Written by W. Chan Kim & Renée Mauborgne
Total notes 155
Industry structure is not given; it can be shaped. … With industry structure seen as fixed, firms are driven to build their strategies based on it. (think five forces or its distant precursor SWOT analysis) Here strategy perforce becomes a zero-sum game where one company's gain is another company's loss, as firms are bound by existing market space. Blue ocean strategy, by contrast, shows how strategy can shape structure in an organisation’s favour to create new market space.
How many of today's industries were then unknown? … Now turn the clock back only forty years. … 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 overriding focus of strategic thinking has been on competition-based red ocean strategies. Part of the explanation for this is that corporate strategy is heavily influenced by its roots in military strategy.
…the overriding focus of strategic thinking has been on competition-based red ocean strategies. Part of the explanation for this is that corporate strategy is heavily influenced by its roots in military strategy. … 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 uncontested.
…history also shows that industries are constantly being created and expanded over time and that industry conditions and boundaries are not given; individual actors can shape them.
What consistently separated winners from losers in creating blue oceans was their approach to strategy. 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. The creators of blue oceans, surprisingly, didn't use the competition as their benchmark. Instead, they followed a different strategic logic that we call value innovation. 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. If they fail to anchor innovation with value in this way, technology innovators and market pioneers often lay the eggs that other companies hatch.
…those that seek to create blue oceans pursue differentiation and low cost simultaneously
Notes -
By violating the dogma of value-cost trade off.
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 about strategy that embraces the entire system of a company's activities. Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves. Absent such an integral approach, innovation will remain divided from the core of strategy.
(Competition-based red ocean strategy is based on) structuralist view, or environmental determinism. 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. We call this the reconstructionist view.
The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It serves two purposes. First, it captures the current state of play in the known market space. This 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. The horizontal axis captures the range of factors the industry competes on and invests in. …the vertical axis of the strategy canvas, which captures the offering level that buyers receive across all these key competing factors. A high score means that a company offers buyers more, and hence invests more, in that factor. In the case of price, a higher score indicates a higher price. The 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 reconstruct buyer value elements in crafting a new value curve, we have developed the four actions framework. …there are four key questions to challenge an industry's strategic logic and business model: 1.Which of the factors that the industry takes for granted should be eliminated? 2.Which factors should be reduced well below the industry's standard? 3.Which factors should be raised well above the industry's standard? 4.Which factors should be created that the industry has never offered? The first question forces you to consider eliminating factors that companies in your industry have long competed on. Often those factors are taken for granted even though they no longer have value or may even detract from value, 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. The second question forces you to determine whether products or services have been overdesigned in the race to match and beat the competition. Here, companies overserve customers, increasing their cost structure for no gain. The third question pushes you to uncover and eliminate the compromises your industry forces customers to make. The fourth question helps you to discover entirely new sources of value for the industry. 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. Collectively they allow you to systematically explore how you can reconstruct buyer value elements across alternative industries to offer buyers entirely new experiences while keeping your cost structure low.
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Reconstruct buyer value elements to craft a new value curve. To do so, four key questions must be answered. See also Management course part 3.1 on value innovation (Kinepolis and hotel formule1).
…a supplementary analytic to the four actions framework called the eliminate-reduce-raise-create grid. The grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. …the grid gives companies four immediate benefits: 1.It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off. 2.It immediately flags companies that are focused only on raising and creating and thereby lifting their cost structure and often overengineering products and services-a common plight in many companies. 3.It is easily understood by managers at any level, creating a high level of engagement in its application 4.Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor the industry compotes on, making them discover the range of implicit assumptions they make unconsciously in competing.
Three characteristics of a good strategy: Focus: (in the value curve) the company did not diffuse its efforts across all key factors of competition. Divergence: The shape of its value curve diverged from the other players'. Tagline: a clear strategic profile that can easily be communicated and understood by potential customers. When expressed through a value curve, then, an effective blue ocean strategy has three complementary qualities: focus, divergence, and a compelling tagline. These three characteristics serve as an initial litmus test of the commercial viability of blue ocean ideas.
(When) investing across the board, companies let their competitors' moves set their own agendas. Costly business models result.
When a company's strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness.
A good strategy has a clear-cut and compelling tagline.
Notes -
Own a word - The 22 immutable laws of marketing
The first question the value curves answer is whether a business deserves to be a winner. When a company's value curve, or its competitors', meets the three criteria that define a good blue ocean strategy-focus, divergence, and a compelling tagline that speaks to the market the company is on the right track. On the other hand, 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 metoo, 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
Are there strategic contradictions? These are areas where a company is offering a high level on one competing factor while ignoring others that support that factor. An example is investing heavily in making a company's website easy to use but failing to correct the site's slow speed of operation.
In drawing the strategy canvas, how does a company label the industry's competing factors? Are the competing factors stated in terms buyers can understand and value, or are they in operational jargon? 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.
The first principle of blue ocean strategy is to reconstruct market boundaries to break from the competition and create blue oceans.
We found clear patterns for creating blue oceans. Specifically, we found six basic approaches to remaking market boundaries. We call this the six paths framework. … These six assumptions, on which most companies hypnotically build their strategies, keep companies trapped competing in red oceans. Specifically, companies tend to do the following: • Define their industry similarly and focus on being the best within it • Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in • Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry) • Define the scope of the products and services offered by their industry similarly • Accept their industry's functional or emotional orientation • Focus on the same point in time and often on current competitive threats-in formulating strategy The more that companies share this conventional wisdom about them.
