Management innovation: General Electric, DuPont, Procter and Gamble, Visa, Linux?, what makes them to keep in business, its great products?, perhaps, its great people?, maybe, its great leaders?, sometimes, but if we dig deeper, we can find another, more fundamental reason for their success: innovation.
With these crazy times, the complexity of global markets requires a newly, fresh and reframed structured approach to the planning process, and to all the market it selves, regarding their old and antique planning process, regarding too much information, the management neglect of new strategies of long term relationships, the overemphasis on the plans, a misbelieve of forecasting appropriately, and the lack of focus on actual corporate leaders.
What I have done with this research paper is to obtain in-deep information regarding this lovely strategy: the blue ocean strategy, which since I knew it back on 2007, thanks to Dr Homero Aguirre, it has been amazing journey this strategy travel to knowledge me since then.
The logic at Blue Ocean Strategy is not about technology innovation. Blue oceans seldom result from technological innovation. Most blue oceans are created from within, not beyond, the red oceans of existing industries, Actual often create blue oceans within their core businesses. I am about to tell you a story that still amazes me, Cirque du Soleil.
A onetime accordion player, stilt walker and fire-eater, Guy Laliberté is now CEO of one of Canada’s largest cultural exports, Cirque du Soleil. Founded in 1984 by a group of street performers, Cirque has staged dozens of productions seen by some 40 million people in 90 cities around the world. In 20 years, Cirque has achieved revenues that Ringling Bros. and Barnum & Bailey took more than a century to attain. Cirque’s rapid growth occurred in an unlikely setting. The circus business was (and still is) in long-term decline.
Alternative forms of entertainment—sporting events, TV, and video games—were casting a growing shadow. Children preferred PlayStations to circus acts. There was also rising sentiment, fueled by animal rights groups, against the use of animals, traditionally an integral part of the circus.
On the supply side, the star performers that Ringling and the other circuses relied on to draw in the crowds could often name their own terms. As a result, the industry was hit by steadily decreasing audiences and increasing costs. What’s more, any new entrant to this business would be competing against a formidable incumbent that for most of the last century had set the industry standard.
How did Cirque profitably increase net revenues by a factor of 22 over the last ten years in such an unattractive market environment? The tagline for one of the first Cirque productions is amazing: “We reinvent the circus.” Cirque did not make its money by competing within the confines of the existing industry or by stealing customers from circle and the others. Instead it has created uncontested market space that made the competition irrelevant. It pulled in a whole new group of customers who were traditionally non-customers of the industry—adults and corporate clients who had turned to theater, opera, or ballet and were, therefore, prepared to pay several times more than the price of a conventional circus ticket for an unprecedented entertainment experience.
To understand the nature of Cirque’s achievement, we have to realize that the business universe consists of two distinct kinds of space, which we think of as red and blue oceans. Red oceans represent all the industries in existence today—the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody.
Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is an ample opportunity for growth that is both profitable and rapid. There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as e-Bay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry. As will become evident later, this is what Cirque did. In breaking through the boundary traditionally separating circus and theater, it made a new and profitable blue ocean from within the red ocean of the circus industry.
The natural logic behind blue ocean strategy parts with traditional models focused on competing in existing market space. Indeed, it can be argued that managers’ failure to realize the differences between red and blue ocean strategy lies behind the difficulties many companies encounter as they try to break from the competition. In this article, we present the concept of blue ocean strategy and describe its defining characteristics. We assess the profit and growth consequences of blue oceans and discuss why their creation is a rising imperative for companies in the future. We believe that an understanding of blue ocean strategy will help today’s companies as they struggle to thrive in an accelerating and expanding business universe.
Reduce your costs while also offering customers more value. Cirque du Soleil omitted costly elements of traditional circus, such as animal acts and aisle concessions. Its reduced cost structure enabled it to provide sophisticated elements from theater that appealed to adult audiences— such as themes, original scores, and enchanting sets, all of which change year to year. The added value lured adults who had not gone to a circus for years and enticed them to come back more frequently— thereby increasing revenues. By offering the best of circus and theater, Cirque created a market space that, as yet, has no name—and no equals.
Michael Hammer, a visionary leader of reengineering and process management, agrees: “High performance operating processes are necessary but not sufficient for enterprise success.” A senior strategic planner at a Fortune 20 company toughened Hammer’s view: “You can have the best processes in the world, but if your governance processes don’t provide the direction and course correction necessary to achieve your goals, success is a matter of luck.”
