,

•I

HARVARD
BUSINESS
SCHOOL
PRESS

Analytical Tools and Frameworks

(

EXCERPTED FROM

Blue Ocean Strategy:

How to Create Uncontested Market Space and Make the Competition Irrell?Vant

By

W Chan Kim and Renee Mauborgne

Hatvard Business School Press

BostOIl, A1nSSilclillsetts

ISBN-13: 978 -1 -4221 -1629-6

1629BC

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 •

Copyright 2006 HalVard BusinL"SS School Publishing Corporation

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How to Creille Ullcoutested Mork('1 SPIICC muf Mllk(' lire CompetitioJl tn-e!eu/wl,
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 C H A PT E R 2

Ana lytical Tools

(
and Frameworks

W E H AV E S P EN T T HE PAST DECA D E developing a

set of a nalytica l tools and fram eworks in a n attempt
to ma ke the formulation a nd execut ion of blue ocean strategy as
systemati c a nd actionable as competing in the red waters of known
market spa ce. These ana lyt ics fi ll a central void in t he fi e ld of
strategy, whi ch has developed an impressive array of tool s a nd
fram ewo rks to compete in red oceans, such a s the five forces fo r
analyzing existing industry condit ions a nd three gener ic strate-
gies. but has rema ined virtually silent on practica l tools to excel in
blue oceans. Instea d. exec utives have rece ived ca lls to be brave a nd
e ntrepre neurial, to learn from fa ilure, and to see k out revolut io n·
aries. Although thought· provoking, these are not substitutes for
a nalytics to navigate successfully in blue waters. In the absence of
a na lyt ics, exec utives cannot be ex pected to act on t he ca ll to break
out of ex isti ng competition . Effective blue ocean strategy should be
about risk mi nimization a nd not risk ta king.

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 2 BLUE OCE AN ST RAT EG y

To address this imbal a nce, we studied companies around the

world a nd developed practical methodologies in the quest of blue
oceans. We then appl ied and tested these tools a nd frameworks in
action by working with companies in thei r purs uit of blue oceans,
en rich ing and refining t h em in t he process. The tools a nd frame-
works presented here are used t hroughout t his book as we discuss
the six pri nciples of formulating and executing bl ue ocean strat-
egy. As a brie f introduction to t hese tools and frameworks. let's
loo k at one industry- the U.S. wine indu stry - to see how these
tools can be a pp lied in practice in the creatio n of blue oceans.
T he Un ited States has the third largest aggregate co nsumption
of wine worldwide. Yet the $20 billion industry is intensely compet-
itive. Cali forni a wines dominate t h e domestic market, ca pturin g
two· t h irds of a ll U.S. wi ne sales. T hese wines compete head-to-head
wit h imported wines from Fra nce, Italy. and Spain and New World
wines from countries such as Ch ile. Australia . and Argentina.
which have increasi ngly targeted the U.S. ma rket. Wi t h the supply
of wines increasi ng from Oregon , Washington, a nd New Yo rk state
and with newly mature vineyard plantings in Ca li fo rnia, the num ber
of wines has ex ploded. Yet t he U.S. consumer base has essentially
remai ned stagnant. The United States rema ins stuck at t hirty· first
place in world per capita wine consumption.
The intense competition has fueled o ngoing ind ustry conso lida-
tion. The top e ight compani es produce more t han 75 percent of t he
wine in the United States. and t he estimated one t housand six hun-
dred other wineri es prod uce the remaining 25 percen t. The domi·
nance of a few key pl ayers allows them to leverage distributors to
gain shelf space a nd put millions of dollars into above-the-l ine mar-
keti ng budgets. There is a simultaneo us consolidation of reta ilers
and distributors across the United States, somethi ng that raises
thei r bargaining power against the plethora of wi ne makers. Ti·
tan ic battles are bei ng fought for retail and distribution space. It is
no surprise that weak, poorly run co mpanies are increas ingly being
swept aside. Downward pressure on wine prices has set in .

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 Analytical Tools and Frameworks 3

In short, the U.S. wine industry faces inte nse competit ion.
mount ing price pressure, increasin g bargaining power on t he pa rt
of retail and distr ibution channels, and Aat demand despite over-
whelming cho ice. Following conventional strategic thinking, the
industry is hardly att ractive. For strategists, the critical question
is, How do you break out of t his red ocean of bloody competitio n to
make the competition irrelevant? How do you open up and captw'e
a blue ocean of uncontested market space?
1'0 a dd ress these questions. we turn to the strategy callUM, an
analytic framework that is centra l to value innovation and the ere·
atio n of bl ue ocea ns,;....

