In 2005, INSEAD professors Renée Mauborgne and W. Chan Kim launched what has today become one of the biggest best-sellers in the business world, translated into almost 40 languages: “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant”. Mauborgne and Kim compare the markets in which the majority of companies work to “red oceans”, stained by the “blood” from the war waged by thousands of competitors for the same space. Faced with this scenario, they analyze how close to 150 companies from more than 30 different sectors throughout the last 100 years have been able to create “blue oceans”: new markets that they have discovered alone and which have caused a strategic and definitive shift in the company’s path.
While the companies that “sail” on red oceans compete in already existing markets, the ones on blue oceans create the markets themselves. The former devote themselves to beating the competition, while the latter are not affected by it. The losing side exploits an existing demand; the winning side creates a new demand. The companies submerged in “red oceans” are submitted to the tyranny of “cost-value”, while those who enjoy “blue oceans” have been able to break from that conditioning element. A company fighting for survival in a “red ocean” is faced with the permanent strategic dilemma between differentiating itself or fighting to keep costs at bay; the company that finds a “blue ocean”” is able to align the entire company towards the achievement of the “differentiation + low costs” combination.
Any company would love to escape the hostile waters of a “red ocean” and enter their own “blue ocean”. The million-dollar question is, how? Renée Mauborgne and W. Chan Kim insist on a fundamental point: get away from the reductionist point of view of our own company and look beyond it. A company doesn’t compete only with the rest of the companies in its sector. It also competes with companies that satisfy a similar demand. Taking, as the authors of the book did, the examples of the film industry and the restaurant industry, it is clear that each of them compete with their rivals, but both have a similar mission: entertain the customer in their leisure time.
A golden rule for the creation of “blue oceans” is to observe sectors that are not exclusively ours, having extensive points of view, and focusing the attention on the competitive environment. That’s what Sony did with the historic launching of the Walkman, mixing the concepts of “music + movement”, after observing the phenomenon of youth who, in the 1980’s, walked down the street with a radio cassette on their shoulder. It’s also what Swatch did, when they turned the watch into a fashion accessory and were able to change the way consumers looked at the product: instead of a watch they wanted many different good, cheap ones to be able to mix and match.
It’s not very often that an industry looks beyond the market it’s accustomed to competing in. Until very recently, it was unthinkable for big designers to offer their services to fashion distribution companies known for their affordable prices. However, aware that many of the big fashion companies were eager to find new customers and that the “relegation of chic” to “lower” segments on the market would be a sure success, the Swedish chain H&M has been able to get designers on the level of Kurt Lagerfeld, Víctor&Rolf, and Stella McCartney to create special collections for the thousands of customers the company has all over the world. H&M’s latest sensation was adding Madonna’s creations as a “blue chip” to the company’s collection. Again, a brilliant example of how the borders of markets can expand just by having brilliant ideas that translate into projects and end up materializing in products and services.
Another possible route for creating “blue oceans”, apart from expanding a sector’s borders, is the search for new customers. When put like that, it may seem obvious, but that’s not always the case. For example, pharmaceutical companies naturally focus on doctors as a “target”. Mauborgne and Kim take the example of the Danish pharmaceutical laboratory Novo Nordisk as a company capable of looking beyond its traditional customer. The company focused all of its attention on diabetic patients. Not on insulin, which the doctors naturally must prescribe, but rather on the entire apparatus that patients use to administer it.
The laboratory thought of the problems the patients have: syringes, needles, doses…and the social stigma involved with intravenous administration. As a result of this observation, Novo Nordisk launched NovoPen onto the market, a type of “pen” capable of administering several doses of insulin in a simple way that’s not “showy”. The company went from being a laboratory specializing in insulin to being a company geared towards treating diabetes: it expanded the limits of a “red ocean” and created its own “blue ocean”, which allows it to currently control more than 60% of the European market, and 80% in Japan.
Strategy must prevail over day-to-day improvisation. A company’s long-term mission must impose itself on the tyranny of the short-term. This focus is fundamental in the creation of blue oceans. The majority of companies do not have a true strategy that is defined by management and carried out correctly at all levels of the organization. In a large part of cases, the budget is usually the only instrument that sets the objectives to be obtained.
As a model for strategic management, Renée Mauborgne and W. Chan Kim propose the design of a “canvas” that reflects, in the clearest, simplest way possible, the strategy for a company to define, carry out, and follow. This doesn’t mean that numbers don’t count. It’s obvious that financial planning must adapt to these objectives and will have a decisive impact on them, but finance should be at the service of strategy, not the other way around. Cirque du Soleil is an exemplary case.
