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TLFeBOOK

Blue Ocean Strategy
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Blue Ocean
Strategy
How to Create Uncontested Market Space and
Make the Competition Irrelevant
W. Chan Kim
Renée Mauborgne
H A R V A R D B U S I N E S S S C H O O L P R E S S
B O S T O N , M A S S A C H U S E T T S
( ) ( ) ( ) ( ) (
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Copyright 2005 Harvard Business School Publishing Corporation
All rights reserved
Printed in the United States of America
09 08 07 06 05 5 4 3 2 1
No part of this publication may be reproduced, stored in or introduced into a
retrieval system, or transmitted, in any form, or by any means (electronic, mechanical,
photocopying, recording, or otherwise), without the prior permission of the publisher.
Requests for permission should be directed to permissions@hbsp.harvard.edu, or
mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston,
Massachusetts 02163.
Library of Congress Cataloging-in-Publication Data
Kim, W. Chan.
Blue ocean strategy: how to create uncontested market space and make the
competition irrelevant / W. Chan Kim, Renée Mauborgne.
p. cm.
Includes bibliographical references and index.
ISBN 1-59139-619-0 (hardcover: alk. paper)
1. New products. 2. Market segmentation. I. Mauborgne, Renée. II. Title.
HF5415.153.K53 2005
658.8�02—dc22
2004020857
The paper used in this publication meets the requirements of the American National
Standard for Permanence of Paper for Publications and Documents in Libraries and
Archives Z39.48–1992
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To friendship and to our families,
who make our worlds
more meaningful
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Contents
Preface ix
Acknowledgments xiii
Part One: Blue Ocean Strategy
1 Creating Blue Oceans 3
2 Analytical Tools and Frameworks 23
Part Two: Formulating Blue Ocean Strategy
3 Reconstruct Market Boundaries 47
4 Focus on the Big Picture, Not the Numbers 81
5 Reach Beyond Existing Demand 101
6 Get the Strategic Sequence Right 117
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Part Three: Executing Blue Ocean Strategy
7 Overcome Key Organizational Hurdles 147
8 Build Execution into Strategy 171
9 Conclusion: The Sustainability and Renewal
of Blue Ocean Strategy 185
Appendix A 191
Appendix B 209
Appendix C 213
Notes 217
Bibliography 223
Index 231
About the Authors 239
viii Contents
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( ) ( ) ( ) ( )
Preface
TH I S I S A B O O K about friendship, about loyalty, aboutbelieving in one another. It was because of that friend-
ship, and that belief, that we set out on the journey to explore the
ideas in this book and eventually came to write it.
We met twenty years ago in a classroom—one the professor, the
other the student. And we have worked together ever since, often
seeing ourselves along the journey as two wet rats in a drain. This
book is not the victory of an idea but of a friendship that we have
found more meaningful than any idea in the world of business. It has
made our lives rich and our worlds more beautiful. We were not alone.
No journey is easy; no friendship is filled only with laughter. But
we were excited every day of that journey because we were on a mis-
sion to learn and improve. We believe passionately in the ideas in
this book. These ideas are not for those whose ambition in life is to
get by or merely to survive. That was never an interest of ours. If
you can be satisfied with that, do not read on. But if you want to
make a difference, to create a company that builds a future where
customers, employees, shareholders, and society win, read on. We
are not saying it is easy, but it is worthwhile.
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Our research confirms that there are no permanently excellent
companies, just as there are no permanently excellent industries.
As we have found on our own tumbling road, we all, like corpora-
tions, do smart things and less-than-smart things. To improve the
quality of our success we need to study what we did that made a
positive difference and understand how to replicate it systemati-
cally. That is what we call making smart strategic moves, and we
have found that the strategic move that matters centrally is to cre-
ate blue oceans.
Blue ocean strategy challenges companies to break out of the red
ocean of bloody competition by creating uncontested market space
that makes the competition irrelevant. Instead of dividing up exist-
ing—and often shrinking—demand and benchmarking competi-
tors, blue ocean strategy is about growing demand and breaking
away from the competition. This book not only challenges compa-
nies but also shows them how to achieve this. We first introduce a
set of analytical tools and frameworks that show you how to sys-
tematically act on this challenge, and, second, we elaborate the
principles that define and separate blue ocean strategy from compe-
tition-based strategic thought.
Our aim is to make the formulation and execution of blue ocean
strategy as systematic and actionable as competing in the red wa-
ters of known market space. Only then can companies step up to
the challenge of creating blue oceans in a smart and responsible
way that is both opportunity maximizing and risk minimizing. No
company—large or small, incumbent or new entrant—can afford to
be a riverboat gambler. And no company should.
The contents of this book are based on more than fifteen years of
research, data stretching back more than a hundred years, and a se-
ries of Harvard Business Review articles as well as academic arti-
cles on various dimensions of this topic. The ideas, tools, and
frameworks presented here have been further tested and refined
over the years in corporate practice in Europe, the United States,
and Asia. This book builds on and extends this work by providing a
narrative arc that draws these ideas together to offer a unified
x Preface
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framework. This framework addresses not only the analytic as-
pects behind the creation of blue ocean strategy but also the all-
important human aspects of how to bring an organization and its
people on this journey with a willingness to execute these ideas in
action. Here, understanding how to build trust and commitment, as
well as an understanding of the importance of intellectual and
emotional recognition, are highlighted and brought to the core of
strategy.
Blue ocean opportunities have been out there. As they have been
explored, the market universe has been expanding. This expansion,
we believe, is the root of growth. Yet poor understanding exists
both in theory and in practice as to how to systematically create
and capture blue oceans. We invite you to read this book to learn
how you can be a driver of this expansion in the future.
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Acknowledgments
WE H AV E H A D S I G N I F I C A N T H E L P in actualizingthis book. INSEAD has provided a unique environ-
ment in which to conduct our research. We have benefited greatly
from the crossover between theory and practice that exists at
INSEAD, and from the truly global composition of our faculty, stu-
dent, and executive education populations. Deans Antonio Borges,
Gabriel Hawawini, and Ludo Van der Heyden provided encourage-
ment and institutional support from the start and allowed us to
closely intertwine our research and teaching. Pricewaterhouse-
Coopers (PwC) and the Boston Consulting Group (BCG) have ex-
tended the financial support for our research; in particular, Frank
Brown and Richard Baird at PwC, and René Abate, John Clarkeson,
George Stalk, and Olivier Tardy of BCG have been valued partners.
While we had help from a highly talented group of researchers
over the years, our two dedicated research associates, Jason
Hunter and Ji Mi, who have worked with us for the last several
years, deserve special mention. Their commitment, persistent re-
search support, and drive for perfection, were essential in realizing
this book. We feel blessed by their presence.
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Our colleagues at the school have contributed to the ideas in the
book. INSEAD faculty members, particularly Subramanian Ran-
gan and Ludo Van der Heyden, helped us to reflect upon our ideas
and offered valuable comments and support. Many of INSEAD’s
faculty have taught the ideas and frameworks in this book to execu-
tive and M.B.A. audiences, providing valuable feedback that sharp-
ened our thinking. Others have provided intellectual encourage-
ment and the energy of kindness. We thank here, among others,
Ron Adner, Jean-Louis Barsoux, Ben Bensaou, Henri-Claude de
Bettignies, Mike Brimm, Laurence Capron, Marco Ceccagnoli,
Karel Cool, Arnoud De Meyer, Ingemar Dierickx, Gareth Dyas,
George Eapen, Paul Evans, Charlie Galunic, Annabelle Gawer,
Javier Gimeno, Dominique Héau, Neil Jones, Philippe Lasserre,
Jean-François Manzoni, Jens Meyer, Claude Michaud, Deigan
Morris, Quy Nguyen-Huy, Subramanian Rangan, Jonathan Story,
Heinz Thanheiser, Ludo Van der Heyden, David Young, Peter Zem-
sky, and Ming Zeng.
We have been fortunate to have a network of practitioners and
case writers across the globe. They have contributed greatly in
showing how the ideas in this book apply in action and helping to
develop case material for our research. Among many people, one
deserves special mention: Marc Beauvois-Coladon, who has worked
with us from the start and made a major contribution to chapter 4
based on his field experiences practicing our ideas in companies.
Among the wealth of others, we would like to thank Francis Gouillart
and his associates; Gavin Fraser and his associates; Wayne Morten-
sen; Brian Marks; Kenneth Lau; Yasushi Shiina; Jonathan Landrey
and his associates; Junan Jiang; Ralph Trombetta and his associ-
ates; Gabor Burt and his associates; Shantaram Venkatesh; Miki
Kawawa and her associates; Atul Sinha and his associates; Arnold
Izsak and his associates; Volker Westermann and his associates;
Matt Williamson; and Caroline Edwards and her associates. We
also appreciate the emerging cooperation with Accenture as kicked
off with Mark Spelman, Omar Abbosh, Jim Sayles, and their team.
Thanks are also due to Lucent Technologies for their support.
xiv Acknowledgments
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During the course of our research, we have met with corporate
executives and public officers around the world who generously
gave us their time and insight, greatly shaping the ideas in this
book. We are grateful to them. Among many private and public ini-
tiatives for putting our ideas into practice, the Value Innovation
Program (VIP) Center at Samsung Electronics and the Value Inno-
vation Action Tank (VIAT) in Singapore for the country’s govern-
ment and private sectors have been major sources of inspiration
and learning. In particular, Jong-Yong Yun at Samsung Electronics
and all the Permanent Secretaries of Singapore Government have
been valued partners. Warm thanks also to the members of the
Value Innovation Network (VIN), a global community of practice
on the Value Innovation family of concepts—especially to those we
were unable to mention here.
Finally, we would like to thank Melinda Merino, our editor, for
her wise comments and editorial feedback, and the Harvard Busi-
ness School Publishing team for their commitment and enthusias-
tic support. Thanks also to our present and past editors at Harvard
Business Review, in particular David Champion, Tom Stewart, Nan
Stone, and Joan Magretta. We owe a great deal to INSEAD
M.B.A.’s and Ph.D.’s and executive education participants. Particu-
larly, participants in both Strategy and Value Innovation Study
Group (VISG) courses have been patient as we have tried out the
ideas in this book. Their challenging questions and thoughtful
feedback clarified and strengthened our ideas.
Acknowledgments xv
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( ) ( ) ( ) ( ) (
P A R T O N E
Blue Ocean
Strategy
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C H A P T E R 1
Creating Blue Oceans
AONE TIME ACCORDION PLAYER, stilt-walker, and fire-eater, Guy Laliberté is now CEO of Cirque du Soleil,
one of Canada’s largest cultural exports. Created in 1984 by a group
of street performers, Cirque’s productions have been seen by almost
forty million people in ninety cities around the world. In less than
twenty years Cirque du Soleil has achieved a level of revenues that
took Ringling Bros. and Barnum & Bailey—the global champion of
the circus industry—more than one hundred years to attain.
What makes this rapid growth all the more remarkable is that it
was not achieved in an attractive industry but rather in a declining
industry in which traditional strategic analysis pointed to limited
potential for growth. Supplier power on the part of star performers
was strong. So was buyer power. Alternative forms of entertain-
ment—ranging from various kinds of urban live entertainment to
sporting events to home entertainment—cast an increasingly long
shadow. Children cried out for PlayStations rather than a visit to
the traveling circus. Partially as a result, the industry was suffer-
ing from steadily decreasing audiences and, in turn, declining rev-
enue and profits. There was also increasing sentiment against the
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use of animals in circuses by animal rights groups. Ringling Bros.
and Barnum & Bailey set the standard, and competing smaller cir-
cuses essentially followed with scaled-down versions. From the per-
spective of competition-based strategy, then, the circus industry
appeared unattractive.
Another compelling aspect of Cirque du Soleil’s success is that
it did not win by taking customers from the already shrinking circus
industry, which historically catered to children. Cirque du Soleil
did not compete with Ringling Bros. and Barnum & Bailey. Instead
it created uncontested new market space that made the competi-
tion irrelevant. It appealed to a whole new group of customers:
adults and corporate clients prepared to pay a price several times
as great as traditional circuses for an unprecedented entertain-
ment experience. Significantly, one of the first Cirque productions
was titled “We Reinvent the Circus.”
New Market Space
Cirque du Soleil succeeded because it realized that to win in the fu-
ture, companies must stop competing with each other. The only way
to beat the competition is to stop trying to beat the competition.
To understand what Cirque du Soleil has achieved, imagine a
market universe composed of two sorts of oceans: red oceans and
blue oceans. Red oceans represent all the industries in existence
today. This is the known market space. Blue oceans denote all the
industries not in existence today. This is the unknown market space.
In the red oceans, industry boundaries are defined and accepted,
and the competitive rules of the game are known.1 Here, companies
try to outperform their rivals to grab a greater share of existing de-
mand. As the market space gets crowded, prospects for profits and
growth are reduced. Products become commodities, and 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.
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Although some blue oceans are created well beyond existing indus-
try boundaries, most are created from within red oceans by expand-
ing existing industry boundaries, as Cirque du Soleil did. 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 al-
ways 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.2
Companies need to go beyond competing. To seize new profit and
growth opportunities, they also need to create blue oceans.
Unfortunately, blue oceans are largely uncharted. The dominant
focus of strategy work over the past twenty-five years has been on
competition-based red ocean strategies.3 The result has been a
fairly good understanding of how to compete skillfully in red waters,
from analyzing the underlying economic structure of an existing
industry, to choosing a strategic position of low cost or differentia-
tion or focus, to benchmarking the competition. Some discussions
around blue oceans exist.4 However, there is little practical guid-
ance on how to create them. Without analytic frameworks to create
blue oceans and principles to effectively manage risk, creating
blue oceans has remained wishful thinking that is seen as too risky
for managers to pursue as strategy. This book provides practical
frameworks and analytics for the systematic pursuit and capture of
blue oceans.
The Continuing Creation of Blue Oceans
Although the term blue oceans is new, their existence is not. They
are a feature of business life, past and present. Look back one hun-
dred years and ask yourself, How many of today’s industries were
then unknown? The answer: Many industries as basic as automo-
biles, music recording, aviation, petrochemicals, health care, and
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management consulting were unheard of or had just begun to
emerge at that time. Now turn the clock back only thirty years.
Again, a plethora of multibillion-dollar industries jumps out—mu-
tual funds, cell phones, gas-fired electricity plants, biotechnology,
discount retail, express package delivery, minivans, snowboards,
coffee bars, and home videos, to name a few. Just three decades ago,
none of these industries existed in a meaningful way.
Now put the clock forward twenty years—or perhaps fifty years—
and ask yourself how many now unknown industries will likely
exist then. If history is any predictor of the future, again the answer
is many of them.
The reality is that industries never stand still. They continu-
ously evolve. Operations improve, markets expand, and players
come and go. History teaches us that we have a hugely underesti-
mated capacity to create new industries and re-create existing
ones. In fact, the half-century-old Standard Industrial Classifica-
tion (SIC) system published by the U.S. Census was replaced in 1997
by the North America Industry Classification Standard (NAICS)
system. The new system expanded the ten SIC industry sectors into
twenty sectors to reflect the emerging realities of new industry ter-
ritories.5 The services sector under the old system, for example, is
now expanded into seven business sectors ranging from informa-
tion to health care and social assistance.6 Given that these systems
are designed for standardization and continuity, such a replace-
ment shows how significant the expansion of blue oceans has been.
Yet the overriding focus of strategic thinking has been on com-
petition-based red ocean strategies. Part of the explanation for this
is that corporate strategy is heavily influenced by its roots in mili-
tary strategy. The very language of strategy is deeply imbued with
military references—chief executive “officers” in “headquarters,”
“troops” on the “front lines.” Described this way, strategy is about
confronting an opponent and fighting over a given piece of land
that is both limited and constant.7 Unlike war, however, the his-
tory of industry shows us that the market universe has never been
constant; rather, blue oceans have continuously been created over
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time. To focus on the red ocean is therefore to accept the key
constraining factors of war—limited terrain and the need to beat
an enemy to succeed—and to deny the distinctive strength of the
business world: the capacity to create new market space that is un-
contested.
The Impact of Creating Blue Oceans
We set out to quantify the impact of creating blue oceans on a com-
pany’s growth in both revenues and profits in a study of the busi-
ness launches of 108 companies (see figure 1-1). We found that 86
percent of the launches were line extensions, that is, incremental
improvements within the red ocean of existing market space. Yet
they accounted for only 62 percent of total revenues and a mere 39
percent of total profits. The remaining 14 percent of the launches
were aimed at creating blue oceans. They generated 38 percent of
total revenues and 61 percent of total profits. Given that business
launches included the total investments made for creating red and
blue oceans (regardless of their subsequent revenue and profit con-
sequences, including failures), the performance benefits of creating
Creating Blue Oceans 7
F I G U R E 1-1
The Profit and Growth Consequences of Creating Blue Oceans
Launches within red oceans Launches for creating blue oceans
Business Launch
Revenue Impact
Profit Impact
86% 14%
62% 38%
39% 61%
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blue waters are evident. Although we don’t have data on the hit rate
of success of red and blue ocean initiatives, the global performance
differences between them are marked.
The Rising Imperative of Creating Blue Oceans
There are several driving forces behind a rising imperative to create
blue oceans. Accelerated technological advances have substantially
improved industrial productivity and have allowed suppliers to pro-
duce an unprecedented array of products and services. The result
is that in increasing numbers of industries, supply exceeds de-
mand.8 The trend toward globalization compounds the situation.
As trade barriers between nations and regions are dismantled and
as information on products and prices becomes instantly and glob-
ally available, niche markets and havens for monopoly continue to
disappear.9 While supply is on the rise as global competition inten-
sifies, there is no clear evidence of an increase in demand world-
wide, and statistics even point to declining populations in many
developed markets.10
The result has been accelerated commoditization of products
and services, increasing price wars, and shrinking profit margins.
Recent industrywide studies on major American brands confirm
this trend.11 They reveal that for major product and service cate-
gories, brands are generally becoming more similar, and as they are
becoming more similar people increasingly select based on price.12
People no longer insist, as in the past, that their laundry detergent
be Tide. Nor will they necessarily stick to Colgate when Crest is on
sale, and vice versa. In overcrowded industries, differentiating brands
becomes harder in both economic upturns and downturns.
All this suggests that the business environment in which most
strategy and management approaches of the twentieth century
evolved is increasingly disappearing. As red oceans become increas-
ingly bloody, management will need to be more concerned with blue
oceans than the current cohort of managers is accustomed to.
8 B L U E O C E A N S T R A T E G Y
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From Company and Industry to Strategic Move
How can a company break out of the red ocean of bloody competi-
tion? How can it create a blue ocean? Is there a systematic ap-
proach to achieve this and thereby sustain high performance?
In search of an answer, our initial step was to define the basic
unit of analysis for our research. To understand the roots of high
performance, the business literature typically uses the company as
the basic unit of analysis. People have marveled at how companies
attain strong, profitable growth with a distinguished set of strate-
gic, operational, and organizational characteristics. Our question,
however, was this: Are there lasting “excellent” or “visionary”
companies that continuously outperform the market and repeat-
edly create blue oceans?
Consider, for example, In Search of Excellence and Built to Last.13
The bestselling book In Search of Excellence was published twenty
years ago. Yet within two years of its publication a number of the
companies surveyed began to slip into oblivion: Atari, Chesebrough-
Pond’s, Data General, Fluor, National Semiconductor. As docu-
mented in Managing on the Edge, two-thirds of the identified model
firms in the book had fallen from their perches as industry leaders
within five years of its publication.14
The book Built to Last continued in the same footsteps. It sought
out the “successful habits of visionary companies” that had a long-
running track record of superior performance. To avoid the pitfalls
of In Search of Excellence, however, the survey period of Built to
Last was expanded to the entire life span of the companies while its
analysis was limited to firms more than forty years old. Built to
Last also became a bestseller.
But again, upon closer examination, deficiencies in some of the
visionary companies spotlighted in Built to Last have come to light.
As illustrated in the recent book Creative Destruction, much of the
success attributed to some of the model companies in Built to Last
was the result of industry sector performance rather than the
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companies themselves.15 For example, Hewlett-Packard (HP) met
the criteria of Built to Last by outperforming the market over the
long term. In reality, while HP outperformed the market, so did the
entire computer-hardware industry. What’s more, HP did not even
outperform the competition within the industry. Through this and
other examples, Creative Destruction questioned whether “visionary”
companies that continuously outperform the market have ever ex-
isted. And we all have seen the stagnating or declining performance
of the Japanese companies that were celebrated as “revolutionary”
strategists in their heyday of the late 1970s and early 1980s.
If there is no perpetually high-performing company and if the
same company can be brilliant at one moment and wrongheaded at
another, it appears that the company is not the appropriate unit of
analysis in exploring the roots of high performance and blue oceans.
As discussed earlier, history also shows that industries are con-
stantly being created and expanded over time and that industry
conditions and boundaries are not given; individual actors can
shape them. Companies need not compete head-on in a given indus-
try space; Cirque du Soleil created a new market space in the enter-
tainment sector, generating strong, profitable growth as a result. It
appears, then, that neither the company nor the industry is the best
unit of analysis in studying the roots of profitable growth.
Consistent with this observation, our study shows that the
strategic move, and not the company or the industry, is the right
unit of analysis for explaining the creation of blue oceans and sus-
tained high performance. A strategic move is the set of managerial
actions and decisions involved in making a major market-creating
business offering. Compaq, for example, was acquired by Hewlett-
Packard in 2001 and ceased to be an independent company. As a re-
sult, many people might judge the company as unsuccessful. This
does not, however, invalidate the blue ocean strategic moves that
Compaq made in creating the server industry. These strategic
moves not only were a part of the company’s powerful comeback in
the mid-1990s but also unlocked a new multibillion-dollar market
space in computing.
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Appendix A, “A Sketch of the Historical Pattern of Blue Ocean
Creation,” provides a snapshot overview of the history of three rep-
resentative U.S. industries drawn from our database: the auto in-
dustry—how we get to work; the computer industry—what we use
at work; and the cinema industry—where we go after work for en-
joyment. As shown in appendix A, no perpetually excellent com-
pany or industry is found. But a striking commonality appears to
exist across strategic moves that have created blue oceans and have
led to new trajectories of strong, profitable growth.
The strategic moves we discuss—moves that have delivered prod-
ucts and services that opened and captured new market space, with
a significant leap in demand—contain great stories of profitable
growth as well as thought-provoking tales of missed opportunities
by companies stuck in red oceans. We built our study around these
strategic moves to understand the pattern by which blue oceans are
created and high performance achieved. We studied more than one
hundred fifty strategic moves made from 1880 to 2000 in more than
thirty industries, and we closely examined the relevant business
players in each of these events. Industries ranged from hotels, the
cinema, retail, airlines, energy, computers, broadcasting, and con-
struction to automobiles and steel. We analyzed not only winning
business players who created blue oceans but also their less suc-
cessful competitors.
Both within a given strategic move and across strategic moves,
we searched for convergence among the group that created blue
oceans and within less successful players caught in the red ocean.
We also searched for divergence across these two groups. In so
doing, we tried to discover the common factors leading to the cre-
ation of blue oceans and the key differences separating those win-
ners from the mere survivors and the losers adrift in the red ocean.
Our analysis of more than thirty industries confirms that neither
industry nor organizational characteristics explain the distinction
between the two groups. In assessing industry, organizational, and
strategic variables we found that the creation and capturing of blue
oceans were achieved by small and large companies, by young and
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old managers, by companies in attractive and unattractive indus-
tries, by new entrants and established incumbents, by private and
public companies, by companies in low- and high-tech industries,
and by companies of diverse national origins.
Our analysis failed to find any perpetually excellent company or
industry. What we did find behind the seemingly idiosyncratic suc-
cess stories, however, was a consistent and common pattern across
strategic moves for creating and capturing blue oceans. Whether it
was Ford in 1908 with the Model T; GM in 1924 with cars styled to
appeal to the emotions; CNN in 1980 with real-time news 24/7; or
Compaq, Starbucks, Southwest Airlines, or Cirque du Soleil—or,
for that matter, any of the other blue ocean moves in our study—the
approach to strategy in creating blue oceans was consistent across
time regardless of industry. Our research also reached out to em-
brace famous strategic moves in public sector turnarounds. Here
we found a strikingly similar pattern.
Value Innovation: The Cornerstone
of Blue Ocean Strategy
What consistently separated winners from losers in creating blue
oceans was their approach to strategy. The companies caught in
the red ocean followed a conventional approach, racing to beat the
competition by building a defensible position within the existing
industry order.16 The creators of blue oceans, surprisingly, didn’t
use the competition as their benchmark.17 Instead, they followed a
different strategic logic that we call value innovation. Value inno-
vation is the cornerstone of blue ocean strategy. We call it value in-
novation because instead of focusing on beating the competition,
you focus on making the competition irrelevant by creating a leap
in value for buyers and your company, thereby opening up new and
uncontested market space.
Value innovation places equal emphasis on value and innova-
tion. Value without innovation tends to focus on value creation on
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an incremental scale, something that improves value but is not suf-
ficient to make you stand out in the marketplace.18 Innovation with-
out value tends to be technology-driven, market pioneering, or
futuristic, often shooting beyond what buyers are ready to accept
and pay for.19 In this sense, it is important to distinguish between
value innovation as opposed to technology innovation and market
pioneering. Our study shows that what separates winners from los-
ers in creating blue oceans is neither bleeding-edge technology nor
“timing for market entry.” Sometimes these exist; more often, how-
ever, they do not. Value innovation occurs only when companies
align innovation with utility, price, and cost positions. If they fail
to anchor innovation with value in this way, technology innovators
and market pioneers often lay the eggs that other companies hatch.
Value innovation is a new way of thinking about and executing
strategy that results in the creation of a blue ocean and a break
from the competition. Importantly, value innovation defies one of
the most commonly accepted dogmas of competition-based strat-
egy: the value-cost trade-off.20 It is conventionally believed that
companies can either create greater 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.21 In
contrast, those that seek to create blue oceans pursue differentia-
tion and low cost simultaneously.
Let’s return to the example of Cirque du Soleil. Pursuing differ-
entiation and low cost simultaneously lies at the heart of the enter-
tainment experience it created. At the time of its debut, other
circuses focused on benchmarking one another and maximizing
their share of already shrinking demand by tweaking traditional
circus acts. This included trying to secure more famous clowns and
lion tamers, a strategy that raised circuses’ cost structure without
substantially altering the circus experience. The result was rising
costs without rising revenues, and a downward spiral of overall cir-
cus demand.
These efforts were made irrelevant when Cirque du Soleil ap-
peared. Neither an ordinary circus nor a classic theater production,
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Cirque du Soleil paid no heed to what the competition did. Instead
of following the conventional logic of outpacing the competition
by offering a better solution to the given problem—creating a cir-
cus with even greater fun and thrills—it sought to offer people the
fun and thrill of the circus and the intellectual sophistication and
artistic richness of the theater at the same time; hence, it redefined
the problem itself.22 By breaking the market boundaries of theater
and circus, Cirque du Soleil gained a new understanding not only
of circus customers but also of circus noncustomers: adult theater
customers.
This led to a whole new circus concept that broke the value-cost
trade-off and created a blue ocean of new market space. Consider
the differences. Whereas other circuses focused on offering animal
shows, hiring star performers, presenting multiple show arenas in
the form of three rings, and pushing aisle concession sales, Cirque
du Soleil did away with all these factors. These factors had long
been taken for granted in the traditional circus industry, which
never questioned their ongoing relevance. However, there was in-
creasing public discomfort with the use of animals. Moreover, ani-
mal acts were one of the most expensive elements, including not
only the cost of the animals but also their training, medical care,
housing, insurance, and transportation.
Similarly, while the circus industry focused on featuring stars, in
the mind of the public the so-called stars of the circus were trivial
next to movie stars. Again, they were a high-cost component carry-
ing little sway with spectators. Gone, too, are three-ring venues.
Not only did this arrangement create angst among spectators as
they rapidly switched their gaze from one ring to the other, but it
also increased the number of performers needed, with obvious cost
implications. And although aisle concession sales appeared to be a
good way to generate revenue, in practice the high prices discour-
aged audiences from making purchases and made them feel they
were being taken for a ride.
The lasting allure of the traditional circus came down to only
three key factors: the tent, the clowns, and the classic acrobatic
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acts such as the wheelman and short stunts. So Cirque du Soleil
kept the clowns but shifted their humor from slapstick to a more en-
chanting, sophisticated style. It glamorized the tent, an element
that, ironically, many circuses had begun to forfeit in favor of
rented venues. Seeing that this unique venue symbolically cap-
tured the magic of the circus, Cirque du Soleil designed the classic
symbol of the circus with a glorious external finish and a higher
level of comfort, making its tents reminiscent of the grand epic cir-
cuses. Gone were the sawdust and hard benches. Acrobats and
other thrilling acts are retained, but their roles were reduced and
made more elegant by the addition of artistic flair and intellectual
wonder to the acts.
By looking across the market boundary of theater, Cirque du
Soleil also offered new noncircus factors, such as a story line and,
with it, intellectual richness, artistic music and dance, and multiple
productions. These factors, entirely new creations for the circus in-
dustry, are drawn from the alternative live entertainment industry
of theater.
Unlike traditional circus shows having a series of unrelated
acts, for example, each Cirque du Soleil creation has a theme and
story line, somewhat resembling a theater performance. Although
the theme is vague (and intentionally so), it brings harmony and an
intellectual element to the show—without limiting the potential
for acts. Le Cirque also borrows ideas from Broadway shows. For
example, it features multiple productions rather than the traditional
“one for all” shows. As with Broadway shows, too, each Cirque du
Soleil show has an original score and assorted music, which drives
the visual performance, lighting, and timing of the acts rather than
the other way around. The shows feature abstract and spiritual
dance, an idea derived from theater and ballet. By introducing
these new factors into its offering, Cirque du Soleil has created
more sophisticated shows.
Moreover, by injecting the concept of multiple productions and
by giving people a reason to come to the circus more frequently,
Cirque du Soleil has dramatically increased demand.
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In short, Cirque du Soleil offers the best of both circus and theater,
and it has eliminated or reduced everything else. By offering un-
precedented utility, Cirque du Soleil has created a blue ocean and
has invented a new form of live entertainment, one that is markedly
different from both traditional circus and theater. At the same time,
by eliminating many of the most costly elements of the circus, it has
dramatically reduced its cost structure, achieving both differentia-
tion and low cost. Le Cirque strategically priced its tickets against
those of the theater, lifting the price point of the circus industry by
several multiples while still pricing its productions to capture the
mass of adult customers, who were used to theater prices.
Figure 1-2 depicts the differentiation–low cost dynamics under-
pinning value innovation.
16 B L U E O C E A N S T R A T E G Y
F I G U R E 1-2
Value Innovation: The Cornerstone of Blue Ocean Strategy
Value innovation is created in the region where a company’s actions favorably affect both
its cost structure and its value proposition to buyers. Cost savings are made by eliminating
and reducing the factors an industry competes on. Buyer value is lifted by raising and
creating elements the industry has never offered. Over time, costs are reduced further as
scale economies kick in due to the high sales volumes that superior value generates.
The Simultaneous Pursuit of Differentiation and Low Cost
Value
Innovation
Costs
Buyer Value
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As shown in figure 1-2, the creation of blue oceans is about driv-
ing costs down while simultaneously driving value up for buyers.
This is how a leap in value for both the company and its buyers is
achieved. Because buyer value comes from the utility and price
that the company offers to buyers and because the value to the com-
pany is generated from price and its cost structure, value innova-
tion is achieved only when the whole system of the company’s utility,
price, and cost activities is properly aligned. It is this whole-system
approach that makes the creation of blue oceans a sustainable
strategy. Blue ocean strategy integrates the range of a firm’s func-
tional and operational activities.
In contrast, innovations such as production innovations can be
achieved at the subsystem level without impacting the company’s
overall strategy. An innovation in the production process, for exam-
ple, may lower a company’s cost structure to reinforce its existing
cost leadership strategy without changing the utility proposition
of its offering. Although innovations of this sort may help to secure
and even lift a company’s position in the existing market space,
such a subsystem approach will rarely create a blue ocean of new
market space.
In this sense, value innovation is more than innovation. It is
about strategy that embraces the entire system of a company’s ac-
tivities.23 Value innovation requires companies to orient the whole
system toward achieving a leap in value for both buyers and them-
selves. Absent such an integral approach, innovation will remain
divided from the core of strategy.24 Figure 1-3 outlines the key
defining features of red and blue ocean strategies.
Competition-based red ocean strategy assumes that an indus-
try’s structural conditions are given and that firms are forced to
compete within them, an assumption based on what the academics
call the structuralist view, or environmental determinism.25 In con-
trast, value innovation 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. We call this the
Creating Blue Oceans 17
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reconstructionist view. In the red ocean, differentiation costs be-
cause firms compete with the same best-practice rule. Here, the
strategic choices for firms are to pursue either differentiation or
low cost. In the reconstructionist world, however, the strategic aim
is to create new best-practice rules by breaking the existing value-
cost trade-off and thereby creating a blue ocean. (For more discus-
sions on this, see appendix B, “Value Innovation: A Reconstruc-
tionist View of Strategy.”)
Cirque du Soleil broke the best practice rule of the circus indus-
try, achieving both differentiation and low cost by reconstructing
elements across existing industry boundaries. Is Cirque du Soleil,
then, really a circus, with all that it eliminated, reduced, raised,
and created? Or is it theater? And if it is theater, then what genre—
a Broadway show, an opera, a ballet? It is not clear. Cirque du Soleil
reconstructed elements across these alternatives, and, in the end, it
is simultaneously a little of all of them and none of any of them in
their entirety. It created a blue ocean of new, uncontested market
space that as of yet has no agreed-on industry name.
18 B L U E O C E A N S T R A T E G Y
F I G U R E 1-3
Red Ocean Versus Blue Ocean Strategy
Red Ocean Strategy Blue Ocean Strategy
Compete in existing market space. Create uncontested market space.
Beat the competition. Make the competition irrelevant.
Exploit existing demand. Create and capture new demand.
Make the value-cost trade-off. Break the value-cost trade-off.
Align the whole system of a firm’s activities Align the whole system of a firm’s
with its strategic choice of differentiation activities in pursuit of differentiation
or low cost. and low cost.
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Formulating and Executing
Blue Ocean Strategy
Although economic conditions indicate the rising imperative of
blue oceans, there is a general belief that the odds of success are
lower when companies venture beyond existing industry space.26 The
issue is how to succeed in blue oceans. How can companies system-
atically maximize the opportunities while simultaneously minimiz-
ing the risks of formulating and executing blue ocean strategy? If
you lack an understanding of the opportunity-maximizing and risk-
minimizing principles driving the creation and capture of blue oceans,
the odds will be lengthened against your blue ocean initiative.
Of course, there is no such thing as a riskless strategy.27 Strategy
will always involve both opportunity and risk, be it a red ocean or a
blue ocean initiative. But at present the playing field is dramati-
cally unbalanced in favor of tools and analytical frameworks to
succeed in red oceans. As long as this remains true, red oceans will
continue to dominate companies’ strategic agenda even as the busi-
ness imperative for creating blue oceans takes on new urgency. Per-
haps this explains why, despite prior calls for companies to go
beyond existing industry space, companies have yet to act seriously
on these recommendations.
This book seeks to address this imbalance by laying out a method-
ology to support our thesis. Here we present the principles and ana-
lytical frameworks to succeed in blue oceans.
Chapter 2 introduces the analytical tools and frameworks that
are essential for creating and capturing blue oceans. Although
supplementary tools are introduced in other chapters as needed,
these basic analytics are used throughout the book. Companies
can make proactive changes in industry or market fundamentals
through the purposeful application of these blue ocean tools and
frameworks, which are grounded in the issues of both opportunity
and risk. Subsequent chapters introduce the principles that drive
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the successful formulation and implementation of blue ocean strat-
egy and explain how they, along with the analytics, are applied in
action.
There are four guiding principles for the successful formulation
of blue ocean strategy. Chapters 3 to 6 address these in turn. Chap-
ter 3 identifies the paths by which you can systematically create un-
contested market space across diverse industry domains, hence
attenuating search risk. It teaches you how to make the competition
irrelevant by looking across the six conventional boundaries of
competition to open up commercially important blue oceans. The
six paths focus on looking across alternative industries, across
strategic groups, across buyer groups, across complementary prod-
uct and service offerings, across the functional-emotional orienta-
tion of an industry, and even across time.
Chapter 4 shows how to design a company’s strategic planning
process to go beyond incremental improvements to create value in-
novations. It presents an alternative to the existing strategic plan-
ning process, which is often criticized as a number-crunching
exercise that keeps companies locked into making incremental im-
provements. This principle tackles planning risk. Using a visualiz-
ing approach that drives you to focus on the big picture rather than
to be submerged in numbers and jargon, this chapter proposes a
four-step planning process whereby you can build a strategy that
creates and captures blue ocean opportunities.
Chapter 5 shows how to maximize the size of a blue ocean. To
create the greatest market of new demand, this chapter challenges
the conventional practice of aiming for finer segmentation to bet-
ter meet existing customer preferences. This practice often results
in increasingly small target markets. Instead, this chapter shows
you how to aggregate demand, not by focusing on the differences
that separate customers but by building on the powerful commonal-
ities across noncustomers to maximize the size of the blue ocean
being created and new demand being unlocked, hence minimizing
scale risk.
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Chapter 6 lays out the design of a strategy that allows you not
only to provide a leap in value to the mass of buyers but also to
build a viable business model to produce and maintain profitable
growth for itself. It shows you how to ensure that your company
builds a business model that profits from the blue ocean it is creat-
ing. It addresses business model risk. The chapter articulates the
sequence in which you should create a strategy to ensure that
both you and your customers win as you create new business ter-
rain. Such a strategy follows the sequence of utility, price, cost,
and adoption.
Chapters 7 and 8 turn to the principles that drive effective execu-
tion of blue ocean strategy. Specifically, chapter 7 introduces what
we call tipping point leadership. Tipping point leadership shows
managers how to mobilize an organization to overcome the key or-
ganizational hurdles that block the implementation of a blue ocean
strategy. It deals with organizational risk. It lays out how leaders
and managers alike can surmount the cognitive, resource, motiva-
tional, and political hurdles in spite of limited time and resources
in executing blue ocean strategy.
Chapter 8 argues for the integration of execution into strategy
making, thus motivating people to act on and execute a blue ocean
strategy in a sustained way deep in an organization. This chapter
Creating Blue Oceans 21
F I G U R E 1-4
The Six Principles of Blue Ocean Strategy
Formulation principles Risk factor each principle attenuates
Reconstruct market boundaries ↓ Search risk
Focus on the big picture, not the numbers ↓ Planning risk
Reach beyond existing demand ↓ Scale risk
Get the strategic sequence right ↓ Business model risk
Execution principles Risk factor each principle attenuates
Overcome key organizational hurdles ↓ Organizational risk
Build execution into strategy ↓ Management risk
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introduces what we call fair process. Because a blue ocean strategy
perforce represents a departure from the status quo, this chapter
shows how fair process facilitates both strategy making and execu-
tion by mobilizing people for the voluntary cooperation needed to
execute blue ocean strategy. It deals with management risk associ-
ated with people’s attitudes and behaviors.
Figure 1-4 highlights the six principles driving the successful
formulation and execution of blue ocean strategy and the risks that
these principles attenuate.
Chapter 9 discusses the dynamic aspects of blue ocean strategy—
the issues of sustainability and renewal.
Let’s now move on to chapter 2, where we lay out the basic ana-
lytical tools and frameworks that will be used throughout this book
in the formulation and execution of blue ocean strategy.
22 B L U E O C E A N S T R A T E G Y
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( ) ( ) ( ) ( )
C H A P T E R 2
Analytical Tools
and Frameworks
WE H AV E S P E N T T H E PA S T D E C A D E developing a set of analytical tools and frameworks in an attempt
to make the formulation and execution of blue ocean strategy as
systematic and actionable as competing in the red waters of known
market space. These analytics fill a central void in the field of
strategy, which has developed an impressive array of tools and
frameworks to compete in red oceans, such as the five forces for
analyzing existing industry conditions and three generic strate-
gies, but has remained virtually silent on practical tools to excel in
blue oceans. Instead, executives have received calls to be brave and
entrepreneurial, to learn from failure, and to seek out revolution-
aries. Although thought-provoking, these are not substitutes for
analytics to navigate successfully in blue waters. In the absence of
analytics, executives cannot be expected to act on the call to break
out of existing competition. Effective blue ocean strategy should be
about risk minimization and not risk taking.
( ) ( ) ( ) ( )
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To address this imbalance, we studied companies around the
world and developed practical methodologies in the quest of blue
oceans. We then applied and tested these tools and frameworks in
action by working with companies in their pursuit of blue oceans,
enriching and refining them in the process. The tools and frame-
works presented here are used throughout this book as we discuss
the six principles of formulating and executing blue ocean strat-
egy. As a brief introduction to these tools and frameworks, let’s
look at one industry—the U.S. wine industry—to see how these
tools can be applied in practice in the creation of blue oceans.
The United States has the third largest aggregate consumption
of wine worldwide. Yet the $20 billion industry is intensely compet-
itive. California wines dominate the domestic market, capturing
two-thirds of all U.S. wine sales. These wines compete head-to-head
with imported wines from France, Italy, and Spain and New World
wines from countries such as Chile, Australia, and Argentina,
which have increasingly targeted the U.S. market. With the supply
of wines increasing from Oregon, Washington, and New York state
and with newly mature vineyard plantings in California, the number
of wines has exploded. Yet the U.S. consumer base has essentially
remained stagnant. The United States remains stuck at thirty-first
place in world per capita wine consumption.
The intense competition has fueled ongoing industry consolida-
tion. The top eight companies produce more than 75 percent of the
wine in the United States, and the estimated one thousand six hun-
dred other wineries produce the remaining 25 percent. The domi-
nance of a few key players allows them to leverage distributors to
gain shelf space and put millions of dollars into above-the-line mar-
keting budgets. There is a simultaneous consolidation of retailers
and distributors across the United States, something that raises
their bargaining power against the plethora of wine makers. Ti-
tanic battles are being fought for retail and distribution space. It is
no surprise that weak, poorly run companies are increasingly being
swept aside. Downward pressure on wine prices has set in.
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In short, the U.S. wine industry faces intense competition,
mounting price pressure, increasing bargaining power on the part
of retail and distribution channels, and flat demand despite over-
whelming choice. Following conventional strategic thinking, the
industry is hardly attractive. For strategists, the critical question
is, How do you break out of this red ocean of bloody competition to
make the competition irrelevant? How do you open up and capture
a blue ocean of uncontested market space?
To address these questions, we turn to the strategy canvas, an
analytic framework that is central to value innovation and the cre-
ation of blue oceans.
The Strategy Canvas
The strategy canvas is both a diagnostic and an action framework
for building a compelling blue ocean strategy. It serves two pur-
poses. First, it captures the current state of play in the known mar-
ket space. This allows you to understand where the competition is
currently investing, the factors the industry currently competes on
in products, service, and delivery, and what customers receive from
the existing competitive offerings on the market. Figure 2-1 cap-
tures all this information in graphic form. The horizontal axis cap-
tures the range of factors the industry competes on and invests in.