To break out of red oceans, companies must break out of the accepted boundaries that define how they compete. … They need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time. This gives companies keen insight into how to reconstruct market realities to open up blue oceans.
…a company competes not only with the other firms in its own industry but also with companies in those other industries that produce alternative products or services. Alternatives are broader than substitutes. Substitutes: products or services that have different forms but offer the same functionality or core utility Alternatives: products or services that have different functions and forms but the same purpose.
What are the alternative industries to your industry? Why do customers trade across them? By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, you can create a blue ocean of new market space
Looking across strategic groups. The term refers to a group of companies within an industry that pursue a similar strategy. In most industries, the fundamental strategic differences among industry players are captured by a small number of strategic groups.
Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. Each jump in price tends to bring a corresponding jump in some dimensions of performance. Most companies focus on improving their competitive position within a strategic group.
The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers' decisions to trade up or down from one group to another.
What are the strategic groups in your industry? Why do customers trade up for the higher group, and why do they trade down for the lower one?
(There is not a target buyer) there is a chain of "buyers" who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ. Purchaser: who physically pays for the product or service. User: who actually uses the product or service. Influencers: who can influence the decisions to buy the product or service.
Challenging an industry's conventional wisdom about which buyer group to target can lead to the discovery of a new blue ocean
By questioning conventional definitions of who can and should be the target buyer, companies can often see fundamentally new ways to unlock value.
What is the chain of buyers in your industry? Which buyer group does your industry typically focus on? If you shifted the buyer group of your industry, how could you unlock new value?
Few products and services are used in a vacuum. In most cases, other products and services affect their value. … Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used.
What is the context in which your product or service is used? What happens before, during, and after? Can you identify the pain points? How can you eliminate these pain points through a complementary product or service offering?
Some industries compete principally on price and function largely on calculations of utility: their appeal is rational. Other industries compete largely on feelings: their appeal is emotional. Yet the appeal of most products or services is rarely intrinsically one or the other. Rather it is usually a result of the way companies have competed in the past, which has unconsciously educated consumers on what to expect. Companies' behavior affects buyers' … No wonder market research rarely reveals new insights into what attracts customers.
When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space. We have observed two common patterns. Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand.
Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make it functional? If you compete on functionality, what elements can be added to make it emotional?
By looking across time from the value a market delivers today to the value it might deliver tomorrow --managers can actively shape their future and lay claim to a new blue ocean. We are not talking about predicting the future, something inherently impossible. Rather we’re talking about finding insights in trends that are observable today.
Notes -
See also trends description from The 22 immutable laws of marketing.
Three principles are critical to assessing trends across time. Decisive: they must be decisive to your business. Irreversible: they must be irreversible Clear trajectory: and they must have a clear trajectory. … Having identified a trend of this nature, you can then look across time and ask yourself what the market would look like if the trend were taken to its logical conclusion. Working back from that vision of a blue ocean strategy, you can identify what must be changed today to unlock a new blue ocean.
What trends have a high probability of impacting your industry, are irreversible, and are evolving in a clear trajectory? How will these trends impact your industry? Given this, how can you open up unprecedented customer utility?
The process of discovering and creating blue oceans is not about predicting or preempting industry trends. Nor is it a trial-and-error process of implementing wild new business ideas that happen to come across managers' minds or intuition. Rather, managers are engaged in a structured process of reordering market realities in a fundamentally new way. Through reconstructing existing market elements across industry and market boundaries, they will be able to free themselves from head-to-head competition in the red ocean.
The second principle of blue ocean strategy is to focus on the big picture, not the numbers. This principle is key to mitigating the planning risk of investing lots of effort and lots of time but delivering only tactical red ocean moves.
…we have found that drawing a strategy canvas not only visualizes a company's current strategic position in its marketplace but also helps it chart its future strategy. By building a company's strategic planning process around a strategy canvas, a company and its managers focus their main attention on the big picture rather than becoming immersed in numbers and jargon and getting caught up in operational details.
…drawing a strategy canvas does three things: First, it shows the strategic profile of an industry by depicting very clearly the factors (and the possible future factors) that affect competition among industry players. Second, it shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically. Finally, it shows the company's strategic profile or value curve depicting how it invests in the factors of competition and how it might invest in them in the future.
Most managers have a strong impression of how they and their competitors fare along one or two dimensions within their own scope of responsibility, but very few can see the overall dynamics of their industry. … But that focus makes consistent measurement difficult; what seems to be a very big difference to the catering manager may not be important to customers, who look at the complete offering.
The process (visualizing the strategy canvas), which builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people's creativity, has four major steps: 1.Visual awakening 2.Visual exploration 3.Visual strategy fair 4.Visual communication
A common mistake is to discuss changes in strategy before resolying differences of opinion about the current state of play. Another problem is that executives are often reluctant to accept the need for change; … Fortunately, we've found that asking executives to draw the value curve of their company's strategy brings home the need for change. It serves as a forceful wake-up call for companies to challenge their existing strategies.
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. This step may seem obvious, but we have found that managers often outsource this part of the strategy-making process. They rely on reports that other people (often at one or two removes from the world they report on) have put together. A company should never outsource its eyes. There is simply no substitute for seeing for yourself.
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. Finally, you need to look at how customers might find alternative ways of fulfilling the need that your product or service satisfies.
