HOW DO BLUE OCEAN strategists see new opportunities where others see only red oceans of declining profits and growth? They don’t get taken in by what everyone else takes for granted. They embrace a perspective that allows them to ask fundamentally different sets of questions, which, in turn, enable them to perceive and appreciate the fallacies behind long-held assumptions and the artificial boundaries we unknowingly impose upon ourselves. Their perspective is very different from the market-competing logic that dominates most executives’ mental models.
To fully delineate how blue ocean strategists think, let’s explore two strategic moves—one by a nonprofit B2C, and the other by a classic for-profit B2B—so you can see how this mindset applies across industries and sectors.
Can you imagine someone hitching around town carrying a refrigerator? Or a town where highwaymen and -women dressed only in underpants accost motorists and passers-by to solicit small donations? Or your CEO coming into work, holding meetings with a soft squishy red ball the size of a golf ball affixed to her nose all day? Welcome to Comic Relief, a UK charity formed in 1985, and Red Nose Day, an event it holds once every two years. In the 16 Red Nose Days since its founding, the UK charity has raised more than £1 billion in the UK alone, with its 2017 Red Nose Day raising over £73 million.
Now imagine the UK charity fund-raising industry at the time Comic Relief was born. It was redder than red. Not only were there thousands of charities, but for most causes there was huge overlap, including more than 600 cancer charities and 200 charities for the homeless just in London. What’s more, in little over a decade, the number of charities had jumped by over 60 percent. So competition was way up.
At the same time, donor fatigue was setting in, and the number of British people donating to charities had dropped by more than 25 percent. People were tired of being made to feel guilty, of the continuous solicitations, of the difficulty in choosing the right charity to support among the plethora of options. And they were suspicious of how the funds were actually being used—to cover overhead or to go to the cause?
At the time, fund-raising charities followed a fairly predictable strategy, a pattern we see played out in industry after industry. Almost in lockstep, they concentrated on competing more effectively within the boundaries of their existing industry space. They focused on their biggest customers, in this case wealthy, educated, mostly older (55–64-year-old) donors. They invested heavily in year-round marketing and solicitations. They publicly recognized large donations to encourage the same people to give more. They organized ever-fancier fund-raising galas, all the while using serious and depressing campaigns to trigger feelings of guilt. In short, they fought to capture a greater share of the industry’s already shrinking demand by focusing on the same customers and factors their industry had long competed on. This had the decidedly negative effect of raising their costs at the precise moment demand was going down, annoying existing donors even further.
Comic Relief took a fundamentally different approach. It created Red Nose Day, a national day of wacky community fund-raising, together with a star-studded (and entirely pro bono) comedy telethon, Red Nose Night, which revolutionized charity fund-raising. Today, Red Nose Day is almost like a national holiday in the UK, and Comic Relief has built an amazing 96 percent brand awareness.
To achieve this, Comic Relief redefined the charity industry’s problem, from how to get the wealthy to give out of guilt, to how to get everyone to do something funny for money; in essence, crowdsourcing fund-raising. Whereas most charities hold glamorous special events to attract the wealthy, Comic Relief eliminated or reduced expensive fund-raising galas, year-round solicitations and the writing of grants, and counseling and care services. Nor does it target wealthy donors. It refuses to limit itself to such a small segment; it targets everyone—the poor, the rich, the young, the old, even kindergartners! With some imagination and perhaps a bit of courage, even the poorest person can make a major contribution. Take the London travel agent with a reputation as a chatterbox who got her friends to sponsor her to stay silent for 24 hours, raising over £500 in sponsorships; or the hairy “man’s man” from Manchester, who had all his body hair waxed off, raising £500 as well. Taking part is as cheap and easy as purchasing one of the hard-to-resist little red plastic noses that are sold everywhere and currently cost £1 apiece. All those connected to the telethon, including the TV station, donate their services because they love the cause and generate such goodwill by participating.
By offering star-studded quality entertainment, community “fun”d-raising where everyone gets the opportunity to go just a little bit mad, and selling little red noses across the country, Comic Relief creates a unique, inspiring event that attracts masses of people. And because Red Nose Day happens only once every two years, there is no time for donor fatigue to set in. Comic Relief has fans, not supporters. What’s more, unlike other top UK fund-raising charities that can give roughly 87 percent of their income to their charitable purpose, Comic Relief guarantees that 100 percent of donations go directly to the cause. Comic Relief is able to guarantee this Golden Pound Promise, because its costs are low, thanks to all that it eliminated and reduced, and because sponsors and investment income cover its far lower administrative costs. As for marketing costs, they are zero in the UK, as a result of all the free word-of-mouth advertising generated by the Red Nose Day activities held across the country. In 2015 Comic Relief formally brought Red Nose Day to the United States.
