Blue Ocean Strategy or Old Wine in New Bottle? A Critique On the Book Blue Ocean Strategy by Prof. Chan Kim & Prof. Renee Mauborgne

An abridged version of this appeared as a book review in South Asian Journal of Management, April-June 2008 Issue.Originally writtena as a critique, this is an exhaustive analysis of the Blue Ocean Strategy.
The concept of creating uncontested market space was already available and hence authors Prof.W.Chan Kim and Prof.Renee Mauborgne haven’t created any blue ocean of ideas through their book Blue Ocean Strategy
The book Blue Ocean Strategy(BOS) by W. Chan Kim and Renee Mauborgne, both professors at INSEAD, has been making waves in the strategy arena ever since it’s publication in the year 2005.It has also been adorning the top 10 best-sellers list in the field of management books and also appearing within the top twenty five in the 800ceoread.com most of the time since its publication. Many business schools have even included Blue Ocean Strategy as one of the modules in their curriculum for the Strategic Management course. A number of schools have also started offering management development programmes (MDPs) or conducting industry conferences on Blue Ocean Strategy.
What is this Blue Ocean Strategy? As part of the book title explains, the strategy is aimed “to create uncontested market space and make the competition irrelevant”. The book details the process of formulating BOS. Companies have long engaged in head-to-head competition in search of sustained, profitable growth. They have always fought for competitive advantage, battled over market share, and struggled for differentiation. All strategic thrusts were aimed at the above. Professors Kim and Mauborgne say that in today’s overcrowded industries the strategy of competing head-on results in nothing but a bloody “red ocean” of rivals fighting over a shrinking profit pool and is increasingly unlikely to create profitable growth in future. They argue that tomorrow’s winners will succeed not by battling competitors, but by creating “blue oceans” of uncontested market space ripe for growth.
Such strategic moves-termed “value innovation”- create powerful leaps in value for both the firm and its buyers, rendering rivals obsolete and unleashing new demand. It is a systematic approach to make the competition irrelevant. In the earlier context, the overriding focus of strategic thinking has been on competition-based red ocean strategies which had its roots in military strategy. Described in military way, strategy is about confronting an opponent and fighting over a given piece of land that is both limited and constant. But the authors argue that unlike war, industrial history points to a market universe that has never been constant or blue oceans have continuously been created over time.
A focus on red ocean is akin to accepting the constraining factors of war-limited terrain and the need to beat the enemy to succeed- and to deny the distinctive strength of business-the capacity to create new market space that is uncontested.
The strategic approach consistently separated winners from losers in the creation of BOS. While companies caught in the red ocean followed a conventional approach of beating the competition by building a defensible position within the existing industry order, creators of blue oceans didn’t benchmark on competition but followed a different strategic logic , value innovation .The term was coined because BOS focus on making competition irrelevant by crating a leap in value for buyers and the company, opening up new and uncontested market space. The value innovation by BOS defies the value- cost trade-off dogma of the competition-based strategy. In the earlier context, the choice was between creating greater value at higher cost or reasonable value at low cost – or looking at strategy as making a choice between differentiation & low cost whereas BOS pursue differentiation and low cost simultaneously. According to the authors, the value innovation is the cornerstone of BOS.The authors propose the Four Actions Framework for creating a new value proposition, namely
1.Eliminate: There are certain factors that companies in one’s industry have long competed on. Those factors are often taken for granted even though they no longer have value or may even detract from value. There can be even fundamental change in what buyers value but companies hell-bent on benchmarking on one another do not act or even sense the change.
2.Reduce :One has to determine whether products or services have been overdesigned in the race to match and best the competition. Companies overserve at a higher cost which the customer does not value.
3.Raise :One uncovers or eliminates the compromises one’s industry forces customers to make. Sets new standards well above competitors.
4.Create :One discovers entirely new sources of value for buyers and create new demand and shift the strategic pricing of the industry.