In the case of the U.S. wine industry, there are seven principal
factors:
• Price per bottle of wine
• An elite, refined image in packaging, including labels an-
nouncing the wine medals won and the use of esoteric enologi-
cal terminology to stress the art and science of wine making
• Above-the-line marketing to raise consumer awareness in a
crowded market and to encourage distributors and retailers
to give prominence to a particular wine house
Analytical Tools and Frameworks 25
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• Aging quality of wine
• The prestige of a wine’s vineyard and its legacy (hence the
appellations of estates and chateaux and references to the
historic age of the establishment)
• The complexity and sophistication of a wine’s taste, includ-
ing such things as tannins and oak
• A diverse range of wines to cover all varieties of grapes and
consumer preferences from Chardonnay to Merlot, and so on
These factors are viewed as key to the promotion of wine as a
unique beverage for the informed wine drinker, worthy of special
occasions.
That is the underlying structure of the U.S. wine industry from
the market perspective. Now let’s turn to the vertical axis of the
26 B L U E O C E A N S T R A T E G Y
F I G U R E 2-1
The Strategy Canvas of the U.S. Wine Industry in the Late 1990s
Premium Wines
High
Low
Budget Wines
Price Above-the-line Vineyard prestige Wine
Use of enological marketing Aging and legacy Wine range
terminology and quality complexity
distinctions in wine
communication
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strategy canvas, which captures the offering level that buyers re-
ceive across all these key competing factors. A high score means
that a company offers buyers more, and hence invests more, in that
factor. In the case of price, a higher score indicates a higher price.
We can now plot the current offering of wineries across all these
factors to understand wineries’ strategic profiles, or value curves.
The value curve, the basic component of the strategy canvas, is a
graphic depiction of a company’s relative performance across its
industry’s factors of competition.
Figure 2-1 shows that, although more than one thousand six
hundred wineries participate in the U.S. wine industry, from the
buyer’s point of view there is enormous convergence in their value
curves. Despite the plethora of competitors, when premium brand
wines are plotted on the strategy canvas we discover that from the
market point of view all of them essentially have the same strategic
profile. They offer a high price and present a high level of offering
across all the key competing factors. Their strategic profile follows
a classic differentiation strategy. From the market point of view,
however, they are all different in the same way. On the other hand,
budget wines also have the same essential strategic profile. Their
price is low, as is their offering across all the key competing factors.
These are classic low-cost players. Moreover, the value curves of
premium and low-cost wines share the same basic shape. The two
strategic groups’ strategies march in lockstep, but at different alti-
tudes of offering level.
To set a company on a strong, profitable growth trajectory in the
face of these industry conditions, it won’t work to benchmark com-
petitors and try to outcompete them by offering a little more for a
little less. Such a strategy may nudge sales up but will hardly drive
a company to open up uncontested market space. Nor is conducting
extensive customer research the path to blue oceans. Our research
found that customers can scarcely imagine how to create uncontested
market space. Their insight also tends toward the familiar “offer me
more for less.” And what customers typically want “more” of are those
product and service features that the industry currently offers.
Analytical Tools and Frameworks 27
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To fundamentally shift the strategy canvas of an industry, you
must begin by reorienting your strategic focus from competitors to
alternatives, and from customers to noncustomers of the industry.1
To pursue both value and cost, you should resist the old logic of
benchmarking competitors in the existing field and choosing be-
tween differentiation and cost leadership. As you shift your strategic
focus from current competition to alternatives and noncustomers,
you gain insight into how to redefine the problem the industry fo-
cuses on and thereby reconstruct buyer value elements that reside
across industry boundaries. Conventional strategic logic, by con-
trast, drives you to offer better solutions than your rivals to exist-
ing problems defined by your industry.
In the case of the U.S. wine industry, conventional wisdom caused
wineries to focus on overdelivering on prestige and the quality of
wine at its price point. Overdelivery meant adding complexity to
the wine based on taste profiles shared by wine makers and rein-
forced by the wine show judging system. Wine makers, show judges,
and knowledgeable drinkers concur that complexity—layered per-
sonality and characteristics that reflect the uniqueness of the soil,
season, and wine maker’s skill in tannins, oak, and aging pro-
cesses—equates with quality.
By looking across alternatives, however, Casella Wines, an Aus-
tralian winery, redefined the problem of the wine industry to a new
one: how to make a fun and nontraditional wine that’s easy to drink
for everyone. Why? In looking at the demand side of the alter-
natives of beer, spirits, and ready-to-drink cocktails, which cap-
tured three times as many U.S. consumer alcohol sales as wine,
Casella Wines found that the mass of American adults saw wine as
a turnoff. It was intimidating and pretentious, and the complexity
of wine’s taste created flavor challenges for the average person even
though it was the basis on which the industry fought to excel. With
this insight, Casella Wines was ready to explore how to redraw the
strategic profile of the U.S. wine industry to create a blue ocean. To
achieve this, it turned to the second basic analytic underlying blue
oceans: the four actions framework.
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The Four Actions Framework
To reconstruct buyer value elements in crafting a new value curve,
we have developed the four actions framework. As shown in figure
2-2, to break the trade-off between differentiation and low cost and
to create a new value curve, there are four key questions to chal-
lenge an industry’s strategic logic and business model:
• 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?
Analytical Tools and Frameworks 29
F I G U R E 2-2
The Four Actions Framework
Create
Which factors should
be created that
the industry has
never offered?
Reduce
Which factors should
be reduced well
below the industry’s
standard?
Eliminate
Which of the factors
that the industry
takes for granted
should be eliminated?
Raise
Which factors should
be raised well
above the industry’s
standard?
A New
Value
Curve
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The first question forces you to consider eliminating factors that
companies in your industry have long competed on. Often those
factors are taken for granted even though they no longer have
value or may even detract from value. Sometimes there is a funda-
mental change in what buyers value, but companies that are fo-
cused on benchmarking one another do not act on, or even perceive,
the change.
The second question forces you to determine whether products
or services have been overdesigned in the race to match and beat
the competition. Here, companies overserve customers, increasing
their cost structure for no gain.
The third question pushes you to uncover and eliminate the com-
promises your industry forces customers to make. The fourth question
helps you to discover entirely new sources of value for buyers and to
create new demand and shift the strategic pricing of the industry.
It is by pursuing the first two questions (of eliminating and re-
ducing) that you gain insight into how to drop your cost structure
vis-à-vis competitors. Our research has found that rarely do man-
agers systematically set out to eliminate and reduce their invest-
ments in factors that an industry competes on. The result is
mounting cost structures and complex business models. The sec-
ond two factors, by contrast, provide you with insight into how to
lift buyer value and create new demand. Collectively, they allow
you to systematically explore how you can reconstruct buyer value
elements across alternative industries to offer buyers an entirely
new experience, while simultaneously keeping your cost structure
low. Of particular importance are the actions of eliminating and
creating, which push companies to go beyond value maximization
exercises with existing factors of competition. Eliminating and
creating prompt companies to change the factors themselves,
hence making the existing rules of competition irrelevant.
When you apply the four actions framework to the strategy can-
vas of your industry, you get a revealing new look at old perceived
truths. In the case of the U.S. wine industry, by thinking in terms of
these four actions vis-à-vis the current industry logic and looking
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across alternatives and noncustomers, Casella Wines created [yel-
low tail], a wine whose strategic profile broke from the competition
and created a blue ocean. Instead of offering wine as wine, Casella
created a social drink accessible to everyone: beer drinkers, cock-
tail drinkers, and other drinkers of nonwine beverages. In the space
of two years, the fun, social drink [yellow tail] emerged as the
fastest growing brand in the histories of both the Australian and
the U.S. wine industries and the number one imported wine into
the United States, surpassing the wines of France and Italy. By
August 2003 it was the number one red wine in a 750-ml bottle sold
in the United States, outstripping California labels. By mid-2003,
[yellow tail]’s moving average annual sales were tracking at 4.5 mil-
lion cases. In the context of a global wine glut, [yellow tail] has been
racing to keep up with sales.
What’s more, whereas large wine companies developed strong
brands over decades of marketing investment, [yellow tail] leap-
frogged tall competitors with no promotional campaign, mass media,
or consumer advertising. It didn’t simply steal sales from competi-
tors; it grew the market. [yellow tail] brought nonwine drinkers—
beer and ready-to-drink cocktail consumers—into the wine market.
Moreover, novice table wine drinkers started to drink wine more
frequently, jug wine drinkers moved up, and drinkers of more ex-
pensive wines moved down to become consumers of [yellow tail].
Figure 2-3 shows the extent to which the application of these
four actions led to a break from the competition in the U.S. wine in-
dustry. Here we can graphically compare [yellow tail]’s blue ocean
strategy with the more than one thousand six hundred wineries
competing in the United States. As shown in figure 2-3, [yellow
tail]’s value curve stands apart. Casella Wines acted on all four ac-
tions—eliminate, reduce, raise, and create—to unlock uncontested
market space that changed the face of the U.S. wine industry in a
span of two years.
By looking at the alternatives of beer and ready-to-drink cock-
tails and thinking in terms of noncustomers, Casella Wines created
three new factors in the U.S. wine industry—easy drinking, easy to
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select, and fun and adventure—and eliminated or reduced every-
thing else. Casella Wines found that the mass of Americans rejected
wine because its complicated taste was difficult to appreciate.
Beer and ready-to-drink cocktails, for example, were much sweeter
and easier to drink. Accordingly, [yellow tail] was a completely
new combination of wine characteristics that produced an uncom-
plicated wine structure that was instantly appealing to the mass of
alcohol drinkers. The wine was soft in taste and approachable like
ready-to-drink cocktails and beer, and had up-front, primary fla-
vors and pronounced fruit flavors. The sweet fruitiness of the wine
also kept people’s palate fresher, allowing them to enjoy another
glass of wine without thinking about it. The result was an easy-
drinking wine that did not require years to develop an apprecia-
tion for.
32 B L U E O C E A N S T R A T E G Y
F I G U R E 2-3
The Strategy Canvas of [yellow tail]
Premium Wines
High
Low
Budget Wines
Price Above-the-line Vineyard prestige Wine Ease of
marketing and legacy range selection
Use of enological Aging Wine Easy Fun and
terminology and quality complexity drinking adventure
distinctions in wine
communication
[yellow tail]
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In line with this simple fruity sweetness, [yellow tail] dramati-
cally reduced or eliminated all the factors the wine industry had
long competed on—tannins, oak, complexity, and aging—in crafting
fine wine, whether it was for the premium or the budget segment.
With the need for aging eliminated, the needed working capital for
aging wine at Casella Wines was also reduced, creating a faster
payback for the wine produced. The wine industry criticized the
sweet fruitiness of [yellow tail] wine, seeing it as significantly low-
ering the quality of wine and working against proper appreciation
of fine grapes and historic wine craftsmanship. These claims may
have been true, but customers of all sorts loved the wine.
Wine retailers in the United States offered buyers aisles of wine
varieties, but to the general consumer the choice was overwhelm-
ing and intimidating. The bottles looked the same, labels were com-
plicated with enological terminology understandable only to the
wine connoisseur or hobbyist, and the choice was so extensive that
salesclerks at retail shops were at an equal disadvantage in under-
standing or recommending wine to bewildered potential buyers.
Moreover, the rows of wine choice fatigued and demotivated cus-
tomers, making selection a difficult process that left the average
wine purchaser insecure with the choice.
[yellow tail] changed all that by creating ease of selection. It dra-
matically reduced the range of wines offered, creating only two:
Chardonnay, the most popular white in the United States, and a
red, Shiraz. It removed all technical jargon from the bottles and
created instead a striking, simple, and nontraditional label featur-
ing a kangaroo in bright, vibrant colors of orange and yellow on a
black background. The wine boxes [yellow tail] came in were also of
the same vibrant colors, with the name [yellow tail] printed boldly
on the sides; the boxes served the dual purpose of acting as eye-
catching, unintimidating displays for the wine.
[yellow tail] hit a home run in ease of selection when it made re-
tail shop employees the ambassadors of [yellow tail] by giving them
Australian outback clothing, including bushman’s hats and oilskin
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jackets to wear at work. The retail employees were inspired by the
branded clothing and having a wine they themselves did not feel in-
timidated by, and recommendations to buy [yellow tail] flew out of
their mouths. In short, it was fun to recommend [yellow tail].
The simplicity of offering only two wines at the start—a red and
a white—streamlined Casella Wines’ business model. Minimizing
the stockkeeping units maximized its stock turnover and mini-
mized investment in warehouse inventory. In fact, this reduction of
variety was carried over to the bottles inside the cases. [yellow tail]
broke industry conventions. Casella Wines was the first company to
put both red and white wine in the same-shaped bottle, a practice
that created further simplicity in manufacturing and purchasing
and resulted in stunningly simple wine displays.
The wine industry worldwide was proud to promote wine as a re-
fined beverage with a long history and tradition. This is reflected in
the target market for the United States: educated professionals in
the upper income brackets. Hence, the continuous focus on the
quality and legacy of the vineyard, the chateau’s or estate’s histori-
cal tradition, and the wine medals won. Indeed the growth strate-
gies of the major players in the U.S. wine industry were targeted at
the premium end of the market, with tens of millions invested in
brand advertising to strengthen this image. By looking to beer and
ready-to-drink cocktail customers, however, [yellow tail] found that
this elite image did not resonate with the general public, which
found it intimidating. So [yellow tail] broke with tradition and cre-
ated a personality that embodied the characteristics of the Aus-
tralian culture: bold, laid back, fun, and adventurous. Approacha-
bility was the mantra: “The essence of a great land . . . Australia.”
There was no traditional winery image. The lowercase spelling of
the name [yellow tail], coupled with the vibrant colors and the kan-
garoo motif, echoed Australia. And indeed no reference to the vine-
yard was made on the bottle. The wine promised to jump from the
glass like an Aussie kangaroo.
The result is that [yellow tail] appealed to a broad cross section
of alcohol beverage consumers. By offering this leap in value, [yel-
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low tail] raised the price of its wines above the budget market, pric-
ing them at $6.99 a bottle, more than double the price of a jug wine.
From the moment the wine hit the retail shelves in July 2001, sales
took off.
The Eliminate-Reduce-Raise-Create Grid
There is a third tool that is key to creation of blue oceans. It is a
supplementary analytic to the four actions framework called the
eliminate-reduce-raise-create grid (see figure 2-4). The grid pushes
companies not only to ask all four questions in the four actions
framework but also to act on all four to create a new value curve. By
driving companies to fill in the grid with the actions of eliminating
and reducing as well as raising and creating, the grid gives compa-
nies four immediate benefits:
• It pushes them to simultaneously pursue differentiation and
low costs to break the value-cost trade-off.
Analytical Tools and Frameworks 35
F I G U R E 2-4
Eliminate-Reduce-Raise-Create Grid: The Case of [yellow tail]
Eliminate Raise
Enological terminology Price versus
and distinctions budget wines
Aging qualities Retail store
involvement
Above-the-line marketing
Reduce Create
Wine complexity Easy drinking
Wine range Ease of selection
Vineyard prestige Fun and adventure
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• It immediately flags companies that are focused only on rais-
ing and creating and thereby lifting their cost structure and
often overengineering products and services—a common
plight in many companies.
• It is easily understood by managers at any level, creating a
high level of engagement in its application.
• Because completing the grid is a challenging task, it drives
companies to robustly scrutinize every factor the industry
competes on, making them discover the range of implicit
assumptions they make unconsciously in competing.
Figure 2-5, the eliminate-reduce-raise-create grid for Cirque du
Soleil, provides another snapshot of this tool in action and shows
what it reveals. Worth noting is the range of factors that an indus-
try has long competed on that companies discover can be elimi-
nated and reduced. In the case of Cirque du Soleil, it eliminated
several factors from traditional circuses, such as animal shows,
36 B L U E O C E A N S T R A T E G Y
F I G U R E 2-5
Eliminate-Reduce-Raise-Create Grid: The Case of Cirque du Soleil
Eliminate Raise
Star performers Unique venue
Animal shows
Aisle concession sales
Multiple show arenas
Reduce Create
Fun and humor Theme
Thrill and danger Refined environment
Multiple productions
Artistic music and dance
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star performers, and multiple show arenas. These factors had long
been taken for granted in the traditional circus industry, which
never questioned their ongoing relevance. However, there was in-
creasing public discomfort with the use of animals. Moreover, ani-
mal acts are one of the most expensive elements; not only is there
the cost of the animals, but also their training, medical care, hous-
ing, insurance, and transportation. Similarly, although the circus
industry focused on featuring stars, in the mind of the public the
so-called stars of the circus were trivial next to movie stars. Again,
they were a high-cost component carrying little sway with specta-
tors. Gone, too, are three-ring venues. Not only did these create
angst among spectators as they rapidly switched their gaze from
one ring to the other, but they also increased the number of per-
formers needed, with the obvious cost implications.
Three Characteristics of a Good Strategy
[yellow tail], like Cirque du Soleil, created a unique and excep-
tional value curve to unlock a blue ocean. As shown in the strategy
canvas, [yellow tail]’s value curve has focus; the company does not
diffuse its efforts across all key factors of competition. The shape of
its value curve diverges from the other players’, a result of not
benchmarking competitors but instead looking across alternatives.
The tagline of [yellow tail]’s strategic profile is clear: a fun and sim-
ple wine to be enjoyed every day.
When expressed through a value curve, then, an effective blue
ocean strategy like [yellow tail]’s has three complementary quali-
ties: focus, divergence, and a compelling tagline. Without these
qualities, a company’s strategy will likely be muddled, undifferenti-
ated, and hard to communicate with a high cost structure. The four
actions of creating a new value curve should be well guided toward
building a company’s strategic profile with these characteristics.
These three characteristics serve as an initial litmus test of the
commercial viability of blue ocean ideas.
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A look at Southwest Airlines’ strategic profile illustrates how
these three qualities underlie the company’s effective strategy in
reinventing the short-haul airline industry via value innovation
(see figure 2-6). Southwest Airlines created a blue ocean by break-
ing the trade-offs customers had to make between the speed of air-
planes and the economy and flexibility of car transport. To achieve
this, Southwest offered high-speed transport with frequent and flexi-
ble departures at prices attractive to the mass of buyers. By elimi-
nating and reducing certain factors of competition and raising
others in the traditional airline industry, as well as by creating new
factors drawn from the alternative industry of car transport, South-
west Airlines was able to offer unprecedented utility for air travel-
ers and achieve a leap in value with a low-cost business model.
The value curve of Southwest Airlines differs distinctively from
those of its competitors in the strategy canvas. Its strategic profile
is a typical example of a compelling blue ocean strategy.
38 B L U E O C E A N S T R A T E G Y
F I G U R E 2-6
The Strategy Canvas of Southwest Airlines
Southwest
High
Low
Average Airlines
Price Lounges Hub Speed
Meals Seating connectivity Friendly Frequent
class service point-to-
choices point
departures
Car Transport
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Focus
Every great strategy has focus, and a company’s strategic profile, or
value curve, should clearly show it. Looking at Southwest’s profile,
we can see at once that the company emphasizes only three factors:
friendly service, speed, and frequent point-to-point departures. By
focusing in this way, Southwest has been able to price against car
transportation; it doesn’t make extra investments in meals, lounges,
and seating choices. By contrast, Southwest’s traditional competi-
tors invest in all the airline industry’s competitive factors, making
it much more difficult for them to match Southwest’s prices. Invest-
ing across the board, these companies let their competitors’ moves
set their own agendas. Costly business models result.
Divergence
When a company’s strategy is formed reactively as it tries to keep
up with the competition, it loses its uniqueness. Consider the simi-
larities in most airlines’ meals and business-class lounges. On the
strategy canvas, therefore, reactive strategists tend to share the
same strategic profile. Indeed, in the case of Southwest, the value
curves of the company’s competitors are virtually identical and
therefore can be summarized on the strategy canvas with a single
value curve.
In contrast, the value curves of blue ocean strategists always
stand apart. By applying the four actions of eliminating, reducing,
raising, and creating, they differentiate their profiles from the in-
dustry’s average profile. Southwest, for example, pioneered point-
to-point travel between midsize cities; previously, the industry
operated through hub-and-spoke systems.
Compelling Tagline
A good strategy has a clear-cut and compelling tagline. “The speed
of a plane at the price of a car—whenever you need it.” That’s the
tagline of Southwest Airlines, or at least it could be. What could
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Southwest’s competitors say? Even the most proficient ad agency
would have difficulty reducing the conventional offering of lunches,
seat choices, lounges, and hub links, with standard service, slower
speeds, and higher prices into a memorable tagline. A good tagline
must not only deliver a clear message but also advertise an offering
truthfully, or else customers will lose trust and interest. In fact, a
good way to test the effectiveness and strength of a strategy is to
look at whether it contains a strong and authentic tagline.
As shown in figure 2-7, Cirque du Soleil’s strategic profile also
meets the three criteria that define blue ocean strategy: focus, di-
vergence, and a compelling tagline. Cirque du Soleil’s strategy
canvas allows us to graphically compare its strategic profile with
those of its major competitors. The canvas shows clearly the ex-
tent of Cirque du Soleil’s departure from the conventional logic of
the circus. The figure shows that the value curve of Ringling Bros.
and Barnum & Bailey is the same basic shape as those of smaller
regional circuses. The main difference is that regional circuses
40 B L U E O C E A N S T R A T E G Y
F I G U R E 2-7
The Strategy Canvas of Cirque du Soleil
High
Low
Ringling Bros. and Barnum & Bailey Value Curve
Smaller
Regional
Circuses
Cirque du Soleil
Value Curve
Price Animal Multiple Thrills and Theme Multiple
shows show danger productions
Star Aisle arenas Fun Unique Refined Artistic
performers concessions and venue watching music
humor environment and dance
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offer less of each competing factor because of their restricted
resources.
By contrast, Cirque du Soleil’s value curve stands apart. It has
new and noncircus factors such as theme, multiple productions, re-
fined watching environment, and artistic music and dance. These
factors, entirely new creations for the circus industry, are drawn
from the alternative live entertainment industry of theater. In this
way, the strategy canvas clearly depicts the traditional factors that
affect competition among industry players, as well as new factors
that lead to creation of new market space and that shift the strat-
egy canvas of an industry.
[yellow tail], Cirque du Soleil, and Southwest Airlines created
blue oceans in very different business situations and industrial
contexts. However, their strategic profiles shared the same three
characteristics: focus, divergence, and a compelling tagline. These
three criteria guide companies in carrying out the process of re-
construction to arrive at a breakthrough in value both for buyers
and for themselves.
Reading the Value Curves
The strategy canvas enables companies to see the future in the pres-
ent. To achieve this, companies must understand how to read value
curves. Embedded in the value curves of an industry is a wealth of
strategic knowledge on the current status and future of a business.
A Blue Ocean Strategy
The first question the value curves answer is whether a business de-
serves to be a winner. When a company’s value curve, or its com-
petitors’, meets the three criteria that define a good blue ocean
strategy—focus, divergence, and a compelling tagline that speaks to
the market—the company is on the right track. These three criteria
serve as an initial litmus test of the commercial viability of blue
ocean ideas.
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On the other hand, when a company’s value curve lacks focus, its
cost structure will tend to be high and its business model complex
in implementation and execution. When it lacks divergence, a com-
pany’s strategy is a me-too, with no reason to stand apart in the
marketplace. When it lacks a compelling tagline that speaks to buy-
ers, it is likely to be internally driven or a classic example of inno-
vation for innovation’s sake with no great commercial potential
and no natural take-off capability.
A Company Caught in the Red Ocean
When a company’s value curve converges with its competitors, it
signals that a company is likely caught within the red ocean of
bloody competition. A company’s explicit or implicit strategy tends
to be trying to outdo its competition on the basis of cost or quality.
This signals slow growth unless, by the grace of luck, the company
benefits from being in an industry that is growing on its own ac-
cord. This growth is not due to a company’s strategy, however, but
to luck.
Overdelivery Without Payback
When a company’s value curve on the strategy canvas is shown to
deliver high levels across all factors, the question is, Does the com-
pany’s market share and profitability reflect these investments? If
not, the strategy canvas signals that the company may be oversup-
plying its customers, offering too much of those elements that add
incremental value to buyers. To value-innovate, the company must
decide which factors to eliminate and reduce—and not only those
to raise and create—to construct a divergent value curve.
An Incoherent Strategy
When a company’s value curve looks like a bowl of spaghetti—a
zigzag with no rhyme or reason, where the offering can be de-
scribed as “low-high-low-low-high-low-high”—it signals that the
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company doesn’t have a coherent strategy. Its strategy is likely
based on independent substrategies. These may individually make
sense and keep the business running and everyone busy, but col-
lectively they do little to distinguish the company from the best
competitor or to provide a clear strategic vision. This is often a re-
flection of an organization with divisional or functional silos.
Strategic Contradictions
Are there strategic contradictions? These are areas where a com-
pany is offering a high level on one competing factor while ignor-
ing others that support that factor. An example is investing heavily
in making a company’s Web site easy to use but failing to correct
the site’s slow speed of operation. Strategic inconsistencies can
also be found between the level of your offering and your price. For
example, a petroleum station company found that it offered “less
for more”: fewer services than the best competitor at a higher price.
No wonder it was losing market share fast.
An Internally Driven Company
In drawing the strategy canvas, how does a company label the in-
dustry’s competing factors? For example, does it use the word mega-
hertz instead of speed, or thermal water temperature instead of hot
water? Are the competing factors stated in terms buyers can under-
stand and value, or are they in operational jargon? The kind of lan-
guage used in the strategy canvas gives insight as to whether a
company’s strategic vision is built on an “outside-in” perspective,
driven by the demand side, or an “inside-out” perspective that is op-
erationally driven. Analyzing the language of the strategy canvas
helps a company understand how far it is from creating industry
demand.
The tools and frameworks introduced here are essential analytics
used throughout this book, and supplementary tools are introduced
Analytical Tools and Frameworks 43
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in other chapters as needed. It is the intersection between these
analytic techniques and the six principles of formulating and exe-
cuting blue oceans that allow companies to break from the compe-
tition and unlock uncontested market space.
Now we move on to the first principle, reconstructing market
boundaries. In the next chapter we discuss the opportunity-maxi-
mizing and risk-minimizing paths to creating blue oceans.
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( ) ( ) ( ) ( ) (
P A R T T W O
Formulating Blue
Ocean Strategy
( ) ( ) ( ) ( ) (
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( ) ( ) ( ) ( )
C H A P T E R 3
Reconstruct Market Boundaries
TH E F I R S T P R I N C I P L E of blue ocean strategy is to re-construct market boundaries to break from the compe-
tition and create blue oceans. This principle addresses the search
risk many companies struggle with. The challenge is to success-
fully identify, out of the haystack of possibilities that exist, com-
mercially compelling blue ocean opportunities. This challenge is
key because managers cannot afford to be riverboat gamblers bet-
ting their strategy on intuition or on a random drawing.
In conducting our research, we sought to discover whether there
were systematic patterns for reconstructing market boundaries to
create blue oceans. And, if there were, we wanted to know whether
these patterns applied across all types of industry sectors—from
consumer goods, to industrial products, to finance and services, to
telecoms and IT, to pharmaceuticals and B2B—or were they lim-
ited to specific industries?
We found clear patterns for creating blue oceans. Specifically,
we found six basic approaches to remaking market boundaries. We
call this the six paths framework. These paths have general applica-
bility across industry sectors, and they lead companies into the
( ) ( ) ( ) ( )
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corridor of commercially viable blue ocean ideas. None of these
paths requires special vision or foresight about the future. All are
based on looking at familiar data from a new perspective.
These paths challenge the six fundamental assumptions underly-
ing many companies’ strategies. These six assumptions, on which
most companies hypnotically build their strategies, keep compa-
nies trapped competing in red oceans. Specifically, companies tend
to do the following:
• Define their industry similarly and focus on being the best
within it
• Look at their industries through the lens of generally ac-
cepted strategic groups (such as luxury automobiles, econ-
omy cars, and family vehicles), and strive to stand out in the
strategic group they play in
• Focus on the same buyer group, be it the purchaser (as in the
office equipment industry), the user (as in the clothing indus-
try), or the influencer (as in the pharmaceutical industry)
• Define the scope of the products and services offered by their
industry similarly
• Accept their industry’s functional or emotional orientation
• Focus on the same point in time—and often on current com-
petitive threats—in formulating strategy
The more that companies share this conventional wisdom
about how they compete, the greater the competitive convergence
among them.
To break out of red oceans, companies must break out of the ac-
cepted boundaries that define how they compete. Instead of look-
ing within these boundaries, managers need to look systematically
across them to create blue oceans. They need to look across alter-
native industries, across strategic groups, across buyer groups,
across complementary product and service offerings, across the
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functional-emotional orientation of an industry, and even across
time. This gives companies keen insight into how to reconstruct
market realities to open up blue oceans. Let’s examine how each of
these six paths works.
Path 1: Look Across Alternative Industries
In the broadest sense, a company competes not only with the other
firms in its own industry but also with companies in those other in-
dustries that produce alternative products or services. Alternatives
are broader than substitutes. Products or services that have differ-
ent forms but offer the same functionality or core utility are often
substitutes for each other. On the other hand, alternatives include
products or services that have different functions and forms but the
same purpose.
For example, to sort out their personal finances, people can buy
and install a financial software package, hire a CPA, or simply use
pencil and paper. The software, the CPA, and the pencil are largely
substitutes for each other. They have very different forms but serve
the same function: helping people manage their financial affairs.
In contrast, products or services can take different forms and
perform different functions but serve the same objective. Consider
cinemas versus restaurants. Restaurants have few physical fea-
tures in common with cinemas and serve a distinct function: They
provide conversational and gastronomical pleasure. This is a very
different experience from the visual entertainment offered by cine-
mas. Despite the differences in form and function, however, people
go to a restaurant for the same objective that they go to the movies:
to enjoy a night out. These are not substitutes, but alternatives to
choose from.
In making every purchase decision, buyers implicitly weigh al-
ternatives, often unconsciously. Do you need a self-indulgent two
hours? What should you do to achieve it? Do you go to movie, have a
massage, or enjoy reading a favorite book at a local café? The
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thought process is intuitive for individual consumers and indus-
trial buyers alike.
For some reason, we often abandon this intuitive thinking when
we become sellers. Rarely do sellers think consciously about how
their customers make trade-offs across alternative industries. A
shift in price, a change in model, even a new ad campaign can elicit
a tremendous response from rivals within an industry, but the same
actions in an alternative industry usually go unnoticed. Trade jour-
nals, trade shows, and consumer rating reports reinforce the verti-
cal walls between one industry and another. Often, however, the
space between alternative industries provides opportunities for
value innovation.
Consider NetJets, which created the blue ocean of fractional jet
ownership. In less than twenty years NetJets has grown larger than
many airlines, with more than five hundred aircraft, operating
more than two hundred fifty thousand flights to more than one hun-
dred forty countries. Purchased by Berkshire Hathaway in 1998,
today NetJets is a multibillion-dollar business, with revenues grow-
ing at 30–35 percent per year from 1993 to 2000. NetJets’ success
has been attributed to its flexibility, shortened travel time, hassle-
free travel experience, increased reliability, and strategic pricing.
The reality is that NetJets reconstructed market boundaries to cre-
ate this blue ocean by looking across alternative industries.
The most lucrative mass of customers in the aviation industry
are corporate travelers. NetJets looked at the existing alternatives
and found that when business travelers want to fly, they have two
principal choices. On the one hand, a company’s executives can fly
business class or first class on a commercial airline. On the other
hand, a company can purchase its own aircraft to serve its corpo-
rate travel needs. The strategic question is, Why would corpora-
tions choose one alternative industry over another? By focusing on
the key factors that lead corporations to trade across alternatives
and eliminating or reducing everything else, NetJets created its
blue ocean strategy.
Consider this: Why do corporations choose to use commercial
airlines for their corporate travel? Surely it’s not because of the
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long check-in and security lines, hectic flight transfers, overnight
stays, or congested airports. Rather, they choose commercial air-
lines for only one reason: costs. On the one hand, commercial travel
avoids the high up-front, fixed-cost investment of a multimillion-
dollar jet aircraft. On the other hand, a company purchases only
the number of corporate airline tickets needed per year, lowering
variable costs and reducing the possibility of unused aviation
travel time that often accompanies the ownership of corporate jets.
So NetJets offers its customers one-sixteenth ownership of an
aircraft to be shared with fifteen other customers, each one entitled
to fifty hours of flight time per year. Starting at $375,000 (plus pilot,
maintenance, and other monthly costs), owners can purchase a
share in a $6 million aircraft.1 Customers get the convenience of a
private jet at the price of a commercial airline ticket. Comparing
first-class travel with private aircraft, the National Business Avia-
tion Association found that when direct and indirect costs—hotel,
meals, travel time, expenses—were factored in, the cost of first-
class commercial travel was significantly higher. In a cost-benefit
analysis for four passengers on a theoretical trip from Newark to
Austin, the real cost of the commercial trip was $19,400, compared
with $10,100 in a private jet.2 As for NetJets, it avoids the enormous
fixed costs that commercial airlines attempt to cover by filling larger
and larger aircraft. NetJets’ smaller airplanes, the use of smaller
regional airports, and limited staff keep costs to a minimum.
To understand the rest of the NetJets formula, consider the flip
side: Why do people choose corporate jets over commercial travel?
Certainly it is not to pay the multimillion-dollar price to purchase
planes. Nor is it to set up a dedicated flight department to take care
of scheduling and other administrative matters. Nor it is to pay so-
called deadhead costs—the costs of flying the aircraft from its
home base to where it is needed. Rather, corporations buy private
jets to dramatically cut total travel time, to reduce the hassle
of congested airports, to allow for point-to-point travel, and to
gain the benefit of having more productive and energized execu-
tives who can hit the ground running upon arrival. So NetJets built
on these distinctive strengths. Whereas 70 percent of commercial
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flights went to only thirty airports across the United States, Net-
Jets offered access to more than five thousand five hundred airports
across the country, in convenient locations near business centers.
On international flights, your plane pulls directly up to the cus-
toms office.
With point-to-point service and the exponential increase in the
number of airports to land in, there are no flight transfers; trips
that would otherwise require overnight stays can be completed in a
single day. The time from your car to takeoff is measured in min-
utes instead of hours. For example, whereas a flight from Washing-
ton, D.C., to Sacramento would take 10.5 hours on a commercial
airline, it is only 5.2 hours on a NetJets aircraft; from Palm Springs
to Cabo San Lucas takes 6 hours commercial, and only 2.1 hours via
NetJets.3 NetJets offers substantial cost savings in total travel time.
Perhaps most appealing, your jet is always available with only
four hours’ notice. If a jet is not available, NetJets will charter one
for you. Last but not least, NetJets dramatically reduces issues re-
lated to security threats and offers clients customized in-flight ser-
vice, such as having your favorite food and beverages ready for you
when you board.
By offering the best of commercial travel and private jets and
eliminating and reducing everything else, NetJets opened up a
multibillion-dollar blue ocean wherein customers get the conven-
ience and speed of a private jet with a low fixed cost and the low
variable cost of commercial airline travel (see figure 3-1). And the
competition? According to NetJets, in the past seven years fifty-
seven companies have set up fractional jet operations; of those,
fifty-seven have gone out of business.
The biggest telecommunications success in Japan since the
1980s also has its roots in path 1. Here we are speaking of NTT
DoCoMo’s i-mode, which was launched in 1999. The i-mode service
changed the way people communicate and access information in
Japan. NTT DoCoMo’s insight into creating a blue ocean came by
thinking about why people trade-across the alternatives of mobile
phones and the Internet. With deregulation of the Japanese tele-
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communications industry, new competitors were entering the mar-
ket and price competition and technological races were the norm.
The result was that costs were rising while the average revenue per
user fell. NTT DoCoMo broke out of this red ocean of bloody com-
petition by creating a blue ocean of wireless transmission not only
of voice but also of text, data, and pictures.
NTT DoCoMo asked, What are the distinctive strengths of the
Internet over cell phones, and vice versa? Although the Internet of-
fered endless information and services, the killer apps were e-mail,
simple information (such as news, weather forecasts, and a tele-
phone directory), and entertainment (including games, events, and
music entertainment). The key downside of the Internet was the far
higher price of computer hardware, an overload of information, the
nuisance of dialing up to go online, and the fear of giving credit
Reconstruct Market Boundaries 53
F I G U R E 3-1
The Strategy Canvas of NetJets
High
Low
Price Need for Deadhead Speed of total Ease of travel Flexibility In-flight
customers costs travel time (including and service
to manage check-in, reliability
aircraft customs, etc.)
(aircraft
management
and administration)
Private Jet
Corporate travel
NetJets’ Value Curve
Commercial Airlines
First- and business-class business travel
(fixed
purchase
+ variable
price per
flight)
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card information electronically. On the other hand, the distinctive
strengths of mobile phones were their mobility, voice transmission,
and ease of use.
NTT DoCoMo broke the trade-off between these two alterna-
tives, not by creating new technology but by focusing on the deci-
sive advantages that the Internet has over the cell phone and vice
versa. The company eliminated or reduced everything else. Its user-
friendly interface has one simple button, the i-mode button (i stand-
ing for interactive, Internet, information, and the English pronoun
I), which users press to give them immediate access to the few killer
apps of the Internet. Instead of barraging you with infinite infor-
mation as on the Internet, however, the i-mode button acts as a
hotel concierge service, connecting only to preselected and preap-
proved sites for the most popular Internet applications. That makes
navigation fast and easy. At the same time, even though the i-mode
phone is priced 25 percent higher than a regular cell phone, the
price of the i-mode phone is dramatically less than that of a PC,
and its mobility is high.
Moreover, beyond adding voice, the i-mode uses a simple billing
service whereby all the services used on the Web via the i-mode are
billed to the user on the same monthly bill. This dramatically re-
duces the number of bills users receive and eliminates the need to
give credit card details, as on the Internet. And because the i-mode
service is automatically turned on whenever the phone is on, users
are always connected and have no need to go through the hassle of
logging on.
Neither the standard cell phone nor the PC could compete with
i-mode’s divergent value curve. By the end of 2003 the number of
i-mode subscribers had reached 40.1 million, and revenues from the
transmission of data, pictures, and text increased from 295 million
yen ($2.6 million) in 1999 to 886.3 billion yen ($8 billion) in 2003.
The i-mode service did not simply win customers from competitors.
It dramatically grew the market, drawing in youth and senior citi-
zens and converting voice-only customers to voice and data trans-
mission customers.
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Ironically, European and U.S. counterparts who have been scram-
bling to unlock a similar blue ocean in the West have so far failed.
Why? Our assessment shows that they have been focused on deliver-
ing the most sophisticated technology, WAP (wireless application
protocol), instead of delivering exceptional value. This has led
them to build overcomplicated offerings that miss the key common-
alities valued by the mass of people.
Many other well-known success stories have looked across alter-
natives to create new markets. The Home Depot offers the expertise of
professional home contractors at markedly lower prices than hard-
ware stores. By delivering the decisive advantages of both alterna-
tive industries—and eliminating or reducing everything else—The
Home Depot has transformed enormous latent demand for home
improvement into real demand, making ordinary homeowners into
do-it-yourselfers. Southwest Airlines concentrated on driving as the
alternative to flying, providing the speed of air travel at the price of
car travel and creating the blue ocean of short-haul air travel. Simi-
larly, Intuit looked to the pencil as the chief alternative to personal
financial software to develop the fun and intuitive Quicken software.
What are the alternative industries to your industry? Why do
customers trade across them? By focusing on the key factors that
lead buyers to trade across alternative industries and eliminating
or reducing everything else, you can create a blue ocean of new
market space.
Path 2: Look Across Strategic
Groups Within Industries
Just as blue oceans can often be created by looking across alterna-
tive industries, so can they be unlocked by looking across strategic
groups. The term refers to a group of companies within an industry
that pursue a similar strategy. In most industries, the fundamental
strategic differences among industry players are captured by a small
number of strategic groups.
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Strategic groups can generally be ranked in a rough hierarchical
order built on two dimensions: price and performance. Each jump
in price tends to bring a corresponding jump in some dimensions of
performance. Most companies focus on improving their competi-
tive position within a strategic group. Mercedes, BMW, and Jaguar,
for example, focus on outcompeting one another in the luxury car
segment as economy car makers focus on excelling over one an-
other in their strategic group. Neither strategic group, however,
pays much heed to what the other is doing because from a supply
point of view they do not seem to be competing.
The key to creating a blue ocean across existing strategic groups
is to break out of this narrow tunnel vision by understanding
which factors determine customers’ decisions to trade up or down
from one group to another.
Consider Curves, the Texas-based women’s fitness company.
Since franchising began in 1995, Curves has grown like wildfire, ac-
quiring more than two million members in more than six thousand
locations, with total revenues exceeding the $1 billion mark. A new
Curves opens, on average, every four hours somewhere in the world.
What’s more, this growth was triggered almost entirely through
word of mouth and buddy referrals. Yet, at its inception, Curves
was seen as entering an oversaturated market, gearing its offering
to customers who would not want it, and making its offering signif-
icantly blander than the competition’s. In reality, however, Curves
exploded demand in the U.S. fitness industry, unlocking a huge un-
tapped market, a veritable blue ocean of women struggling and fail-
ing to keep in shape through sound fitness. Curves built on the
decisive advantages of two strategic groups in the U.S. fitness in-
dustry—traditional health clubs and home exercise programs—
and eliminated or reduced everything else.
At the one extreme, the U.S. fitness industry is awash with tradi-
tional health clubs that catered to both men and women, offering a
full range of exercise and sporting options, usually in upscale urban
locations. Their trendy facilities are designed to attract the high-end
health club set. They have the full range of aerobic and strength
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training machines, a juice bar, instructors, and a full locker room
with showers and sauna, because the aim is for customers to spend
social as well as exercise time there. Having fought their way
across town to health clubs, customers typically spend at least an
hour there, and more often two. Membership fees for all this are
typically in the range of $100 per month—not cheap, guaranteeing
that the market would stay upscale and small. Traditional health
club customers represent only 12 percent of the entire population,
concentrated overwhelmingly in the larger urban areas. Investment
costs for a traditional full-service health club run from $500,000 to
more than $1 million, depending on the city center location.
At the other extreme is the strategic group of home exercise pro-
grams, such as exercise videos, books, and magazines. These are a
small fraction of the cost, are used at home, and generally require
little or no exercise equipment. Instruction is minimal, being con-
fined to the star of the exercise video or book and magazine expla-
nations and illustrations.
The question is, What makes women trade either up or down be-
tween traditional health clubs and home exercise programs? Most
women don’t trade up to health clubs for the profusion of special
machines, juice bars, locker rooms with sauna, pool, and the
chance to meet men. The average female nonathlete does not even
want to run into men when she is working out, perhaps revealing
lumps in her leotards. She is not inspired to line up behind ma-
chines in which she needs to change weights and adjust their in-
cline angles. As for time, it has become an increasingly scarce
commodity for the average woman. Few can afford to spend one to
two hours at a health club several times a week. For the mass of
women, the city center locations also present traffic challenges,
something that increases stress and discourages going to the gym.
