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Blue Ocean Strategy

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Blue Ocean Strategy

How to Create Uncontested Market Space and

Make the Competition Irrelevant

W. Chan Kim

Renée Mauborgne

H A R V A R D B U S I N E S S S C H O O L P R E S S

B O S T O N , M A S S A C H U S E T T S

( ) ( ) ( ) ( ) (

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Copyright 2005 Harvard Business School Publishing Corporation

All rights reserved

Printed in the United States of America

09 08 07 06 05 5 4 3 2 1

No part of this publication may be reproduced, stored in or introduced into a

retrieval system, or transmitted, in any form, or by any means (electronic, mechanical,

photocopying, recording, or otherwise), without the prior permission of the publisher.

Requests for permission should be directed to permissions@hbsp.harvard.edu, or

mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston,

Massachusetts 02163.

Library of Congress Cataloging-in-Publication Data

Kim, W. Chan.

Blue ocean strategy: how to create uncontested market space and make the

competition irrelevant / W. Chan Kim, Renée Mauborgne.

p. cm.

Includes bibliographical references and index.

ISBN 1-59139-619-0 (hardcover: alk. paper)

1. New products. 2. Market segmentation. I. Mauborgne, Renée. II. Title.

HF5415.153.K53 2005

658.8�02—dc22

2004020857

The paper used in this publication meets the requirements of the American National

Standard for Permanence of Paper for Publications and Documents in Libraries and

Archives Z39.48–1992

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To friendship and to our families,

who make our worlds

more meaningful

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Contents

Preface ix

Acknowledgments xiii

Part One: Blue Ocean Strategy

1 Creating Blue Oceans 3

2 Analytical Tools and Frameworks 23

Part Two: Formulating Blue Ocean Strategy

3 Reconstruct Market Boundaries 47

4 Focus on the Big Picture, Not the Numbers 81

5 Reach Beyond Existing Demand 101

6 Get the Strategic Sequence Right 117

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Part Three: Executing Blue Ocean Strategy

7 Overcome Key Organizational Hurdles 147

8 Build Execution into Strategy 171

9 Conclusion: The Sustainability and Renewal

of Blue Ocean Strategy 185

Appendix A 191

Appendix B 209

Appendix C 213

Notes 217

Bibliography 223

Index 231

About the Authors 239

viii Contents

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Preface

TH I S I S A B O O K about friendship, about loyalty, aboutbelieving in one another. It was because of that friend- ship, and that belief, that we set out on the journey to explore the

ideas in this book and eventually came to write it.

We met twenty years ago in a classroom—one the professor, the

other the student. And we have worked together ever since, often

seeing ourselves along the journey as two wet rats in a drain. This

book is not the victory of an idea but of a friendship that we have

found more meaningful than any idea in the world of business. It has

made our lives rich and our worlds more beautiful. We were not alone.

No journey is easy; no friendship is filled only with laughter. But

we were excited every day of that journey because we were on a mis-

sion to learn and improve. We believe passionately in the ideas in

this book. These ideas are not for those whose ambition in life is to

get by or merely to survive. That was never an interest of ours. If

you can be satisfied with that, do not read on. But if you want to

make a difference, to create a company that builds a future where

customers, employees, shareholders, and society win, read on. We

are not saying it is easy, but it is worthwhile.

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Our research confirms that there are no permanently excellent

companies, just as there are no permanently excellent industries.

As we have found on our own tumbling road, we all, like corpora-

tions, do smart things and less-than-smart things. To improve the

quality of our success we need to study what we did that made a

positive difference and understand how to replicate it systemati-

cally. That is what we call making smart strategic moves, and we

have found that the strategic move that matters centrally is to cre-

ate blue oceans.

Blue ocean strategy challenges companies to break out of the red

ocean of bloody competition by creating uncontested market space

that makes the competition irrelevant. Instead of dividing up exist-

ing—and often shrinking—demand and benchmarking competi-

tors, blue ocean strategy is about growing demand and breaking

away from the competition. This book not only challenges compa-

nies but also shows them how to achieve this. We first introduce a

set of analytical tools and frameworks that show you how to sys-

tematically act on this challenge, and, second, we elaborate the

principles that define and separate blue ocean strategy from compe-

tition-based strategic thought.

Our aim is to make the formulation and execution of blue ocean

strategy as systematic and actionable as competing in the red wa-

ters of known market space. Only then can companies step up to

the challenge of creating blue oceans in a smart and responsible

way that is both opportunity maximizing and risk minimizing. No

company—large or small, incumbent or new entrant—can afford to

be a riverboat gambler. And no company should.

