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RED OCEAN VS.

BLUE
OCEAN STRATEGY
VS

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 firms activities Align the whole system of a firms
with its strategic choice of differentiation activities in pursuit of differentiation and
or low cost. low cost.

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W. Chan Kim & Rene Mauborgne coined the terms red and blue oceans to denote the
market universe. Red oceans are all the industries in existence today the known market
space, where industry boundaries are defined and companies try to outperform their rivals to
grab a greater share of the existing market. Cutthroat competition turns the ocean bloody
red. Hence, the term red oceans.
Blue oceans denote all the industries not in existence today the unknown market space,
unexplored and untainted by competition. Like the blue ocean, it is vast, deep and powerful
in terms of opportunity and profitable growth.
The chart above summarizes the distinct characteristics of competing in red oceans (Red
Ocean Strategy) versus creating a blue ocean (Blue Ocean Strategy).
VALUE INNOVATION
W. Chan Kim and Rene Mauborgne developed the concept of Value Innovation, the
cornerstone of Blue Ocean Strategy. It is the simultaneous pursuit of differentiation and low
cost, creating a leap in value for both buyers and the company. Because value to buyers
comes from the offerings utility minus its price, and because value to the company is
generated from the offerings price minus its cost, value innovation is achieved only when the
whole system of utility, price, and cost is aligned.

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.

Kim & Mauborgne. All rights reserved.

Break the value-cost trade-off by answering the following questions:

Which of the factors that the industry takes for granted should be eliminated?
Which factors should be reduced well below the industrys standard?
What factors should be raised well above the industrys standard?
What factors should be created that the industry has never offered?
VISUALIZING STRATEGY
At the center of blue ocean strategy formulation is a structured four-step process created
by Kim & Mauborgne that involves visual exploration to unlock peoples creativity for pushing
a companys strategy towards a blue ocean. The four major steps for visualizing strategy are:

Visual Visual Visual Strategy Visual


Awakening Exploration Fair Communication

Compare your business Go into the field to explore Draw your to be Distribute your before-and-

with your competitors by the six paths to creating strategy canvas based after strategic profiles on one

drawing your as blue oceans. Observe the on insights from field page for easy comparison.

is strategy canvas. See distinctive advantages of observations. Get Support only those projects

where your strategy alternative products and feedback on alternative and operational moves that

canvas needs to change. services. See which strategy canvases from allow your company to close

factors you should customers, competitors the gaps to actualize the new

eliminate, reduce raise, customers, and strategy.

create, or change. noncustomers. Use

feedback to build the

best to be future

strategy.

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Visualizing strategy can also greatly inform the dialogue among individual 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 portfolio. Moreover, the process also
fosters the transfer of strategic best practices across units.
STRATEGY CANVAS
The strategy canvas is a central diagnostic tool and an action framework developed by W.
Chan Kim and Rene Mauborgne for building a compelling blue ocean strategy. It graphically
captures, in one simple picture, the current strategic landscape and the future prospects for a
company.

Kim & Mauborgne. All rights reserved.

The strategy canvas serves two purposes:

To capture the current state of play in the known market space, which allows users to
clearly see the factors that the industry competes on and where the competition
currently invests
To propel users to action by reorienting their focus
from competitors to alternatives and from customers to noncustomers of the industry

The horizontal axis on the strategy canvas captures the range of factors that an industry
competes on and invests in, while the vertical axis captures the offering level that buyers
receive across all of these key competing factors.
The value curve or strategic profile is the basic component of the strategy canvas. It is a
graphic depiction of a companys relative performance across its industrys factors of
competition. A strong value curve has focus, divergence as well as a compelling tagline.
FOUR ACTIONS
FRAMEWORK
Raise

Which factors should be raised well


above the industrys standard?

Eliminate Create

New Value Curve


Which factors that the industry has Which factor
long competed on should be the industry h
eliminated ?

Reduce

Which factors should be reduced well


below the industrys standard?

Kim & Mauborgne. All rights reserved.

The Four Actions Framework developed by W. Chan Kim and Rene Mauborgne is used to
reconstruct buyer value elements in crafting a new value curve or strategic profile. To break
the trade-off between differentiation and low cost in creating a new value curve, the
framework poses four key questions, shown in the diagram, to challenge an industrys
strategic logic.
ERRC GRID
The Eliminate-Reduce-Raise-Create (ERRC) Grid developed by W. Chan Kim and Rene
Mauborgne is a simple matrix like tool that drives companies to focus simultaneously on
eliminating and reducing, as well as raising and creating while unlocking a new blue ocean.