It turns out that most women trade up to health clubs for one
principal reason. When they are at home it’s too easy to find an ex-
cuse for not working out. It is hard to be disciplined in the confines
of one’s home if you are not already a committed sports enthusiast.
Working out collectively, instead of alone, is more motivating and
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inspiring. Conversely, women who use home exercise programs do
so primarily for the time saving, lower costs, and privacy.
Curves built its blue ocean by drawing on the distinctive strengths
of these two strategic groups, eliminating and reducing everything
else (see figure 3-2). Curves has eliminated all the aspects of the tra-
ditional health club that are of little interest to the broad mass of
women. Gone are the profusion of special machines, food, spa, pool,
and even locker rooms, which have been replaced by a few curtained-
off changing areas.
The experience in a Curves club is entirely different from that in
a typical health club. The member enters the exercise room where
the machines (typically about ten) are arranged, not in rows facing
a television as in the health club, but in a circle to facilitate inter-
change among members, making the experience fun. The QuickFit
circuit training system uses hydraulic exercise machines, which
need no adjusting, are safe, simple to use, and nonthreatening.
Specifically designed for women, these machines reduce impact
stress and build strength and muscle. While exercising, members
can talk and support one another, and the social, nonjudgmental
atmosphere is totally different from that of a typical health club.
There are few if any mirrors on the wall, and there are no men star-
ing at you. Members move around the circle of machines and aero-
bic pads and in thirty minutes complete the whole workout. The
result of reducing and focusing service on the essentials is that
prices fall to around $30 per month, opening the market to the
broad mass of women. Curves’ tagline could be “for the price of a
cup of coffee a day you can obtain the gift of health through proper
exercise.”
Curves offers the distinctive value depicted in figure 3-2 at a
lower cost. Compared with the start-up investment of $500,000 to
$1 million for traditional health clubs, start-up investments for
Curves are in the range of only $25,000 to $30,000 (excluding a
$20,000 franchise fee) because of the wide range of factors the com-
pany eliminated. Variable costs are also significantly lower, with
personnel and maintenance of facilities dramatically reduced and
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rent reduced because of the much smaller spaces required: 1,500
square feet in nonprime suburban locations versus 35,000 to 100,000
square feet in prime urban locations. Curves’ low-cost business
model makes its franchises easy to afford and helps explain why
they have mushroomed quickly. Most franchises are profitable
within a few months, as soon as they recruit on average one hun-
dred members. Established Curves franchises are selling in the
range of $100,000 to $150,000 on the secondary market.
The result is that Curves facilities are everywhere in most towns
of any size. Curves is not competing directly with other health and
exercise concepts; it created new blue ocean demand. As the
United States and North America become saturated, management
has plans to expand into Europe. Expansion has already begun in
Latin America and Spain. By the end of 2004, Curves is expected to
reach eight thousand five hundred fitness centers.
Reconstruct Market Boundaries 59
F I G U R E 3-2
The Strategy Canvas of Curves
High
Low
Price Workout Availability of Nonthreatening Womanly
equipment instructors same-sex fun
Amenities (treadmills, Workout Environment environ- Conven- atmos-
weights, time encouraging ment ience phere
etc.) discipline
and motivation
in exercise
Curves
Home Exercise
Program
Traditional
Health Clubs
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Beyond Curves, many companies have created blue oceans by
looking across strategic groups. Ralph Lauren created the blue
ocean of “high fashion with no fashion.” Its designer name, the ele-
gance of its stores, and the luxury of its materials capture what
most customers value in haute couture. At the same time, its up-
dated classical look and price capture the best of the classical lines
such as Brooks Brothers and Burberry. By combining the most at-
tractive factors of both groups and eliminating or reducing every-
thing else, Polo Ralph Lauren not only captured share from both
segments but also drew many new customers into the market.
In the luxury car market, Toyota’s Lexus carved out a new blue
ocean by offering the quality of the high-end Mercedes, BMW, and
Jaguar at a price closer to the lower-end Cadillac and Lincoln. And
think of the Sony Walkman. By looking across the high fidelity of
boom boxes with the low price and mobility of transistor radios
within the audio equipment industry, Sony created the personal
portable-stereo market in the late 1970s. The Walkman took share
from these two strategic groups. In addition, its leap in value drew new
customers, including joggers and commuters, into this blue ocean.
Michigan-based Champion Enterprises identified a similar op-
portunity by looking across two strategic groups in the housing in-
dustry: makers of prefabricated housing and on-site developers.
Prefabricated houses are cheap and quick to build, but they are
also dismally standardized and have a low-quality image. Houses
built by developers on-site offer variety and an image of high qual-
ity but are dramatically more expensive and take longer to build.
Champion created a blue ocean by offering the decisive advan-
tages of both strategic groups. Its prefabricated houses are quick to
build and benefit from tremendous economies of scale and lower
costs, but Champion also allows buyers to choose such high-end fin-
ishing touches as fireplaces, skylights, and even vaulted ceilings to
give the homes a personal feel. In essence, Champion has changed
the definition of prefabricated housing. As a result, far more lower-
to middle-income buyers have become interested in purchasing pre-
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fabricated housing rather than renting or buying an apartment,
and even some affluent people are being drawn into the market.
What are the strategic groups in your industry? Why do cus-
tomers trade up for the higher group, and why do they trade down
for the lower one?
Path 3: Look Across the Chain of Buyers
In most industries, competitors converge around a common defini-
tion of who the target buyer is. In reality, though, there is a chain of
“buyers” who are directly or indirectly involved in the buying deci-
sion. The purchasers who pay for the product or service may differ
from the actual users, and in some cases there are important influ-
encers as well. Although these three groups may overlap, they often
differ. When they do, they frequently hold different definitions of
value. A corporate purchasing agent, for example, may be more con-
cerned with costs than the corporate user, who is likely to be far
more concerned with ease of use. Similarly, a retailer may value a
manufacturer’s just-in-time stock replenishment and innovative fi-
nancing. But consumer purchasers, although strongly influenced
by the channel, do not value these things.
Individual companies in an industry often target different cus-
tomer segments—for example, large versus small customers. But an
industry typically converges on a single buyer group. The pharma-
ceutical industry, for example, focuses overridingly on influencers:
doctors. The office equipment industry focuses heavily on pur-
chasers: corporate purchasing departments. And the clothing in-
dustry sells predominantly to users. Sometimes there is a strong
economic rationale for this focus. But often it is the result of indus-
try practices that have never been questioned.
Challenging an industry’s conventional wisdom about which
buyer group to target can lead to the discovery of new blue ocean.
By looking across buyer groups, companies can gain new insights
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into how to redesign their value curves to focus on a previously
overlooked set of buyers.
Think of Novo Nordisk, the Danish insulin producer that cre-
ated a blue ocean in the insulin industry. Insulin is used by diabet-
ics to regulate the level of sugar in their blood. Historically, the
insulin industry, like most of the pharmaceutical industry, focused
its attention on the key influencers: doctors. The importance of
doctors in affecting the insulin purchasing decision of diabetics
made doctors the target buyer group of the industry. Accordingly,
the industry geared its attention and efforts to produce purer in-
sulin in response to doctors’ quest for better medication. The issue
was that innovations in purification technology had improved dra-
matically by the early 1980s. As long as the purity of insulin was
the major parameter upon which companies competed, little
progress could be made further in that direction. Novo itself had
already created the first “human monocomponent” insulin that
was a chemically exact copy of human insulin. Competitive conver-
gence among the major players was rapidly occurring.
Novo Nordisk, however, saw that it could break away from the
competition and create a blue ocean by shifting the industry’s long-
standing focus on doctors to the users—patients themselves. In fo-
cusing on patients, Novo Nordisk found that insulin, which was
supplied to diabetes patients in vials, presented significant chal-
lenges in administering. Vials left the patient with the complex and
unpleasant task of handling syringes, needles, and insulin, and
of administering doses according to his or her needs. Needles and
syringes also evoked unpleasant feelings of social stigmatism for
patients. And patients did not want to fiddle with syringes and nee-
dles outside their homes, a frequent occurrence because many pa-
tients must inject insulin several times a day.
This led Novo Nordisk to the blue ocean opportunity of NovoPen,
launched in 1985. NovoPen, the first user-friendly insulin delivery
solution, was designed to remove the hassle and embarrassment of
administering insulin. The NovoPen resembled a fountain pen; it
contained an insulin cartridge that allowed the patient to easily
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carry, in one self-contained unit, roughly a week’s worth of insulin.
The pen had an integrated click mechanism, making it possible for
even blind patients to control the dosing and administer insulin.
Patients could take the pen with them and inject insulin with ease
and convenience without the embarrassing complexity of syringes
and needles.
To dominate the blue ocean it had unlocked, Novo Nordisk fol-
lowed up by introducing, in 1989, NovoLet, a prefilled disposable in-
sulin injection pen with a dosing system that provided users with
even greater convenience and ease of use. And in 1999 it brought
out the Innovo, an integrated electronic memory and cartridge-
based delivery system. Innovo was designed to manage the delivery
of insulin through built-in memory and to display the dose, the last
dose, and the elapsed time—information that is critical for reduc-
ing risk and eliminating worries about missing a dose.
Novo Nordisk’s blue ocean strategy shifted the industry landscape
and transformed the company from an insulin producer to a dia-
betes care company. NovoPen and the later delivery systems swept
over the insulin market. Sales of insulin in prefilled devices or pens
now account for the dominant share in Europe and Japan, where
patients are advised to take frequent injections of insulin every day.
Although Novo Nordisk itself has more than a 60 percent share in
Europe and 80 percent in Japan, 70 percent of its total turnover
comes from diabetes care, an offering that originated largely in the
company’s thinking in terms of users rather than influencers.
Similarly, consider Bloomberg. In a little more than a decade,
Bloomberg became one of the largest and most profitable business-
information providers in the world. Until Bloomberg’s debut in the
early 1980s, Reuters and Telerate dominated the online financial-
information industry, providing news and prices in real time to the
brokerage and investment community. The industry focused on pur-
chasers—IT managers—who valued standardized systems, which
made their lives easier.
This made no sense to Bloomberg. Traders and analysts, not IT
managers, make or lose millions of dollars for their employers each
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day. Profit opportunities come from disparities in information.
When markets are active, traders and analysts must make rapid de-
cisions. Every second counts.
So Bloomberg designed a system specifically to offer traders bet-
ter value, one with easy-to-use terminals and keyboards labeled
with familiar financial terms. The systems also have two flat-panel
monitors so that traders can see all the information they need at
once without having to open and close numerous windows. Because
traders must analyze information before they act, Bloomberg added
a built-in analytic capability that works with the press of a button.
Before, traders and analysts had to download data and use a pencil
and calculators to perform important financial calculations. Now
users can quickly run “what if ” scenarios to compute returns on al-
ternative investments, and they can perform longitudinal analyses
of historical data.
By focusing on users, Bloomberg was also able to see the paradox
of traders’ and analysts’ personal lives. They have tremendous in-
come but work such long hours that they have little time to spend
it. Realizing that markets have slow times during the day when lit-
tle trading takes place, Bloomberg decided to add information and
purchasing services aimed at enhancing traders’ personal lives.
Traders can use these services to buy items such as flowers, cloth-
ing, and jewelry; make travel arrangements; get information about
wines; or search through real estate listings.
By shifting its focus upstream from purchasers to users, Bloom-
berg created a value curve that was radically different from any-
thing the industry had seen before. The traders and analysts wielded
their power within their firms to force IT managers to purchase
Bloomberg terminals.
Many industries afford similar opportunities to create blue
oceans. By questioning conventional definitions of who can and
should be the target buyer, companies can often see fundamentally
new ways to unlock value. Consider how Canon copiers created the
small desktop copier industry by shifting the target customer of
the copier industry from corporate purchasers to users. Or how
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SAP shifted the customer focus of the business application soft-
ware industry from the functional user to the corporate purchaser
to create its enormously successful real-time integrated software
business.
What is the chain of buyers in your industry? Which buyer group
does your industry typically focus on? If you shifted the buyer
group of your industry, how could you unlock new value?
Path 4: Look Across Complementary
Product and Service Offerings
Few products and services are used in a vacuum. In most cases,
other products and services affect their value. But in most indus-
tries, rivals converge within the bounds of their industry’s product
and service offerings. Take movie theaters. The ease and cost of
getting a babysitter and parking the car affect the perceived value
of going to the movies. Yet these complementary services are be-
yond the bounds of the movie theater industry as it has been tradi-
tionally defined. Few cinema operators worry about how hard or
costly it is for people to get babysitters. But they should, because it
affects demand for their business. Imagine a movie theater with a
babysitting service.
Untapped value is often hidden in complementary products and
services. The key is to define the total solution buyers seek when
they choose a product or service. A simple way to do so is to think
about what happens before, during, and after your product is used.
Babysitting and parking the car are needed before people can go to
the movies. Operating and application software are used along
with computer hardware. In the airline industry, ground trans-
portation is used after the flight but is clearly part of what the cus-
tomer needs to travel from one place to another.
Consider NABI, a Hungarian bus company. It applied path 4 to
the $1 billion U.S. transit bus industry. The major customers in
the industry are public transport properties (PTPs), municipally
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owned transportation companies serving fixed-route public bus
transportation in major cities or counties.
Under the accepted rules of competition in the industry, compa-
nies competed to offer the lowest purchase price. Designs were out-
dated, delivery times were late, quality was low, and the price of
options was prohibitive given the industry’s penny-pinching ap-
proach. To NABI, however, none of this made sense. Why were bus
companies focused only on the initial purchase price of the bus,
when municipalities kept buses in circulation for twelve years on
average? When it framed the market in this way, NABI saw insights
that had escaped the entire industry.
NABI discovered that the highest-cost element to municipalities
was not the price of the bus per se, the factor the whole industry
competed on, but rather the costs that came after the bus was pur-
chased: the maintenance of running the bus over its twelve-year
life cycle. Repairs after traffic accidents, fuel usage, wear and tear
on parts that frequently needed to be replaced due to the bus’s
heavy weight, preventive body work to stop rusting, and the like—
these were the highest-cost factors to municipalities. With new de-
mands for clean air being placed on municipalities, the cost for
public transport not being environmentally friendly was also begin-
ning to be felt. Yet despite all these costs, which outstripped the
initial bus price, the industry had virtually overlooked the comple-
mentary activity of maintenance and life-cycle costs.
This made NABI realize that the transit bus industry did not
have to be a commodity-price-driven industry but that bus compa-
nies, focusing on selling buses at the lowest possible price, had
made it that way. By looking at the total solution of complemen-
tary activities, NABI created a bus unlike any the industry had
seen before. Buses were normally made from steel, which was
heavy, corrosive, and hard to repair after accidents because entire
panels had to be replaced. NABI adopted fiberglass in making its
buses, a practice that killed five birds with one stone. Fiberglass
bodies substantially cut the costs of preventive maintenance by
being corrosion-free. It made body repairs faster, cheaper, and eas-
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ier because fiberglass does not require panel replacements for
dents and accidents; rather, damaged parts are simply cut out and
new fiberglass materials are easily soldered. At the same time, its
light weight (30–35 percent lighter than steel) cut fuel consumption
and emissions substantially, making the buses more environmen-
tally friendly. Moreover, its light weight allowed NABI to use not
only lower-powered engines but also fewer axles, resulting in lower
manufacturing costs and more space inside the bus.
In this way, NABI created a value curve that is radically diver-
gent from the industry’s average curve. As you can see in figure 3-3,
by building its buses in lightweight fiberglass, NABI eliminated or
significantly reduced costs related to corrosion prevention, mainte-
nance, and fuel consumption. As a result, even though NABI
charged a higher initial purchase price than the average price of
the industry, it offered its buses at a much lower life-cycle cost to
municipalities. With much lighter emissions, the NABI buses
Reconstruct Market Boundaries 67
F I G U R E 3-3
The Strategy Canvas of the U.S. Municipal Bus Industry, Circa 2001
High
Low
Initial Corrosion Maintenance Fuel Environmental Aesthetic Customer
purchase cost consumption friendliness design friendliness
price
NABI
Average U.S. Transit Bus
Life-Cycle Costs
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raised the level of environmental friendliness high above the indus-
try standard. Moreover, the higher price NABI charged allowed it
to create factors unprecedented in the industry, such as modern
aesthetic design and customer friendliness, including lower floors
for easy mounting and more seats for less standing. These boosted
demand for transit bus service, generating more revenues for mu-
nicipalities. NABI changed the way municipalities saw their rev-
enues and costs involved in transit bus service. NABI created
exceptional value for the buyers—in this case for both municipali-
ties and end users—at a low life-cycle cost.
Not surprisingly, both municipalities and riders loved the new
buses. NABI has captured 20 percent of the U.S. market since its in-
ception in 1993, quickly vying for the number one slot in market
share, growth, and profitability. NABI, based in Hungary, created a
blue ocean that made the competition irrelevant in the United
States, creating a win-win for all: itself, municipalities, and citi-
zens. It has accumulated more than $1 billion in orders and was
named by the Economist Intelligence Unit in October 2002 as one
of the thirty most successful companies in the world.
Similarly, consider the British teakettle industry, which, despite
its importance to British culture, had flat sales and shrinking profit
margins until Philips Electronics came along with a teakettle that
turned the red ocean blue. By thinking in terms of complementary
products and services, Philips saw that the biggest issue the British
had in brewing tea was not in the kettle itself but in the comple-
mentary product of water, which had to be boiled in the kettle. The
issue was the lime scale found in tap water. The lime scale accumu-
lated in kettles as the water was boiled, and later found its way into
the freshly brewed tea. The phlegmatic British typically took a tea-
spoon and went fishing to capture the off-putting lime scale before
drinking home-brewed tea. To the kettle industry, the water issue
was not its problem. It was the problem of another industry—the
public water supply.
By thinking in terms of solving the major pain points in cus-
tomers’ total solution, Philips saw the water problem as its oppor-
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tunity. The result: Philips created a kettle having a mouth filter
that effectively captured the lime scale as the water was poured.
Lime scale would never again be found swimming in British home-
brewed tea. The industry was again kick-started on a strong growth
trajectory as people began replacing their old kettles with the new
filtered kettles.
There are many other examples of companies that have followed
this path to create a blue ocean. Borders and Barnes & Noble
(B&N) superstores redefined the scope of the services they offer.
They transformed the product they sell from the book itself into
the pleasure of reading and intellectual exploration, adding lounges,
knowledgeable staff, and coffee bars to create an environment that
celebrates reading and learning. In less than six years, Borders and
B&N emerged as the two largest bookstore chains in the United
States, with more than one thousand seventy superstores between
them. Virgin Entertainment’s megastores combine CDs, videos, com-
puter games, and stereo and audio equipment to satisfy buyers’
complete entertainment needs. Dyson designs its vacuum cleaners
to eliminate the cost and annoyance of having to buy and change
vacuum cleaner bags. Zeneca’s Salick cancer centers combine all
the cancer treatments their patients might need under one roof so
that they don’t have to go from one specialized center to another,
making separate appointments for each service they require.
What is the context in which your product or service is used?
What happens before, during, and after? Can you identify the pain
points? How can you eliminate these pain points through a comple-
mentary product or service offering?
Path 5: Look Across Functional or
Emotional Appeal to Buyers
Competition in an industry tends to converge not only on an ac-
cepted notion of the scope of its products and services but also on
one of two possible bases of appeal. Some industries compete
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principally on price and function largely on calculations of utility;
their appeal is rational. Other industries compete largely on feel-
ings; their appeal is emotional.
Yet the appeal of most products or services is rarely intrinsically
one or the other. Rather it is usually a result of the way companies
have competed in the past, which has unconsciously educated con-
sumers on what to expect. Companies’ behavior affects buyers’ ex-
pectations in a reinforcing cycle. Over time, functionally oriented
industries become more functionally oriented; emotionally ori-
ented industries become more emotionally oriented. No wonder
market research rarely reveals new insights into what attracts cus-
tomers. Industries have trained customers in what to expect. When
surveyed, they echo back: more of the same for less.
When companies are willing to challenge the functional-
emotional orientation of their industry, they often find new market
space. We have observed two common patterns. Emotionally oriented
industries offer many extras that add price without enhancing func-
tionality. Stripping away those extras may create a fundamentally
simpler, lower-priced, lower-cost business model that customers
would welcome. Conversely, functionally oriented industries can
often infuse commodity products with new life by adding a dose of
emotion and, in so doing, can stimulate new demand.
Two well-known examples are Swatch, which transformed the
functionally driven budget watch industry into an emotionally
driven fashion statement, or The Body Shop, which did the reverse,
transforming the emotionally driven industry of cosmetics into a
functional, no-nonsense cosmetics house. In addition, consider the
experience of QB (Quick Beauty) House. QB House created a blue
ocean in the Japanese barbershop industry and is rapidly growing
throughout Asia. Started in 1996 in Tokyo, QB House has blos-
somed from one outlet in 1996 to more than two hundred shops in
2003. The number of visitors surged from 57,000 in 1996 to 3.5 mil-
lion annually in 2002. The company is expanding in Singapore and
Malaysia and is targeting one thousand outlets in Asia by 2013.
At the heart of QB House’s blue ocean strategy is a shift in the
Asian barbershop industry from an emotional industry to a highly
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functional one. In Japan the time it takes to get a man’s haircut
hovers around one hour. Why? A long process of activities is under-
taken to make the haircutting experience a ritual. Numerous hot
towels are applied, shoulders are rubbed and massaged, customers
are served tea and coffee, and the barber follows a ritual in cutting
hair, including special hair and skin treatments such as blow dry-
ing and shaving. The result is that the actual time spent cutting
hair is a fraction of the total time. Moreover, these actions create a
long queue for other potential customers. The price of this haircut-
ting process is 3,000 to 5,000 yen ($27 to $45).
QB House changed all that. It recognized that many people, espe-
cially working professionals, do not wish to waste an hour on a
haircut. So QB House stripped away the emotional service ele-
ments of hot towels, shoulder rubs, and tea and coffee. It also dra-
matically reduced special hair treatments and focused mainly on
basic cuts. QB House then went one step further, eliminating the
traditional time-consuming wash-and-dry practice by creating the
“air wash” system—an overhead hose that is pulled down to “vac-
uum” every cut-off hair. This new system works much better and
faster, without getting the customer’s head wet. These changes re-
duced the haircutting time from one hour to ten minutes. More-
over, outside each shop is a traffic light system that indicates when
a haircut slot is available. This removes waiting time uncertainty
and eliminates the reservation desk.
In this way, QB House was able to reduce the price of a haircut to
1,000 yen ($9) versus the industry average of 3,000 to 5,000 yen
($27–$45) while raising the hourly revenue earned per barber nearly
50 percent, with lower staff costs and less required retail space per
barber. QB House created this “no-nonsense” haircutting service
with improved hygiene. It introduced not only a sanitation facility
set up for each chair but also a “one-use” policy, where every cus-
tomer is provided with a new set of towel and comb. To appreciate
its blue ocean creation, see figure 3-4.
Cemex, the world’s third-largest cement producer, is another
company that created a blue ocean by shifting the orientation of its
industry—this time in the reverse direction, from functional to
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emotional. In Mexico, cement sold in retail bags to the average do-
it-yourselfer represents more than 85 percent of the total cement
market.4 As it stood, however, the market was unattractive. There
were far more noncustomers than customers. Even though most
poor families owned their own land and cement was sold as a rela-
tively inexpensive functional input material, the Mexican popula-
tion lived in chronic overcrowding. Few families built additions,
and those that did took on average four to seven years to build only
one additional room. Why? Most of the families’ extra money was
spent on village festivals, quinceañeras (girls’ fifteen-year birthday
parties), baptisms, and weddings. Contributing to these important
milestone events was a chance to distinguish oneself in the commu-
nity, whereas not contributing would be a sign of arrogance and
disrespect.
As a result, most of Mexico’s poor had insufficient and inconsis-
tent savings to purchase building materials, even though having a
72 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 3-4
The Strategy Canvas of QB House
High
Low
Price Extra Hygiene Time savings
Reservation services Range of hair Time savings on haircut High-
desk (other than treatments on waiting performance
haircutting) “air wash”
system
QB House
Average Japanese Barbershop
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cement house was the stuff of dreams in Mexico. Cemex conserva-
tively estimated that this market could grow to be worth $500 mil-
lion to $600 million annually if it could unlock this latent demand.5
Cemex’s answer to this dilemma came in 1998 with its launch of
the Patrimonio Hoy program, which shifted the orientation of ce-
ment from a functional product to the gift of dreams. When people
bought cement they were on the path to building rooms of love,
where laughter and happiness could be shared—what better gift
could there be? At the foundation of Patrimonio Hoy was the tradi-
tional Mexican system of tandas, a traditional community savings
scheme. In a tanda, ten individuals (for example) contribute 100
pesos per week for ten weeks. In the first week, lots are drawn to see
who “wins” the 1,000 pesos ($93) in each of the ten weeks. All par-
ticipants win the 1,000 pesos one time only, but when they win, they
receive a large amount to make a large purchase.
In traditional tandas the “winning” family would spend the
windfall on an important festive or religious event such as a bap-
tism or marriage. In the Patrimonio Hoy, however, the supertanda is
directed toward building room additions with cement. Think of it
as a form of wedding registry, except that instead of giving, for ex-
ample, silverware, Cemex positioned cement as a loving gift.
The Patrimonio Hoy building materials club that Cemex set up
consisted of a group of roughly seventy people contributing on aver-
age 120 pesos each week for seventy weeks. The winner of the super-
tanda each week, however, did not receive the total sum in pesos
but rather received the equivalent building materials to complete
an entire new room. Cemex complemented the winnings with
the delivery of the cement to the winner’s home, construction
classes on how to effectively build rooms, and a technical adviser
who maintained a relationship with the participants during their
project.
Whereas Cemex’s competitors sold bags of cement, Cemex was
selling a dream, with a business model involving innovative finan-
cing and construction know-how. Cemex went a step further, throw-
ing small festivities for the town when a room was finished and
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thereby reinforcing the happiness it brought to people and the
tanda tradition.
Since the company launched this new emotional orientation of
Cemex cement coupled with its funding and technical services,
demand for cement has soared. Around 20 percent more families
are building additional rooms, and families are planning to build
two to three more rooms than originally planned. In a market that
competed on price with slow growth, Cemex enjoys 15 percent
monthly growth, selling its cement at higher prices (roughly 3.5
pesos). Cemex has so far tripled cement consumption by the mass of
do-it-yourself homebuilders—from 2,300 pounds consumed every
four years, on average, to the same amount being consumed in fif-
teen months. The predictability of the quantities of cement sold
through the supertandas also drops Cemex’s cost structure via
lower inventory costs, smoother production runs, and guaranteed
sales that lower costs of capital. Social pressure makes defaults on
supertanda payments rare. Overall, Cemex created a blue ocean of
emotional cement that achieved differentiation at a low cost.
Similarly, with its wildly successful Viagra, Pfizer shifted the
focus from medical treatment to lifestyle enhancement. Likewise,
consider how Starbucks turned the coffee industry on its head by
shifting its focus from commodity coffee sales to the emotional at-
mosphere in which customers enjoy their coffee.
A burst of blue ocean creation is under way in a number of ser-
vice industries but in the opposite direction—moving from an emo-
tional to a functional orientation. Relationship businesses, such as
insurance, banking, and investing, have relied heavily on the emo-
tional bond between broker and client. They are ripe for change.
Direct Line Group, a U.K. insurance company, for example, has done
away with traditional brokers. It reasoned that customers would
not need the hand-holding and emotional comfort that brokers tradi-
tionally provide if the company did a better job of, for example, pay-
ing claims rapidly and eliminating complicated paperwork. So
instead of using brokers and regional branch offices, Direct Line
uses information technology to improve claims handling, and it
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passes on some of the cost savings to customers in the form of lower
insurance premiums. In the United States, The Vanguard Group (in
index funds) and Charles Schwab (in brokerage services) are doing
the same thing in the investment industry, creating a blue ocean by
transforming emotionally oriented businesses based on personal
relationships into high-performance, low-cost functional businesses.
Does your industry compete on functionality or emotional ap-
peal? If you compete on emotional appeal, what elements can you
strip out to make it functional? If you compete on functionality,
what elements can be added to make it emotional?
Path 6: Look Across Time
All industries are subject to external trends that affect their busi-
nesses over time. Think of the rapid rise of the Internet or the
global movement toward protecting the environment. Looking at
these trends with the right perspective can show you how to create
blue ocean opportunities.
Most companies adapt incrementally and somewhat passively as
events unfold. Whether it’s the emergence of new technologies or
major regulatory changes, managers tend to focus on projecting
the trend itself. That is, they ask in which direction a technology
will evolve, how it will be adopted, whether it will become scalable.
They pace their own actions to keep up with the development of
the trends they’re tracking.
But key insights into blue ocean strategy rarely come from pro-
jecting the trend itself. Instead they arise from business insights
into how the trend will change value to customers and impact the
company’s business model. By looking across time—from the value
a market delivers today to the value it might deliver tomorrow—
managers can actively shape their future and lay claim to a new
blue ocean. Looking across time is perhaps more difficult than the
previous approaches we’ve discussed, but it can be made subject to
the same disciplined approach. We’re not talking about predicting
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the future, something that is inherently impossible. Rather, we’re
talking about finding insight in trends that are observable today.
Three principles are critical to assessing trends across time. To
form the basis of a blue ocean strategy, these trends must be deci-
sive to your business, they must be irreversible, and they must have
a clear trajectory. Many trends can be observed at any one time—
for example, a discontinuity in technology, the rise of a new life-
style, or a change in regulatory or social environments. But usually
only one or two will have a decisive impact on any particular busi-
ness. And it may be possible to see a trend or major event without
being able to predict its direction.
In 1998, for example, the mounting Asian crisis was an important
trend certain to have a big impact on financial services. But it was
impossible to predict the direction that trend would take, and
therefore it would have been a risky enterprise to envision a blue
ocean strategy that might result from it. In contrast, the euro has
been evolving along a constant trajectory as it has been replacing
Europe’s multiple currencies. It is a decisive, irreversible, and clearly
developing trend in financial services upon which blue oceans can
be created as the European Union continues to enlarge.
Having identified a trend of this nature, you can then look
across time and ask yourself what the market would look like if the
trend were taken to its logical conclusion. Working back from that
vision of a blue ocean strategy, you can identify what must be
changed today to unlock a new blue ocean.
For example, Apple observed the flood of illegal music file sharing
that began in the late 1990s. Music file sharing programs such as
Napster, Kazaa, and LimeWire had created a network of Internet-
savvy music lovers freely, yet illegally, sharing music across the
globe. By 2003 more than two billion illegal music files were being
traded every month. While the recording industry fought to stop
the cannibalization of physical CDs, illegal digital music down-
loading continued to grow.
With the technology out there for anyone to digitally download
music free instead of paying $19 for an average CD, the trend toward
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digital music was clear. This trend was underscored by the fast-
growing demand for MP3 players that played mobile digital music,
such as Apple’s hit iPod. Apple capitalized on this decisive trend with
a clear trajectory by launching the iTunes online music store in 2003.
In agreement with five major music companies—BMG, EMI Group,
Sony, Universal Music Group, and Warner Brothers Records—iTunes
offered legal, easy-to-use, and flexible à la carte song downloads.
iTunes allowed buyers to freely browse two hundred thousand
songs, listen to thirty-second samples, and download an individual
song for 99 cents or an entire album for $9.99. By allowing people
to buy individual songs and strategically pricing them far more
reasonably, iTunes broke a key customer annoyance factor: the
need to purchase an entire CD when they wanted only one or two
songs on it.
iTunes also leapt past free downloading services, providing
sound quality as well as intuitive navigating, searching, and brows-
ing functions. To illegally download music you must first search for
the song, album, or artist. If you are looking for a complete album
you must know the names of all the songs and their order. It is rare
to find a complete album to download in one location. The sound
quality is consistently poor because most people burn CDs at a low
bit rate to save space. And most of the tracks available reflect the
tastes of sixteen-year-olds, so although theoretically there are bil-
lions of tracks available, the scope is limited.
In contrast, Apple’s search and browsing functions are consid-
ered the best in the business. Moreover, iTunes music editors in-
clude a number of added features usually found in the record shops,
including iTunes essentials such as Best Hair Bands or Best Love
Songs, staff favorites, celebrity play lists, and Billboard charts.
And the iTunes sound quality is the highest because iTunes en-
codes songs in a format called AAC, which offers sound quality su-
perior to MP3s, even those burned at a very high data rate.
Customers have been flocking to iTunes, and recording compa-
nies and artists are also winning. Under iTunes they receive 65 per-
cent of the purchase price of digitally downloaded songs, at last
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financially benefiting from the digital downloading craze. In addi-
tion, Apple further protected recording companies by devising
copyright protection that would not inconvenience users—who
had grown accustomed to the freedom of digital music in the post-
Napster world—but would satisfy the music industry. The iTunes
Music Store allows users to burn songs onto iPods and CDs up to
seven times, enough to easily satisfy music lovers but far too few
times to make professional piracy an issue.
Today the iTunes Music Store offers more than 700,000 songs
and has sold more than 70 million songs in its first year, with users
downloading on average 2.5 million per week. Nielsen//NetRatings
estimates that the iTunes Music Store now accounts for 70 percent
of the legal music download market. Apple’s iTunes is unlocking a
blue ocean in digital music, with the added advantage of increasing
the attractiveness of its already hot iPod player. As other online
music stores enter the fray, the challenge for Apple will be to keep
its sights on the evolving mass market and not to fall into competi-
tive benchmarking or high-end niche marketing.
Similarly, Cisco Systems created a new market space by thinking
across time trends. It started with a decisive and irreversible trend
that had a clear trajectory: the growing demand for high-speed data
exchange. Cisco looked at the world as it was and concluded that
the world was hampered by slow data rates and incompatible com-
puter networks. Demand was exploding as, among other factors,
the number of Internet users doubled roughly every one hundred
days. So Cisco could clearly see that the problem would inevitably
worsen. Cisco’s routers, switches, and other networking devices
were designed to create breakthrough value for customers, offering
fast data exchanges in a seamless networking environment. Thus
Cisco’s insight is as much about value innovation as it is about
technology. Today more than 80 percent of all traffic on the Inter-
net goes through Cisco’s products, and its gross margins in this
new market space have been in the 60 percent range.
Similarly, a host of other companies are creating blue oceans by
applying path 6. Consider how CNN created the first real-time
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twenty-four-hour global news network based on the rising tide of
globalization. Or how HBO’s hit show Sex and the City acted on the
trend of increasingly urban and successful women who struggle to
find love and marry later in life.
What trends have a high probability of impacting your industry,
are irreversible, and are evolving in a clear trajectory? How will
these trends impact your industry? Given this, how can you open up
unprecedented customer utility?
Conceiving New Market Space
By thinking across conventional boundaries of competition, you
can see how to make convention-altering, strategic moves that re-
construct established market boundaries and create blue oceans.
The process of discovering and creating blue oceans is not about
predicting or preempting industry trends. Nor is it a trial-and-error
process of implementing wild new business ideas that happen to
Reconstruct Market Boundaries 79
F I G U R E 3-5
From Head-to-Head Competition to Blue Ocean Creation
Head-to-Head Competition Blue Ocean Creation
Industry Focuses on rivals within Looks across alternative
its industry industries
Strategic group Focuses on competitive position Looks across strategic
within strategic group groups within industry
Buyer group Focuses on better serving the Redefines the industry
buyer group buyer group
Scope of product Focuses on maximizing the Looks across to
or service offering value of product and service complementary product
offerings within the bounds and service offerings
of its industry
Functional- Focuses on improving price Rethinks the functional-
emotional performance within the emotional orientation of
orientation functional-emotional orientation its industry
of its industry
Time Focuses on adapting to external Participates in shaping
trends as they occur external trends over time
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come across managers’ minds or intuition. Rather, managers are
engaged in a structured process of reordering market realities in a
fundamentally new way. Through reconstructing existing market
elements across industry and market boundaries, they will be able
to free themselves from head-to-head competition in the red ocean.
Figure 3-5 summarizes the six-path framework.
We are now ready to move on to building your strategy planning
process around these six paths. We next look at how you reframe
your strategy planning process to focus on the big picture and
apply these ideas in formulating your own blue ocean strategy.
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( ) ( ) ( ) ( )
C H A P T E R 4
Focus on the Big Picture,
Not the Numbers
YO U N O W K N O W T H E PAT H S to creating blue oceans.The next question is, How do you align your strategic
planning process to focus on the big picture and apply these ideas
in drawing your company’s strategy canvas to arrive at a blue ocean
strategy? This is no small challenge. Our research reveals that most
companies’ strategic planning process keeps them wedded to red
oceans. The process tends to drive companies to compete within ex-
isting market space.
Think of a typical strategic plan. It starts with a lengthy de-
scription of current industry conditions and the competitive situa-
tion. Next is a discussion of how to increase market share, capture
new segments, or cut costs, followed by an outline of numerous
goals and initiatives. A full budget is almost invariably attached, as
are lavish graphs and a surfeit of spreadsheets. The process usually
culminates in the preparation of a large document culled from a
mishmash of data provided by people from various parts of the or-
ganization who often have conflicting agendas and poor communi-
cation. In this process, managers spend the majority of strategic
( ) ( ) ( ) ( )
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thinking time filling in boxes and running numbers instead of
thinking outside the box and developing a clear picture of how to
break from the competition. If you ask companies to present their
proposed strategies in no more than a few slides, it is not surprising
that few clear or compelling strategies are articulated.
It’s no wonder that few strategic plans lead to the creation of
blue oceans or are translated into action. Executives are paralyzed
by the muddle. Few employees deep down in the company even
know what the strategy is. And a closer look reveals that most
plans don’t contain a strategy at all but rather a smorgasbord of
tactics that individually make sense but collectively don’t add up to
a unified, clear direction that sets a company apart—let alone
makes the competition irrelevant. Does this sound like the strate-
gic plans in your company?
This brings us to the second principle of blue ocean strategy:
Focus on the big picture, not the numbers. This principle is key to
mitigating the planning risk of investing lots of effort and lots of
time but delivering only tactical red ocean moves. Here we develop
an alternative approach to the existing strategic planning process
that is based not on preparing a document but on drawing a strat-
egy canvas.1 This approach consistently produces strategies that
unlock the creativity of a wide range of people within an organiza-
tion, open companies’ eyes to blue oceans, and are easy to under-
stand and communicate for effective execution.
Focusing on the Big Picture
In our research and consulting work, we have found that drawing a
strategy canvas not only visualizes a company’s current strategic
position in its marketplace but also helps it chart its future strat-
egy. By building a company’s strategic planning process around a
strategy canvas, a company and its managers focus their main at-
tention on the big picture rather than becoming immersed in num-
bers and jargon and getting caught up in operational details.2
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As previous chapters reveal, drawing a strategy canvas does
three things. First, it shows the strategic profile of an industry by
depicting very clearly the factors (and the possible future factors)
that affect competition among industry players. Second, it shows
the strategic profile of current and potential competitors, identify-
ing which factors they invest in strategically. Finally, it shows the
company’s strategic profile—or value curve—depicting how it in-
vests in the factors of competition and how it might invest in them
in the future. As discussed in chapter 2, the strategic profile with
high blue ocean potential has three complementary qualities:
focus, divergence, and a compelling tagline. If a company’s strate-
gic profile does not clearly reveal those qualities, its strategy will
likely be muddled, undifferentiated, and hard to communicate. It is
also likely to be costly to execute.
Drawing Your Strategy Canvas
Drawing a strategy canvas is never easy. Even identifying the key
factors of competition is far from straightforward. As you will see,
the final list is usually very different from the first draft.
Assessing to what extent your company and its competitors offer
the various competitive factors is equally challenging. Most man-
agers have a strong impression of how they and their competitors
fare along one or two dimensions within their own scope of respon-
sibility, but very few can see the overall dynamics of their industry.
The catering manager of an airline, for example, will be highly sen-
sitive to how the airline compares in terms of refreshments. But
that focus makes consistent measurement difficult; what seems to
be a very big difference to the catering manager may not be impor-
tant to customers, who look at the complete offering. Some man-
agers will define the competitive factors according to internal
benefits. For example, a CIO might prize the company’s IT infra-
structure for its data-mining capacity, a feature lost on most cus-
tomers, who are more concerned with speed and ease of use.
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Over the past ten years, we have developed a structured process
for drawing and discussing a strategy canvas that pushes a com-
pany’s strategy toward a blue ocean. A 150-year-old financial serv-
ices group that we’ll call European Financial Services (EFS) is one
of the companies that adopted this process to develop a strategy
that breaks away from the competition. The resulting EFS strategy
yielded a 30 percent revenue boost in its initial year. The process,
which builds on the six paths of creating blue oceans and involves a
lot of visual stimulation in order to unlock people’s creativity, has
four major steps (see figure 4-1).
Step 1: Visual Awakening
A common mistake is to discuss changes in strategy before resolv-
ing differences of opinion about the current state of play. Another
problem is that executives are often reluctant to accept the need for
change; they may have a vested interest in the status quo, or they
may feel that time will eventually vindicate their previous choices.
84 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 4-1
The Four Steps of Visualizing Strategy
1. Visual 2. Visual 3. Visual 4. Visual
Awakening Exploration Strategy Fair Communication
• Compare your • Go into the field • Draw your “to be” • Distribute your
business with your to explore the six strategy canvas based before-and-after
competitors’ by paths to creating on insights from strategic profiles
drawing your “as is” blue oceans. field observations. on one page for
strategy canvas. easy comparison.
• Observe the dis- • Get feedback on
• See where your tinctive advantages alternative strategy • Support only those
strategy needs of alternative canvases from projects and
to change. products and customers, com- operational moves
services. petitors’ customers, that allow your
and noncustomers. company to close
• See which factors the gaps to
you should • Use feedback to actualize the
eliminate, create, build the best “to new strategy.
or change. be” future strategy.
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Indeed, when we ask executives what prompts them to seek out blue
oceans and introduce change, they usually say that it takes a highly
determined leader or a serious crisis.
Fortunately, we’ve found that asking executives to draw the
value curve of their company’s strategy brings home the need for
change. It serves as a forceful wake-up call for companies to chal-
lenge their existing strategies. That was the experience at EFS,
which had been struggling for a long time with an ill-defined and
poorly communicated strategy. The company was also deeply di-
vided. The top executives of EFS’s regional subsidiaries bitterly re-
sented what they saw as the arrogance of the corporate executives,
whose philosophy, they believed, was essentially “nuts in the field,
brains in the center.” That conflict made it all the more difficult for
EFS to come to grips with its strategic problems. Yet before the firm
could chart a new strategy, it was essential that it reach a common
understanding of its current position.