An inspiring story, no doubt. But what have we learned? Could Comic Relief have been conceived with a red ocean perspective? To find out, let’s run through four sets of questions. As we do, ask yourself about your own state of thinking.
One. If Comic Relief had accepted existing industry practices as a given, and let the structure of the UK charity fund-raising industry shape its strategy, would the idea for Red Nose Day ever have been conceived? Or is it more than likely that, with competition so intense, demand down, and costs up, it might not even have entered the industry? How about you? What would you have done in this scenario?
Two. If Comic Relief had focused on benchmarking other charities and tried to emulate—and better—their best practices, what would the likely result have been? Would its strategy have been different? Or is it more likely that the more it focused on benchmarking and outpacing the competition, the more its strategy would simply have looked like the competition’s? Is this something your organization does all too often, too?
Three. Customer satisfaction and understanding customer needs are hot buttons. Most organizations regularly monitor customer satisfaction scores. But if Comic Relief had focused on better satisfying existing wealthy donors, would those customers have given them the idea to ask everyone—rich and poor alike—to do something funny for money? Or would they have urged them to do what the industry was already doing, only better? Do your existing customers keep you focused on what is, instead of what could be?
Four. If Comic Relief had pursued either differentiation or low cost, how would its strategy be different? With a differentiation strategy, wouldn’t they simply have been likely to add bells and whistles to the industry’s current approach, paying scant heed to what they could eliminate or reduce to simultaneously achieve low cost? If instead they had pursued a low-cost strategy, wouldn’t they likely have cut back the industry’s existing competing factors without creating anything new to stand apart? How about you? Do you act on the assumption that, to achieve differentiation you need to spend more, while to win through low costs you need to compromise on the distinctive value you can offer?
Now let’s turn to the corporate B2B sector and consider the customer relationship management (CRM) software used to manage organizations’ interactions with customers and sales prospects in all areas of their business. CRM software is a growing multibillion-dollar industry. Not surprisingly, it’s also highly competitive. Major enterprise resource planning vendors, such as SAP, Oracle, and Microsoft, had long dominated the industry. They have what most start-ups don’t have—the deep resources needed to cover the steep R&D costs associated with product development.
And yet, despite these impressive vendors, from the customers’ point of view, all the offerings looked pretty much the same. All these firms made highly customized software to match their clients’ needs. They all applied the traditional software business model of selling perpetual software licenses, which allow customers to use the software indefinitely. Software was installed, configured, and customized on-site for each client, which required both significant professional services on the part of the vendor and significant internal expertise on the part of the customer. The software also had to be integrated with the client’s legacy systems, which could entail substantial changes to their work processes and infrastructure. Overall, CRM software was expensive and time-consuming to install, with a high total cost of ownership. To stand apart in the industry and close a sale, vendors normally pursued one of two strategies: Either they tried to differentiate their product by adding still more features or they offered big discounts in the final stages of negotiation. Either way, everyone in the industry focused on selling CRM software to the businesses that could afford it: large, complex corporations.
The irony of this is that because the software was complex, expensive to purchase and maintain, hard to install, and required considerable middleware and hardware to run, CRM software vendors effectively limited demand for their own industry.
Enter Salesforce.com. Formed in 1999 by four people, former Oracle executive Marc Benioff, Parker Harris, Dave Moellenhoff, and Frank Dominguez, Salesforce.com did not take the existing industry structure as given, nor did it set out to beat the competition. Instead, it strove to make the competition irrelevant by removing all the pain points the industry had traditionally imposed on its clients, pain points companies ironically had come to accept. This last point is worth mulling over, as it happens in all too many industries. If we need a vaccination, we take it for granted that this will usually require a shot, even though most people cringe at the prospect. If we go to the airport, we take it for granted that there will be lines, and we’ll feel a measure of stress. And if we fly first class on a domestic US flight, we take it for granted that the first-class seats of US carriers will hardly be roomier or recline much further than those in economy, despite the steep ticket price.
Determined to break out of the red ocean of similar offerings, Salesforce.com launched a market-creating strategy that unlocked a blue ocean of new market space. It created a highly reliable, easy-to-use CRM solution accessible over the web, which worked the moment business users signed up for it via a monthly subscription. Not having to purchase a software license or expend resources on infrastructure, deployment, and maintenance reduced the total cost of ownership by roughly 90 percent. Salesforce.com also significantly reduced the risk of deploying its software by allowing subscriptions to be canceled at any time. What’s more, by initially offering only one version of CRM software, Salesforce.com dramatically lowered its per-unit development costs. It could also learn which features mattered and which ones didn’t based on usage rates, allowing it to focus strategically on what mattered most to users.
