Q&A: Renée Mauborgne

BUSINESS STRATEGY:  is one of the world's pre-eminent experts on business strategy, innovation and wealth creation and developer of blue ocean strategy

Renée Mauborgne and W Chan Kim, built international management reputations on their book Blue Ocean Strategy, aimed at "making competition irrelevant."

The strategy is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over a period of 120 years (1880-2000). In addition to retrospective case studies, the book offers theoretical approaches and practical tools to create and capture "blue oceans" of uncontested market space ripe for growth. Kim and Mauborgne argue that tomorrow's leading companies will succeed not by battling competitors, but by creating these "blue oceans".

The metaphor of red and blue oceans describes the business market. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans.

In blue oceans, in contrast, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. Here competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored

INNOVATION (INN):How do you define blue ocean strategy, and why is it important for executives to embrace the idea? Is it more than just another buzzword for ideas that have been around for some time?

PROF RENÉE MAUBORGNE (RM):Blue ocean strategy is about creating and capturing uncontested market space, thereby making the competition irrelevant.

In short, it's about creating exceptional value for the buyer and compelling profit for the firm that is executed in a motivating fashion.

There are several driving forces behind the rising imperative for executives to create blue oceans of new market space. Accelerated technological advances have substantially improved industrial productivity and have allowed suppliers to produce an unprecedented array of products and services. The result is that in increasing numbers of industries, supply exceeds demand.

The trend toward globalisation compounds the situation. As trade barriers between nations and regions are dismantled and as information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to disappear.

With competition on the rise from China, India, Latin America and Eastern Europe the red ocean of most industries is only going to get bloodier. That's what makes creating blue oceans a rising imperative.

While supply is on the rise as global competition intensifies, there is no clear evidence of an increase in demand worldwide. The result has been accelerated commoditisation of products and services, increasing price wars, and shrinking profit margins.

As supply increasingly exceeds demand in most industries, competing for a share of contracting markets is not sufficient. Executives need to go beyond competing. To seize new profit and growth opportunities, they need to create new markets, or what we call blue oceans. In creating blue oceans the objective is not to compete head-to-head, but to make competition irrelevant.

We have spent the past decade developing a set of analytical tools and frameworks in an attempt to make the formulation and execution of blue ocean strategy as systematic and actionable as competing in the 'red ocean' of known market space.

INN:Can you give us some examples of blue ocean firms (and some red ocean ones as well)?

RM:We don't believe in blue ocean companies. History teaches us that there are no perpetually excellent companies that continuously outperform the market. We only believe in blue ocean "strategic moves."

Consider, for example, In Search of Excellence: Lessons from America's Best Run Companies, the 1983 bestseller. This publication outlined what were perceived as the world's best companies to emulate. Yet within two years of its publication a number of the companies surveyed began to slip into oblivion: Atari, Chesebrough-Pond's, Data General, Fluor, National Semiconductor.

As documented in Managing on the Edge, two-thirds of the identified model firms in the book had fallen from their perches as industry leaders within five years of its publication. And this result has happened time and time again for the last 25 years: one company can be brilliant at one moment and wrong-headed at another.

Consider Body Shop. For over 10 years Body Shop created and captured breakthrough growth in their blue ocean. Yet, the competition eventually imitated and the Body Shop became mired in the red ocean. Therefore, we believe that the "strategic move" is the right unit of analysis for explaining the creation of blue oceans and the root of profitable growth.

By "strategic move," we mean the set of managerial actions and decisions involved in making a major market-creating business offering. So, for example, while we would label the Wii, Nintendo's new gaming system, a blue ocean strategic move that made the competition irrelevant and created all new demand (including senior citizens), we would not say that Nintendo is a blue ocean company, per se.

INN:Are the the key message of cost cutting and differentiation not what you would expect managers to understand and pursue already?

RM:The cornerstone of blue ocean strategy is the simultaneous pursuit of differentiation and low-cost (not general un-focused cost cutting). This is what we call "value innovation".

One of the most commonly accepted dogmas of competition-based strategy is 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. As differentiation and low cost are seen as mutually exclusive pursuits, strategy is seen as a choice between them.

In contrast, companies that seek to create blue oceans break this trade-off and pursue differentiation and low-cost simultaneously.

