Blue Ocean Strategy Examples:
With the launch of iTunes, Apple unlocked a blue ocean of new market space in digital music that it has now dominated for more than a decade.
Apple observed the flood of illegal music file sharing that began in the late 1990s, enabled by file sharing programs such as Napster, Kazaa, and LimeWire. By 2003 more than two billion illegal music files were being traded 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 for anyone to digitally download music free, the trend toward digital music was clear. This trend was underscored by the fast-growing demand for MP3 players that played mobile digital music, such as Apple’s hit iPod. Apple capitalized on this decisive trend with a clear trajectory with the creation of iTunes in 2003.
In agreement with five major music companies—BMG, EMI Group, Sony, Universal Music Group, and Warner Brothers Records— iTunes offered legal, easy-to-use, and flexible à la carte song downloads. By allowing people to buy individual songs and strategically pricing them far more reasonably, iTunes broke a key customer annoyance factor: the need to purchase an entire CD when they wanted only one or two songs on it. iTunes also provided a leap in value beyond free downloading services via sound quality as well as intuitive navigation, search and browsing functions.
The unprecedented value iTunes offered triggered customers the world over to flock to iTunes with recording companies and artists also winning. Under iTunes they receive some 70 percent of the purchase price of digitally downloaded songs, at last financially benefiting from the digital downloading craze. In addition, Apple further protected recording companies by devising copyright protection that would not inconvenience users—who had grown accustomed to the freedom of digital music in the post-Napster world—but would satisfy the music industry.
Today iTunes offers more than 37 million songs as well as movies, TV shows, books and podcasts. It has now sold more than 25 billion songs, with users downloading on average fifteen thousand songs per minute. iTunes is estimated to account for more than 60 percent of the global digital music download market. While Apple has dominated this blue ocean for more than a decade, as other online stores zoom in on the this market, the challenge for Apple will be to keep its sights on the evolving mass market and not to fall into competitive benchmarking or high end niche marketing.
In a little more than a decade, the U.S.-based financial information provider, Bloomberg became one of the largest and most profitable business information providers in the world. Challenging its industry’s conventional wisdom about which buyer group to target, Bloomberg created a blue ocean in the financial information services industry.
Until Bloomberg’s debut in the early 1980s, Reuters, Dow Jones and Telerate dominated the online financial information industry, providing news and prices in real time to the brokerage and investment community. The industry focused on purchasers —IT managers—who valued standardized systems, which made their lives easier.
Bloomberg saw that it was traders and analysts, not IT managers, who make or lose millions of dollars for their employers each day. Profit opportunities come from disparities in information. When markets are active, traders and analysts must make rapid decisions. Every second counts.
So Bloomberg designed a system specifically to offer traders a leap in value, one with easy-to-use terminals and keyboards labeled with familiar financial terms. The systems also have two flat-panel monitors so that traders can see all the information they need at once and built-in analytic capability with the press of a button.
By focusing on users, Bloomberg was able to create a blue ocean of strong and profitable growth. With this shift in focus Bloomberg could also see the paradox of traders’ and analysts’ personal lives. They have tremendous income but work such long hours that they have little time to spend it. Realizing that markets have slow times during the day when little trading takes place, Bloomberg decided to add information and purchasing services aimed at enhancing traders’ personal lives. Well before the internet offered such services, traders could use Bloomberg online services to buy items such as flowers, clothing, and jewelry; make travel arrangements; get information about wines; or search through real estate listings.
By shifting its focus upstream from purchasers to users, Bloomberg created a value curve that was radically different from anything the industry had seen before. The traders and analysts wielded their power within their firms to force IT managers to purchase Bloomberg terminals. This is an example of path three of blue ocean strategy’s six paths framework that suggests that companies can gain new insights into unlocking blue oceans by looking across the chain of buyers in an industry and shifting their focus to a previously overlooked set of buyers.
Canon’s strategic move, which created the personal desktop copier industry, is a classic example of blue ocean strategy. Traditional copy machine manufacturers targeted office purchasing managers, who wanted machines that were large, durable, fast, and required minimal maintenance.