…draw six new value curves using the six path framework explained in chapter 3. Each new value curve had to depict a strategy that would make the company stand out in its market. By demanding six pictures from each team, we hoped to push managers to create innovative proposals and break the boundaries of their conventional thinking. For each visual strategy, the teams also had to write a compelling tagline that captured the essence of the strategy and spoke directly to buyers.
…teams presented their strategy canvases at what we call a visual strategy fair. Attendees included senior corporate executives but consisted mainly of representatives of (company)'s external constituencies the kinds of people the managers had met with during their field trips, including noncustomers, customers of competitors, and some of the most demanding (company’s) customers. … They were given no more than ten minutes to present each curve, on the theory that any idea that takes more than ten minutes to communicate is probably too complicated to be any good. … 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.
After the future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee.
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.
…pioneers are the businesses that offer unprecedented value. …settlers (are) businesses whose value curves conform to the basic shape of the industry's. These are me too businesses. …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. … A useful exercise for a corporate management team pursuing profitable growth is to plot the company's current and planned portfolios on a pioneer migrator-settler (PMS) map. … If both the current portfolio and the planned offerings consist mainly of settlers, the company has a low growth trajectory, … If current and planned offerings consist of a lot of migrators, reasonable growth can be expected.
Today's market share is a reflection of how well a business has performed historically.
…innovative ideas will be profitable only if they are linked to what buyers are willing to pay for.
How do you maximize the size of the blue ocean you are creating? This brings us to the third principle of blue ocean strategy: reach beyond existing demand. … To achieve this, companies should challenge two conventional strategy practices. One is the focus on existing customers. The other is the drive for finer segmentation to accommodate buyer differences. … 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 non-customers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.
Where is your locus of attention-on capturing a greater share of existing customers, or on converting noncustomers of the industry into new demand? Do you seek out key commonalities in what buyers value, or do you strive to embrace customer differences through finer customization and segmentation? To reach beyond existing demand, think non-customers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.
There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of noncustomers is closest to your market. They sit on the edge of the market.They are buyers who minimally purchase an industry's 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 your industry's offerings. These are buyers who have seen your industry's offerings as an option to fulfill their needs but have voted against them. The third tier of noncustomers is farthest from your market. They are noncustomers who have never thought of your market's offerings 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.
These soon-to-be noncustomers are those who minimally use the current market offerings to get by as they search for something better. Upon finding any better alternative, they will eagerly jump ship. In this sense, they sit on the edge of the market. A market becomes stagnant and develops a growth problem as the number of soon-to-be noncustomers increases. Yet locked within these first tier non customers is an ocean of untapped demand waiting to be released.
The lesson: non-customers tend to offer far more insight into how to unlock and grow a blue ocean than do relatively content existing customers.
What are the key reasons first-tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to desegment buyers and unleash an ocean of latent untapped demand.
[Second tier non-customers] are refusing noncustomers, people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. Their needs either dealt with by other means or ignored. Harboring within refusing noncustomers, however, is an ocean of untapped demand waiting to be released.
What are the key reasons second-tier noncustomers refuse to use the products or services of your industry? Look for the commonalities across their responses. Focus on these, and not on their differences. You will glean insight into how to unleash an ocean of latent untapped demand.
The third tier of noncustomers is the farthest away from an industry's existing customers. Typically, these unexplored noncustomers have not been targeted or thought of as potential customers by any player in the industry. That's because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets.
At the end of the day, actual delivery of performance is a function of not only creative conception but also good execution.
Because the scale of blue ocean opportunities that a specific tier of noncustomers can unlock varies across time and industries, you should focus on the tier that represents the biggest catchment that your organization has the capability to act on. But you should also explore whether there are overlapping commonalities across all three tiers of noncustomers. In that way, you can expand the scope of latent demand you can unleash. When that is the case, you should not focus on a specific tier but instead should look across tiers. The rule here is to go for the largest catchment that your organization has competence to seize.
The next challenge is to build a robust business model to ensure that you make a healthy profit on your blue ocean idea. This brings us to the fourth principle of blue ocean strategy: get the strategic sequence right. 1. Buyer utility: is it useful to people? 2. Price: is the process right to the targeted market? 3. Cost: are you able to produce and have a healthy margin? 4. Adoption: is there anything blocking your path?
The starting point is buyer utility: Does your offering unlock exceptional utility? Is there a compelling reason for the target 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.
Second step (in the strategic sequence): setting the right strategic price. Remember, a company does not want to rely solely on price to create demand.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.
Securing the profit side brings us to the third element: cost. Can you produce your offering at the target cost and still earn a healthy profit margin? Can you profit at the strategic price --the price easily accessible to the mass of target buyers? 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 won't be profitable, or you must innovate your business model to hit the target cost.
It is the combination of exceptional utility, strategic pricing, and target costing that allows companies to achieve value innovation.
The last step 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. Adoption hurdles include, for example, potential resistance to the idea by retailers or partners.
The need to assess the buyer utility of your offering may seem self-evident. Yet many companies fail to deliver exceptional value because they are obsessed by the novelty of their product or service, especially if new technology plays a part in it.
They acted on the assumption that bleeding-edge technology is equivalent to bleeding-edge utility for buyers-something that, our research found, is rarely the case. … Unless the technology makes buyers' lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins. Value innovation is not the same as technology innovation.
The buyer utility map helps managers look at this issue from the right 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 map allows managers to identify the full range of utility spaces that a product or service can potentially fill.
