The surge in social network sites, blogs, micro-blogs, video-sharing services, user-driven content, and internet ratings that have become close to ubiquitous around the globe have shifted the power and credibility of voice from organizations to individuals.

Cirque du Soleil’s

It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price several times as great as traditional circuses for an unprecedented entertainment experience.

Look back 120 years and ask yourself, How many of today’s industries were then unknown? The answer: many industries as basic as automobiles, music recording, aviation, petrochemicals, health care, and management consulting were unheard of or had just begun to emerge at that time. Now turn the clock back only forty years. Again, a plethora of multi billion- and trillion-dollar industries jumps out—e-commerce; cell phones; laptops, routers, switches, and networking devices; gas-fired electricity plants; biotechnology; discount bars to name a few. Just four decades ago, none of these industries existed in a meaningful way.

Now put the clock forward twenty years —or perhaps fifty years—and ask yourself how many now unknown industries will likely exist then.

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 very language of strategy is deeply imbued with military references – chief executive “officers” in “headquarters”, “troops” on the “front lines”. Described this way, strategy is about confronting an opponent and fighting over a given piece of land that is both limited and constant.

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.

Our study shows that the strategic move, and not the company or the industry, is the right unit of analysis for explaining the creation of blue oceans and sustained high performance. A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.

What consistently separated winners from losers in creating blue oceans was their approach to strategy.

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 companies hatch.

Value innovation is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy: the value-cost trade-off. It is conventionally believed that companies can either create greater value to customers at a higher cost or create reasonable value at a lower cost. Here strategy is seen as making a choice between differentiation and low cost.In contrast, those that seek to create blue oceans pursue differentiation and low cost simultaneously.

Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.

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.

Effective blue ocean strategy should be about risk minimization and not risk taking.

Our research found that customers can scarcely imagine how to create uncontested market space. Their insight also tends toward the familiar “offer me more for less.” And what customers typically want “more” of are those product and service features that the industry currently offers.

To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to noncustomers of the industry. To pursue both value and low cost, you should resist the old logic of benchmarking competitors in the existing field and choosing between differentiation and cost leadership.

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 Eliminate-Reduce-Raise-Create Grid

Three complementary qualities: focus, divergence, and a compelling tagline.

Focus

Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.

Divergence

When a company’s strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness.

Compelling Tagline

A good strategy has a clear-cut and compelling tagline.

Reading the Value Curves

The strategy canvas enables companies to see the future in the present. To achieve this, companies must understand how to read value curves.

A Blue Ocean Strategy

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. These three criteria serve as an initial litmus test of the commercial viability of blue ocean ideas.

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 me-too, with no reason to stand apart in the marketplace. When it lacks an internally driven or a classic example of innovation for innovation’s sake with no great commercial potential and no natural take-off capability.

A Company Caught in the Red Ocean

When a company’s value curve converges with its competitors, it signals that a company is likely caught within the red ocean of bloody competition. A company’s explicit or implicit strategy tends to be trying to outdo its competition on the basis of cost or quality. This signals slow growth unless,

Overdelivery without Payback

When a company’s value curve on the strategy canvas is shown to deliver high levels across all factors, the question is, does the company’s market share and profitability reflect these investments? If not, the strategy canvas signals that the company may be oversupplying its customers, offering too much of those elements that add incremental value to buyers.

Strategic Contradictions

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 operations.

An Internally Driven Company

In drawing the strategy canvas, how does a company label the industry’s competing factors? For example, does it use the word megahertz instead of speed, or thermal water temperature instead of hot water? Are the competing factors stated in terms buyers can understand and value, or are they in operational jargon?

Reconstruct Market Boundaries

This principle addresses the search risk many companies struggle with. The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. These patterns applied across all types of industry sectors—from consumer goods, to industrial products, to finance and services, to telecoms and IT, to pharmaceuticals and B2B

Looking at familiar data from a new perspective. These paths challenge the six fundamental assumptions underlying many companies’ strategies.