Blue and Red Oceans
Although the term may be new, blue oceans have always been with us. Look back 100 years and ask yourself which of the industries known today were then unknown. The answer: Industries as basic as automobiles, music recording, aviation, petrochemicals, pharmaceuticals, and more recently management consulting were unheard-of or had just begun to emerge. Now turn the travel clock back 30 years and ask yourself the same question. Again, a excess of multibillion-dollar industries jump out: mutual funds, cellular telephones, computer technology, biotechnology, discount retailing, express package delivery, starbucks, wii, Nintendo DS, to name a few. Just three decades ago, none of these industries existed, not even in someone’s most precious mind.
Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers.
This time, put the time clock 20 years ahead. Ask yourself: How many industries that are unknown today will exist then? Now look at the current fact: The half-century-old Standard Industrial Classification (SIC) system was replaced in 1997 by the North American Industry Classification System (NAICS). The new system expanded the ten SIC industry sectors into 20 to reflect the emerging realities of new industry territories— blue oceans.
The services sector under the old system, for example, is now seven sectors ranging from information to health care and social assistance. Given that these classification systems are designed for standardization and continuity, such a replacement shows how significant a source of economic growth the creation of blue oceans has been.
Looking forward, it seems clear to us that blue oceans will remain the engine of growth. And as trade barriers between nations and regions fall and information on products and prices becomes instantly and globally available, niche markets and monopoly havens are continuing to disappear. At the same time, there is little evidence of any increase in demand, at least in the developed markets, where recent United Nations statistics even point to declining populations. The result is that in more and more industries, supply is overtaking demand. This situation has inevitably hastened the commoditization of products and services, stoked price wars, and shrunk profit margins.
According to recent studies of Harvard University, major American brands in a variety of product and service categories have become more and more alike. Also, as brands become more and more similar, people increasingly base its purchase choices on price. People no longer insist, as in the past, that their laundry detergent should be Tide. Nor do they necessarily stick to Colgate, Bimbo, Palmolive or McDonalds, when there is a special promotion for Crest, nor do they need and Old-Spice deodorant when out there is a bunch of new brands, and vice versa. In overcrowded industries, differentiating brands becomes harder both in economic upturns and in downturns.
The Strategy Paradox
Unfortunately, most companies seem stuck in their red oceans. In a simple study of business launches in 108 companies, we found that 86% of those new ventures were line extensions— incremental improvements to already existing industry offerings—and a mere 14% were aimed at creating new markets or industries. While line extensions accounted for 62% of the total revenues, they delivered only 39% of the total profits. By contrast, the 14% invested in creating new markets and industries delivered 38% of total revenues and a startling 61% of total profits.
So, why the dramatic imbalance in favor of red oceans? Part of the explanation 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 all about red ocean competition.
Blue ocean strategy, by contrast, is about doing business where there is no competitor. It is about creating new lands, not dividing up existing land.
Focusing on the red ocean therefore means accepting the key constraining factors of war—limited terrain and the need to beat an enemy to succeed. And it means denying the distinctive strength of the business world—the capacity to create new market space that is uncontested.
The term that best symbolizes this is “competitive advantage.” In the competitive-advantage worldview, companies are often driven to outperform rivals and capture greater shares of existing market space.
Of course competition matters. But by focusing on competition, academics, companies, and consultants have ignored two very important— and, we would argue, far more lucrative— aspects of strategy: One is to find and develop markets where there is little or no competition—blue oceans—and the other is to exploit and protect blue oceans. These challenges are very different from those to which strategists have devoted most of their attention.
En route for Blue Ocean Strategy
What kind of strategic logic is needed to guide the creation of blue oceans? To answer that question, we can look back over 100 years of data on blue ocean creation to see what patterns could be discerned.
We can conclude the following:
Blue oceans are not about technology innovation
Leading-edge technology is sometimes involved in the creation of blue oceans, but it is not a defining feature of them. This is often true even in industries that are technology intensive. Even Ford’s revolutionary assembly line can be traced to the meatpacking industry in America. Like those within the auto industry, the blue oceans within the computer industry did not come about through technology innovations alone but by linking technology to what buyers valued. As with the IBM 650 and the Compaq PC server, this often involved simplifying the technology.
