All companies are subject to external trends that affect their business over time. Think of the rapid rise of the cloud or the global movement toward protecting the environment. Looking at these trends with the proper perspective can show you how to create Blue Ocean opportunities.

Most companies adopt incrementally and somewhat passively as events unfold. Managers need to focus on projecting the trend itself, whether it’s the emergence of new technology or significant regulatory changes. They ask in which direction the technology will evolve, how it will be adopted, and whether it will become scalable—the pace of their activities to keep up with the trends they’re tracking.

The key insights in the Blue Ocean strategy arise from business insights into how the direction will change customer value and impact its business model. Looking across time, from the value delivered today to the value it might provide tomorrow, managers can shape their future and lay claim to a new Blue Ocean.

Looking across time is perhaps more complex than the previous approach. It’s impossible to predict the future, but it can be a disciplined approach. Our objective is to find insights into trends that are observable today.  

Three Trends

You must access three trends over time to find a Blue Ocean strategy. These three trends must be decisive for your business, irreversible, and have a clear direction. You can also watch more than one trend at a time—for example, a technology disruption, the rise of a new lifestyle, or a change in regulatory or social environments. But usually, only one or two will impact your business.  

Once you have identified an important trend, look across time and ask what the market would look like if the trend continued to its conclusion. Then, you can identify what must be changed today to unlock a new Blue Ocean by working back from that vision.   

An Example

For example, Apple observed the flood of illegal music file-sharing in the late 90s, such as Napster, which had built a global internet base by downloading more than 2 billion music files every month. While the recording industry fought to stop the cannibalization of physical CDs, illegal digital music downloading continued to grow.

With the technology out there to digitally download music free instead of paying $19 on average per CD, the trend toward digital music was evident. Also, the fast-growing demand for MP3 players that played mobile digital music, such as Apple’s iPod, underscored this trend. Apple capitalized on this solid trend with a clear track trajectory by launching the iTunes online music store in 2003. 

iTunes buyers were free to browse 200,000 songs, listen to 30-second samples, and download an individual song for $.99 or an entire album for $99.99. Because people could buy at a reasonable price, iTunes solved a key consumer problem: having to buy an entire CD when they only wanted one or two songs on the CD.

The process is about discovering, not predicting, or preempting industry trends. It is also not a trial-and-error process of implementing wild new business ideas that happen to come across managers’ minds or intuitions. Instead, managers are engaged in a structured method of re-ordering market realities in a fundamentally new way.  

Some Questions

What current trends are highly likely to impact your industry, are irreversible, and have a clear trajectory?

How could these trends impact your industry?

Based on this trajectory, could you increase customer value?

 

Competition tends to converge not only on the scope of their products and services but also on their appeal. Some industries compete primarily on price and function based on calculations of utility. Other industries compete essentially on feelings or emotion. 

 In the past, companies have unconsciously educated consumers on what to expect. A company’s behavior affects buyers’ expectations in a reinforcing cycle.

These traits change over time and become more entrenched. It is no wonder market research rarely reveals new insights into what attracts customers. Industries have trained consumers on what to expect and what they hope is more of the same for less.

Companies willing to challenge their industry’s functional and emotional orientation can often find new market space.

Industries that are emotionally oriented offer many extras that add price without enhancing functionality. Stripping away these extras may create a fundamentally simpler, lower-priced, lower-cost business model customers would welcome.

Conversely, functionality-oriented industries-infuse commodity products with a new life by adding a dose of emotion and, in doing so, can stimulate new demand.

Some Examples

For example, Swatch watch transformed the functionally driven budget watch industry into an emotionally driven fashion statement. Or Body Shop, which did the reverse, transformed an emotionally driven cosmetics industry into a functional, no-nonsense cosmetics house.

Comex, a large cement producer, created a Blue Ocean by shifting the orientations of its industry from functional to emotional. Instead of selling cement, they got people together who each put money into a pot. 

Then each week, there was a winner. At the end of 10 weeks, there would be enough winnings to buy cement to build a particular room in their house. It was very successful because they were selling a dream with a business model involving innovative financing and construction know-how.

Pfizer shifted its focus from medical treatment to a love lifestyle enhancement. Starbucks turned the coffee industry and its head by shifting its focus from commodity coffee sales to the emotional atmosphere where customers could enjoy their coffee.

