An ocean away from competition

THINK:ACT
Roland Berger
May, 2005, Vol. 2, p. 50-53

Those who do nothing but trail after their competitors will never discover lucrative new markets. INSEAD professors Renée Mauborgne and W. Chan Kim call on executives to follow a “blue ocean” strategy and seek growth in completely new areas.

THINK:ACT Professor Mauborgne, Professor Kim – most companies work feverishly on increasing their market share and setting themselves apart through price leadership or differentiation from the competition. What is wrong with that?
KIM The fact that doing so causes them to flounder about in markets where prospects for lucrative growth are limited. Technological progress and the demise of trade and information barriers have led to offerings overlapping in many business segments. Products are becoming ever more similar, and brand loyalty and profit margins are shrinking. The typical answer to this is price wars. To escape this vicious cycle, you have to create new markets in which you can make up the rules yourself.

THINK:ACT And how do you envision that working?
MAUBORGNE Our philosophy is illustrated by the image of a red ocean and a blue ocean. Out in the red ocean, companies are trying to outdo their rivals, poach their competitors’ customers, and capture market share. The field in which they operate is limited. In a blue ocean strategy, companies are entering new territory, creating new market space, and generating demand through value innovation. They leap the boundaries of their traditional terrain and thus no longer are subject to the rules of a zero-sum game. The blue ocean is large and offers many attractive opportunities; competition in a traditional sense plays no role there.

THINK:ACT Those are really enchanting conditions for a business to operate in. Could you name a few examples for us?
KIM Think of the Sony Walkman, which in the 1980s revolutionized the way we listen to music – just like Apple Computer’s iPod MP3 player and its iTunes music portal are doing today. Or take the vacuum cleaner designed by British inventor James Dyson, which forgoes the need for vacuum cleaner bags altogether and never loses suction. Or the Swatch watch, the Body Shop chain of cosmetics shops, Starbucks coffee shops, and Dell computers.

THINK:ACT Correct me if I’m wrong, but isn’t Body Shop actually facing a great deal of competitive pressure at the moment?
MAUBORGNE Unfortunately, yes it is. That’s because the company did not recognize the worth of its own strategic move. The Body Shop got big because the chain broke out of a hard-fought industry with completely novel offerings and earned tremendous word-of-mouth buzz. Eventually, the competition followed suit, and that would have been the time to dive into a new blue ocean. Instead, Body Shop fell back into a “blood red” competition for market share, prices, and profit margins. The strategic lesson: As the blue oceans turns red, that is when companies need to reach out to create a new blue ocean.

W. CHAN KIM AND RENÉE MAUBORGNE are among the most well-known guiding intellectual forces in developing and implementing company strategies. As speakers in demand throughout the world, they have appeared with such entrepreneurial figures as Bill Gates, Michael Dell, and Michael Bloomberg and with politicians such as Mikhail Gorbachev. Both are fellows of the Davos World Economic Forum and were selected members of the Thinkers 50, a global list of the most influential economic thinkers. The French economic magazine L’Expansion named the pair of professors the number one gurus of the future. The two strategists’ articles in the Harvard Business Review are global bestsellers, and two of the articles were selected among the best articles the Review ever published. Both of them are founding members of the Value Innovation Network (VIN).

THINK:ACT Are there types of companies, industries, and markets that you think could benefit particularly from a blue ocean strategy?
KIM We hear this question often – partly because many managers cannot imagine that there could be an offerings out there that would blow their market boundaries wide open. Our analysis covering a period in excess of 100 years and more than 30 industries is very clear on this issue, however. This approach can be used by any company, no matter what the industry.

THINK:ACT Why is it, then, that such opportunities are often overlooked?
MAUBORGNE Industries and market boundaries exist primarily in the heads of managers. They must redirect their focus away from benchmarking the competition to breaking out of industry boundaries to leave the competition behind. But the field of strategy has been essentially silent in this regard. Blue ocean strategy seeks to fill this void by providing companies with the practical tools and frameworks they need to successfully create blue oceans in an opportunity-maximizing, risk-minimizing way. One of the most provocative findings of our research is that there are patterns behind the successful creation of blue oceans. Companies can apply these patterns to find market spaces that secure profitable growth.

THINK:ACT What does your analysis have to say about the profitability of these blue oceans?
KIM We have analyzed the introduction of various products from 108 companies. Eighty-six percent of them were minor changes to existing products – a classic red ocean scenario. The remaining 14 percent, in contrast, targeted new markets in the blue ocean, and they produced 38 percent of the revenues and 61 percent of the profits for all business launches.

THINK:ACT How does a company go about implementing a blue ocean strategy?
MAUBORGNE The goal for the firm is to create something that we call a value innovation – a leap in value for buyers and company alike. This comes from the simultaneous pursuit of differentiation and low cost. The following questions are helpful in looking for blue ocean opportunities:
- Which factors should be totally eliminated?
- Which factors should be reduced well below the industry standard?
- Which factors should be raised well beyond the industry standard?
- Which factors should be created that the industry never offered?