Cutting across the stages of the buyer's experience are what we call utility levers: the ways in which companies can unlock exceptional utility for buyers. ... To test for exceptional utility, companies should check whether their offering has removed the greatest blocks to utility across the entire buyer experience cycle for customers and noncustomers. The greatest blocks to utility often represent the greatest and most pressing opportunities to unlock exceptional value. … (The utility map is made of 6 stages and 6 levers. Totalling 36 spaces.) If your offering falls on the same space or spaces as those of other players, chances are it is not a blue ocean offering.
A buyer's 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: 1. Purchase 2. Delivery 3. Use 4. Supplements 5. Maintenance 6. Disposal
Where are the greatest blocks to utility across the buyer experience cycle for your customers and noncustomers? Does your offering effectively eliminate these blocks? If it does not, chances are your offering is innovation for innovation's sake or a revision of existing offerings. When a company's offering passes this test, the company is ready to move to the next step.
To secure a strong revenue stream for your offering, you must set the right strategic price. This step ensures that buyers not only will want to buy your offering but also will have a compelling ability to pay for it. Many companies take a reverse course, first testing the waters of a new product or service by targeting novelty-seeking, price-insensitive customers at the launch of a new business idea; only over time do they drop prices to attract mainstream buyers. It is increasingly important, however, to know from the start what price will quickly capture the mass of target buyers. There are two reasons for this change. First, companies are discovering that volume generates higher returns than it used to. As the nature of goods becomes more knowledge intensive, companies bear much more of their costs in product development than in manufacturing. … A second reason is that to a buyer, the value of a product or service may be closely tied to the total number of people using it. … As a result of this phenomenon, called network externalities, many products and services are increasingly an all-or-nothing proposition: either you sell millions at once, or you sell nothing at all.
In the meantime, the rise of knowledge-intensive products also creates the potential for free riding. … All this means that the strategic price you set for your offering must not only attract buyers in large numbers but also help you to retain them. Given the high potential for free riding, an offering's reputation must be earned on day one, because brand building increasingly relies heavily on word-of-mouth recommendations spreading rapidly through our networked society. Companies must therefore start with an offer that buyers can't refuse and must keep it that way to discourage any free-riding imitations. This is what makes strategic pricing key. Strategic pricing addresses this question: Is your offering priced to attract the mass of target buyers from the start so that they have a compelling ability to pay for it? When exceptional utility is combined with strategic pricing, imitation is discouraged.
We have developed a tool called the price corridor of the target mass to help managers find the right price for an irresistible offer, which, by the way, isn't necessarily the lower price. The tool involves two distinct but interrelated steps: 1. Price corridor of the target mass 2. Level within a price corridor
So the main challenge in determining a strategic price is to understand the price sensitivities of those people who will be comparing the new product or service with a host of very different-looking products and services offered outside the group of traditional competitors. A good way to look outside industry boundaries is to list products and services that fall into two categories: those that take different forms but perform the same function; and those that take different forms and functions but share the same overarching objective.
Different form, same function. Many companies that create blue oceans attract customers from other industries who use a product or service that performs the same function or bears the same core utility as the new one but takes a very different physical form.
Listing the groups of alternative products and services allows managers to see the full range of buyers they can poach from other industries as well as from non-industries, such as parents (for the school lunch catering industry) or the noble pencil in managing household finances (for the personal finance software industry). … This approach provides a straightforward way to identify where the mass of target buyers is and what prices these buyers are prepared to pay for the products and services they currently use. The price bandwidth that captures the largest groups of target buyers is the price corridor of the target mass.
The key here is not to pursue pricing against the competition within an industry but rather to pursue pricing against substitutes and alternatives across industries and non-industries.
The second part of the tool helps managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services. That assessment depends on two principal factors. First is the degree to which the product or service is protected legally through patents or copyrights. Second is the degree to which the company owns some exclusive asset or core capability, such as an expensive production plant or unique design competence that can block imitation. As for companies that have no such protection, lower-boundary strategic pricing is advised.
The price corridor of the target mass not only signals the strategic pricing zone central to pulling in an ocean of new demand but also signals how you might need to adjust your initial price estimates to achieve this. When your offering passes the test of strategic pricing, you're ready to move to the next step.
Companies would be wise to pursue mid- to lower-boundary strategic pricing from the start if any of the following apply: - Their blue ocean offering has high fixed costs and marginal variable costs. - The attractiveness of the blue ocean offering depends heavily on network externalities. - The cost structure behind the blue ocean offering benefits from steep economies of scale and scope. In these cases, volume brings with it significant cost advantages, something that makes pricing for volume even more key.
Target costing, the next step in the strategic sequence, addresses the profit side of the business model. To maximize the profit potential of a blue ocean idea, a company should start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost. Here, price-minus costing, and not cost plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match.
Part of the challenge of meeting the target cost is addressed in building a strategic profile that has not only divergence but also focus, which makes a company strip out costs.
Instead of drilling down and finding ways to creatively meet the target cost as Ford did, if companies give in to the tempting route of either bumping up the strategic price or cutting back on utility, they are not on the path to lucrative blue waters. To hit the cost target, companies have three principal levers: 1. Streamlining operations 2. Partnering 3. Change pricing model
The first involves streamlining operations and introducing cost innovations from manufacturing to distribution. Can the product's or service's raw materials be replaced by unconventional, less expensive ones such as switching from metal to plastic or shifting a call center from the UK to Bangalore? Can high-cost, low-value-added activities in your value chain be significantly eliminated, reduced, or outsourced? Can the physical location of your product or service be shifted from prime real estate locations to lower-cost locations, as The Home Depot, IKEA, and Walmart have done in retail or Southwest Airlines has done by shifting from major to secondary airports? Can you truncate the number of parts or steps used in production by shifting the way things are made, as Ford did by introducing the assembly line? Can you digitize activities to reduce costs?