The contents of this book are based on more than fifteen years of

research, data stretching back more than a hundred years, and a se-

ries of Harvard Business Review articles as well as academic arti-

cles on various dimensions of this topic. The ideas, tools, and

frameworks presented here have been further tested and refined

over the years in corporate practice in Europe, the United States,

and Asia. This book builds on and extends this work by providing a

narrative arc that draws these ideas together to offer a unified

x Preface

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framework. This framework addresses not only the analytic as-

pects behind the creation of blue ocean strategy but also the all-

important human aspects of how to bring an organization and its

people on this journey with a willingness to execute these ideas in

action. Here, understanding how to build trust and commitment, as

well as an understanding of the importance of intellectual and

emotional recognition, are highlighted and brought to the core of

strategy.

Blue ocean opportunities have been out there. As they have been

explored, the market universe has been expanding. This expansion,

we believe, is the root of growth. Yet poor understanding exists

both in theory and in practice as to how to systematically create

and capture blue oceans. We invite you to read this book to learn

how you can be a driver of this expansion in the future.

Preface xi

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Acknowledgments

WE H AV E H A D S I G N I F I C A N T H E L P in actualizingthis book. INSEAD has provided a unique environ- ment in which to conduct our research. We have benefited greatly

from the crossover between theory and practice that exists at

INSEAD, and from the truly global composition of our faculty, stu-

dent, and executive education populations. Deans Antonio Borges,

Gabriel Hawawini, and Ludo Van der Heyden provided encourage-

ment and institutional support from the start and allowed us to

closely intertwine our research and teaching. Pricewaterhouse-

Coopers (PwC) and the Boston Consulting Group (BCG) have ex-

tended the financial support for our research; in particular, Frank

Brown and Richard Baird at PwC, and René Abate, John Clarkeson,

George Stalk, and Olivier Tardy of BCG have been valued partners.

While we had help from a highly talented group of researchers

over the years, our two dedicated research associates, Jason

Hunter and Ji Mi, who have worked with us for the last several

years, deserve special mention. Their commitment, persistent re-

search support, and drive for perfection, were essential in realizing

this book. We feel blessed by their presence.

( ) ( ) ( ) ( )

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Our colleagues at the school have contributed to the ideas in the

book. INSEAD faculty members, particularly Subramanian Ran-

gan and Ludo Van der Heyden, helped us to reflect upon our ideas

and offered valuable comments and support. Many of INSEAD’s

faculty have taught the ideas and frameworks in this book to execu-

tive and M.B.A. audiences, providing valuable feedback that sharp-

ened our thinking. Others have provided intellectual encourage-

ment and the energy of kindness. We thank here, among others,

Ron Adner, Jean-Louis Barsoux, Ben Bensaou, Henri-Claude de

Bettignies, Mike Brimm, Laurence Capron, Marco Ceccagnoli,

Karel Cool, Arnoud De Meyer, Ingemar Dierickx, Gareth Dyas,

George Eapen, Paul Evans, Charlie Galunic, Annabelle Gawer,

Javier Gimeno, Dominique Héau, Neil Jones, Philippe Lasserre,

Jean-François Manzoni, Jens Meyer, Claude Michaud, Deigan

Morris, Quy Nguyen-Huy, Subramanian Rangan, Jonathan Story,

Heinz Thanheiser, Ludo Van der Heyden, David Young, Peter Zem-

sky, and Ming Zeng.

We have been fortunate to have a network of practitioners and

case writers across the globe. They have contributed greatly in

showing how the ideas in this book apply in action and helping to

develop case material for our research. Among many people, one

deserves special mention: Marc Beauvois-Coladon, who has worked

with us from the start and made a major contribution to chapter 4

based on his field experiences practicing our ideas in companies.

Among the wealth of others, we would like to thank Francis Gouillart

and his associates; Gavin Fraser and his associates; Wayne Morten-

sen; Brian Marks; Kenneth Lau; Yasushi Shiina; Jonathan Landrey

and his associates; Junan Jiang; Ralph Trombetta and his associ-

ates; Gabor Burt and his associates; Shantaram Venkatesh; Miki

Kawawa and her associates; Atul Sinha and his associates; Arnold

Izsak and his associates; Volker Westermann and his associates;

Matt Williamson; and Caroline Edwards and her associates. We

also appreciate the emerging cooperation with Accenture as kicked

off with Mark Spelman, Omar Abbosh, Jim Sayles, and their team.

Thanks are also due to Lucent Technologies for their support.

xiv Acknowledgments

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During the course of our research, we have met with corporate

executives and public officers around the world who generously

gave us their time and insight, greatly shaping the ideas in this

book. We are grateful to them. Among many private and public ini-

tiatives for putting our ideas into practice, the Value Innovation

Program (VIP) Center at Samsung Electronics and the Value Inno-

vation Action Tank (VIAT) in Singapore for the country’s govern-

ment and private sectors have been major sources of inspiration

and learning. In particular, Jong-Yong Yun at Samsung Electronics

and all the Permanent Secretaries of Singapore Government have

been valued partners. Warm thanks also to the members of the

Value Innovation Network (VIN), a global community of practice

on the Value Innovation family of concepts—especially to those we

were unable to mention here.