Eliminate Raise

Which factors that the industry has long Which factors should be raised well above the industrys

competed on should be eliminated ? standard?

Reduce Create

Which factors should be reduced well belowthe Which factors should be created that the industry has

industrys standard? never offered?

Kim & Mauborgne. All rights reserved.

This analytic tool complements the Four Actions Framework. It pushes companies not only to
ask the questions posed in the Four Actions Framework but also to act on all four to create a
new value curve (or strategic profile), which is essential to unlocking a new blue ocean. The
grid gives companies four immediate benefits:

It pushes them to simultaneously pursue differentiation and low cost to break the
value-cost trade off.
It immediately flags companies that are focused only on raising and creating, thereby
lifting the cost structure and often over-engineering products and services a
common plight for many companies.
It is easily understood by managers at any level, creating a high degree of
engagement in its application.
Because completing the grid is a challenging task, it drives companies to thoroughly
scrutinize every factor the industry competes on, helping them discover the range of
implicit assumptions they unconsciously make in competing.
SIX PATHS FRAMEWORK
To win in the future companies need to stop trying to beat the competition. The Six Paths
Framework developed by W. Chan Kim and Rene Mauborgne allows managers to address
the search risk many companies struggle with. It enables them to successfully identify out of
the haystack of possibilities that exist, commercially compelling blue oceans by
reconstructing market boundaries.

Head-to-Head Competition Blue Ocean Creation

Industry Focuses on rivals within its Looks across alternative


industry industries

Strategic Focuses on competitive position Looks across strategic groups


Group within strategic group within industry

Buyer Focuses on better serving the Redefines the industry buyer


Group buyer group group

Scope of Focuses on maximizing the Looks across to complementary


Product or value of product and service product and service offerings
Service offerings within the bounds of its
Offering industry

Functional- Focuses on improving the price Rethinks the functional-emotional


emotional performance within the orientation of its industry
Orientation functional-emotional orientation
of its industry

Time Focuses on adapting to external Participates in shaping external


trends as they occur trends over time

Kim & Mauborgne. All rights reserved


PIONEER-MIGRATOR-
SETTLER (PMS) MAP
A useful exercise for a corporate management team pursuing profitable growth is to plot the
companys current and planned portfolios on the Pioneer-Migrator-Settler Map created by W.
Chan Kim and Rene Mauborgne.

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Settlers are defined as me-too businesses, migrators are business offerings better than most
in the marketplace, and a companys pioneers are the businesses that offer unprecedented
value. These are a companys blue ocean strategic moves, and are the most powerful
sources of profitable growth. They are the only ones with a mass following of customers.
If both the current portfolio and the planned offering consist mainly of settlers, the company
has a low growth trajectory, is largely confined to red oceans, and needs to push for value
innovation. Although the company might be profitable today as its settlers are still making
money, it may well have fallen into the trap of competitive 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 exploiting its potential for growth and risks being
marginalized by a company that value-innovates. In our experience the more an industry is
populated by settlers, the greater 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 todays
performance. Revenue, profitability, market share, and customer satisfaction are all
measures of a companys 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. Todays market share is a reflection of how well a business has performed
historically.
Clearly, what companies should be doing is shifting the balance of their future portfolio
toward pioneers. That is the path to profitable growth.
THREE TIERS OF
NONCUSTOMERS
W. Chan Kim and Rene Mauborgne created the three tiers of noncustomers. Typically, to
grow their share of a market, companies strive to retain and expand their existing customer
base. 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, the
resulting customization of offerings. As companies compete to embrace customer
preferences through finer segmentation, they often risk creating too-small target markets.
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.
This reorientation allows companies to reach beyond existing demand to unlock a new mass
of customers that did not exist before.

Customers of your industry.

Soon-to-be noncustomers who are on the hedge of your market waiting to jump
1 ship.

2 Refusing noncustomers who consciously choose against your market.

3 Unexplored noncustomers who are in markets distant from yours.

Kim & Mauborgne. All rights reserved.

