only  when  companies align innovation with utility, price, and cost positions. If  they fail to anchor innovation with value in this way, technology innovators and market pioneers often lay the eggs that other companies hatch. Value innovation 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  strat- egy:  the  value-cost  trade-off.20   It  is  conventionally  believed  that companies can either create greater value to 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.21  In contrast, those that seek to create blue oceans pursue differentia-

tion and low cost simultaneously.

Let’s return to the example of  Cirque du Soleil. Pursuing differ- entiation and low cost simultaneously lies at the heart of the enter- tainment  experience  it  created.  At  the  time  of  its  debut,  other circuses  focused  on  benchmarking  one  another  and  maximizing their share of  already shrinking demand by tweaking traditional circus acts. This included trying to secure more famous clowns and lion tamers, a strategy that raised circuses’ cost structure without substantially altering the circus experience. The result was rising costs without rising revenues, and a downward spiral of overall cir- cus demand.

These  efforts  were  made  irrelevant  when  Cirque  du  Soleil  ap- peared. Neither an ordinary circus nor a classic theater production,

14                                 B L U E   O C E A N   S T R A T E G Y

Cirque du Soleil paid no heed to what the competition did. Instead

of  following the conventional logic of  outpacing the competition by offering a better solution to the given problem—creating a cir- cus with even greater fun and thrills—it sought to offer people the fun and thrill of  the circus and the intellectual sophistication and artistic richness of the theater at the same time; hence, it redefined the problem itself.22  By breaking the market boundaries of  theater and circus, Cirque du Soleil gained a new understanding not only of circus customers but also of circus noncustomers: adult theater customers.

This led to a whole new circus concept that broke the value-cost trade-off  and created a blue ocean of  new market space. Consider the differences. Whereas other circuses focused on offering animal shows, hiring star performers, presenting multiple show arenas in the form of  three rings, and pushing aisle concession sales, Cirque du  Soleil  did  away  with  all  these  factors.  These  factors  had  long been  taken  for  granted  in  the  traditional  circus  industry,  which never questioned their ongoing relevance. However, there was in- creasing public discomfort with the use of  animals. Moreover, ani- mal acts were one of  the most expensive elements, including not only the cost of  the animals but also their training, medical care, housing, insurance, and transportation.

Similarly, while the circus industry focused on featuring stars, in the mind of  the public the so-called stars of  the circus were trivial next to movie stars. Again, they were a high-cost component carry- ing  little  sway  with  spectators.  Gone,  too,  are  three-ring  venues. Not  only  did  this  arrangement  create  angst  among  spectators  as they rapidly switched their gaze from one ring to the other, but it also increased the number of performers needed, with obvious cost implications. And although aisle concession sales appeared to be a good way to generate revenue, in practice the high prices discour- aged  audiences  from  making  purchases  and  made  them  feel  they were being taken for a ride.

The lasting allure of  the traditional circus came down to only three  key  factors:  the  tent,  the  clowns,  and  the  classic  acrobatic

Creating Blue Oceans                                15

acts such as the wheelman and short stunts. So Cirque du Soleil

kept the clowns but shifted their humor from slapstick to a more en- chanting,  sophisticated  style.  It  glamorized  the  tent,  an  element that,  ironically,  many  circuses  had  begun  to  forfeit  in  favor  of rented  venues.  Seeing  that  this  unique  venue  symbolically  cap- tured the magic of the circus, Cirque du Soleil designed the classic symbol of  the circus with a glorious external finish and a higher level of comfort, making its tents reminiscent of the grand epic cir- cuses.  Gone  were  the  sawdust  and  hard  benches.  Acrobats  and other thrilling acts are retained, but their roles were reduced and made more elegant by the addition of artistic flair and intellectual wonder to the acts.

By  looking  across  the  market  boundary  of  theater,  Cirque  du Soleil also offered new noncircus factors, such as a story line and, with it, intellectual richness, artistic music and dance, and multiple productions. These factors, entirely new creations for the circus in- dustry, are drawn from the alternative live entertainment industry of theater.

