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Strategic Management Ch5 Of Blue Ocean Strategy   How innovation in business-level strategy can change the competitive game in an industry, giving the innovator a sustained competitive advantage TLFeBOOK Blue Ocean Strategy FM-Kim.qxd 10/25/04 10:03 AM Page i FM-Kim.qxd 10/25/04 10:03 AM Page ii 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 ( ) ( ) ( ) ( ) ( FM-Kim.qxd 10/25/04 10:03 AM Page iii 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 [email protected], 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 FM-Kim.qxd 10/25/04 10:03 AM Page iv To friendship and to our families, who make our worlds more meaningful FM-Kim.qxd 10/25/04 10:03 AM Page v FM-Kim.qxd 10/25/04 10:03 AM Page vi 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 ( ) ( ) ( ) ( ) FM-Kim.qxd 10/25/04 10:03 AM Page vii 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 FM-Kim.qxd 10/25/04 10:03 AM Page viii ( ) ( ) ( ) ( ) 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. ( ) ( ) ( ) ( ) FM-Kim.qxd 10/25/04 10:03 AM Page ix 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 FM-Kim.qxd 10/25/04 10:03 AM Page x 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. Preface xi FM-Kim.qxd 10/25/04 10:03 AM Page xi FM-Kim.qxd 10/25/04 10:03 AM Page xii 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. ( ) ( ) ( ) ( ) FM-Kim.qxd 10/25/04 10:03 AM Page xiii 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 FM-Kim.qxd 10/25/04 10:03 AM Page xiv 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 FM-Kim.qxd 10/25/04 10:03 AM Page xv FM-Kim.qxd 10/25/04 10:03 AM Page xvi ( ) ( ) ( ) ( ) ( P A R T O N E Blue Ocean Strategy ( ) ( ) ( ) ( ) ( 01-Kim.qxd 10/25/04 10:02 AM Page 1 01-Kim.qxd 10/25/04 10:02 AM Page 2 ( ) ( ) ( ) ( ) 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 ( ) ( ) ( ) ( ) 01-Kim.qxd 10/25/04 10:02 AM Page 3 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. 4 B L U E O C E A N S T R A T E G Y 01-Kim.qxd 10/25/04 10:02 AM Page 4 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 Creating Blue Oceans 5 01-Kim.qxd 10/25/04 10:02 AM Page 5 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 6 B L U E O C E A N S T R A T E G Y 01-Kim.qxd 10/25/04 10:02 AM Page 6 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\% 01-Kim.qxd 10/25/04 10:02 AM Page 7 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 01-Kim.qxd 10/25/04 10:02 AM Page 8 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 Creating Blue Oceans 9 01-Kim.qxd 10/25/04 10:02 AM Page 9 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. 10 B L U E O C E A N S T R A T E G Y 01-Kim.qxd 10/25/04 10:02 AM Page 10 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 …