The result: In just 10 years since it was founded, Salesforce.com earned more than US$1.3 billion in annual revenues. It pulled medium-size and even small businesses into the industry, converting former noncustomers into customers as it grew overall demand. Today, Salesforce.com has over 20,000 employees and annual revenues approaching US$8 billion.
Clearly, the CRM software and the UK charity fund-raising industries are worlds apart. Yet, here again, we see striking parallels between the two. First, we see again that players in an industry all too often move in lockstep with one another. They compete in the same way, invest in the same things, and focus on the existing customers of the industry, largely commoditizing and limiting the size of their own industry. Second, we see again that while industry players fight to capture a greater share of existing demand, the market universe of total potential demand is often far greater. And yet, organizations act as though the existing market boundaries define the de facto universe when in reality these boundaries are not fixed but are merely products of our minds. They can be transcended when we apply a new lens to our thinking. Finally, we see again that organizations can redefine the basis of strategy in an industry to open up new market space and achieve differentiation and low cost.
But the question is—how do they do it?
We are now ready to deduce the mindset of blue ocean strategists and the distinctive ways their thinking departs from red ocean logic. The aim here is for you to understand how blue ocean strategists think so that you can embrace this logic as you embark on your own blue ocean shift journey. This mindset acts as a compass to guide your strategic direction. Without getting it right, the market-creating tools, however good, may be misapplied in action and fail to produce your intended shift. As we go through each guiding principle, think about how it allows you to begin to see opportunities where before only constraints were visible.
Blue ocean strategists do not take industry conditions as given. Rather, they set out to reshape them in their favor.
When executives develop strategy, they nearly always begin by analyzing the environment: Is the industry growing, stagnant, or shrinking? Are raw material prices rising or falling? Are competitors building new plants, launching major new product lines, laying off hundreds of employees, or hiring new talent? Is customer demand up or down? Most executives build their strategies on the basis of these assessments. In other words, structure shapes strategy.1 This view of strategy is deterministic in that: (1) It treats an organization’s strategic options as limited by the environment; and (2) it bounds executives’ imaginations by the industry’s current conditions.
This works fine when industries are attractive. But what if your industry structure is unattractive, and your number-one competitor is barely scraping by or even losing money? What will your strategy be then? To lose less money than everyone else? To pull out? Neither is terribly inspiring, nor is it a path to strong, profitable growth.
What a blue ocean strategist recognizes, and what most of us all too often forget, is that while industry conditions exist, individual firms created them. And just as individual firms created them, individual firms can shape them too, the way Comic Relief and Salesforce.com did. Reflect for a moment on many of the greatest industries. Back at the turn of the 20th century, didn’t Ford create a mass market for the auto industry, as Xerox did later in the copier industry, followed by Canon in the personal copier industry? How about McDonald’s in fast food? Apple in apps? FedEx in express delivery? Or even DryBar, which launched the “only-blowouts” market space in US hair salons, rather than offering haircuts, coloring, and perms.
Just as single organizations can drive entire industries with powerful ideas, single organizations can shape existing industries and create new ones.2 Industry boundaries are not fixed. They are as fluid as your imagination. And one of the greatest ironies is that often it is organizations themselves that contribute to their industry’s declining conditions. Think of the US Postal Service that today teetters on the brink as people shift to alternatives like email and express delivery services, which are significantly more expensive. Why is demand for government postal services shrinking? Is it simply because these new, alternative industries are so strong? Partially. But it’s also because the total postal experience is so poor. How many times have you entered a US post office and found fast efficient service, with every window open, no lines, and postal workers who actually seem happy to serve you? Was the experience a pleasant one you would want to repeat? Probably not. More likely, you were one of many people standing in line with a dissatisfied look on your face. Or maybe you were one of those people who, after waiting five minutes in line, threw up your hands and walked out, frustrated, with time wasted and nothing accomplished, swearing never to go back.
Organizations contribute to their own downfall more often than they realize, and then blame exogenous market forces they don’t control instead. Blue ocean strategists don’t. They refuse to take existing industry conditions as givens. Nor do they blame those conditions for their difficulties. They look to themselves for answers, and don’t let industry conditions frame their understanding of what is possible and profitable. While shared industry logic may help you make sense of the world, it dramatically restricts your creative thinking. It impels you to leave assumptions unquestioned and ideas unexplored, and to defend the status quo. It also disempowers you. As Steve Jobs put it, “You tend to get told that the world is the way it is… But that’s a very limited [view]. Life can be much broader once you discover one simple fact. And that is everything around you that you call life was made up by people that were no smarter than you. And you can change it. You can influence it. You can build your own things that other people can use. And the minute you understand that you can poke life… that you can change it. You can mold it. That’s maybe the most important thing—to shake off this erroneous notion that life is there and you’re just going to live in it.… And once you learn that, you’ll never be the same again.”3 Blue ocean strategists act on this insight, which widens their creative palette and drives them to seriously weigh, rather than instantly write off, ideas that set out to shape, not merely accept, industry conditions.