Although the universe of noncustomers typically offers 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 new customers, companies
need to deepen their understanding of the universe of noncustomers.
Kim and Mauborgne outline the three tiers of noncustomers that can be transformed into
customers. They differ in their relative distance from the current market.
The first tier of noncustomers is closest to the current market, sitting just on the edge. They
are buyers who minimally purchase an industrys offering out of necessity but are mentally
noncustomers of the industry. They are waiting 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, unlocking enormous latent
demand.
The second tier of noncustomers is people who refuse to use an industrys offering. These
are buyers who have seen the current offering as an option to fulfill their needs but have
decided against participating.
The third tier of noncustomers is farthest from the market. They are noncustomers who have
never considered the markets offering as an option.
By focusing on key commonalities across these noncustomers and existing customers,
companies can understand how to pull them into their new market.
SEQUENCE OF BLUE
OCEAN STRATEGY
Companies need to build their blue ocean strategy in the sequence of buyer utility, price,
cost, and adoption. This allows them to build a viable business model and ensure that a
company profits from the blue ocean it is creating. W. Chan Kim and Rene Mauborgne
argue that with an understanding of the right strategic sequence and of how to assess blue
ocean ideas against the key criteria in that sequence, companies can dramatically reduce
business model risk and ensure that both the company and its customers win as it creates
new business terrain.

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 upfront?

A Commercially Viable Blue Ocean Idea


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Here Kim and Mauborgne articulate the strategic sequence of Blue Ocean Strategy and a
commercially viable blue ocean idea. The starting point is buyer utility. Does your offering
unlock exceptional utility? Is there a compelling reason for the mass of people 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.
The second step is setting the right strategic price. 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 companys business model. They ensure
that you create a leap in net buyer value. To secure the profit side you need to assess the
third element: cost. The cost side of a companys business model ensures that it creates a
leap in value for itself in the form of profitthat is, the price of the offering minus the cost of
production. The key question here is: Can you produce your offering at the target cost and
still earn a healthy profit margin? 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 wont be
profitable, or you must innovate your business model to hit the target cost.
The last step in the sequence is to address adoption hurdles. What are the adoption 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.
BUYER UTILITY MAP
The Buyer Utility Map, developed by W. Chan Kim and Rene Mauborgne, helps to get
managers thinking from a demand-side perspective. It outlines all the levers companies can
pull to deliver exceptional utility to buyers as well as the various experiences buyers can
have with a product or service. This mindset helps managers identify the full range of utility
spaces that a product or service can potentially fill. It has two dimensions: The Buyer
Experience Cycle (BEC) and the Utility levers.

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The Buyer Experience Cycle (BEC): A buyers experience can usually be broken into a cycle
of six stages, running more or less sequentially from purchase to disposal. Each stage
encompasses a wide variety of specific experiences. Purchasing, for example, might include
the experience of browsing Amazon.com as well as the experience of pushing a shopping
cart through Wal-Marts aisles.
Utility levers: Cutting across the stages of the buyers experience are what we call utility
levers the ways in which companies unlock utility for their customers. 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 customers financial, 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.
By locating a new offering on one of the spaces of the buyer utility map, managers can
clearly see how, and whether, the new idea 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. In our experience, managers all too often focus on delivering
more of the same stage of the buyers experience. This approach may be reasonable in
emerging industries, where there is plenty of room for improving a companys utility
proposition. But in many existing industries, this approach is unlikely to produce a market-
shaping blue ocean strategy.

THE PRICE CORRIDOR OF


THE MASS
The Price Corridor of the Target Mass developed by W. Chan Kim and Rene Mauborgne is
a tool managers can use to determine the right price to unlock the mass of target buyers.
When setting a strategic price for a product or service, managers must evaluate the trade-
offs that buyers consider when making their purchasing decision, as well as the level of legal
and resource protection that will block other companies from imitating their offering.

To set the strategic price, first identify the price corridor of the target mass, that is, the price
range that attracts the mass of target buyers. Key to determining the strategic price is for
managers to understand the price sensitivities of buyers who will be comparing the new
offering with a host of very different-looking products and services offered outside the group
of traditional competitors. For example, buyers can choose between several movie theaters,
but they can also decide to go to restaurants and bars. Managers should consider two
categories of products/services that are beyond an industrys boundaries in identifying the
price corridor of the mass: products and services that take different forms but perform the
same function, and products and services that have different forms and functions but serve
the same objective.
Next, determine how high or low the strategic price should be set within the corridor without
inviting imitation from competition. A company must consider two sets of factors: the level of
legal and resource protection the new offering has to block imitation, and secondly the
degree to which the company owns some exclusive asset or core capability that can also
block imitation. The higher the level of protection against imitation, the higher the strategic
price can be within the price range that still attracts the mass of target buyers. For example, if
the product or service has strong patents and hard-to-imitate service capabilities one can use
upper-boundary strategic pricing to attract the mass of buyers. On the other hand, if a
manager is uncertain about their patent and asset protection they should consider pricing
somewhere in the middle to lower end of the corridor.