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 care, 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 how they compete, the greater the competitive convergence among them.

Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyers groups, across complementary product and service offering, across the functional-emotional orientation of an industry, and even across time.

Path 1: Look Across Alternative Industries

Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose.

For example, to sort out their personal finance, people can buy and install a finance software package, hire a CPA, or simply use pencil and paper. And nowadays there are also apps that help with this. The software, the CPA, the pencil and financial apps are largely substitutes for each other.

Despite the differences in form and function, however, people go to a restaurant for the same objective that they go to the movies: to enjoy a night out. These are not substitutes, but alternatives to choose from.

In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously.

The thought process is intuitive for individual consumers and industrial buyers alike. For some reason, we often abandon this intuitive thinking when we become sellers. A shift in price, a change in model, even a new ad campaign can elicit a tremendous response from rivals within an industry, but the same actions in an alternative industry are usually so unnoticed.

Path 2: Look Across Strategic Groups Within Industries

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.

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.

In the luxury car market, Toyota’s Lexus carved out a new blue ocean by offering the quality of the high-end Mercedes, BMW, and Jaguar at a price closer to the lower-end Cadillac and Lincoln.

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?

Path 3: Look Across the chain of buyers

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. When they do, they frequently hold different definitions of value. A corporate purchasing agent, for example, may be more concerned with cost than the corporate user, who is likely to be far more concerned with ease of use. Similarly, a retailer may value a manufacturer’s just-in-time stock replenishment and innovative financing. But consumer purchasers, although strongly influenced by the channel, do not value these things. The pharmaceutical industry, for example, focuses overridingly on influencers: doctors. The office equipment industry focuses heavily on purchasers: corporate purchasing departments. And the clothing industry sells predominantly to users. Sometimes there is a strong economic rationale for this focus. But often it is the result of industry practices that have never been questioned.

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?

Path 4: Look across Complementary Product and Service Offerings

Path 5 Looks Across Functional or Emotional Appeal to Buyers

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.

Swatch, which transformed the functionally driven budget watch industry into an emotionally driven fashion statement, or The Body Shop, which did the reverse, transforming the emotionally driven industry of cosmetics into a functional, no-nonsense cosmetic house.

Patrimonio Hoy program.

At the foundation of patrimonio Hoy was the traditional Mexican system of tandas, a traditional community savings scheme. In a tanda, ten individuals (for example) contribute 100 pesos per week for ten weeks. In the first week, lots are drawn to see who “wins” the 1,000 pesos ($93) in each of the ten weeks. All participants win the 1,000 pesos one time only,

Patrimonio Hoy building materials club.

Whereas Cemex’s competitors sold bags of cement, Cemex was selling a dream, with a business model involving innovative financing and construction know-how. Cemex went a step further, throwing small festivities for the town when a room was finished and thereby reinforcing the happiness it brought to people and the tanda tradition

A burst of blue ocean creation has been under way in a number of service industries but in the opposite direction—moving from an emotional to a functional orientation, Relationship businesses, such as insurance, banking, and investing, have relied heavily on the emotional bond between broker and client. They are ripe for change.

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?

Path 6: Look Across Time

Whether it’s the emergence of new technologies or major regulatory changes, managers tend to focus on projecting the trend itself. That is, they ask in which direction a technology will evolve, how it will be adopted, whether it will become scalable. They pace their own actions to keep up with the development of the trends they’re tracking.

But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise from business insights into how the trend will change value to customers and impact the company’s business model. By looking across time—from the value a market delivers today to the value it might deliver tomorrow.

Three principles are critical to assessing trends across time. These trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory.

Many trends can be observed at any one time—for example, a discontinuity in technology, the rise of a new lifestyle, or a change in regulatory or social environments. But usually only one or two will have a decisive impact on any particular business. 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.

Today iTunes offers more than 37 million songs as well as movies, TV shows, books, and podcasts.

