Follow us:
Cover Story enterprise strategy markets c'est la vie magazines subscribe
 
W Chan Kim & Renee Mauborgne, Professors of Strategy, INSEAD
Blue Ocean Man
W Chan Kim
“Whenever a blue ocean is created, competition is rendered irrelevant”
COMMENTS PRINT
Special Issue: Masterspeak Masterspeak

South Korean rapper Psy may have become a YouTube sensation, but W Chan Kim still remains the most recognised business personality to emerge from Korea. If you have any doubts, try naming the chief executives of either Samsung, Hyundai or LG? In all likelihood, we would have a much bigger show of hands if we asked a random collection of management jocks if they are familiar with the term Blue Ocean. In South Korea, not to mention Japan, collective effort is much prized over individual daredevilry. That is why there is no Richard Branson in Japan and SoftBank’s Masayoshi Son is an exception. Therefore, the rise to eminence of Korean born Kim and US born co-author Renee Mauborgne in 2005 was a big surprise. There is another achievement to Kim and Mauborgne’s credit that the Korean rapper will find hard to match. Their bestselling book, Blue Ocean Strategy, has been translated into 42 languages. Like all good story tellers, the duo is working on a sequel but wouldn’t give away anything at the moment.

How did Blue Ocean Strategy come about? Why did you decide to use the term Red and Blue Ocean?

Mauborgne and I have worked together for the past 30 years. From the beginning, we have shared an intellectual curiosity to understand what it takes to stand apart and create strong profitable growth. In search of an answer, we looked back more than 100 years and across 30 industries. Contrary to common thought, we did not find any permanently excellent companies or permanently excellent industries in our research. What we did find, however, were smart strategic moves. And the strategic move that we found matters centrally is to create blue oceans. Blue oceans allow companies to create strong profitable growth. This led to our book, Blue Ocean Strategy.

 
 
Excellent companies across the world have a “heartbeat” — it is similar across cultures
 
 
We use the terms red and blue oceans to describe the market universe. Red oceans are all the industries in existence today — the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities and cutthroat competition turns the ocean bloody. Therefore, the term “red” oceans.

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

In the seven years since you wrote the book, have you seen companies take the strategy to heart?

In fact, blue ocean strategic moves have taken place throughout the history of industry evolutions. Our book simply studied samples of such moves, uncovered and decoded the underlying pattern behind those moves. Some of the examples given in the book were historical, others were ex-ante — companies started to work with us to practise blue ocean strategy (BOS) even before the book was published. The strategic move of European Financial Service laid out in the book, for example, was a move made by Thomas Cook but at the time of publication of the book, we could not reveal its name as the period of confidentiality was not yet over.

Of course, with the publication of Blue Ocean Strategy, this approach is systematically laid out to business practitioners, which encourages them to adopt such an approach in their practice. We are now working with the world’s top companies executing BOS. This approach has not only been adopted by companies, but also by public and government organisations to reform and value-innovate public services and national policies. Examples include the Malaysia Blue Ocean Strategy Institute created by the Malaysian government and the Value Innovation Action Tank set up by Singapore ministries.

Can you give a few recent examples that you think are good examples of blue ocean thinking?

Examples are numerous. The original concept of Tata Nano “the people’s car”, is a very powerful blue ocean idea that promises to revolutionise the automobile industry, despite the difficulties Tata Motors has encountered in the implementation of the strategy. Nintendo Wii is another compelling example. Instead of competing head-to-head with other major players in the computer gaming industry, Nintendo looked at alternatives for buyers such as sports and leisure activities. Instead of focusing on existing customers of the gaming industry, who were mostly male teens and take up a small percentage of the entire population, Nintendo shifted its attention to the needs and wants of non-customers, i.e., the adult population, among whom were women and even elderly people. By offering a new game model that was healthy, interactive, socially friendly and family-oriented at an attractive price, Wii became an immediate hit and unlocked huge demand in the game and leisure markets.

How is BOS superior to a random process of innovation? Is it fair to say that all BOS is innovation but not vice versa?