Th e Strategy Canvas

The strategy canvas is both a diagnostic and an action fra mework

for building a compelli ng blue ocean st rategy. It ser ves two pur·
poses. First. it captures the cur rent state of play in the k nown mar·
ket space. This a llows you to understand where the competition is
currently investing, the factors the industry currently competes on
in products, service, and de livery, and what customers receive from
t he existing com petitive offerings on the market, Figure 2-1 cap-
tures all this information in graphi c form. The hor izontal axis cap-
tures the range of factor s t he industry competes on and invests in.
In the case of t he U.S. wine industry, there are seve n principal
factors:
Price per bottle of wine
An elite, refined image in packaging, incl udi ng labels an-
nouncing the wine medals won and the use of esoteric enologi·
cal terminology to stress the a rt and science of wine making
Above-the·line marketing to raise consumer awareness in a
crowded market and to encourage distributors a nd retailers
to give prominence to a particu lar wine ho use

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 4 BLUE OCEAN STRATEGy

FIGURE 2-1

The Strategy Canvas of the U.S. Wine Industry in the Late 1990s

H"'---------~ ~-------

Premium WinM
. - . - - • • - ••• ",_ •• - _•• - _ ... - •••• • - ...... - _•••• ••• -4o ••• - - - _•••• _• • _. - _. - _...

- -/'---.
/' ........... Bud9et Wines
/' '.-.---+.-.-.+- -- . ~-. - .~
... '

"'" ,- -,
Price
~--, --~ -----,----,
Abo'o'e-tIle-lne \ilneyard prestoge Wne
Use ot eooIoQcaI ~ Agng and Ierp;:y Wne ronoa
tefrnnoiogy <n:l QJa1ry COf'IllIeloly
(loStrctals ., wne
conYI1!.1'OCatiOO

Aging qu ality of wine

The I)rest ige of a wine's vineyard and its legacy (hence the
appellations o f estates and chateaux and references to the
h istoric age of the establishment)

The compl exity and sophistication o f a wine's taste. includ-

ing suc h t hings as ta nnins and oak

A diverse range of wines to cover all va rieties of grapes and

consumer preferences from Chardonnay to Merlot. a nd so on

These factors are viewed as key to the promotion of wine as a

unique beverage for the informed wine drinker, worthy of special
occasIOns.
That is the underlying structure of the U.S. wine indu stry from
the market Ilcrs pective. Now let's turn to the vertical axis of the

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 Analytical Tools and Frameworks 5

strategy canvas, which captures the offering level that buyers re-
ceive across all these key competing factors_ A high score means
that a company offers buyers more, a nd hence invests more, in that
factor. In t he case of price, a higher score ind icates a hi gher price.
We can now plot the current offering of wineries across all these
factors to unde rstand wineries' strategic profil es, or value curves.
The value curve, the basic compo nent of t he strategy ca nvas, is a
graphic depiction of a company's relative performan ce across its
industry's fa ctors of competition.
Figure 2- 1 shows t hat, although more than o ne thousand six
hundred winer ies participate in t he U.S. wine industry, from the
buyer's po int of view there is enormous converge nce in their value
curves. Despite the plethora of competitor s, when premium brand
wines are plotted on the strategy ca nvas we discover that from the
market po int of view all of them essentially have t he same strategic
profile. They o ffer a high I)r ice a nd present a hi gh level of offering
across all the key competing factors. Their strategic profile follow s
a classic differentiation strategy. From the market point of view,
however, they are a ll different in the same way. On the other hand,
budget wines also have the same essent ial strategic profile. Thei r
price is low, as is t he ir offering ac ross all the key competing factors.
These are classic low-cost players. Moreover, the value curves o f
premium and low-cost wines sha re the same basic shape. Th e two
strategic groups' strategies march in lockstep. but at different alti·
tudes o f offeri ng level.
'1'0 set a company on a strong, profitable growth trajectory in the
face of these industry cond itions. it won't work to benchmark co m·
pelitors and try to oulcompetc t hem by offering a little more for a
little less. Such a strategy may nudge sa les up but will hardly drive
a compa ny toopen up uncontested market space. Nor is conducting
extensive CUSlomer research the path to blue oceans. Our research
fowld that customers can scarcely imagine how to create uncontested
market space. Their insight also tends toward the familiar "offer me
more for less." And what customers typically want "more" of are those
product and service features that the industry currently offers.