Defying the industry logic, the Japanese company Canon created a blue ocean of new market space by shifting the target customer of the copier industry from corporate purchasers to users. With their small, easy-to-use desktop copiers and printers Canon created new market space by focusing on the key competitive factors that the mass of noncustomers – the secretaries that used copiers – wanted.
By questioning conventional definitions of who can and should be the target buyer, companies can often see fundamentally new ways to unlock value. Path three of blue ocean strategy’s six paths framework pushes companies to look across the chain of buyers in their industry. By shifting focus to a previously overlooked set of buyers, companies can unlock new value and create uncontested market space.
The Ford Model T
Ford’s Model T, introduced in 1908, is a classic example of a market-creating blue ocean strategic move that challenged the conventions of the automotive industry in the United States. It made the automobile accessible to the mass of the market.
Until that time, America’s five hundred automakers built custom-made novelty automobiles. Despite the number of automakers, the industry was small and unattractive with cars unreliable and expensive, costing around $1,500, twice the average annual family income. But Ford changed all of that with the Model T.
He called it the car ‘for the great multitude, constructed of the best materials.’ Although it only came in one color (black) and one model, the Model T was reliable, durable, and easy to fix. And it was priced so that the majority of Americans could afford one. In 1908 the first Model T cost $850, half the price of existing automobiles. In 1909 it dropped to $609, by 1924 it was down to $240. A 1909 sales brochure proclaimed, ‘Watch the Ford Go By, High Priced Quality in a Low Priced Car.’
Ford’s success was underpinned by a profitable business model. By keeping the cars highly standardized and offering limited options and interchangeable parts, Ford’s revolutionary assembly line replaced skilled craftsmen with ordinary unskilled laborers who worked one small task faster and more efficiently, cutting the labor hours by 60 percent. With lower costs, Ford was able to charge a price that was accessible to the mass market.
Sales of the Model T exploded. Ford’s market share surged from 9 percent in 1908 to 61 percent in 1921. So great was the blue ocean Ford created that the Model T replaced the horse-drawn carriage as the primary means of transport in the United States.
This automotive industry case study highlights the common pattern underlying successful blue ocean strategic moves: Value Innovation. It’s the simultaneous pursuit of differentiation and low cost that allows companies to unlock new demand and create blue oceans of uncontested market space.
Philips’ blue ocean strategic move in the teakettle industry is an example of looking across complementary product and service offerings, path four in the six paths framework.
Despite its importance to British culture, the British teakettle industry had flat sales and shrinking profit margins until Philips Electronics, the Dutch consumer electronics company, came along with a teakettle that turned the red ocean blue.
By thinking in terms of complementary products and services, Philips saw that the biggest issue the British had in brewing tea was not in the kettle itself but in the complementary product of water, which had to be boiled in the kettle. The issue was the limescale found in tap water. The limescale accumulated in kettles as the water was boiled, and later found its way into the freshly brewed tea. The phlegmatic British typically took a teaspoon and went fishing to capture the off-putting limescale before drinking home-brewed tea. To the kettle industry, the water issue was not its problem. It was the problem of another industry—the public water supply.
By thinking in terms of solving the major pain points in customers’ total solution, Philips saw the water problem as its opportunity. The result: Philips created a kettle with a mouth filter that effectively captured the limescale as the water was poured. Limescale would never again be found swimming in British home-brewed tea. The industry was kick-started on a strong growth trajectory as people began replacing their old kettles with the new filtered kettles.
To reconstruct market boundaries and create new market space, think about applying path four of blue ocean strategy’s six paths framework. It drives you to look across complementary products and service offerings to discover ways to create a leap in value.
Intuit created a blue ocean with its Quicken financial software package by looking across substitute industries and reconstructing boundaries across them.
To sort out their personal finances people can buy and install a financial software package, hire a CPA, or simply use pencil and paper. The software, the CPA, and the pencil are largely substitutes for each other. They have very different forms but serve the same function: helping people manage their financial affairs.