Finally, we would like to thank Melinda Merino, our editor, for

her wise comments and editorial feedback, and the Harvard Busi-

ness School Publishing team for their commitment and enthusias-

tic support. Thanks also to our present and past editors at Harvard

Business Review, in particular David Champion, Tom Stewart, Nan

Stone, and Joan Magretta. We owe a great deal to INSEAD

M.B.A.’s and Ph.D.’s and executive education participants. Particu-

larly, participants in both Strategy and Value Innovation Study

Group (VISG) courses have been patient as we have tried out the

ideas in this book. Their challenging questions and thoughtful

feedback clarified and strengthened our ideas.

Acknowledgments xv

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( ) ( ) ( ) ( ) (

P A R T O N E

Blue Ocean Strategy

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( ) ( ) ( ) ( ) C H A P T E R 1

Creating Blue Oceans

AONE TIME ACCORDION PLAYER, stilt-walker, and fire-eater, Guy Laliberté is now CEO of Cirque du Soleil, one of Canada’s largest cultural exports. Created in 1984 by a group

of street performers, Cirque’s productions have been seen by almost

forty million people in ninety cities around the world. In less than

twenty years Cirque du Soleil has achieved a level of revenues that

took Ringling Bros. and Barnum & Bailey—the 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 an attractive industry but rather 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 entertain-

ment—ranging from various kinds of urban live entertainment to

sporting events to home entertainment—cast an increasingly long

shadow. Children cried out for PlayStations rather than a visit to

the traveling circus. Partially as a result, the industry was suffer-

ing from steadily decreasing audiences and, in turn, declining rev-

enue and profits. There was also increasing sentiment against the

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use of animals in circuses by animal rights groups. Ringling Bros.

and Barnum & Bailey set the standard, and competing smaller cir-

cuses essentially followed with scaled-down versions. From the per-

spective of competition-based strategy, then, 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. Cirque du Soleil

did not compete with Ringling Bros. and Barnum & Bailey. Instead

it created uncontested new market space that made the competi-

tion 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 entertain-

ment experience. Significantly, one of the first Cirque productions

was titled “We Reinvent the Circus.”

New Market Space

Cirque du Soleil succeeded because it realized that to win in the fu-

ture, companies must stop competing with each other. The only way

to beat the competition is to stop trying to beat the competition.

To understand what Cirque du Soleil has achieved, imagine a

market universe composed of two sorts of oceans: red oceans and

blue oceans. Red oceans represent all the industries in existence

today. This is the known market space. Blue oceans denote all the

industries not in existence today. This is the unknown market space.

In the red oceans, industry boundaries are defined and accepted,

and the competitive rules of the game are known.1 Here, companies

try to outperform their rivals to grab a greater share of existing de-

mand. As the market space gets crowded, prospects for profits and

growth are reduced. Products become commodities, and cutthroat

competition turns the red ocean bloody.

Blue oceans, in contrast, are defined by untapped market space,

demand creation, and the opportunity for highly profitable growth.

4 B L U E O C E A N S T R A T E G Y

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Although some blue oceans are created well beyond existing indus-

try boundaries, most are created from within red oceans by expand-

ing existing industry boundaries, as Cirque du Soleil did. In blue

oceans, competition is irrelevant because the rules of the game are

waiting to be set.

It will always be important to swim successfully in the red ocean

by outcompeting rivals. Red oceans will always matter and will al-

ways be a fact of business life. But with supply exceeding demand

in more industries, competing for a share of contracting markets,

while necessary, will not be sufficient to sustain high performance.2

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 twenty-five years has been on

competition-based red ocean strategies.3 The result has been a

fairly good understanding of how to compete skillfully in red waters,

from analyzing the underlying economic structure of an existing

industry, to choosing a strategic position of low cost or differentia-

tion or focus, to benchmarking the competition. Some discussions

around blue oceans exist.4 However, there is little practical guid-

ance on how to create them. Without analytic frameworks to create

blue oceans and principles to effectively manage risk, creating

blue oceans has remained wishful thinking that is seen as too risky

for managers to pursue as strategy. This book provides practical

frameworks and analytics for the systematic pursuit and capture of

blue oceans.

The Continuing Creation of Blue Oceans

Although the term blue oceans is new, their existence is not. They

are a feature of business life, past and present. Look back one hun-

dred years and ask yourself, How many of today’s industries were

then unknown? The answer: Many industries as basic as automo-

biles, music recording, aviation, petrochemicals, health care, and

Creating Blue Oceans 5

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management consulting were unheard of or had just begun to

emerge at that time. Now turn the clock back only thirty years.

Again, a plethora of multibillion-dollar industries jumps out—mu-

tual funds, cell phones, gas-fired electricity plants, biotechnology,

discount retail, express package delivery, minivans, snowboards,

coffee bars, and home videos, to name a few. Just three decades ago,

none of these industries existed in a meaningful way.

Now put the clock forward twenty years—or perhaps fifty years—

and ask yourself how many now unknown industries will likely

exist then. If history is any predictor of the future, again the answer

is many of them.