Cisco Systems created a new market space by thinking across time trends. It started with a decisive and irreversible trend that had a clear trajectory: the growing demand for high-speed data exchange.

CNN created the first real-time twenty-four-hour global news network based on the rising tide of globalization.

Focus on the big picture, not the numbers. This approach consistently produces strategies that unlock the creativity of a wide range of people within an organization, open companies’ eyes to blue oceans, and are easy to understand and communicate for effective execution.

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.

The strategic profile with high blue ocean potential has three complementary qualities: focus, divergence, and a compelling tagline. If a company’s strategic profile does not clearly reveal those qualities, its strategy will likely be muddled, undifferentiated, and hard to communicate. It is also likely to be costly to execute.

Drawing Your Strategy Canvas

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. The catering manager of an airline, for example, will be highly sensitive to how the airline compares in terms of refreshments. 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.

Step 1: Visual Awakening

Many people had pet ideas of which they were the sole champions.

Step 2: Visual Exploration

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 form the world they report on) have put together. A company should never outsource its eyes.

For example, account relationship managers, whom nearly everyone had agreed were a key to success and on whom EFS prided itself, turned out to be the company’s Achilles’ heel. Customers hated wasting time dealing with relationship managers. To buyers, relationship managers were seen as relationship savers because EFS failed to deliver on its promises.

Each team had to 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. Suggestions included “Leave It to Us,” “Make ME Smarter,” and “Transactions in Trust.” A strong sense of competition developed between the two teams, making the process fun, imbuing it with energy, and driving the teams to develop blue ocean strategies.

Step 3: Visual Strategy Fair

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 if they found it that compelling. The transparency and immediacy of this approach freed it from the politics that sometimes seem endemic to the strategic planning process.

Step 4: Visual Communication

After the future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee.

Employees were so motivated by the clear game plan that many pinned up a version of the strategy canvas in their cubicles as a reminder of EFS’s new priorities and the gaps that needed to be closed.

Using the pioneer-Migrator-Settler (PMS) Map

All the companies that created blue oceans in our study have been pioneers in their industries, not necessarily in developing new technologies but in pushing the value they offer customers to new frontiers.

A company’s pioneers are the businesses that offer unprecedented value. These are your blue ocean offerings, and they are the most powerful sources of profitable growth. At the other extreme are settlers—businesses whose value curves conform to the basic shape of the industry’s. These are me-too businesses.

The potential of 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. These businesses offer improved value, but not innovative value. These are businesses whose strategies fall on the margin between red oceans and blue oceans.

The more an industry is populated by settlers, the greater is the opportunity to value-innovate and create a blue ocean of new market space. Chief executives should instead use value and innovation as the important parameters for managing their portfolio of businesses. They should use innovation because, without it, companies are stuck in the trap of competitive improvements. They should use value because innovative ideas will be profitable only if they are linked to what buyers are willing to pay for.

Aristotle pointed out, “The soul never thinks without an image.”

Reach Beyond Existing Demand

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.

Typically, to grow their share of a market, companies strive to retain and expand existing customers. This often leads to finer segmentation and greater tailoring of offerings to better meet customer preferences. The more intense the competition is, the greater, on average, is the resulting customization of offerings. As companies compete to embrace customer preferences through finer segmentation, they often risk creating too-small target markets. To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.

To reach beyond existing demand, think noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.

The Three Tiers of Noncustomers

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.

The second tier of noncustomers is people who refuse to use your industry’s offerings.

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.

Lesson: noncustomers 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.

Go for the Biggest Catchment

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

The point here is not to argue that it’s wrong to focus on existing customers or segmentation but rather to challenge these existing, taken-for-granted strategic orientations.

The Right Strategic Sequence

As shown in figure 6-1, companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.

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.

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.

Like the creative concepts of Pret A Manger or JCDecaux, many of the most powerful blue ocean ideas have tremendous value but in themselves consist of no new technological discoveries. As a result they are neither patentable nor excludable and hence are vulnerable to imitation.