Incumbents often create blue oceans—and usually within their core businesses
GM, Honda, Toyota, and Chrysler were established players when they created blue oceans in the auto industry. So were IBM and Compaq in the computer industry. Of the companies listed here, only Ford, Apple, Dell, and Nickelodeon were new entrants in their industries; the first three were start-ups, and the fourth was an established player entering an industry that was new to it. This only suggests that incumbents are not at a disadvantage in creating new market spaces. Furthermore, the blue oceans made by incumbents were usually within their core businesses. In fact, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waves. Blue oceans are right next to us in every industry we look at.
Company and industry are the wrong units of analysis
The traditional units of strategic analysis—company and industries—have little explanatory power when it comes to analyzing how and why blue oceans are created. Every company rises and falls over time. The most appropriate unit of analysis for explaining the creation of blue oceans is the strategic move—the set of managerial actions and decisions involved in making a major market-creating business offering. Compaq, for example, is considered by many people to be “unsuccessful” because it was acquired by Hewlett- Packard in 2001 and ceased to be a company. But the firm’s ultimate fate does not invalidate the smart strategic move Compaq made that led to the creation of the multibillion-dollar market in PC servers, a move that was a key cause of the company’s powerful comeback in the 1990s.
Creating blue oceans that builds brands
So powerful is blue ocean strategy that a blue ocean strategic move can create brand equity that lasts for decades. Very few people alive today were around when the first Model T rolled off Henry Ford’s assembly line in 1908, but the company’s brand still benefits from that blue ocean move. Fender, the electric guitar maker, too, is often regarded as an “American institution” largely for the blue oceans it created in computing; the Stratocaster series was its equivalent of the Model T. The key is making the right strategic moves. What’s more, companies that understand what drives a good strategic move will be well placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action.
The Defining Characteristics
Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a tradeoff exists between value and cost. Companies can either create greater value for customers at a higher cost or create reasonable value at a lower cost. In other words, strategy is essentially a choice between differentiation and low cost. But when it comes to creating blue oceans, the evidence shows that successful companies pursue differentiation and low cost simultaneously.
To see how it is done, let return to Cirque du Soleil. At the time of Cirque’s debut, circuses focused on benchmarking one another and maximizing their shares of shrinking demand by tweaking traditional circus acts. This included trying to secure more and better-known clowns and lion & tiger tamers, efforts that raised circuses’ cost structure without substantially altering the circus experience. The result was raising costs without rising revenues and a downward spiral in overall circus demand. Now Cirque du Soleil. Instead of following the conventional logic of outpacing the competition by offering a better solution to the given problem, it redefined the problem itself by offering people the fun and thrill of the circus and the intellectual sophistication and artistic richness of the theater.
In designing performances, Cirque had to reevaluate the components of the traditional circus offering. What the company found was that many of the elements considered essential to the fun and thrill of the circus were unnecessary and in many cases costly. For instance, most circuses offer animal acts. These are a heavy economic encumber, because circuses have to shell out not only for the animals but also for their training, veterinarian care, housing, insurance, and transportation across the countries. Yet Cirque found that the appetite for animal shows was rapidly diminishing because of rising public concern about the treatment of circus animals and the ethics of exhibiting them.
Similarly, although traditional circuses promoted their performers as stars, Cirque realized that the public no longer thought of circus artists as stars. Not only did these create confusion among spectators forced to switch their attention from one ring to another, they also increased the number of performers needed, with obvious cost implications. And while aisle concession sales appeared to be a good way to generate revenue, the high prices discouraged parents from making purchases and made them feel they were being taken for a ride.
Cirque found that the lasting allure of the traditional circus came down to just three factors: the clowns, the tent, and the classic acrobatic acts.
So Cirque kept the clowns, while changing their humor away from slapstick to a more enchanting, charming and sophisticated style. It glamorized the tent, which many circuses had abandoned in favor of rented venues. Realizing that the tent, more than anything else, captured the magic of the circus, Cirque designed this classic symbol with a glorious external finish and a high level of audience comfort.
Acrobats and other thrilling performers were retained, but Cirque reduced their roles and made their acts more elegant by adding artistic finesse. Even as Cirque stripped away some of the traditional circus offerings, it injected new elements drawn from the world of theater.
For instance, unlike traditional circuses featuring a series of unrelated acts, each Cirque creation resembles a theater performance in that it has a theme and story line. Although the themes are intentionally vague, they bring harmony and an intellectual element to the acts. Cirque also borrows ideas from the wonderful Broadway.
For example, rather than putting on the traditional “once and for all” show, Cirque mount multiple productions based on different themes and story lines. As with Broadway productions, too, each Cirque show has an original musical score, which drives the performance, lighting, and timing of the acts, rather than the other way around. The productions feature abstract and spiritual dance, an idea derived from theater and ballet.
