Professors W Chan Kim and Renée Mauborgne explain how their 'blue ocean' strategy can help businesses out-perform the competition by exploiting less troubled commercial waters.
In the space of just two years, a red wine produced by the Casella Wines Australian winery emerged as the fastest-growing brand in the histories of both the Australian and US wine industries. The wine – called Yellow Tail – quickly became the number one imported wine into the USA, surpassing the wines of France and Italy.
What's more, whereas large wine companies developed strong brands over decades of marketing investment, Yellow Tail leap-frogged its competitors without a promotional campaign, mass media or consumer advertising. It didn't just steal sales from competitors; it grew the overall market. Yellow Tail brought non-wine drinkers – beer and ready-to-drink cocktail drinkers – into the market. Moreover, novice table wine drinkers started to drink wine more frequently, jug wine drinkers moved up and drinkers of more expensive wines moved down to become consumers of Yellow Tail.
BREAKING THE MOULD
With Yellow Tail, Casella revolutionised the US wine industry. Prior to its arrival in 2001, the conventional wisdom was that wineries had to compete on the prestige and the quality of wine at a price point – an example of traditional competitive strategy. Prestige and quality were viewed as a function of adding complexity to the wine based on taste profiles shared by winemakers and reinforced by the wine show judging system.
The wine experts concur that complexity – layered personality and characteristics that reflect the uniqueness of the soil, the season, and the winemaker's skill in tannins, oak, and ageing processes – equates with quality.
So how did Casella challenge the old logic? First, the company took a fresh look at the US wine market. It changed the problem of the wine industry to a new one: how to make a fun and non-traditional wine that's easy to drink for everyone. But why did they take this approach? In looking at the demand side of alternatives of beer, spirits, and ready-to-drink cocktails, which captured three times as many consumer alcohol sales as wine, Casella Wines found that the mass of US adults saw wine as a turnoff. It was intimidating and pretentious, and the complexity of taste – even though it was where the industry sought to excel – created a challenge to the inexperienced palate.
Armed with this insight, Casella was ready to challenge the industry's strategic logic and business model. The upshot of this analysis was the creation of Yellow Tail wine, the strategic profile of which broke from the norm. Yellow Tail was a completely new combination of characteristics which produced an uncomplicated wine structure that was instantly appealing to the mass of alcohol drinkers.
This allowed the company to dramatically reduce or eliminate all the factors the wine industry had long competed on – tannins, complexity and ageing. With the need for ageing reduced, the working capital required was also reduced. The wine industry criticised the sweet fruitiness of Yellow Tail, but consumers loved the wine.
Casella also made selection easy by offering only two choices of Yellow Tail: Chardonnay, the most popular white wine in the USA, and a red Shiraz. It removed all technical jargon from the bottle and created instead a striking and instantly recognisable label featuring a kangaroo in vibrant colours. The new wine was priced above the budget price, at $6.99 a bottle, more than twice the price of jug wine. From the moment it hit the retail shelves in July 2001, sales took off.
To understand what Casella achieved, imagine a market universe composed of two sorts of 'oceans': red oceans and blue oceans. Red oceans represent the industries currently in existence. This is the known market space. Blue oceans are all the industries not in existence today. This is the unknown market space.
In the red oceans, industry boundaries are well defined and generally accepted, and the competitive rules of the game are known. Here, companies endeavour to compete with their rivals to grab a greater share of existing demand. As the market space gets more crowded, prospects for profits and growth are reduced. Products become commodities, and cut-throat competition turns the ocean bloody.
Blue oceans, in contrast, are defined by untapped market space, demand creation and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries, as Casella did. In blue oceans, competition is absent because the rules of the game are not yet set.
It will always be important to swim successfully in the red ocean by out-performing rivals. But with supply exceeding demand in more industries, competing for a share of contracting markets, while necessary, is not sufficient to sustain high performance.
Companies need to go beyond competing. To seize new profit and growth opportunities, they also need to create blue oceans.
Unfortunately, blue oceans are largely uncharted. The dominant focus of strategy work over the past 25 years has been on competition-based red ocean strategies. Some discussions of blue oceans exist. But until now there has been little practical guidance on how to create them. That's why in our book, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, we provide practical frameworks and analytics for the systematic pursuit and capture of blue oceans.
BEYOND COMPETITIVE STRATEGY
We also set out to quantify the impact of creating blue oceans on a company's growth in terms of both revenues and profits, in a study of the launches of 108 companies. We found that 86% of the launches were line extensions – that is, incremental improvements within the red ocean of existing market space. Yet, they accounted for only 62% of total revenues and a mere 39% of total profits.
The remaining 14% of the launches were aimed at creating new blue oceans. They generated 38% of total revenues and 61% of total profits. Given that business launches included the total investments made for creating red and blue oceans, the performance benefits of creating blue waters are self-evident.
THE BLUE OCEAN IMPERATIVE
There are several driving forces behind a rising imperative to create blue oceans. Accelerated technological advances have substantially improved industrial productivity and have allowed suppliers to produce an unprecedented array of products and services. The result is that, in increasing numbers of industries, supply exceeds demand. The trend towards globalisation compounds the situation. As trade barriers between nations and regions are dismantled and as information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to disappear.
All this suggests that the business environment in which most strategy and management approaches of the twentieth century evolved is increasingly disappearing. As red oceans become more and more bloody, management will need to be more concerned with blue oceans than ever before. That is why the future belongs to companies that can create and execute on blue ocean strategy.
In blue oceans, competition is absent because the rules are not yet set