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.

Step 1: Identify the Price Corridor of the Target Mass

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. In the case of Ford’s Model T, Ford looked to the horse-drawn carriage. The horse-drawn carriage had the same core utility as the car:

Different form and function, same objective.

Some companies lure customers from even further away. Cirque du Soleil, for example, has diverted customers from a wide range of evening activities. To enjoy a night out

The key here is not to pursue pricing against competition within an industry but rather to pursue pricing against substitutes and alternatives across industries and non-industries.

Step 2: Specify a Level within the Price Corridor

Companies with uncertain patent and asset protection should consider pricing somewhere in the middle of the corridor. As for companies that have no such protection, lower-boundary strategic pricing is advised. 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.

From Strategic Pricing to Target Costing

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.

Before plowing forward and investing in the new idea, the company must first overcome such fears by educating the fearful.

Employees

Business Partners

The General Public

The Blue Ocean Idea Index

Overcome Key Organizational Hurdles

They face four hurdles. One is cognitive: waking employees up to the need for a strategic shift. 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.”

Four hurdles that managers consistently claim limit their ability to execute blue ocean strategy: the cognitive hurdle that blinds employees from seeing that radical change is necessary; the resource hurdle that is endemic in firms; the motivational hurdle that discourages and demoralizes staff; and the political hurdle of internal and external resistance to change.

Break through the Cognitive Hurdle

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 such as Bratton zoom in on the act of disproportionate influence: making people see and experience harsh reality firsthand. “Seeing is believing.” After a child puts a finger on a burning stove, he or she will never do it again. After a negative experience, children will change their behavior of their own accord; again, no parental pestering is required.

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.

Ride the “Electric Sewer”

To break the status quo, employees must come face-to-face with the worst operational problems. Numbers are disputable and uninspiring, but coming face-to-face with poor performance is shocking and inescapable, but actionable.

Making top brass and middle brass—starting with himself—ride the electric sewer day and night

Meet with Disgruntled Customers

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.

What they felt victimized by and harassed by were the constant minor irritants:

Jump the Resource Hurdle

Do they have the money to spend on the necessary changes? At this point, most reformist CEOs do one of two things. Either they trim their ambitions and demoralize their workforce all over again, or they fight for more resources from their bankers and shareholders, a process that can take time and divert attention from the underlying problems.

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. In every organization, hot spots and cold spots typically abound. Horse trading involves trading your unit’s excess resources in one area for another unit’s excess resources to fill remaining resource gaps.

Redistribute Resources to Your Hot Spots

Logic was that increments in performance could be achieved only with proportional increment in resource.

Are you allocating resources based on old assumptions, or do you seek out and concentrate resources on hot spots? Where are your hot spots? What activities have the greatest performance impact but are resource starved? Where are your cold spots? What activities are resource oversupplied but have scant performance impact? Do you have a horse trader, and what can you trade ?

Jump the Motivational Hurdle

How can you motivate the mass of employees fast and at low cost? When most business leaders want to break from the status quo and transform their organization, they issue grand strategic visions and turn to massive top-down mobilization initiatives. They act on the assumption that to create massive reactions, proportionately massive action is required. But this is often a cumbersome, expensive, and time-consuming process, given the wide variety of motivational needs in most large companies. Kingpins, fishbowl management, and atomization.

Zoom In on Kingpins

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. These are people inside the organization who are natural leaders, who are well respected and persuasive, or who have an ability to unlock or block access to key resources.

Place Kingpins in a Fishbowl

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 fishbowl management to work, it must be based on transparency, inclusion, and fair process. Biweekly crime strategy review meeting, top brass to review the performance of all. Attendance was mandatory.

As a result, an intense performance culture was created in weeks—forget about months. For this 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.