Beyond streamlining operations and introducing cost innovations, a second lever companies can pull to meet their target cost is partnering. Partnering, however, provides a way for companies to secure needed capabilities fast and effectively while dropping their cost structure. It allows a company to leverage other companies' expertise and economies of scale. Partnering includes closing gaps in capabilities through making small acquisitions when doing so is faster and cheaper, providing access to needed expertise that has already been mastered.
…the third lever companies can use to make their desired profit margin without compromising their strategic price: changing the pricing model of the industry. By changing the pricing model used-and not the level of the strategic price-companies can often overcome this problem. Timeshare: buy the right to use a (product) for a certain amount of time rather than buy the (product) itself. Slice-share; mutual fund managers, for example, bring high-quality portfolio services --traditionally provided by private banks to the rich-to the small investor by selling a sliver of the portfolio rather than its whole. Freemium is yet another pricing strategy some companies are using by which a product or service (typically a digital offering such as software, media, games, or web services) is provided free of charge to pull in the target mass, but a premium is charged for proprietary features, functionality, or virtual goods. These are all examples of pricing innovation. Remember, however, that what is a pricing Innovation innovation for one industry is often a standard pricing model in another industry.
Of course, even when the target cost can be met, pricing innovation still can be pursued.
A business model built in the sequence of exceptional utility, strategic pricing, and target costing produces value innovation.
Even an unbeatable business model may not be enough to guarantee the commercial success of a blue ocean idea. Almost by definition, it threatens the status quo, and for that reason it may provoke fear and resistance among a company's three main stakeholders: its employees, its business partners, and the general public
Failure to adequately address the concerns of employees about the impact of a new business idea on their work and livelihoods can be expensive. … Before companies go public with an idea and set out to implement it, they should make a concerted effort to communicate to employees that they are aware of the threats posed by the execution of the idea. Companies should work with employees to find ways of defusing the threats so that everyone in the company wins, despite shifts in people's roles, responsibilities, and rewards.
Potentially even more damaging than employee disaffection is the resistance of partners who fear that their revenue streams or market positions are threatened by a new business idea.
Opposition to a new business idea can also spread to the general public, especially if the idea threatens established social or political norms. The effects can be dire. … In educating these three groups of stakeholders-your employees, your partners, and the general publicthe key challenge is to engage in an open discussion about why the adoption of the new idea is necessary.
Although companies should build their blue ocean strategy in the sequence of utility, price, cost, and adoption, these criteria form an integral whole to ensure commercial success. The blue ocean idea (BOI) index provides a simple but robust test of this system view.
Once a company has developed a blue ocean strategy with a profitable business model, it must execute it. The challenge of execution exists in any strategy. … (Managers) face four hurdles. One is cognitive: waking employees up to the need for a strategic shift. Red oceans may not be the paths to future profitable growth, but they feel comfortable to people and may have even served an organization well until now, so why rock the boat? The second hurdle is limited resources. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it. But resources were being cut, and not raised, in many of the organizations we studied. Third is motivation. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo? That will take years, and managers don't have that kind of time. The final hurdle is politics. As one manager put it, “In our organization you get shot down before you stand up.”
The key to tipping point leadership is concentration, not diffusion. Tipping point leadership builds on the rarely exploited corporate reality that in every organization, there are people, acts, and activities that exercise a disproportionate influence on performance.
The key questions answered by tipping point leaders are as follows: 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? By single-mindedly focusing on points of disproportionate influence, tipping point leaders can topple the four hurdles that limit execution of blue ocean strategy. They can do this fast and at low cost.
Tipping point leadership does not rely on numbers to break through the organization's cognitive hurdle. To tip the cognitive hurdle fast, tipping point leaders zoom in on the act of disproportionate influence: making people see and experience harsh reality firsthand.
Tipping point leadership builds on this insight to inspire a fast change in mind-set that is internally driven of people's own accord. Instead of relying on numbers to tip the cognitive hurdle, they make people experience the need for change in two ways: 1. To break the status quo, employees must come face-to-face with the worst operational problems. Don't let top brass, middle brass, or any brass hypothesize about reality. Numbers are disputable and uninspiring, but coming face-to-face with poor performance is shocking and inescapable, but actionable. This direct experience exercises a disproportionate influence on tipping people's cognitive hurdle fast. 2. To tip the cognitive hurdle, not only must you get your managers out of the office to see operational horror, but you also must get them to listen to their most disgruntled customers firsthand. Don't rely on market surveys. To what extent does your top team actively observe the market firsthand and meet with your most disgruntled customers to hear their concerns? Do you ever wonder why sales don't match your confidence in your product? Simply put, there is no substitute for meeting and listening to dissatisfied customers directly.
When you want to wake up your organization to the need for a strategic shift and a break from the status quo, do you make your case with numbers? Or do you get your managers, employees, and superiors (and yourself) face-to-face with your worst operational problems? Do you get your managers to meet the market and listen to disenchanted customers holler? Or do you outsource your eyes and send out market research questionnaires?