Indeed, innovation in the conventional sense is largely a random occurrence. It depends either on entrepreneurial insight, which can hardly be replicated in a corporation over the long run, or on costly R&D activities, which, while highly organised, do not guarantee commercially applicable results. A related challenge is the high risks associated with innovation. Since random innovation largely follows a trial and error process, financial and strategic risks are high. Consider Motorola Iridium, a technology marvel that turned out to be a flop in the market as it did not provide attractive utility for the mass of buyers and at the same time was unreasonably expensive because of high production costs. Its failure hit the company hard. All these drawbacks call for a systematic approach to innovation. BOS provides such an approach. Its actionable frameworks, tools and processes guide companies to maximise opportunities and minimise risks in pursuing value innovation and creating blue oceans. Conventional innovations are often technology-based sub-system activities of a company. Blue ocean strategy is about value-based innovations, forms the core of a company’s business strategy and aims to achieve differentiation and low cost simultaneously.

Have you come across companies that have enthusiastically imbibed Eliminate and Reduce but have not that readily embraced Raise & Create? While it is not in the spirit of BOS, do publicly listed companies still adopt it because of quarterly earnings pressure?

Cost leaders in the conventional sense usually do that. They compete within industry boundaries without challenging the rules of the game and try to provide “comparable value” at lower cost as competitive strategy stipulates. This means that they either provide a lower offering level on each factor of competition, or eliminate and reduce some factors to keep solely the “essentials”. Doing so will likely improve their market share in the short run but eventually will trap them in intensified price wars and accelerate the commoditisation of the industry.

Publicly listed companies have every reason to adopt BOS to improve their corporate portfolios. Experienced investors make their decisions not based solely on past performances of companies, but on a solid prospect of future growth. If a publicly listed company’s earnings are fine but the business offerings in its portfolio do not offer a growth prospect, it is not likely to be appreciated by the stock market.

How can managements inculcate Blue Ocean thinking in their organisations? Does culture play a big role?

BOS can be learned and practised with proper methodologies, frameworks and tools by any company and is not generated from or greatly influenced by “culture” or “corporate DNA”. In fact, we have perceived more differences between top performing companies and poor performing ones in a single country than between top performing companies in different countries. Excellent companies across the world have much in common — a certain “heartbeat”, a momentum, a way of viewing opportunities — and it is very similar across cultures.

 
 
Value innovation takes places mostly in highly developed markets and mature economies where competition is intense
 
 
To help companies learn this approach, our book outlines the four-step strategy visualisation process any company or organisation can apply to break out of the red ocean. The first step is Visual Awakening. At this stage executives are asked to draw their “As Is” strategy canvas — a visual representation of their company’s strategy vis-à-vis the competition. This brings home the need for change. It serves as a wake-up call for companies to challenge their existing strategies. The next step is what we call the Visual Exploration. Here managers go into the field to explore the Six Paths to new market space creation. Here executives observe the distinct differences of alternative products and services and see which factors should be eliminated, created or changed in the company’s offerings. The penultimate step is the Visual Strategy Fair. Here executives begin to draw their “To Be” Strategy Canvas based on insights from the market exploration observations and test these ideas with customers, non-customers, and lost customers. After refining the “To Be” strategy canvas, the last step is to communicate it in a way that can be easily understood by any employee. This step is called Visual Communication.

Since slowing demand is more of a problem in developed countries, would it be fair to assume that most blue ocean thinking would continue to originate from there?

As breaking away from the pack to achieve growth and profitability is a pressing need for companies immersed in cutthroat competition. Value innovation takes places most frequently in highly developed markets and mature economies where competition is intense. Yet we have observed more and more instances of BOS moves made by companies in emerging economies such as China and India. In the past decade companies in these countries relied mainly on a low cost strategy in pursuing international trade or approaching their domestic market. Over the years competitive pressure has dramatically intensified, with companies fighting price wars in the domestic market and competing head-to-head over razor-thin profits in the international market. BOS offers them an effective way to break away from the competition and achieve profitable growth. And as these companies are no longer content to stay within the walls of their local economies and instead aspire to become global champions with strong brand recognition, we expect to see increasing efforts on their part to value innovate their businesses and head for blue oceans.