The reality is that industries never stand still. They continu-

ously evolve. Operations improve, markets expand, and players

come and go. History teaches us that we have a hugely underesti-

mated capacity to create new industries and re-create existing

ones. In fact, the half-century-old Standard Industrial Classifica-

tion (SIC) system published by the U.S. Census was replaced in 1997

by the North America Industry Classification Standard (NAICS)

system. The new system expanded the ten SIC industry sectors into

twenty sectors to reflect the emerging realities of new industry ter-

ritories.5 The services sector under the old system, for example, is

now expanded into seven business sectors ranging from informa-

tion to health care and social assistance.6 Given that these systems

are designed for standardization and continuity, such a replace-

ment shows how significant the expansion of blue oceans has been.

Yet the overriding focus of strategic thinking has been on com-

petition-based red ocean strategies. Part of the explanation for this

is that corporate strategy is heavily influenced by its roots in mili-

tary 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 about

confronting an opponent and fighting over a given piece of land

that is both limited and constant.7 Unlike war, however, the his-

tory of industry shows us that the market universe has never been

constant; rather, blue oceans have continuously been created over

6 B L U E O C E A N S T R A T E G Y

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time. To focus on the red ocean is therefore to accept the key

constraining factors of war—limited terrain and the need to beat

an enemy to succeed—and to deny the distinctive strength of the

business world: the capacity to create new market space that is un-

contested.

The Impact of Creating Blue Oceans

We set out to quantify the impact of creating blue oceans on a com-

pany’s growth in both revenues and profits in a study of the busi-

ness launches of 108 companies (see figure 1-1). We found that 86

percent of the launches were line extensions, that is, incremental

improvements within the red ocean of existing market space. Yet

they accounted for only 62 percent of total revenues and a mere 39

percent of total profits. The remaining 14 percent of the launches

were aimed at creating blue oceans. They generated 38 percent of

total revenues and 61 percent of total profits. Given that business

launches included the total investments made for creating red and

blue oceans (regardless of their subsequent revenue and profit con-

sequences, including failures), the performance benefits of creating

Creating Blue Oceans 7

FIGURE 1-1

The Profit and Growth Consequences of Creating Blue Oceans

Launches within red oceans Launches for creating blue oceans

Business Launch

Revenue Impact

Profit Impact

86% 14%

62% 38%

39% 61%

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blue waters are evident. Although we don’t have data on the hit rate

of success of red and blue ocean initiatives, the global performance

differences between them are marked.

The Rising Imperative of Creating Blue Oceans

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 pro-

duce an unprecedented array of products and services. The result

is that in increasing numbers of industries, supply exceeds de-

mand.8 The trend toward globalization compounds the situation.

As trade barriers between nations and regions are dismantled and

as information on products and prices becomes instantly and glob-

ally available, niche markets and havens for monopoly continue to

disappear.9 While supply is on the rise as global competition inten-

sifies, there is no clear evidence of an increase in demand world-

wide, and statistics even point to declining populations in many

developed markets.10

The result has been accelerated commoditization of products

and services, increasing price wars, and shrinking profit margins.

Recent industrywide studies on major American brands confirm

this trend.11 They reveal that for major product and service cate-

gories, brands are generally becoming more similar, and as they are

becoming more similar people increasingly select based on price.12

People no longer insist, as in the past, that their laundry detergent

be Tide. Nor will they necessarily stick to Colgate when Crest is on

sale, and vice versa. In overcrowded industries, differentiating brands

becomes harder in both economic upturns and downturns.

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 increas-

ingly bloody, management will need to be more concerned with blue

oceans than the current cohort of managers is accustomed to.

8 B L U E O C E A N S T R A T E G Y

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From Company and Industry to Strategic Move

How can a company break out of the red ocean of bloody competi-

tion? How can it create a blue ocean? Is there a systematic ap-

proach to achieve this and thereby sustain high performance?

In search of an answer, our initial step was to define the basic

unit of analysis for our research. To understand the roots of high

performance, the business literature typically uses the company as

the basic unit of analysis. People have marveled at how companies

attain strong, profitable growth with a distinguished set of strate-

gic, operational, and organizational characteristics. Our question,

however, was this: Are there lasting “excellent” or “visionary”

companies that continuously outperform the market and repeat-

edly create blue oceans?

Consider, for example, In Search of Excellence and Built to Last.13

The bestselling book In Search of Excellence was published twenty

years ago. Yet within two years of its publication a number of the

companies surveyed began to slip into oblivion: Atari, Chesebrough-

Pond’s, Data General, Fluor, National Semiconductor. As docu-

mented in Managing on the Edge, two-thirds of the identified model

firms in the book had fallen from their perches as industry leaders

within five years of its publication.14

The book Built to Last continued in the same footsteps. It sought

out the “successful habits of visionary companies” that had a long-

running track record of superior performance. To avoid the pitfalls

of In Search of Excellence, however, the survey period of Built to

Last was expanded to the entire life span of the companies while its

analysis was limited to firms more than forty years old. Built to

Last also became a bestseller.