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 6 BLUE OCEAN STRATEGy

To fundame ntally shift the strategy canvas of an industry, YOll

must begin by reorienting your strategic focus from competitors to

altenwtiues. and from customers to 1l0llcustomers of the industry, l
To pursue both value and cost, you should resist the old logic of
benchmarking competitors in the existing fi eld and choosing be-
tween diffe rentiation and cost leade rship. As you shift your strategic
focu s from current competition to alternatives and noncustome rs,
you gain insight into how to redefine the problem the industry fo-
cuses on and thereby reconstruct buyer value elements that reside
across industry boundaries. Conventional strategic logic, by can·
trast, drives you to offer better solutions t han your rivals to exist.
ing problems defined by your industry.
In the case of the U.S. wine industry, conventional wisdom ca used
wineries to focus on overdelivering o n prestige and the qual ity of
wine at its pri ce point. Overde livery meant adding complexity to
the win e based on taste profi les shared by wi ne makers and r ein·
forced by the wine show j udgi ng system . Wine makers, show judges,
a nd knowledgeable drinkers concur that complexity- layered I)e r-
sonality and characteristics that reRect the uniqueness of the soi l.
season. and wine maker's skill in tannins. oak, and aging pro-
cesses- equates with quality.
By looking across alternatives, however, Casella Wines, an Aus,
tralia n winery. redefined the problem of the wine industry to a new
one: how to make a fun and nontraditional wine that's easy to drink
for everyone. Why? In looking at the demand side of the alter·
natives of beer, s pirits. and ready·to-drink cocktails, which cap-
tured three times as many U.S. consumer a lcohol sales as wine,
Casella Wines found that the mass of America n adults saw wine as
a turnoff. It was intimidating and pretentious. and the complexity
of wine's taste created flavor challenges for the average person even
though it was the basis on which the industry fought to exce l. With
this insight, Casella Wines was ready to explore how to redraw the
strategic profi le of the U.S. wine industry to create a blue ocean. To
achieve t h is, it turned to the second basic analytic underlying blue
oceans: the four actions framework.
-

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 Analytical Tools and Frameworks 7

The Fou r Actions Framework

To reconstruct buye r value elements in crafting a new val ue cu rve,

we have develo ped the four actions framework. As shown in fi gu re
2·2, to brea k t he trade·off between d ifferentiat ion and low cost and
to create a new val ue curve, there arc fo ur key questions to cha l·
lenge an industry's strategic logic a nd business model:

Wh ich of the factors that the industry takes for granted

should be eliminated?

Which factors sho uld be red llced well beLow the industry's
stand ard?

Whi ch factors shoul d be raised well above the indu stry's

sta ndard?

Which factor s should be created that the industry has never

offered?

F I GURE 2· 2

The Four Act ions Framework

Reduce
Whic h fa<: tors should
be reduced wfll/
OOSOw the industry's
standard?

I
B ,'m;nafe Create
Which ot the factors
thai. the industry
takes for granted
should be elimina ted?
- 'Now
""',
c,~ )- Which factors should
be created thai
the industry has
never offered?

t
Raise
Which factors Should

.......,
be mised well
alxw8 the indUSlry's

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 8 BLU E OCEAN S TRAT EGY

The first question forc es you to consi der el iminating fac tors t hat
com panies in your indus try have long competed o n. Often t h os~
fa ctors are taken for granted even though t hey no longer have
value or may even detract from val ue. SometmlCs t here is a fun da-
mental change in what buyer s value, but companies that are fo -
cused on be nchmarking one a nother do not act on, or even perceive,
the change.
T he second question for ces yo u t o d etermi ne whether products
or services have been overdcsigned in the race to match and beat
t he competition. Here, companies overserve customers, increasing
t h eir cost st ructure for no gain.
The t hi rd question pushes you to u ncover and e liminate the com-
promises your indust ry forces customers to ma ke. The fourth question
helps you to discover entirely new sources of val ue for buyers a nd to
create new dema nd a nd s hi ft the strategic pricin g o f t he indus try.
It is by purs uin g the first two questions (of eli minating a nd reo
ducing) that you gain insig ht into how to drop yo ur cost struct u re
vis·a·v is competit ors Our resea rch has found that rarely do man·
agers systematica lly set o ut to el iminate and reduce their invest-
ments in factors t hat an industry competes o n , The resu lt is
mounting cost str uctures and complex business models. T he sec·
ond two factors, by contrast, provid e you with ins ight into how to
lift buyer va lue a nd create new demand. Coll ectively, they a llow
you to syst ematically explore how you can reco nstruct buyer value
elements ac ross al ter native industries to offer buye rs a n enti rely
new expe rience, while simultaneous ly keepi ng your cost structure
low. Of pa rti cular importance are the act ions of eliminating and
creating, which push compa ni es to go beyond yal ue maximization
exercises with existing factors of competition. Eliminating a nd
creating prompt compan ies to cha nge th e fact ors themselves,
hence ma k ing the existing r ules of competition irrelevant.
When you a pply t he four actions fra mework to th e strategy can ·
vas of your industry, you get a revealing new look at old perce ived
truths. In t he case of the U.S. wine ind ustry, by thinking in terms of
these four act ions vis-a-v is t he current industry logic a nd looking

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 Analytical Tools and Frameworks 9

across alternat ives a nd noncustomers. Casella Wines created [yel.

