Blue Ocean Strategy

Leaving Your Competition Far Behind

Blue Ocean Strategy - Leaving Your Competition Far Behind

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Mikhail Dudarev

How did Apple predict that we'd love the iPod so much? After all, we seemed to be happy carrying around our clunky portable CD players – which were so much better than the personal cassette machines they'd replaced! But somehow they knew we wanted a smaller gadget that would hold a thousand songs. And they were right.

Or what about Southwest Airlines? Why did they decide to encourage their cabin crew to be friendly and funny, when other airlines wanted their staff to behave like maître d's in up-market restaurants? Southwest created a whole new type of flying experience, and their customers loved it.

Many organizations work hard at customer research to find out what their target market wants. But the ones that gain more than just a percentage point or two of market share are those that identify wants and needs that we don't even know we have. And, by challenging the assumptions of their industries, they're propelled to greatness. They have no competition, because they actually redefine the benchmarks for their kind of product.

If you look more closely, you'll find that many companies that achieve industry leadership use an approach that's now called "Blue Ocean Strategy". In this article we'll look at what Blue Ocean Strategy is, and look at how you can use it to foster change and innovation.

Blue Ocean Strategy

Blue Ocean Strategy was developed by W Chan Kim and Renée Mauborgne, both of whom are distinguished professors at INSEAD in France. They identified this approach to strategy based on a study of 150 strategic business moves, spanning more than 100 years and thirty industries.

The approach was first published in the Harvard Business Review in October 2004. The following year Kim and Mauborgne published a book entitled "Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant".

When it comes to defining what Blue Ocean Strategy is, it helps to start by picturing a vast ocean. Most businesses are located in what the authors call a red ocean. The red ocean is jam-packed with other businesses, all offering similar products and services. As they each fight to be the best, they stain the waters red with blood, shed through skirmishing at close quarters. Profits shrink and market share declines in red oceans, simply because they're so overcrowded.

Blue oceans are the exact opposite of red oceans. Blue oceans are open and empty, with plenty of space to expand and sail where you want. In blue oceans there is often no competition, or, if there is any, it's effectively irrelevant to you because it can't touch you. Here demand, customers, and growth are yours for the taking. You and your organization stop using the competition as your benchmark, and go your own way.

At heart, Blue Ocean Strategy is about navigating your organization into a blue ocean, where it can achieve rapid growth and dramatically increase profits.

The authors stress that the most important thinking shift to be found in Blue Ocean Strategy is that it defies conventional corporate wisdom about value and cost. Most red ocean companies think that there needs to be a tradeoff: they can either create more value for the customer at greater cost, or they can create less value at lower cost.

Blue ocean companies understand that there doesn't have to be such a tradeoff. They create great value at a lower cost, and it works for both themselves and the customer.

Another important aspect to Blue Ocean Strategy is that it needn't be based on technological innovation. According to the authors' studies, new technology is rarely the key characteristic of blue oceans. More often than not, companies use existing technologies to redesign a product or service or method of delivery, creating a new product or benchmark as a result.

Companies like Cirque de Soleil, CNN, Federal Express, Apple, and Southwest Airlines are all examples of organizations that successfully reached their blue oceans, and consequently achieved 10-15 years of market domination.

Example

Understanding Blue Ocean Strategy is easiest when you look at how an existing company has applied the concept successfully. For this example, let's look at Netflix, the online and rent-by-mail movie rental organization.

Stop and think about how you borrowed movies in the late 1990s. You probably got them from a bricks and mortar store, at a fairly high price. And you had to return them promptly or face outrageously high late fees. This usually meant driving back to the store by 11:00am.

Until 1997, this was simply the way movies were rented. No one questioned it – at least until Netflix appeared.

Netflix's approach was 100 percent consumer-focused, and its business model tore down the existing walls of the industry.