How do you get an organization to execute a strategic shift with fewer resources? Instead of focusing on getting more resources, tipping point leaders concentrate on multiplying the value of the resources they have. When it comes to scarce resources, there are three factors of disproportionate influence that executives can leverage to dramatically free resources, on the one hand, and multiply the value of resources, on the other. These are hot spots, cold spots, and horse trading. Hot spots are activities that have low resource input but high potential performance gains. In contrast, cold spots are activities that have high resource input but low performance impact. Horse trading involves trading your unit's excess resources in one area for another unit's excess resources to fill remaining resource gaps. By learning to use their current resources right, companies often find they can tip the resource hurdle outright.
What actions consume your greatest resources but have scant performance impact? Conversely, what activities have the greatest performance impact but are resource starved? When the questions are framed in this way, organizations rapidly gain insight into freeing up low-return resources and redirecting them to highimpact areas. In this way, both lower costs and higher value are simultaneously pursued and achieved.
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Note: Identify and redistribute resources from cold spots to hot spots. Furthermore, identify what excess resources you have and exchange them to get resources that are scarce in your context.
To reach your organization's tipping point and execute blue ocean strategy, you must alert employees to the need for a strategic shift and identify how it can be achieved with limited resources. For a new strategy to become a movement, people must not only recognize what needs to be done, but they must also act on that insight in a sustained and meaningful way. How can you motivate the mass of employees fast and at low cost? … Instead of diffusing change efforts widely, tipping point leaders follow a reverse course and seek massive concentration. They focus on three factors of disproportionate influence in motivating employees, what we call kingpins, fishbowl management, and atomization.
To trigger an epidemic movement of positive energy, however, you should not spread your efforts thin. Rather, you should concentrate your efforts on kingpins, the key influencers in the organization.
At the heart of motivating the kingpins in a sustained and meaningful way is shining a spotlight on their actions in a repeated and highly visible way. This is what we refer to as fishbowl management, where kingpins' actions and inaction are made as transparent to others as are fish in a bowl of water. By placing kingpins in a fishbowl in this way, you greatly raise the stakes of inaction. Light is shined on who is lagging behind, and a fair stage is set for rapid change agents to shine. … For this to work, however, organizations must simultaneously make fair process the modus operandi. By fair process we mean engaging all the affected people in the process, explaining to them the basis of decisions and the reasons people will be promoted or sidestepped in the future, and setting clear expectations of what that means to employees' performance.
Atomization relates to the framing of the strategic challenge-one of the most subtle and sensitive tasks of the tipping point leader. Unless people believe that the strategic challenge is attainable, the change is not likely to succeed.
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Breakdown ambitious plans into smaller, more attainable goals to increase buy-in.
Do you indiscriminately try to motivate the masses? Or do you focus on key influencers, your kingpins? Do you put the spotlight on and manage kingpins in a fishbowl based on fair process? Or do you just demand high performance and cross your fingers until the next quarter numbers come out? Do you issue grand strategic visions? Or do you atomize the issue to make it actionable to all levels?
The more likely change becomes, the more fiercely and vocally these negative influencers --both internal and external-- will fight to protect their positions, and their resistance can seriously damage and even derail the strategy execution process. To overcome these political forces, tipping point leaders focus on three disproportionate influence factors: leveraging angels, silencing devils, and getting a consigliere on their top management team. Angels are those who have the most to gain from the strategic shift. Devils are those who have the most to lose from it. And a consigliere is a politically adept but highly respected insider who knows in advance all the land mines, including who will fight you and who will support you.
Don't fight alone. Get the higher and wider voice to fight with you. Identify your detractors and supporters forget the middle and strive to create a win-win outcome for both. But move quickly. Isolate your detractors by building a broader coalition with your angels before a battle begins. In this way, you will discourage the war before it has a chance to start or gain steam.
Do you have a consigliere a highly respected insider-in your top management team, or only a CFO and other functional heads? Do you know who will fight you and who will align with the new strategy? Have you built coalitions with natural allies to encircle dissidents? Do you have your consigliere remove the biggest land mines so that you don't have to focus on changing those who cannot and will not change?
Don't follow conventional wisdom. Not every challenge requires a proportionate action. Focus on acts of disproportionate influence. This is a critical leadership component for making blue ocean strategy happen.
You must create a culture of trust and commitment that motivates people to execute the agreed strategy-not to the letter, but to the spirit.
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Warfighting: commander’s intent & decentralised command.
The more removed people are from the top and the less they have been involved in the creation of the strategy, the more this trepidation builds. On the front line, at the very level at which a strategy must be executed day in and day out, people can resent having a strategy thrust upon them with little regard for what they think and feel. Just when you think you have done everything right, things can suddenly go very wrong on your front line.
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Warfighting: subordinates must know the strategy at least two levels up.
Sixth principle of blue ocean strategy: to build people's trust and commitment deep in the ranks and inspire their voluntary cooperation, companies need to build execution into strategy from the start.
(Two researchers combined) psychology of justice with the study of process, creating the term procedural justice. … Their research established that people care as much about the justice of the process through which an outcome is produced as they do about the outcome itself. … Fair process is our managerial expression of procedural justice theory.
