Blue Ocean Strategy

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Blue Ocean Strategy

Image:BOStrategy.jpg First edition cover
Author	W. Chan Kim and Renée Mauborgne
Country	United States
Language	English
Genre(s)	Business Management
Publisher	Harvard Business School Press
Publication date	2005
Media type	Print (Hardback)
Pages	256 pp
ISBN	ISBN 1591396190

Blue Ocean Strategy is a business strategy book that promotes approaches "for making the competition irrelevant."^[1]. The authors, W.Chan Kim and Renée Mauborgne, are professors of Strategy and Management at INSEAD.^[2] A core idea is to create a leap in value for both the company and its buyers by breaking the differentiation/low cost trade-off.

Blue Ocean Strategy is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over 100 years (1880-2000). In addition to case studies, the book offers theoretical approaches to create and capture "blue oceans". Kim and Mauborgne argue that tomorrow’s leading companies will succeed not by battling competitors, but by creating “blue oceans” of uncontested market space ripe for growth.

The best-selling business book sold more than a million copies in its first year of publication and is being published in 39 languages.^[3]

Contents 1 The Concept 2 Blue Ocean Strategy Examples 3 Blue Ocean Strategy vs. Competition Based Strategies 4 Blue Ocean Strategy tools and frameworks 5 Criticisms 6 References 7 External links

[edit] The Concept

Conceptually Blue Ocean Strategy can be traced back to Harvard Business Review's classic article by Kim and Mauborgne entitled "Value Innovation: The Strategic Logic of High Growth"^[4], first published in 1997. The concept was further developed, refined, and presented in six additional HBR articles, before being published in a book in 2005. The name "Blue Ocean Strategy" was introduced in the Harvard Business Review article titled "Blue Ocean Strategy" published in October 2004.^[5]

The metaphor of red and blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans.^[6]

Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. ^[7]

The corner-stone of Blue Ocean Strategy is 'Value Innovation'. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. Value for the buyer comes (utility minus price) by creating an offer that dramatically raises buyer utility at the right price for the mass of the market; value for the company (price minus cost) comes by making a profit itself and by practicing fair process that inspires voluntary cooperation among its employees.^[8]

[edit] Blue Ocean Strategy Examples

Examples documented in the book

Some examples of companies that may have created new market spaces in the opinion of Kim and Mauborgne include ;

• Cirque du Soleil: Blending of opera and ballet with circus format while eliminating star performer and animals;

• Netjets: fractional jet ownership;

• Southwest Airlines: offering flexibility of bus travel at the speed of air travel using secondary airports;

• Curves: redefining market boundaries between health clubs and home exercise programs for women, and;

• Home Depot: offering the prices and range of lumberyard, while offering consumers classes to help them with DIY projects.

The recent application

An example of this strategy is the success of the Nintendo Wii and DS, which Nintendo designed to target audiences not traditionally known to play videogames. By simplifying its interface (through a touchscreen on the DS and motion controls on the Wii) and by marketing software which is designed to complement daily life rather than create escapist experiences(games such as Wii sports, Wii fit, Brain Training) Nintendo has manged to spark greater mainstream appeal than any previous consoles, news stories have detailed its appeal to those who have never played video games before. In addition both the Wii and the DS have faced supply issues throughout their lifetimes, forcing Nintendo to have to ramp up production rates repeatedly to try and keep up with demand for its systems. Whereas the competitors Sony's Playstation and Microsoft's Xbox lose money on every console sold, Nintendo Wii makes profit on each console sold.^{[citation needed]}

[edit] Blue Ocean Strategy vs. Competition Based Strategies

Kim and Mauborgne argue that tradtional competition-based strategies (red ocean strategies) while necessary, are not 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.^[9]

The authors argue that competion based strategies assume that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what academics call the structuralist view, or environmental determinism.^[10] To sustain themselves in the marketplace, practitioners of red ocean strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy. Here, cost and value are seen as trade-offs and a firm chooses a distinctive cost or differentiation position. Because the total profit level of the industry is also determined exogenously by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.