Netflix created its blue ocean by being completely different from its competition:

  • It had no store. Movies were chosen by customers online. This kept costs down for Netflix, and for its consumers.
  • Since movies were mailed out, people no longer had to drive to drop them off.
  • Postage was taken care of by Netflix, getting rid of another source of customer annoyance.
  • Late fees were eliminated. You could keep a movie as long as you wanted.
  • Movies could also be watched online. This eliminated waiting, and added considerable value for customers.
  • Pricing was set using a flat-fee monthly membership structure, instead of on a "per movie" basis. This gave members more value for their money.

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Netflix completely changed the way people rented movies, and changed how movie rental companies delivered those movies. As a result, they had complete control of the online and rent-by-mail market for almost a decade. Competition has now crept in, but Netflix has had such a big head start in the industry and has such a strong brand name that it's going to be hard for the competition to shake them.

It's important to realize that organizations don't have to completely redefine their industry or organization in order for Blue Ocean Strategy to work. Most of the time, blue oceans are created from within existing organizations. It's usually about designing one new product or service and linking it to what buyers really want, even if they don't realize they want it.

Kim and Mauborgne's Blue Ocean Strategy is a specific approach. It shouldn't be confused with the generic term "blue sky thinking", which describes unconstrained brainstorming.

How to Use the Tool

Follow these steps to take a Blue Ocean strategic approach to what you do:

  1. Start by analyzing your organization and industry. Make a list of standards or best practices that everyone follows. What does everyone do in the same way, including your company?
  2. Next, look between the lines. You've written down what's known. Now it's time to go off the map. Which of these industry standards or best practices could your organization skip over or redefine when creating a new service or product?
  3. Question what your customers or target markets are really looking for. Often, blue ocean companies identify wants and needs that customers don't even realize they have. Put yourself in their shoes. What might irritate them about existing products or services that you could address?
  4. Once you've identified a need and/or a product, look at costs. Blue ocean companies succeed because they offer an incredible product with incredible value for everyone, including themselves. What industry standards, that everyone takes for granted, could be eliminated or adapted in order to save on costs?
  5. Now take a look at the hurdles you're likely to come up against in implementing this idea. Make a list of what might stop you, and decide how you'll overcome each problem.

For a detailed methodology for creating and implementing a Blue Ocean Strategy, as well as a list of supporting tools, visit Kim and Mauborgne's own website.

Key Points

Blue Ocean Strategy is a way for your organization to leave the competition behind, and enter a market that's open and undisturbed. Its cornerstone concepts are that companies can offer themselves, and their customers, value while still rising above their competition in a meaningful way.

You can apply Blue Ocean Strategy to your organization by examining standards and steps that are a given in your industry. Look between the lines, and identify what your customers truly want from your company, and what existing problems you can help solve.

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Comments (6)
  • Over a month ago Midgie wrote
    Hi Shanelf,
    Welcome to the Club.

    We are often limited by our own boundaries, or what we perceive to be our boundaries, and do not venture further afield. Yet, those that do take a step into the unknown can certainly reap great rewards and success!

    Hope to see more of you around the Club and if you have any questions, please feel free to either post them for other members to contribute to send me a PM.

    Midgie
  • Over a month ago shanelf wrote
    I always wondered why management literature spoke of the tradeoff concept as though it were written in stone. I also wonder which one of us have tried to explain this tradeoff to our 11-12 year old only to have them stare at us blankly and say, "That's dumb, why cant you have it both ways?"
    In the context of a small business, this may be what sets the entrepreneur apart from the average small business owner. Entrepreneurs dont realize there are "boundaries" and are "disillusioned" in their thinking, making them the next perfect success story.
  • Over a month ago cobberas wrote
    Netflix completely changed the way people rented movies, and changed how movie rental companies delivered those movies. As a result, they had complete control of the online and rent-by-mail market for almost a decade. Competition has now crept in, but Netflix has had such a big head start in the industry and has such a strong brand name that it's going to be hard for the competition to shake them.
    One thing that's always amazed me about the Netflix story is why no-one copied what they did for a whole 10 or so years!! Maybe no-one else realised how successful they were actually being?

    Cheers
    Cos
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