low tai l), a wine whose strategic profile broke from the competition
and created a blue ocean. Instead of offering wine as wine, Casella
created a social drink accessi ble to everyone: beer drinkers. cock·
tail drinkers. and other drinkers of nonwine beverages. In the s pace
of two years, the fun, soc ia l drink [yellow tail1 emerged as the
fastest growing brand in the histori es of both the Australian and
the U.S. wine industries and the number one imported wine into
the Un ited States, surpassing the wines of France and Italy. By
August 2003 it was the number one rod wine in a 750·ml bottle sold
in the United States, outstripping California labels. By mid-2003,
[yellow taill's moving average annual sales were tracking at 4.5 mil ·
lion cases. In the context of a global wine glut, [yellow tail j has been
raci ng to keep UI) with sales.
What's more, whereas large wine companies developed strong
brands over decades of marketing investment. [yellow tail ) lenp-
frogged tall competitors with no promotional campaign, mass media,
or consumer advertising. It didn't simply steal sales fro m competi.
tors; it grew the market. (yellow tail] brought nonwine drinkers-
beer and ready·to-drink cocktail consumers- into the wine market.
Moreover, novice table wine drinkers started to drink wine more
frequ ently, jug wi ne drinkers moved up, and drinkers of more ex-
pensive wines moved down to become co nsumers of [yellow tail].
Figure 2-3 shows the extent to whi ch the application of these
four actions led to a break from the competition in the U.S. wine in-
dustry. Here we can graphica lly compare [yellow tail)'s blue ocean
strategy with the more than one thousand six hundred wineries
competing in the United States. As shown in figure 2-3. (yellow
taill's value curve stands apart. Casella Wines acted on a ll four ac·
tions- eliminate, reduce, raise, and create-to unlock Wlcontested
market space that changed t he face of the u.s. wine industry in a
span of two years.
By looking at the alternatives of beer and ready-to-drink cock·
tai ls and thinking in terms of noncustomers, Casella Wines created
three new factors in the U.S. wine industry- easy drinking, easy to

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 10 BL UE OCE AN S TR A T E GY

FIG U RE 2-3

The Strategy Canvas of (yellow tail]

~ -------------------------------------

Pre mium Wines

._ •• _. _ .... _ • • __ .... __ __ . ...... _ ••• .A.. .. .. ..... , ___ . 4
[yellow tail]

./'
/
"' -........ Budget Wines
........ ---+- .---+- _. -+. _ .•

Low j r
Po::o A.bo"~Hhe-W'te
marl<et"Q

""'''-
,....-"'"
<lislincb:Jns n woe

""""""'"
se lect, and fun a nd adventure-------and eli minated or reduced every-
thing else. Casella Wi nes found that the mass of Americans rejected
wi ne because its complicated ta ste was d ifficult to app reciate.
Bee r a nd ready-to-drin k cockta ils. for example. were much sweeter
and ea sier to dr in k. Accordingly, [yellow tail] was a completely
new combinatio n of wine cha ra ct eristics that produced an uncom-
plicated wi ne st r ucture that was instantly appeali ng to t he mass o f
a lcohol d ri nkers. T he wine wa s soft in taste and a pproachable like
ready-to-drink cock tails and beer, a nd had up-front, prima ry fl a-
vors and pro no unced fru it fl avors. Th e sweet fruit iness o f t he wine
a lso kept people's palate fresher, a llow ing t.he m to enjoy anot her
glass of wine wi t hout thinking abou t it. The result was an ea sy-
dr inki ng wine that d id not requ ire years to develop an apprecia-
tio n for.

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 Analytical Tools and Frameworks 11

In line with this simple fr uity sweetness, !.Yellow tai lJ dra mati-
cally reduced or eliminated a ll the factors the wine industry had
long competed on- tannin s, oak, complexity. a nd agi ng- in crafting
fi ne w ine, whether it was for the premium or the budget segment.
With the need for aging e liminated, the needed working capi tal for
aging wi ne at Casell a Wines was also r educed, creating a faster
payback for the wine produced. Th e wi ne industry critic ized the
sweet fru iti ness of (yellow tai l) wi ne, seeing it as sign ificant ly low-
er ing the quality o f win e a nd work ing aga inst proper appreciation
of fi ne grapes and historic wine craftsmanship. These cl aims may
have been true, but custo mers of a ll so rts loved the wine.
Wine retail ers in the Un ited States offered buye rs aisles of win e
varieties, but to the genera l consumer the cho ice was overwhelm-
ing and inti midating. The bottles looked the same, labels were com·
pl icated with cnological ter minology understa ndable only to the
wine connoisseur or hobbyist, and the cho ice was so extensive that
salesclerks at reta il shops were at a n equal di sadvan tage in under ·
st and ing or recommend ing wine to bewil dered potentia l buyers.
Moreover, the rows of wine choice fatigued a nd demotivated cus·
tomers, maki ng se lection a diffi cult process that left the average
wine pu rchaser insecure with the choice.
[yellow taill changed all that by creating ease of se lection. It dra·
matically red uced the range of wi nes offered, creating o nly two:
Chardo nnay, the most popular white in the United States. and a
red, Shiraz. It removed a ll tech nical jargon from t he bottles and
created instead a striking, simple, and no ntraditional label featur·
ing a kangaroo in bright, vibra nt colors of ora nge and yellow on a
black background. The wine boxes [yellow tail] came in we re a lso of
the same vibrant colors, with the name [yell ow tail] pr inted boldly
on t he sides; the boxes served the dual purpose of acting as eye·
catch ing, un intimidating displays for the wine.
!.Yellow tail] hit a home run in ease of selectio n when it ma de reo
tail sho p employees the a mbassadors of [yellow tai ll by givi ng t hem
Austra lia n o utback clothin g, includ ing bushman's hats a nd oi lskin

