Sailing into Blue Ocean

HERE’S A FINAL TIP

Sailing into Blue Ocean

By Prof. W. Chan Kim

Competing in existing market space, beating the competition, exploiting current demand, making the value-cost trade off, and aligning the whole system of a firm’s activities with its strategic choice of differentiation or low cost – these are the collective strategy used by all industries in existence today – the red oceans as we define them.

There is still a largely untapped strategy to consider, especially this time of global economic and financial crisis: a strategy to create uncontested market space, make the competition irrelevant, focus on non-customers, create and capture new demand, break the value-cost trade off by seeking greater value to customers and low cost simultaneously, and align the whole system of a firm’s activities in pursuit of differentiation and low cost – these are the collective blue ocean strategy (BOS).

*To further understand what BOS is, and how a company or individual can apply BOS to get out of the red ocean of competition:

Create demand. To start, red ocean strategists focus on dividing up the red ocean, thus limiting growth. Blue ocean strategists think that extra demand is out there, largely untapped. BOS requires attention from supply to demand, from competing to creating innovative value, achieved via the simultaneous pursuit of differentiation and low-cost. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created. Such a strategy therefore allows firms to largely play a non-zero-sum game, with high payoff possibilities.

Out-compete rivals. Red oceans will always matter and will always be a fact of business life. It will always be important to swim successfully in the red ocean by out-competing rivals. Companies need to go beyond competing. To seize new profit and growth opportunities they also need to create blue oceans.  A better balance must be struck across red ocean and blue ocean initiatives.

Unlock innovative value. Innovation goes up while the economy goes down. Despite the pain, recessions are historically times of enormous creativity and breakthrough business launches. Microsoft, General Electric, FedEx, CNN, and Apple are among the hundreds of companies that created blue oceans during an economic downturn. Our experience though further suggests that, first, companies in these industries tend to view their businesses as commodity businesses with little room to offer innovative value.  The more these companies view their businesses as commodities, the more they treat their businesses as such. Second, the more removed companies are from the final customer, the more levers there are to unlock innovative value as every company in that chain can be viewed as a customer.  If a company can’t see an opportunity to unlock innovative value for the next direct customer in that chain, there are still opportunities to unlock innovative value for that customer’s customers, and so forth.

Make the right strategic moves. We found that 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 market space. The blue oceans made by incumbents were usually within their core businesses. In fact, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters. Blue oceans are right next to you in every industry. Companies that understand what drives good strategic moves—incumbents or start-ups—will be well placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action, not the size or age of the firm.

*Excerpted from the Q8A with Kim and Renée Mauborgne, authors of the international bestseller, Blue Ocean Strategy, with notes from the exclusive press conference and presentation of Kim during the Philippine Blue Ocean Strategy Day on March 12, 2009.

PROF. W. CHAN KIM is the recipient of the Nobels Colloquia Prize for Leadership on Business and Economic Thinking 2008 and a winner of the Eldridge Haynes Prize by the Academy of International Business and the Eldridge Haynes Memorial Trust of Business International. A fellow of the World Economic Forum, Kim is also co-director of the INSEAD Blue Ocean Strategy Institute and the Boston Consulting Group Bruce D. Henderson chair professor of Strategy and International Management at INSEAD, France (the second largest business school).