After taking its first steps in a small town in Quebec, Cirque du Soleil was officially born in 1984 at the hands of its brilliant founder, Guy Laliberté, during the festivities for commemorating the discovery of Canada. In those days, only 74 people worked for Cirque du Soleil.
Today, the company employs close to 3,000 workers worldwide, 900 of which are artists. The company’s Montreal headquarters alone gives work to 1,600 employees, whose average age is 35. More than 40 different nationalities are represented in the company, and close to 25 different languages are spoken.
Since 1984, the touring show of Cirque du Soleil has been performed in close to 100 cities around the world, drawing more than 60 million spectators. In 2007 alone, it is estimated that about 8 million people will see Cirque du Soleil perform. It is a project that, under the guiding hand of its leader, was able to slip away from the stale, exploited, and seemingly decadent circus segment in order to create a thriving “blue ocean” that has exploded with amazing worldwide success.
In the strategic canvases that W. Chan Kim and Renée Mauborgne propose, the horizontal axis represents the competitive elements that make up a sector. The dots mark the importance that each one of these elements has in the company and sector strategy, in such a way that connecting the dots with a curve allows us to clearly see the company’s strategy and relate it to the sector’s general strategy.
This process of definition and deployment of the strategy is valid not only at the corporate level, but can also be applied easily to the functional areas or divisions of any company. Kim and Mauborgne define businesses that are in a “blue ocean” position as “pioneers”, those whose “strategic canvas” is identical to that of the competition’s as “settlers”, and those that fall somewhere between the two previous categories as “migrants”.
Despite being sure of having discovered a new market and the possibility of exploiting it, it is imperative to ask whether or not the existing demand can be expanded. “Red Oceans” have submerged many companies in the race for an excessive segmentation of markets. In their struggle to launch products or services the competition doesn’t have, the companies make an effort to increasingly personalize their products and services portfolio, breaking the competition into “micro-segments”: separated housewives with dependent children, self-employed workers without a fixed office, urban pre-adolescents… The risk of hyper-segmentation directly attacks the philosophy of blue oceans.
In order to create an authentic “blue ocean” it is necessary to broaden the limits of demand, not to minimize them. Instead of focusing on minimal differences between one customer and another, it is advisable to look at the common elements that they all share and are willing to reward. Profiling to unsuspected extremes does not widen the limits of demand; the limits are expanded by incorporating large masses of “non-customers”. This is what the The Body Shop achieved in its day, creating a new demand for customers of healthy cosmetics, without limiting itself to “hyper-segmenting” the already existing cosmetics customers in the hands of other companies in the sector.
Famous failures, such as the initially terrific CD-i from Philips, a device that played audio, video, and videogames, or the Iridium satellite mobile phone, or WAP technology, all come from one mistake: the accurate assurance that a market exists for these products, but the inviability –due to lack of market maturity, poor conceptualization of the product or service, etc- of their commercialization and distribution.
In general, blue oceans must simplify customers’ lives, speed it up, and make it more pleasant, not complicate it with sophisticated mechanisms or purchasing processes. Launches that are too technologically complex or poorly planned commercially –the sad case of Air Madrid- can turn potential “blue oceans” into spectacular failures.
Big ideas like IKEA or The Home Depot have been possible because one of the attractive elements –affordable prices- was compensated for with solutions such as using land outside the city, where prices per square meter are lower, or offering the customers the possibility of carrying, assembling, and transporting the products themselves, with the resulting savings. Other “blue oceans” have gone, for example, towards the establishment of proper distributor chains, or “resellers”, which have freed companies from the weight of direct sales. It is absolutely vital that a company meticulously studies the price and cost structure in order to guarantee the viability of a “blue ocean”.
Even though a company might know exactly what basic foundations it needs to enter its own “blue ocean” (creating new consumer spaces, focusing on the idea over numbers, expanding the existing demand, and assuring the commercial viability of the project), it is only fair to warn that long-lasting “blue oceans” are few and far between. The competition is experienced and almost all products and services are imitable. So, companies must fight to constantly reinvent themselves with new blue oceans –as the brilliant Apple has done again and again, under the guidance of Steve Jobs, whose case we will study next- and not lose sight of the fact that the only thing that is inimitable is the customer. The golden rule for the creation of new markets is that without customers, no “blue ocean” is possible, and therefore the entire focus of the company’s Strategy must be on the customers, beyond budget, competition, and the tyranny of short-term management. Customers, whether ours or someone else’s, also want to swim in “blue oceans”.
Highlights:
“Excessive segmentation does not help to create new markets. A blue ocean demands a great demand”
“Companies must look beyond numbers, competition, and the short-term in order to focus on an overall long-term Strategy”