Blue ocean strategists do not seek to beat the competition. Instead they aim to make the competition irrelevant.
Most organizations are stuck in the trap of competing.4 Having accepted the industry structure as a given, executives proceed to benchmark their rivals and focus on outperforming them to achieve a competitive advantage. Indeed, one can hardly speak of strategy without invoking the idea of building a competitive advantage. But focusing on building a competitive advantage has an unintended and deeply ironic effect, because it leads to imitative, not innovative, approaches to the market. How can this be? This is a critical point to grasp because it’s probably affecting your organization and what you do more than you know.
Let’s start with the obvious. Every winning organization, by definition, has a competitive advantage. Comic Relief and Salesforce.com certainly do. So having a competitive advantage is good. No one is arguing with that. But that competitive advantage explains what the organization has achieved, the outcome of its strategy. In statistics, this is known as the dependent variable. The trouble is that, over time, people have confused the outcome of a winning strategy, namely a competitive advantage, with the process of achieving it or the independent variable. So managers have been increasingly urged to build competitive advantages to beat the competition.
At first glance this appears reasonable. If winning organizations have competitive advantages, pursuing a competitive advantage would seem to be the direct path to achieving it. The problem is one of framing. When managers are urged to secure a competitive advantage, what are they likely to do? They automatically look to the competition, assess what their competitors do, and strive to do it better. But, in so doing, their strategic thinking unknowingly regresses toward the competition. The competition becomes the defining variable of strategy, not buyer value. This narrows an organization’s view to the competitive factors and shared assumptions held among existing competitors, leading it to improve along the established trajectory.
But should your strategy be driven in this way? Our research suggests not, especially if you are in an increasingly unattractive industry. Focusing on building competitive advantages distracts you from reshaping old industries and creating new ones. It blocks creativity and keeps you locked in the same way of competing as everyone else.
In direct contrast, blue ocean strategists are keenly focused not on building competitive advantages but on how to make the competition irrelevant.5 They have a quiet disregard for what the competition is doing. They don’t assume that just because competitors are doing something it’s the right thing to do. The question they obsess about is this: What would it take to win over the mass of buyers, even with no marketing? Why the stipulation? Not because these organizations don’t believe in or use marketing just like everyone else. They do. It’s just that their aim is to push their organizations to create offerings so compelling that anyone who sees them or tries them can’t help but rave about them. As Michael Levie, cofounder of citizenM, which created the new market space of affordable luxury hotels, put it, “Our aim is not to rely on marketing to sell hotel rooms. It is to create a hotel experience that in itself becomes our marketing, because people can’t stop recommending it and sharing pictures of it on Facebook and Instagram.” That’s precisely what drove Steve Jobs’s relentless challenge to Apple to create “insanely great” products and services, not products and services that were better than competitors’, though, in the end, they were that too.
When organizations frame the strategic challenge this way, the futility of benchmarking the competition becomes clear. It causes managers to fundamentally challenge and rethink all the factors an industry competes on and invests in, and to push for a quantum leap in value. For while an incremental improvement over what competitors do may give you a competitive advantage, nothing short of a quantum leap in value will make the competition irrelevant.
It is this drive to make the competition irrelevant that opens organizations’ eyes to the difference between what industries are competing on and what the mass of buyers actually values. Ironically, although blue ocean strategists are not focused on building a competitive advantage, they often achieve the greatest competitive advantage in the end.
Blue ocean strategists focus on creating and capturing new demand, not fighting over existing customers.
Almost every organization of a certain size regularly engages in some form of customer satisfaction survey. Even if you run a small business or nonprofit organization, satisfying existing customers is usually a key priority. So organizations elicit feedback from customers on what they like and don’t like, on how they are doing, and on what they need to improve. As organizations garner insights, this often leads to a richer appreciation of the nuances in what current customers value. This, in turn, triggers finer segmentation and greater customization to meet their customers’ specialized needs. Improved customer satisfaction almost always follows. “Exactly,” you may think. “That’s what we do. We’re great at that.” Or “We have a really creative way to tailor our offerings to best meet our individual customer needs.”