Relationship businesses –such as insurance, banking, and investing — have relied heavily on the emotional bond between broker and client. They are ripe for change. 

Direct Line Group, a UK insurance company, has eliminated its traditional brokers. They felt they could do that because customers would not need the hand-holding and emotional comfort if they could pay claims quickly and eliminate any complicated paperwork.

So instead of using brokers and regional branch offices, Direct Lines uses information technology to improve claims handling and passes on some of the cost savings to customers in the form of lower insurance premiums.

The vanguard group (an index fund) from Charles Schwab (brokerage services) did the same thing in the investment industry, creating a Blue ocean by transforming emotionally oriented businesses based on personal relationships into high-performance, low-cost, functional businesses.

Questions

Does your industry compete on functionality or emotional appeal?

If you complete with an emotional appeal, what elements can you strip out to make it functional?

If you compete on functionality, what features can be added to make it emotional?

 

Very few products and services are used in a vacuum. Most of the time, other products and services affect their value. But, in most industries, products or services converge are within the bounds of their industry’s product and service offerings.

Take a look at movie theaters. The cost of getting a babysitter and parking the car affect the perceived value of going to the movies. However, these complimentary services are beyond the bounds of the movie theater industry as normally defined. Movie theatre operators worry about how hard or costly it is for people to get babysitters. Imagine a movie theatre with babysitters services. 

Untapped value can often be 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 this is to think about what happens before, during, and after your product is used. 

Think airline industry and ground transportation, or trucks that used to be purchased and how much they cost rather than the total cost. Peterbilt is the most expensive and the least expensive over the road truck in overall cost.   

Use the strategy canvas.

Think about these issues:

What is the context in which your product or service is used?

What happens before, during, and after the use of your product or service?

Can you identify all the pain points?

Can you eliminate these pain points through a complementary product or service offering?

 

Path Three: Look Across Your Chain Of Buyers

In most industries, competitors converge around a standard definition of who the target buyer is. In reality, though, there is a chain of buyers directly or indirectly involved in the buying decision. The purchasers you pay for the product or service are different from the actual users, and in some cases, there are Important influencers. When they do overlap, they frequently all have different definitions of value.

The corporate purchasing agent may be more concerned with costs—the corporate user, who is likely to be far more concerned with the ease of use. Similarly, a retailer may value a manufactures just in time stock replenishment and innovative financing.  

Companies generally target customer segments as large versus small customers. But the industry typically converges on a single buyer group. The pharmaceutical industry, for example, focuses primarily on influencers, the doctors. Sometimes there is a solid economic reason for doing so. But often, the buyer is never questioned and the practice is never questioned.  

Challenge Your Buyer Group

Challenging conventional wisdom about which buyer group to target can lead to discovering a new Blue Ocean. If you look across buyer groups, companies can gain new insights into redesigning their value curves to focus on the previously overlooked set of buyers.

For example, Novo Nordisk went from selling insulin to doctors to selling an insulin pen to the users – the patients themselves — and created a new market. Novo sold a pre-filled, disposable insulin injection pen with a dosing system. They provided users with even greater convenience and ease of use.

Novo Nordisk created a Blue Ocean strategy that shifted the industry landscape and transformed the company from an insulin producer to a diabetes care company.

You may find an opportunity to create a new market by questioning conventional definitions of who can and should be the target. 

Canon copiers created a small desktop copier industry by shifting the target customer of the copier industry from corporate purchasers to individual users.

Questions For You

Who are the buyers you automatically or typically focus on?   

Does everyone in your industry focus on those buyers?  

If you shifted the buyer groups of your industry, how could you unlock new value?

 

Groups here refer to companies within the same industry group that have a very similar strategy. In most industries, the strategic differences among industry players are captured by a small number of strategic groups.

Strategic groups can generally be ranked in two dimensions: price and performance. Each increase in price tends to bring a corresponding jump in some performance measurement.  

Most companies are inward-looking

Most companies are focused on improving their competitive position within a strategic group. For example, Mercedes, BMW, and Jaguar try to outcompete one another in the luxury car segment. Economy car makers focus on excelling in their strategic group. Neither strategic group ever pays much attention to the other groups. 

To break away from competitors, you need to look across different groups

The key to competing in a Blue Ocean market across existing groups is to break out of this tunnel vision by understanding which factors determine consumer’s decisions to trade up or down from one group to another.