EFS began the strategy process by bringing together more than
twenty senior managers from subsidiaries in Europe, North Amer-
ica, Asia, and Australia and splitting them into two teams. One
team was responsible for producing a value curve depicting EFS’s
current strategic profile in its traditional corporate foreign ex-
change business relative to its competitors. The other team was
charged with the same task for EFS’s emerging online foreign ex-
change business. They were given ninety minutes, because if EFS
had a clear strategy, surely it would emerge quickly.
It was a painful experience. Both teams had heated debates
about what constituted a competitive factor and what the factors
were. Different factors were important, it seemed, in different re-
gions and even for different customer segments. For example, Euro-
peans argued that in its traditional business, EFS had to offer
consulting services on risk management, given the perceived risk-
averse nature of its customers. Americans, however, dismissed that
as largely irrelevant. They stressed the value of speed and ease of use.
Many people had pet ideas of which they were the sole champions.
One person in the online team argued, for example, that customers
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would be drawn in by the promise of instant confirmations of their
transactions—a service no one else thought necessary.
Despite these difficulties, the teams completed their assign-
ments and presented their pictures in a general meeting of all par-
ticipants. Their results are shown in figures 4-2 and 4-3.
The pictures clearly revealed defects in the company’s strategy.
EFS’s traditional and online value curves both demonstrated a se-
rious lack of focus; the company was investing in diverse and nu-
merous factors in both businesses. What’s more, EFS’s two curves
were very similar to those of competitors. Not surprisingly, neither
team could come up with a memorable tagline that was true to the
team’s value curve.
The pictures also highlighted contradictions. The online busi-
ness, for example, had invested heavily in making the Web site easy
to use—it had even won awards for this—but it became apparent
86 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 4-2
The Strategy Canvas of Corporate Foreign Exchange, Offline
High
Low
Price Corporate Speed Ease Knowledge
dealers of use
Risk Flexible Relationship Responsiveness
management payment terms management
consultancy
EFS and Its
Nonbank Competitors
Banks
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that speed had been overlooked. EFS had one of the slowest Web
sites in the business, and that might explain why such a well-
regarded site did a relatively poor job of attracting customers and
converting them into sales.
The sharpest shocks, perhaps, came from comparing EFS’s strat-
egy with its competitors’. The online group realized that its strongest
competitor, which we’ve called Clearskies, had a focused, original,
and easily communicable strategy: “One-click E-Z FX.” Clearskies,
which was growing rapidly, was swimming away from the red ocean.
Faced with direct evidence of the company’s shortcomings,
EFS’s executives could not defend what they had shown to be a
weak, unoriginal, and poorly communicated strategy. Trying to
draw the strategy canvases had made a stronger case for change
than any argument based on numbers and words could have done.
This created a strong desire in top management to seriously re-
think the company’s current strategy.
Focus on the Big Picture, Not the Numbers 87
F I G U R E 4-3
The Strategy Canvas of Corporate Foreign Exchange, Online
High
Low
Price Real-time Web site Ease Security
rates attractiveness of use
Electronic data Customer Speed Accuracy
interchange support
EFS Online
Clearskies
Other Online
Competitors
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Step 2: Visual Exploration
Getting the wake-up call is only the first step. The next step is to
send a team into the field, putting managers face-to-face with what
they must make sense of: how people use or don’t use their products
or services. This step may seem obvious, but we have found that
managers often outsource this part of the strategy-making process.
They rely on reports that other people (often at one or two removes
from the world they report on) have put together.
A company should never outsource its eyes. There is simply no
substitute for seeing for yourself. Great artists don’t paint from
other people’s descriptions or even from photographs; they like to
see the subject for themselves. The same is true for great strate-
gists. Michael Bloomberg, before becoming mayor of New York
City, was hailed as a business visionary for his realization that the
providers of financial information also needed to provide online
analytics to help users make sense of the data. But he would be the
first to tell you that the idea should have been obvious to anyone
who had ever watched traders using Reuters or Dow Jones Telerate.
Before Bloomberg, traders used paper, pencil, and handheld calcu-
lators to write down price quotes and figure fair market values be-
fore making buy and sell decisions, a practice that cost them time
and money as well as built-in errors.
Great strategic insights like this are less the product of genius
than of getting into the field and challenging the boundaries of
competition.3 In the case of Bloomberg, his insight came by switch-
ing the focus of the industry from IT purchasers to users: the traders
and analysts. This allowed him to see what was invisible to others.4
Obviously, the first port of call should be the customers. But you
should not stop there. You should also go after noncustomers.5 And
when the customer is not the same as the user, you need to extend
your observations to the users, as Bloomberg did. You should not
only talk to these people but also watch them in action. Identifying
the array of complementary products and services that are con-
sumed alongside your own may give you insight into bundling op-
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portunities. For example, parents who go to the movies will engage
a babysitter for the night. As the European cinema operator Kine-
polis discovered, adding on-site childcare services helped fill Euro-
pean cinemas. Finally, you need to look at how customers might find
alternative ways of fulfilling the need that your product or service
satisfies. For example, driving is an alternative to flying, so you
should also examine its distinct advantages and characteristics.
EFS sent its managers into the field for four weeks to explore the
six paths to creating blue oceans.6 In this process, each was to inter-
view and observe ten people involved in corporate foreign exchange,
including lost customers, new customers, and the customers of
EFS’s competitors and alternatives. The managers also reached
outside the industry’s traditional boundaries to companies that did
not yet use corporate foreign exchange services but that might in
the future, such as Internet-based companies with a global reach
like Amazon.com. They interviewed the end users of corporate for-
eign exchange services—the accounting and treasury departments
of companies. And finally, they looked at ancillary products and
services that their customers used—in particular, treasury man-
agement and pricing simulations.
The field research overturned many of the conclusions managers
had reached in the first step of the strategy creation process. For
example, account relationship managers, whom nearly everyone
had agreed were a key to success and on whom EFS prided itself,
turned out to be the company’s Achilles’ heel. Customers hated
wasting time dealing with relationship managers. To buyers, rela-
tionship managers were seen as relationship savers because EFS
failed to deliver on its promises.
To everyone’s astonishment, the factor customers valued most
was getting speedy confirmation of transactions, which only one
manager had previously suggested was important. The EFS man-
agers saw that their customers’ accounting department personnel
spent a lot of time making phone calls to confirm that payments
had been made and to check when they would be received. Cus-
tomers received numerous calls on the same subject, and the time
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wasted in handling them was compounded by the necessity of mak-
ing further calls to the foreign exchange provider, namely EFS or a
competitor.
EFS’s teams were then sent back to the drawing board. This time,
though, they had to propose a new strategy. Each team had to draw six
new value curves using the six path framework explained in chapter
3. Each new value curve had to depict a strategy that would make
the company stand out in its market. By demanding six pictures from
each team, we hoped to push managers to create innovative propos-
als and break the boundaries of their conventional thinking.
For each visual strategy, the teams also had to write a com-
pelling tagline that captured the essence of the strategy and spoke
directly to buyers. Suggestions included “Leave It to Us,” “Make
Me Smarter,” and “Transactions in Trust.” A strong sense of com-
petition developed between the two teams, making the process fun,
imbuing it with energy, and driving the teams to develop blue ocean
strategies.
Step 3: Visual Strategy Fair
After two weeks of drawing and redrawing, the teams presented
their strategy canvases at what we call a visual strategy fair. Atten-
dees included senior corporate executives but consisted mainly of
representatives of EFS’s external constituencies—the kinds of peo-
ple the managers had met with during their field trips, including
noncustomers, customers of competitors, and some of the most de-
manding EFS customers. In two hours, the teams presented all
twelve curves—six by the online group, and six by the offline group.
They were given no more than ten minutes to present each curve, on
the theory that any idea that takes more than ten minutes to com-
municate is probably too complicated to be any good. The pictures
were hung on the walls so that the audience could easily see them.
After the twelve strategies were presented, each judge—an in-
vited attendee—was given five sticky notes and told to put them
next to his or her favorites. The judges could put all five on a single
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strategy if they found it that compelling. The transparency and im-
mediacy of this approach freed it from the politics that sometimes
seem endemic to the strategic planning process. Managers had to
rely on the originality and clarity of their curves and their pitches.
One began, for example, with the line, “We’ve got a strategy so cun-
ning that you won’t be our customers, you’ll be our fans.”
After the notes were posted, the judges were asked to explain
their picks, adding another level of feedback to the strategy-making
process. Judges were also asked to explain why they did not vote for
the other value curves.
As the teams synthesized the judges’ common likes and dislikes,
they realized that fully one-third of what they had thought were key
competitive factors were, in fact, marginal to customers. Another
one-third either were not well articulated or had been overlooked
in the visual awakening phase. It was clear that the executives
needed to reassess some long-held assumptions, such as EFS’s sepa-
ration of its online and traditional businesses.
They also learned that buyers from all markets had a basic set of
needs and expected similar services. If you met those common
needs, customers would happily forgo everything else. Regional dif-
ferences became significant only when there was a problem with
the basics. This was news to many people who had claimed that
their regions were unique.
Following the strategy fair, the teams were finally able to com-
plete their mission. They were able to draw a value curve that was a
truer likeness of the existing strategic profile than anything they
had produced earlier, in part because the new picture ignored the
specious distinction that EFS had made between its online and off-
line businesses. More important, the managers were now in a posi-
tion to draw a future strategy that would be distinctive as well as
speak to a true but hidden need in the marketplace. Figure 4-4 high-
lights the stark differences between the company’s current and fu-
ture strategies.
As the figure shows, EFS’s future strategy eliminated relation-
ship management and reduced investment in account executives,
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who, from this point on, were assigned only to “AAA” accounts.
These moves dramatically reduced EFS’s costs because relation-
ship managers and account executives were the highest-cost ele-
ment of its business. EFS’s future strategy emphasized ease of use,
security, accuracy, and speed. These factors would be delivered
through computerization, which would allow customers to input
data directly instead of having to send a fax to EFS.
This action would also free up corporate dealers’ time, a large
portion of which had been spent completing paperwork and cor-
recting errors. Dealers would now be able to provide richer market
commentary, a key success factor. Using the Internet, EFS would
send automatic confirmations to all customers. And it would offer a
payment-tracking service, just as FedEx and UPS do for parcels.
The foreign exchange industry had never offered these services be-
fore. Figure 4-5 summarizes EFS’s four actions to create value inno-
vation, the cornerstone of blue ocean strategy.
92 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 4-4
EFS: Before and After
High
Low
Price Account Ease Accuracy Market Tracking
executives of use commentary
Relationship Corporate Security Speed Confirmation
management dealers
EFS’s “After” Strategy
EFS and Other Traditional
Competitors’ “Before” Strategy
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The new value curve exhibited the criteria of a successful strat-
egy. It displayed more focus than the previous strategy; investments
that were made were given a much stronger commitment than be-
fore. It also stood apart from the industry’s existing me-too curves
and lent itself to a compelling tagline: “The FedEx of corporate for-
eign exchange: easy, reliable, fast, and trackable.” By collapsing its
online and traditional businesses into one compelling offering,
EFS substantially cut the operational complexity of its business
model, making systematic execution far easier.
Step 4: Visual Communication
After the future strategy is set, the last step is to communicate it in
a way that can be easily understood by any employee. EFS distrib-
uted the one-page picture showing its new and old strategic profiles
so that every employee could see where the company stood and
where it had to focus its efforts to create a compelling future. The
senior managers who participated in developing the strategy held
Focus on the Big Picture, Not the Numbers 93
F I G U R E 4-5
Eliminate-Reduce-Raise-Create Grid: The Case of EFS
Eliminate Raise
Relationship management Ease of use
Security
Accuracy
Speed
Market commentary
Reduce Create
Account executives Confirmation
Corporate dealers Tracking
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meetings with their direct reports to walk them through the pic-
ture, explaining what needed to be eliminated, reduced, raised, and
created to pursue a blue ocean. Those people passed the message on
to their direct reports. Employees were so motivated by the clear
game plan that many pinned up a version of the picture in their
cubicles as a reminder of EFS’s new priorities and the gaps that
needed to be closed.
The new picture became a reference point for all investment de-
cisions. Only those ideas that would help EFS move from the old to
the new value curve were given the go-ahead. When, for example,
regional offices requested that the IT department add links on the
Web site—something that in the past would have been agreed to
without debate—IT asked them to explain how the new links helped
move EFS toward its new profile. If the regional offices couldn’t
provide an explanation, the request was denied, thereby promoting
clarity and not confusion on the Web site. Similarly, when the IT de-
partment pitched a multimillion-dollar back-office system to top
management, the system’s ability to meet the new value curve’s
strategic needs was the chief metric by which it was judged.
Visualizing Strategy at the Corporate Level
Visualizing strategy can also greatly inform the dialogue among in-
dividual business units and the corporate center in transforming a
company from a red ocean to a blue ocean player. When business
units present their strategy canvases to one another, they deepen
their understanding of the other businesses in the corporate port-
folio. Moreover, the process also fosters the transfer of strategic
best practices across units.
Using the Strategy Canvas
To see how this works, consider how Samsung Electronics of Korea
used strategy canvases at its 2000 corporate conference, which was
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attended by more than seventy top managers, including the CEO.
Unit heads presented their canvases and implementation plans to
senior executives and to one another. Discussions were heated, and a
number of unit heads argued that the freedom of their units to form
future strategies was constrained by the degree of competition they
faced. Poor performers felt that they had little choice but to match
their competitors’ offerings. That hypothesis proved to be false when
one of the fastest-growing units—the mobile phone business—pre-
sented its strategy canvas. Not only did the unit have a distinctive
value curve, but it also faced the most intense competition.
Samsung Electronics has institutionalized the use of the strat-
egy canvas in its key business creation decisions by establishing
the Value Innovation Program (VIP) Center in 1998. Core cross-
functional team members of its various business units come to-
gether in the VIP Center to discuss their strategic projects. These
discussions typically focus on strategy canvases.
With the value innovation knowledge it has developed, the cen-
ter, equipped with twenty project rooms, assists the units in mak-
ing their product and service offering decisions. In 2003, the center
completed more than eighty strategic projects and opened more
than ten VIP branches to meet business units’ rising demands. For
example, the world’s leading forty-inch LCD TV, launched in De-
cember 2002, is the result of one project team’s devoted four-month
efforts made at the center. So is the world’s bestselling mobile
phone, the SGH T-100, which has sold more than ten million units.
Since 1999, Samsung Electronics has established an annual
Value Innovation corporate conference presided over by all of its
top executives. At this conference, Samsung’s hit Value Innovation
projects are shared through presentations and exhibitions, and
awards are given to the best cases. This is one way that Samsung
Electronics establishes a common language system, instilling a cor-
porate culture and strategic norms that drive its corporate business
portfolio from red to blue oceans.7
Do your business unit heads lack an understanding of the other
businesses in your corporate portfolio? Are your strategic best
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practices poorly communicated across your business units? Are
your low-performing units quick to blame their competitive situa-
tions for their results? If the answer to any of these questions is
yes, try drawing, and then sharing, the strategy canvases of your
business units.
Using the Pioneer-Migrator-Settler (PMS) Map
Visualizing strategy can also help managers responsible for corpo-
rate strategy predict and plan the company’s future growth and
profit. All the companies that created blue oceans in our study have
been pioneers in their industries, not necessarily in developing
new technologies but in pushing the value they offer customers to
new frontiers. Extending the pioneer metaphor can provide a use-
ful way of talking about the growth potential of current and future
businesses.
A company’s pioneers are the businesses that offer unprece-
dented value. These are your blue ocean strategists, and they are
the most powerful sources of profitable growth. These businesses
have a mass following of customers. Their value curve diverges
from the competition on the strategy canvas. At the other extreme
are settlers—businesses whose value curves conform to the basic
shape of the industry’s. These are me-too businesses. Settlers will
not generally contribute much to a company’s future growth. They
are stuck within the red ocean.
The potential of migrators lies somewhere in between. Such
businesses extend the industry’s curve by giving customers more
for less, but they don’t alter its basic shape. These businesses offer
improved value, but not innovative value. These are businesses
whose strategies fall on the margin between red oceans and blue
oceans.
A useful exercise for a corporate management team pursuing
profitable growth is to plot the company’s current and planned
portfolios on a pioneer-migrator-settler (PMS) map. For the purpose
of the exercise, settlers are defined as me-too businesses, migrators
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are business offerings better than most in the marketplace, and pio-
neers are the only ones with a mass following of customers.
If both the current portfolio and the planned offerings consist
mainly of settlers, the company has a low growth trajectory, is
largely confined to red oceans, and needs to push for value innova-
tion. Although the company might be profitable today as its settlers
are still making money, it may well have fallen into the trap of com-
petitive benchmarking, imitation, and intense price competition.
If current and planned offerings consist of a lot of migrators,
reasonable growth can be expected. But the company is not exploit-
ing its potential for growth, and it risks being marginalized by a
company that value-innovates. In our experience the more an in-
dustry is populated by settlers, the greater is the opportunity to
value-innovate and create a blue ocean of new market space.
This exercise is especially valuable for managers who want to see
beyond today’s performance. Revenue, profitability, market share,
and customer satisfaction are all measures of a company’s current
position. Contrary to what conventional strategic thinking sug-
gests, those measures cannot point the way to the future; changes
in the environment are too rapid. Today’s market share is a reflec-
tion of how well a business has performed historically. Think of the
strategic reversal and market share upset that occurred when CNN
entered the U.S. news market. ABC, CBS, and NBC—all with his-
torically strong market shares—were devastated.
Chief executives should instead use value and innovation as the
important parameters for managing their portfolio of businesses.
They should use innovation because, without it, companies are
stuck in the trap of competitive improvements. They should use
value because innovative ideas will be profitable only if they are
linked to what buyers are willing to pay for.
Clearly, what senior executives should be doing is getting their
organizations to shift the balance of their future portfolio toward
pioneers. That is the path to profitable growth. The PMS map
shown in figure 4-6 depicts this trajectory, showing the scatter
plot of a company’s portfolio of businesses, where the gravity of
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its current portfolio of twelve businesses, expressed as twelve dots,
shifts from a preponderance of settlers to a stronger balance of mi-
grators and pioneers.
In pushing their businesses toward pioneers, however, senior ex-
ecutives should be well aware that even though settlers have mar-
ginal growth potential, they are frequently today’s cash generators.
On the other hand, pioneers have maximum growth potential but
often consume cash at the outset as they grow and expand. Evi-
dently, senior managers’ goal here should be to manage their port-
folio of businesses to wisely balance between profitable growth and
cash flow at a given point in time.
Overcoming the Limitations
of Strategic Planning
Managers often express discontent, either explicitly or implicitly,
with existing strategic planning—the core activity of strategy. To
98 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 4-6
Testing the Growth Potential of a Portfolio of Businesses
Pioneers
Migrators
Settlers
Today Tomorrow
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them, strategic planning should be more about collective wisdom
building than top-down or bottom-up planning. They think that it
should be more conversational than solely documentation-driven,
and it should be more about building the big picture than about
number-crunching exercises. It should have a creative component
instead of being strictly analysis-driven, and it should be more mo-
tivational, invoking willing commitment, than bargaining-driven,
producing negotiated commitment. Despite this appetite for change,
however, scant work exists on building a viable alternative to exist-
ing strategic planning, which is the most essential management
task in the sense that almost every company in the world not only
does it but often takes several grueling months each year to com-
plete the exercise.
Building the process around a picture addresses many of man-
agers’ discontents with existing strategic planning and yields much
better results. As Aristotle pointed out, “The soul never thinks with-
out an image.”
Drawing a strategy canvas and a PMS map is not, of course, the
only part of the strategic planning process. At some stage, numbers
and documents must be compiled and discussed. But we believe
that the details will fall into place more easily if managers start
with the big picture of how to break away from the competition.
The methods of visualizing strategy proposed here will put strat-
egy back into strategic planning, and they will greatly improve
your chances of creating a blue ocean.
How do you maximize the size of the blue ocean you are creat-
ing? The following chapter addresses that precise question.
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( ) ( ) ( ) ( )
C H A P T E R 5
Reach Beyond Existing Demand
NO C O M PA N Y W A N T S to venture beyond red oceansonly to find itself in a puddle. The question is, How do
you maximize the size of the blue ocean you are creating? This
brings us to the third principle of blue ocean strategy: Reach be-
yond existing demand. This is a key component of achieving value
innovation. By aggregating the greatest demand for a new offering,
this approach attenuates the scale risk associated with creating a
new market.
To achieve this, companies should challenge two conventional
strategy practices. One is the focus on existing customers. The
other is the drive for finer segmentation to accommodate buyer dif-
ferences. Typically, to grow their share of a market, companies
strive to retain and expand existing customers. This often leads to
finer segmentation and greater tailoring of offerings to better meet
customer preferences. The more intense the competition is, the
greater, on average, is the resulting customization of offerings. As
companies compete to embrace customer preferences through finer
segmentation, they often risk creating too-small target markets.
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To maximize the size of their blue oceans, companies need to
take a reverse course. Instead of concentrating on customers, they
need to look to noncustomers. And instead of focusing on customer
differences, they need to build on powerful commonalities in what
buyers value. That allows companies to reach beyond existing de-
mand to unlock a new mass of customers that did not exist before.
Think of Callaway Golf. It aggregated new demand for its offer-
ing by looking to noncustomers. While the U.S. golf industry
fought to win a greater share of existing customers, Callaway cre-
ated a blue ocean of new demand by asking why sports enthusiasts
and people in the country club set had not taken up golf as a sport.
By looking to why people shied away from golf, it found one key
commonality uniting the mass of noncustomers: Hitting the golf
ball was perceived as too difficult. The small size of the golf club
head demanded enormous hand-eye coordination, took time to
master, and required concentration. As a result, fun was sapped for
novices, and it took too long to get good at the sport.
This understanding gave Callaway insight into how to aggregate
new demand for its offering. The answer was Big Bertha, a golf club
with a large head that made it far easier to hit the golf ball. Big
Bertha not only converted noncustomers of the industry into cus-
tomers, but it also pleased existing golf customers, making it a run-
away bestseller across the board. With the exception of pros, it
turned out that the mass of existing customers also had been frus-
trated with the difficulty of advancing their game by mastering the
skills needed to hit the ball consistently. The club’s large head also
lessened this difficulty.
Interestingly, however, existing customers, unlike noncustomers,
had implicitly accepted the difficulty of the game. Although the
mass of existing customers didn’t like it, they had taken for granted
that that was the way the game was played. Instead of registering
their dissatisfaction with golf club makers, they themselves ac-
cepted the responsibility to improve. By looking to noncustomers
and focusing on their key commonalities—not differences—Call-
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away saw how to aggregate new demand and offer the mass of cus-
tomers and noncustomers a leap in value.
Where is your locus of attention—on capturing a greater share
of existing customers, or on converting noncustomers of the indus-
try into new demand? Do you seek out key commonalities in what
buyers value, or do you strive to embrace customer differences
through finer customization and segmentation? To reach beyond
existing demand, think noncustomers before customers; common-
alities before differences; and desegmentation before pursuing
finer segmentation.
The Three Tiers of Noncustomers
Although the universe of noncustomers typically offers big blue
ocean opportunities, few companies have keen insight into who
noncustomers are and how to unlock them. To convert this huge
latent demand into real demand in the form of thriving new cus-
tomers, companies need to deepen their understanding of the uni-
verse of noncustomers.
There are three tiers of noncustomers that can be transformed
into customers. They differ in their relative distance from your mar-
ket. As depicted in figure 5-1, the first tier of noncustomers is clos-
est to your market. They sit on the edge of the market. They are
buyers who minimally purchase an industry’s offering out of neces-
sity but are mentally noncustomers of the industry. They are wait-
ing to jump ship and leave the industry as soon as the opportunity
presents itself. However, if offered a leap in value, not only would
they stay, but also their frequency of purchases would multiply, un-
locking enormous latent demand.
The second tier of noncustomers is people who refuse to use
your industry’s offerings. These are buyers who have seen your in-
dustry’s offerings as an option to fulfill their needs but have voted
against them. In the Callaway case, for example, these were sports
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enthusiasts, especially the country club tennis set, who could have
chosen golf but had consciously chosen against it.
The third tier of noncustomers is farthest from your market.
They are noncustomers who have never thought of your market’s
offerings as an option. By focusing on key commonalities across
these noncustomers and existing customers, companies can under-
stand how to pull them into their new market.
Let’s look at each of the three tiers of noncustomers to under-
stand how you can attract them and expand your blue ocean.
First-Tier Noncustomers
These soon-to-be noncustomers are those who minimally use the
current market offerings to get by as they search for something bet-
ter. Upon finding any better alternative, they will eagerly jump
ship. In this sense, they sit on the edge of the market. A market be-
104 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 5-1
The Three Tiers of Noncustomers
First Tier: “Soon-to-be” noncustomers who are on the edge of your market,
waiting to jump ship.
Second Tier: “Refusing” noncustomers who consciously choose against
your market.
Third Tier: “Unexplored” noncustomers who are in markets distant from yours.
Third
Tier
Your
Market
First
Tier
Second
Tier
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comes stagnant and develops a growth problem as the number of
soon-to-be noncustomers increases. Yet locked within these first-
tier noncustomers is an ocean of untapped demand waiting to be
released.
Consider how Pret A Manger, a British fast-food chain that opened
in 1988, has expanded its blue ocean by tapping into the huge latent
demand of first-tier noncustomers. Before Pret, professionals in
European city centers principally frequented restaurants for
lunch. Sit-down restaurants offered a nice meal and setting. How-
ever, the number of first-tier noncustomers was high and rising.
Growing concerns over the need for healthy eating gave people sec-
ond thoughts about eating out in restaurants. And professionals
did not always have time for a sit-down meal. Some restaurants were
also too expensive for lunch on a daily basis. So professionals were
increasingly grabbing something on the run, bringing a brown bag
from home, or even skipping lunch.
These first-tier noncustomers were in search of better solutions.
Although there were numerous differences across them, they shared
three key commonalities: They wanted lunch fast, they wanted it
fresh and healthy, and they wanted it at a reasonable price.
The insight gained from the commonalities across these first-tier
noncustomers shed light on how Pret could unlock and aggregate
untapped demand. The Pret formula is simple. It offers restaurant-
quality sandwiches made fresh every day from only the finest ingre-
dients, and it makes the food available at a speed that is faster than
that of restaurants and even fast food. It also delivers this in a sleek
setting at reasonable prices.
Consider what Pret is like. Walking into a Pret A Manger is like
walking into a bright Art Deco studio. Along the walls are clean re-
frigerated shelves stocked with more than thirty types of sand-
wiches (average price $4–$6) made fresh that day, in that shop, from
fresh ingredients delivered earlier that morning. People can also
choose from other freshly made items, such as salads, yogurt, par-
faits, blended juices, and sushi. Each store has its own kitchen, and
nonfresh items are made by high-quality producers. Even in its
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New York stores, Pret’s baguettes are from Paris, its croissants are
from Belgium, and its Danish pastries are from Denmark. And
nothing is kept over to the next day. Leftover food is given to home-
less shelters.
In addition to offering fresh healthy sandwiches and other fresh
food items, Pret speeds up the customer ordering experience from
fast food’s queue-order-pay-wait-receive-sit down purchasing cycle to
a much faster browse-pick up-pay-leave cycle. On average, customers
spend just ninety seconds from the time they get in line to the time
they leave the shop. This is made possible because Pret produces
ready-made sandwiches and other things at high volume with a
high standardization of assembly, does not make to order, and does
not serve its customers. They serve themselves as in a supermarket.
Whereas sit-down restaurants have seen stagnant demand, Pret
has been converting the mass of soon-to-be noncustomers into core
thriving customers who eat at Pret more often than they used to eat
at restaurants. Beyond this, as with Callaway, restaurant-goers who
were content to eat lunch at restaurants also have been flocking to
Pret. Although restaurant lunches had been acceptable, the three
key commonalities of first-tier noncustomers struck a chord with
these people; but unlike soon-to-be noncustomers, they had not
thought to question their lunch habits. The lesson: Noncustomers
tend to offer far more insight into how to unlock and grow a blue
ocean than do relatively content existing customers.
Today Pret A Manger sells more than twenty-five million sand-
wiches a year from its one hundred thirty stores in the U.K., and it
recently opened stores in New York and Hong Kong. In 2002 it had
sales of more than £100m ($160 million). Its growth potential trig-
gered McDonald’s to buy a 33 percent share of the company.
What are the key reasons first-tier noncustomers want to jump
ship and leave your industry? Look for the commonalities across
their responses. Focus on these, and not on the differences between
them. You will glean insight into how to desegment buyers and un-
leash an ocean of latent untapped demand.
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Second-Tier Noncustomers
These are refusing noncustomers, people who either do not use or
cannot afford to use the current market offerings because they find
the offerings unacceptable or beyond their means. Their needs are
either dealt with by other means or ignored. Harboring within re-
fusing noncustomers, however, is an ocean of untapped demand
waiting to be released.
Consider how JCDecaux, a vendor of French outdoor advertis-
ing space, pulled the mass of refusing noncustomers into its market.
Before JCDecaux created a new concept in outdoor advertising
called “street furniture” in 1964, the outdoor advertising industry
included billboards and transport advertisement. Billboards typi-
cally were located on city outskirts and along roads where traffic
quickly passed by; transport advertisement comprised panels on
buses and taxies, which again people caught sight of only as they
whizzed by.
Outdoor advertising was not a popular campaign medium for
many companies because it was viewed only in a transitory way.
Outdoor ads were exposed to people for a very short time while they
were in transit, and the rate of repeat visits was low. Especially for
lesser-known companies, such advertising media were ineffective
because they could not carry the comprehensive messages needed
to introduce new names and products. Hence, many such compa-
nies refused to use such low-value-added outdoor advertising be-
cause it was either unacceptable or a luxury they could not afford.
Having thought through the key commonalities that cut across
refusing noncustomers of the industry, JCDecaux realized that the
lack of stationary downtown locations was the key reason the in-
dustry remained unpopular and small. In searching for a solution,
JCDecaux found that municipalities could offer stationary down-
town locations, such as bus stops, where people tended to wait a few
minutes and hence had time to read and be influenced by advertise-
ments. JCDecaux reasoned that if it could secure these locations to
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use for outdoor advertising, it could convert second-tier noncus-
tomers into customers.
This gave it the idea to provide street furniture, including main-
tenance and upkeep, free to municipalities. JCDecaux figured that
as long as the revenue generated from selling ad space exceeded the
costs of providing and maintaining the furniture at an attractive
profit margin, the company would be on a trajectory of strong, prof-
itable growth. Accordingly, street furniture was created that would
integrate advertising panels.
In this way, JCDecaux created a breakthrough in value for sec-
ond-tier noncustomers, the municipalities, and itself. The strategy
eliminated cities’ traditional costs associated with urban furni-
ture. In return for free products and services, JCDecaux gained the
exclusive right to display advertisements on the street furniture lo-
cated in downtown areas. By making ads available in city centers,
the company significantly increased the average exposure time, im-
proving the recall capabilities of this advertising medium. The in-
crease in exposure time also permitted richer contents and more
complex messages. Moreover, as the maintainer of the urban furni-
ture, JCDecaux could help advertisers roll out their campaigns in
two to three days, as opposed to fifteen days of rollout time for tra-
ditional billboard campaigns.
In response to JCDecaux’s exceptional value offering, the mass
of refusing noncustomers flocked to the industry. As a medium of
advertisement, street furniture became the highest-growth market
in the overall display advertising industry. Global spending on
street furniture between 1995 and 2000, for example, grew by 60 per-
cent compared with a 20 percent total increase in overall display
advertising.
By signing contracts of eight to twenty-five years with munici-
palities, JCDecaux gained long-term exclusive rights for displaying
ads with street furniture. After an initial capital investment, the
only expenditure for JCDecaux in the subsequent years was the
maintenance and renewal of the furniture. The operating margin
of street furniture was as high as 40 percent, compared with 14 per-
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cent for billboards and 18 percent for transport advertisements.
The exclusive contracts and high operating margins created a
steady source of long-term revenue and profits. With this business
model, JCDecaux was able to capture a leap in value for itself in re-
turn for a leap in value created for its buyers.
Today, JCDecaux is the number one street furniture-based ad
space provider worldwide, with 283,000 panels in thirty-three coun-
tries. What’s more, by looking to second-tier noncustomers and fo-
cusing on the key commonalities that turned them away from the
industry, JCDecaux also increased the demand for outdoor adver-
tising by existing customers of the industry. Until then, existing
customers had focused on what billboard locations or bus lines they
could secure, for what period, and for how much. They took for
granted that those were the only options available and worked
within them. Again, it took noncustomers to shed insight into the
implicit assumptions of the industry and its existing customers that
could be challenged and rewritten to create a leap in value for all.
What are the key reasons second-tier noncustomers refuse to use
the products or services of your industry? Look for the commonali-
ties across their responses. Focus on these, and not on their differ-
ences. You will glean insight into how to unleash an ocean of latent
untapped demand.
Third-Tier Noncustomers
The third tier of noncustomers is the farthest away from an indus-
try’s existing customers. Typically, these unexplored noncustomers
have not been targeted or thought of as potential customers by any
player in the industry. That’s because their needs and the business
opportunities associated with them have somehow always been as-
sumed to belong to other markets.
It would drive many companies crazy to know how many third-
tier noncustomers they are forfeiting. Just think of the long-held
assumption that tooth whitening was a service provided exclu-
sively by dentists and not by oral care consumer-product compa-
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nies. Consequently, oral care companies, until recently, never looked
at the needs of these noncustomers. When they did, they found an
ocean of latent demand waiting to be tapped; they also found that
they had the capability to deliver safe, high-quality, low-cost tooth
whitening solutions, and the market exploded.
This potential applies to most industries. Consider the U.S. de-
fense aerospace industry. It has been argued that the inability to
control aircraft costs is a key vulnerability in the long-term military
strength of the United States.1 Soaring costs combined with shrink-
ing budgets, concluded a 1993 Pentagon report, left the military
without a viable plan to replace its aging fleet of fighter aircraft.2 If
the military couldn’t find a way to build aircraft differently, mili-
tary leaders worried, the United States would not have enough air-
planes to properly defend its interests.
Traditionally, the Navy, Marines, and Air Force differed in their
conceptions of the ideal fighter plane and hence each branch de-
signed and built its own aircraft independently. The Navy argued
for a durable aircraft that would survive the stress of landing on
carrier decks. The Marines wanted an expeditionary aircraft capa-
ble of short takeoffs and landings. The Air Force wanted the fastest
and most sophisticated aircraft.
Historically, these differences among the independent branches
were taken for granted, and the defense aerospace industry was re-
garded as having three distinct and separate segments. The Joint
Strike Fighter (JSF) program challenged this industry practice.3 It
looked to all three segments as potentially unexplored noncus-
tomers that could be aggregated into a new market of higher-per-
forming, lower-cost fighter planes. Rather than accept the existing
segmentation and develop products according to the differences in
specifications and features demanded by each branch of the mili-
tary, the JSF program questioned these differences. It searched for
the key commonalities across the three branches that had previ-
ously disregarded one another.
This process revealed that the two highest-cost components of
the three branches’ aircraft were the same: avionics (software) and
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engines. The shared use and production of these components held
the promise of enormous cost reductions. Moreover, even though
each branch had a long list of highly customized requirements,
most aircraft across branches performed the same missions.
The JSF team looked to understand how many of these highly
customized features decisively influenced the branches’ purchase
decision. Interestingly, the Navy’s answer did not hinge on a wide
range of factors. Instead, it boiled down to only two: durability and
maintainability. With aircraft stationed on aircraft carriers thou-
sands of miles away from the nearest maintenance hangar, the
Navy wants a fighter that is easy to maintain and yet durable as a
Mack truck so that it can absorb the shock of carrier landings and
constant exposure to salt air. Fearing that these two essential qual-
ities would be compromised with the requirements of the Marines
and the Air Force, the Navy bought its aircraft separately.
The Marines had many differences in requirements from those of
the other branches, but again only two kept them from decisively
avoiding joint aircraft purchases: the need for short takeoff verti-
cal landing (STOVL) and robust countermeasures. To support
troops in remote and hostile conditions the Marines need an air-
craft that performs as a jet fighter and yet hovers like a helicopter.
And given the low-altitude, expeditionary nature of their missions,
the Marines want an aircraft equipped with various countermea-
sures—flares, electronic jamming devices—to evade enemy ground-
to-air missiles because their planes are relatively easier targets
given their short air-to-ground range.
Tasked with maintaining global air superiority, the Air Force de-
mands the fastest aircraft and superior tactical agility—the ability
to outmaneuver all current and future enemy aircraft—and one
equipped with stealth technology: radar-absorbing materials and
structures to make it less visible to radar and therefore more likely to
evade enemy missiles and aircraft. The other two branches’ aircraft
lacked these factors, and hence the Air Force had not considered them.
These findings on unexplored noncustomers made the JSF a feasi-
ble project. The aim was to build one aircraft for all three divisions
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by combining those key factors while reducing or eliminating
everything else—that is, all the factors that had been taken for
granted by each branch but provided little value, or factors that
had been overdesigned in the race to beat the competition. As out-
lined in figure 5-2, some twenty competing factors in the Marine,
Navy, and Air Force segments were eliminated or reduced.
By combining the factors in this way and reducing or eliminat-
ing the rest, the JSF program is able to build one aircraft for all
three branches. The result is a dramatic drop in costs and hence the
price per aircraft, with a leap in value in performance for all three
branches. Specifically, the JSF promised to reduce costs to $33 mil-
112 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 5-2
The Key Competing Factors of the Defense Aerospace
Industry, After JSF
The JSF eliminated or reduced all existing competing factors other than those shaded.
Air Force Navy Marines
Lightweight Two engines STOVL
Integrated avionics Two seats Lightweight
Stealth Large wings Short wings Design
Supercruise engine Durability Countermeasures
customization
Long-distance Long-distance
Agility Maintainability
Air-air Large/flexible Large/flexible
armaments weapons payloads weapons payloads
Fixed internal Air-air and air-ground Air-ground Weapons
weapons payload armaments armaments customization
Electronic warfare
An aircraft built for An aircraft built An aircraft built Mission
every mission for every mission for every mission customization
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lion per aircraft from the current $190 million. At the same time,
the performance of the JSF, now called the F-35, promised to be su-
perior to that of any of the top-performing aircraft for the three
branches: the Air Force’s F-22, the Marine’s AV-8B Harrier jet, and
the Navy’s F-18. Figure 5-3 illustrates how the JSF creates excep-
tional value by offering superior performance at lower costs.
As revealed in the figure, the strategy canvas shows that while
the JSF roughly maintains the distinctive strengths of the Air
Force’s aircraft—agility and stealth—it also offers greater maintain-
ability, durability, countermeasures, and STOVL, the key strengths
required by the Navy and the Marines. These factors are powerful
additions that the Air Force had assumed it could not have. By fo-
cusing on these key decisive factors and dropping or reducing all
other factors in the three dominant domains of customization—
namely, design, weapons, and mission customization—the JSF pro-
gram was able to offer a superior fighter plane at a lower cost.
Reach Beyond Existing Demand 113
F I G U R E 5-3
Joint Strike Fighter (F-35) Versus Air Force F-22
High
Low
Price Weapons Agility Maintainability Countermeasures
customization
Design Mission Stealth Durability STOVL
customization customization
Air Force (F-22)
JSF (F-35)
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By reaching beyond the existing customers of each of the three
military branches, the JSF aggregated demand previously divided
among them. In fall 2001, Lockheed Martin was awarded the mas-
sive $200 billion JSF contract—the largest military contract in his-
tory—over Boeing. The first JSF F-35 is set to be delivered in 2010.
To date, the Pentagon is confident that the program will be an un-
qualified success, not only because the strategic profile of the JSF
F-35 achieves exceptional value but also, equally important, be-
cause it has won the support of all three defense branches.4
Go for the Biggest Catchment
There is no hard-and-fast rule to suggest which tier of noncus-
tomers you should focus on and when. Because the scale of blue
ocean opportunities that a specific tier of noncustomers can un-
lock varies across time and industries, you should focus on the tier
that represents the biggest catchment at the time. But you should
also explore whether there are overlapping commonalities across
all three tiers of noncustomers. In that way, you can expand the
scope of latent demand you can unleash. When that is the case, you
should not focus on a specific tier but instead should look across
tiers. The rule here is to go for the largest catchment.
The natural strategic orientation of many companies is toward
retaining existing customers and seeking further segmentation op-
portunities. This is especially true in the face of competitive pres-
sure. Although this might be a good way to gain a focused
competitive advantage and increase share of the existing market
space, it is not likely to produce a blue ocean that expands the mar-
ket and creates new demand. The point here is not to argue that it’s
wrong to focus on existing customers or segmentation but rather to
challenge these existing, taken-for-granted strategic orientations.
What we suggest is that to maximize the scale of your blue ocean
you should first reach beyond existing demand to noncustomers and
desegmentation opportunities as you formulate future strategies.
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If no such opportunities can be found, you can then move on to
further exploit differences among existing customers. But in mak-
ing such a strategic move, you should be aware that you might end
up landing in a smaller space. You should also be aware that when
your competitors succeed in attracting the mass of noncustomers
with a value innovation move, many of your existing customers
may be attracted away because they too may be willing to put their
differences aside to gain the offered leap in value.
It is not enough to maximize the size of the blue ocean you are
creating. You must profit from it to create a sustainable win-win
outcome. The next chapter shows how to build a viable business
model that produces and maintains profitable growth for your blue
ocean offering.
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( ) ( ) ( ) ( )
C H A P T E R 6
Get the Strategic
Sequence Right
YO U ’ V E L O O K E D A C R O S S PAT H S to discover possibleblue oceans. You’ve constructed a strategy canvas that
clearly articulates your future blue ocean strategy. And you have
explored how to aggregate the largest possible mass of buyers for
your idea. The next challenge is to build a robust business model to
ensure that you make a healthy profit on your blue ocean idea. This
brings us to the fourth principle of blue ocean strategy: Get the
strategic sequence right.
This chapter discusses the strategic sequence of fleshing out and
validating blue ocean ideas to ensure their commercial viability.
With an understanding of the right strategic sequence and of how
to assess blue ocean ideas along the key criteria in that sequence,
you dramatically reduce business model risk.
The Right Strategic Sequence
As shown in figure 6-1, companies need to build their blue ocean
strategy in the sequence of buyer utility, price, cost, and adoption.
( ) ( ) ( ) ( )
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The starting point is buyer utility. Does your offering unlock ex-
ceptional utility? Is there a compelling reason for the mass of peo-
ple to buy it? Absent this, there is no blue ocean potential to begin
with. Here there are only two options. Park the idea, or rethink it
until you reach an affirmative answer.
118 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 6-1
The Sequence of Blue Ocean Strategy
Buyer utility
Is there exceptional buyer utility
in your business idea?
Price
Is your price easily accessible
to the mass of buyers?
Cost
Can you attain your cost target
to profit at your strategic price?
Adoption
What are the adoption hurdles in
actualizing your business idea?
Are you addressing them up front?