Instead of benchmarking the competition Intuit created a blue ocean by looking to the pencil as the chief alternative to personal financial software to develop Quicken software. Intuit focused on bringing out both the decisive advantages that financial software had over the pencil – speed and accuracy; and the decisive advantages that the pencil had over software – simplicity of use and low price – and eliminated or reduced everything else.
With Quicken’s user-friendly interface resembling the familiar checkbook, it was faster and more accurate than the pencil, yet almost as simple to use. The program eliminated the accounting jargon and the sophisticated features traditional financial software offered, offering only the few basic functions that most customers use.
The product was so simple, easy to use, fun and productive that buyers fell in love with it. Moreover, simplifying the software cut costs. Neither the pencil nor other software packages could compete.
Today, more than thirty years on, Quicken still remains the number-one-selling personal financial software. Microsoft tried for years to dislodge Intuit’s value innovation, but after nearly thirty years of efforts and investment, it finally threw in the towel and ceased operations of its contender, Microsoft Money, in 2009.
Ralph Lauren, the U.S. designer, created a blue ocean of “high fashion with no fashion” by understanding the factors that determine buyers’ decisions to trade up or down from one strategic group to another.
In creating Polo, Ralph Lauren combined the most attractive features of two strategic groups in fashion: haute couture and classical lines. Its designer name, the elegance of its stores, and the luxury of its materials capture what most customers value in haute couture. At the same time, its updated classical look and price capture the best of the classical lines such as Brooks Brothers and Burberry. By combining the decisive factors of both groups and eliminating or reducing everything else, Polo Ralph Lauren not only captured share from both strategic groups, but also drew many new customers into the market.
Polo Ralph Lauren’s blue ocean strategic move illustrates the potential to create new market space by looking across strategic groups in an industry, path two in blue ocean strategy’s six paths framework six paths framework.
Cemex, one of the world’s largest cement producers, created a blue ocean of high profitability and growth in the cement industry that historically competed solely on price and functionality. It did so by shifting the orientation of its industry from functional to emotional.
In Mexico, cement sold in retail bags to the average do-it-yourselfer represents more than 85 percent of the total cement market. As it stood, however, the market was unattractive. There were far more noncustomers than customers. Even though most poor families owned their own land and cement was sold as a relatively inexpensive functional input material, the Mexican people lived in chronic overcrowding. Few families built additions, and those that did took on average four to seven years to build a single additional room. Why? Most of families’ extra money was spent on village festivals, quinceañeras (girls’ fifteen-year birthday parties), baptisms, and weddings.
As a result, most of Mexico’s poor had insufficient and inconsistent savings to purchase building materials, even though having a cement house was the stuff of dreams in Mexico.
Cemex’s answer to this dilemma came with its launch of the Patrimonio Hoy program, which shifted the orientation of cement from a functional product to the gift of dreams. When people bought cement they were on the path to building rooms of love, where laughter and happiness could be shared —what better gift could there be? At the foundation of Patrimonio Hoy was the traditional Mexican system of tandas, a community savings scheme. In a tanda, a group of individuals contributed a small sum each week for ten weeks. In the first week, lots are drawn to see who “wins” the pot in each of the ten weeks. All participants win the 1,000 pesos one time only, but when they do, they receive enough to make a large purchase.
In traditional tandas the “winning” family would spend the windfall on an important festival or religious event such as a baptism or marriage. In the Patrimonio Hoy, the winner is directed toward building room additions with cement. Think of it as a wedding registry, except that instead of giving silverware, for example, Cemex positioned cement as a loving gift.
At its debut, the Patrimonio Hoy building materials club that Cemex set up consisted of a group of roughly seventy people contributing on average 120 pesos each week for seventy weeks. The winner however, did not receive the total sum in pesos but rather received the equivalent building materials to complete an entire new room. Cemex complemented the winnings with the delivery of the cement to the winner’s home, construction classes on how to effectively build rooms, and a technical adviser who maintained a relationship with the participants during their project. The result: Patrimonio Hoy participants build their homes or additions three times faster at a lower cost than the norm in Mexico.