Blue ocean strategy, on the other hand, 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. This is what the authors call “reconstructionist view”. Recognizing that structure and market boundaries exist only in managers’ minds, practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there, largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation—that is, the creation of innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost. As market structure is changed by breaking the value/cost tradeoff, so are the rules of the game. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created. Such a strategy therefore allows firms to largely play a non–zero-sum game, with high payoff possibilities. ^[11]

[edit] Blue Ocean Strategy tools and frameworks

Blue Ocean Strategy has introduced a number of practical tools, methodologies and frameworks to formulate and execute Blue Ocean Strategies, attempting to make creation of blue oceans a systematic, repeatable process. Some of these are listed below;

Essential tools of Blue Ocean Strategy

• The strategy canvas
• The four Actions framework
• Eliminate-Reduce-Raise-Create Grid
• The initial litmus test for BOS: focus, divergence, compelling tagline

Additional tools/methodologies/frameworks for strategy formulation

• The six paths framework
• The sequence of Blue Ocean Strategy
• Buyer Utility map
• Buyer experience cycle
• The profit model of Blue Ocean Strategy
• Price corridor of the mass model
• Four Step Visualizing Strategy Process
• Pioneer-Migrator Settler Map
• Three tiers of noncustomers framework

Frameworks/methodologies applicable to strategy execution

• Tipping Point Leadership approach
• Four Organizational Hurdles framework
• Kingpins approach, Fishbowl management, atomization
• Hot spots, cold spots and consigliere approach
• 3 E principles of Fair Process

[edit] Criticisms

Many of the principles they claim unique to Blue Ocean Strategy had been already proposed by Swedish professors Jonas Ridderstrale and Kjell Nordstrom in their 1999 book "Funky Business". For example, "competing factors" in Blue Ocean Strategy are similar to the definition of "finite and infinite dimensiones" in Funky Business. Just as Blue Ocean Strategy claims that a Red Ocean Strategy does not guarantee success, Funky Business explained that "Competitive Strategy is the route to nowhere". Funky Business argues that firms need to create "Sensational Strategies". Just like Blue Ocean Strategy, a Sensational Strategy is about "playing a different game" according to Ridderstrale and Nordstrom. Ridderstrale and Nordstrom also claim that the aim of companies is to create temporary monopolies. Kim and Mauborgne explain that the aim of companies is to create blue oceans, that will eventually turn red. This is the same idea expressed in the form of an analogy. Ridderstrale and Nordstrom also claimed in 1999 that "in the slow-growth 1990s overcapacity is the norm in most businesses". Kim and Mauborgne claim that blue ocean strategy make sense in a world that supply exceeds demand.

While co-authors, Professor Kim and and Affiliate Professor Mauborgne, propose approaches to finding uncontested market space, at the present there are few if any success stories of companies that applied their theories. This hole in their data persists despite the publication of Value Innovation concepts since 1997. A critical question is whether this book and its related ideas are descriptive rather than prescriptive.^[12] The authors present many examples of successful innovations, and then explain from their Blue Ocean perspective - essentially interpreting success through their lenses.^[13]

This idea was originally proposed by Prof. Charles W. L. Hill from Michigan State University in 1988. Prof. Hill claimed that Porter's model was flawed because differentiation can be a means for firms to achieve low cost. Prof. Hill proposed that a combination of differentiation and low cost may be necessary for firms to achieve a sustainable competitive advantage.

The research process followed by the authors has been criticized on several grounds, some of them below: No control group was used. There is no way to know how many companies exploiting a blue ocean strategy concept failed. The theory therefore does not meet the falsifiability criteria in practice. A deductive process was not followed. The examples in the book are selected to "tell a winning story".

A whole chapter of the book "Tipping Point Leadership" is based on a conclusion stated in the book The Tipping Point that the drop in crime in New York city was caused by a change in policies, actions, and leadership. However, according to the book Freakonomics, it was more likely caused by an increase in abortion rates several years earlier. The methodology of this study was also criticized. Crime rates fell simultaneously in cities other than New York that had not applied what the authors call Tipping Point Leadership.^[14]

Brand and communication are taken for granted and do not represent a key for success. Kim and Maubourgne take the marketing of a value innovation as a given, assuming the marketing success will come as a matter of course. ^[15]

It is argued that rather than a theory, Blue Ocean Strategy is an extremely successful attempt to brand a set of already existing concepts and frameworks with a highly sticky idea. The blue ocean/red ocean analogy is a powerful and memorable metaphor, which is responsible for its popularity. This metaphor can be powerful enough to stimulate people to action. However, the concepts behind the Blue Ocean Strategy (such as the competing factors, the consumer cycle, non-customers, etc.) are not new. Many of these tools are also used by Six Sigma practitioners and proposed by other management gurus.

The book only presents a snaphot overview of 3 industries: automobiles, computers and movie theaters.

[edit] References

[edit] External links

• Blue Ocean Strategy Book's Websiteda:Blue Ocean Strategy

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