Consider Curves, the Texas-based women’s fitness company. Its growth was triggered almost entirely through word of mouth and referrals. Curves entered an oversaturated market in its inception, gearing its offering to customers who would not want it.  

In reality, however, Curves created a new demand in the US fitness industry, unlocking an untapped market if women were struggling and failing to keep in shape through sound fitness. Curves were built under the decisive advantages of two strategic groups in the US fitness industry, traditional health clubs and home exercise programs, eliminating or reducing everything else.

At one extreme were the costly health clubs mainly in the suburbs that catered to wealthy people who could pay $100 a month or more for membership. It had all the facilities they wanted juice bars, sauna instructors, etc. At the other extreme was a group of home exercise programs including exercise videos, books, and magazines which were a small fraction of the cost, and generally required little or no exercise equipment.  

What made women choose between the traditional health club and at-home exercise programs? It turns out that most women don’t trade up to health clubs for all the machines, locker rooms, etc., and the chance to meet men. The average female non-athlete does not even want to run into men when she’s working out. She’s not inspired to lineup behind machines in which she needs to change weights and adjust their incline angles. Also, you have to spend one or two hours at a health club several times a week.

It turns out that most women move up to health clubs because, at home, it is too easy to find a reason not to work out. Working with a group is enjoyable and motivating. Plus, working out at home saves time, costs less, and is more private.  

Curves built a Blue Ocean strategy by drawing on the distinctive strengths of these two strategic groups, eliminating and reducing everything else. The experience in the Curves club was entirely different. Members could talk and support each other in a non-judgmental atmosphere.   

There were few if any mirrors and no men to stare at you. Members moved around the circle of machines in 30 minutes which completed the whole workout. The price was $30 a month. According to Kim and Mauborgne, their tagline could have been “For the price of a cup of coffee a day; you can obtain the gift of health through proper exercise.” Curves created a new market. 

What are some of the different groups you could look at?

 

The first step in the Blue Ocean Strategy is to reconstruct the market boundaries to break from the competition and create blue oceans. The challenge is to identify commercially compelling Blue Ocean opportunities out of all the possibilities that exist.

There are six basic approaches to re-making market boundaries. Authors Chan and Mauborgne call these approaches the six paths framework. None of these paths require exceptional vision or foresight about the future. They are all based on current but from a different viewpoint. 

These six paths challenge the six fundamental assumptions underlying many companies’ strategies. These six assumptions keep companies trapped in very competitive markets. Companies often: 

1. Define their industry similar to competitors and focus on being the best
2. See their industry through the lens of generally accepted groups (luxury automobiles, economy cars, and family vehicles) and strive to stand out in their strategic group.
3. Focus on the same buyer groups, the purchase, the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry).
4. Defined the scope of the products and services offered by their industry similarly
5. Accept the industry functional or emotional orientation.
6. Focus on current competitive threats in formulating strategy.

The more a company shares this conventional wisdom about competing, the more similar they are.  

To break out of the excepted boundaries that define how they compete, you need to look systematically across them to create Blue Oceans. 

Do you 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 analysis gives companies keen insight into how to reconstruct market realities to open up Blue Oceans.

Path one: look across alternative industries 

In a broader sense, a company competes with the other firms in their industry and that produce alternative products or services. Alternative products are wider than substitutes. Products may have different forms but offer the same functionality or utility can substitute for one another. Also, alternatives include products or services with different functions and forms with the same purpose.

For example, people can buy and install a financial software package, hire a CPA, use pencil and paper, or a financial app to sort out their finances. All of these are substitutes for each other. They have different forms, but the same function.  

Also, products or services can take different forms and perform other functions, serving the same objective—for example, movie theatres vs. restaurants. While they have few physical features in common with movie theatres and fill a distinct role: they provide conversational and gastronomical pleasure. This role is a very different experience from the visual entertainment offered by cinemas. 

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

Alternative decisions

In making purchase decisions, buyers implicitly way their alternatives, often unconsciously. Should we go to the movie or should we get a massage or read a book. This thought process is intuitive for individual consumers and industrial buyers alike.

For some reason, we forget about this intuitive process when we are sellers. Seldom do sellers think consciously about how their customers make trade-offs across alternative industries?