Unlike  traditional  circus  shows  having  a  series  of  unrelated acts, for example, each Cirque du Soleil creation has a theme and story line, somewhat resembling a theater performance. Although the theme is vague (and intentionally so), it brings harmony and an intellectual  element  to  the  show—without  limiting  the  potential for acts. Le Cirque also borrows ideas from Broadway shows. For example, it features multiple productions rather than the traditional

“one for all” shows. As with Broadway shows, too, each Cirque du Soleil show has an original score and assorted music, which drives the visual performance, lighting, and timing of the acts rather than the  other  way  around.  The  shows  feature  abstract  and  spiritual dance,  an  idea  derived  from  theater  and  ballet.  By  introducing these  new  factors  into  its  offering,  Cirque  du  Soleil  has  created more sophisticated shows.

Moreover, by injecting the concept of  multiple productions and by  giving  people  a  reason  to  come  to  the  circus  more  frequently, Cirque du Soleil has dramatically increased demand.

16                                 B L U E   O C E A N   S T R A T E G Y

In short, Cirque du Soleil offers the best of both circus and theater,

and it has eliminated or reduced everything else. By offering un- precedented utility, Cirque du Soleil has created a blue ocean and has invented a new form of live entertainment, one that is markedly different from both traditional circus and theater. At the same time, by eliminating many of the most costly elements of the circus, it has dramatically reduced its cost structure, achieving both differentia- tion and low cost. Le Cirque strategically priced its tickets against those of the theater, lifting the price point of the circus industry by several multiples while still pricing its productions to capture the mass of adult customers, who were used to theater prices.

Figure 1-2 depicts the differentiation–low cost dynamics under- pinning value innovation.

FIGURE  1-2

Value Innovation: The Cornerstone of Blue Ocean Strategy

Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates.

Costs

Value

Innovation

Buyer Value

The Simultaneous Pursuit of Differentiation and Low Cost

Creating Blue Oceans                                17

As shown in figure 1-2, the creation of blue oceans is about driv-

ing costs down while simultaneously driving value up for buyers. This is how a leap in value for both the company and its buyers is achieved.  Because  buyer  value  comes  from  the  utility  and  price that the company offers to buyers and because the value to the com- pany is generated from price and its cost structure, value innova- tion is achieved only when the whole system of the company’s utility, price, and cost activities is properly aligned. It is this whole-system approach  that  makes  the  creation  of  blue  oceans  a  sustainable strategy. Blue ocean strategy integrates the range of  a firm’s func- tional and operational activities.

In contrast, innovations such as production innovations can be achieved at the subsystem level without impacting the company’s overall strategy. An innovation in the production process, for exam- ple, 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.

In  this  sense,  value  innovation  is  more  than  innovation.  It  is about strategy that embraces the entire system of  a company’s ac- tivities.23  Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and them- selves. Absent such an integral approach, innovation will remain divided  from  the  core  of  strategy.24   Figure  1-3  outlines  the  key defining features of red and blue ocean strategies.

Competition-based  red  ocean  strategy  assumes  that  an  indus- try’s structural conditions are given and that firms are forced to compete within them, an assumption based on what the academics call the structuralist view, or environmental determinism.25  In con- trast, value innovation is based on the view that market boundaries and  industry  structure  are  not  given  and  can  be  reconstructed by  the  actions  and  beliefs  of  industry  players.  We  call  this  the

18                                 B L U E   O C E A N   S T R A T E G Y

FIGURE  1-3

Red Ocean Versus Blue Ocean Strategy

Red Ocean Strategy

Blue Ocean Strategy

Compete in existing market space.

Create uncontested market space.

Beat the competition.

Make the competition irrelevant.

Exploit existing demand.

Create and capture new demand.

Make the value-cost trade-off.

Break the value-cost trade-off.

Align the whole system of a firm’s activities

with its strategic choice of differentiation

or low cost.