But again, upon closer examination, deficiencies in some of the

visionary companies spotlighted in Built to Last have come to light.

As illustrated in the recent book Creative Destruction, much of the

success attributed to some of the model companies in Built to Last

was the result of industry sector performance rather than the

Creating Blue Oceans 9

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companies themselves.15 For example, Hewlett-Packard (HP) met

the criteria of Built to Last by outperforming the market over the

long term. In reality, while HP outperformed the market, so did the

entire computer-hardware industry. What’s more, HP did not even

outperform the competition within the industry. Through this and

other examples, Creative Destruction questioned whether “visionary”

companies that continuously outperform the market have ever ex-

isted. And we all have seen the stagnating or declining performance

of the Japanese companies that were celebrated as “revolutionary”

strategists in their heyday of the late 1970s and early 1980s.

If there is no perpetually high-performing company and if the

same company can be brilliant at one moment and wrongheaded at

another, it appears that the company is not the appropriate unit of

analysis in exploring the roots of high performance and blue oceans.

As discussed earlier, history also shows that industries are con-

stantly being created and expanded over time and that industry

conditions and boundaries are not given; individual actors can

shape them. Companies need not compete head-on in a given indus-

try space; Cirque du Soleil created a new market space in the enter-

tainment sector, generating strong, profitable growth as a result. It

appears, then, that neither the company nor the industry is the best

unit of analysis in studying the roots of profitable growth.

Consistent with this observation, our study shows that the

strategic move, and not the company or the industry, is the right

unit of analysis for explaining the creation of blue oceans and sus-

tained high performance. A strategic move is the set of managerial

actions and decisions involved in making a major market-creating

business offering. Compaq, for example, was acquired by Hewlett-

Packard in 2001 and ceased to be an independent company. As a re-

sult, many people might judge the company as unsuccessful. This

does not, however, invalidate the blue ocean strategic moves that

Compaq made in creating the server industry. These strategic

moves not only were a part of the company’s powerful comeback in

the mid-1990s but also unlocked a new multibillion-dollar market

space in computing.

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Appendix A, “A Sketch of the Historical Pattern of Blue Ocean

Creation,” provides a snapshot overview of the history of three rep-

resentative U.S. industries drawn from our database: the auto in-

dustry—how we get to work; the computer industry—what we use

at work; and the cinema industry—where we go after work for en-

joyment. As shown in appendix A, no perpetually excellent com-

pany or industry is found. But a striking commonality appears to

exist across strategic moves that have created blue oceans and have

led to new trajectories of strong, profitable growth.

The strategic moves we discuss—moves that have delivered prod-

ucts and services that opened and captured new market space, with

a significant leap in demand—contain great stories of profitable

growth as well as thought-provoking tales of missed opportunities

by companies stuck in red oceans. We built our study around these

strategic moves to understand the pattern by which blue oceans are

created and high performance achieved. We studied more than one

hundred fifty strategic moves made from 1880 to 2000 in more than

thirty industries, and we closely examined the relevant business

players in each of these events. Industries ranged from hotels, the

cinema, retail, airlines, energy, computers, broadcasting, and con-

struction to automobiles and steel. We analyzed not only winning

business players who created blue oceans but also their less suc-

cessful competitors.

Both within a given strategic move and across strategic moves,

we searched for convergence among the group that created blue

oceans and within less successful players caught in the red ocean.

We also searched for divergence across these two groups. In so

doing, we tried to discover the common factors leading to the cre-

ation of blue oceans and the key differences separating those win-

ners from the mere survivors and the losers adrift in the red ocean.

Our analysis of more than thirty industries confirms that neither

industry nor organizational characteristics explain the distinction

between the two groups. In assessing industry, organizational, and

strategic variables we found that the creation and capturing of blue

oceans were achieved by small and large companies, by young and

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old managers, by companies in attractive and unattractive indus-

tries, by new entrants and established incumbents, by private and

public companies, by companies in low- and high-tech industries,

and by companies of diverse national origins.

Our analysis failed to find any perpetually excellent company or

industry. What we did find behind the seemingly idiosyncratic suc-

cess stories, however, was a consistent and common pattern across

strategic moves for creating and capturing blue oceans. Whether it

was Ford in 1908 with the Model T; GM in 1924 with cars styled to

appeal to the emotions; CNN in 1980 with real-time news 24/7; or

Compaq, Starbucks, Southwest Airlines, or Cirque du Soleil—or,

for that matter, any of the other blue ocean moves in our study—the

approach to strategy in creating blue oceans was consistent across

time regardless of industry. Our research also reached out to em-

brace famous strategic moves in public sector turnarounds. Here

we found a strikingly similar pattern.