Yet, the space between alternative industries provides opportunities for value innovation.

Consider NetJets, owned by Berkshire Hathaway. Business people didn’t want to use commercial flights because they were uncomfortable and time-consuming. Yet, they didn’t want to buy a jet because it’s costly upfront.

Net Jets created the concept of selling fractions of jets which can be as small as 1/16 ownership of an aircraft in the United States. This ownership entitles them to 50 flight hours per year starting at just over $400,000 (plus pilot, maintenance, and other monthly costs) for an aircraft that cost 7 million dollars.   

Owners get the convenience of a private jet at the price of first-class air travel. When you consider all the other expenses, NetJets is less expensive than first class. Also, because it is a smaller airplane, you can use smaller regional airports, and limited staff help to keep costs low.  

 By offering the best commercial travel and private jets and illuminating and reducing everything else, NetJets opened up a multibillion-dollar Blue Ocean where customers get the convenience and speed of a private plane with low fixed costs and lower variable costs.  

Home Depot is another example and offers expertise to professional home contractors at markedly lower prices than hardware stores. They also made ordinary homeowners into doing it your self customers. Today is the world’s largest home retail improvement store. 

What are the alternative industries in your industry? 

Why do customers trade across alternatives?  

If you focus on the key factors that lead buyers to sell across alternative industries and reduce everything else, is one way to create a Blue Ocean market.

 

According to authors Kim and Mauborgne, in their book, Blue Ocean Strategy, “when expressed through a value curve, an effective Blue Ocean strategy has three complementary qualities: focus, divergence, and a compelling tagline.”

Focus

Every great strategy has focus, and the company’s strategic profile, or value curve, should clearly show it. For example, Southwest Airline’s profile emphasized only three factors: friendly service, speed, and frequent point-to-point departures. This focus allowed them to price against car transportation. Its competitors invested in meals, seating choices, etc.

Divergence

When a company strategy is formed reactively to keep up with the competition, it loses its uniqueness. On a strategy canvas, reactive strategies tend to share the same strategic profile. In the case of Southwest Airlines, the value curves of their competitors are virtually identical. In contrast, the value curves of the Blue Ocean strategy always stand apart.

A Compelling tagline

A good strategy has a compelling tagline. For example, Southwest Airlines: “The speed of a plane at the price of a car whenever you need it.” A good tagline not only delivers a clear message but also advertises an offering truthfully, or else customers will lose trust and interest. An excellent way to test the effectiveness and strength is to determine whether it contains a strong and authentic tagline.

Reading the value curves.

A strategy canvas enables you to visualize the industry. These value curves contain a wealth of strategic knowledge, current status, and the future of a business.

The Blue Ocean strategy

The first question on the value curve answers is whether a business deserves to be a winner? When a company’s value curve or its competitors meets the three criteria that define an excellent Blue Ocean strategy (focus, divergence, and a compelling tagline that speaks to the market), it shows the company is on track toward a viable Blue Ocean idea. 

However, when a company’s value curve lacks focus, its cost structure will tend to be high and have a complex business model. When it lacks the divergence, the company strategy is a Me-too with no reason to stand apart. When there is no compelling tagline,it signals an internally oriented innovation with little commercial potential and no natural takeoff capability.

Don’t get caught in the red ocean.

When the company’s value curve converges with its competitors, it signals that a company is likely caught in bloody competition. Thi signals slow growth unless the industry is growing rapidly.

Over delivery without payback

When a company’s value curve on the strategy canvas shows high levels across all factors, the question is, do the company’s market share and profitability reflect all of these costs? If the answer is no, the strategy canvas signals that the company may be oversupplying its customers, offering too many elements that add incremental value to buyers. The company must then decide which factors to eliminate and reduce, and not just those to raise and create a divergent value curve.

Strategic contradictions

Are there strategic contradictions? These are areas where a company offers a high level on one competing factor or ignores other competing factors. For example, investing heavily to make the company’s website easy to use, but not considering its slow loading time. Or an inconsistency between the value of an offering and its price.   

An internally driven company

How does the company label the industry competing components? Do you use jargon or words that all customers will understand and value?. The kind of language used in the strategy canvas gives insight into whether the company’s strategic vision is built on an outside-in perspective, by the demand side, or an inside-out perspective that is operationally driven.