Align the whole system of a firm’s

activities in pursuit of differentiation

and low cost.

reconstructionist  view.  In  the  red  ocean,  differentiation  costs  be-

cause  firms  compete  with  the  same  best-practice  rule.  Here,  the strategic  choices  for  firms  are  to  pursue  either  differentiation  or low cost. In the reconstructionist world, however, the strategic aim

is to create new best-practice rules by breaking the existing value- cost trade-off  and thereby creating a blue ocean. (For more discus- sions  on  this,  see  appendix  B,  “Value  Innovation:  A  Reconstruc- tionist View of Strategy.”)

Cirque du Soleil broke the best practice rule of the circus indus- try, achieving both differentiation and low cost by reconstructing elements across existing industry boundaries. Is Cirque du Soleil, then,  really  a  circus,  with  all  that  it  eliminated,  reduced,  raised, and created? Or is it theater? And if it is theater, then what genre—

a Broadway show, an opera, a ballet? It is not clear. Cirque du Soleil reconstructed elements across these alternatives, and, in the end, it

is simultaneously a little of all of them and none of any of them in their entirety. It created a blue ocean of  new, uncontested market space that as of yet has no agreed-on industry name.

Creating Blue Oceans                                19

Formulating and Executing

Blue Ocean Strategy

Although  economic  conditions  indicate  the  rising  imperative  of blue oceans, there is a general belief  that the odds of  success are lower when companies venture beyond existing industry space.2^6 The issue is how to succeed in blue oceans. How can companies system- atically maximize the opportunities while simultaneously minimiz- ing the risks of  formulating and executing blue ocean strategy? If you lack an understanding of the opportunity-maximizing and risk- minimizing principles driving the creation and capture of blue oceans, the odds will be lengthened against your blue ocean initiative.

Of course, there is no such thing as a riskless strategy.27 Strategy

will always involve both opportunity and risk, be it a red ocean or a blue  ocean  initiative.  But  at  present  the  playing  field  is  dramati- cally  unbalanced  in  favor  of  tools  and  analytical  frameworks  to succeed in red oceans. As long as this remains true, red oceans will continue to dominate companies’ strategic agenda even as the busi- ness imperative for creating blue oceans takes on new urgency. Per- haps  this  explains  why,  despite  prior  calls  for  companies  to  go beyond existing industry space, companies have yet to act seriously on these recommendations.

This book seeks to address this imbalance by laying out a method- ology to support our thesis. Here we present the principles and ana- lytical frameworks to succeed in blue oceans.

Chapter 2 introduces the analytical tools and frameworks that are  essential  for  creating  and  capturing  blue  oceans.  Although supplementary  tools  are  introduced  in  other  chapters  as  needed, these  basic  analytics  are  used  throughout  the  book.  Companies can  make  proactive  changes  in  industry  or  market  fundamentals through the purposeful application of  these blue ocean tools and frameworks, which are grounded in the issues of  both opportunity and risk. Subsequent chapters introduce the principles that drive

20                                 B L U E   O C E A N   S T R A T E G Y

the successful formulation and implementation of blue ocean strat-

egy and explain how they, along with the analytics, are applied in action.

There are four guiding principles for the successful formulation of blue ocean strategy. Chapters 3 to 6 address these in turn. Chap- ter 3 identifies the paths by which you can systematically create un- contested  market  space  across  diverse  industry  domains,  hence attenuating search risk. It teaches you how to make the competition irrelevant  by  looking  across  the  six  conventional  boundaries  of competition to open up commercially important blue oceans. The six  paths  focus  on  looking  across  alternative  industries,  across strategic groups, across buyer groups, across complementary prod- uct and service offerings, across the functional-emotional orienta- tion of an industry, and even across time.

Chapter 4 shows how to design a company’s strategic planning process to go beyond incremental improvements to create value in- novations. It presents an alternative to the existing strategic plan- ning  process,  which  is  often  criticized  as  a  number-crunching exercise that keeps companies locked into making incremental im- provements. This principle tackles planning risk. Using a visualiz- ing approach that drives you to focus on the big picture rather than to  be  submerged  in  numbers  and  jargon,  this  chapter  proposes  a four-step planning process whereby you can build a strategy that creates and captures blue ocean opportunities.