According to BOS, there are three characteristics of a good strategy, namely,
1.Focus-the firm doesn’t diffuse its efforts across all key factors of competition
2.Divergence-don’t benchmark competitors but instead look across alternatives
3.Compelling tagline-which makes the strategic profile clear
The formulation part includes steps like reconstructing the market boundaries(looking across alternative industries, looking across strategic groups within industries, looking across the chain of buyers, looking across complementary product and service offerings, looking across functional or emotional appeal to buyers, looking across time), focusing on the big picture of the strategic canvas rather than becoming too immersed in numbers and jargons and getting too involved in the operational details, reaching beyond the existing demand and sequencing it rightly. The implementation part does not differ from many earlier explorations on the subject.
The authors explain how some companies created uncontested market spaces and made the competition irrelevant. The notable examples include the introduction of small, fuel efficient cars by Japanese car makers and the unveiling of the Minivan by the beleaguered Chrysler in the auto industry, the introduction of PC servers by Compaq and the direct sales of computers to customers by Dell in the computer industry, the introduction of multiplexes and the megaplexes in the movie theatre industry etc.
Old Wine In New Bottle
So far so good. But what is so different in this new strategic approach? A scan of the literature on similar subjects tells you that there has been at least two books which detailed the ideas of a different approach to achieve growth by not necessarily competing directly with the competition. Those who have read Every Business Is A Growth Business by Ram Charan & Noel M. Tichy (Times Business, A Division of Random House, 1998)and How To Grow When Markets Don’t by Adrian Slywotzky and Richard Wise with Karl Weber (Warner Business Books,2003) will agree that more or less the same concepts were discussed in these books. While Charan & Tichy calls the new growth approach “Strategy from Outside-in”, Slywotsky et al terms it “Demand Innovation”
Strategy From Outside In
According to Charan & Tichy, conventional thinking about growth- and a lot of what is billed as unconventional thinking-tends to be muddle of tactics and intellectually seductive but usually vague concepts masquerading as strategies. The problem is that most corporate leaders seeking growth look at their business from the inside out. That’s why they are trapped in the fight for share of a traditionally defined market. Those who build growth companies, whether they are entrepreneurs or executives of multibillion-dollar corporations, don’t worry about share. They redefine the market, they grow it- and they want all of the growth.
Once they know that they’ve got the basics right, ie they have/develop business acumen, they follow four simple rules that are the framework for any growth plan or strategy:
1.Look at the business from outside in.
2.Enlarge the pond one fishes in-look beyond one’s industry’s boundaries and existing markets to customer’s total needs.
3.Find market segments that are growing- or create them. Build new core competencies to capitalize on the new opportunities.
1.Looking at business from outside in. Many very good businesspeople design new growth games that look great on paper but fail because the designers haven’t looked in from the outside. For all that’s been preached and written about “ knowing the customer “, these executives still are not anticipating their customers’ changing needs- needs the customers themselves may not perceive. They are thinking about their customers from the inside out. Too often the question is still:” How can I get my customers to buy more of what I sell now?”. It’s the wrong question. Authors quote Drucker, “We have concentrated these past years on improving traditional information, which is almost exclusively information about what goes on inside an organization….Increasingly, a winning strategy will require information about events and conditions outside the institution: non-customers, technologies other than those currently used by the company and its present competitors, markets not currently served, and so on”.
Growth starts with looking at the company from the perspective of the present and future customers. What’s happening in the market place? How are needs changing? What’s causing the change? Where are the resulting opportunities? Then work backward from there. What is required? What do we have? What’s the gap and how do we fill it?
The sources of growth
Charan & Tichy dentified nine basic sources of growth- all of them potential opportunities for creating new growth trajectories.
1.Normal growth, where the market for what one makes is strong and expanding.
2.Gaining market share through low cost- high productivity growth, rapid cycle times, high asset turnover.
3.Proprietary or patented technology.