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 12 BLUE OCEAN STR ATE G Y

jackets to wear at work. T he retail employees were ins pired by the

branded clothi ng and having a wine they them selves did not feel in-
timidated by, and recommendations to buy [ye llow tail] flew out of
their mouths. In short, it was fun to recommend {yellow tail].
The simplicity of offering only t wo wines at the start- a red and
a white-streamli ned Casella Wi nes' business model. Minimizi ng
the stock keeping units max imized its stock turnover and mini·
mized investment in wa rehollse inventory. In fnct , this reduction of
vari ety was ca rried over to t he bottl es inside the cases. [yellow tai ll
broke industry co nventions. Case lla Wines was the fir st company to
put both red a nd white wine in the sa me-shaped bottle. a practice
that created further simplici ty in manufactu ring and purchas ing
and resulted in stunn ingly simple wine displays.
The wine ind ustry worldwide was proud to promote wine as a re-
fin ed beverage with a long history and tradition. Th is is refl ected in
t he target market for the United States: educated professionals in
the upper income brackets. Hence. the continuous focus on t he
qua lity and legacy of t he vineyard . the chatea u 's or estate's histori-
cal t radition, a nd the wine medals won. Indeed t he growth strate-
gies o f the majOl' players in t he U.S. wine industry were targeted at
t he premium end of the market. wit h tens of millions invested in
bra nd advertising to strengthen this image. By looking to beer and
ready-to-drink cocktai l customers, however. [yellow tail] found that
this el ite image did not resonate with the general public, which
found it intimidating. So [yellow tail ] broke with tradition and cre-
ated a persona lity that embodied the characteristics of the Aus-
t ralian culture: bold, laid back . fun . and adventurous. Approacha-
bility was t he mant ra: "The essence of a great la nd . .. Australia."
There was no traditional winery image. T he lowercase spell ing o f
t he name [yellow tail], coupled with the vibrant colors and t he kan-
garoo motif, echoed Australia. And indeed no reference to t he vine-
yard was made on the bottle. The wine promised to jump from the
glass like an Aussie kangaroo.
The result is that (ye llow tail] appealed to a broad cross section
of a lcohol beverage consumers. By offering thi s leap in value, [yel-

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 Analyrical Tools and Frameworks 13

low tail] raised the price of its wines above the budget market, pric-
ing them at 86.99 a bottle, more than dou ble the pr ice of a jug wine.
From the moment the wine hit the retail shelves in July 2001, sa les
took off.

The Eliminate-Reduce-Raise-Create Grid

There is a third tool that is key to creation of blue oceans. It is a

( supp lementary aua iyLic to the fum acbons framework called the
eltmtnate-reduce-raise-creale grtd (see fi gure 2-4). The grid pushes
compani es not o nly to ask a ll fo ur questions in the four actions
Iramework but also to act on all four to create a new value curve. By
driving compan ies to fill in t he grid with the actions of eli minating
and reducing as well as raising and creating, the grid gives compa-
nies fo u r immediate benefits:

It pushes t hem to simultaneously pursue differentiation and

low costs to break the val U/.!-cost trade-off.

F IGURE 2-4

Eliminate-Reduce-Raise-Create Grid: The Case of [yellow tail]

---
Eliminate Raise

Enological termnology Price versus

and distinctions

Aging qua lities Retail store

involvement
AOO\l8·tOO-line marketing

"",",. Create

Wine complexity Easy drlnlmg

Wine range Ease 01 selEM::tion

Vineyard prestige Fun and adventure

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 14 BLUE OCEAN S TRAT EG Y

It immediately Hags com panies that are focu sed only on rais-
ing and creating and thereby lift ing their cost structure and
o ften overengineerin g products and services- a common
plight in many companies.

It is easily understood by managers at any level, creating a

hi gh level of engagement in its appl ication.