A Commercially
Viable
Blue Ocean Idea
Yes
No—Rethink
Yes
Yes
Yes
No—Rethink
No—Rethink
No—Rethink
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When you clear the exceptional utility bar, you advance to the
second step: setting the right strategic price. Remember, a company
does not want to rely solely on price to create demand. The key
question here is this: Is your offering priced to attract the mass of
target buyers so that they have a compelling ability to pay for your
offering? If it is not, they cannot buy it. Nor will the offering create
irresistible market buzz.
These first two steps address the revenue side of a company’s
business model. They ensure that you create a leap in net buyer
value, where net buyer value equals the utility buyers receive minus
the price they pay for it.
Securing the profit side brings us to the third element: cost. Can
you produce your offering at the target cost and still earn a healthy
profit margin? Can you profit at the strategic price—the price
easily accessible to the mass of target buyers? You should not let
costs drive prices. Nor should you scale down utility because high
costs block your ability to profit at the strategic price. When the
target cost cannot be met, you must either forgo the idea because
the blue ocean won’t be profitable, or you must innovate your
business model to hit the target cost. The cost side of a company’s
business model ensures that it creates a leap in value for itself in
the form of profit—that is, the price of the offering minus the cost
of production. It is the combination of exceptional utility, strategic
pricing, and target costing that allows companies to achieve value
innovation—a leap in value for both buyers and companies.
The last step is to address adoption hurdles. What are the adop-
tion hurdles in rolling out your idea? Have you addressed these up
front? The formulation of blue ocean strategy is complete only
when you can address adoption hurdles in the beginning to ensure
the successful actualization of your idea. Adoption hurdles include,
for example, potential resistance to the idea by retailers or part-
ners. Because blue ocean strategies represent a significant depar-
ture from red oceans, it is key to address adoption hurdles up front.
How can you assess whether your blue ocean strategy is passing
through each of the four sequential steps? And how can you refine
Get the Strategic Sequence Right 119
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your idea to pass each bar? Let’s address these questions, starting
with utility.
Testing for Exceptional Utility
The need to assess the buyer utility of your offering may seem self-
evident. Yet many companies fail to deliver exceptional value be-
cause they are obsessed by the novelty of their product or service,
especially if new technology plays a part in it.
Consider Philips’ CD-i, an engineering marvel that failed to offer
people a compelling reason to buy it. The player was promoted as
the “Imagination Machine” because of its diverse functions. CD-i
was a video machine, music system, game player, and teaching tool
all wrapped into one. Yet it did so many different tasks that people
could not understand how to use it. In addition, it lacked attractive
software titles. So even though the CD-i theoretically could do al-
most anything, in reality it could do very little. Customers lacked a
compelling reason to use it, and sales never took off.
Managers responsible for Philips’ CD-i (as well as Motorola’s
Iridium) fell into the same trap: They reveled in the bells and whis-
tles of their new technology. They acted on the assumption that
bleeding-edge technology is equivalent to bleeding-edge utility for
buyers—something that, our research found, is rarely the case.
The technology trap that snagged Philips and Motorola trips up
the best and brightest companies time and again. Unless the tech-
nology makes buyers’ lives dramatically simpler, more convenient,
more productive, less risky, or more fun and fashionable, it will not
attract the masses no matter how many awards it wins. Think, for
example, of Starbucks, Cirque du Soleil, The Home Depot, South-
west Airlines, [yellow tail], or Ralph Lauren: Value innovation is
not the same as technology innovation.
To get around this trap, the starting point, as articulated in
chapter 2, is to create a strategic profile that passes the initial lit-
120 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
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mus test of being focused, being divergent, and having a compelling
tagline that speaks to buyers. Having done this, companies are
ready to expressly assess where and how the new product or service
will change the lives of its buyers. Such a difference in perspective
is important because it means that the way a product or service is
developed becomes less a function of its technical possibilities and
more a function of its utility to buyers.
The buyer utility map helps managers look at this issue from the
right perspective (see figure 6-2). It outlines all the levers compa-
nies can pull to deliver exceptional utility to buyers as well as the
various experiences buyers can have with a product or service. This
map allows managers to identify the full range of utility spaces that
a product or service can potentially fill. Let’s look at the map’s di-
mensions in detail.
Get the Strategic Sequence Right 121
F I G U R E 6-2
The Buyer Utility Map
1. 2. 3. 4. 5. 6.
Purchase Delivery Use Supplements Maintenance Disposal
T
h
e
S
ix
U
ti
lit
y
L
e
ve
rs
Customer
productivity
Simplicity
Convenience
Risk
Fun and
image
Environmental
friendliness
The Six Stages of the Buyer Experience Cycle
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The Six Stages of the Buyer Experience Cycle
A buyer’s experience can usually be broken into a cycle of six
stages, running more or less sequentially from purchase to dis-
posal. Each stage encompasses a wide variety of specific experi-
ences. Purchasing, for example, may include the experience of
browsing eBay as well as the aisles of The Home Depot. At each
stage, managers can ask a set of questions to gauge the quality of
buyers’ experience, as described in figure 6-3.
The Six Utility Levers
Cutting across the stages of the buyer’s experience are what we call
utility levers: the ways in which companies can unlock exceptional
utility for buyers. Most of the levers are obvious. Simplicity, fun
and image, and environmental friendliness need little explanation.
Nor does the idea that a product might reduce a customer’s finan-
cial, physical, or credibility risks. And a product or service offers
convenience simply by being easy to obtain, use, or dispose of. The
most commonly used lever is that of customer productivity, in
which an offering helps a customer do things faster or better.
To test for exceptional utility, companies should check whether
their offering has removed the greatest blocks to utility across the
entire buyer experience cycle for customers and noncustomers. The
greatest blocks to utility often represent the greatest and most
pressing opportunities to unlock exceptional value. Figure 6-4
shows how a company can identify the most compelling hot spots to
unlock exceptional utility. By locating your proposed offering on
the thirty-six spaces of the buyer utility map, you can clearly see
how, and whether, the new idea not only creates a different utility
proposition from existing offerings but also removes the biggest
blocks to utility that stand in the way of converting noncustomers
into customers. If your offering falls on the same space or spaces as
those of other players, chances are it is not a blue ocean offering.
122 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
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F
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06-Kim.qxd 10/25/04 9:58 AM Page 123

Consider the Ford Model T. Before its debut, the more than five
hundred automakers in the United States focused on building cus-
tom-made luxury autos for the wealthy. In terms of the buyer utility
map, the entire industry focused on image in the use phase, creat-
ing luxury cars for fashionable weekend outings. Only one of the
thirty-six utility spaces was occupied.
The greatest blocks to utility for the mass of people, however,
were not in refining the auto’s luxury or stylish image. Rather, they
had to do with two other factors. One was convenience in the use
phase. The bumpy and muddy dirt roads that prevailed at the cen-
tury’s start were a natural for horses to tread over but often pre-
vented finely crafted autos from passing. This significantly limited
where and when cars could travel (driving on rainy and snowy days
was ill advised), making the use of the car limited and inconven-
ient. The second block to utility was risk in the maintenance phase.
The cars, being finely crafted and having multiple options, often
broke down, requiring experts to fix them, and experts were expen-
sive and in short supply.
124 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 6-4
Uncovering the Blocks to Buyer Utility
Purchase Delivery Use Supplements Maintenance Disposal
Customer Productivity: In which stage are the biggest blocks to customer productivity?
Simplicity: In which stage are the biggest blocks to simplicity?
Convenience: In which stage are the biggest blocks to convenience?
Risk: In which stage are the biggest blocks to reducing risks?
Fun and Image: In which stage are the biggest blocks to fun and image?
Environmental In which stage are the biggest blocks to
Friendliness: environmental friendliness?
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In one fell swoop, Ford’s Model T eliminated these two utility
blocks. The Model T was called the car for the great multitude. It
came in only one color (black) and one model, with scant options.
In this way, Ford eliminated investments in image in the use phase.
Instead of creating cars for weekends in the countryside—a luxury
few could justify—Ford’s Model T was made for everyday use. It
was reliable. It was durable; it was designed to travel effortlessly
over dirt roads and in rain, sleet, or shine. It was easy to fix and use.
People could learn to drive it in one day.
In this way the buyer utility map highlights the differences be-
tween ideas that genuinely create new and exceptional utility and
those that are essentially revisions of existing offerings or techno-
logical breakthroughs not linked to value. The aim is to check
whether your offering passes the exceptional utility test, as did the
Model T. By applying this diagnostic, you can find out how your
idea needs to be refined.
Where are the greatest blocks to utility across the buyer experi-
ence cycle for your customers and noncustomers? Does your offer-
ing effectively eliminate these blocks? If it does not, chances are
your offering is innovation for innovation’s sake or a revision of ex-
isting offerings. When a company’s offering passes this test, it is
ready to move to the next step.
From Exceptional Utility to Strategic Pricing
To secure a strong revenue stream for your offering, you must set
the right strategic price. This step ensures that buyers not only will
want to buy your offering but also will have a compelling ability to
pay for it. Many companies take a reverse course, first testing the
waters of a new product or service by targeting novelty-seeking,
price-insensitive customers at the launch of a new business idea;
only over time do they drop prices to attract mainstream buyers. It
is increasingly important, however, to know from the start what
price will quickly capture the mass of target buyers.
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There are two reasons for this change. First, companies are dis-
covering that volume generates higher returns than it used to. As
the nature of goods becomes more knowledge intensive, companies
bear much more of their costs in product development than in man-
ufacturing. This is easy to understand in the software industry.
Producing the first copy of the Windows XP operating system, for
example, cost Microsoft billions of dollars, whereas subsequent
copies involved no more than the nearly trivial cost of a CD. This
makes volume key.
A second reason is that to a buyer, the value of a product or ser-
vice may be closely tied to the total number of people using it. An
example is the online auction service managed by eBay. People will
not buy a product or service when it is used by few others. As a re-
sult of this phenomenon, called network externalities, many prod-
ucts and services are an all-or-nothing proposition: Either you sell
millions at once, or you sell nothing at all.1
In the meantime, the rise of knowledge-intensive products also
creates the potential for free riding. This relates to the nonrival
and partially excludable nature of knowledge.2 The use of a rival
good by one firm precludes its use by another. So, for example,
Nobel Prize–winning scientists who are fully employed by IBM
cannot simultaneously be employed by another company. Nor can
scrap steel consumed by Nucor be simultaneously consumed for
production by other minimill steel makers.
In contrast, the use of a nonrival good by one firm does not limit
its use by another. Ideas fall into this category. So, for example,
when Virgin Atlantic Airways launched its Upper Class brand—a
new concept in business-class travel that essentially combined the
huge seats and legroom of traditional first class with the price of
business-class tickets—other airlines were free to apply this idea to
their own business-class service without limiting Virgin’s ability to
use it. This makes competitive imitation not only possible but less
costly. The cost and risk of developing an innovative idea are borne
by the initiator, not the follower.
This challenge is exacerbated when the notion of excludability is
considered. Excludability is a function both of the nature of the
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good and of the legal system. A good is excludable if the company
can prevent others from using it because of, for example, limited ac-
cess or patent protection. Intel, for example, can exclude other mi-
croprocessor chipmakers from using its manufacturing facilities
through property ownership laws. The women’s fitness club Curves,
however, cannot exclude someone from walking into any of its cen-
ters, studying its layout, atmosphere, and exercise routine, and
mimicking its women’s fitness concept: Women need only thirty
minutes, three days a week, to get in shape while having fun with
other women, with none of the usual embarrassment faced at gyms.
The highest value-added element of the Curves formula is not ex-
cludable. Once ideas are out there, knowledge naturally spills over
to other firms.
This lack of excludability reinforces the risk of free riding. Like
the creative and explosive concepts of Curves, Starbucks, or South-
west Airlines, many of the most powerful blue ocean ideas have
tremendous value but in themselves consist of no new technologi-
cal discoveries. As a result they are neither patentable nor exclud-
able and hence are vulnerable to imitation.
All this means that the strategic price you set for your offering
must not only attract buyers in large numbers but also help you to
retain them. Given the high potential for free riding, an offering’s
reputation must be earned on day one, because brand building
increasingly relies heavily on word-of-mouth recommendations
spreading rapidly through our networked society. Companies must
therefore start with an offer that buyers can’t refuse and must keep
it that way to discourage any free-riding imitations. This is what
makes strategic pricing key. Strategic pricing addresses this ques-
tion: Is your offering priced to attract the mass of target buyers
from the start so that they have a compelling ability to pay for it?
When exceptional utility is combined with strategic pricing, imita-
tion is discouraged.
We have developed a tool called the price corridor of the mass to
help managers find the right price for an irresistible offer, which, by
the way, isn’t necessarily the lower price. The tool involves two dis-
tinct but interrelated steps (see figure 6-5).
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Step 1: Identify the Price Corridor of the Mass
In setting a price, all companies look first at the products and ser-
vices that most closely resemble their idea in terms of form. Typically
they look at other products and services within their industries.
That’s still a necessary exercise, of course, but it is not sufficient to
attract new customers. So the main challenge in determining a
strategic price is to understand the price sensitivities of those peo-
ple who will be comparing the new product or service with a host of
very different-looking products and services offered outside the
group of traditional competitors.
A good way to look outside industry boundaries is to list prod-
ucts and services that fall into two categories: those that take differ-
ent forms but perform the same function, and those that take different
forms and functions but share the same over-arching objective.
128 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 6-5
The Price Corridor of the Mass
Lower-level pricing
Step 2: Specify a price level
within the price corridor.
Step 1: Identify the price
corridor of the mass.
Three alternative product/service types:
Different form
Same Different form, and function,
form same function same objective
Size of circle is proportional to number
of buyers that product/service attracts
High degree of legal and
resource protection
Difficult to imitate
Some degree of legal and
resource protection
Low degree of legal and
resource protection
Easy to imitate
Price Corridor
of the Mass
Upp
er-l
eve
l pr
icin
g
Mid-level pricing
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Different form, same function. Many companies that create blue
oceans attract customers from other industries who use a product
or service that performs the same function or bears the same core
utility as the new one but takes a very different physical form. In
the case of Ford’s Model T, Ford looked to the horse-drawn car-
riage. The horse-drawn carriage had the same core utility as the
car: transportation for individuals and families. But it had a very
different form: a live animal versus a machine. Ford effectively con-
verted the majority of noncustomers of the auto industry, namely
customers of horse-drawn carriages, into customers of its own blue
ocean by pricing its Model T against horse-drawn carriages and not
the cars of other automakers.
In the case of the school lunch catering industry, raising this
question led to an interesting insight. Suddenly those parents who
make their children’s lunches came into the equation. For many
children, parents had the same function: making their child’s
lunch. But they had a very different form: mom or dad versus a
lunch line in the cafeteria.
Different form and function, same objective. Some companies
lure customers from even further away. Cirque du Soleil, for exam-
ple, has diverted customers from a wide range of evening activities.
Its growth came in part through drawing people away from other
activities that differed in both form and function. For example, bars
and restaurants have few physical features in common with a cir-
cus. They also serve a distinct function by providing conversational
and gastronomical pleasure, a very different experience from the
visual entertainment that a circus offers. Yet despite these differ-
ences in form and function, people have the same objective in un-
dertaking these three activities: to enjoy a night out.
Listing the groups of alternative products and services allows
managers to see the full range of buyers they can poach from other
industries as well as from nonindustries, such as parents (for the
school lunch catering industry) or the noble pencil in managing
household finances (for the personal finance software industry).
Get the Strategic Sequence Right 129
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Having done this, managers should then graphically plot the price
and volume of these alternatives, as shown in figure 6-5.
This approach provides a straightforward way to identify where
the mass of target buyers is and what prices these buyers are pre-
pared to pay for the products and services they currently use. The
price bandwidth that captures the largest groups of target buyers is
the price corridor of the mass.
In some cases, the range is very wide. For Southwest Airlines, for
example, the price corridor of the mass covered the group of people
paying, on average, $400 to buy an economy-class short-haul ticket
to about $60 for the cost of going the same distance by car. The key
here is not to pursue pricing against the competition within an in-
dustry but rather to pursue pricing against substitutes and alterna-
tives across industries and nonindustries. Had Ford, for example,
priced its Model T against other autos, which were more than three
times the price of horse-drawn carriages, the market for the Model
T would not have exploded.
Step 2: Specify a Level Within the Price Corridor
The second part of the tool helps managers determine how high a
price they can afford to set within the corridor without inviting
competition from imitation products or services. That assessment
depends on two principal factors. First is the degree to which the
product or service is protected legally through patents or copyrights.
Second is the degree to which the company owns some exclusive
asset or core capability, such as an expensive production plant, that
can block imitation. Dyson, a British electrical white goods com-
pany, for example, has been able to charge a high unit price for its
bagless vacuum cleaner since the product’s launch in 1995, thanks
to both strong patents and hard-to-imitate service capabilities.
Many other companies have used upper-boundary strategic pric-
ing to attract the mass of target buyers. Examples include DuPont
with its Lycra brand in specialty chemicals, Philips’ ALTO in the
professional lighting industry, SAP in the business application
software industry, and Bloomberg in the financial software industry.
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On the other hand, companies with uncertain patent and asset
protection should consider pricing somewhere in the middle of the
corridor. As for companies that have no such protection, they must
set a relatively low price. In the case of Southwest Airlines, because
its service wasn’t patentable and required no exclusive assets, its
ticket prices fell into the lower boundary of the corridor—namely,
against the price of car travel. Companies would be wise to pursue
mid- to lower-boundary strategic pricing from the start if any of the
following apply:
• Their blue ocean offering has high fixed costs and marginal
variable costs.
• Their attractiveness depends heavily on network externalities.
• Their cost structure benefits from steep economies of scale
and scope. In these cases, volume brings with it significant
cost advantages, something that makes pricing for volume
even more key.
The price corridor of the mass not only signals the strategic
pricing zone central to pulling in an ocean of new demand but also
signals how you might need to adjust your initial price estimates to
achieve this. When your offering passes the test of strategic pric-
ing, you’re ready to move to the next step.
From Strategic Pricing to Target Costing
Target costing, the next step in the strategic sequence, addresses
the profit side of the business model. To maximize the profit poten-
tial of a blue ocean idea, a company should start with the strategic
price and then deduct its desired profit margin from the price to ar-
rive at the target cost. Here, price-minus costing, and not cost-plus
pricing, is essential if you are to arrive at a cost structure that is
both profitable and hard for potential followers to match.
When target costing is driven by strategic pricing, however, it is
usually aggressive. Part of the challenge of meeting the target cost
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is addressed in building a strategic profile that has not only diver-
gence but also focus, which makes a company strip out costs. Think
of the cost reductions Cirque du Soleil enjoyed by eliminating ani-
mals and stars or that Ford enjoyed by making the Model T in one
color and one model having few options.
Sometimes these reductions are sufficient to hit the cost target,
but often they are not. Consider the cost innovations that Ford had
to introduce to meet its aggressive target cost for the Model T. Ford
had to scrap the standard manufacturing system, in which cars
were handmade by skilled craftsmen from start to finish. Instead,
Ford introduced the assembly line, which replaced skilled crafts-
men with ordinary unskilled laborers, who worked one small task
faster and more efficiently, cutting the time to make a Model T from
twenty-one days to four days and cutting labor hours by 60 percent.3
Had Ford not introduced these cost innovations, it could not have
met its strategic price profitably.
Instead of drilling down and finding ways to creatively meet the
target cost as Ford did, if companies give in to the tempting route
of either bumping up the strategic price or cutting back on utility,
they are not on the path to lucrative blue waters. To hit the cost tar-
get, companies have three principal levers.
The first involves streamlining operations and introducing cost
innovations from manufacturing to distribution. Can the product’s
or service’s raw materials be replaced by unconventional, less ex-
pensive ones—such as switching from metal to plastic or shifting a
call center from the U.K. to Bangalore? Can high-cost, low-value-
added activities in your value chain be significantly eliminated,
reduced, or outsourced? Can the physical location of your product
or service be shifted from prime real estate locations to lower-cost
locations, as The Home Depot, IKEA, and Wal-Mart have done in
retail or Southwest Airlines has done by shifting from major to sec-
ondary airports? Can you truncate the number of parts or steps
used in production by shifting the way things are made, as Ford did
by introducing the assembly line? Can you digitize activities to re-
duce costs?
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By probing questions such as these, the Swiss watch company
Swatch, for example, was able to arrive at a cost structure some 30
percent lower than any other watch company in the world. At the
start, Nicolas Hayek, chairman of Swatch, set up a project team to
determine the strategic price for the Swatch. At the time, cheap
(about $75), high-precision quartz watches from Japan and Hong
Kong were capturing the mass market. Swatch set the price at $40,
a price at which people could buy multiple Swatches as fashion ac-
cessories. The low price left no profit margin for Japanese or Hong
Kong-based companies to copy Swatch and undercut its price. Di-
rected to sell the Swatch for that price and not a penny more, the
Swatch project team worked backwards to arrive at the target cost,
a process that involved determining the margin Swatch needed to
support marketing and services and earn a profit.
Given the high cost of Swiss labor, Swatch was able to achieve
this goal only by making radical changes in the product and pro-
duction methods. Instead of using the more traditional metal or
leather, for example, Swatch used plastic. Swatch’s engineers also
drastically simplified the design of the watch’s inner workings, re-
ducing the number of parts from one hundred fifty to fifty-one. Fi-
nally, the engineers developed new and cheaper assembly techniques;
for example, the watch cases were sealed by ultrasonic welding in-
stead of screws. Taken together, the design and manufacturing
changes enabled Swatch to reduce direct labor costs from 30 per-
cent to less than 10 percent of total costs. These cost innovations
produced a cost structure that is hard to beat and let Swatch prof-
itably dominate the mass market for watches, a market previously
dominated by Asian manufacturers with a cheaper labor pool.
Beyond streamlining operations and introducing cost innova-
tions, a second lever companies can pull to meet their target cost is
partnering. In bringing a new product or service to market, many
companies mistakenly try to carry out all the production and dis-
tribution activities themselves. Sometimes that’s because they see
the product or service as a platform for developing new capabili-
ties. Other times it is simply a matter of not considering other out-
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side options. Partnering, however, provides a way for companies to
secure needed capabilities fast and effectively while dropping their
cost structure. It allows a company to leverage other companies’ ex-
pertise and economies of scale. Partnering includes closing gaps in
capabilities through making small acquisitions when doing so is
faster and cheaper, providing access to needed expertise that has
already been mastered.
A large part of IKEA’s ability to meet its target cost, for example,
comes down to partnering. IKEA seeks out the lowest prices for ma-
terials and production via partnering with some fifteen hundred
manufacturing companies in more than fifty countries to ensure it
the lowest cost and fastest production of products in its IKEA
lineup of some twenty thousand items.
Or consider German-based, world-leading business application
software maker SAP. By partnering with Oracle, SAP saved hun-
dreds of millions if not billions of dollars in development costs and
got a world-class central database, namely Oracle’s, which sits
at the heart of SAP’s core products R/2 and R/3. SAP went a step
further and also partnered with leading consulting firms, such as
Capgemini and Accenture, to gain a global sales force overnight at
no extra cost. Whereas Oracle had the fixed costs of a much smaller
sales force on its balance sheet, SAP was able to leverage Capgem-
ini’s and Accenture’s strong global networks to reach SAP’s target
customers, with no cost implication to the company.
Sometimes, however, no amount of streamlining and cost inno-
vation or partnering will make it possible for a company to deliver
its target cost. This brings us to the third lever companies can use
to make their desired profit margin without compromising their
strategic price: changing the pricing model of the industry. By
changing the pricing model used—and not the level of the strategic
price—companies can often overcome this problem.
When film videotapes first came out, for example, they were
priced at around $80. Few people were willing to pay that amount
because no one expected to watch the video more than two or three
times. The strategic price of a video had to be set in relation to
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going to the movies and not to owning a tape for life. So at $80 a
tape, demand was not taking off. How could a company make
money by selling the videos at only a few dollars if it followed the
path of using strategic pricing? The answer was that it couldn’t.
Blockbuster, however, got around this problem by changing the
pricing model from selling to renting. This allowed it to strategi-
cally price videotapes at only a few dollars per rental. The result
was that the home video market exploded and Blockbuster made
more money by repeatedly renting the same $80 videos than it
could have by selling them outright. Similarly, IBM exploded the
tabulating market by shifting the pricing model from selling to
leasing to hit its strategic price while covering its cost structure.
In addition to Blockbuster’s rental model or IBM’s leasing
model, companies have used several innovations in pricing models
to profitably deliver on the strategic price. One model is the time-
share. The New Jersey company NetJets follows this model to make
jets accessible to a wide range of corporate customers, who buy the
right to use a jet for a certain amount of time rather than buy the
jet itself. Another model is the slice-share; mutual fund managers,
for example, bring high-quality portfolio services—traditionally
provided by private banks to the rich—to the small investor by sell-
ing a sliver of the portfolio rather than its whole.
Some companies are abandoning the concept of price altogether.
Instead, they give products to customers in return for an equity in-
terest in the customer’s business. Hewlett-Packard, for example, has
traded high-powered servers to Silicon Valley start-ups for a share
of their revenues. The customers get immediate access to a key ca-
pability, and HP stands to earn a lot more than the price of the ma-
chine. The aim is not to compromise on the strategic price but to hit
the target through a new price model. We call this pricing innova-
tion. Remember, however, that what is a pricing innovation for one
industry, such as video rentals, is often a standard pricing model in
another industry.
Figure 6-6 shows how value innovation typically maximizes
profit by using the foregoing three levers. As the figure depicts, a
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company begins with its strategic price, from which it deducts its
target profit margin to arrive at its target cost. To hit the cost target
that supports that profit, companies have two key levers: One is
streamlining and cost innovations, and the other is partnering.
When the target cost cannot be met despite all efforts to build a
low-cost business model, the company should turn to the third
lever, pricing innovation, to profitably meet the strategic price. Of
course, even when the target cost can be met, pricing innovation
still can be pursued. When a company’s offering successfully ad-
dresses the profit side of the business model, the company is ready
to advance to the final step in the sequence of blue ocean strategy.
136 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 6-6
The Profit Model of Blue Ocean Strategy
The Strategic Price
The Target Cost
Pricing Innovation
Streamlining and
Cost Innovations
Partnering
The Target Profit
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A business model built in the sequence of exceptional utility,
strategic pricing, and target costing produces value innovation. Un-
like the practice of conventional technology innovators, value in-
novation is based on a win-win game among buyers, companies, and
society. Appendix C, “The Market Dynamics of Value Innovation,”
illustrates how such a game is played out in the market and shows
the economic and social welfare implications for its stakeholders.
From Utility, Price, and Cost to Adoption
Even an unbeatable business model may not be enough to guaran-
tee the commercial success of a blue ocean idea. Almost by defini-
tion, it threatens the status quo, and for that reason it may provoke
fear and resistance among a company’s three main stakeholders: its
employees, its business partners, and the general public. Before
plowing forward and investing in the new idea, the company must
first overcome such fears by educating the fearful.
Employees
Failure to adequately address the concerns of employees about the
impact of a new business idea on their livelihoods can be expensive.
When Merrill Lynch’s management, for example, announced plans
to create an online brokerage service, its stock price fell by 14 per-
cent as reports emerged of resistance and infighting within the
company’s large retail brokerage division.
Before companies go public with an idea, they should make a
concerted effort to communicate to employees that they are aware
of the threats posed by the execution of the idea. Companies
should work with employees to find ways of defusing the threats so
that everyone in the company wins, despite shifts in people’s roles,
responsibilities, and rewards. In contrast to Merrill Lynch, Mor-
gan Stanley Dean Witter & Co. engaged employees in an open inter-
nal discussion of the company’s strategy for meeting the challenge
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of the Internet. Morgan’s efforts paid off handsomely. Because
the market realized that its employees understood the need for an
e-venture, the company’s shares rose 13 percent when it eventually
announced the venture.
Business Partners
Potentially even more damaging than employee disaffection is the
resistance of partners who fear that their revenue streams or mar-
ket positions are threatened by a new business idea. That was the
problem faced by SAP when it was developing its product Acceler-
atedSAP (ASAP), an enterprise software system that was fast to im-
plement and hence low cost. ASAP brought business application
software within the reach of midsized and small companies for the
first time. The problem was that the development of best-practice
templates for ASAP required the active cooperation of large con-
sulting firms that were deriving substantial income from lengthy
implementations of SAP’s other products. As a result, they were
not necessarily incentivized to find the fastest way to implement
the company’s software.
SAP resolved the dilemma by openly discussing the issues with
its partners. Its executives convinced the consulting firms that they
stood to gain more business by cooperating. Although ASAP would
reduce implementation time for small and midsized companies,
consultants would gain access to a new client base that would more
than compensate for some lost revenues from larger companies.
The new system would also offer consultants a way to respond to
customers’ increasingly vocal concerns that business application
software took too long to implement.
The General Public
Opposition to a new business idea can also spread to the general
public, especially if the idea is very new and innovative, threaten-
ing established social or political norms. The effects can be devas-
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tating. Consider Monsanto, which makes genetically modified foods.
Its intentions have been questioned by European consumers, largely
because of the efforts of environmental groups such as Green-
peace, Friends of the Earth, and the Soil Association. The attacks of
these groups have struck many chords in Europe, which has a his-
tory of environmental concern and powerful agricultural lobbies.
Monsanto’s mistake was to let others take charge of the debate.
The company should have educated the environmental groups as
well as the public on the benefits of genetically modified food and
its potential to eliminate world famine and disease. When the prod-
ucts came out, Monsanto should have given consumers a choice be-
tween organic and genetically modified foods by labeling which
products had genetically modified seeds as their base. If Monsanto
had taken these steps, then instead of being vilified, it might have
ended up as the “Intel Inside” of food for the future—the provider
of the essential technology.
In educating these three groups of stakeholders—your employ-
ees, your partners, and the general public—the key challenge is to
engage in an open discussion about why the adoption of the new
idea is necessary. You need to explain its merits, set clear expecta-
tions for its ramifications, and describe how the company will ad-
dress them. Stakeholders need to know that their voices have been
heard and that there will be no surprises. Companies that take the
trouble to have such a dialogue with stakeholders will find that it
amply repays the time and effort involved. (For a fuller discussion
of how companies can engage stakeholders, see chapter 8.)
The Blue Ocean Idea Index
Although companies should build their blue ocean strategy in the
sequence of utility, price, cost, and adoption, these criteria form an
integral whole to ensure commercial success. The blue ocean idea
(BOI) index provides a simple but robust test of this system view
(see Figure 6-7).
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As shown in figure 6-7, had Philips’ CD-i and Motorola’s Iridium
scored their ideas on the BOI index they would have seen how far
they were from opening up lucrative blue oceans. With respect to
Philips CD-i, it did not create exceptional buyer utility with its of-
fering of complex technological functions and limited software
titles. It was priced out of reach of the mass of buyers, and its man-
ufacturing process was complicated and costly. With its compli-
cated design, it took more than thirty minutes to explain and sell to
customers, something that gave no incentive for sales clerks to sell
CD-i in fast-moving retail. Philips CD-i therefore failed all four cri-
teria on the BOI index despite the billions poured into it.
By assessing the business idea of the CD-i against the BOI index
during development, Philips could have foreseen the shortcomings
embedded in the idea and addressed them up front by simplifying
the product and locking in partners to develop winning software ti-
tles, setting a strategic price accessible to the masses, instituting
price-minus costing instead of cost-plus pricing, and working with
retail to find a simple, easy way for the sales force to sell and ex-
plain the product in a few minutes.
140 F O R M U L A T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 6-7
Blue Ocean Idea (BOI) Index
DoCoMo
Philips Motorola i-mode
CD-i Iridium Japan
Utility Is there exceptional utility? Are there
compelling reasons to buy your offering?
– – +
Price Is your price easily accessible to the
mass of buyers?
– – +
Cost Does your cost structure meet the
target cost?
– – +
Adoption Have you addressed adoption hurdles
up front?
– +/– +
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Similarly, Motorola’s Iridium was unreasonably expensive be-
cause of high production costs. It provided no attractive utility for
the mass of buyers, not being usable in buildings or cars and being
the size of a brick. When it came to adoption, Motorola overcame
many regulations and secured transmission rights from numerous
countries. Employees, partners, and the society were also reason-
ably motivated to accept the idea. But the company had a weak
sales team and marketing channels in the global markets. Because
Motorola was not able to follow up sales leads effectively, Iridium
phone sets were sometimes unavailable when requested. Weak util-
ity, price, and cost positions, plus average adoption ability, indi-
cated that the Iridium idea would be a flop.
In contrast to these failures, consider NTT DoCoMo’s i-mode
launch in Japan. In 1999, when most telecom operators were focus-
ing on technology races and price competition over voice-based
wireless devices, NTT DoCoMo, the largest Japanese telecom oper-
ator, launched i-mode to offer the Internet on cell phones. Regular
mobile telephony in Japan had reached a high level of sophistica-
tion in terms of mobility, quality of voice, ease of use, and hard-
ware design. But it offered few data-based services such as e-mail,
access to information, news, and games, and transaction capabili-
ties, which were the killer applications of the PC-Internet world.
The i-mode service brought together the key advantages of these
two alternative industries—the cell phone industry and the PC-
Internet industry—and created unique and superior buyer utility.
The i-mode service offered exceptional buyer utility at a price ac-
cessible to the mass of buyers. The monthly i-mode subscription fee,
the voice and data transmission fee, and the price of content were
in the “nonreflection” strategic price zone, encouraging impulse
buying and reaching the masses as quickly as possible. For exam-
ple, the monthly subscription fee for a content site is between ¥100
and ¥300 ($1 and $3), which is the result of benchmarking against
the price of the weekly magazines most Japanese regularly pick up
at their train station kiosk.
After setting a price that was attractive to the mass of buyers,
NTT DoCoMo strove to obtain the capabilities it needed to deliver
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the service within its cost target in order to turn a profit. In achiev-
ing this end, the company was never bounded by its own assets and
capabilities. While it focused on its traditional role as an operator
to develop and maintain a high-speed, high-capacity network in the
i-mode project, it sought to deliver other key elements of its offer-
ing by actively partnering with handset manufacturers and infor-
mation providers.
By creating a win-win partnership network, the company aimed
to meet and sustain the target cost set by its strategic price. Al-
though there are many partners and dimensions involved in its
partnership network, a few aspects are particularly relevant here.
First, NTT DoCoMo regularly and persistently shared know-how
and technology with its handset manufacturing partners to help
them stay ahead of their competitors. Second, the company played
the role of the portal and gateway to the wireless network, expand-
ing and updating the list of i-mode menu sites while attracting con-
tent providers to join the i-mode list and create the content that
would boost user traffic. By handling the billing for the content
providers with a small commission fee, for example, the company
offered content providers major cost savings associated with billing
system development. At the same time DoCoMo also obtained a
growing revenue stream for itself.
More importantly, instead of using the Wireless Markup Lan-
guage (WML) under the WAP standard for site creation, i-mode
used c-HTML, an existing and already widely used language in
Japan. This made i-mode more attractive to content providers be-
cause under c-HTML, software engineers needed no retraining to
convert their existing Web sites, designed for the Internet environ-
ment, into sites for i-mode use, and thus they incurred no additional
costs. NTT DoCoMo also entered into collaborative arrangements
with key foreign partners, such as Sun Microsystems, Microsoft,
and Symbian, to reduce the total development costs and shorten
the time for an effective launch.
Another key aspect of the i-mode strategy was the way the project
was carried out. A team specially dedicated to the project was set
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up and given a clear mandate and autonomy. The head of the i-mode
team selected most of the team members and engaged them in an open
discussion on how to create the new market of mobile data commu-
nications, making them committed to the project. All this created a
favorable corporate environment for the adoption of i-mode. More-
over, the win-win game the company created for its partners, as well
as the readiness of the Japanese general public to use database
services, also contributed to the successful adoption of i-mode.
The i-mode service passed all four criteria on the BOI index, as
shown earlier in figure 6-7. Indeed, i-mode turned out to be an ex-
plosive success. Six months after its launch, subscribers had
reached the 1 million mark. Within two years, the number of sub-
scribers had reached 21.7 million, and revenues from packet trans-
mission alone had increased 130 times. By the end of 2003 the
number of subscribers had reached 40.1 million, and revenues from
the transmission of data, pictures, and text increased from 295 mil-
lion yen ($2.6 million) to 886.3 billion yen ($8 billion).
DoCoMo is the only company that has been able to make money
out of the mobile Internet. DoCoMo now exceeds its parent com-
pany, NTT, in terms of market capitalization as well as potential for
profitable growth.
Although i-mode has been a huge success in Japan, its success
outside Japan hinges on whether it can overcome regional adop-
tion barriers of a regulatory, cultural, and emotional nature as
well as those stemming from partnership dynamics and infrastruc-
ture economics.
Having passed the blue ocean idea index, companies are ready to
shift gears from the formulation side of blue ocean strategy to its
execution. The question is, How do you bring an organization with
you to execute this strategy even though it often represents a sig-
nificant departure from the past? This brings us to the second part
of this book, and the fifth principle of blue ocean strategy: over-
coming key organizational hurdles, the subject of our next chapter.
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( ) ( ) ( ) ( ) (
P A R T T H R E E
Executing Blue
Ocean Strategy
( ) ( ) ( ) ( ) (
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( ) ( ) ( ) ( )
C H A P T E R 7
Overcome Key
Organizational Hurdles
ON C E A C O M PA N Y H A S D E V E L O P E D a blue oceanstrategy with a profitable business model, it must exe-
cute it. The challenge of execution exists, of course, for any strategy.
Companies, like individuals, often have a tough time translating
thought into action whether in red or blue oceans. But compared
with red ocean strategy, blue ocean strategy represents a signifi-
cant departure from the status quo. It hinges on a shift from conver-
gence to divergence in value curves at lower costs. That raises the
execution bar.
Managers have assured us that the challenge is steep. They face
four hurdles. One is cognitive: waking employees up to the need for
a strategic shift. Red oceans may not be the paths to future prof-
itable growth, but they feel comfortable to people and may have
even served an organization well until now, so why rock the boat?
The second hurdle is limited resources. The greater the shift in
strategy, the greater it is assumed are the resources needed to exe-
cute it. But resources were being cut, and not raised, in many of the
organizations we studied.
( ) ( ) ( ) ( )
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Third is motivation. How do you motivate key players to move
fast and tenaciously to carry out a break from the status quo? That
will take years, and managers don’t have that kind of time.
The final hurdle is politics. As one manager put it, “In our organ-
ization you get shot down before you stand up.”
Although all companies face different degrees of these hurdles,
and many may face only some subset of the four, knowing how to
triumph over them is key to attenuating organizational risk. This
brings us to the fifth principle of blue ocean strategy: Overcome key
organizational hurdles to make blue ocean strategy happen in action.
To achieve this effectively, however, companies must abandon
perceived wisdom on effecting change. Conventional wisdom as-
serts that the greater the change, the greater the resources and
time you will need to bring about results. Instead, you need to flip
conventional wisdom on its head using what we call tipping point
leadership. Tipping point leadership allows you to overcome these
four hurdles fast and at low cost while winning employees’ backing
in executing a break from the status quo.
Tipping Point Leadership in Action
Consider the New York City Police Department (NYPD), which ex-
ecuted a blue ocean strategy in the 1990s in the public sector. When
Bill Bratton was appointed police commissioner of New York City
in February 1994, the odds were stacked against him to an extent
few executives ever face. In the early 1990s, New York City was veer-
ing toward anarchy. Murders were at an all-time high. Muggings,
Mafia hits, vigilantes, and armed robberies filled the daily head-
lines. New Yorkers were under siege. But Bratton’s budget was
frozen. Indeed, after three decades of mounting crime in New York
City, many social scientists had concluded that it was impervious
to police intervention. The citizens of New York City were crying
out. A front-page headline in the New York Post had screamed:
“Dave do something!”—a direct call to then mayor David Dinkins
to get crime down fast.1 With miserable pay, dangerous working
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conditions, long hours, and little hope of advancement in a tenure
promotion system, morale among the NYPD’s thirty-six thousand
officers was at rock bottom—not to mention the debilitating effects
of budget cuts, dilapidated equipment, and corruption.
In business terms, the NYPD was a cash-strapped organization
with thirty-six thousand employees wedded to the status quo, un-
motivated, and underpaid; a disgruntled customer base—New York
City’s citizens; and rapidly declining performance as measured by
the increase in crime, fear, and disorder. Entrenched turf wars and
politics topped off the cake. In short, leading the NYPD to execute
a shift in strategy was a managerial nightmare far beyond the imag-
inations of most executives. The competition—the criminals—was
strong and rising.
Yet in less than two years and without an increase in his budget,
Bratton turned New York City into the safest large city in the United
States. He broke out of the red ocean with a blue ocean policing
strategy that revolutionized U.S. policing as it was then known. Be-
tween 1994 and 1996, the organization won as “profits” jumped:
Felony crime fell 39 percent, murders 50 percent, and theft 35 per-
cent. “Customers” won: Gallup polls reported that public confidence
in the NYPD leaped from 37 percent to 73 percent. And employees
won: Internal surveys showed job satisfaction in the NYPD reach-
ing an all-time high. As one patrolman put it, “We would have
marched to hell and back for that guy.” Perhaps most impressively,
the changes have outlasted its leader, implying a fundamental shift
in the organizational culture and strategy of the NYPD. Even after
Bratton’s departure in 1996, crime rates have continued to fall.
Few corporate leaders face organizational hurdles as steep as
Bratton did in executing a break from the status quo. And still
fewer are able to orchestrate the type of performance leap that
Bratton achieved under any organizational conditions, let alone
those as stringent as he encountered. Even Jack Welch needed
some ten years and tens of millions of dollars of restructuring and
training to turn GE into a powerhouse.
Moreover, defying conventional wisdom, Bratton achieved these
breakthrough results in record time with scarce resources while
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lifting employee morale, creating a win-win for all involved. Nor
was this Bratton’s first strategic reversal. It was his fifth, with each
of the others also achieved despite his facing all four hurdles that
managers consistently claim limit their ability to execute blue
ocean strategy: the cognitive hurdle that blinds employees from
seeing that radical change is necessary; the resource hurdle that is
endemic in firms; the motivational hurdle that discourages and de-
moralizes staff; and the political hurdle of internal and external re-
sistance to change (see figure 7-1).
The Pivotal Lever: Disproportionate
Influence Factors
Tipping point leadership traces its roots to the field of epidemiol-
ogy and the theory of tipping points.2 It hinges on the insight that
150 E X E C U T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 7-1
The Four Organizational Hurdles to Strategy Execution
Cognitive Hurdle
An organization
wedded to the
status quo
Motivational Hurdle
Unmotivated staff
Political Hurdle
Opposition from
powerful vested
interests
Resource Hurdle
Limited resources
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in any organization, fundamental changes can happen quickly
when the beliefs and energies of a critical mass of people create an
epidemic movement toward an idea. Key to unlocking an epidemic
movement is concentration, not diffusion.
Tipping point leadership builds on the rarely exploited corpo-
rate reality that in every organization, there are people, acts, and ac-
tivities that exercise a disproportionate influence on performance.