Chapter 5 shows how to maximize the size of  a blue ocean. To create the greatest market of  new demand, this chapter challenges the conventional practice of  aiming for finer segmentation to bet- ter meet existing customer preferences. This practice often results in  increasingly  small  target  markets.  Instead,  this  chapter  shows you how to aggregate demand, not by focusing on the differences that separate customers but by building on the powerful commonal- ities across noncustomers to maximize the size of  the blue ocean being created and new demand being unlocked, hence minimizing scale risk.

Creating Blue Oceans                                21

Chapter 6 lays out the design of  a strategy that allows you not

only to provide a leap in value to the mass of  buyers but also to build a viable business model to produce and maintain profitable growth for itself. It shows you how to ensure that your company builds a business model that profits from the blue ocean it is creat- ing. It addresses business model risk. The chapter articulates the sequence  in  which  you  should  create  a  strategy  to  ensure  that both you and your customers win as you create new business ter- rain.  Such  a  strategy  follows  the  sequence  of  utility,  price,  cost, and adoption.

Chapters 7 and 8 turn to the principles that drive effective execu- tion of  blue ocean strategy. Specifically, chapter 7 introduces what we  call  tipping  point  leadership.  Tipping  point  leadership  shows managers how to mobilize an organization to overcome the key or- ganizational hurdles that block the implementation of a blue ocean strategy. It deals with organizational risk. It lays out how leaders and managers alike can surmount the cognitive, resource, motiva- tional, and political hurdles in spite of  limited time and resources in executing blue ocean strategy.

Chapter 8 argues for the integration of  execution into strategy making, thus motivating people to act on and execute a blue ocean strategy in a sustained way deep in an organization. This chapter

FIGURE  1-4

The Six Principles of Blue Ocean Strategy

Formulation principles                                           Risk factor each principle attenuates

Reconstruct market boundaries                                 ¯ Search risk Focus on the big picture, not the numbers   ¯ Planning risk Reach beyond existing demand                                                      ¯ Scale risk

Get the strategic sequence right                                ¯ Business model risk

Execution principles                                              Risk factor each principle attenuates

Overcome key organizational hurdles                         ¯ Organizational risk

Build execution into strategy                                     ¯ Management risk

22                                 B L U E   O C E A N   S T R A T E G Y

introduces what we call fair process. Because a blue ocean strategy

perforce represents a departure from the status quo, this chapter shows how fair process facilitates both strategy making and execu- tion by mobilizing people for the voluntary cooperation needed to execute blue ocean strategy. It deals with management risk associ- ated with people’s attitudes and behaviors.

Figure  1-4  highlights  the  six  principles  driving  the  successful formulation and execution of blue ocean strategy and the risks that these principles attenuate.

Chapter 9 discusses the dynamic aspects of blue ocean strategy—

the issues of sustainability and renewal.

Let’s now move on to chapter 2, where we lay out the basic ana- lytical tools and frameworks that will be used throughout this book in the formulation and execution of blue ocean strategy.

C H A P T E R   2

Analytical Tools and Frameworks

E   HAVE   S P E NT   TH E   PAST   D E CAD E  developing  a set of analytical tools and frameworks in an attempt

W

to make the formulation and execution of  blue ocean strategy as systematic and actionable as competing in the red waters of known market  space.  These  analytics  fill  a  central  void  in  the  field  of strategy,  which  has  developed  an  impressive  array  of  tools  and frameworks  to  compete  in  red  oceans,  such  as  the  five  forces  for analyzing  existing  industry  conditions  and  three  generic  strate- gies, but has remained virtually silent on practical tools to excel in blue oceans. Instead, executives have received calls to be brave and entrepreneurial, to learn from failure, and to seek out revolution- aries.  Although  thought-provoking,  these  are  not  substitutes  for analytics to navigate successfully in blue waters. In the absence of analytics, executives cannot be expected to act on the call to break out of existing competition. Effective blue ocean strategy should be about risk minimization and not risk taking.