Atomize to Get the Organization to Change Itself

The last disproportionate influence factor is atomization. To make the challenge attainable, Bratton broke it into bite-size atoms that officers at different levels could relate to. “block by block, precinct by precinct, and borough by borough.”

Knock Over the Political Hurdle

Organizational politics is an inescapable reality of corporate and public life. 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.

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 strategy. 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 a 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. Key to winning over your detractors or devils is knowing all their likely angels of attack and building up counterarguments backed by irrefutable facts and reason.

Challenging Conventional Wisdom

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.

Build Execution into Strategy

People’s minds and hearts must align with the new strategy so that at the level of the individual, people embrace it of their own accord and willingly go beyond compulsory execution to voluntary cooperation in carrying it out. Where blue ocean strategy is concerned, this challenge is heightened. Trepidation builds as people are required to step out of their comfort zones and change how they have worked in the past. They wonder, what are the real reasons for this change? Is management honest when it speaks of building future growth through a change in strategic course? Or are they trying to make us redundant and work us out of our jobs?

Management risk is relevant to strategy execution in both red and blue oceans, but it is greater for blue ocean strategy because its execution often requires significant change. Companies must reach beyond the usual suspects of carrots and sticks. They must reach a fair process in the making and executing of strategy. Our research shows that fair process is a key variable that distinguishes successful blue ocean strategic moves from those that failed. The presence or absence of fair process can make or break a company’s best execution efforts.

The Three E Principles of Fair Process

There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation.

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. When people understand what is expected of them, political jockeying and favoritism are minimized, and people can force on executing the strategy rapidly.

No one explained why the strategic shift was needed, how the company needed to break away from the competition to stimulate new demand, and why the shift in the manufacturing process was a key element of that strategy. Employees sat in stunned silence, with no understanding of the rationale behind the change. The managers mistook this for acceptance.

Why Does Fair Process Matter?

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.

When individuals feel recognized for their intellectual worth, they are willing to share their knowledge; in fact, they feel inspired to impress and confirm the expectations of their intellectual value, suggesting active ideas and knowledge sharing.Similarly, when individuals are treated with emotional recognition, they feel emotionally tied to the strategy and inspired to give their all. Lacking trust is the strategy-making process, people lack trust in the resulting strategies. Such is the emotional power that a fair process can provoke.

Fair Process and External Stakeholders

Align Value, Profit, and People Propositions

Define what blue ocean strategy is, how to reconstruct market boundaries and offer a leap in value to buyers. Unlocking business model innovation through strategic pricing, target costing, and the like so a company can seize new customers profitably. Releasing the creativity, knowledge sharing, and voluntary cooperation of people through the proper approach to employees and partners. While all three are correct, they are also only partial answers.

At the highest level, there are three propositions essential to the success of strategy: the value proposition, the profit proposition, and the people proposition. While good strategy content is based on a compelling value proposition for buyers with a robust profit proposition for the organization, sustainable strategy execution is based largely on a motivating people proposition. Lacking a holistic understanding of strategy, it is easy for an organization to focus overridingly on one or two strategy propositions to the exclusion of the other(s).

Strategic alignment is the responsibility of an organization’s top executives versus those in charge of marketing, manufacturing, human resource, 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.

Putting It All Together

When the record labels approached Napster to work out a revenue-sharing model for the digital download of music that would create a win-win for both sides, Napster balked. The excitement over Napster’s spectacular growth prevented it from appreciating that it needed an external people proposition that offered differentiation and low cost for its key partners,

Renew Blue Oceans

Understanding the process of renewal is key to ensure that the creation of blue oceans is not a one-off occurrence but is institutionalized as a repeatable process in an organization.

Barriers to Imitation

The alignment barrier. The alignment of the three strategy propositions—value, profit, and people.

The cognitive and organizational barrier. CNN was referred to as Chicken Noodle News by the industry. Ridicule does not inspire rapid imitation as it creates a cognitive barrier. Imitation often requires companies to make substantial changes to their existing business practices, organizational politics often kick in, delaying for years a company’s commitment to imitate a blue ocean strategy.