Value Innovation: The Cornerstone

of Blue Ocean Strategy

What consistently separated winners from losers in creating blue

oceans was their approach to strategy. The companies caught in

the red ocean followed a conventional approach, racing to beat the

competition by building a defensible position within the existing

industry order.16 The creators of blue oceans, surprisingly, didn’t

use the competition as their benchmark.17 Instead, they followed a

different strategic logic that we call value innovation. Value inno-

vation is the cornerstone of blue ocean strategy. We call it value in-

novation because instead of focusing on beating the competition,

you focus on making the competition irrelevant by creating a leap

in value for buyers and your company, thereby opening up new and

uncontested market space.

Value innovation places equal emphasis on value and innova-

tion. Value without innovation tends to focus on value creation on

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an incremental scale, something that improves value but is not suf-

ficient to make you stand out in the marketplace.18 Innovation with-

out value tends to be technology-driven, market pioneering, or

futuristic, often shooting beyond what buyers are ready to accept

and pay for.19 In this sense, it is important to distinguish between

value innovation as opposed to technology innovation and market

pioneering. Our study shows that what separates winners from los-

ers in creating blue oceans is neither bleeding-edge technology nor

“timing for market entry.” Sometimes these exist; more often, how-

ever, they do not. Value innovation occurs only when companies

align innovation with utility, price, and cost positions. If they fail

to anchor innovation with value in this way, technology innovators

and market pioneers often lay the eggs that other companies hatch.

Value innovation is a new way of thinking about and executing

strategy that results in the creation of a blue ocean and a break

from the competition. Importantly, value innovation defies one of

the most commonly accepted dogmas of competition-based strat-

egy: the value-cost trade-off.20 It is conventionally believed that

companies can either create greater value to customers at a higher

cost or create reasonable value at a lower cost. Here strategy is

seen as making a choice between differentiation and low cost.21 In

contrast, those that seek to create blue oceans pursue differentia-

tion and low cost simultaneously.

Let’s return to the example of Cirque du Soleil. Pursuing differ-

entiation and low cost simultaneously lies at the heart of the enter-

tainment experience it created. At the time of its debut, other

circuses focused on benchmarking one another and maximizing

their share of already shrinking demand by tweaking traditional

circus acts. This included trying to secure more famous clowns and

lion tamers, a strategy that raised circuses’ cost structure without

substantially altering the circus experience. The result was rising

costs without rising revenues, and a downward spiral of overall cir-

cus demand.

These efforts were made irrelevant when Cirque du Soleil ap-

peared. Neither an ordinary circus nor a classic theater production,

Creating Blue Oceans 13

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Cirque du Soleil paid no heed to what the competition did. Instead

of following the conventional logic of outpacing the competition

by offering a better solution to the given problem—creating a cir-

cus with even greater fun and thrills—it sought to offer people the

fun and thrill of the circus and the intellectual sophistication and

artistic richness of the theater at the same time; hence, it redefined

the problem itself.22 By breaking the market boundaries of theater

and circus, Cirque du Soleil gained a new understanding not only

of circus customers but also of circus noncustomers: adult theater

customers.

This led to a whole new circus concept that broke the value-cost

trade-off and created a blue ocean of new market space. Consider

the differences. Whereas other circuses focused on offering animal

shows, hiring star performers, presenting multiple show arenas in

the form of three rings, and pushing aisle concession sales, Cirque

du Soleil did away with all these factors. These factors had long

been taken for granted in the traditional circus industry, which

never questioned their ongoing relevance. However, there was in-

creasing public discomfort with the use of animals. Moreover, ani-

mal acts were one of the most expensive elements, including not

only the cost of the animals but also their training, medical care,

housing, insurance, and transportation.

Similarly, while 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 carry-

ing little sway with spectators. Gone, too, are three-ring venues.

Not only did this arrangement create angst among spectators as

they rapidly switched their gaze from one ring to the other, but it

also increased the number of performers needed, with obvious cost

implications. And although aisle concession sales appeared to be a

good way to generate revenue, in practice the high prices discour-

aged audiences from making purchases and made them feel they

were being taken for a ride.

The lasting allure of the traditional circus came down to only

three key factors: the tent, the clowns, and the classic acrobatic

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acts such as the wheelman and short stunts. So Cirque du Soleil

kept the clowns but shifted their humor from slapstick to a more en-

chanting, sophisticated style. It glamorized the tent, an element

that, ironically, many circuses had begun to forfeit in favor of

rented venues. Seeing that this unique venue symbolically cap-

tured the magic of the circus, Cirque du Soleil designed the classic

symbol of the circus with a glorious external finish and a higher

level of comfort, making its tents reminiscent of the grand epic cir-

cuses. Gone were the sawdust and hard benches. Acrobats and

other thrilling acts are retained, but their roles were reduced and

made more elegant by the addition of artistic flair and intellectual

wonder to the acts.

By looking across the market boundary of theater, Cirque du

Soleil also offered new noncircus factors, such as a story line and,

with it, intellectual richness, artistic music and dance, and multiple

productions. These factors, entirely new creations for the circus in-

dustry, are drawn from the alternative live entertainment industry

of theater.