You write in the book, “In blue oceans, demand is created than fought over.” But are there any businesses where head-to-head competition is unavoidable? If yes, how can companies deal with it?

We talk about creating blue oceans, rather than finding blue oceans. That’s because blue oceans are markets or industries not in existence today. They are not existent sub-markets in a red ocean industry for companies to enter and occupy. The scope of blue ocean opportunities does not depend on the industry or sector. It depends on how skilful a value innovator is in identifying ways of market reconstruction based on existing market realities. Whenever a blue ocean is created, competition is rendered irrelevant as the rules of the game are redefined. As the market universe represents infinite opportunities for demand creation, as long as companies follow the right methodology for creating blue oceans, it is not possible they will be trapped in head-to-head competition with no way out.

Are there any sectors where it is hard to differentiate between red and blue ocean strategy? Is technology an example of a perpetually blue ocean space?

No. Red and blue ocean strategies are fundamentally different from each other. Red ocean strategists 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 a finite market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss.

Blue ocean strategists recognise that market boundaries exist only in managers’ minds, and they do not let existing market structures limit their thinking. They shift their attention from supply to demand, from a focus on competing to a focus on creating innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost.

There is no chance that these two approaches to strategy can be confused. In the technology sector, if a company does not focus on providing a leap in buyer value and instead tries to outcompete its rivals by providing better technologies, it is still in a red ocean game. In fact, rapid technological development tends to shorten the product life cycle and accelerate the commoditisation of products, making competition in red oceans more intense and bloody.

In the book, you mention Apple as a BOS, but don’t you think the smartphone market is now classic red ocean?

The smartphone market before iPhone was a high-end niche market making up less than 5% of the mobile phone industry, with handset manufacturers competing to provide handsets with more features and better technologies to high income professionals. Apple’s iPhone did not focus on adding more hardware features to make the phone smarter. Instead, it offered users a dramatically simplified and easy-to-use interface, and the “iTunes App Store”, allowing users to customise their phones to match their own interests. iPhone’s value innovation generated a loyal mass following for itself and huge profits for the company. By 2010 Apple had 51% of the profits of the global mobile phone industry with just 22% share of revenues and 4% share of volume.

Meanwhile, iPhone set a new standard for the mobile phone industry with almost everyone now going the Apple way. As a matter of fact, when more and more imitators jump in, the market will get crowded. That’s why BOS never intends to offer a one-time solution to companies. Rather, it calls for companies to monitor their value curves and renew their blue ocean offerings by making new blue ocean strategic moves at the proper time.

Which company has had the most sustainable success after adopting a BOS? You say, “There is no such thing as a permanently great company”. But what steps can a company management take to get as close as possible?

If a company wants to get great and stay that way, it needs to do a number of things. First, it should make its BOS move to create new market space of profitable growth. Our research indicates that a BOS often goes without credible challenges for 10-15 years. Formulating and executing a BOS in the right sequence will by itself build a rather strong barrier to imitation. Companies like Ikea, Southwest Airlines and Swatch have sustained market leadership for many years since the initial strategic moves.

Most importantly, as a BOS requires the alignment of the three strategy propositions — value, profit and people — once it is successfully implemented, it is hard to be copied as many a times an imitator could get one or two propositions right, but not all the three of them. A key way to block new entrants into the blue ocean market as long as possible and to dissuade copying is to heighten these barriers with constant improvement on the value, profit and people propositions of the initial BOS.

Next, the company needs to constantly monitor value curves on the strategy canvas to avoid the trap of competing. When its value curve remains distinctive and divergent from those of the competition, the company should sail as far as possible in its blue ocean by lengthening, widening and deepening the rent stream via geographic expansion, operational improvements and refining the offering. When its value curve begins to converge with those of the competition, it signals that the competition, not the buyer, may have come to occupy the centre of the company’s strategic thought and actions. It is time to value innovate again and reach out for another blue ocean. In this way, the company may hope to stay at the top for a prolonged period of time.

COMMENTS PRINT
Post a Comment
You are not logged in, please log in or register
If you wish your letter to be considered for publication in the print magazine, we request you to use a proper name, with full postal address - you could still maintain your anonymity, but please desist from using unpublishable sobriquets and handles