Because completing t he grid is a challenging task, it drives

companies to robustly scrutinize every fa ctor the indus try
competes on, mak ing them di scover the range of implic it
a ssumptions they make uncon sciollsly in competing.

Figure 2·5, the eliminate-redu ce-raise-c reate grid for Cirque du

Solei!. provides a nothe r snapshot of t hi s tool in action a nd s hows
what it reveals. Worth noting is t he runge of fa ctors that an indus·
t ry has long competed o n that companies discover can be elimi·
nated and reduced. In the case o f Cirque du Sole il , it el imi nated
several fa ctors from traditional ci rcu ses, s uch as animal s hows.

F tGURE 2·5

Eliminate-Reduce-Raise-Create Grid: The Case of Cirque du Soleil

Eliminate Raise

Star pet1ormer.; Uniq~e ~ nue

Animal shows
Aisle conces.sion saIn
Multople $hOw arenas

Reduce Cmate

fun and hl.n'Or Tho_

Tlvill and danger Refined environment
Mu l tlp~ productions
Art ~ic music and dance

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 Analytical Tools and Frameworks 15

star performers, and multiple show arenas. These factors had long
been taken for granted in the traditional circus ind ustry, which
never questioned t heir ongoing relevance. However, there was in-
creasing public discomfort with the usc of an ima ls. Moreove r, ani-
mal acts are one of the most expens ive elements; not on ly is there
t he cost of the ani mals, but a lso their t rain in g. medical care, hous·
ing, insu rance. a nd transportation . Similarly, although the circus
ind ustry focu sed on featuring stars. in the mind of the publ ic the
so-call ed stars of the circus were trivial next to mov ie stars. Again,
they were a high-cost component carrying little sway with specta-
tors. Gone, too, are three-ring venueS. Not only did these create
a ngst a mong spectators as they rapidly switched their gaze from
one ring to the other, but they a lso increased the number of per-
form ers needed. with the obvious cost im plications.

Three Characteristics of a Good Strategy

[ye llow tail], like Cirque du Sole ii, created a unique and excep-
tional valu e curve to unl ock a bl ue ocean. As shown in the strategy
canvas, [yellow tail J's value curve has DCUS the company does not
diffuse its efforts across a ll key factors of competit ion. The shape of
its val lie curve diverges from the other players', a result of not
benchmarking competitors but instead looking across alternatives.
The tagli/le of [yellow tai lJ's strategic profile is clear: a fun and sim-
ple wine to be enjoyed every day.
When ex pressed through a value curve, then, an effective blue
ocean strategy li ke [yellow tailJ's has three comp lementary qual i-
- ties: focus, divergence, a nd a compelli ng tagli ne. Without these
qua lities, a compa ny's strategy will likely be muddled. undifferenti-
ated. a nd hard to communicate with a high cost structure. The four
actions of creating a new value curve should be we ll guided toward
buildin g a company's strategic profile with these characteristics.
These three characteristics serve as an initial litmus test of the
commercial viabili ty of blue ocean ideas.

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 16 BL UE OCEAN STRATEGY

FIG URE 2-6

The Strategy Canvas of Southwest Airlines

~--------------------------------- .
,
,
Southwest

----------,...--
.......,------1-----1-
"

• ..A..'
'---.~:_e_~:~~~~~.':',c.c'''c'_'______
-'......+_____'".......-;-,__
Car Transport !
r--
--.
""' r--~__t_---
,--1
Pfice I
loonges I lUI
Meals
.-
Seal l1lQ CCII'"tl8I:1MIy

""""

A look at Southwest Airlines' strateg ic profile illustrates how

these three qualities underlie the company's effective strategy in
reinventing the short·haul airline industry via value innovation
(see figure 2·6). Southwest Airlines created a blue ocean by break-
in g the trade-orfs customers had to ma ke between the speed of a ir-
planes and the economy a nd flex ibil ity of car transport. To achieve
this, Southwest offered high·speed transport with frequent and Aexi-
ble departures at prices attractive to the mass of buyers. Byelimi-
nating and reducing certain factors of competition and raising
others in the traditio na l airline indust ry, as well as by creating new
factors drawn from the alternative industry of car transport, South-
west Airlines was able to offer unprecedented utility for air t ravel-
ers a nd achieve a leap in va lue with a low·cost business model.
Th e value curve of Southwest Airlines differs distinctively fro m
t hose of its compet itors in the strategy canvas. Its strategic pro file
is a typical example of a compelling blue ocean strategy.

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 Analytical Toofs and Fram eworks 17

Focus

Every great strategy has focu s. and a compa ny's strategic profile. or
value c urve, should cl early show it. Looking at Southwest's profil e.
we can see at once that the company emphasizes only three factors:
fri endly service. speed, and fr equent point-to-point departures. By
focusing in this way_ Southwest has been able to pri ce against car
transportation; it doesn't make extra investments in meals, lounges.
a nd seating choices. By contrast, Southwest's traditional competi-
tors invest in all the ai rl ine industry's COml)etitive factors. making
it much more difficu lt for them to match Southwest's prices. Invest·
ing across the boa rd . these companies let their competitors' moves
set their own age ndas. Costly business models result.

