Sunday, January 4, 2009

Blue Ocean Strategy - Part 1

I just finished reading a book on strategy: "Blue Ocean Strategy" written by W.Chan Kim and Renee Mauborgne. It is one of the best books written on strategy out there and that is why I wanted to share this with you in this post.

It redefines strategy as we know it today: competition-based and customer-driven strategies are referred to as "red ocean strategies" in this book. Authors provide examples of how companies continue to compete head-on in overcrowded industries - that results in nothing but bloody "red ocean" rivals fighting over a shrinking profit pool.

Definition: Strategy
The word "Strategy" derives from the Greek word stratēgos, which derives from two words: stratos (army) and ago (ancient Greek for leading). Stratēgos referred to a 'military commander' during the age of Athenian Democracy. This definition leads us to believe that strategy is about making such choices that beat the competition; that's a classic red-ocean strategy.

Blue Ocean Strategy
Blue Ocean Strategy is just the opposite. Instead of beating the competition, this new strategy focuses on making the competition irrelevant by changing the market-space. It starts with re-orienting the company's strategic focus from "competitors" to "alternatives" and from "customers" to "non-customers". Conventional Red Ocean Strategy is based on value-cost trade-off which explains why companies pursue either "differentiation" or "low cost" strategy. As it is conventionally believed that companies can either create greater value to customer at a higher cost or create reasonable value at a lower cost.

Blue Ocean Strategy leads us to break the value-cost trade off .Basic tenet of this strategy is that "differentiation" AND "low cost" should be pursued simultaneously by companies in order to create "blue oceans".

Key Principles of Blue Ocean Strategy
Blue Ocean Strategy is different than red ocean strategy in several ways. As I just mentioned, the focus of blue ocean is to
1) create "uncontested market space" unlike competing in existing market space (red ocean).
2) focus on non-customers to create and capture new customer demand
3) make the competition irrelevant
4) break the value-cost trade off
5) align firm's activities in pursuit of both differentiation and low cost

To read more about Blue Strategy analytical tools and frameworks, stay tuned for my next post-
Blue Ocean Strategy-Part 2. Also don't forget to check out previous posts from December last year: Purpose Brands, Learning to Love Recession, What's your profit? and Pocket-Price Waterfall.

RECOMMENDED READING: Blue Ocean Strategy (Kim & Mauborgne)

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