Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth.
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.
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.
A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.
We found that the creation and capturing of blue oceans were achieved by small and large companies, by young and old managers, by companies in attractive and unattractive industries, by new entrants and established incumbents, by private and public companies, by companies in B2B and B2C industries, and by companies of diverse national origins.
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.
Value innovation is the cornerstone of blue ocean strategy. We call it value innovation 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 innovation.
Value without innovation tends to focus on value creation on an incremental scale, something that improves value but is not sufficient to make you stand out in the marketplace.
Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for.
Value innovation occurs only when companies align innovation with utility, price, and cost positions.
Value innovation defies one of the most commonly accepted dogmas of competition-based strategy: the value-cost trade-off. 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.
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.
By offering unprecedented utility, Cirque du Soleil created a blue ocean and 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 dramatically reduced its cost structure, achieving both differentiation and low cost.
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.
For value innovation to be a sustainable strategy, then, the alignment of the company’s utility, price, cost, and people is needed. It is this whole-system approach that makes value innovation strategic rather than operational or functional.
Value innovation is a distinct concept. It is about strategy that embraces the entire system of a company’s activities.23 Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.
Red ocean versus blue ocean strategy Competition-based red ocean strategy assumes that an industry’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 contrast, 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.
Red ocean versus blue ocean strategy
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 reconstructionist view.
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.
The eight principles of blue ocean strategy
Reconstruct market boundaries (Search risk)
Focus on the big picture, not the numbers (Planning risk)
Reach beyond the existing demand (Scale risk)
Get the strategic sequence right (Business model risk)
Overcome key organisational hurdles (Organizational risk)
Build execution into strategy (Management risk)
Align the value, profit, and people propositions (Sustainability risk)
Renew blue oceans (Renewal risk)
Effective blue ocean strategy should be about risk minimization and not risk taking.
The Strategy Canvas
Captures the current state of play in the known market space
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.
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.
To set a company on a strong, profitable growth trajectory in the face of industry conditions like these, it won’t work to benchmark competitors and try to outcompete them by offering a little more for a little less. 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.
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. To pursue both value and low cost, you should resist the old logic of benchmarking competitors in the existing field and choosing between differentiation and cost leadership.
The four actions framework
Four key questions to challenge 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?
Sometimes there is a fundamental change in what buyers value, but companies that are focused on benchmarking one another do not act on, or even perceive, the change.
It is by pursuing the first two questions (of eliminating and reducing) that you gain insight into how to drop your cost structure vis-à-vis competitors.
The second two factors, by contrast, provide you with insight into how to lift buyer value and create new demand.
Three characteristics of a good blue ocean strategy:
Focus - every great strategy has focus
Divergence - when a company’s strategy is formed reactively as it tries to keep up with competition, it loses its uniqueness
Compelling tagline - must not only deliver a clear message but also advertise an offering truthfully
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 company’s strategy is a me-too, with no reason to stand apart in the marketplace. When it lacks a compelling tagline that speaks to buyers, it is likely to be internally driven or a classic example of innovation for innovation’s sake with no great commercial potential and no natural take-off capability.
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.
The kind of language 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 operationally driven. Analyzing the language of the strategy canvas helps a company understand how far it is from creating industry demand.
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.
Great strategic insights like this are less the product of genius than of getting into the field and challenging the boundaries of competition.
Obviously, the first port of call should be the customers. But you should not stop there. You should also go after noncustomers. And when the customer is not the same as the user, you need to extend your observations to the users,
You should not only talk to these people but also watch them in action. Identifying the array of complementary products and services that are consumed alongside your own may give you insight into bundling opportunities.
You need to look at how customers might find alternative ways of fulfilling the need that your product or service satisfies.
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.
The pictures were hung on the walls so that the audience could easily see them. After the twelve strategies were presented, each judge—an invited 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 strategy if they found it that compelling. The transparency and immediacy of this approach freed it from the politics that sometimes seem endemic to the strategic planning process.
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 distributed 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.
Do your business unit heads lack an understanding of the other businesses in your corporate portfolio? Are your strategic best practices poorly communicated across your business units? Are your low-performing units quick to blame their competitive situations 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.
A company’s pioneers are the businesses that offer unprecedented value. These are your blue ocean offerings, 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.
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 innovation.
If current and planned offerings consist of a lot of migrators, reasonable growth can be expected. But the company is not exploiting its potential for growth, and it risks being marginalized by a company that value-innovates.
Revenue, profitability, market share, and customer satisfaction are all measures of a company’s current position. Contrary to what conventional strategic thinking suggests, those measures cannot point the way to the future; changes in the environment are too rapid. Today’s market share is a reflection of how well a business has performed historically.
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.
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.