4.Highly- developed distribution channels that one has built over time.
5.Opening new markets for one’s existing products- for example, globalization.
6.Gaining power in the marketplace via acquisitions, alliances, vertical integration.
7.Expanding one’s pond.
8.Resegmenting one’s markets.
9.Moving into adjacent segments.
Charan & Tichy confirms that the first six are familiar &that they have been used with varying degrees of success-the variation depends largely on how successful the leaders using them have been in looking at their business from the outside in. The last three are not part of the standard strategy domain. Author say that they are ways of thinking, more than anything else. They represent the distillation of outside –in thinking, and they are the ones the authors focus on.
2.Enlarge the pond you fish in
Authors observe that looking from outside in, successful growth companies’ leaders think expansively. They ask,” Are there any related market places that we can serve?”. They are regularly seeking to enlarge or broaden the pond they fish in. Broadening the pond forces outside in thinking. They feel that the central idea behind it is usually stunningly simple-once it is articulated. Charan & Tichy explains how Roberto Goizueta used it in transforming Coca-Cola in the early eighties.
Coca-Cola looked bad when Goizueta took over. At the time, the company dominated the US soft drink market, with roughly a 35% share, and everyone knew the market was mature. The game involved fighting for tenths of a percent of market share- at exorbitant cost to the bottom line- or defending each tenth of a percent, since Pepsico was giving tough competition to Coca Cola. Security analysts and business writers had written-off Coca –Cola and the authors say “they were all but composing its obituary”.
But,Goizueta didn’t buy the argument. But breaking “ the mindset of amature business-the deeply ingrained set of beliefs that circumscribes everyone’s thinking and hopes, dulling their minds and imaginations” was an onerous task. His company was “full of talented people butting their heads against a stone wall-the inexplorable logic of squeezing out drops of market share in a zero-sum game”.
Goizueta had an insight-a simple but stunningly powerful one that he shared with his senior executives in the 1980s.He asked almost casually as to what was the average per-capita daily consumption of fluids by the world’s 4.4 billion people? The answer was :64 ounces. And what, he asked, is the daily per capita consumption of Coca-Cola? Answer: Less than 2 ounces.
Finally, he asked: What is Coca-Cola’s market share of the stomach? Not Coca-Cola’s share of the US cola market or the world soft-drink market, but of all fluids everyone in the world drinks on a given day, Coca-Cola’s share was scarcely measurable.
Authors go on to say that Coca-Cola people had invested a lot in the idea of PepsiCo as their enemy. But Goizueta led them to see that the enemy was coffee, milk , tea. The enemy was water. With a few simple questions, Goizueta redefined Coca-Cola’s market to be vaster than anybody had imagined. And he changed the psychology of the people. They saw that their company was not a large fish contained in a small pond, but a small fish in a huge pond. Rather than facing the depressing chore of struggling to not lose fractions of market share, they could set their sights on winning a larger share of a huge opportunity.
“Obvious? Yes- but not until Goizueta pointed it out. It was the beginning of Coca-Cola’s transformation from a threatened leader in a mature business to the greatest market value creator ever”.
According to Charan & Tichy,broadening the pond is the antithesis of going for market share. The goal, in fact, is to put one’s current market share in its proper perspective by restating it as one’s share of your potential market. If you now have , say, 40% of a $10 billion market, you need to look for the much larger pond of which your share is perhaps 4%.That’s literally what Jack Welch told his business unit leaders at GE: Redefine your market to one in which your current share is no more than 10%.The buzz phrase he used was “10X”- meaning, expand one’s pond tenfold- and it’s on the mind of every business unit head. It punctures any arrogance that may have come with success; it unlocks creativity and releases energy.
For Charan & Tichy,what’s important is to think expansively. Learn everything one can about the customers’ needs, including those that the customers haven’t yet identified. Develop insights into those needs. From those insights, one can extract what they call mega- ideas
-market-stretching concepts that burst the bonds of supposedly mature industries.