Unlike traditional circus shows having a series of unrelated

acts, for example, each Cirque du Soleil creation has a theme and

story line, somewhat resembling a theater performance. Although

the theme is vague (and intentionally so), it brings harmony and an

intellectual element to the show—without limiting the potential

for acts. Le Cirque also borrows ideas from Broadway shows. For

example, it features multiple productions rather than the traditional

“one for all” shows. As with Broadway shows, too, each Cirque du

Soleil show has an original score and assorted music, which drives

the visual performance, lighting, and timing of the acts rather than

the other way around. The shows feature abstract and spiritual

dance, an idea derived from theater and ballet. By introducing

these new factors into its offering, Cirque du Soleil has created

more sophisticated shows.

Moreover, by injecting the concept of multiple productions and

by giving people a reason to come to the circus more frequently,

Cirque du Soleil has dramatically increased demand.

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In short, Cirque du Soleil offers the best of both circus and theater,

and it has eliminated or reduced everything else. By offering un-

precedented utility, Cirque du Soleil has created a blue ocean and

has invented a new form of live entertainment, one that is markedly

different from both traditional circus and theater. At the same time,

by eliminating many of the most costly elements of the circus, it has

dramatically reduced its cost structure, achieving both differentia-

tion and low cost. Le Cirque strategically priced its tickets against

those of the theater, lifting the price point of the circus industry by

several multiples while still pricing its productions to capture the

mass of adult customers, who were used to theater prices.

Figure 1-2 depicts the differentiation–low cost dynamics under-

pinning value innovation.

16 B L U E O C E A N S T R A T E G Y

FIGURE 1-2

Value Innovation: The Cornerstone of Blue Ocean Strategy

Value innovation 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 by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates.

The Simultaneous Pursuit of Differentiation and Low Cost

Value Innovation

Costs

Buyer Value

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As shown in figure 1-2, the creation of blue oceans is about driv-

ing costs down while simultaneously driving value up for buyers.

This is how a leap in value for both the company and its buyers is

achieved. Because buyer value comes from the utility and price

that the company offers to buyers and because the value to the com-

pany is generated from price and its cost structure, value innova-

tion is achieved only when the whole system of the 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 func-

tional and operational activities.

In contrast, innovations such as production innovations can be

achieved at the subsystem level without impacting the company’s

overall strategy. An innovation in the production process, for exam-

ple, may lower a company’s cost structure to reinforce its existing

cost leadership strategy without changing the utility proposition

of its offering. Although innovations of this sort may help to secure

and even lift a company’s position in the existing market space,

such a subsystem approach will rarely create a blue ocean of new

market space.

In this sense, value innovation is more than innovation. It is

about strategy that embraces the entire system of a company’s ac-

tivities.23 Value innovation requires companies to orient the whole

system toward achieving a leap in value for both buyers and them-

selves. Absent such an integral approach, innovation will remain

divided from the core of strategy.24 Figure 1-3 outlines the key

defining features of red and blue ocean strategies.

Competition-based red ocean strategy assumes that an indus-

try’s structural conditions are given and that firms are forced to

compete within them, an assumption based on what the academics

call the structuralist view, or environmental determinism.25 In con-

trast, value innovation is based on the view that market boundaries

and industry structure are not given and can be reconstructed

by the actions and beliefs of industry players. We call this the

Creating Blue Oceans 17

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reconstructionist view. In the red ocean, differentiation costs be-

cause firms compete with the same best-practice rule. Here, the

strategic choices for firms are to pursue either differentiation or

low cost. In the reconstructionist world, however, the strategic aim

is to create new best-practice rules by breaking the existing value-

cost trade-off and thereby creating a blue ocean. (For more discus-

sions on this, see appendix B, “Value Innovation: A Reconstruc-

tionist View of Strategy.”)

Cirque du Soleil broke the best practice rule of the circus indus-

try, achieving both differentiation and low cost by reconstructing

elements across existing industry boundaries. Is Cirque du Soleil,

then, really a circus, with all that it eliminated, reduced, raised,

and created? Or is it theater? And if it is theater, then what genre—

a Broadway show, an opera, a ballet? It is not clear. Cirque du Soleil

reconstructed elements across these alternatives, and, in the end, it

is simultaneously a little of all of them and none of any of them in

their entirety. It created a blue ocean of new, uncontested market

space that as of yet has no agreed-on industry name.

18 B L U E O C E A N S T R A T E G Y

FIGURE 1-3

Red Ocean Versus Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space. Create uncontested market space.

Beat the competition. Make the competition irrelevant.

Exploit existing demand. Create and capture new demand.

Make the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of a firm’s activities Align the whole system of a firm’s with its strategic choice of differentiation activities in pursuit of differentiation or low cost. and low cost.