24                                 B L U E   O C E A N   S T R A T E G Y

To  address  this  imbalance,  we  studied  companies  around  the

world and developed practical methodologies in the quest of  blue oceans. We then applied and tested these tools and frameworks in action by working with companies in their pursuit of  blue oceans, enriching and refining them in the process. The tools and frame- works presented here are used throughout this book as we discuss the six principles of  formulating and executing blue ocean strat- egy.  As  a  brief  introduction  to  these  tools  and  frameworks,  let’s look  at  one  industry—the  U.S.  wine  industry—to  see  how  these tools can be applied in practice in the creation of blue oceans.

The United States has the third largest aggregate consumption of wine worldwide. Yet the $20 billion industry is intensely compet- itive.  California  wines  dominate  the  domestic  market,  capturing two-thirds of all U.S. wine sales. These wines compete head-to-head with imported wines from France, Italy, and Spain and New World wines  from  countries  such  as  Chile,  Australia,  and  Argentina, which have increasingly targeted the U.S. market. With the supply of wines increasing from Oregon, Washington, and New York state and with newly mature vineyard plantings in California, the number of  wines has exploded. Yet the U.S. consumer base has essentially remained stagnant. The United States remains stuck at thirty-first place in world per capita wine consumption.

The intense competition has fueled ongoing industry consolida- tion. The top eight companies produce more than 75 percent of the wine in the United States, and the estimated one thousand six hun- dred other wineries produce the remaining 25 percent. The domi- nance of  a few key players allows them to leverage distributors to gain shelf space and put millions of dollars into above-the-line mar- keting budgets. There is a simultaneous consolidation of  retailers and  distributors  across  the  United  States,  something  that  raises their  bargaining  power  against  the  plethora  of  wine  makers.  Ti- tanic battles are being fought for retail and distribution space. It is no surprise that weak, poorly run companies are increasingly being swept aside. Downward pressure on wine prices has set in.

Analytical Tools and Frameworks                        25

In  short,  the  U.S.  wine  industry  faces  intense  competition,

mounting price pressure, increasing bargaining power on the part of  retail and distribution channels, and flat demand despite over- whelming  choice.  Following  conventional  strategic  thinking,  the industry is hardly attractive. For strategists, the critical question is, How do you break out of this red ocean of bloody competition to make the competition irrelevant? How do you open up and capture

a blue ocean of uncontested market space?

To  address  these  questions,  we  turn  to  the  strategy  canvas,  an analytic framework that is central to value innovation and the cre- ation of blue oceans.

The Strategy Canvas

The strategy canvas is both a diagnostic and an action framework for  building  a  compelling  blue  ocean  strategy.  It  serves  two  pur- poses. First, it captures the current state of play in the known mar- ket space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the  existing  competitive  offerings  on  the  market.  Figure  2-1  cap- tures all this information in graphic form. The horizontal axis cap- tures the range of  factors the industry competes on and invests in. In the case of  the U.S. wine industry, there are seven principal

factors:

•   Price per bottle of wine

•   An elite, refined image in packaging, including labels an- nouncing the wine medals won and the use of esoteric enologi- cal terminology to stress the art and science of wine making

•   Above-the-line marketing to raise consumer awareness in a crowded market and to encourage distributors and retailers to give prominence to a particular wine house

26                                 B L U E   O C E A N   S T R A T E G Y

FIGURE  2-1

The Strategy Canvas of the U.S. Wine Industry in the Late 1990s

High

Premium Wines

Budget Wines

Low

Price

Above-the-line                     Vineyard prestige                          Wine Use of enological     marketing         Aging                       and legacy                                                  Wine        range terminology and                  quality                                    complexity

distinctions in wine communication

•   Aging quality of wine

•   The prestige of a wine’s vineyard and its legacy (hence the appellations of estates and chateaux and references to the historic age of the establishment)

•   The complexity and sophistication of a wine’s taste, includ- ing such things as tannins and oak

•   A diverse range of wines to cover all varieties of grapes and consumer preferences from Chardonnay to Merlot, and so on

These factors are viewed as key to the promotion of  wine as a unique beverage for the informed wine drinker, worthy of  special occasions.