Whereas Cemex’s competitors sold bags of cement, Cemex was selling a dream, with a business model involving innovative financing and construction know-how. Cemex went a step further, throwing small festivities for the town when a room was finished thereby reinforcing the happiness it brought to people and the tanda tradition.
NetJets created the blue ocean of fractional jet ownership. Today, NetJets is a multibillion-dollar business with the largest private jet fleet in the world – over seven hundred aircraft, flying over one hundred seventy countries
NetJets observed that business travelers, the most lucrative mass of customers in the airline industry, had two principal choices: They could fly business class or first class on a commercial airline or the company could purchase its own aircraft to serve its corporate travel needs.
Commercial travel avoids the high up-front, fixed-cost investment of a multimillion dollar jet aircraft. Also, a company purchases only the number of corporate airline tickets needed per year, lowering variable costs and reducing the possibility of unused aviation travel time that often accompanies the ownership of corporate jets. On the other hand, corporations buy private jets to dramatically cut total travel time, to reduce the hassle of congested airports, to allow for point-to-point travel, and to gain the benefit of having more productive and energized executives who can hit the ground running upon arrival.
To create a blue ocean NetJets built on these distinctive strengths. The result was the new market space of fractional jet ownership. Here customers don’t buy a jet outright. They only buy a small fraction of it. The result is that buyers get the convenience of a private jet at the price of a commercial airline travel. NetJets’ smaller airplanes, the use of smaller regional airports, and limited staff keep costs to a minimum. With point-to-point service and an exponential increase in the number of airports to land in, there are no flight transfers; trips that would otherwise require overnight stays can be completed in a single day. The time from your car to takeoff is measured in minutes instead of hours. Perhaps most appealing, your jet is always available with only four hours’ notice. If a jet is not available, NetJets will charter one for you. Last but not least, NetJets dramatically reduces issues related to security threats and offers client’s customized in-flight service.
By offering the best of commercial travel and private jets and eliminating and reducing everything else, NetJets opened up a multibillion-dollar blue ocean wherein customers get the convenience and speed of a private jet with a low fixed cost and the lower variable cost of first- and business-class commercial airline travel. Now, nearly thirty years later, NetJets share of the blue ocean it unlocked still stands a staggering five times greater than that of its nearest competitor.
As the NetJets case study illustrates, insight into new market space can be gained by shifting an organization’s focus from competing within to looking across defined industry boundaries.
Cirque du Soleil
Cirque du Soleil took the world by storm. It created a blue ocean of new market space. Its blue ocean strategic move challenged the conventions of the circus industry. Cirque’s productions have been seen by more than 150 million spectators in more than 300 cities around the world. In less than twenty years since its creation, Cirque du Soleil achieved a level of revenues that took Ringling Bros. and Barnum & Bailey—the once global champion of the circus industry—more than one hundred years to attain.
What makes this rapid growth all the more remarkable is that it was not achieved in a declining industry in which traditional strategic analysis pointed to limited potential for growth. Supplier power on the part of star performers was strong. So was buyer power. Alternative forms of entertainment —ranging from various kinds of urban live entertainment to sporting events to home entertainment—cast an increasingly long shadow. Children cried out for video games rather than a visit to the travelling circus. Partially as a result, the industry was suffering from steadily decreasing audiences and, in turn, declining revenue and profits. There was also increasing sentiment against the use of animals in circuses by animal rights groups. Ringling Bros. and Barnum & Bailey set the standard, and competing smaller circuses essentially followed with scaled-down versions. From the perspective of competition-based strategy, the circus industry appeared unattractive.
Another compelling aspect of Cirque du Soleil’s success is that it did not win by taking customers from the already shrinking circus industry, which historically catered to children. Instead it created uncontested market space that made the competition irrelevant. It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price several times as great as traditional circuses for an unprecedented entertainment experience. Significantly, one of the first Cirque productions was titled “We Reinvent the Circus.”
Cirque du Soleil succeeded because it realized that to win in the future, companies must stop competing in red oceans. Instead they should create blue oceans of uncontested market space and make the competition irrelevant.
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