Hence, contrary to conventional wisdom, mounting a massive chal-
lenge is not about putting forth an equally massive response where
performance gains are achieved by proportional investments in
time and resources. Rather, it is about conserving resources and
cutting time by focusing on identifying and then leveraging the fac-
tors of disproportionate influence in an organization.
The key questions answered by tipping point leaders are as fol-
lows: What factors or acts exercise a disproportionately positive in-
fluence on breaking the status quo? On getting the maximum bang
out of each buck of resources? On motivating key players to aggres-
sively move forward with change? And on knocking down political
roadblocks that often trip up even the best strategies? By single-
mindedly focusing on points of disproportionate influence, tipping
point leaders can topple the four hurdles that limit execution of
blue ocean strategy. They can do this fast and at low cost.
Let us consider how you can leverage disproportionate influence
factors to tip all four hurdles to move from thought to action in the
execution of blue ocean strategy.
Break Through the Cognitive Hurdle
In many turnarounds and corporate transformations, the hardest
battle is simply to make people aware of the need for a strategic shift
and to agree on its causes. Most CEOs will try to make the case for
change simply by pointing to the numbers and insisting that the com-
pany set and achieve better results: “There are only two performance
alternatives: to make the performance targets or to beat them.”
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But as we all know, figures can be manipulated. Insisting on
stretch goals encourages abuse in the budgetary process. This, in
turn, creates hostility and suspicion between the various parts of
an organization. Even when the numbers are not manipulated, they
can mislead. Salespeople on commission, for example, are seldom
sensitive to the costs of the sales they produce.
What’s more, messages communicated through numbers seldom
stick with people. The case for change feels abstract and removed
from the sphere of the line managers, who are the very people the
CEO needs to win over. Those whose units are doing well feel that
the criticism is not directed at them; the problem is top manage-
ment’s. Meanwhile, managers of poorly performing units feel that
they are being put on notice, and people who are worried about per-
sonal job security are more likely to scan the job market than to try
to solve the company’s problems.
Tipping point leadership does not rely on numbers to break
through the organization’s cognitive hurdle. To tip the cognitive
hurdle fast, tipping point leaders such as Bratton zoom in on the
act of disproportionate influence: making people see and experi-
ence harsh reality firsthand. Research in neuroscience and cog-
nitive science shows that people remember and respond most
effectively to what they see and experience: “Seeing is believing.”
In the realm of experience, positive stimuli reinforce behavior,
whereas negative stimuli change attitudes and behavior. Simply
put, if a child puts a finger in icing and tastes it, the better it tastes
the more the child will taste it repetitively. No parental advice is
needed to encourage that behavior. Conversely, after a child puts a
finger on a burning stove, he or she will never do it again. After a
negative experience, children will change their behavior of their
own accord; again, no parental pestering is required.3 On the other
hand, experiences that don’t involve touching, seeing, or feeling ac-
tual results, such as being presented with an abstract sheet of num-
bers, are shown to be non-impactful and easily forgotten.4
Tipping point leadership builds on this insight to inspire a fast
change in mindset that is internally driven of people’s own accord.
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Instead of relying on numbers to tip the cognitive hurdle, they
make people experience the need for change in two ways.
Ride the “Electric Sewer”
To break the status quo, employees must come face-to-face with the
worst operational problems. Don’t let top brass, middle brass, or any
brass hypothesize about reality. Numbers are disputable and unin-
spiring, but coming face-to-face with poor performance is shocking
and inescapable, but actionable. This direct experience exercises a
disproportionate influence on tipping people’s cognitive hurdle fast.
Consider this example. In the 1990s the New York subway system
reeked of fear, so much so that it earned the epithet “electric
sewer.” Revenues were tumbling fast as citizens boycotted the sys-
tem. But members of the New York City Transit Police department
were in denial. Why? Only 3 percent of the city’s major crimes hap-
pened on the subway. So no matter how much the public cried out,
their cries fell on deaf ears. There was no perceived need to rethink
police strategies.
Then Bratton was appointed chief, and in a matter of weeks he
orchestrated a complete break from the status quo in the mindset of
the city’s police. How? Not by force, nor by arguing for numbers,
but by making top brass and middle brass—starting with himself—
ride the electric sewer day and night. Until Bratton came along,
that had not been done.
Although the statistics may have told the police that the subway
was safe, what they now saw was what every New Yorker faced every
day: a subway system on the verge of anarchy. Gangs of youths pa-
trolled the cars, people jumped turnstiles, and the riders faced graf-
fiti, aggressive begging, and winos sprawled over benches. The
police could no longer evade the ugly truth. No one could argue
that current police strategies didn’t require a substantial depar-
ture from the status quo—and fast.
Showing the worst reality to your superiors can also shift their
mindset fast. A similar approach works to help sensitize superiors
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to a leader’s needs fast. Yet few leaders exploit the power of this
rapid wake-up call. Rather, they do the opposite. They try to garner
support based on a numbers case that lacks urgency and emotional
impetus. Or they try to put forth the most exemplary case of their
operational excellence to garner support. Although these alterna-
tives may work, neither leads to tipping superiors’ cognitive hurdle
as fast and stunningly as showing the worst.
When Bratton, for example, was running the police division of
the Massachusetts Bay Transportation Authority (MBTA), the
MBTA board decided to purchase small squad cars that would be
cheaper to buy and to run. That went against Bratton’s new polic-
ing strategy. Instead of fighting the decision, however, or arguing
for a larger budget—something that would have taken months to
reevaluate and probably would have been rejected in the end—
Bratton invited the MBTA’s general manager for a tour of his unit
to see the district.
To let the general manager see the horror he was trying to rec-
tify, Bratton picked him up in a small car just like the ones that
were being ordered. He jammed the seats up front to let the man-
ager feel how little legroom a six-foot cop would get, and then Brat-
ton drove over every pothole he could. Bratton also put on his belt,
cuffs, and gun for the trip so that the manager would see how little
space there was for the tools of the police officer’s trade. After two
hours, the general manager wanted out. He told Bratton he didn’t
know how Bratton could stand being in such a cramped car for so
long on his own, never mind having a criminal in the back seat.
Bratton got the larger cars his new strategy demanded.
Meet with Disgruntled Customers
To tip the cognitive hurdle, not only must you get your managers
out of the office to see operational horror, but also you must get
them to listen to their most disgruntled customers firsthand. Don’t
rely on market surveys. To what extent does your top team actively
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observe the market firsthand and meet with your most disgruntled
customers to hear their concerns? Do you ever wonder why sales
don’t match your confidence in your product? Simply put, there
is no substitute for meeting and listening to dissatisfied customers
directly.
In the late 1970s, Boston’s Police District 4, which housed the
Symphony Hall, Christian Science Mother Church, and other cul-
tural institutions, was experiencing a serious surge in crime. The
public was increasingly intimidated; residents were selling their
homes and leaving, thereby pushing the community into a down-
ward spiral. But even though the citizens were leaving the area
in droves, the police force under Bratton’s direction felt they
were doing a fine job. The performance indicators they historically
used to benchmark themselves against other police departments
were tip-top: 911 response times were down, and felony crime ar-
rests were up. To solve the paradox Bratton arranged a series
of town hall meetings between his officers and the neighborhood
residents.
It didn’t take long to find the gap in perceptions. Although the
police officers took great pride in short response times and their
record in solving major crimes, these efforts went unnoticed and
unappreciated by citizens; few felt endangered by large-scale crimes.
What they felt victimized by and harassed by were the constant
minor irritants: winos, panhandlers, prostitutes, and graffiti.
The town meetings led to a complete overhaul of police priori-
ties to focus on the blue ocean strategy of “broken windows.”5
Crime went down, and the neighborhood felt safe again.
When you want to wake up your organization to the need for a
strategic shift and a break from the status quo, do you make your
case with numbers? Or do you get your managers, employees, and
superiors (and yourself) face-to-face with your worst operational
problems? Do you get your managers to meet the market and listen
to disenchanted customers holler? Or do you outsource your eyes
and send out market research questionnaires?
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Jump the Resource Hurdle
After people in an organization accept the need for a strategic shift
and more or less agree on the contours of the new strategy, most
leaders are faced with the stark reality of limited resources. Do
they have the money to spend on the necessary changes? At this
point, most reformist CEOs do one of two things. Either they trim
their ambitions and demoralize their work force all over again, or
they fight for more resources from their bankers and shareholders,
a process that can take time and divert attention from the underly-
ing problems. That’s not to say that this approach is not necessary
or worthwhile, but acquiring more resources is often a long, politi-
cally charged process.
How do you get an organization to execute a strategic shift with
fewer resources? Instead of focusing on getting more resources, tip-
ping point leaders concentrate on multiplying the value of the re-
sources they have. When it comes to scarce resources, there are
three factors of disproportionate influence that executives can
leverage to dramatically free resources, on the one hand, and multi-
ply the value of resources, on the other. These are hot spots, cold
spots, and horse trading.
Hot spots are activities that have low resource input but high po-
tential performance gains. In contrast, cold spots are activities that
have high resource input but low performance impact. In every or-
ganization, hot spots and cold spots typically abound. Horse trad-
ing involves trading your unit’s excess resources in one area for
another unit’s excess resources to fill remaining resource gaps. By
learning to use their current resources right, companies often find
they can tip the resource hurdle outright.
What actions consume your greatest resources but have scant
performance impact? Conversely, what activities have the greatest
performance impact but are resource starved? When the questions
are framed in this way, organizations rapidly gain insight into free-
ing up low-return resources and redirecting them to high-impact
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areas. In this way, both lower costs and higher value are simultane-
ously pursued and achieved.
Redistribute Resources to Your Hot Spots
At the New York Transit Police, Bratton’s predecessors argued that
to make the city’s subways safe they had to have an officer ride
every subway line and patrol every entrance and exit. To increase
profits (lower crime) would mean increasing costs (police officers)
in multiples that were not possible given the budget. The underly-
ing logic was that increments in performance could be achieved
only with proportional increments in resources—the same inher-
ent logic guiding most companies’ view of performance gains.
Bratton, however, achieved the sharpest drop in subway crime,
fear, and disorder in Transit’s history, not with more police officers
but with police officers targeted at hot spots. His analysis revealed
that although the subway system was a maze of lines and entrances
and exits, the vast majority of crimes occurred at only a few sta-
tions and on a few lines. He also found that these hot spots were
starved for police attention even though they exercised a dispro-
portionate impact on crime performance, whereas lines and sta-
tions that almost never reported criminal activity were staffed
equally. The solution was a complete refocusing of cops at subway
hot spots to overwhelm the criminal element. And crime came tum-
bling down while the size of the police force remained constant.
Similarly, before Bratton’s arrival at the NYPD the narcotics
unit worked nine-to-five weekday-only shifts and made up less than
5 percent of the department’s human resources. To search out re-
source hot spots, in one of his initial meetings with the NYPD’s
chiefs Bratton’s deputy commissioner of crime strategy, Jack Maple,
asked people around the table for their estimates of the percentage
of crimes attributable to narcotics usage. Most said 50 percent, oth-
ers 70 percent; the lowest estimate was 30 percent. On that basis,
as Maple pointed out, it was hard to argue that a narcotics unit
consisting of less than 5 percent of the NYPD force was not grossly
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understaffed. What’s more, it turned out that the narcotics squad
largely worked Monday to Friday, even though most drugs were
sold over the weekend, when drug-related crimes persistently oc-
curred. Why? That was the way it had always been; it was the un-
questioned modus operandi.
When these facts were presented and the hot spot identified,
Bratton’s case for a major reallocation of staff and resources within
the NYPD was quickly accepted. Accordingly, Bratton reallocated
staff and resources on the hot spot, and drug crime plummeted.
Where did he get the resources to do this? He simultaneously as-
sessed his organization’s cold spots.
Redirect Resources from Your Cold Spots
Leaders need to free up resources by searching out cold spots.
Again in the subway, Bratton found that one of the biggest cold
spots was processing criminals in court. On average, it would take
an officer sixteen hours to take someone downtown to process even
the pettiest of crimes. This was time officers were not patrolling the
subway and adding value.
Bratton changed all that. Instead of bringing criminals to the
court, he brought processing centers to the criminals by using
“bust buses”—roving old buses retrofitted into miniature police
stations that were parked outside subway stations. Now instead of
dragging a suspect down to the courthouse across town, a police of-
ficer needed only escort the suspect up to street level to the bus.
This cut processing time from sixteen hours to just one, freeing
more officers to patrol the subway and catch criminals.
Engage in Horse Trading
In addition to internally refocusing the resources a unit already
controls, tipping point leaders skillfully trade resources they don’t
need for those of others that they do need. Consider again the case
of Bratton. The chiefs of public sector organizations know that the
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size of their budgets and the number of people they control are
often hotly debated because public sector resources are notori-
ously limited. This makes chiefs of public sector organizations un-
willing to advertise excess resources, let alone release them for use
by other parts of the larger organization, because that would risk a
loss of control over those resources. One result is that over time,
some organizations become well endowed with resources they don’t
need even while they are short of ones they do need.
On taking over as chief of the New York Transit Police in 1990,
Bratton’s general counsel and policy adviser, Dean Esserman (now
police chief of Providence, Rhode Island), played a key horse trad-
ing role. Esserman discovered that the Transit unit, which was
starved for office space, had been running a fleet of unmarked cars
in excess of its needs. The New York Division of Parole, on the
other hand, was short of cars but had excess office space. Esserman
and Bratton offered the obvious trade, which was gratefully ac-
cepted by the parole officials. For their part, Transit unit officers
were delighted to get the first floor of a prime downtown building.
The deal stoked Bratton’s credibility within the organization,
something that later made it easier for him to introduce more fun-
damental changes. At the same time, it marked him to his political
bosses as a man who could solve problems.
Figure 7-2 illustrates how radically Bratton refocused the Tran-
sit Police department’s resources to break out of the red ocean and
execute its blue ocean strategy. The vertical axis here shows the
relative level of resource allocation, and the horizontal axis shows
the various elements of strategy in which the investments were
made. By deemphasizing or virtually eliminating some traditional
features of transit police work while increasing emphasis on the
others or creating new ones, Bratton achieved a dramatic shift in
resource allocation.
Whereas the actions of eliminating and reducing cut the costs
for the organization, raising certain elements or creating new ones
required added investments. As you can see on the strategy canvas,
however, the overall investment of resources remained more or less
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constant. At the same time, the value to citizens went way up. Elim-
inating the practice of widespread coverage of the subway system
and replacing it with a targeted strategy on hot spots enabled the
transit police to combat subway crimes more efficiently and effec-
tively. Reducing the involvement of officers in processing arrests or
cold spots and creating bust buses significantly raised the value of
the police force by allowing officers to concentrate their time and
attention on policing the subway. Raising the level of investment in
combating quality-of-life crimes rather than big crimes refocused
the police resources on crimes that presented constant dangers to
citizens’ daily lives. Through these moves, the New York Transit
Police significantly enhanced the performance of its officers, who
were now freed from administrative hassles and assigned clear du-
160 E X E C U T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 7-2
The Strategy Canvas of Transit: How Bratton Refocused Resources
High
Low
Widespread Arrests of Arrests Focus on Use of “bust buses”
patrols of warrant violators quality-of-life for processing
subway in daytime crimes arrests
system Involvement Issuance of desk Group Arrests of warrant Train sweeps
of officers in appearance tickets arrests violators during for safe
processing (which violators had sleeping hours atmosphere
arrests routinely ignored)
After Bratton’s Appointment
Before Bratton’s Appointment
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ties as to what kinds of crimes they should focus on and where to
combat them.
Are you allocating resources based on old assumptions, or do
you seek out and concentrate resources on hot spots? Where are
your hot spots? What activities have the greatest performance im-
pact but are resource starved? Where are your cold spots? What ac-
tivities are resource oversupplied but have scant performance
impact? Do you have a horse trader, and what can you trade?
Jump the Motivational Hurdle
To reach your organization’s tipping point and execute blue ocean
strategy, you must alert employees to the need for a strategic shift
and identify how it can be achieved with limited resources. For a
new strategy to become a movement, people must not only recog-
nize what needs to be done, but they must also act on that insight in
a sustained and meaningful way.
How can you motivate the mass of employees fast and at low
cost? When most business leaders want to break from the status
quo and transform their organizations, they issue grand strategic
visions and turn to massive top-down mobilization initiatives. They
act on the assumption that to create massive reactions, proportion-
ate massive actions are required. But this is often a cumbersome,
expensive, and time-consuming process, given the wide variety of
motivational needs in most large companies. And overarching
strategic visions often inspire lip service instead of the intended
action. It would be easier to turn an aircraft carrier around in a
bathtub.
Or is there another way? Instead of diffusing change efforts
widely, tipping point leaders follow a reverse course and seek mas-
sive concentration. They focus on three factors of disproportionate
influence in motivating employees, what we call kingpins, fishbowl
management, and atomization.
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Zoom in on Kingpins
For strategic change to have real impact, employees at every level
must move en masse. To trigger an epidemic movement of positive
energy, however, you should not spread your efforts thin. Rather,
you should concentrate your efforts on kingpins, the key influ-
encers in the organization. These are people inside the organization
who are natural leaders, who are well respected and persuasive, or
who have an ability to unlock or block access to key resources. As
with kingpins in bowling, when you hit them straight on, all the
other pins come toppling down. This frees an organization from
tackling everyone, and yet in the end everyone is touched and
changed. And because in most organizations there are a relatively
small number of key influencers, who tend to share common prob-
lems and concerns, it is relatively easy for the CEO to identify and
motivate them.
At the NYPD, for example, Bratton zoomed in on the seventy-six
precinct heads as his key influencers and kingpins. Why? Each
precinct head directly controlled two hundred to four hundred po-
lice officers. Hence, galvanizing these seventy-six heads would have
the natural ripple effect of touching and motivating the thirty-six-
thousand-deep police force to embrace the new policing strategy.
Place Kingpins in a Fishbowl
At the heart of motivating the kingpins in a sustained and mean-
ingful way is to shine a spotlight on their actions in a repeated and
highly visible way. This is what we refer to as fishbowl management,
where kingpins’ actions and inaction are made as transparent to
others as are fish in a bowl of water. By placing kingpins in a fish-
bowl in this way you greatly raise the stakes of inaction. Light is
shined on who is lagging behind, and a fair stage is set for rapid
change agents to shine. For fishbowl management to work it must
be based on transparency, inclusion, and fair process.
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At the NYPD, Bratton’s fishbowl was a biweekly crime strategy
review meeting known as Compstat that brought together the city’s
top brass to review the performance of all the seventy-six precinct
commanders in executing its new strategy. Attendance was manda-
tory for all precinct commanders; three-star chiefs, deputy commis-
sioners, and borough chiefs were also required to attend. Bratton
himself was there as often as possible. As each precinct commander
was questioned on decreases and increases in crime performance in
front of peers and superiors based on the organization’s new strate-
gic directives, enormous computer-generated overhead maps and
charts were shown, visually illustrating in inescapable terms the
commander’s performance in executing the new strategy. The com-
mander was responsible for explaining the maps, describing how
his or her officers were addressing the issues, and outlining why
performance was going up or down. These inclusive meetings in-
stantly made results and responsibilities clear and transparent for
everyone.
As a result, an intense performance culture was created in
weeks—forget about months, let alone years—because no kingpin
wanted to be shamed in front of others, and they all wanted to
shine in front of their peers and superiors. In the fishbowl, incom-
petent precinct commanders could no longer cover up their failings
by blaming their precinct’s results on the shortcomings of neigh-
boring precincts, because their neighbors were in the room and
could respond. Indeed, a picture of the precinct commander to be
grilled at the crime strategy meetings was printed on the front page
of the handout, emphasizing that the commander was responsible
and accountable for that precinct’s results.
By the same token, the fishbowl gave an opportunity for high
achievers to gain recognition for work in their own precincts and in
helping others. The meetings also provided an opportunity for pol-
icy leaders to compare notes on their experiences; before Bratton’s
arrival, precinct commanders seldom got together as a group. Over
time, this style of fishbowl management filtered down the ranks, as
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the precinct commanders tried out their own versions of Bratton’s
meetings. With the spotlight shining brightly on their performance
in strategy execution, the precinct commanders were highly moti-
vated to get all the officers under their control marching to the new
strategy.
For this to work, however, organizations must simultaneously
make fair process the modus operandi. By fair process we mean en-
gaging all the affected people in the process, explaining to them the
basis of decisions and the reasons people will be promoted or side-
stepped in the future, and setting clear expectations of what that
means to employees’ performance. At the NYPD’s crime strategy
review meetings, no one could argue that the playing field wasn’t
fair. The fishbowl was applied to all kingpins. There was clear
transparency in the assessment of every commander’s performance
and how it would tie into advancement or demotion, and clear ex-
pectations were set in every meeting of what was expected in per-
formance from everyone.
In this way, fair process signals to people that there is a level
playing field and that leaders value employees’ intellectual and
emotional worth despite all the change that may be required. This
greatly mitigates feelings of suspicion and doubt that are almost
necessarily present in employees’ minds when a company is trying
to make a major strategic shift. The cushion of support provided
by fair process, combined with the fishbowl emphasis on sheer
performance, pushes people and supports them on the journey,
demonstrating managers’ intellectual and emotional respect for
employees. (For a fuller discussion on fair process and its motiva-
tional implications, see chapter 8.)
Atomize to Get the Organization to Change Itself
The last disproportionate influence factor is atomization. Atomiza-
tion relates to the framing of the strategic challenge—one of the
most subtle and sensitive tasks of the tipping point leader. Unless
people believe that the strategic challenge is attainable, the change
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is not likely to succeed. On the face of it, Bratton’s goal in New
York City was so ambitious as to be scarcely believable. Who could
believe that anything an individual could do would turn such a
huge city from being the most dangerous place in the country into
the safest? And who would want to invest time and energy in chas-
ing an impossible dream?
To make the challenge attainable, Bratton broke it into bite-size
atoms that officers at different levels could relate to. As he put it,
the challenge facing the NYPD was to make the streets of New
York City safe “block by block, precinct by precinct, and borough
by borough.” Thus framed, the challenge was both all-encompass-
ing and doable. For officers on the street, the challenge was to make
their beat or block safe—no more. For the precinct commanders,
the challenge was to make their precinct safe—no more. Borough
heads also had a concrete goal within their capabilities: making
their boroughs safe—no more. No one could say that what was being
asked of them was too tough. Nor could they claim that achieving
it was largely out of their hands—“It’s beyond me.” In this way, re-
sponsibility for executing Bratton’s blue ocean strategy shifted
from him to each of the NYPD’s thirty-six thousand officers.
Do you indiscriminately try to motivate the masses? Or do you
focus on key influencers, your kingpins? Do you put the spotlight
on and manage kingpins in a fishbowl based on fair process? Or do
you just demand high performance and cross your fingers until the
next quarter numbers come out? Do you issue grand strategic vi-
sions? Or do you atomize the issue to make it actionable to all levels?
Knock Over the Political Hurdle
Youth and skill will win out every time over age and treachery.
True or false? False. Even the best and brightest are regularly
eaten alive by politics, intrigue, and plotting. Organizational poli-
tics is an inescapable reality of corporate and public life. Even if an
organization has reached the tipping point of execution, there
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exist powerful vested interests that will resist the impending
changes. (Also see our discussion on adoption hurdles in chapter
6.) The more likely change becomes, the more fiercely and vocally
these negative influencers—both internal and external—will fight
to protect their positions, and their resistance can seriously dam-
age and even derail the strategy execution process.
To overcome these political forces, tipping point leaders focus on
three disproportionate influence factors: leveraging angels, silenc-
ing devils, and getting a consigliere on their top management team.
Angels are those who have the most to gain from the strategic shift.
Devils are those who have the most to lose from it. And a consigliere
is a politically adept but highly respected insider who knows in ad-
vance all the land mines, including who will fight you and who will
support you.
Secure a Consigliere on Your Top Management Team
Most leaders concentrate on building a top management team hav-
ing strong functional skills such as marketing, operations, and fi-
nance—and that is important. Tipping point leaders, however, also
engage one role few other executives think to include: a consigliere.
To that end, Bratton, for example, always ensured that he had a re-
spected senior insider on his top team who knew the land mines he
would face in implementing the new policing strategy. At NYPD,
Bratton appointed John Timoney (now the police commissioner of
Miami) as his number two. Timoney was a cop’s cop, respected and
feared for his dedication to the NYPD and for the more than sixty
decorations and combat crosses he had received. Twenty years in
the ranks had taught him not only who all the key players were but
also how they played the political game. One of the first tasks Tim-
oney did was to report to Bratton on the likely attitudes of the top
staff to the NYPD’s new policing strategy, identifying those who
would fight or silently sabotage the new initiative. This led to a dra-
matic changing of the guard.
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Leverage Your Angels and Silence Your Devils
To knock down the political hurdles, you should also ask yourself
two sets of questions:
• Who are my devils? Who will fight me? Who will lose the most
by the future blue ocean strategy?
• Who are my angels? Who will naturally align with me? Who
will gain the most by the strategic shift?
Don’t fight alone. Get the higher and wider voice to fight with
you. Identify your detractors and supporters—forget the middle—
and strive to create a win-win outcome for both. But move quickly.
Isolate your detractors by building a broader coalition with your
angels before a battle begins. In this way, you will discourage the
war before it has a chance to start or gain steam.
One of the most serious threats to Bratton’s new policing strat-
egy came from New York City’s courts. Believing that Bratton’s
new policing strategy of focusing on quality-of-life crimes would
overwhelm the system with small crime cases such as prostitution
and public drunkenness, the courts opposed the strategic shift. To
overcome this opposition, Bratton clearly illustrated to his sup-
porters, including the mayor, district attorneys, and jail managers,
that the court system could indeed handle the added quality-of-life
crimes and that focusing on them would, in the long term, actually
reduce their caseload. The mayor decided to intervene.
Then Bratton’s coalition, led by the mayor, went on the offensive
in the press with a clear and simple message: If the courts did not
pull their weight, the city’s crime rate would not go down. Bratton’s
alliance with the mayor’s office and the city’s leading newspaper
successfully isolated the courts. They could hardly be seen to pub-
licly oppose an initiative that would not only make New York a
more attractive place to live but would also ultimately reduce the
number of cases brought before them. With the mayor speaking ag-
gressively in the press of the need to pursue quality-of-life crimes
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and the city’s most respected—and liberal—newspaper giving cre-
dence to the new police strategy, the costs of fighting Bratton’s
strategy were daunting. Bratton had won the battle: The courts would
comply. He also won the war: Crime rates did indeed come down.
Key to winning over your detractors or devils is knowing all
their likely angles of attack and building up counterarguments
backed by irrefutable facts and reason. For example, when the
NYPD’s precinct commanders were first requested to compile de-
tailed crime data and maps, they balked at the idea, arguing that it
would take too much time. Anticipating this reaction, Bratton had
already done a test run of the operation to see how long it would
take: no more than eighteen minutes a day, which worked out, as he
told the commanders, to less than 1 percent of their average work-
load. Armed with irrefutable information, he was able to tip the po-
litical hurdle and win the battle before it even began.
Do you have a consigliere—a highly respected insider—in your
top management team, or only a CFO and other functional head
heads? Do you know who will fight you and who will align with the
new strategy? Have you built coalitions with natural allies to encir-
cle dissidents? Do you have your consigliere remove the biggest
land mines so that you don’t have to focus on changing those who
cannot and will not change?
Challenging Conventional Wisdom
As shown in figure 7-3, the conventional theory of organizational
change rests on transforming the mass. So change efforts are fo-
cused on moving the mass, requiring steep resources and long time
frames—luxuries few executives can afford. Tipping point leader-
ship, by contrast, takes a reverse course. To change the mass it fo-
cuses on transforming the extremes: the people, acts, and activities
that exercise a disproportionate influence on performance. By
transforming the extremes, tipping point leaders are able to change
the core fast and at low cost to execute their new strategy.
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It is never easy to execute a strategic shift, and doing it fast with
limited resources is even more difficult. Yet our research suggests
that it can be achieved by leveraging tipping point leadership. By
consciously addressing the hurdles to strategy execution and fo-
cusing on factors of disproportionate influence, you too can knock
them over to actualize a strategic shift. Don’t follow conventional
wisdom. Not every challenge requires a proportionate action. Focus
on acts of disproportionate influence. This is a critical leadership
component for making blue ocean strategy happen. It aligns em-
ployees’ actions with the new strategy.
The next chapter drills down one level further. It addresses the
challenge of aligning people’s minds and hearts with the new strat-
egy by building a culture of trust, commitment, and voluntary co-
operation in its execution, as well as support for the leader.
Addressing this challenge spells the difference between forced exe-
cution and voluntary execution driven by people’s free will.
Overcome Key Organizational Hurdles 169
F I G U R E 7-3
Conventional Wisdom Versus Tipping Point Leadership
Extremes
Company
Extremes
Theory of organization change rests on transforming the mass. So change efforts
are focused on moving the mass, requiring steep resources and long time frames.
Conventional Wisdom
Mass of Employees
To change the mass, focus on the extremes—people, acts, and activities that exercise
a disproportionate influence on performance to achieve a strategic shift fast at low cost.
Tipping Point Leadership
Company
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( ) ( ) ( ) ( )
C H A P T E R 8
Build Execution into Strategy
AC O M PA N Y I S N O T O N LY T O P M A N A G E M E N T, nor isit only middle management. A company is everyone
from the top to the front lines. And it is only when all the members
of an organization are aligned around a strategy and support it, for
better or for worse, that a company stands apart as a great and con-
sistent executor. Overcoming the organizational hurdles to strat-
egy execution is an important step toward that end. It removes the
roadblocks that can put a halt to even the best of strategies.
But in the end, a company needs to invoke the most fundamental
base of action: the attitudes and behavior of its people deep in the
organization. You must create a culture of trust and commitment
that motivates people to execute the agreed strategy—not to the
letter, but to the spirit. People’s minds and hearts must align with
the new strategy so that at the level of the individual, people em-
brace it of their own accord and willingly go beyond compulsory
execution to voluntary cooperation in carrying it out.
Where blue ocean strategy is concerned, this challenge is height-
ened. Trepidation builds as people are required to step out of their
comfort zones and change how they have worked in the past. They
( ) ( ) ( ) ( )
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wonder, What are the real reasons for this change? Is top manage-
ment honest when it speaks of building future growth through a
change in strategic course? Or are they trying to make us redun-
dant and work us out of our jobs?
The more removed people are from the top and the less they have
been involved in the creation of the strategy, the more this trepida-
tion builds. On the front line, at the very level at which a strategy
must be executed day in and day out, people can resent having a
strategy thrust upon them with little regard for what they think
and feel. Just when you think you have done everything right,
things can suddenly go very wrong in your front line.
This brings us to the sixth principle of blue ocean strategy: To
build people’s trust and commitment deep in the ranks and inspire
their voluntary cooperation, companies need to build execution
into strategy from the start. That principle allows companies to
minimize the management risk of distrust, noncooperation, and
even sabotage. This management risk is relevant to strategy execu-
tion in both red and blue oceans, but it is greater for blue ocean
strategy because its execution often requires significant change.
Hence, minimizing such risk is essential as companies execute blue
ocean strategy. Companies must reach beyond the usual suspects of
carrots and sticks. They must reach to fair process in the making
and executing of strategy.
Our research shows that fair process is a key variable that distin-
guishes successful blue ocean strategic moves from those that
failed. The presence or absence of fair process can make or break a
company’s best execution efforts.
Poor Process Can Ruin Strategy Execution
Consider the experience of a global leader in supplying water-
based liquid coolants for metalworking industries. We’ll call this
organization Lubber. Because of the many processing parameters
in metal-based manufacturing, there are several hundred complex
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types of coolants to choose from. Choosing the right coolant is a
delicate process. Products must first be tested on production ma-
chines before purchasing, and the decision often rests on fuzzy
logic. The result is machine downtime and sampling costs, and
these are expensive for customers and Lubber alike.
To offer customers a leap in value, Lubber devised a strategy to
eliminate the complexity and costs of the trial phase. Using artifi-
cial intelligence, it developed an expert system that cut the failure
rate in selecting coolants to less than 10 percent from an industry
average of 50 percent. The system also reduced machine downtime,
eased coolant management, and raised the overall quality of work
pieces produced. As for Lubber, the sales process was dramatically
simplified, giving sales representatives more time to gain new sales
and dropping the costs per sale.
This win-win value innovation strategic move, however, was
doomed from the start. It wasn’t that the strategy was not good or
that the expert system did not work; it worked exceptionally well.
The strategy was doomed because the sales force fought it.
Having not been engaged in the strategy-making process nor ap-
prised of the rationale for the strategic shift, sales reps saw the ex-
pert system in a light no one on the design team or management
team had ever imagined. To them, it was a direct threat to what
they saw as their most valuable contribution—tinkering in the trial
phase to find the right water-based coolant from the long list of
possible candidates. All the wonderful benefits—having a way to
avoid the hassle-filled part of their job, having more time to pull in
more sales, and winning more contracts by standing out in the in-
dustry—went unappreciated.
With the sales force feeling threatened and often working
against the expert system by expressing doubts about its effective-
ness to customers, sales did not take off. After cursing its hubris
and learning the hard way the importance of dealing with manage-
rial risk up front based on the proper process, management was
forced to pull the expert system from the market and work on re-
building trust with its sales representatives.
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The Power of Fair Process
What, then, is fair process? And how does it allow companies to
build execution into strategy? The theme of fairness or justice has
preoccupied writers and philosophers throughout the ages. But the
direct theoretical origin of fair process traces back to two social
scientists: John W. Thibaut and Laurens Walker. In the mid-1970s,
they combined their interest in the psychology of justice with the
study of process, creating the term procedural justice.1 Focusing
their attention on legal settings, they sought to understand what
makes people trust a legal system so that they will comply with
laws without being coerced. Their research established that people
174 E X E C U T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 8-1
How Fair Process Affects People’s Attitudes and Behavior
Fair Process
Engagement
Explanation
Expectation clarity
Strategy
Formulation
Process
Attitudes
Behavior
Strategy
Execution
Trust and
Commitment
“I feel my
opinion counts.”
Voluntary
Cooperation
“I’ll go beyond
the call of duty.”
Exceeds
Expectations
Self-initiated
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care as much about the justice of the process through which an
outcome is produced as they do about the outcome itself. People’s
satisfaction with the outcome and their commitment to it rose
when procedural justice was exercised.2
Fair process is our managerial expression of procedural justice
theory. As in legal settings, fair process builds execution into strat-
egy by creating people’s buy-in up front. When fair process is exer-
cised in the strategy-making process, people trust that a level
playing field exists. This inspires them to cooperate voluntarily in
executing the resulting strategic decisions.
Voluntary cooperation is more than mechanical execution, where
people do only what it takes to get by. It involves going beyond the
call of duty, wherein individuals exert energy and initiative to the
best of their abilities—even subordinating personal self-interest—
to execute resulting strategies.3 Figure 8-1 presents the causal flow
we observed among fair process, attitudes, and behavior.
The Three E Principles of Fair Process
There are three mutually reinforcing elements that define fair
process: engagement, explanation, and clarity of expectation.
Whether people are senior executives or shop floor employees, they
all look to these elements. We call them the three E principles of
fair process.
Engagement means involving individuals in the strategic deci-
sions that affect them by asking for their input and allowing them
to refute the merits of one another’s ideas and assumptions. En-
gagement communicates management’s respect for individuals and
their ideas. Encouraging refutation sharpens everyone’s thinking
and builds better collective wisdom. Engagement results in better
strategic decisions by management and greater commitment from
all involved to execute those decisions.
Explanation means that everyone involved and affected should
understand why final strategic decisions are made as they are. An
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explanation of the thinking that underlies decisions makes people
confident that managers have considered their opinions and have
made decisions impartially in the overall interests of the company.
An explanation allows employees to trust managers’ intentions
even if their own ideas have been rejected. It also serves as a power-
ful feedback loop that enhances learning.
Expectation clarity requires that after a strategy is set, managers
state clearly the new rules of the game. Although the expectations
may be demanding, employees should know up front what standards
they will be judged by and the penalties for failure. What are the goals
of the new strategy? What are the new targets and milestones?
Who is responsible for what? To achieve fair process, it matters less
what the new goals, expectations, and responsibilities are and more
that they are clearly understood. When people clearly understand
what is expected of them, political jockeying and favoritism are
minimized, and people can focus on executing the strategy rapidly.
Taken together, these three criteria collectively lead to judg-
ments of fair process. This is important, because any subset of the
three does not create judgments of fair process.
A Tale of Two Plants
How do the three E principles of fair process work to affect strat-
egy execution deep in an organization? Consider the experience of
an elevator systems manufacturer we’ll call Elco. In the late 1980s,
sales in the elevator industry declined. Excess office space left
some large U.S. cities with vacancy rates as high as 20 percent.
With domestic demand falling, Elco set out to offer buyers a leap
in value while lowering its costs to stimulate new demand and
break from the competition. In its quest to create and execute a
blue ocean strategy, the company realized that it needed to replace
its batch-manufacturing system with a cellular approach that
would allow self-directed teams to achieve superior performance.
The management team was in agreement and ready to go. To exe-
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cute this key element of its strategy, the team adopted what looked
like the fastest and smartest way to move forward.
It would first install the new system at Elco’s Chester plant and
then roll it out to its second plant, High Park. The logic was simple.
The Chester plant had exemplary employee relations, so much so
that the workers had decertified their own union. Management was
certain it could count on employee cooperation to execute the
strategic shift in manufacturing. In the company’s words, “They
were the ideal work force.” Next, Elco would roll out the process to
its plant in High Park, where a strong union was expected to resist
that, or any other, change. Management was counting on having
achieved a degree of momentum for execution at Chester that it
hoped would have positive spillover effects on High Park.
The theory was good. In practice, however, things took an unpre-
dicted turn. The introduction of the new manufacturing process at
the Chester plant quickly led to disorder and rebellion. Within a
few months, both cost and quality performance were in free fall.
Employees were talking about bringing back the union. Having
lost control, the despairing plant manager called Elco’s industrial
psychologist for help.
In contrast, the High Park plant, despite its reputation for resist-
ance, had accepted the strategic shift in the manufacturing pro-
cess. Every day, the High Park manager waited for the anticipated
meltdown, but it never came. Even when people didn’t like the deci-
sions, they felt they had been treated fairly, and so they willingly
participated in the rapid execution of the new manufacturing
process, a pivotal component of the company’s new strategy.
A closer look at the way the strategic shift was made at the two
plants reveals the reasons behind this apparent anomaly. At the
Chester plant, Elco managers violated all three of the basic princi-
ples of fair process. First, they failed to engage employees in the
strategic decisions that directly affected them. Lacking expertise
in cellular manufacturing, Elco brought in a consulting firm to de-
sign a master plan for the conversion. The consultants were briefed
to work quickly and with minimal disturbance to employees so that
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fast, painless implementation could be achieved. The consultants
followed the instructions. When Chester employees arrived at work
they discovered strangers at the plant who not only dressed differ-
ently—wearing dark suits, white shirts, and ties—but also spoke in
low tones to one another. To minimize disturbance, they didn’t in-
teract with employees. Instead they quietly hovered behind people’s
backs, taking notes and drawing diagrams. The rumor circulated
that after employees went home in the afternoon, these same peo-
ple would swarm across the plant floor, snoop around people’s
workstations, and have heated discussions.
During this period, the plant manager was increasingly absent.
He was spending more time at Elco’s head office in meetings with
the consultants—sessions deliberately scheduled away from the
plant so as not to distract the employees. But the plant manager’s
absence produced the opposite effect. As people grew anxious, won-
dering why the captain of their ship seemed to be deserting them,
the rumor mill moved into high gear. Everyone became convinced
that the consultants would downsize the plant. They were sure they
were about to lose their jobs. The fact that the plant manager was
always gone without any explanation—obviously, he was avoiding
them—could only mean that management was, they thought, “try-
ing to put one over on us.” Trust and commitment at the Chester
plant deteriorated quickly.
Soon, people were bringing in newspaper clippings about other
plants around the country that had been shut down with the help of
consultants. Employees saw themselves as imminent victims of man-
agement’s hidden intention to downsize and work people out of their
jobs. In fact, Elco managers had no intention of closing the plant.
They wanted to cut waste, freeing people to produce higher-quality
elevators faster at lower cost to leapfrog the competition. But plant
employees could not have known that.
Managers at Chester also didn’t explain why strategic decisions
were being made the way they were and what those decisions meant
to employees’ careers and work methods. Management unveiled the
master plan for change in a thirty-minute session with employees.
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The audience heard that their time-honored way of working would
be abolished and replaced by something called “cellular manufactur-
ing.” No one explained why the strategic shift was needed, how the
company needed to break away from the competition to stimulate
new demand, and why the shift in the manufacturing process was a
key element of that strategy. Employees sat in stunned silence, with
no understanding of the rationale behind the change. The managers
mistook this for acceptance, forgetting how long it had taken them
over the preceding few months to get comfortable with the idea of
shifting to cellular manufacturing to execute the new strategy.
Master plan in hand, management quickly began rearranging
the plant. When employees asked what the new layout aimed to
achieve, the response was “efficiency gains.” The managers didn’t
have time to explain why efficiency had to be improved and didn’t want
to worry employees. But lacking an intellectual understanding of
what was happening to them, some employees began feeling sick as
they came to work.
Managers also neglected to make clear what would be expected
of employees under the new manufacturing process. They informed
employees that they would no longer be judged on individual per-
formance but rather on the performance of the cell. They said that
faster or more experienced employees would have to pick up the
slack for slower or less experienced colleagues. But they didn’t
elaborate. How the new cellular system was supposed to work, man-
agers didn’t make clear.
Violations of the principles of fair process undermined employees’
trust in the strategic shift and in management. In fact, the new cell de-
sign offered tremendous benefits to employees—for example, mak-
ing vacations easier to schedule and giving them the opportunity to
broaden their skills and engage in a greater variety of work. Yet em-
ployees could see only its negative side. They began taking out their
fear and anger on one another. Fights erupted on the plant floor as
employees refused to help those they called “lazy people who can’t
finish their own jobs” or interpreted offers of help as meddling, re-
sponding with, “This is my job. You keep to your own workstation.”
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Chester’s model work force was falling apart. For the first time in
the plant manager’s career, employees refused to do as they were
asked, turning down assignments “even if you fire me.” They felt
they could no longer trust the once popular plant manager, so they
began to go around him, taking their complaints directly to his
boss at the head office. In the absence of fair process, the Chester
plant’s employees rejected the transformation and refused to play
their role in executing the new strategy.
In contrast, management at the High Park plant abided by all
three principles of fair process when introducing the strategic shift.
When the consultants came to the plant, the plant manager intro-
duced them to all employees. Management engaged employees by
holding a series of plantwide meetings, where corporate executives
openly discussed the declining business conditions and the com-
pany’s need for a change in strategic course to break from the compe-
tition and simultaneously achieve higher value at lower cost. They
explained that they had visited other companies’ plants and had
seen the productivity improvements that cellular manufacturing
could bring. They explained how this would be a pivotal determi-
nant of the company’s ability to achieve its new strategy. They an-
nounced a proaction-time policy to calm employees’ justifiable
fears of layoffs. As old performance measures were discarded, man-
agers worked with employees to develop new ones and to establish
each cell team’s new responsibilities. Goals and expectations were
made clear to employees.