3.Find market segments that are growing-or create them
According to Charan & Tichy,sustainable, profitable growth starts with breaking markets down into segments. If one looks at the broad aggregate of demand, one may see a “mature” business. But any market is a sum of many segments, and each segment fulfills a need. Learning to identify those segments is the first step in getting out of the “served market” trap-the blinder that keeps one focused on one’s current business and ignorant of opportunities within and around it. Eliminate “served market” from one’s business vocabulary. When one breaks one’s markets down to segments, one has got a powerful methodology for generating growth ideas. What needs are changing? Which ones are growing or declining? How does one tap into the new or growing needs? Segmentation is a tool one can use as modestly or ambitiously as one wants. One can use it make incremental gains or to map out a whole new range of possibilities. Defining a new segment means defining a consumer need that nobody else has thought of or addressed before.
Adjacent Segments
The most accessible and powerful kind of segmentation, according to Charan & Tichy, targets an adjacent segment-the segment next to the present one- where one can sell an additional product or service. It’s one way of leveraging one’s existing skills and resources into new business. Examples: Basketball shoes from Nike, Minivan from Chrysler etc. Or one can expand one’s markets by moving into segments already occupied by others, bringing one’s particular strengths to bear more effectively than competitors. Indeed, service is a hotbed of adjacency these days, authors observe. Manufacturers have a trove of untapped core competencies to offer in meeting customers’ needs for maintenance, support, upgrading, system management, and all other functions associated with ownership of a product over the long haul.
Such growth is both profitable and sustainable. Capital investments tend to be lower, profit margins are higher, and earnings are more predictable.
Creating a framework
Looking from the outside in, how does one translate what one sees into a plan? One can start by identifying combinations of existing and new customers one can reach, and the existing and/or new needs one can meet for those customers. Charan & Tichy sugest a 2*2 matrix between Customers and Needs as an outside-in strategic tool. The moment one looks at it, one’s whole framework for planning changes. One focuses on needs, not on products.
With the 2*2, one can choose and pick the universe of potentially profitable revenue streams from:
A. Existing customers with existing needs.
B. New customers with existing needs.
C. New customers with new needs.
D. Existing customers wit new needs.
A need is an end need. Somebody may already be supplying it, but it usually can be satisfied by more than one product. Could that product be the company’s? Or can one create a new need?
Defining Needs
Authors go on to say that needs are always changing, new ones keep arising. But what is a need? What do people in your marketplace want? Once the need has been pinned down, satisfying becomes strikingly simple. But until then it is usually not obvious, even to the customer.
Invention is the mother of necessity. Before they saw one, how many people thought they needed a minivan? Who yearned for a mutual funds portfolio? Computer purchases on the internet? Outside-in thinking brings such new products and services to markets; outside-in thinking is about looking for unmet needs.
No matter what business one is in, one has to separate one’s perspective on the marketplace from one’s attachment to what one already does. Leaders who can’t make this tough call are found moaning about being stuck in mature industries. Charan & Tichy cite the example of Arthur Wood, the Sears Roebuck chairman , who saw no growth left in retailing. Wood was right-about his company. He wasn’t looking for needs, he was pushing Sears Roebuck’s existing value proposition at customers who were looking for a better one. There was plenty of growth for people like Sam Walton.
But no one has a monopoly of spotting needs, and no company is immune to losing touch with the total needs of its customers. Using the 2*2, look at one’s potential pond as the sum of many segments, one or more of which the company now occupies. Each segment is a need, one that the company either meets now(existing) or the one the company could meet(new).Some of the needs may be ones that other companies now meet, but which the company could meet better; some may be new for the customers themselves. Authors advise that in working with a 2*2, one need not spend a lot of time trying to develop a highly precise taxonomy; define the moves according to the predominant areas they take the company into. The question to keep before one always is, What other customer needs can one serve?