THINK:ACT How can you identify a blue ocean?
KIM Our “strategy canvas” has stood the test of time: It depicts an industry’s strategic profile with current and future competitive factors and players. Using this overview it is easy to decide which points the company must focus on in order to find a blue ocean. Three characteristics must be present to implement and communicate a blue ocean strategy: The strategy must be focused, diverge from the competition’s strategic profile, and have a compelling tagline that speaks to the market.

THINK:ACT Do managers only have to think about products, or is it a good idea for them to consider services and delivery as well?
KIM Blue ocean strategy focuses on the entire range of a firm’s activities from product to service delivery. Dell is a good example. The computer manufacturing company did not offer its customers a novel PC; rather, it offered greater flexibility in ordering and configuration, shorter delivery times and – thanks to lower inventory costs – lower prices. The competition has thus far been unable to find an effective response to Dell’s blue ocean strategy in an otherwise red-hot industry.

THINK:ACT How much weight do purely technological innovations have on the path the success in the marketplace?
MAUBORGNE Take a look at Starbucks or Cirque du Soleil – the theater circus that combines acrobatics with theater and musical elements and has done away with the smelly animals and star performers. Our research shows that creating a blue ocean does not rest on technological innovation. It rests on value innovation.

THINK:ACT Does the ideal company operate exclusively in blue oceans?
KIM Certainly not. In order to ensure growth and profitability over the long term, companies should maintain a balance between red and blue oceans. Most companies, however, have no chance of achieving this, as the strategic profile of most of their activities barely stands out from the competition.
MAUBORGNE With companies so focused on outpacing the competition, market share battles, and price competition, the competition ends up setting companies’ strategic agenda. Me-too businesses are the result.

THINK:ACT Breaking new ground has its own risks. What does a company need to equip itself for a blue ocean?
KIM No strategy is risk free. Blue ocean strategy is different in that it explicitly recognizes the key risks in creating blue oceans and tackles these through practical frameworks. This is one reason why the response we’ve received from top managers has been great. They can’t afford to be riverboat gamblers.

THINK:ACT Which obstacles do companies have to surmount within their own organizations?
MAUBORGNE There are four hurdles – cognitive, resource, motivational and political. The degree varies across companies. As one manger complained to us: “At this company you are shot down before you even have a chance to get up.” So dealing with these hurdles is important.

THINK:ACT In a world marked by turbulence, people are seeking security. How can you inspire employees to take part in a new strategy?
KIM You have to motivate your employees anyway, but of course the strategic leap into a blue ocean is greater than with conventional realignments. It is not enough to obligate employees to implement the strategy – it is crucial to win their hearts. They have to internalize the spirit of the new strategy and get into it, which requires them to have sufficient faith in the management’s intentions. Many companies first have to establish a culture of trust. To achieve this, fair process is key.

THINK:ACT Can a blue ocean strategy work without this culture, if need be?
MAUBORGNE Our analysis of failed blue ocean strategies shows that these companies generally did not succeed in winning the faith of their employees. Even the best of strategies can fail when employees aren’t inspired to voluntarily cooperate in their execution. You need to build execution into strategy through the exercise of fair process in the strategy-making process. You don’t get far with the usual incentives.

THINK:ACT What is the role of the CEO? How important are charisma and reputation?
KIM Charisma is not that important. What is crucial is how credibly the CEO communicates a strategy. The chief executive has to inspire people, persuading them with consistency and commitment that the strategy fits in with the company. Taking the fear of change away from people is a key point. People who are afraid of losing their jobs are hardly going to champion change; they are going to oppose it.

THINK:ACT Lucrative new fields draw players like bees to honey. How long can a company exploit a blue ocean in peace?
MAUBORGNE Ten to fifteen years. This is because of the barriers that a blue ocean strategy creates that make it difficult to for the competition to follow suit. Let’s look at Southwest Airlines. When the airline made flying as cheap and flexible as driving, other airlines were not able to change their route planning, marketing, and pricing policies nearly as quickly as they would have liked. We came across very few cases where a blue ocean strategy was successfully imitated in a short timeframe.

THINK:ACT Where are your blue oceans in the science of management?
KIM Renée and I have been working together for 20 years. We are connected by a curiosity about how companies break away from the competition and are able to grow profitably in the long term. Our blue ocean is providing the analytic frameworks and tools to make the creation of blue oceans as systematic and actionable as competing in the red oceans. We wanted to develop a theory that explains what has happened before in the business world and that suggests to companies what they should pay particular attention to in the future. With it, we wanted to close the gap between the theoretical strategy debate and corporate practice.

THINK:ACT And what kind of reaction have you gotten from the real world?
MAUBORGNE Our insights appear to be falling on fertile ground. Companies and organizations around the world have already put our ideas into practice. Ultimately that is what inspires us – the hope that we can help create many blue oceans.

W. Chan Kim is The Boston Consulting Group Bruce D. Henderson Chaired

Professor of International Management and
Professor of Strategy and International Management at INSEAD.

Renée Mauborgne is The INSEAD Distinguished Fellow and

Professor of Strategy and Management at INSEAD.

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