Instead of focusing on beating the competition, you focus on making them irrelevant by creating a leap in value for both buyers and your company, thereby opening up uncontested market space. Lastly, value innovation is geared towards creating new market space by encompassing the entire range of a firm's activities from product, service, and delivery and the business model, instead of any one function.

INN:Can you explain your concept of value innovation and how it relates to creating a blue ocean strategy?

RM:Value innovation is the cornerstone of Blue Ocean Strategy. Value improvements get you only so far. Value innovation is concerned with challenging accepted assumptions about particular markets, changing the way managers frame the range of strategic possibilities. Value innovation is not about making trade-offs, but about simultaneously pursuing both exceptional value and lower costs.

INN:Where are firms going wrong in terms of strategic planning?

RM:Most companies are too numbers-driven. They do lots of comparative industry analysis - especially on the competition - but that blinds them to the big picture.

I think most companies know that strategic planning is an imperfect process. There are certainly many books and articles criticising it. But they have not had an alternative to it, so companies have kept on using it because it does allow for some degree of accountability.

Blue ocean strategy offers an alternative. At the centre is the four-step strategy visualisation process any company or organisation can apply. The first step is Visual Awakening. At this stage executives are asked to draw their 'As Is' strategy map - a visual representation of their company's strategy vis-à-vis the competition. This brings home the need for change. It serves as a forceful wake-up call for companies to challenge their existing strategies.

The next step is what we call the Visual Exploration. Here managers go into the field to explore the Six Paths to new market space creation. Here executives observe the distinct differences of alternative products and services and see which factors should be eliminated, created or changed in the company's offerings.

The penultimate step is the Visual Strategy Fair. Here executives begin to draw their 'To Be' Strategy map based on insights from the market exploration observations and test these ideas with customers, non-customers, and lost customers. After refining the 'To Be' strategy canvas, the last step is to communicate it in a way that can be easily understood by any employee.

INN:Specifically with traditional industries - like newspapers - is there any hope of "breaking away"? While it's great to innovate and lead, there seems to be plenty of money around for those that follow as well?

RM:In our book, there are numerous examples of traditional industries ranging from cement, to hair cutting, to the circus and municipal bus industries that have seen companies break away and create blue oceans of new market space.

Interestingly, however, while most companies can see how Blue Ocean Strategy would apply to other industries, executives are often quick to point out how their industry is different. Yet, blue oceans have been created across all types of industries.

Of course, there is money to be made by following as well. Microsoft is a prime example of a company that is often a fast follower in many of the businesses it operates in with tenacious execution power.

INN:Part of the strategy is to focus on 'non-customers'; but do you risk disappointing your current customers and end up serving no one well?

RM:Let's first look at the importance of non-customers. When you ask existing customers, 'what would you like us to give to you?' their insights tend toward the familiar 'offer me more for less.' Focusing on existing customers drives you to offer better solutions than your rivals to existing problems defined by your industry.

That is why customer-based strategy tends be less likely to yield insight into how to create blue oceans. To create new demand you must begin by reorienting your strategic focus from customers to non-customers. With this simple cognitive shift, one gains insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value elements that reside across industry boundaries.

Consider Cirque du Soleil. The conventional wisdom was that in the traditional circus industry, everybody was competing with each other on the basis of bringing in more exotic animals and more acrobatics.

They tried to improve the thrill of the circus. By looking to non-customers, Cirque was able to reconstruct market boundaries to create and capture enormous new demand.

Will you lose existing customers by focusing on non-customers? It can happen. But often this is not the case as existing customers gain new benefits from the non-customer offering that they never realised they wanted. In the case of Cirque du Soleil, it is popular with both existing circus customers (families) as it is with a whole new ocean of once non-customers.

INN:How do you get staff to consider

blue ocean thinking, particularly in a climate where senior managers may be more prone to lock down than trying something new for fear of failure in the current credit crisis?

RM:Fear of failure is something that has always been present in most companies and it's a relevant concern.

For all the talk of allowing for failure and even celebrating it that one reads about, no one wants, and many cannot afford, to fail and bear the financial and credibility risk that goes with it. Blue Ocean Strategy explicitly recognises that. It is not about taking risks, but about learning how to open up and capture new markets. No company can afford to be a riverboat gambler.