For all its strength, however, this drive to improve customers’ satisfaction scores also tends to keep organizations anchored in the red ocean of existing market space. In most industries, organizations converge around a common definition of who their customers are: older, wealthy, educated donors for the UK charity industry, for instance, or large complex corporations for enterprise resource planning software. This common definition then defines whom they expend their resources and efforts on. While this focus on existing customers is fine when industries are growing, it starts to impose real limits when demand is stagnant or in decline. It prevents organizations from seeing the wider potential of new demand outside their industry that they could tap into. And as Comic Relief and Salesforce.com show, in many industries, existing customers are just a drop in the bucket, compared with all the noncustomers who can be reached through market-creating strategies.6
Moreover, when you ask existing customers, “How can we make you happier?” their insights tend toward the familiar, such as “Offer me more for less.” But this focus almost always drives you to merely offer better solutions to your industry’s existing problem, keeping you trapped in the red ocean.7 The US retail industry painfully pays for this focus at the end of every year, when their customers, who have been trained to expect preholiday sales, ask for the sales to start even earlier and for the stores to offer ever-larger discounts. Now holiday decorations can be seen in stores as early as October. As for strong, profitable growth, customers may be happier with the earlier and larger discounts, but retail sales have hardly inched up while profit margins continue to shrink.
Instead of fighting to win a greater percentage of existing customers, blue ocean strategists seek to create new demand by looking to noncustomers. They recognize that extra demand is out there, waiting to be unlocked. By looking to noncustomers and what turns them off about an industry, they begin to uncover the major pain points—like pity pleas—imposed by their industry that make people choose against it. In this way, they glean critical insight into how to open up new market space.
As you will discover on your blue ocean shift journey, noncustomers, not customers, provide the greatest insight into what your industry is doing to limit demand and how you can overcome this. The opportunity here is to create new demand where there is no competition, not to simply get a tad more of a shrinking red ocean.
Blue ocean strategists simultaneously pursue differentiation and low cost. They aim to break, not make, the value-cost trade-off.
As discussed in chapter 1, for a red ocean strategist, strategy requires making a choice between differentiation and low cost. By contrast, blue ocean strategists follow a different path and see market-creating strategy not as an either-or, but as a both-and approach. In short, they pursue differentiation and low cost simultaneously.8
Think back to Comic Relief. With its little red noses, its focus on community “fun”d-raising and mayhem, and its shift from year-round solicitations to a unique experience once every two years, Comic Relief is clearly the most differentiated fund-raising charity in the industry. At the same time, it has a low cost structure. Unlike traditional charities, Comic Relief doesn’t plow time and money into expensive galas, or write grants to solicit funds from governments and foundations, or engage in counseling or care services. Instead, it uses high-street retail outlets, from supermarkets to fashion stores, to sell its little red noses. By some estimates, Comic Relief has stripped away more than 75 percent of traditional fund-raising operations. Comic Relief’s staff costs are also very low, with ordinary citizens volunteering to do the bulk of the fund-raising by engaging in silly antics that others sponsor. What’s more, thanks to the widespread media attention and free word-of-mouth advertising that Red Nose Day generates, Comic Relief avoids large advertising costs. The result: Comic Relief broke the value-cost trade-off, pioneering a new value-cost frontier.
Organizations that pursue differentiation to stand apart from competitors tend to focus on what to offer more of. Those that pursue cost leadership tend to focus on what to offer less of. While both of these are viable strategic options, which a great many organizations currently pursue, both will keep you stuck in the red ocean, operating on your industry’s existing productivity frontier. To offer buyers a quantum leap in value and break the value-cost trade-off, blue ocean strategists focus as much on what to eliminate and reduce as they do on what to raise and create. It is the simultaneous pursuit of differentiation and low cost that allows blue ocean strategists to leapfrog the competition, creating the positive buzz that drives thumbs-up and five-star ratings on websites, and attracting not just new customers but fans, who can’t do enough to sing their praises.
Adopting the perspective of the blue ocean strategist is like looking up at the night sky at the single constellation your industry has long been focused on and then turning your head to see the vast expanse of the universe that hadn’t been in your field of vision before. It shifts your thinking from constraints to new opportunities. With it, you will be guided in the right direction to challenge industry structure, break from industry logic, look to noncustomers, and craft strategies that achieve both differentiation and low cost. You can’t expect to create a blue ocean if you think like a red ocean strategist.
Now let’s dive into the next chapter. There we outline how humanness is systematically built into the blue ocean shift process and how that inspires and builds people’s confidence so that they own and drive the process. The chapter also shows how people’s creative competence is unlocked in the process and what you can expect at each step.