By introducing these factors, Cirque has created highly sophisticated entertainments. And by staging multiple productions, Cirque gives people reason to come to the circus more often, thereby increasing revenues.
Cirque offers the best of both circus and theater. And by eliminating many of the most expensive elements of the circus, it has been able to dramatically reduce its cost structure, achieving both differentiation and low cost.
By driving down costs while simultaneously driving up value for buyers, a company can achieve a leap in value for both itself and its customers. Since buyer value comes from the utility and price a company offers, and a company generates value for itself through cost structure and price, blue ocean strategy is achieved only when the whole system of a company’s utility, price, and cost activities is properly aligned. It is this whole-system approach that makes the creation of blue oceans a sustainable strategy. Blue ocean strategy integrates the range of a firm’s functional and operational activities.
A rejection of the trade-off between low cost and differentiation implies a fundamental change in strategic mind-set—we cannot emphasize enough how fundamental a shift it is. The red ocean assumption that industry structural conditions are a given and firms are forced to compete within them is based on an intellectual worldview that academics call the structuralist view, or environmental determinism.
According to this point of view, companies and managers are largely at the mercy of economic forces greater than themselves. Blue ocean strategies, by contrast, are based on a worldview in which market boundaries and industries can be reconstructed by the actions and beliefs of industry players. We can call this the reconstructionist view.
The founders of Cirque du Soleil clearly did not feel constrained to act within the confines of their industry. Indeed, is Cirque really a circus with all that it has eliminated, reduced, raised, and created?
Or is it theater? If it is theater, then what genre—Broadway show, opera, ballet? The magic of Cirque was created through a reconstruction of elements drawn from all of these alternatives. In the end, Cirque is none of them and a little of all of them. From within the red oceans of theater and circus, Cirque has created a blue ocean of uncontested market space that has, as yet, no name.
The Simultaneous Pursuit of Differentiation and Low-Cost Leader
A blue ocean company is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made from eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry that has never been offered. Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates.
Barriers to Imitation
Companies that create blue oceans usually reap the benefits without credible challenges for ten to 15 years, as was the case with Cirque du Soleil, Home Depot, Andromedical, Federal Express, and CNN, to name just a few. The reason is that blue ocean strategy creates considerable economic and cognitive barriers to imitation. For a start, adopting a blue ocean creator’s business model is easier to imagine than to do. Because blue ocean creators immediately attract customers in large volumes, they are able to generate scale economies very rapidly, putting would-be imitators at an immediate and continuing cost disadvantage. 
In other situations, attempts to imitate a blue ocean creator conflict with the imitator’s existing brand image. The Body Shop, for example, shuns top models and makes no promises of eternal youth and beauty. For the established cosmetic brands like Estée Lauder and L’Oréal, imitation was very difficult, because it would have signaled a complete invalidation of their current images, which are based on promises of eternal youth and beauty.
A Consistent Pattern
While our conceptual articulation of the pattern may be new, blue ocean strategy has always existed, whether or not companies have been conscious of the fact. Just think the striking parallels between the Cirque du Soleil theater-circus experience and Ford’s creation of the Model T. At the end of the nineteenth century, the automobile industry was small and unattractive. More than 500 automakers in America competed in turning out hand-made luxury cars that cost around $1,500 and were enormously unpopular with all but the very rich.
Woodrow Wilson, the Twenty-Eighth President of USA, caught the spirit of the times when he said in 1906 that “nothing has spread socialistic feeling more than the automobile.” Instead of trying to beat the competition and steal a share of existing demand from other automakers, Ford reconstructed the industry limits of cars and horse-drawn carriages to create a blue ocean. At the time, horse-drawn carriages were the primarily means of local transportation across North America.
Like Cirque, the Ford Motor Company made the competition irrelevant. Instead of creating fashionable, customized cars for weekends in the countryside, a luxury few could justify, Ford built a car that, like the horse-drawn carriage, was for everyday use. The Model T came in just one color, black, and there were few optional extras.
Analytical Tools and Frameworks
Now let’s look on what we have: 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 waters of known market space.
These analytics fills a central void in the field of strategy, which has developed an impressive array of tools and frameworks to compete in red oceans, such as the five forces for analyzing existing industry conditions and three generic strategies, but has remained virtually silent on practical tools to excel in blue oceans. Instead, executives have received calls to be brave and entrepreneurial, to learn from failure, and to seek out revolutionaries.