By practicing the three principles of fair process in tandem,
management won the understanding and support of High Park em-
ployees. The employees spoke of their plant manager with admira-
tion, and they commiserated with the difficulties Elco’s managers
had in executing the new strategy and making the changeover to
cellular manufacturing. They concluded that it had been a neces-
sary, worthwhile, and positive experience.
Elco’s managers still regard this experience as one of the most
painful in their careers. They learned that people in the front line
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care as much about the proper process as those at the top. By vio-
lating fair process in making and rolling out strategies, managers
can turn their best employees into their worst, earning their dis-
trust of and resistance to the very strategy they depend on them to
execute. But if managers practice fair process, the worst employees
can turn into the best and can execute even difficult strategic shifts
with their willing commitment while building their trust.
Why Does Fair Process Matter?
Why is fair process important in shaping people’s attitudes and be-
havior? Specifically, why does the observance or violation of fair
process in strategy making have the power to make or break a strat-
egy’s execution? It all comes down to intellectual and emotional
recognition.
Emotionally, individuals seek recognition of their value, not as
“labor,” “personnel,” or “human resources” but as human beings who
are treated with full respect and dignity and appreciated for their
individual worth regardless of hierarchical level. Intellectually, in-
dividuals seek recognition that their ideas are sought after and
given thoughtful reflection, and that others think enough of their
intelligence to explain their thinking to them. Such frequently
cited expressions in our interviews as “that goes for everyone I
know” or “every person wants to feel” and constant references to
“people” and “human beings” reinforce the point that managers
must see the nearly universal value of the intellectual and emo-
tional recognition that fair process conveys.
Intellectual and Emotional Recognition Theory
Using fair process in strategy making is strongly linked to both in-
tellectual and emotional recognition. It proves through action that
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there is an eagerness to trust and cherish the individual as well as a
deep-seated confidence in the individual’s knowledge, talents, and
expertise.
When individuals feel recognized for their intellectual worth,
they are willing to share their knowledge; in fact, they feel inspired
to impress and confirm the expectation of their intellectual value,
suggesting active ideas and knowledge sharing. Similarly, when in-
dividuals are treated with emotional recognition, they feel emo-
tionally tied to the strategy and inspired to give their all. Indeed, in
Frederick Herzberg’s classic study on motivation, recognition was
found to inspire strong intrinsic motivation, causing people to go
beyond the call of duty and engage in voluntary cooperation.4
Hence, to the extent that fair process judgments convey intellec-
tual and emotional recognition, people will better apply their
knowledge and expertise, as well as their voluntary efforts to coop-
erate for the organization’s success in executing strategy.
However, there is a flip side to this that is deserving of equal, if
not more, attention: the violation of fair process and, with it, the vi-
olation of recognizing individuals’ intellectual and emotional
worth. The observed pattern of thought and behavior can be sum-
marized as follows. If individuals are not treated as though their
knowledge is valued, they will feel intellectual indignation and
will not share their ideas and expertise; rather, they will hoard
their best thinking and creative ideas, preventing new insights
from seeing the light of day. What’s more, they will reject others’
intellectual worth as well. It’s as if they were saying, “You don’t
value my ideas. So I don’t value your ideas, nor do I trust in or care
about the strategic decisions you’ve reached.”
Similarly, to the extent that people’s emotional worth is not rec-
ognized, they will feel angry and will not invest their energy in
their actions; rather, they will drag their feet and apply counter-
efforts, including sabotage, as in the case of Elco’s Chester plant.
This often leads employees to push for rolling back strategies that
have been imposed unfairly, even when the strategies themselves
were good ones—critical to the company’s success or beneficial to
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employees and managers themselves. Lacking trust in the strategy-
making process, people lack trust in the resulting strategies. Such
is the emotional power that fair process can provoke. Figure 8-2
shows the observed causal pattern.
Fair Process and Blue Ocean Strategy
Commitment, trust, and voluntary cooperation are not merely atti-
tudes or behaviors. They are intangible capital. When people have
trust, they have heightened confidence in one another’s intentions
and actions. When they have commitment, they are even willing to
override personal self-interest in the interests of the company.
If you ask any company that has created and successfully exe-
cuted a blue ocean strategy, managers will be quick to rattle off
how important this intangible capital is to their success. Similarly,
managers from companies that have failed in executing blue ocean
strategies will point out that the lack of this capital contributed to
their failure. These companies were not able to orchestrate strate-
gic shifts because they lacked people’s trust and commitment. Com-
mitment, trust, and voluntary cooperation allow companies to
Build Execution into Strategy 183
F I G U R E 8-2
The Execution Consequences of the Presence and
Absence of Fair Process in Strategy Making
Fair
Process
Intellectual
and Emotional
Recognition
Trust and
Commitment
Voluntary
Cooperation in
Strategy
Execution
Violation of
Fair Process
Intellectual
and Emotional
Indignation
Distrust and
Resentment
Refusal to
Execute
Strategy
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stand apart in the speed, quality, and consistency of their execu-
tion and to implement strategic shifts fast at low cost.
The question companies wrestle with is how to create trust, com-
mitment, and voluntary cooperation deep in the organization. You
don’t do it by separating strategy formulation from execution. Al-
though this disconnect may be a hallmark of most companies’ prac-
tice, it is also a hallmark of slow and questionable implementation,
and mechanical follow-through at best. Of course, traditional in-
centives of power and money—carrots and sticks—help. But they
fall short of inspiring human behavior that goes beyond outcome-
driven self-interest. Where behavior cannot be monitored with cer-
tainty, there is still plenty of room for foot-dragging and sabotage.
The exercise of fair process gets around this dilemma. By organ-
izing the strategy formulation process around the principles of fair
process, you can build execution into strategy making from the
start. With fair process, people tend to be committed to support the
resulting strategy even when it is viewed as not favorable or at odds
with their perception of what is strategically correct for their unit.
People realize that compromises and sacrifices are necessary in
building a strong company. They accept the need for short-term
personal sacrifices in order to advance the long-term interests of
the corporation. This acceptance is conditional, however, on the
presence of fair process. Whatever the context in which a com-
pany’s blue ocean strategy is executed—be it working with a joint
venture partner to outsource component manufacturing, reorient-
ing the sales force, transforming the manufacturing process, relo-
cating a company’s call center from the United States to India—we
have consistently observed this dynamic at work.
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( ) ( ) ( ) ( )
C H A P T E R 9
Conclusion: The Sustainability and
Renewal of Blue Ocean Strategy
CR E AT I N G B L U E O C E A N S is not a static achievementbut a dynamic process. Once a company creates a blue
ocean and its powerful performance consequences are known,
sooner or later imitators appear on the horizon. The question is,
How soon or late will they come? Put differently, how easy or diffi-
cult is blue ocean strategy to imitate?
As the company and its early imitators succeed and expand the
blue ocean, more companies eventually jump in. This raises a re-
lated question: When should a company reach out to create an-
other blue ocean? In this concluding chapter, we address the issues
of the sustainability and renewal of blue ocean strategy.
Barriers to Imitation
A blue ocean strategy brings with it considerable barriers to imita-
tion. Some of these are operational, and others are cognitive. More
( ) ( ) ( ) ( )
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often than not, a blue ocean strategy will go without credible chal-
lenges for ten to fifteen years, as was the case with Cirque du Soleil,
Southwest Airlines, Federal Express, The Home Depot, Bloomberg,
and CNN, for starters. This sustainability can be traced to the fol-
lowing imitation barriers rooted in blue ocean strategy:
• A value innovation move does not make sense based on
conventional strategic logic. When CNN was introduced,
for example, NBC, CBS, and ABC ridiculed the idea of
twenty-four-hour, seven-day, real-time news without star
broadcasters. CNN was referred to as Chicken Noodle
News by the industry. Ridicule does not inspire rapid
imitation.
• Brand image conflict prevents companies from imitating a
blue ocean strategy. The blue ocean strategy of The Body
Shop, for example—which shunned beautiful models, prom-
ises of eternal beauty and youth, and expensive packaging—
left major cosmetic houses the world over actionless for
years because imitation would signal an invalidation of
their current business models.
• Natural monopoly blocks imitation when the size of a market
cannot support another player. For example, the Belgian
cinema company Kinepolis created the first megaplex in
Europe in the city of Brussels and has not been imitated in
more than fifteen years despite its enormous success. The
reason is that the size of Brussels could not support a second
megaplex, which would cause both Kinepolis and its imitator
to suffer.
• Patents or legal permits block imitation.
• The high volume generated by a value innovation leads to
rapid cost advantages, placing potential imitators at an
ongoing cost disadvantage. The huge economies of scale in
purchasing enjoyed by Wal-Mart, for example, have signifi-
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cantly discouraged other companies from imitating its blue
ocean strategy.
• Network externalities also block companies from easily and
credibly imitating a blue ocean strategy, much as eBay enjoys
in the online auction market. In short, the more customers
eBay has online, the more attractive the auction site becomes
for both sellers and buyers of wares, creating scant incentive
for buyers to switch to a potential imitator.
• Because imitation often requires companies to make substan-
tial changes to their existing business practices, politics
often kick in, delaying for years a company’s commitment to
imitate a blue ocean strategy. When Southwest Airlines, for
example, created a service that offered the speed of air travel
with the cost and flexibility of driving, imitating this blue
ocean strategy would have meant major revisions in routing
planes, retraining staff, and changing marketing and pricing,
not to mention culture—significant changes that the politics
of few companies can bear in the short term.
• When a company offers a leap in value, it rapidly earns brand
buzz and a loyal following in the marketplace. Even large
advertising budgets by an aggressive imitator rarely have the
strength to overtake the brand buzz earned by the value inno-
vator. Microsoft, for example, has been trying for years to dis-
lodge Intuit’s value innovation, Quicken. More than ten years
out, despite all its efforts and investment, it has not been able
to do so.
Figure 9-1 provides a snapshot of these barriers to imitation. As
the figure shows, the barriers are high. This is why we have seldom
observed rapid imitation of blue ocean strategy. In addition, blue
ocean strategy is a systems approach that requires not only getting
each strategic element right but also aligning them in an integral
system to deliver value innovation. Imitating such a system is not
an easy feat.
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When to Value-Innovate Again
Eventually, however, almost every blue ocean strategy will be imi-
tated. As imitators try to grab a share of your blue ocean, you typi-
cally launch offenses to defend your hard-earned customer base.
But imitators often persist. Obsessed with hanging on to market
share, you may fall into the trap of competing, racing to beat the
new competition. Over time, the competition, and not the buyer,
may come to occupy the center of your strategic thought and ac-
tions. If you stay on this course, the basic shape of your value curve
will begin to converge with those of the competition.
To avoid the trap of competing, you need to monitor value curves
on the strategy canvas. Monitoring value curves signals when to
value-innovate and when not to. It alerts you to reach out for an-
other blue ocean when your value curve begins to converge with
those of the competition.
It also keeps you from pursuing another blue ocean when there
is still a huge profit stream to be collected from your current offer-
ing. When the company’s value curve still has focus, divergence,
and a compelling tagline, you should resist the temptation to value-
innovate again and instead should focus on lengthening, widening,
and deepening your rent stream through operational improvements
188 E X E C U T I N G B L U E O C E A N S T R A T E G Y
F I G U R E 9-1
Imitation Barriers to Blue Ocean Strategy
• Value innovation does not make sense to a company’s conventional logic.
• Blue ocean strategy may conflict with other companies’ brand image.
• Natural monopoly: The market often cannot support a second player.
• Patents or legal permits block imitation.
• High volume leads to rapid cost advantage for the value innovator, discouraging
followers from entering the market.
• Network externalities discourage imitation.
• Imitation often requires significant political, operational, and cultural changes.
• Companies that value-innovate earn brand buzz and a loyal customer following that
tends to shun imitators.
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and geographical expansion to achieve maximum economies of
scale and market coverage. You should swim as far as possible in
the blue ocean, making yourself a moving target, distancing your-
self from your early imitators, and discouraging them in the
process. The aim here is to dominate the blue ocean over your imi-
tators for as long as possible.
As rivalry intensifies and total supply exceeds demand, bloody
competition commences and the ocean will turn red. As competi-
tors’ value curves converge toward yours, you should begin reach-
ing out for another value innovation to create a new blue ocean.
Hence, by charting your value curve on the strategy canvas and in-
termittently replotting your competitors’ value curves versus your
own, you will be able to visually see the degree of imitation, and
hence of value curve convergence and the extent to which your
blue ocean is turning red.
The Body Shop, for example, dominated the blue ocean it had
created for more than a decade. The company, however, is now in
the middle of a bloody red ocean, with declining performance. It
did not reach out for another value innovation when competitors’
value curves converged with its own. Similarly, [yellow tail] is
swimming in the clear blue waters of new market space. It has
made the competition irrelevant and is enjoying strong, profitable
growth as a result. However, the test of Casella Wines’ long-run
profitable growth will be its ability to value-innovate again when
imitators compete both aggressively and credibly with converging
value curves.
The six principles of blue ocean strategy proposed in this book
should serve as essential pointers for every company thinking
about its future strategy if it aspires to lead the increasingly over-
crowded business world. This is not to suggest that companies will
suddenly stop competing or that the competition will suddenly
come to a halt. On the contrary, the competition will be more pres-
ent and will remain a critical factor of the market reality. What
we suggest is that to obtain high performance in this overcrowded
market, companies should go beyond competing for share to creat-
ing blue oceans.
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Because blue and red oceans have always coexisted however,
practical reality demands that companies succeed in both oceans
and master the strategies for both. But because companies already
understand how to compete in red oceans, what they need to learn
is how to make the competition irrelevant. This book aims to help
balance the scales so that formulating and executing blue ocean
strategy can become as systematic and actionable as competing in
the red oceans of known market space.
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A P P E N D I X A
A Sketch of the Historical
Pattern of Blue Ocean Creation
A T T H E R I S K O F O V E R S I M P L I F I C AT I O N , here we pre-sent a snapshot overview of the history of three
American industries—automobiles, computers, and movie theaters—
from the perspective of major product and service offerings that
opened new market space and generated significant new demand.
This review intends to be neither comprehensive in its coverage nor
exhaustive in its content. Its aim is limited to identifying the com-
mon strategic elements across key blue ocean offerings. U.S. indus-
tries are chosen here because they represent the largest and least
regulated free market during our study period.
Although the review is only a sketch of the historical pattern of
blue ocean creation, several patterns stand out across these three
representative industries.
• There is no permanently excellent industry. The attractive-
ness of all industries rose and fell over the study period.
• There are no permanently excellent companies. Companies,
like industries, rose and fell over time. These first two findings
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both confirm and add further evidence that permanently ex-
cellent companies and industries do not exist.
• A key determinant of whether an industry or a company was
on a rising trajectory of strong, profitable growth was the
strategic move of blue ocean creation. The creation of blue
oceans was a key catalyst in setting an industry on an upward
growth and profit trajectory. It was also a pivotal determinant
driving a company’s rise in profitable growth, as well as its
fall when another company gained the lead and created a new
blue ocean.
• Blue oceans were created by both industry incumbents and
new entrants, challenging the lore that start-ups have natural
advantages over established companies in creating new mar-
ket space. Moreover, the blue oceans created by incumbents
were usually within their core businesses. In fact, most blue
oceans are created from within, not beyond, red oceans of
existing boundaries. Issues of perceived cannibalization or
creative destruction for established companies proved to be
exaggerated.1 Blue oceans created profitable growth for every
company launching them, start-ups and incumbents alike.
• The creation of blue oceans was not about technology innova-
tion per se. Sometimes leading edge technology was present,
but often it was not a defining feature of blue oceans. This
was true even when the industry under examination was tech-
nology intensive, such as computers. Rather, the key defining
feature of blue oceans was value innovation—innovation that
was linked to what buyers value.
• The creation of blue oceans did more than contribute to
strong, profitable growth; this strategic move exercised a
strong, positive effect on establishing a company’s standing
brand name in buyers’ minds.
Let’s now turn to these three representative industries to let
the history of blue ocean creation speak for itself. Here we begin
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with the auto industry, a central form of transportation in the de-
veloped world.
The Automobile Industry
The U.S. auto industry dates back to 1893, when the Duryea brothers
launched the first one-cylinder auto in the United States. At the
time, the horse and buggy was the primary means of U.S. transporta-
tion. Soon after the auto’s U.S. debut, there were hundreds of auto
manufacturers building custom-made automobiles in the country.
The autos of the time were a luxurious novelty. One model even
offered electric curlers in the back seat for on-the-go primping.
They were unreliable and expensive, costing around $1,500, twice
the average annual family income. And they were enormously un-
popular. Anticar activists tore up roads, ringed parked cars with
barbed wire, and organized boycotts of car-driving businessmen and
politicians. Public resentment of the automobile was so great that
even future president Woodrow Wilson weighed in, saying, “Noth-
ing has spread socialistic feeling more than the automobile . . . a
picture of the arrogance of wealth.”2 Literary Digest suggested,
“The ordinary ‘horseless carriage’ is at present a luxury for the
wealthy; and although its price will probably fall in the future, it
will never, of course, come into as common use as the bicycle.”3
The industry, in short, was small and unattractive. Henry Ford,
however, didn’t believe it had to be this way.
The Model T
In 1908, while America’s five hundred automakers built custom-
made novelty automobiles, Henry Ford introduced the Model T. He
called it the car “for the great multitude, constructed of the best
materials.” Although it came in only one color (black) and one
model, the Model T was reliable, durable, and easy to fix. And it
was priced so that the majority of Americans could afford one. In
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1908 the first Model T cost $850, half the price of existing automo-
biles. In 1909 it dropped to $609, and by 1924 it was down to $290.4
In comparison, the price of a horse-driven carriage, the car’s clos-
est alternative at the time, was around $400. A 1909 sales brochure
proclaimed, “Watch the Ford Go By, High Priced Quality in a Low
Priced Car.”
Ford’s success was underpinned by a profitable business model.
By keeping the cars highly standardized and offering limited op-
tions and interchangeable parts, Ford’s revolutionary assembly
line replaced skilled craftsmen with ordinary unskilled laborers
who worked one small task faster and more efficiently, cutting the
time to make a Model T from twenty-one days to four days and cut-
ting labor hours by 60 percent.5 With lower costs, Ford was able to
charge a price that was accessible to the mass market.
Sales of the Model T exploded. Ford’s market share surged from
9 percent in 1908 to 61 percent in 1921, and by 1923, a majority of
American households owned an automobile.6 Ford’s Model T ex-
ploded the size of the automobile industry, creating a huge blue
ocean. So great was the blue ocean Ford created that the Model T
replaced the horse-drawn carriage as the primary means of trans-
port in the United States.
General Motors
By 1924, the car had become an essential household item, and the
wealth of the average American household had grown. That year
General Motors (GM) unveiled a line of automobiles that would
create a new blue ocean in the auto industry. In contrast to Ford’s
functional, one-color, single-model strategy, GM introduced “a car
for every purse and purpose”—a strategy devised by chairman Al-
fred Sloan to appeal to the emotional dimensions of the U.S. mass
market, or what Sloan called the “mass-class” market.7
Whereas Ford stuck with the functional “horseless carriage”
concept of the car, GM made the car fun, exciting, comfortable, and
fashionable. GM factories pumped out a broad array of models,
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with new colors and styles updated every year. The “annual car
model” created new demand as buyers began to trade up for fashion
and comfort. Because cars were replaced more frequently, the used
car market was also formed.
Demand for GM’s fashionable and emotionally charged cars
soared. From 1926 to 1950, the total number of cars sold in the
United States increased from two million to seven million a year,
and General Motors increased its overall market share from 20 per-
cent to 50 percent, while Ford’s fell from 50 percent to 20 percent.8
But the rapid growth in the U.S. auto industry unleashed by this
new blue ocean could not last forever. Following GM’s surging suc-
cess, Ford and Chrysler jumped into the blue ocean GM had cre-
ated, and the Big Three pursued the common strategy of launching
new car models yearly and hitting an emotional chord with con-
sumers by building a wide range of car styles to meet various
lifestyles and needs. Slowly, bloody competition began as the Big
Three imitated and matched one another’s strategies. Collectively,
they captured more than 90 percent of the U.S. auto market.9 A pe-
riod of complacency set in.
Small, Fuel-Efficient Japanese Cars
The auto industry, however, did not stand still. In the 1970s, the
Japanese created a new blue ocean, challenging the U.S. auto-
mobile industry with small, efficient cars. Instead of following
the implicit industry logic “the bigger, the better” and focusing on
luxuries, the Japanese altered the conventional logic, pursuing
ruthless quality, small size, and the new utility of highly gas-
efficient cars.
When the oil crisis occurred in the 1970s, U.S. consumers flocked
to fuel-efficient, robust Japanese cars made by Honda, Toyota,
and Nissan (then called Datsun). Almost overnight the Japanese
became heroes in consumers’ minds. Their compact, fuel-efficient
cars created a new blue ocean of opportunity, and again demand
soared.
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With the Big Three focused on benchmarking and matching one
another, none had taken the initiative to produce functional, com-
pact, fuel-efficient cars, even though they did see the market poten-
tial for such vehicles. Hence, instead of creating a new blue ocean,
the Big Three were dragged into a new round of competitive bench-
marking, only this time with the Japanese; they began to invest
heavily in the production of smaller, fuel-efficient vehicles.
Nevertheless, the Big Three were still hit by a dive in car sales, with
aggregate losses mounting to $4 billion in 1980.10 Chrysler, the little
brother among the Big Three, suffered the hardest hit and narrowly
escaped bankruptcy by virtue of a government bailout. The Japan-
ese car producers had been so effective at creating and capturing
this blue ocean that the U.S. automakers found it hard to make a
real comeback; their competitiveness and long-run viability were
thrown into serious question by industry experts across the world.
Chrysler’s Minivan
Fast-forward to 1984. A beleaguered Chrysler, on the edge of bank-
ruptcy, unveiled the minivan, creating a new blue ocean in the auto
industry. The minivan broke the boundary between car and van,
creating an entirely new type of vehicle. Smaller than the tradi-
tional van and yet more spacious than the station wagon, the mini-
van was exactly what the nuclear family needed to hold the entire
family plus its bikes, dogs, 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. Chrysler, however, was not the first to work on this concept.
Ford and GM had had the minivan on their drawing boards for
years, but they had worried that the design would cannibalize their
own station wagons. Undoubtedly they passed a golden opportunity
to Chrysler. Within its first year, the minivan became Chrysler’s
bestselling vehicle, helping the company regain its position as one
of the Big Three auto manufacturers. Within three years, Chrysler
gained $1.5 billion from the minivan’s introduction alone.11
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The success of the minivan ignited the sports utility vehicle
(SUV) boom in the 1990s, which expanded the blue ocean Chrysler
had unlocked. Built on a truck chassis, the SUV continued the pro-
gression from car to utility truck. First designed for off-road driv-
ing and towing boat trailers, the SUV became wildly popular with
young families for its carlike handling, increased passenger and
cargo space over the minivan, and comfortable interiors combined
with the increased functionality of four-wheel drive, towing capa-
bilities, and safety. By 1998, total sales of new light trucks (mini-
vans, SUVs, and pickups) reached 7.5 million, nearly matching the
8.2 million new car sales.12
As history reveals, GM and Chrysler were established players
when they created blue oceans. For the most part, however, these blue
oceans were not triggered by technological innovations. The under-
lying technology had been around; even Ford’s revolutionary as-
sembly line can be traced to the U.S. meatpacking industry.13 The
attractiveness of the auto industry was continuously rising and
falling and rising again, driven, to no small extent, by blue ocean
strategic moves. The same is true for the profitable growth trends of
companies in the industry. Companies’ profit and growth were linked
in no small way to the blue oceans they created or failed to create.
Almost all these companies are remembered for the blue oceans
they have created across time. Ford, for example, has suffered sig-
nificantly at times, but its brand still stands out largely for the
Model T it created some one hundred years ago.
The Computer Industry
Let’s now turn to the computer industry, which supplies a central
component of work environments across the globe. The U.S. com-
puter industry traces back to 1890, when Herman Hollerith invented
the punch card tabulating machine to shorten the process of data
recording and analysis for the U.S. census. Hollerith’s tabulator
completed the census tabulations five years sooner than the preced-
ing census.
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Soon after, Hollerith left the census office to form Tabulating
Machine Company (TMC), which sold its tabulators to U.S. and for-
eign government agencies. At the time, there was no real market for
Hollerith’s tabulators in business settings, where data processing
was accomplished with pencils and ledgers that were easy to use,
inexpensive, and accurate. Although Hollerith’s tabulator was very
fast and accurate, it was expensive and difficult to use, and it required
continuous upkeep. Facing new competition after the expiration of
his patent and frustrated after the U.S. government dropped TMC
due to its steep prices, Hollerith sold the company, which was then
merged with two other companies to form CTR in 1911.
The Tabulating Machine
In 1914, CTR’s tabulating business remained small and unprof-
itable. In an attempt to turn the company around, CTR turned to
Thomas Watson, a former executive at National Cash Register
Company, for help. Watson recognized that there was enormous un-
tapped demand for tabulators to help businesses improve their in-
ventory and accounting practices. Yet he also realized that the
cumbersome new technology was too expensive and complicated
for businesses when their pencils and ledgers worked just fine.
In a strategic move that would launch the computer industry,
Watson combined the strengths of the tabulator with the ease and
lower costs of pencils and ledgers. Under Watson, CTR’s tabulators
were simplified and modularized, and the company began to offer
on-site maintenance and user education and oversight. Customers
would get the speed and efficiency of the tabulator without the
need to hire specialists to train employees or technicians to fix the
machines when they broke down.
Next, Watson decreed that tabulators would be leased and not
sold, an innovation that helped establish a new pricing model for
the tabulating machine business. On the one hand, it allowed busi-
nesses to avoid large capital expenditures, while giving them the
flexibility to upgrade as tabulators improved. On the other hand, it
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gave CTR a recurring revenue stream while precluding customers
from buying used machines from one another.
Within six years, the firm’s revenues more than tripled.14 By the
mid-1920s, CTR held 85 percent of the tabulating market in the
United States. In 1924, to reflect the company’s growing interna-
tional presence, Watson changed CTR’s name to International
Business Machines Corp. (IBM). The blue ocean of tabulators was
unlocked.
The Electronic Computer
Skip ahead thirty years to 1952. Remington Rand delivered the
UNIVAC, the world’s first commercial electronic computer, to the
census bureau. Yet that year only three UNIVACs were sold. A blue
ocean was not in sight until IBM’s Watson—this time his son
Thomas Watson Jr.—would see the untapped demand in what looked
like a small, lackluster market. Watson Jr. realized the role elec-
tronic computers could play in business and pushed IBM to meet
the challenge.
In 1953, IBM introduced the IBM 650, the first intermediate-
sized computer for business use. Recognizing that if businesses
were going to use the electronic computer, they wouldn’t want a
complicated machine and would pay only for the computing power
they would use, IBM had made the IBM 650 much simpler to use
and less powerful than the UNIVAC, and it priced the machine at
only $200,000, compared with the UNIVAC’s $1 million price tag. As
a result, by the end of the 1950s IBM had captured 85 percent of the
business electronic computer market. Revenues almost tripled be-
tween 1952 and 1959, from $412 million to $1.16 billion.15
IBM’s expansion of the blue ocean was greatly accentuated in
1964, with the introduction of the System/360, the first large family
of computers to use interchangeable software, peripheral equip-
ment, and service packages. It was a bold departure from the mono-
lithic, one-size-fits-all mainframe. Later, in 1969, IBM changed the
way computers were sold. Rather than offer hardware, services, and
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software exclusively in packages, IBM unbundled the components
and offered them for sale individually. Unbundling gave birth to the
multibillion-dollar software and services industries. Today, IBM is
the world’s largest computer services company, and it remains the
world’s largest computer manufacturer.
The Personal Computer
The computer industry continued its evolution through the 1960s
and 1970s. IBM, Digital Equipment Corporation (DEC), Sperry,
and others that had jumped into the computer industry expanded
operations globally and improved and extended product lines to
add peripherals and service markets. Yet in 1978, when the major
computer manufacturers were intent on building bigger, more pow-
erful machines for the business market, Apple Computer, Inc., cre-
ated an entirely new market space with its Apple II home computer.
However, contrary to conventional wisdom, the Apple was not
the first personal computer on the market. Two years earlier, Micro
Instrumentation and Telemetry Systems (MITS) had unveiled the
Altair 8800. The Altair was released with high expectations in com-
puter hobbyist circles. BusinessWeek quickly called MITS the “IBM
of home computers.”
Yet MITS did not create a blue ocean. Why? The machine had no
monitor, no permanent memory, only 256 characters of temporary
memory, no software, and no keyboard. To enter data, users manip-
ulated switches on the front of the box, and program results were
displayed in a pattern of flashing lights on the front panel. Unsur-
prisingly, no one saw much of a market for such difficult-to-use
home computers. Expectations were so low that in that same year
Ken Olsen, president of Digital Equipment, famously said, “There
is no reason for any individual to have a computer in their home.”
Two years later, the Apple II would make Olsen eat his words,
creating a blue ocean of home computing. Based largely on existing
technology, the Apple II offered a solution with an all-in-one design
in a plastic casing, including the keyboard, power supply, and
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graphics, that was easy to use. The Apple II came with software
ranging from games to businesses programs such as the Apple
Writer word processor and the VisiCalc spreadsheet, making the
computer accessible to the mass of buyers.
Apple changed the way people thought about computers. Com-
puters were no longer products for technological “geeks”; they be-
came, like the Model T before them, a staple of the American
household. Only two years after the birth of the Apple II, Apple
sales were more than 200,000 units a year, with Apple placed on the
Fortune 500 list at three years of age, an unprecedented feat.16 In
1980 some two dozen firms sold 724,000 personal computers, bring-
ing in more than $1.8 billion.17 By the next year, twenty other com-
panies entered the market, and sales doubled to 1.4 million units,
racking in almost $3 billion.18
Like a stalking horse, IBM waited out the first couple of years
to study the market and the technology and to plan the launch of
its home computer. In 1982, IBM dramatically expanded the blue
ocean of home computing by offering a far more open architecture
that allowed other parties to write software and develop peripher-
als. By creating a standardized operating system for which out-
siders could create the software and peripheral components, IBM
was able to keep its cost and price low while offering customers
greater utility. The company’s scale and scope advantages allowed
it to price its PC at a level accessible to the mass of buyers.19 Dur-
ing its first year, IBM sold 200,000 PCs, nearly matching its five-year
projection; by 1983 consumers had bought 1.3 million IBM PCs.20
Compaq PC Servers
With corporations across the United States buying and installing
PCs throughout their organizations, there was a growing need to
connect PCs for simple but important tasks such as sharing files
and printers. The business computer industry spawned by the IBM
650—and jumped into by HP, DEC, and Sequent, to name a few—
offered high-end enterprise systems to run corporations’ critical
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missions, as well as numerous operating systems and application
software. But these machines were too expensive and complex to
justify handling simple but important needs such as file and printer
sharing. This was especially true in small to midsize companies
that needed to share printers and files but did not yet require the
huge investment of a complex minicomputer architecture.
In 1992, Compaq changed all that by effectively creating the blue
ocean of the PC server industry with its launch of the ProSignia, a
radically simplified server that was optimized for the most com-
monly used functions of file and printer sharing. It eliminated in-
teroperability with a host of operating systems, ranging from SCO
UNIX to OS/3 to DOS, that were extraneous to these basic func-
tions. The new PC server gave buyers twice a minicomputer’s file
and print sharing capability and speed at one-third the price. As for
Compaq, the dramatically simplified machines translated into much
lower manufacturing costs. Compaq’s creation of the ProSignia,
and three subsequent offerings in the PC server industry, not only
fueled PC sales but also grew the PC server industry into a $3.8 bil-
lion industry in less than four years.21
Dell Computer
In the mid-1990s, Dell Computer Corporation created another blue
ocean in the computer industry. Traditionally, computer manufac-
tures competed on offering faster computers having more features
and software. Dell, however, challenged this industry logic by
changing the purchasing and delivery experiences of buyers. With
its direct sales to customers, Dell was able to sell its PCs for 40 per-
cent less than IBM dealers while still making money.
Direct sales further appealed to customers because Dell offered
unprecedented delivery time. For example, the time it took from
order to customer delivery at Dell was four days, compared with its
competitors’ average of more than ten weeks. Moreover, through
Dell’s online and telephone ordering system, customers were given
the option to customize their machines to their liking. In the mean-
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time, the built-to-order model allowed Dell to significantly reduce
inventory costs.
Today Dell is the undisputed market leader in PC sales, with rev-
enues skyrocketing from $5.3 billion in 1995 to $35.5 billion in 2003.
Its U.S. market share grew from 2 percent to more than 30 percent
in the same period.22
As with the auto industry, the blue oceans in the computer in-
dustry were not unleashed by technology innovations per se but by
linking technology to elements valued by buyers. As in the case of
the IBM 650 and the Compaq PC server, the value innovation often
rested on simplifying the technology. We also see industry incum-
bents—CTR, IBM, Compaq—launching blue oceans as much as we
see new entrants, such as Apple and Dell. Each blue ocean has rein-
forced the originating company’s standing brand name and has led
to a surge not only in its profitable growth but in the profitable
growth of the computer industry overall.
The Movie Theater Industry
Now let’s turn to the movie theater industry, which offers a way for
many of us to relax after work or on weekends. The U.S. movie the-
ater industry can be traced back to 1893, when Thomas Edison un-
veiled the Kinetoscope, a wooden cabinet inside which light was
projected through a reel of film. Viewers saw the action through a
peephole one at a time, and the performance was called a “peep show.”
Two years later, Edison’s staff developed a projecting kineto-
scope, which showed motion pictures on a screen. The projecting
kinetoscope, however, did not take off in any meaningful way. The
clips, each several minutes long, were introduced between vaude-
ville acts and at theaters. The aim was to lift the value of live enter-
tainment performances, the focus of the theater industry, rather
than to provide a discrete entertainment form. The technology was
there for the movie theater industry to ignite, but the idea to create
a blue ocean had not yet been planted.
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Nickelodeons
Harry Davis changed all that by opening his first nickelodeon theater
in Pittsburgh, Pennsylvania, in 1905. The nickelodeon is widely
credited with launching the movie theater industry in the United
States, creating a huge blue ocean. Consider the differences. Al-
though most Americans belonged to the working class at the begin-
ning of the twentieth century, the theater industry until then
concentrated on offering live entertainment, such as theater, op-
eras, and vaudeville, to the social elite.
With the average family earning only $12 a week, live entertain-
ment simply wasn’t an option. It was too expensive. Average ticket
prices for an opera were $2, and vaudeville was 50 cents. For the
majority, theater was too serious. With little education, the theater
or opera just wasn’t appealing to the working class. It was also in-
convenient. Productions played only a few times a week, and with
most theaters located in the well-heeled parts of the city, they were
difficult to get to for the mass of working-class people. When it
came to entertainment, most Americans were left in the dark.
In contrast, the price of admission to Davis’s nickelodeon the-
ater was 5 cents (thus explaining the name). Davis kept the price at
a nickel by stripping the theater venue to its bare essentials—
benches and the screen—and placing his theaters in lower-rent,
working-class neighborhoods. Next he focused on volume and con-
venience, opening his theaters at eight in the morning and playing
reels continuously until midnight. The nickelodeons were fun,
playing slapstick comedies accessible to most people regardless of
their education, language, or age.
Working-class people flocked to nickelodeons, which entertained
some seven thousand customers per day. In 1907 the Saturday
Evening Post reported that daily attendance at nickelodeons ex-
ceeded two million.23 Soon nickelodeons set up shop across the
country. By 1914 the United States had eighteen thousand nick-
elodeons, with seven million daily admissions.24 The blue ocean had
grown into a half-billion-dollar industry.
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The Palace Theaters
As the nickelodeon’s blue ocean reached its peak, in 1914 Samuel
“Roxy” Rothapfel set out to bring the appeal of motion pictures to
the emerging middle and upper classes by opening the country’s
first Palace Theater in New York City. Until that point, Rothapfel
had owned a number of nickelodeons in the United States and was
best known for turning around struggling theaters across the coun-
try. Unlike nickelodeons, which were considered lowbrow and sim-
plistic, Rothapfel’s Palace Theaters were elaborate affairs, with
extravagant chandeliers, mirrored hallways, and grand entrance-
ways. With valet parking, plush “love seats,” and longer films with
theatrical plots, these theaters made going to the movies an event
worthy of theater- or operagoers, but at an affordable price.
The picture palaces were a commercial success. Between 1914
and 1922, four thousand new Palace Theaters opened in the United
States. Movie-going became an increasingly important entertain-
ment event for Americans of all economic levels. As Roxy pointed
out, “Giving the people what they want is fundamentally and disas-
trously wrong. The people don’t know what they want . . . [Give]
them something better.” Palace Theaters effectively combined the
viewing environment of opera houses with the viewing contents of
nickelodeons—films—to unlock a new blue ocean in the cinema in-
dustry and attract a whole new mass of moviegoers: the upper and
middle classes.25
As the wealth of the nation increased and Americans headed for
the suburbs to fulfill the dream of a house with a picket fence, a
chicken in every pot, and a car in every garage, the limitations of
further growth in the Palace Theater concept began to be felt in the
late 1940s. Suburbs, unlike major cities or metropolitan areas,
could not support the large size and opulent interiors of the Palace
Theater concept. The result of competitive evolution was the emer-
gence of small theaters in suburban locations running one movie
per week. Although the small theaters were “cost leaders” com-
pared with Palace Theaters, they failed to capture people’s imagi-
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nations. They gave people no special feeling of a night out, and
their success depended solely on the quality of the film being played.
If a film was unsuccessful, customers saw no reason to come, and
the theater owner lost money. With the industry increasingly tak-
ing on a has-been status, its profitable growth was flagging.
The Multiplex
Yet, once again, the industry was set on a new profitable growth tra-
jectory through the creation of a new blue ocean. In 1963, Stan
Durwood undertook a strategic move that turned the industry on
its head. Durwood’s father had opened his family’s first movie the-
ater in Kansas City in the 1920s, and Stan Durwood revitalized the
movie theater industry with the creation of the first multiplex in a
Kansas City shopping center.
The multiplex was an instant hit. On the one hand, the multiplex
gave viewers a greater choice of films; on the other, with different-
sized theaters in one place, theater owners could make adjustments
to meet varying demands for movies, thereby spreading their risk
and keeping costs down. As a result, Durwood’s company, Ameri-
can Multi-Cinema, Inc. (AMC), grew from a small-town theater to
become the second largest movie company in the nation, as the blue
ocean of the multiplex spread across America.
The Megaplex
The launch of the multiplex created a blue ocean of new profitable
growth in the industry, but by the 1980s the spread of videocassette
recorders and satellite and cable television had reduced movie at-
tendance. To make matters worse, in an attempt to capture a
greater share of a shrinking market, theater owners split their the-
aters into smaller and smaller viewing rooms so that they could
show more features. Unwittingly, they undermined one of the in-
dustry’s distinctive strengths over home entertainment: large
screens. With first-run movies available on cable and videocassette
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only weeks after release, the benefit of paying more money to see
movies on a slightly larger screen was marginal. The movie theater
industry fell into a steep decline.
In 1995, AMC again re-created the movie theater industry by in-
troducing the first twenty-four-screen megaplex in the United
States. Unlike the multiplexes, which were often cramped, dingy,
and unspectacular, the megaplex had stadium seating (for unob-
structed views) and comfortable easy chairs, and it offered more
films and superior sight and sound. Despite these improved offerings,
the megaplex’s operating costs are still lower than the multiplex’s.
This is because the megaplex’s location outside city centers—the
key cost factor—is much cheaper; its size gives it economies in pur-
chasing and operations and more leverage with film distributors.
And with twenty-four screens playing every available movie on the
market, the place, and not the movie, becomes the draw.
In the late 1990s, average per-customer revenues at AMC mega-
plexes were 8.8 percent above those of the average multiplex the-
ater. The cinema clearance zones of movie theaters—the radius of
the area from which people will come to the cinema—jumped from
two miles in the mid-1990s to five miles for AMC’s megaplex.26 Be-
tween 1995 and 2001, overall motion picture attendance grew from
1.26 billion to 1.49 billion. Megaplexes constituted only 15 percent
of U.S. movie screens, but they accounted for 38 percent of all box-
office revenues.
The success of the blue ocean created by AMC caused other in-
dustry players to imitate it. Too many megaplexes were built in too
short a time, however, and many of them had closed by 2000 because
of a slowing economy. Again the industry is ripe for a new blue
ocean to be created.
This is only a sketch of the American movie theater industry,
but the same general patterns appear as in the other examples.
This has not been a perpetually attractive industry. There has not
been a perpetually excellent company. The creation of blue oceans
has been a key driving factor in a company’s and the industry’s
profitable growth trajectory, with blue oceans being created here
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mainly by incumbents such as AMC and Palace Theaters. As his-
tory reveals, AMC created a blue ocean in the U.S. movie theater in-
dustry first with the multiplex and then with megaplex, twice
resetting the course of development for the entire industry and
twice bringing its own profitability and growth to a new level. At
the heart of these blue oceans was not technology innovation per
se but value-driven innovation, what we call value innovation.
Looking across the sketches of these three industries we find that
whether or not a company can attain sustained profitable growth
depends largely on whether it can continuously stay in the fore-
front during consecutive rounds of blue ocean creation. Lasting ex-
cellence is scarcely achievable for any company; to date, no company
has been able to lead journeys into blue oceans continuously over
the long run. However, companies with powerful names are often
those that have been capable of reinventing themselves by repeat-
edly creating new market space. In this sense, there have been no
perpetually excellent companies up till now, but companies can
hope to maintain excellence by adhering to excellent strategic
practice. With marginal deviations, the pattern of blue ocean cre-
ation exemplified by these three representative industries is consis-
tent with what we observed in the other industries in our study.
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A P P E N D I X B
Value Innovation
A Reconstructionist View of Strategy
TH E R E A R E B A S I C A L LY T W O D I S T I N C T V I E W S on howindustry structure is related to strategic actions of in-
dustrial players.
The structuralist view of strategy has its roots in industrial
organization (IO) economics.1 The model of industrial organiza-
tion analysis proposes a structure-conduct-performance paradigm,
which suggests a causal flow from market structure to conduct and
performance. Market structure, given by supply and demand condi-
tions, shapes sellers’ and buyers’ conduct, which, in turn, deter-
mines end performance.2 Systemwide changes are induced by
factors that are external to the market structure, such as funda-
mental changes in basic economic conditions and technological
breakthroughs.3
The reconstructionist view of strategy, on the other hand, is built
on the theory of endogenous growth. The theory traces back to
Joseph A. Schumpeter’s initial observation that the forces that
change economic structure and industry landscapes can come from
( ) ( ) ( ) ( )
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within the system.4 Schumpeter argues that innovation can happen
endogenously and that its main source is the creative entrepre-
neur.5 Schumpeterian innovation is still black-boxed, however, be-
cause it is the product of the ingenuity of entrepreneurs and
cannot be reproduced systematically.
