Blue oceans and red oceans
Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne (professors of strategy and management at INSEAD, Fontainebleau, France), appeared in 2005 and has since been published in 42 languages. It ranks high as an important contribution to strategy development.
The authors aver that "to win the future, companies must stop competing with each other. The only way to beat the competition is to strop trying to win the competition." To further quote them (the highlighting is mine):
"In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced, products become commodities and the cutthroat competition turns the red ocean bloody.
Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.
It will always be important to swim successfully in the red ocean by outcompeting rivals. Red oceans will always matter and will always 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. Companies need to go beyond competing. To seize new profit and growth opportunities, they also need to create blue oceans."
Are blue ocean companies new?
No, they are not. The term was created in 2005, but blue ocean companies have always been a part of business life.
Think of the situation 100 years ago: automobiles, music recording, aviation, petrochemicals, health care and management consulting were unheard of, to name a few, were all blue ocean companies.
Think 35 years ago: mutual funds, cellular phones, biotechnology, discount retail, express package delivery, minivans, coffee bars, home videos and more came into being.
Think of the possibilities of the next 10, 20 or more years. Totally new industries and companies will be created.
From company and industry to strategic move
Kim and Maubourgne state that the basic unit of analysis has come to be accepted in the business world to be either a company or its industry. However, why are there no lasting excellent or visionary companies? Why do so many top examples slip into oblivion? Likewise, industries are constantly being created or expanded which means industry boundaries and conditions are not a given; individuals can shape them.
The authors conclude that the "strategic move" (and not the company or industry) is the unit of analysis for the creation of a new blue ocean and sustained high performance.
They define a "strategic move" as "the set of managerial actions and decisions involved in making a major market-creating business offering."
Value innovation (VI)
Kim and Maubourgne, after a decade of research of 150 strategic moves spanning more than 30 industries over 100 years (1880-2000), came to the conclusion: "Companies caught in a 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."
Value innovation, the cornerstone of Blue Ocean Strategy, has as its aim making the opposition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space. Value innovation "is a new way of thinking about executing strategy. It defies one of the most commonly accepted dogmas of competition-based strategy: The value-cost trade-off. It is conventionally believed that companies can either create 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. In contrast, those that seek to create blue oceans pursue differentiation and low cost simultaneously."
Six principles of blue ocean strategy
Maximise opportunities and minimize risk
Formulation principles plus the risk factor which each principle attenuates:
1. Reconstruct market boundaries – Search risk
2. Focus on the big picture, not on numbers – Planning risk
3. Reach beyond existing demand – Scale risk
4. Get the strategic sequence right – Business model risk
Execution principles
5. Overcome key organisational hurdles – Organisational risk
6. Build execution into strategy – Management risk
Developing a blue ocean strategy canvas
The process of developing a strategy canvas is fairly straightforward. However, it is a reiterative process which gains depth through additional reflection, discussion and implementation after a Blue Ocean strategy canvas workshop.
ABPLAN uses the diagrammes which were developed by the authors, but which we have annotated with comprehensive explanations. The creation of a strategy canvas is an intensely practical exercise. I view it as a continuation of the Scenario Conversation and an enrichment of the Balanced Scorecard. I involve my clients deeply in the process of developing a new approach which, if bold and divergent enough, on implementation will set them apart from their (former) competition.
Any company could and should try to develop a Blue Ocean Strategy.
Last modified: 31-01-2012