Divergence

When a company's strategy is formed reactively as it tr ies to keep

up with the competition, it loses its uniqueness. Cons ide r the sim i-
-la rit ies in most airlines' mea ls a nd business-class lounges. On the
strategy canvas. therefor e. reactive strategists tend to share the
same strategic profi le. Indeed. in the case of Southwest, the value
curves of the co mpany's competit.ors are virtually identical and
therefore can be summarized on the strategy ca nvas with a single
value curve.
In contrast. the value curves of blue ocean strategists always
stand apart. ~y applying the four actions of eliminating. reduci ng,
raising, and creating, they differentiate their rofiles from the in·
ustry's average profile. Southwest, for example, pioneered point-
to-point travel between mids ize cities; previously, the industry
Ol)erated throug h hub-and·spoke systems.

Compelling Tagline

A good strategy has a c1ear·c ut and compelling tagline. "The speed

of a plane at tho price of a car- whenever you need it." That's the
taglino of Southwest Airlines, or at least it could be. What could

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 18 BL U E O CE AN S TRAT EG Y

Southwest's co mpetitors say? Even the most proficien t ad agency

wou ld have diffi cu lty reducing the conventiona l offering of lunches,
seat choices, lou nges, a nd h ub lin ks. wi th sta nda rd service. s lower
speeds, and higher pr ices into a memorable tagline. A good tagline
mu st not only deliver a cl ear message but also advertise an offering
truthfully, or else customers will lose tr ust a nd interes t. In fact , a
good way to test t he e ffect iveness a nd s trengt h of a strategy is to
look at wheth er it con tai ns
As show n in fi gu re 2.7, Cirqu e d u So lcil's strategic profi le a lso
meets t he t hree c riteria t hat de fi ne blue ocea n strategy: focu s, di·
vergence, and a co mpell ing tagline. C irque dll Soleil"s s t rategy
canvas all ows us to graphically compare its strategic profi le with
those of its majo r com l)etitors. Th e canvas shows clearly the ex-
ten t o f Cirq ue d u Soleil"s departure fro m the convent iona l log ic o f
the ci rcus. The fi gure shows that the value curve of Ringli ng Bros.
a nd Barnum & Bailey is the sa me basic shape a s those o f smalle r
regio na l circuses. 'rhe main diffe re nce is that regiona l c ircuses

FIG URE 2·1

The Strategy Canvas of Cirque du Soleil

H~ -----------------------------------------
Ringling Bros. and Barnum 8 Bailey Va lu o CUI"\IO

_ ..
..... .. . ....
- - ,•. 0 . ._ _ _ __ .-C
' '. /.-. ~
.
• ... •• 4-
,

l " 'i I
,: ..,._ ....., i 1\ Cirq UE! du 5010il
Va luo Curve

\~
! ~
~ . ----~~--~'\~~
, ---------
" 'Smaller
: / R'~'"
/X Circuses /
1\\l.
f\ •
""' ~I ~,~~---r,-,--,----,---,,---,
PrIce Aroma! M,it''- TrriIs and Treme MlIIIpIe
shoWs ShOw ~ ~
Refined ArtisIic

ard d<nC&

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 Analytical Tools and Frameworks 19

offer less of each competing factor because of t heir restri cted

resources.
By contrast, Cirque du Solcil's value curve stands apart. It has
new and noncirc us factors such as theme, multiple productions, reo
fin ed watching environme nt, and art ist ic music and dance. These
factors, entirely new creations for the circus industry, are drawn
from the alternative live entertainment industry of theater. In t his
way, the strategy canvas clearly depicts the traditional factors that
affect competition among industry pl ayers, as well as new factors
that lead to creation of new market spa ce and that shift t he strat·
egy canvas of an industry.
(yellow tail], Cirque du So lei!. and Southwest Airlines created
blue oceans in very different business situations a nd industria l
contexts. Hoyt.per, t heir str egic praft shared t he sa me t hree
characte ri sti~: focus, divergence, and a c mpelling tagli ne These \\
three criteria guide compani es in carrying out the process 0 reo
__~c=o;ns~t~r~uc;t~io~n~~t0r.oa~rr~iv_e~at~a~b~re~a~k~t~h~rO~u~g~h~in~va~l~u~e~b~o~th~fu~r~bu~y~e~r~s____4
an or t emse ves.

Reading the Value Curves

The strategy canvas enables compa nies to see the future in the pres·
ent. To achieve this, companies must understa nd how to read va lue
curves. Embedded in the value c urves of an industry is a wealth of
strategic knowledge on the current status and future of a business.

