C H A P T E R 3

Reconstruct Market Boundaries

THE FIRST PRINCIPLE of blue ocean strategy is to reconstruct market boundaries to break from the competition and create blue oceans. This principle addresses the search risk many companies struggle with.

In conducting our research, we sought to discover whether there were systematic patterns for reconstructing market boundaries to create blue oceans. And, if there were, we wanted to know whether these patterns applied across all types of industry sectors—from consumer goods, to industrial products, to finance and services, to telecoms and IT, to pharmaceuticals and B2B—or were they limited to specific industries? We found clear patterns for creating blue oceans. Specifically, we found six basic approaches to remaking market boundaries. We call this the six paths framework. These paths challenge the six fundamental assumptions underlying many companies’ strategies. These six assumptions, on which most companies hypnotically build their strategies, keep companies trapped competing in red oceans. Specifically, companies tend to do the following:

• Define their industry similarly and focus on being the best within it

• Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in,

• Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry)

• Define the scope of the products and services offered by their industry similarly

• Accept their industry’s functional or emotional orientation.

• Focus on the same point in time—and often on current competitive threats—in formulating strategy.

To break out of red oceans, companies must break out of the accepted boundaries that define how they compete. Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time.

Path 1: Look Across Alternative Industries

In the broadest sense, a company competes not only with the other firms in its own industry but also with companies in those other industries that produce alternative products or services. Alternatives

are broader than substitutes. On the other hand, alternatives include products or services that have different functions and forms but the same purpose. What are the alternative industries to your industry? Why do customers trade across them? By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, you can create a blue ocean of new market space.

Path 2: Look Across Strategic Groups Within Industries

Just as blue oceans can often be created by looking across alternative industries, so can they be unlocked by looking across strategic groups. In most industries, the fundamental strategic differences among industry players are captured by a small number of strategic groups. Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another.

Path 3: Look Across the Chain of Buyers

In most industries, competitors converge around a common definition of who the target buyer is. In reality, though, there is a chain of “buyers” who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ. When they do, they frequently hold different definitions of value. Individual companies in an industry often target different customer segments, But an industry typically converges on a single buyer group. Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of new blue ocean. By looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers. Many industries afford similar opportunities to create blue oceans. By questioning conventional definitions of who can and should be the target buyer, companies can often see fundamentally new ways to unlock value. What is the chain of buyers in your industry? Which buyer group does your industry typically focus on? If you shifted the buyer group of your industry, how could you unlock new value?

Path 4: Look Across Complementary Product and Service Offerings

Few products and services are used in a vacuum. In most cases, other products and services affect their value. But in most industries, rivals converge within the bounds of their industry’s product and service offerings. Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used. What is the context in which your product or service is used? What happens before, during, and after? Can you identify the pain points? How can you eliminate these pain points through a complementary product or service offering?

Path 5: Look Across Functional or Emotional Appeal to Buyers

Competition in an industry tends to converge not only on an accepted notion of the scope of its products and services but also on one of two possible bases of appeal. Some industries compete principally on price and function largely on calculations of utility; their appeal is rational. Other industries compete largely on feelings; their appeal is emotional. Yet the appeal of most products or services is rarely intrinsically one or the other. Rather it is usually a result of the way companies have competed in the past, which has unconsciously educated consumers on what to expect. Companies’ behavior affects buyers’ expectations in a reinforcing cycle. No wonder market research rarely reveals new insights into what attracts customers. Industries have trained customers in what to expect. When surveyed, they echo back: more of the same for less. When companies are willing to challenge the functional emotional orientation of their industry, they often find new market space. We have observed two common patterns. Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand. Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make it functional? If you compete on functionality, what elements can be added to make it emotional?

Path 6: Look Across Time

All industries are subject to external trends that affect their businesses over time. Think of the rapid rise of the Internet or the global movement toward protecting the environment. Looking at these trends with the right perspective can show you how to create blue ocean opportunities. Most companies adapt incrementally and somewhat passively as events unfold. Whether it’s the emergence of new technologies or major regulatory changes, managers tend to focus on projecting the trend itself. That is, they ask in which direction a technology will evolve, how it will be adopted, whether it will become scalable. They pace their own actions to keep up with the development of the trends they’re tracking. But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise from business insights into how the trend will change value to customers and impact the company’s business model. By looking across time—from the value a market delivers today to the value it might deliver tomorrow managers can actively shape their future and lay claim to a new blue ocean. Looking across time is perhaps more difficult than the previous approaches we’ve discussed, but it can be made subject to the same disciplined approach. We’re not talking about predicting the future, something that is inherently impossible. Rather, we’re talking about finding insight in trends that are observable today.

Three principles are critical to assessing trends across time. To form the basis of a blue ocean strategy, these trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory. Many trends can be observed at any one time— for example, a discontinuity in technology, the rise of a new lifestyle, or a change in regulatory or social environments. But usually only one or two will have a decisive impact on any particular business. And it may be possible to see a trend or major event without being able to predict its direction. What trends have a high probability of impacting your industry, are irreversible, and are evolving in a clear trajectory? How will these trends impact your industry? Given this, how can you open up unprecedented customer utility?

Conceiving New Market Space

By thinking across conventional boundaries of competition, you can see how to make convention-altering, strategic moves that reconstruct established market boundaries and create blue oceans. The process of discovering and creating blue oceans is not about predicting or preempting industry trends. Nor is it a trial-and-error process of implementing wild new business ideas that happen to come across managers’ minds or intuition. Rather, managers are engaged in a structured process of reordering market realities in a fundamentally new way. Through reconstructing existing market elements across industry and market boundaries, they will be able to free themselves from head-to-head competition in the red ocean


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