Although thought-provoking, these are not substitutes for analytics to navigate successfully in blue waters. In the absence of analytics, executives cannot be expected to act on the call to break out of existing competition. Effective blue ocean strategy should be about risk minimization and not risk taking.
For strategists, the critical question is, how do you break out of this red ocean of bloody competition to make the competition irrelevant? How do you open up and capture a blue ocean of uncontested market space? To address these questions, we turn to the strategy canvas, an analytic framework that is central to value innovation and the creation of blue oceans.
The Strategy Canvas
The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It serves two purposes. First, it captures the current state of play in the known market space. This allows us to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The next figure captures all this information in graphic form. The horizontal axis captures the range of factors the industry competes on and invests in.
To fundamentally shift the strategy canvas of an industry, we must begin by reorienting our strategic focus from competitors to alternatives, and from customers to non-customers of the industry. To pursue both value and cost, we should resist the old logic of benchmarking competitors in the existing field and choosing between differentiation and cost leadership. As we shift ourr strategic focus from current competition to alternatives and non-customers, we gain insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value elements that reside across industry boundaries. Conventional strategic logic, by contrast, drives us to offer better solutions than our rivals to existing problems defined by our industries.
Now, let’s redraw the strategic profile to create a blue ocean there is the second basic analytic underlying blue oceans: the four actions framework.
The Four Actions Framework
To reconstruct buyer value elements in crafting a new value curve, we have developed the four actions framework. As shown in our next figure, to break the trade-off between differentiation and low cost and to create a new value curve, there are four key questions to challenge an industry’s strategic logic and business model:
• Which of the factors that are taken for granted should be eliminated?
• Which factors should be reduced well below the industries?
• Which factors should be raised well above the industries?
• Which factors should be created that the industry has never offered?
The first question forces us to consider eliminating factors that companies in ourr industry have long competed on. Often those factors are taken for granted even though they no longer have value or may even detract from value. 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 second question forces us to determine whether products or services have been overdesigned in the race to match and beat the competition. Here, companies over serve customers, increasing their cost structure for no gain.
The third question pushes us to uncover and eliminate the compromises ourr industry forces customers to make.
The fourth question helps us to discover entirely new sources of value for buyers and to create new demand and shift the strategic pricing of the industry.
The Eliminate-Reduce-Raise-Create Grid
There is a third tool that is a key in the creation of blue oceans. It is a supplementary analytic to the four actions framework called the eliminate-reduce-raise-create grid. This grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating and reducing as well as raising and creating, the grid gives companies four immediate benefits:
• It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off.
• It immediately flags companies that are focused only on raising and creating and thereby lifting their cost structure and often over-engineering products and services—a common plight in many companies.
• It is easily understood by managers at any level, creating a high level of engagement in its application.
• Because completing the grid is a challenging task, it drives companies to strongly analyze every factor the industry that competes on, making them discover the range of implicit assumptions they make automatically in competing.
Now, let’s return to our beloved Cirque du Soleil.
Cirque du Soleil provides another snapshot of this tool in action and shows what it reveals. Worth noting is the range of factors that an industry has long competed on that companies discover can be eliminated and reduced. In the case of Cirque du Soleil, it eliminated several factors from traditional circuses, such as animal shows, star performers, and multiple show arenas.
These factors had long been taken for granted in the traditional circus industry, which never questioned their ongoing relevance. However, there was increasing public discomfort with the use of animals. Moreover, animal acts are one of the most expensive elements; not only is there the cost of the animals, but also their training, medical care, housing, insurance, and transportation. Similarly, although the circus industry focused on featuring stars, in the mind of the public the so-called stars of the circus were trivial next to movie stars. Again, they were a high-cost component carrying little sway with spectators. Gone, too, are three-ring venues. Not only did these create angst among spectators as they rapidly switched their gaze from one ring to the other, but they also increased the number of performers needed, with the obvious cost implications.
Cirque du Soleil’s value curve stands apart. It has new and non-circus factors such as theme, multiple productions, refined watching environment, and artistic music and dance. These factors, entirely new creations for the circus industry, are drawn from the alternative live entertainment industry of theater. In this way, the strategy canvas clearly depicts the traditional factors that affect competition among industry players, as well as new factors that lead to creation of new market space and that shift the strategy canvas of an industry.