A Blue Ocean Strategy

The first question the value curves a nswer is whether a business de·
serves to be a winner. When a compa ny's val ue c urve, 0 1' its com·
petitors', meets the three criteria that define a good blue ocean
strategy focus, divergence, and a compell ing lagline that speaks to
the market the company is on the right track. These threc criteria
serve as a n initial litmus test of the commercial viability of blue
ocean ideas.

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 20 BLUE OCEAN S TRAT EGy

On the other h a nd, wh en a company's va lue curve lacks fOC lI S, its

cost structure will tend to be high and its bus iness model com plex
in implementation a nd execution. When it lacks divergence. a com-
pany 's strategy is a me-tOO. with no reason to sta nd apart in t he
marketplace. When it lacks a compell ing tagline that s peaks to buy-
ers. it is li kely to be internally driven or a classic example of inno-
vation for in novatio n's sa ke with no great commercia l potentia l
and no natura l ta ke-otT capability.

A Company Caught in the Red Ocean

When a company's value curve converges with its co mpetitors, it

signals that a company is likely caught within t he red ocean o f
bloody competition. A COml)any's ex plicit or im plic it strategy tends
to be t ry in g to outdo its competit ion on t he basis of cost or quality.
This signals slow growth unl ess, by t he grace of luck, the company
benefits from being in a n indust ry that is growin g on its own ac-
co rd. Th is growt h is not due to a company's strategy. however, bu t
to luck .

Overdelivery Without Payback

When a company's value cu rve on t he strategy canvas is shown to

deliver hig h levels across all factors, the quest io n is. Does the com-
pany's ma rket share and profitabi lity reflect these investments? If
not . t he strategy canvas signals that t he company may be oversup-
plying its customers. offering too much of those elements that add
incremental va lue to buye rs. To va lue-innovate, the company must
decide which fac tors to elimi nate a nd reduce-and not only those
to raise a nd create- to construct a d ivergent va lue curve.

An Incoherent Strategy

When a co mpany's value cu rve looks like a bowl of spaghetti- a

zigzag with no rhyme or reason, where t he offering ca n be de-
scribed a s ;' low-high-Iow- Iow-high-Iow-high"- it signals t hat t he

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 Analytical Tools and Frameworks 21

company doesn't h ave a coherent strategy. Its strategy IS li kely

based on independent substrategies. 'I'hese may indiv idually make
sense and keep the business runn in g and everyone busy, but col·
lectively they do l ittle to distin guish t h e company from the best
competitor or to provide a clear strategic vision. This is often are·
flection of an organization with divisional or fu nctional silos.

Strategic Contradictions

( Are there strategic contradictions? These are areas where a com·

pany is offering a high leve l on one competing factor while ignor·
ing oth ers that support t hat factor. An example is investing heavily
in making a company's Web site easy to use but fai li ng to correct
the site's slow speed of operation. Strategic inconsistencies can
also be fo und between the level of your offering and your price. For
example, a petroleum station COml)any found that it o ffered "less
for more": fewer services than the best competitor at a higher price.
No wonder it was losing market share fast.

An Internally Driven Company

In drawing t he strategy canvas, how does a company label the in·

dustry's competing factors? For example, does it use the word mega·
hertz instead of speed, or thermal water temperature instead of hot
water? Are the competing factors stated in terms buyers can under·
stand and value, or are t hey in operational jargon? The kind of Ian·
guage used in the strategy canvas gives insigh t as to wheth er a
company's strategic vision is built on an "outside-in" perspective,
dnven by the demand side, or an "insi de.ollt" per spective t h at is op·
erationally driven. Analyzing t he language of the strategy canvas
helps a company understand how far it is from creati ng ind ustry
demand.

The tools and frameworks introduced here are essential a nalytics

used throughout this book, a nd supplementary tools are introduced

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 22 BLUE OCEAN STRATEGY

in other chapters as needed. It is the in tersection bet ween t hese

ana lytic tec hniques and t he s ix principles of formulating and exe-
cuting blue oceans that allow companies to break from t he compe-
tition and unlock uncontested market s pace.
Now we move on to t he first principle, reconstructing market
boundaries. In the next chapter we discuss the opportunity-maxi.
mizing and risk-minimizing paths to creating blue ocea ns.

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 Notes
(
Chapter 2

I. Alternatives go beyond s ubstitutes. A restaurant. for example. is an

al ternative to the cinema. Itcoml)Ctes for po tential buye rs who want to enjoy
a night out, even though it is nei ther n d irect coml»Clitor nor It substitute for
the cinema in its func t ional offering. There are three tiers of nonc ustomers n
compa ny can look to. For more dctai led discussions on n ltcrnati\'cs a nd no n·
c ustomers, sec c hll lltor 3 and Chn])Wf 5 of this book, respectively.

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,