Recently, the new growth theory made advances on this front by
showing that innovation can be replicable endogenously via an un-
derstanding of the patterns or recipes behind innovation.6 In
essence, this theoretical advancement separated the recipe for in-
novation—or the pattern of knowledge and ideas behind it—from
Schumpeter’s lone entrepreneur, opening the way for the system-
atic reproduction of innovation. However, despite this important
advance, we still lack an understanding of what those recipes or
patterns are. Absent this, knowledge and ideas cannot be deployed
in action to produce innovation and growth at the firm level.
The reconstructionist view takes off where the new growth the-
ory left off. Building on the new growth theory, the reconstruction-
ist view suggests how knowledge and ideas are deployed in the
process of creation to produce endogenous growth for the firm. In
particular, it proposes that such a process of creation can occur in
any organization at any time by the cognitive reconstruction of ex-
isting data and market elements in a fundamentally new way.
These two views—the structuralist and the reconstructionist—
have important implications for how companies act on strategy.
The structuralist view (or environmental determinism) often leads
to competition-based strategic thinking. Taking market structure
as given, it drives companies to try to carve out a defensible posi-
tion against the competition in the existing market space. To sus-
tain themselves in the marketplace, practitioners of 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, com-
petition, the supply side of the equation, becomes the defining vari-
able of strategy.
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Such strategic thinking leads firms to divide industries into at-
tractive and unattractive ones and to decide accordingly whether
or not to enter. After it is in an industry, a firm chooses a distinctive
cost or differentiation position that best matches its internal sys-
tems and capabilities to counter the competition.7 Here, cost and
value are seen as trade-offs. Because the total profit level of the in-
dustry is also determined exogenously by structural factors, firms
principally seek to capture and redistribute wealth instead of cre-
ating wealth. They focus on dividing up the red ocean, where
growth is increasingly limited.
To reconstructionist eyes, however, the strategic challenge looks
very different. 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 prob-
lem 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 un-
lock new demand. With this new focus in mind, firms can hope to
accomplish the journey of discovery by looking systematically
across established boundaries of competition and reordering exist-
ing elements in different markets to reconstruct them into a new
market space where a new level of demand is generated.8
In the reconstructionist view, there is scarcely any attractive or
unattractive industry per se because the level of industry attrac-
tiveness can be altered through companies’ conscientious efforts
of reconstruction. As market structure is changed in the reconstruc-
tion process, so are best-practice rules of the game. Competition in
the old game is therefore rendered irrelevant. By stimulating the
demand side of the economy, the strategy of value innovation ex-
pands existing markets and creates new ones. Value innovators
achieve a leap in value by creating new wealth rather than at the
expense of competitors in the traditional sense. Such a strategy
therefore allows firms to largely play a non–zero-sum game, with
high payoff possibilities.
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How, then, does reconstruction, such as what we see in Cirque
du Soleil, differ from the “combination” and “recombination” that
have been discussed in the innovation literature?9 Schumpeter, for
example, sees innovation as a “new combination of productive
means.”
We have seen in the example of Cirque du Soleil a focus on the
demand side, whereas recombination is about recombining existing
technologies or productive means, often focusing on the supply
side. The basic building blocks for reconstruction are buyer value
elements that reside across existing industry boundaries. They are
not technologies nor methods of production.
By focusing on the supply side, recombination tends to seek an
innovative solution to the existing problem. Looking at the demand
side, in contrast, reconstruction breaks away from the cognitive
bounds set by existing rules of competition. It focuses on redefin-
ing the existing problem itself. Cirque du Soleil, for example, is not
about offering a better circus by recombining existing knowledge or
technologies about acts and performances. Rather, it is about re-
constructing existing buyer value elements to create a new form of
entertainment that offers the fun and thrill of the circus with the
intellectual sophistication of the theater. Redefining the problem
usually leads to changes in the entire system and hence a shift in
strategy, whereas recombination may end up finding new solutions
to subsystem activities that serve to reinforce an existing strategic
position.
Reconstruction reshapes the boundary and the structure of an
industry and creates a blue ocean of new market space. Recombina-
tion, on the other hand, tends to maximize technological possibili-
ties to discover innovative solutions.
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A P P E N D I X C
The Market Dynamics
of Value Innovation
TH E M A R K E T D Y N A M I C S of value innovation stand instark contrast with the conventional practice of tech-
nology innovation. The latter typically sets high prices, limits ac-
cess, and initially engages in price skimming to earn a premium on
the innovation, only later focusing on lowering prices and costs to
retain market share and discourage imitators.
However, in a world of nonrival and nonexcludable goods, such
as knowledge and ideas, that are imbued with the potential of
economies of scale, learning, and increasing returns, the impor-
tance of volume, price, and cost grows in an unprecedented way.1
Under these conditions, companies would do well to capture the
mass of target buyers from the outset and expand the size of the
market by offering radically superior value at price points accessi-
ble to them.
As shown in Figure C-1, value innovation radically increases the
appeal of a good, shifting the demand curve from D1 to D2. The
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price is set strategically and, as with the Swatch example, is shifted
from P1 to P2 to capture the mass of buyers in the expanded mar-
ket. This increases the quantity sold from Q1 to Q2 and builds
strong brand recognition, for unprecedented value.
The company, however, engages in target costing to simultane-
ously reduce the long-run average cost curve from LRAC1 to
LRAC2 to expand its ability to profit and to discourage free riding
and imitation. Hence, buyers receive a leap in value, shifting the
consumer surplus from axb to eyf. And the company earns a leap in
profit and growth, shifting the profit zone from abcd to efgh.
The rapid brand recognition built by the company as a result of
the unprecedented value offered in the marketplace, combined
with the simultaneous drive to lower costs, makes the competition
nearly irrelevant and makes it hard to catch up, as economies of
214 Appendix C
F I G U R E C-1
The Market Dynamics of Value Innovation
P
ri
c
e
P1
P2
Q1 Q2
LRAC1
LRAC2
Long-Run Average Cost Curve
D2
D1
Demand
Quantity
y
x
a
d
e
h
b
c
f
g
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scale, learning, and increasing returns kick in. What follows is the
emergence of win-win market dynamics, where companies earn
dominant positions while buyers also come out big winners.
Traditionally, firms with monopolistic positions have been asso-
ciated with two social welfare loss activities. First, to maximize
their profits, companies set prices high. This prohibits those cus-
tomers who, although desiring the product, cannot afford to buy it.
Second, lacking viable competition, firms with monopolistic posi-
tions often do not focus on efficiency and cost reduction and hence
consume more scarce resources. As Figure C-2 shows, under con-
ventional monopolistic practice, the price level is raised from P1
under perfect competition to P2 under monopoly. Consequently, de-
mand drops from Q1 to Q2. At this level of demand, the monopolist
increases its profits by the area R, as opposed to the situation of
perfect competition. Because of the artificially high price imposed
on consumers, the consumer surplus decreases from area C+R+D
to area C. Meanwhile, the monopolistic practice, by consuming
more of the society’s resources, also incurs a deadweight loss of
Appendix C 215
F I G U R E C-2
From Perfect Competition to Monopolist Practice
Q2 Q1
Price: Increases from P1 to P2
Demand: Decreases from Q1 to Q2
Consumer surplus: Decreases from
C + R + D to C
Profit: Increases by R for the monopolist
Deadweight loss to the society caused
by monopolist practice: D
C
R D
Demand
P2
P1
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area D for the society at large. Monopolistic profits, therefore, are
achieved at the expense of consumers and society at large.
Blue ocean strategy, on the other hand, works against this sort of
price skimming, which is common to traditional monopolists. The
focus of blue ocean strategy is not on restricting output at a high
price but rather on creating new aggregate demand through a leap
in buyer value at an accessible price. This creates a strong incen-
tive not only to reduce costs to the lowest possible level at the start
but also to keep it that way over time to discourage potential free-
riding imitators. In this way, buyers win and the society benefits
from improved efficiency. This creates a win-win scenario. A break-
through in value is achieved for buyers, for the company, and for
society at large.
216 Appendix C
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Notes
Chapter 1
1. For discussions on how market boundaries are defined and how com-
petitive rules of the game are set, see Harrison C. White (1981) and Joseph
Porac and José Antonio Rosa (1996).
2. Gary Hamel and C. K. Prahalad (1994) and James Moore (1996) ob-
served that competition is intensifying and commoditization of business is
accelerating, two trends that make market creation essential if firms are
to grow.
3. Ever since the groundbreaking work of Michael Porter (1980, 1985),
competition has occupied the center of strategic thinking. See also Paul
Auerbach (1988) and George S. Day et al. (1997).
4. See, for example, Hamel and Prahalad (1994).
5. See Standard Industrial Classification Manual (1987) and North Amer-
ican Industry Classification System (1998).
6. Ibid.
7. For a classic on military strategy and its fundamental focus on compe-
tition over a limited territory, see Carl von Clausewitz (1993).
8. For discussions on this, see Richard A. D’Aveni and Robert Gunther
(1995).
9. For more on globalization and its economic implications, see Kenichi
Ohmae (1990, 1995a, 1995b).
10. United Nations Statistics Division (2002).
11. See, for example, Copernicus and Market Facts (2001).
( ) ( ) ( ) ( )
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12. Ibid.
13. Thomas J. Peters and Robert H. Waterman Jr. (1982) and Jim Collins
and Jerry Porras (1994), respectively.
14. Richard T. Pascale (1990).
15. Richard Foster and Sarah Kaplan (2001).
16. Peter Drucker (1985) observes that companies tend to race against
each other by looking at what competitors do.
17. Kim and Mauborgne (1997a, 1997b, 1997c) argue that a focus on bench-
marking and beating the competition leads to imitative, not innovative, ap-
proaches to the market, often resulting in price pressure and further
commodization. Instead, they argue, companies should strive to make the
competition irrelevant by offering buyers a leap in value. Gary Hamel (1998)
argues that success for both newcomers and industry incumbents hinges
upon the capacity to avoid the competition and to reconceive the existing in-
dustry model. He further argues (2000) that the formula for success is not to
position against the competition but rather to go around it.
18. Value creation as a concept of strategy is too broad, because no
boundary condition specifies how value should be created. A company could
create value, for example, simply by lowering costs by 2 percent. Although
this is indeed value creation, it is hardly the value innovation that is needed
to open new market space. Although you can create value by simply doing
similar things in an improved way, you cannot create value innovation with-
out stopping old things, doing new things, or doing similar things in a funda-
mentally new way. Our research shows that given the strategic objective of
value creation, companies tend to focus on making incremental improve-
ments at the margin. Although value creation on an incremental scale does
create some value, it is not sufficient to make a company stand out in the
crowd and achieve high performance.
19. For examples of market pioneering that shoots beyond what buyers
are ready to accept and pay for, see Gerard J. Tellis and Peter N. Golder
(2002). In their decade-long study they observe that fewer than 10 percent of
market pioneers became business winners, with more than 90 percent turn-
ing out to be business losers.
20. For previous studies that challenged this dogma, see, for example,
Charles W. L. Hill (1988) as well as R. E. White (1986).
21. For discussions on the necessity to choose between differentiation
and low cost, see Porter (1980, 1985). Porter (1996) uses a productivity fron-
tier curve to illustrate the value-cost trade-off.
22. Our studies revealed that value innovation is about redefining the
problem an industry focuses on rather than finding solutions to existing
problems.
23. For discussions on what strategy is and is not, see Porter (1996). He
argues that although strategy should embrace the entire system of activities
a firm performs, operational improvements can occur at the subsystem level.
218 Notes
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24. Ibid. Hence, innovations that happen at the subsystem level are not
strategy.
25. Joe S. Bain is a forerunner of the structuralist view. See Bain (1956,
1959).
26. Although in different contexts, venturing into the new has been ob-
served to be a risky enterprise. Steven P. Schnaars (1994), for example, ob-
serves that market pioneers occupy a disadvantaged position vis-à-vis their
imitators. Chris Zook (2004) argues that diversification away from a com-
pany’s core business is risky and has low odds of success.
27. Inga S. Baird and Howard Thomas (1990) argue, for example, that any
strategic decisions involve risk taking.
Chapter 2
1. Alternatives go beyond substitutes. A restaurant, for example, is an
alternative to the cinema. It competes for potential buyers who want to enjoy
a night out, even though it is neither a direct competitor nor a substitute for
the cinema in its functional offering. There are three tiers of noncustomers a
company can look to. For more detailed discussions on alternatives and non-
customers, see chapter 3 and chapter 5 of this book, respectively.
Chapter 3
1. NetJets (2004).
2. J. Balmer (2001).
3. Available online at http://www.marquisjet.com/vs/vscomm.html.
4. Kris Herbst (2002).
5. Ibid.
Chapter 4
1. For an overview of strategic planning, see Henry Mintzberg (1994).
2. Consider the difference in our perceptual bandwidth (bits/second) of
the various senses: taste (1,000 bits/second); smell (100,000); hearing
(100,000); touch (1,000,000); seeing (10,000,000). Source: T. Norretranders
(1998). For further reading on the power of visual communication, see A. D.
Baddely (1990), J. Larkin and H. Simon (1987), P. Lester (2000), and E.
R.Tufte (1982).
3. For more on the power of experiential learning, see L. Borzak (1981)
and D. A. Kolb (1983).
4. See chapter 3 for further discussion on how Bloomberg applied one of
the six paths to blue ocean creation to break from the competition.
5. See chapter 5 for a discussion on noncustomers.
Notes 219
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6. See chapter 3 for a thorough discussion of the six path framework ap-
plied here.
7. See Korea Economic Daily (2004).
Chapter 5
1. See Committee on Defense Manufacturing (1996), James Fallows
(2002), and John Birkler et al. (2001).
2. Department of Defense (1993).
3. For more on the specifics of the JSF, see Bill Breen (2002), Fallows
(2002), Federation of Atomic Scientists (2001), David H. Freedman (2002),
Nova (2003), and United States Air Force (2002).
4. Given the almost ten-year time lag from the conception of the JSF F-35
strategy to its realization in 2010, we would argue that its success is in no
way secured. As heads of the military and Pentagon change during this time,
the challenge will be to hold tight to the JSF’s value curve. It is essential not to
slip into the “defense deal spiral” of behind-the-scenes bargaining for “just a
little more” customization and, with it, ballooning costs and a resultant blurred
value curve. To avoid this, the Pentagon, in conjunction with Lockheed Mar-
tin, will have to ensure that each branch of the military adheres to the strate-
gic profile agreed to in the strategy canvas of JSF F-35. So far, it looks good,
but the military cannot afford to relax. This is an ongoing mission.
Chapter 6
1. Rohlfs (1974) was the first to define and discuss network externalities.
For a survey of recent work on this, see Katz and Shapiro (1994).
2. See Kenneth J. Arrow (1962) and Paul Romer (1990). It is worth noting
that both Arrow and Romer limited their discussion of nonrival and nonex-
cludable goods to technological innovations, as is the tradition in economics.
When the concept of innovation is redefined as value innovation, which is
more relevant at the microeconomic firm level, the importance of the nonri-
val and nonexcludable notion is even more striking. This is because techno-
logical innovation often has a greater excludable component due to the
possibility and relative ease of obtaining patent protection.
3. See Ford Motor Company (1924) and William J. Abernathy and Ken-
neth Wayne (1974).
Chapter 7
1. New York Post (1990).
2. The first application of the term tipping points to social behavior
was in a 1957 study of racial segregation by Morton Grodzins (1957) and
was more fully developed by University of Maryland economist Thomas
220 Notes
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Schelling (1978). Most recently, Malcom Gladwell’s book The Tipping Point
(2000) popularized the notion and brought the term further into the common
vernacular.
3. See Joseph Ledoux (1998) and J. S. Morris et al. (1998).
4. See Baddely (1990) and Kolb (1983).
5. See James Q. Wilson and George L. Kelling (1982) for a discussion on
the theory of broken windows.
Chapter 8
1. Thibault and L. Walker (1975).
2. Subsequent researchers, such as Tom R. Tyler and E. Allan Lind,
demonstrated the power of fair process across diverse cultures and social
settings. See E. A. Lind and T. R. Tyler (1988) for their research and an
overview of related work.
3. For a discussion on voluntary cooperation, see C. O’Reilly and J.
Chatman (1986), D. Katz (1964), and P. M. Blau (1964).
4. See discussions in F. Herzberg (1966).
Appendix A
1. For a discussion of “creative destruction,” see Joseph A. Schumpeter
(1934; 1975).
2. New York Times (1906).
3. Literary Digest (1899).
4. Bruce McCalley (2002).
5. William J. Abernathy and Kenneth Wayne (1974).
6. Antique Automobile Club of America (2002).
7. Alfred P. Sloan (1965): 150.
8. Mariana Mazzucato and Willi Semmler (1998).
9. Lawrence J. White (1971).
10. Economist (1981).
11. Sanghoon Ahn (2002).
12. Walter Adams and James W. Brock (2001), Table 5.1, Figure 5-1:
116–117.
13. Andrew Hargadon (2003): 43.
14. International Business Machines (2002).
15. Regis McKenna (1989): 24.
16. A+ Magazine (1987): 48–49; Fortune (1982).
17. Otto Friedrich (1983).
18. Ibid.
19. The IBM was priced a little more than the Apple ($1,565 versus
$1,200), but it included a monitor, and the Apple did not.
20. History of Computing Project (accessed 28 June 2002).
Notes 221
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21. Financial Times (1999).
22. Hoovers Online (accessed 14 March 2003).
23. Digital History (2004).
24. Screen Source (2002).
25. Interestingly, a 1924 poll asked moviegoers what aspects of a cinema
appealed to them most; 28 percent cited the music, 19 percent the courtesy of
the staff, 19 percent the comfort of the interior, and 15 percent the attractive-
ness of the theater. Only 10 percent mentioned the films (R. Koszarski, 1990).
And 24 percent of exhibitors surveyed in 1922 said that the quality of the fea-
ture film “made absolutely no difference” to success at the box office; what
mattered, they said, was the surrounding program (ibid.). In fact, cinema ad-
vertisements at the time tended to give as much print to the music as they did
to the films. With the introduction of sound technology in films in 1926, the
importance of live music at the cinema (a band or orchestra and the associ-
ated costs) was dramatically reduced. Palace Theaters, with their elaborate
décor, luxurious environment, and services such as valet parking, were well
placed to take advantage of this shift for more than ten years, until Ameri-
cans began heading to small-town suburbs in droves following World War II.
26. Screen Source (2002).
Appendix B
1. The structuralist school of IO economics finds its origin in Joe S.
Bain’s structure-conduct-performance paradigm. Using a cross-industry empiri-
cal framework, Bain focuses mainly on the impact of structure on perform-
ance. For more discussions on this, see Bain (1956, 1959).
2. F. M. Scherer builds on Bain’s work and seeks to spell out the causal
path between “structure” and “performance” by using “conduct” as an inter-
vening variable. For more discussions, see Scherer (1970).
3. Ibid.
4. See Joseph A. Schumpeter (1975).
5. Ibid.
6. For more discussions on the new growth theory and endogenous
growth, see Paul Romer (1990, 1994) and G. M. Grossman and E. Helpman
(1995).
7. For detailed discussions on competitive strategy, see Porter (1980,
1985, 1996).
8. See Kim and Mauborgne (1997a, 1999a, 1999b).
9. See Joseph Schumpeter (1934) and Andrew Hargadon (2003).
Appendix C
1. For discussion on the potential of increasing returns, see Paul Romer
(1986) and W. B. Arthur (1996).
222 Notes
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Accenture, 134
adoption hurdles, 119
advertising, outdoor, 107–109
airlines
NetJets, 50–52, 135
Southwest, 35, 38–41, 131, 187
Virgin Atlantic Airways, 126
Altair 8800, 200
alternative industries, 49–55
ALTO, 130
American Multi-Cinema, Inc. (AMC),
206, 207, 208
analysis, units of, 9–12
company as, 9–10
industry as, 10
strategic move as, 10–12
analytical tools/frameworks, 23–44
blue ocean idea (BOI) index, 139–143
buyer utility map, 121, 125
eliminate-reduce-raise-create grid,
35–37
four actions framework, 29–35
pioneer-migrator-settler map, 96–98
price corridor of the mass, 127–131
six paths framework, 47–48, 79
strategy canvas, 25–28, 37–44
value curve, 27
angels, 166, 167–168
Apple Computer, Inc., 76–78, 200–201
assumptions, 48–49, 91
buyer utility and, 120
atomization, 164–165
attitudes, 171–184
automobile industry, 193–197
Chrysler in, 196–197
Ford Model T in, 124–125, 129, 132,
193–194
General Motors in, 194–195
Japanese cars in, 195–196
Barnes & Noble, 69
benchmarks, 12, 27–28
Berkshire Hathaway, 50
Big Bertha golf club, 102–103
big picture, the, 81–99
focusing on, 82–83
Blockbuster, 135
Bloomberg, 63–64, 88, 130
Bloomberg, Michael, 88
blue ocean idea (BOI) index, 139–143
blue oceans
automobile industry as, 193–197
computer industry as, 197–203
creating, 3–22
definition of, 4
effects of creating, 7–8
history of, 5–7, 191–208
( ) ( ) ( ) ( )
Index
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blue oceans (continued)
imperative of creating, 8
maximizing the size of, 101–114
movie theater industry as, 203–208
as new market space, 4–5
strategy in, 19–22
sustainability of, 185–190
units of analysis with, 9–12
value innovation to create, 12–18
The Body Shop, 70, 186, 189
Borders, 69
Boston Police District 4, 155
boundaries
industry, 4–5
market, 47–80
reconstructing, 47–80
brand recognition, 214–215
brands
building, 127
buzz about, 187
image conflict in, 186
lack of differentiation and, 8
loyalty to, 187
strategic pricing and, 127
Bratton, Bill, 148–150
Built to Last (Collins, Porras), 9–10
business model
Casella Wines, 34
risk of, 21
strategic sequence and, 117–143
buyers/customers. See also
noncustomers
alternatives/substitutes in choices of,
49–55
chain of buyers in, 61–65
commonalities among, 102–103, 106,
109, 114–115
conduct of, 209
expectations of, 70
experience cycle of, 122, 123
functional/emotional appeals to, 69–75
influencers, 61
maximizing demand and, 101
meeting with disgruntled, 154–155
productivity of, 122
purchasers, 61
strategic pricing and, 127–131
targeting, 61–65, 114–115
users, 61
visual exploration and, 88–89
buyer utility, 118, 119, 120–125
assessing, 139–143
buyer experience cycle and, 122, 123
levers of, 122, 124–125
map for, 121, 125
buyer value elements, 212
Callaway Golf, 102–103
Canon, 64
Capgemini, 134
Casella Wines, 28, 31–35, 189
CD-i, 120, 140–143
Cemex, 71–74
chain of buyers, 61–65
Champion Enterprises, 60–61
change
attitudes/behavior and, 171–184
conventional wisdom on, 168–169
fair process and, 172–184
political hurdles to, 165–168
seeing the need for, 147, 151–155
visual awakening and, 84–87
Charles Schwab, 75
choice, wine industry and, 33–34
Chrysler, 196–197
circuses
Cirque du Soleil, 3–4, 13–16, 18, 36–37,
40–41, 212
Ringling Bros. and Barnum & Bailey,
3, 4, 40
Cirque du Soleil, 3–4, 212
eliminate-reduce-raise-create grid
and, 18, 36–37
price corridor of the mass and, 129
strategic profile of, 40–41
value-cost trade-off and, 13–16
Cisco Systems, 78
CNN, 78–79, 97, 186
cognitive hurdles, 147, 151–155
cold spots, 156–157, 158
Collins, Jim, 9–10
commoditization, 8
communication
through statistics, 152
visual, 93–94
Compaq, 10, 201–202
compelling taglines. See taglines,
compelling
competition. See also strategy canvas
assessing, 83
benchmarking and, 12
endurance of, 189–190
functional/emotional appeal and, 69–75
reconstructionist view of, 17–18, 211–212
red oceans versus blue oceans and, 4–5
232 Index
EM-Kim.qxd 10/25/04 10:03 AM Page 232

strategic pricing and, 130–131
strategic thinking and, 6–7
structuralist view of, 17
value innovation versus, 188–190
wine industry, 25
computer industry, 197–203
direct sales in, 202–203
electronic computers in, 199–200
personal computers in, 200–203
servers in, 201–202
tabulating machines in, 197–199
consiglieres, 166
consolidation, wine industry, 24
convenience, 122
convergence, 11–12
copyright, 130, 186
core capabilities, 130
cost-plus pricing, 131, 140
cost structures, 30
imitation barriers and, 186–187
strategic sequence and, 119
Creative Destruction (Foster, Kaplan), 9–10
CTR, 198–199
culture, organizational, 169, 171–184
Curves, 56–59, 127
customer productivity, 122
customers. See buyers/customers
Davis, Harry, 204
defense aerospace industry, 110–114
Dell Computer Corporation, 202–203
demand
creating, 30–35
maximizing, 101–114
technological advances and, 8
wine industry, 24–25
devils, 166, 167–168
Digital Equipment Corporation (DEC), 200
Dinkins, David, 148
Direct Line Group, 74–75
disproportionate influence factors,
150–151
atomization, 164–165
cognitive hurdles and, 152–155
kingpins, 162–164
motivation and, 161–165
resources and, 156–161
distribution, 133–134
divergence, 11–12, 37
in strategy, 39
as strategy litmus test, 41–42
DoCoMo, 52–55, 141–143
DuPont, 130
Durwood, Stan, 206
Dyson, 69, 130
eBay, 126, 187
economies of scale, 186–187
Economist Intelligence Unit, 68
Edison, Thomas, 203
education, stakeholder, 137–139
Elco, 176–181
eliminate-reduce-raise-create grid,
35–37, 93
emotional appeal, 69–75
emotional recognition, 181–183
employees
atomization and, 164–165
attitudes/behavior of, 171–184
kingpins, 162–164
motivating, 148, 161–165
recognition of, 181–183
resistance of, 137–138
visual communication with, 93–94
endogenous growth, theory of, 209–210
engagement principle of fair process,
175, 177–178
environmental determinism, 17, 209–212
environmental friendliness, 122
equity interests, 135
Esserman, Dean, 159
European Financial Services (EFS), 84
excellence, endurance of, 9–12, 191–192
excludability, 126–127, 213
execution. See strategy execution
expectations
buyer, 70
clarity of, principle of fair process,
176, 179
recognition and, 181–183
explanation principle of fair process,
175–176, 178–179
externalities, network, 126, 187
fair process, 21–22, 164
attitudes/behavior and, 172–184
as capital, 183–184
example of, 176–181
importance of, 181
intellectual and emotional
recognition and, 181–183
power of, 174–175
principles of, 175–176
Index 233
EM-Kim.qxd 10/25/04 10:03 AM Page 233

fear, 137–139, 171–172
fair process and, 171–184
financial services
Bloomberg, 63–64, 88
functional orientation in, 75
Merrill Lynch, 137
Morgan Stanley Dean Witter & Co.,
137–138
fishbowl management, 162–164
fitness industry, 56–59
focus
on the big picture, 81–99
in strategy, 39
as strategy litmus test, 41–42
target costing and, 132
in value curves, 37
Ford, Henry, 193–194. See also Ford
Model T
Ford Model T, 124–125, 129, 132, 193–194
Foster, Richard, 9–10
four actions framework, 29–35
creating factors in, 29–30
eliminating factors in, 29, 30
reducing factors in, 29, 30
free riders, 126, 127
fun, 122
functional appeal, 69–75
General Motors, 194–195
genetically modified foods, 139
globalization, 8
Hayek, Nicolas, 133
HBO, 79
health clubs, 56–57
Hewlett-Packard (HP), 10, 135
Hollerith, Herman, 197–198
Home Depot, the, 55, 120, 122, 132, 186
home exercise programs, 57
Honda, 195
horse trading, 156–157, 158–161
hot spots, 156–158
housing industry, 60–61
IBM, 199–200, 201
IKEA, 134
image, 122
imitation, barriers to, 185–188
industries
alternative, 49–55
boundaries of, 4–5, 128–130
functional versus emotional
orientation of, 69–75
influencers, 61
innovation. See also value innovation
Schumpeterian, 209–210, 212
technology-driven, 13
In Search of Excellence (Peters,
Waterman), 9
insulin pens, 62–63
insurance companies, 74–75
intellectual recognition, 181–183
IBM, 199–200
Internet, cell phone service over, 52–55,
141–143
Intuit, 55, 187
inventory, 34
iPod, 76–78
Iridium, 120, 140, 141
iTunes, 76–78
JCDecaux, 107–109
Joint Strike Fighter (JSF) program,
110–114
Kaplan, Sarah, 9–10
Kinepolis, 89
Kinetoscope, 203
kingpins, 162–164
Laliberté, Guy, 3
leadership. See tipping point leadership
Lexus, 60
line extensions, 7–8
Literary Digest, 193
management risk, 21–22
Managing on the Edge (Pascale), 9
Maple, Jack, 157–158
market boundaries, 47–80
alternative industries and, 49–55
chain of buyers and, 61–65
complementary products/services and,
65–69
functional/emotional appeal to buyers
and, 69–75
six paths framework and, 47–48
strategic groups within industries
and, 55–61
234 Index
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time/external trends and, 75–79
market dynamics, 137, 213–216
market structure, 209
Massachusetts Bay Transportation
Authority (MBTA), 154
mass markets, 194–195
Merrill Lynch, 137
Micro Instrumentation and Telemetry
Systems (MITS), 200
Microsoft, 126, 142, 187
migrators, 96–97
military language, in strategic thinking,
6–7
minivans, 196–197
monopolies, 186, 215–216
globalization and, 8
Monsanto, 139
Morgan Stanley Dean Witter & Co.,
137–138
motivation, 148, 161–165
atomization and, 164–165
kingpins and, 162–164
Motorola Iridium, 120, 140, 141
movie theater industry, 65, 89, 203–208
megaplexes in, 206–207
multiplexes in, 206
nickelodeons in, 204
Palace Theaters in, 205–206
MP3 players, 76–78
municipal bus industry, 65–68
NABI, 65–68
National Business Aviation Association,
51
National Cash Register Company,
198
NetJets, 50–52, 53, 135
network externalities, 126, 187
new growth theory, 210
New York City Police Department
(NYPD), 148–150, 157–158
atomization and, 165
cognitive hurdles and, 152–155
consiglieres in, 166
kingpins and, 162, 163–164
political hurdles and, 166, 167–168
New York City Transit Police, 153–154,
157, 158, 159–161
New York Division of Parole, 159
New York Post, 148
Nickelodeons, 204
Nissan, 195
noncustomers. See also
buyers/customers
refusing (second-tier noncustomers),
103–104, 107–109
soon-to-be (first-tier noncustomers),
103, 104–106
targeting, 114–115
tiers of, 103–114
unexplored (third-tier noncustomers),
104, 109–114
nonrival goods, 126, 213
North America Industry Classification
Standard (NAICS), 6
Novo Nordisk, 62–63
NTT DoCoMo, 52–55, 141–143
Olsen, Ken, 200
open architecture, 201
operations, streamlining, 132–133
opportunity, maximizing, 19–22
Oracle, 134
organizational culture, 169, 171–184
organizational hurdles, 147–169
cognitive, 147, 151–155
motivation as, 148, 161–165
political, 148, 165–168
resources as, 147, 156–161
organizational risk, 21
outsourcing, 88
Palace Theaters, 205–206
partnerships
resistance and, 138
target costing and, 133–134
Pascale, Richard T., 9
patents, 130, 186
Patrimonio Hoy program, 73
performance
blue ocean creation effects on, 7–8
fishbowl management and, 162–164
strategic moves and, 11
Peters, Thomas J., 9
Pfizer, 74
Philips Electronics, 68–69
ALTO, 130
CD-i, 120, 140–143
teakettle, 68–69
pioneer-migrator-settler (PMS) map,
96–98
pioneers, 96–97
planning risk, 20
Index 235
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politics, 148, 165–168
angels in, 166, 167–168
consiglieres in, 166
devils in, 166, 167–168
imitation barriers and, 187
Polo Ralph Lauren, 60
Porras, Jerry, 9–10
portfolio management, 97–98
Pret A Manger, 105–106
price corridor of the mass, 127–131
definition of, 130
identifying, 128–130
price selection and, 130–131
price-minus costing, 131–137
price wars, 8
pricing
models of, 134–135
setting strategic, 119, 125–131, 213–214
skimming, 215–216
strategic groups and, 56
pricing innovation
equity-interest, 135
leasing, 135
renting, 135
slice-share, 135
time-share, 135
procedural justice, 174–175. See also fair
process
products/services
alternative versus substitute, 49–55
complementary, 65–69
profit margins, 8
profits, 7–8
innovation and maximization of,
135–136
target costing and, 131–137
value innovation and, 188–190
ProSignia, 201–202
purchasers, 61
QB (Quick Beauty) House, 70–71, 72
Quicken, 55, 187
Ralph Lauren, 60
reality, showing, 152–155
recognition, emotional and intellectual,
181–183
reconstructionist view, 17–18, 209–212
red oceans
definition of, 4
industry boundaries in, 4
strategy in, 17–18
refusing noncustomers, 103–104, 107–109
Remington Rand, 199
resistance, 137–139
business partner, 138
employee, 137–138
fair process and, 174–181
general public, 138–139
resources, 147, 156–161
cold spots and, 156–157, 158
horse trading, 156–157, 158–161
hot spots and, 156–158
monopolies and, 215–216
Reuters, 63
revenues, 7–8
Ringling Bros. and Barnum & Bailey, 3,
4, 40
risk minimization, 19–22, 23
big picture focus and, 82
business model risk, 21, 117–143
management risk, 21–22
organizational risk, 21
planning risk, 20
scale risk, 20
search risk, 20, 47–80
rival goods, 126
Rothapfel, Samuel “Roxy,” 205
Salick cancer centers, 69
Samsung Electronics, 94–95
SAP, 65, 130, 134
AcceleratedSAP, 138
Saturday Evening Post, 204
scale risk, 20
Schumpeter, Joseph A., 209–210, 212
search risk, 20, 47–80
service industries, emotional to
functional orientation in, 74–75
settlers, 96–97
Sex and the City, 79
simplicity, 122
six paths framework, 47–48, 79
slice-share model, 135
Sloan, Alfred, 194
social welfare, 215
Sony Walkman, 60
soon-to-be noncustomers, 103, 104–106
Southwest Airlines
alternatives of, 55
divergence in, 39
focus in, 39
imitation barriers and, 187
236 Index
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strategic pricing at, 131
strategy canvas of, 38
tagline of, 39–41
sports utility vehicles (SUVs), 196–197
stakeholders, resistance by, 137–139
Standard Industrial Classification (SIC)
system, 6
Starbucks, 74
strategic groups, 55–61
definition of, 55
ranking, 56
strategic moves, as unit of analysis,
10–12
strategic plans
failure of, 81–82
overcoming limitations of, 98–99
strategic sequence, 117–143
adoption hurdles in, 119
assessing, 119–120
buyer utility in, 118
correct, 117–120
cost in, 119
pricing in, 119
strategy. See also blue oceans; value
innovation
assumptions in, 48–49
big picture in, 81–99
building execution into, 171–184
competition-based, 6–7
contradictions in, 43
corporate-level, 94–96
executing, 21–22
focus in, 27–28
formulating, 19–21
incoherent, 42–43
innovation and, 17
internally driven, 43
military references in, 6–7
pioneer-migrator-settler map and,
96–98
reconstructionist view of, 209–212
red ocean, 6–7
red ocean versus blue ocean, 17–18
strategic profile. See value curve
strategy canvas, 25–28
structuralist view of, 17, 209
trends and, 75–79
visual awakening and, 84–87
visual exploration in, 88–90
strategy canvas, 25–28
big picture and, 82–83
corporate-level strategy and, 94–96
definition of, 25
drawing, 83–94
factors in, 25–26
horizontal axis in, 25–26
presenting, 90–93
value curve in, 27
vertical axis in, 26–27
visual awakening step for, 84–87
visual communication of, 93–94
visual exploration step for, 88–90
visual strategy fairs and, 90–93
what it shows, 83
[yellow tail]’s, 32
strategy execution
attitudes/behavior and, 171–184
cognitive hurdles in, 147, 151–155
disproportionate influence factors
and, 150–151
fair process and, 172, 174–184
overcoming organizational hurdles in,
147–169
resources and, 147, 156–161
tipping point leadership in, 148–151
streamlining operations, 132–133
street furniture, 107–109
stretch goals, 152
structuralist view, 17, 209
substitutes, alternatives versus, 49–55
supply, technological advances and, 8.
See also demand
sustainability, 185–190
imitation barriers and, 185–188
Swatch, 70, 133
Tabulating Machine Company (TMC),
198
taglines, compelling, 37
in strategy, 39–41
as strategy litmus test, 41–42
in visual exploration, 90
target costing, 131–137
levers in, 132–135
partnerships and, 133–134
pricing models and, 134–135
teakettle industry, 68–69
technology
buyer utility and, 120
innovation and, 13
strategic pricing and, 126
supply and demand effects from, 8
telecommunications industry, 52–55,
141–143
Telerate, 63
Index 237
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Thibaut, John W., 174–175
time, trends and, 75–79
time-share model, 135
Timoney, John, 166
tipping point leadership, 21
atomization and, 164–165
cognitive hurdles and, 152–155
disproportionate influence factors
and, 150–151
horse trading and, 158–161
motivation by, 161–165
at NYPD, 148–150
politics and, 165–168
resources and, 156–161
tooth whitening solutions, 109–110
Toyota, 195–196
Lexus, 60
trends, looking across, 75–79
trust, cultures of, 169, 171–184, 179–180
unexplored noncustomers, 104, 109–114
UNIVAC, 199
users, 61, 88–89
utility, buyer, 119, 120–125
assessing, 139–143
buyer experience cycle and, 122, 123
levers of, 122, 124–125
value-cost trade-off, 13–16
eliminate-reduce-raise-create grid
and, 35–37
value creation
portfolio management and, 97–98
strategic sequence and, 119
value innovation versus, 12–13
value curves
characteristics of good, 36–37
compelling taglines in, 37, 39–41
definition of, 27
divergence in, 37, 39
focus in, 39, 367
monitoring, 188–190
reading, 41–44
value innovation, 12–18
definition of, 12
demand and, 101
differentiation/low cost dynamics in,
16–18
imitation barriers and, 186
market dynamics of, 137, 213–216
reconstructionist view of strategy,
17–18, 209–212
renewal of, 188–190
target costing and, 137
technology innovation versus, 120
value creation versus, 12–13
Value Innovation Program (VIP) Center,
95
The Vanguard Group, 75
Viagra, 74
videotapes, 134–135
Virgin Atlantic Airways, 126
Virgin Entertainment, 69
vision, 161
visual awakening, 84–87
visual communication, 93–94, 99
visual exploration, 88–90
visual strategy fairs, 90–93
Walker, Laurens, 174–175
Walkman, 60
Wal-Mart, 186–187
Waterman, Robert H., Jr., 9
Watson, Thomas, 198–199
Watson, Thomas, Jr., 199
Wilson, Woodrow, 193
wine industry, U.S., 24–25
creation of demand in, 30–35
strategy canvas factors in, 25–26
target market of, 34–35
value curve of, 27–28
[yellow tail] and, 28, 30–35
wireless application protocol (WAP), 55,
142
Wireless Markup Language (WML), 142
[yellow tail], 28, 189
strategy canvas of, 32
value curve of, 31–32
Zeneca, 69
238 Index
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About the Authors
W. Chan Kim is The Boston Consulting Group Bruce D. Henderson
Chair Professor of Strategy and International Management at INSEAD.
Prior to joining INSEAD, he was a professor at the University of Michigan
Business School. He has served as a board member as well as an adviser for a
number of multinational corporations in Europe, the United States, and Pa-
cific Asia. He has published numerous articles on strategy and managing the
multinational, which can be found in Academy of Management Journal,
Management Science, Organization Science, Strategic Management Journal,
Administrative Science Quarterly, Journal of International Business Studies,
Harvard Business Review, Sloan Management Review, and others. His Har-
vard Business Review articles are worldwide bestsellers and have sold over
half a million reprints. He is a contributor to the Financial Times, the Wall
Street Journal, the Wall Street Journal Europe, the Asian Wall Street Jour-
nal, the New York Times, South China Morning Post, and others. He is a Fel-
low of the World Economic Forum at Davos and an advisory member for the
European Union. He is the winner of the Eldridge Haynes Prize, awarded by
the Academy of International Business and the Eldridge Haynes Memorial
Trust of Business International, for the best original paper in the field of in-
ternational business. Professor Kim is a founder of the Value Innovation
Network (VIN), a global community of practice on the Value Innovation fam-
ily of concepts, and a board member of the Value Innovation Action Tank
(VIAT) in Singapore.
( ) ( ) ( ) ( )
EM-Kim.qxd 10/25/04 10:03 AM Page 239

Renée Mauborgne is the INSEAD Distinguished Fellow and a pro-
fessor of strategy and management at INSEAD in Fontainebleau, France,
and Fellow of the World Economic Forum. She has published numerous arti-
cles on strategy and managing the multinational, which can be found in
Academy of Management Journal, Management Science, Organization Science,
Strategic Management Journal, Administrative Science Quarterly, Journal of
International Business Studies, Harvard Business Review, Sloan Manage-
ment Review, and others. Her Harvard Business Review articles are world-
wide bestsellers and have sold over half a million reprints. Professor
Mauborgne is a contributor to the Financial Times, the Wall Street Journal,
the Wall Street Journal Europe, the New York Times, and others. Her re-
search has also been featured in The Economist, Strategy+Business, the
Times of London, Wirtschaftswoche, The Conference Board, l’Expansion,
Børsen, Svenska Dagbladet, the Australian Financial Review, South China
Morning Post, Sunday Times of South Africa, the Straits Times Singapore,
Handelsblatt,and others. Professor Mauborgne is the winner of the Eldridge
Haynes Prize, awarded by the Academy of International Business and the El-
dridge Haynes Memorial Trust of Business International, for the best origi-
nal paper in the field of international business. She is also a founder of the
Value Innovation Network (VIN), a global community of practice on the Value
Innovation family of concepts, and a board member of the Value Innovation
Action Tank (VIAT) in Singapore.
240 About the Authors
EM-Kim.qxd 10/25/04 10:03 AM Page 240

Table of Contents
Preface
Chapter 1 Creating Blue Oceans
Chapter 2 Analytical Tools and Frameworks
Chapter 3 Reconstruct Market Boundaries
Chapter 4 Focus on the Big Picture, Not the Numbers
Chapter 5 Reach Beyond Existing Demand
Chapter 6 Get the Strategic Sequence Right
Chapter 7 Overcome Key Organizational Hurdles
Chapter 8 Build Execution into Strategy
Chapter 9 Conclusion: The Sustainability and Renewal of Blue Ocean Strategy
Appendix A
Appendix B
Appendix C
Notes
Bibliography
Index

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