There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation. … We call them the three E principles of fair process. Engagement means involving individuals in the strategic decisions that affect them by asking for their input and allowing them to refute the merits of one another's ideas and assumptions. Engagement communicates management's respect for individuals and their ideas. Encouraging refutation sharpens everyone's thinking and builds better collective wisdom. … Explanation means that everyone involved and affected should understand why final strategic decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their opinions and have made decisions impartially in the overall interests of the company. An explanation allows employees to trust managers' intentions even if their own ideas have been rejected. It also serves as a pow erful feedback loop that enhances learning. Expectation clarity requires that after a strategy is set, managers state clearly the new rules of the game. Although the expectations may be demanding, employees should know up front what standards they will be judged by and the penalties for failure. What are the goals of the new strategy? What are the new targets and milestones? Who is responsible for what? To achieve fair process, it matters less what the new goals, expectations, and responsibilities are and more that they are clearly understood. … Taken together, these three criteria collectively lead to judgments of fair process. This is important, because any subset of the three does not create judgments of fair process.
Why is fair process important in shaping people's attitudes and behavior? …It all comes down to intellectual and emotional recognition. Emotionally, individuals seek recognition of their value, not as "labor," "personnel," or "human resources" but as human beings who are treated with full respect and dignity and appreciated for their individual worth regardless of hierarchical level. Intellectually, individuals seek recognition that their ideas are sought after and given thoughtful reflection, and that others think enough of their intelligence to explain their thinking to them.
The question companies wrestle with is how to create trust, commitment, and voluntary cooperation deep in the organization. You don't do it by separating strategy formulation from execution. Although this disconnect may be a hallmark of most companies' practice
…the practice of fair process with external stakeholders could be said to play an even greater role in strategy execution as external stakeholders are outside of hierarchical control and often have diverging interests and understandings.
At the highest level, there are three propositions essential to the success of strategy: the value proposition; the profit proposition; and the people proposition. For any strategy to be successful and sustainable, an organization must develop an offering that attracts buyers; it must create a business model that enables the company to make money out of its offering; and it must motivate the people working for or with the company to execute the strategy.
Strategic alignment is the responsibility of an organization's top executives versus those in charge of marketing, manufacturing, human resources, or other functions. Executives with a strong functional bias typically cannot successfully fulfill this important role because they tend to focus on a part, not the whole, of the three strategy propositions, hence missing the alignment.
Value proposition The utility buyers receive from an offering minus the price they pay for it. Profit proposition The revenues an organization generates from an offering minus the cost to produce and deliver it. People proposition The positive motivations and incentives put in place for the people needed to support and implement the strategy.
To produce a high-performing and sustainable blue ocean strategy, you need to ask the following questions: Are your three strategy propositions aligned in pursuit of differentiation and low cost? Have you identified all the key stakeholders, including external ones on which the effective execution of your blue ocean strategy will depend? Have you developed compelling people propositions for each of these to ensure they are motivated and behind the execution of your new idea?
Do you have a holistic understanding of strategy? Has your new strategy fully developed and aligned the three strategy propositions for sustained success? The continuing success of your company's strategy depends on it.
…the creation of blue oceans is not a oneoff occurrence but is institutionalized as a repeatable process in an organization.
A blue ocean strategy brings with it considerable barriers to imitation that effectively prolong sustainability. This sustainability can be traced to the following imitation barriers: Alignment barrier • Alignment of the value, profit, and people propositions around both differentiation and low cos builds sustainability and hence a formidable barrier to imitation. Cognitive and organizational barrier • Value innovation does not make sense to a company's conventional logic. • Imitation often requires significant organizational changes. Brand barrier • Blue ocean strategy may conflict with other companies' brand image. • Companies that value-innovate earn brand buzz and a loyal customer following that tends to shun imitators. Economic and legal barrier • Natural monopoly: The market often cannot support a second player. • High volume leads to rapid cost advantage for the value innovator, discouraging followers from entering the market. • Network externalities discourage imitation. • Patents or legal permits block imitation.
To avoid the trap of competing at the individual business level, monitoring value curves on the strategy canvas is essential. Monitoring value curves signals when to value-innovate and when not to. It alerts an organization to reach out for another blue ocean when its value curve begins to converge with those of the competition.
Renewal issue for companies with multiple businesses … A complementary tool is needed for companies that have a portfolio of diverse business offerings. … A dynamic extension of the pioneer-migrator-settler (PMS) map introduced in chapter 4 serves this purpose well. It can be used to visually depict the movement of a corporate portfolio in one picture by capturing a corporation's portfolio of business offerings over time. By plotting the corporate portfolio as pioneers, migrators, and settlers on the dynamic PMS map, executives can see at a glance where the gravity of its current portfolio of businesses is, how this has shifted over time, and when there is a need to create a new blue ocean to renew the portfolio. … To maximize growth prospects then, a company's portfolio should have a healthy balance between pioneers for future growth and migrators and settlers for cash flow at a given point in time.
Companies with a diverse portfolio of businesses, will always need to swim in both red and blue oceans at a given point in time and succeed in both oceans at the corporate level. This means that understanding and applying the competition-based principles of red ocean strategy are also needed.
Red Ocean Trap One: The belief that blue ocean strategy is a customer-oriented strategy that's about being customer led. A blue ocean strategist gains insights about reconstructing market boundaries not by looking at existing customers, but by exploring noncustomers.
Red Ocean Trap Two: The belief that to create blue oceans, you must venture beyond your core business. Blue oceans are right next to you in every industry. Understanding this is key. When companies mistakenly believe that they must venture beyond their core business to create blue oceans, they tend to either shy away from venturing beyond the red ocean or, to the contrary, look far afield to other industries that have little overlap with their knowledge.
