‘Create blue oceans to make competition irrelevant’

Every few years a new management concept takes the world by storm.

DNA Money’s Vivek Kaul spoke to W Chan Kim, one of the authors of the book. Kim is the co-director of the Insead Blue Ocean Strategy Institute and The Boston Consulting Group Bruce D Henderson Chair Professor of Strategy and International Management at Insead, France, the world’s second largest business school. Excerpts:

What is the blue ocean strategy?
Blue ocean strategy is about creating and capturing uncontested market space, thereby making competition irrelevant. In more specific terms blue ocean strategy is about a whole system alignment of the value proposition (utility minus price) by creating an offer that dramatically raises buyer utility at the right price for the mass of the market; profit proposition (price minus cost) by creating a leap in value for the company itself by making a tidy profit; and people proposition by overcoming key organisational hurdles and building execution into strategy formulation.

As for defining characteristics, a true blue ocean strategy must have three key components in order to implement and communicate your strategic move: the strategy must be focused, diverge from the competition’s strategic profile, and have a compelling tagline that speaks to the market.

For example, Southwest Airlines created a blue ocean by breaking the trade-offs customers had to make between the speed of airplanes and the economy and flexibility of car transport.

How is it different from the red ocean strategy?
Red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them. 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 through another company’s loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy. The focus is on dividing up the red ocean, where growth is increasingly limited.

Has any company moved from following the red ocean strategy to the blue ocean strategy successfully? How did they go about doing that?
In our research, we looked back over 100 years of data on blue ocean creations to see what patterns could be discerned. We found that blue oceans were created by both industry incumbents and new entrants, challenging the assumption that start-ups have natural advantages over established companies in creating new market space. In the auto industry, think of GM that created the blue ocean of emotional, stylised cars in the 1920s, or the Japanese manufacturers that created the blue ocean of small, gas efficient autos in the 70s, or again Chrysler that created the blue ocean of minivans in the 80s — all were incumbents.

Moreover, the blue oceans created by large staid companies were usually within their core businesses. In 1984, for example, Chrysler unveiled the minivan, creating a blue ocean in the auto industry in which the company has been an established existing player.
The minivan broke the boundary between car and van, creating an entirely new type of vehicle. Smaller than the traditional van and yet more spacious than the station wagon, the minivan was exactly what the nuclear family needed to hold the entire family plus its bikes, groceries, and other necessities. And the minivan was easier to drive than a truck or van. Built on the Chrysler K car chassis, the minivan drove like a car but provided more interior room and could still fit in the family garage.

As illustrated in Chrysler’s minivan that broke the market boundary between car and van, business leaders should first recognise that market boundaries exist only in managers’ minds. They should look systematically across established boundaries of competition and reorder existing elements in different markets to reconstruct them into a new market space where a new level of demand is generated.

How does a company go about looking for blue oceans to compete in?
Blue ocean strategy is about creating and capturing uncontested market space, thereby making the competition irrelevant. For example, NTT DoCoMo is the first company to make money out of the mobile internet. In a very competitive industry engaged in a technology race and strong price erosion, NTT DoCoMo was able to achieve superior performance when it launched its novel i-mode services in February 1999. It was an immediate and explosive success in Japan. As with NTT DoCoMo, the goal for a firm’s blue ocean strategic move is the pursuit of value innovation — a leap in value for buyers and company alike. This comes from simultaneous pursuit of differentiation and low cost. The following questions are helpful in achieving value innovation:

- 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 before?