That is the underlying structure of  the U.S. wine industry from the market perspective. Now let’s turn to the vertical axis of  the

Analytical Tools and Frameworks                        27

strategy canvas, which captures the offering level that buyers re-

ceive across all these key competing factors. A high score means that a company offers buyers more, and hence invests more, in that factor. In the case of  price, a higher score indicates a higher price. We can now plot the current offering of  wineries across all these factors to understand wineries’ strategic profiles, or value curves. The value curve, the basic component of  the strategy canvas, is a graphic  depiction  of  a  company’s  relative  performance  across  its industry’s factors of competition.

Figure  2-1  shows  that,  although  more  than  one  thousand  six hundred  wineries  participate  in  the  U.S.  wine  industry,  from  the buyer’s point of view there is enormous convergence in their value curves. Despite the plethora of  competitors, when premium brand wines are plotted on the strategy canvas we discover that from the market point of view all of them essentially have the same strategic profile. They offer a high price and present a high level of  offering across all the key competing factors. Their strategic profile follows

a  classic  differentiation  strategy.  From  the  market  point  of  view, however, they are all different in the same way. On the other hand, budget wines also have the same essential strategic profile. Their price is low, as is their offering across all the key competing factors. These  are  classic  low-cost  players.  Moreover,  the  value  curves  of premium and low-cost wines share the same basic shape. The two strategic groups’ strategies march in lockstep, but at different alti- tudes of offering level.

To set a company on a strong, profitable growth trajectory in the face of these industry conditions, it won’t work to benchmark com- petitors and try to outcompete them by offering a little more for a little less. Such a strategy may nudge sales up but will hardly drive

a company to open up uncontested market space. Nor is conducting extensive customer research the path to blue oceans. Our research found that customers can scarcely imagine how to create uncontested market space. Their insight also tends toward the familiar “offer me more for less.” And what customers typically want “more” of are those product and service features that the industry currently offers.

28                                 B L U E   O C E A N   S T R A T E G Y

To fundamentally shift the strategy canvas of  an industry, you

must begin by reorienting your strategic focus from competitors to

alternatives, and from customers to noncustomers of  the industry.1

To pursue both value and cost, you should resist the old logic of benchmarking  competitors  in  the  existing  field  and  choosing  be- tween differentiation and cost leadership. As you shift your strategic focus from current competition to alternatives and noncustomers, you gain insight into how to redefine the problem the industry fo- cuses on and thereby reconstruct buyer value elements that reside across industry boundaries. Conventional strategic logic, by con- trast, drives you to offer better solutions than your rivals to exist- ing problems defined by your industry.

In the case of the U.S. wine industry, conventional wisdom caused wineries to focus on overdelivering on prestige and the quality of wine at its price point. Overdelivery meant adding complexity to the wine based on taste profiles shared by wine makers and rein- forced by the wine show judging system. Wine makers, show judges, and knowledgeable drinkers concur that complexity—layered per- sonality and characteristics that reflect the uniqueness of the soil, season,  and  wine  maker’s  skill  in  tannins,  oak,  and  aging  pro- cesses—equates with quality.

By looking across alternatives, however, Casella Wines, an Aus- tralian winery, redefined the problem of the wine industry to a new one: how to make a fun and nontraditional wine that’s easy to drink for  everyone.  Why?  In  looking  at  the  demand  side  of  the  alter- natives  of  beer,  spirits,  and  ready-to-drink  cocktails,  which  cap- tured  three  times  as  many  U.S.  consumer  alcohol  sales  as  wine, Casella Wines found that the mass of American adults saw wine as

a turnoff. It was intimidating and pretentious, and the complexity of wine’s taste created flavor challenges for the average person even though it was the basis on which the industry fought to excel. With this insight, Casella Wines was ready to explore how to redraw the strategic profile of the U.S. wine industry to create a blue ocean. To achieve this, it turned to the second basic analytic underlying blue oceans: the four actions framework.

Analytical Tools and Frameworks                        29

The Four Actions Framework

To reconstruct buyer value elements in crafting a new value curve, we have developed the four actions framework. As shown in figure

2-2, to break the trade-off between differentiation and low cost and to create a new value curve, there are four key questions to chal- lenge 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?

FIGURE  2-2

The Four Actions Framework