Red Ocean Trap Three: The misconception that blue ocean strategy is about new technologies. When companies mistakenly assume blue ocean strategy hinges on new technologies, their organizations tend to push for products or services that are either too out there, too complicated, or lacking the complementary ecosystem needed to open up a new market space.
Red Ocean Trap Four: The belief that to create a blue ocean, you must be first to market. … Organizations that mistakenly assume blue ocean strategy is about being first to market all too often get their priorities wrong. They inadvertently put speed before value. While speed is important, speed alone will not unlock a blue ocean.
Red Ocean Trap Five: The misconception that blue ocean strategy and differentiation strategy are synonymous. … Blue ocean strategy, by contrast, is about breaking the value-cost trade-off to open up new market space. It is about pursuing differentiation and low cost simultaneously.
Red Ocean Trap Six: The misconception that blue ocean strategy is a low-cost strategy that focuses on low pricing. … blue ocean strategy pursues differentiation and low cost simultaneously by reconstructing market boundaries. Instead of focusing on low cost per se, it seeks to create a leap in buyer value at a lower cost. Further, a blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing. … Using strategic pricing, a blue ocean does not have to be created at the low end of the market. Instead it can be created at the high end, at the low end, or in the middle range of a market.
Red Ocean Trap Seven: The belief that blue ocean strategy is the same as innovation. Value innovation, not innovation per se, is the singular focus of blue ocean strategy. Simply creating something original and useful through innovation is not enough to create and capture a blue ocean, even if the innovation wins the company accolades and its researchers a Nobel Prize. … When organizations fail to register the difference between value innovation and innovation per se, they all too often end with an innovation that breaks new ground but does not unlock the mass of target buyers, keeping them by and large stuck in the red ocean.
Red Ocean Trap Eight: The belief that blue ocean strategy is a theory of marketing and a niche strategy. To equate blue ocean strategy with a theory of marketing myopically masks the holistic approach needed to create a sustainable highperformance strategy, including overcoming organizational hurdles, winning people's trust and commitment, and creating the proper incentives via a compelling people proposition. … Blue ocean strategy should also not be confused with a niche strategy. When practitioners confuse the two, they all too often are driven to look for customer differences for niche markets in the existing industry space rather than the commonalities that cut across buyer groups in search of blue oceans of new demand.
Red Ocean Trap Nine: The belief that blue ocean strategy sees competition as bad when in fact it can be good for companies. Blue ocean strategy does not see competition as bad. However, unlike traditional economic thought, it does not see competition as always good. … while understanding how to compete in existing market space is important, blue ocean strategy addresses the critical challenge of how to redefine industry boundaries and create new market space when structural conditions work against you.
Red Ocean Trap Ten: The belief that blue ocean strategy is synonymous with creative destruction or disruption. ... Unlike disruption, however, blue ocean strategy does not necessitate displacement or destruction. Blue ocean strategy is a broader concept that goes beyond creative destruction to embrace nondestructive creation, which is its overriding emphasis. Instead, blue ocean strategy is about redefining the problem itself, which tends to create a new demand or an offering that often complements rather than displaces existing products and services.
The structuralist view of strategy has its roots in industrial organization (IO) economics. The model of industrial organization analysis proposes a structure-conduct-performance paradigm, which suggests a causal flow from market structure to conduct and performance. Market structure, given by supply and demand conditions, shapes sellers' and buyers' conduct, which, in turn, determines end performance. Systemwide changes are induced by factors that are external to the market structure, such as fundamental changes in basic economic conditions and technological breakthroughs. The structuralist view (or environmental determinism) often leads to competition-based strategic thinking. Taking market structure as given, it drives companies to try to carve out a defensible position against the competition in the existing market space. … Here, grabbing a bigger share of the market is seen as a zerosum game in which one company's gain is achieved at another company's loss
The reconstructionist view of strategy, on the other hand, is built on the theory of endogenous growth. … the forces that change economic structure and industry landscapes can come from within the system. (This) innovation is still (considered) black-boxed, because it is the product of the ingenuity of entrepreneurs and cannot be reproduced systematically. To reconstructionist eyes, however, the strategic challenge looks very different. Recognizing that structure and market boundaries exist only in managers' minds, practitioners who hold this view do not let existing market structures limit their thinking. To re structor them, extra demand is out there, largely untapped. The crux of the problem is how to create it.
The new growth theory (shows) that innovation can be replicable endogenously via an understanding of the patterns or recipes behind innovation. … However, despite this important advance, we still lack an understanding of what those recipes or patterns are.
Value innovators achieve a leap in value by creating new wealth rather than necessarily at the expense of competitors in the traditional sense. In this way, value innovation goes beyond creative destruction that displaces and, hence, destructs the players in existing markets.
In a world of nonrival and nonexcludable goods, such as knowledge and ideas that are imbued with the potential of economies of scale, learning, and increasing returns, the importance of volume, price, and cost grows in an unprecedented way. Under these conditions, companies would do well to capture the mass of target buyers from the outset and expand the size of the market by offering radically superior value at price points accessible to them.
The focus of blue ocean strategy is not on restricting output at a high price but rather on creating new aggregate demand through a leap in buyer value at an accessible price. This creates a strong incentive not only to reduce costs to the lowest possible level at the start but also to keep it that way over time to discourage potential free-riding imitators. In this way, buyers win and the society benefits from improved efficiency. This creates a win-win scenario. A breakthrough in value is achieved for buyers, for the company, and for society at large.