The brand barrier.

The economic and legal barrier.

Renewal at the Individual Business level

Monitoring value curves signals when to value-innovate and when not to. When a company’s value curve still has focus, divergence, and a compelling tagline, it should resist the temptation to value innovate the business again and instead should focus on lengthening, widening, and deepening its rent stream through operational improvements of scale and market coverage. It should swim as far as possible in the blue ocean, making itself a moving target, distancing itself from early imitators, and discouraging them in the process. The aim here is to dominate the blue ocean over imitators for as long as possible.

Renewal at the Corporate Level for a Multibusiness Firm

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. As explained in chapter 4, settlers are me-too businesses, migrators represent value improvements, and pioneers are a company’s value innovations. While settlers are today’s cash generators that typically have marginal growth potential, pioneers have high growth potential but often consume cash at the outset as they expand; migrators’ profitable growth potential lies somewhere in between. 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.

Once Apple’s iPod began to be imitated, for example, to counter competition it rapidly launched a range of iPod variants at various price points with the iPod mini, shuffle, nano, touch, and so on. This not only served to keep encroaching competitors at arm’s length, but also expanded the size of the ocean it created, allowing Apple, not imitators, to capture the lion’s share of the profit and growth of this new market space.

Avoid Red Ocean Traps

You have to get your framing right to create blue oceans. Perspective is critical to success. Your mind-set is more ingrained than you realize.

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,

Think of Casella Wines with [yellow tail] in the wine industry, Nintendo with the Wii, Chrysler with the minivan, Apple with its iMac,

Red Ocean Trap Three: The misconception that blue ocean strategy is about new technologies.

The reason buyers love these blue ocean offerings isn’t because they involve bleeding-edge technology per se, but because these offerings make the technology essentially disappear from buyer’s minds. Ask: How does your product or service offer a leap in productivity, simplicity, ease of use, convenience, fun and/or environmental friendliness? Value innovation, not technology innovation, is what opens up commercially compelling new markets.

Red Ocean Trap Four: The belief that to create a blue ocean, you must be first to market.

Blue ocean strategy is not about being first to market. Rather it’s about being first to get it right by linking innovation to value.

Red Ocean Trap Five: misconception that blue ocean strategy and differentiation strategy are synonymous.

Under traditional competitive strategy, differentiation is achieved by providing premium value at a higher cost to the company and at a higher price for customers.

Blue ocean strategy is an “and-and,” not an either-or, strategy.

Red Ocean Trap Six: The misconception that blue ocean strategy is a low-cost strategy that focuses on low pricing.

A blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing. The key here is not to pursue pricing against the competition within an industry but to pursue pricing against substitutes and alternatives that are currently capturing the noncustomers of your industry.

Red Ocean Trap Seven: The belief that blue ocean strategy is the same as innovation.

Many technology innovators fail to create and capture blue oceans by confusing innovation with value innovation.

Red Ocean Trap Eight: The belief that blue ocean strategy is a theory of marketing and a niche strategy.

Blue ocean strategy should also not be confused with a niche strategy. It is more about de-segmenting the market by focusing on key commonalities across the buyer group to open up and capture the largest catchment of demand. 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 or 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.

Red Ocean Trap Ten: The belief that blue ocean strategy is synonymous with creative destruction or disruption.

By reconstructing existing market boundaries, blue ocean strategy creates new market space and is created beyond existing industries. When new market space is created beyond existing industry boundaries, as with Viagra, reconstruction tends to bring about non destructive creation. In many cases, even when the reconstruction occurs within industries, blue ocean strategy also produces nondestructive creation. Nintendo’s Wii, for example, created a blue ocean in the video game industry. It had an element of creative destruction.

Blue ocean strategy is about redefining the problem itself, which tends to create new demand or an offering that often complements rather than displaces existing products and services.

The focus of the 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 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.