FOUR HURDLES TO
STRATEGY EXECUTION
Once a company has developed a blue ocean strategy with a profitable business model, the
next challenge is strategy execution. 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, this can be especially
difficult for blue ocean strategy as it represents a significant departure from the status quo.
To varying degrees, companies may face four types of hurdles to strategy execution.
Knowing how to triumph over these organizational hurdles is key to successful strategy
execution. W. Chan Kim and Rene Mauborgne developed four hurdles to strategy
execution:

The Cognitive Hurdle: Waking employees up to the need for a strategic shift. Red
oceans may not be the paths to future profitable growth, but they may have served
the organization well historically, so why rock the boat?
The Resource Hurdle: It is assumed that the greater the shift in strategy, the greater
the resources it requires for execution.
The Motivational Hurdle: How do you motivate key players to move fast and
tenaciously to carry out a break from the status quo?
The Political Hurdle: As one manager put it, In our organization you get shot down
before you stand up.

Kim & Mauborgne. All rights reserved.

Although all companies face different degrees of these hurdles and some may face only a
subset of the four, to overcome these effectively companies must abandon perceived
wisdom about effecting change.
Conventional wisdom asserts that the greater the change, the greater the resources and time
you will need to bring about results. Instead, blue ocean strategy flips this conventional
wisdom on its head by using what we call tipping point leadership. Tipping point leadership
allows you to overcome the four hurdles fast and at low cost while winning employees
backing in executing a break from the status quo.

TIPPING POINT
LEADERSHIP
The conventional theory of organizational change rests on transforming the mass. So change
efforts are focused on moving the mass, requiring steep resources and long time frames
luxuries few executives can afford. Tipping point leadership developed by W. Chan Kim and
Rene Mauborgne, by contrast, takes a reverse course. To change the mass it focuses 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.

Conventional The theory of organizational change


Wisdom rests on transforming the mass and
these efforts require steep resources
and long timeframes.

Tipping Point To achieve a strategic shift at low cost,


Leadership focus on the extremes the people, acts,
and activities that exert a disproportionate
influence on performance.

Kim & Mauborgne. All rights reserved.

Hence, contrary to conventional wisdom, mounting a massive challenge 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 factors of disproportionate influence in an
organization.
By single-mindedly focusing on points of disproportionate influence, tipping point leadership
helps managers topple the four hurdles to strategy execution quickly and at a low cost by
answering the following questions:

What factors or acts exercise a disproportionately positive influence on breaking the


status quo?
On getting the maximum bang out of each buck of resources?
On motivating key players to aggressively move forward with change?
And on knocking down political roadblocks that often trip up even the best strategies?
FAIR PROCESS
Fair process is a concept developed by W. Chan Kim and Rene Mauborgne that builds
execution into strategy by creating peoples buy-in up front. When fair process is exercised in
the strategy formulation phase, people trust that a level playing field exists, inspiring
voluntary cooperation during the execution phase.
There are three mutually reinforcing elements that define fair process: engagement,
explanation, and clarity of expectation. Whether people are senior executives or shop
employees, they all look to these elements. Kim and Mauborgne call them the three
principles of fair process.

Engagement Explanation Expectation Clarity

Engagement means involving Explanation means that everyone Expectation clarity requires that after a

individuals in the strategic decisions involved and affected should strategy is set, managers clearly state

that affect them by soliciting their input understand why final strategic the new rules of the game. Although

and allowing them to refute the merits decisions are made. An explanation the expectations may be demanding,

of one anothers ideas and of rationale engenders confidence employees know up front the

assumptions. Engagement among employees that managers standards by which their work will be

communicates managements respect have considered their opinions and judged and the consequences of

for individuals and their point of view. have made decisions impartially in failure. When people clearly

The result is better strategic decisions the overall interest of the company, understand expectations, political

by management and genuine even if their own ideas have been jockeying and favoritism are

commitment from everyone involved in rejected. It also serves as a powerful minimized, and people can focus on

execution. feedback loop to enhance learning. executing the strategy rapidly.

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It should be noted that any subset of the three is insufficient. The three
criteria collectively lead to judgments of fair process.