Cirque du Soleil has created blue oceans in very different business situations and industrial contexts. However, their strategic profiles shared the same three characteristics: focus, divergence, and a compelling tagline. These three criteria guide companies in carrying out the process of reconstruction to arrive at a breakthrough in value both for buyers and for themselves.
Reach Beyond Existing Demand
How do you maximize the size of the blue ocean you are creating? This brings us to the third principle of blue ocean strategy: Reach beyond existing demand. This is a key component of achieving value innovation. By aggregating the greatest demand for a new offering, this approach attenuates the scale risk associated with creating a new market.
To achieve this, 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
The Three Tiers of Noncustomers
Although the universe of noncustomers typically offers big blue ocean opportunities, few companies have keen insight into who noncustomers are and how to unlock them. To convert this huge latent demand into real demand in the form of thriving new customers, companies need to deepen their understanding of the universe of noncustomers.
There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market.
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. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself. However, if offered a leap in value, not only would they stay, but also their frequency of purchases would multiply, unlocking enormous latent demand.
The second tier of noncustomers is people who refuse to use your industry’s offerings
These are buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them. In the Callaway case, for example, these were sports enthusiasts, especially the country club tennis set, who could have chosen golf but had consciously chosen against it.
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. By focusing on key commonalities across these noncustomers and existing customers, companies can understand how to pull them into their new market.
Let’s look at each of the three tiers of noncustomers to understand how you can attract them and expand your blue ocean.
These soon-to-be non-customers are those who minimally use the current market offerings to get by as they search for something better. Upon finding any better alternative, they will eagerly jump ship. In this sense, they sit on the edge of the market. A market becomes stagnant and develops a growth problem as the number of Soon-to-be non-customers increases. Yet locked within these first-tier non-customers is an ocean of untapped demand waiting to be released.
These are refusing noncustomers, people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. Their needs are either dealt with by other means or ignored. Harboring within refusing noncustomers, however, is an ocean of untapped demand waiting to be released.
The third tier of noncustomers is the farthest away from an industry’s existing customers. Typically, these unexplored noncustomers have not been targeted or thought of as potential customers by any player in the industry. That’s because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets.
Go for the Biggest Catchment
There is no hard-and-fast rule to suggest which tier of noncustomers you should focus on and when. 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 at the time. But you should also explore whether there are overlapping commonalities across all three tiers of noncustomers. In that way, we can expand the scope of latent demand we can unleash.
The natural strategic orientation of many companies is toward retaining existing customers and seeking further segmentation opportunities. This is especially true in the face of competitive pressure. Although this might be a good way to gain a focused competitive advantage and increase share of the existing market space, it is not likely to produce a blue ocean that expands the market and creates new demand. 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.
Blue and red oceans have always coexisted and always will be. Practical reality, therefore, demands that companies to appreciate the strategic logic of both types of oceans. At hand, competing in red oceans dominates the field of strategy in theory and in practice, even as businesses’ need to create blue oceans intensifies. It is time to even the scales in the field of strategy with a better balance of efforts across both oceans. For although blue ocean strategists have always existed, for the most part their strategies have been largely unconscious.
What is suggested is that to maximize the scale of our blue ocean we should first reach beyond existing demand to noncustomers and segmentation opportunities as we formulate future strategies.
It is not enough to maximize the size of the blue ocean we are creating. We must profit from it to create a sustainable win-win outcome.
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- Change through Persuasion, David A. Garvin and Michael A. Robert.
- The five messages leaders must manage. John Hamm
- Managing authenticity. Rob Goffee and Gareth Jones.
- Big Shoes to fill. Michael Bill.
- Industrial Growth and Competition. Kenneth L. Simmons.
- The execution premium. Robert Kaplan & David Norton.
- Reinventing strategies for emerging markets. London & Hart.
 Cirque du Soleil, Thomas J. DeLong, Vineeta Vijayaraghavan
 Michael E. Porter is the Bishop William Lawrence University Professor at Harvard University, based at Harvard Business School in Boston. He is a six-time McKinsey Award winner, including for his most recent HBR article, “Strategy and Society,” coauthored with Mark R. Kramer (December 2006).
 Crisis in Organizations: Southwest, Barton, 2001
 Strategy & Society, Michael E. Porter & Mark R. Kramer.
 Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, W. Chan Kim and Renée Mauborgne.
 Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael E. Porter
 For a depiction of the economics underpinning blue ocean strategy, see the exhibit “The Simultaneous Pursuit of Differentiation and Low Cost”
 Imaging strategy, Henry Mintzberg