From the Wellhead to the Consumer-The GE Power Systems Story
Authors clarify that turning a business’s viewpoint from inside out to outside in is rarely an instant process-but neither is it necessarily a long grind. They cite the example of GE Power Systems in support of this argument. “We didn’t hit it right the first year,” acknowledges Bob Nardelli, the then CEO of GE Power Systems. Adjacent segments, for example weren’t even on the company’s radar screens. But within two years, GE Power Systems had nailed down some $1.4 billion of revenue commitments for long-term service contracts and operation and maintenance in that $48 billion pond.
And gradually, the company began to broaden its pond to something much bigger. “Last year we said, Let’s take a bolder view. Let’s define our playing field as $700 billion-the energy industry”, said Nardelli. Before, the pond had been pretty well limited to power plant. The new pond would include everything “from the wellhead to the consumer” –a phrase that became the guiding motto of the company’s ambitions.
5.Build new core competencies to capitalize on the new opportunities
Once the enlarged pond has been identified, the company has to develop necessary competencies to execute the same. Changes may be required in the thinking w r t product development, operating mechanisms, organizational culture and even in the organizational architecture. Without the proper way for executing, simply enlargement of the pond won’t help, the necessary processes of which the authors narrate.
Growth Through Demand Innovation
Slywotzky et al in their book, How To Grow When Markets Don’t, say that in the years to come, traditional product-centered strategies alone will not be able to create the kind of growth companies desire. In the past, companies searching for growth opportunities have relied on classic product-focused growth strategies: Create innovative products, expand the market for them globally, and make acquisitions to gain market share and create efficiencies. These traditional growth moves are as important as ever(and for a few companies, even more important).But for most companies, these moves will merely replace revenues and profits lost to commoditization and increased competition. They won’t represent a platform for driving significant, sustained new growth. According to the authors, this is true for a variety of reasons: the challenging dynamics facing product-innovation-oriented growth moves like brand extensions, core product enhancements, and new-product introductions. But brand extensions, product enhancements or product extensions are providing increasingly smaller returns in terms of growth, especially in percentage terms. They say that the advantages gained in this tit-for-tat combat are invariably slender and fleeting. Even new-product innovation is a largely depleted avenue for consistent profit growth. Of course, there will always be new technologies and new products, and some of these will provide genuine growth opportunities. But the intensity of today’s product competition means that most product-driven growth is likely to be increasingly low-margin and short-lived. This is why, according to the authors, consumer electronic companies struggle to post profits despite a never-ending cascade of new gadgets Companies looking for significant, sustained growth in the future will need to find new platforms for growth. Otherwise, authors opine that their stock prices will be going nowhere, while their talent goes elsewhere.
Demand Innovation
According to Slywotzky et al, it has recently been begun to observe a new form of business design innovation- a new response to the challenge and growth that is being pioneered by a handful of farsighted companies. These companies are focused on creating new growth and new value by addressing the hassles and issues that surround the product rather than by improving the product itself. They have shifted their approach from product innovation to demand innovation.
The authors say that rather than being about value migration, demand innovation is about creating new growth by expanding the market’s boundaries. It focuses on using one’s product position as a starting point from which to do new things for customers that solve their biggest problems and improve their overall performance. Thus, companies skilled in demand innovation do more than simply take value and market share away from traditional businesses. They also create new value and new growth in revenues and profits, even in mature industries that appear to have reached a plateau.
The authors observe that the new growth innovators are great business model innovators as well as imaginative and insightful analysts of business environment, skilled at recognizing opportunities where others do not and developing profitable ways to respond. But where value migration businesses focus on reallocating value by responding to pre-existing demand, new-growth businesses focus on growing new value by discovering new forms of demand.
The Power of Next-Generation Demand
All these non-conventional companies ,by offering their customers economic benefits beyond the functionality of their traditional products, have connected their products to bigger issues and bigger opportunities. In each case, they opened up greater market space and moved from a world where future growth expectations were measured in months or quarters to one with growth expectations measured in years or decades. The authors find that they did so by using demand innovation to uncover three sources of new growth.
First, the focus on the next-generation demand creates new, more powerful opportunities, to grow core product sales by reinforcing and deepening customer relationships and shifting the basis of competition from product price and performance to new, more differentiated and valuable dimensions. Companies that play this game right capture a larger share of the customer’s spending, enjoy better pricing, and often earn high margins than their product-focused competitors.
Second, by focusing on broader customer needs, the demand innovators are often able to combine multiple products and services into more valuable integrated offers. This allows them to capture new sales from adjacent markets and create a more lucrative balance between product and service sales.
Finally, a focus on next-generation demand offers opportunities to create entirely new avenues of growth by turning the improvements in the customer’s value chain into new revenue streams in the form of outsourcing fees, tolling charges, output guarantees, subscription fees, and the like.

According to the authors, the best growth practitioners create growth along all three dimensions simultaneously. As a result, they create high-intensity profit growth in otherwise low-margin industries, enhance earnings stability, and forge tighter bonds with their customers. These benefits are compounded by the fact that new demand often begets new demand. Serving one set of customer needs often uncovers a new set.
Viewing Your Customer Through an Economic Lens
Slywotzky et al states that demand innovation is about understanding and acting on one’s customer’s most urgent problems and priorities by asking: What are the issues they wrestle with everyday? What are the headaches that keep them awake at night? How do their lives really unfold, both on and off the job? How do they spend their time, energy and resources? If one can answer questions like these, one will be able to define where one can do more to meet the new needs of customers, whether those customers are businesses or end consumers.
Unfortunately, most companies can’t answer these questions, because they view their customers solely in terms of product needs. The secret to this richer opportunity of altering the customer’s value chain lies in viewing customer activities through an economic lens. This means studying one’s customer’s activities, costs capital needs, information flows, and priorities. It means looking for bottlenecks, repetition, information gaps, and missed opportunities in the customer’s processes that one can help alleviate or eliminate.
Viewing the customers through an economic lens can help one see what’s really important to them, where points of pain are in their internal value chain. This is something most customers can’t articulate directly; next-generation needs are often so profound and ambiguous that customers haven’t yet pinpointed them or put them into words. If one succeeds in viewing and understanding his customers through an economic lens, one will find in time that he has made an important shift- from responding to customer needs to anticipating them.
Haven’t Charan & Tichy and Slywotzky et al been describing the same idea much earlier which the authors of BOS try to propagate? Is there anything dramatically different in BOS which the others mentioned above have not attempted? All books talk about expanding or redefining the boundaries, which seems to be the crux of the whole idea. All the three talk about adjacent segments, and anticipating future needs customers and creating new values for customers. Even common examples have been cited (Compaq in PC Servers, Minivan from Chrysler, Dell on direct selling, Lexus from Toyota, Wal-Mart etc ). The authors have not been able to create a new Blue Ocean for themselves in terms of ideas. The other two books might not have gained lot of attention because they have been written (mostly)by practitioners rather than academicians. And, among the three books, the one by Charan & Tichy has been more refreshing from the point of view of breakthrough ideas like the one from Goizueta of Coca-Cola coupled with the simple and lucid style of writing. All the same, Blue Ocean Strategy , gives good reading and may be useful for those who have not read the other two.
References
Kim,W.Chan, and Mauborgne,Renee,(2005), Blue Ocean Strategy: How To Create Uncontested Market Space and Make the Competition Irrelevant, Boston, Harvard Business School Press
Charan, Ram and Tichy, Noel M.(1998), Every Business Is A Growth Business: How Your Company Can Prosper Year After Year, New York, Times Business, a Division of Random House
Slywotzky, Adrian and Wise, Richard with Weber, Karl, (2003), How To Grow When Markets Don’t ,New York,Warner Business Books
The 2*2 Needs Customers Matrix