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Formulating and Executing

Blue Ocean Strategy

Although economic conditions indicate the rising imperative of

blue oceans, there is a general belief that the odds of success are

lower when companies venture beyond existing industry space.26 The

issue is how to succeed in blue oceans. How can companies system-

atically maximize the opportunities while simultaneously minimiz-

ing the risks of formulating and executing blue ocean strategy? If

you lack an understanding of the opportunity-maximizing and risk-

minimizing principles driving the creation and capture of blue oceans,

the odds will be lengthened against your blue ocean initiative.

Of course, there is no such thing as a riskless strategy.27 Strategy

will always involve both opportunity and risk, be it a red ocean or a

blue ocean initiative. But at present the playing field is dramati-

cally unbalanced in favor of tools and analytical frameworks to

succeed in red oceans. As long as this remains true, red oceans will

continue to dominate companies’ strategic agenda even as the busi-

ness imperative for creating blue oceans takes on new urgency. Per-

haps this explains why, despite prior calls for companies to go

beyond existing industry space, companies have yet to act seriously

on these recommendations.

This book seeks to address this imbalance by laying out a method-

ology to support our thesis. Here we present the principles and ana-

lytical frameworks to succeed in blue oceans.

Chapter 2 introduces the analytical tools and frameworks that

are essential for creating and capturing blue oceans. Although

supplementary tools are introduced in other chapters as needed,

these basic analytics are used throughout the book. Companies

can make proactive changes in industry or market fundamentals

through the purposeful application of these blue ocean tools and

frameworks, which are grounded in the issues of both opportunity

and risk. Subsequent chapters introduce the principles that drive

Creating Blue Oceans 19

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the successful formulation and implementation of blue ocean strat-

egy and explain how they, along with the analytics, are applied in

action.

There are four guiding principles for the successful formulation

of blue ocean strategy. Chapters 3 to 6 address these in turn. Chap-

ter 3 identifies the paths by which you can systematically create un-

contested market space across diverse industry domains, hence

attenuating search risk. It teaches you how to make the competition

irrelevant by looking across the six conventional boundaries of

competition to open up commercially important blue oceans. The

six paths focus on looking across alternative industries, across

strategic groups, across buyer groups, across complementary prod-

uct and service offerings, across the functional-emotional orienta-

tion of an industry, and even across time.

Chapter 4 shows how to design a company’s strategic planning

process to go beyond incremental improvements to create value in-

novations. It presents an alternative to the existing strategic plan-

ning process, which is often criticized as a number-crunching

exercise that keeps companies locked into making incremental im-

provements. This principle tackles planning risk. Using a visualiz-

ing approach that drives you to focus on the big picture rather than

to be submerged in numbers and jargon, this chapter proposes a

four-step planning process whereby you can build a strategy that

creates and captures blue ocean opportunities.

Chapter 5 shows how to maximize the size of a blue ocean. To

create the greatest market of new demand, this chapter challenges

the conventional practice of aiming for finer segmentation to bet-

ter meet existing customer preferences. This practice often results

in increasingly small target markets. Instead, this chapter shows

you how to aggregate demand, not by focusing on the differences

that separate customers but by building on the powerful commonal-

ities across noncustomers to maximize the size of the blue ocean

being created and new demand being unlocked, hence minimizing

scale risk.

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Chapter 6 lays out the design of a strategy that allows you not

only to provide a leap in value to the mass of buyers but also to

build a viable business model to produce and maintain profitable

growth for itself. It shows you how to ensure that your company

builds a business model that profits from the blue ocean it is creat-

ing. It addresses business model risk. The chapter articulates the

sequence in which you should create a strategy to ensure that

both you and your customers win as you create new business ter-

rain. Such a strategy follows the sequence of utility, price, cost,

and adoption.

Chapters 7 and 8 turn to the principles that drive effective execu-

tion of blue ocean strategy. Specifically, chapter 7 introduces what

we call tipping point leadership. Tipping point leadership shows

managers how to mobilize an organization to overcome the key or-

ganizational hurdles that block the implementation of a blue ocean

strategy. It deals with organizational risk. It lays out how leaders

and managers alike can surmount the cognitive, resource, motiva-

tional, and political hurdles in spite of limited time and resources

in executing blue ocean strategy.

Chapter 8 argues for the integration of execution into strategy

making, thus motivating people to act on and execute a blue ocean

strategy in a sustained way deep in an organization. This chapter

Creating Blue Oceans 21

FIGURE 1-4

The Six Principles of Blue Ocean Strategy

Formulation principles Risk factor each principle attenuates

Reconstruct market boundaries ↓ Search risk

Focus on the big picture, not the numbers ↓ Planning risk

Reach beyond existing demand ↓ Scale risk

Get the strategic sequence right ↓ Business model risk

Execution principles Risk factor each principle attenuates

Overcome key organizational hurdles ↓ Organizational risk

Build execution into strategy ↓ Management risk

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introduces what we call fair process. Because a blue ocean strategy

perforce represents a departure from the status quo, this chapter

shows how fair process facilitates both strategy making and execu-

tion by mobilizing people for the voluntary cooperation needed to

execute blue ocean strategy. It deals with management risk associ-

ated with people’s attitudes and behaviors.

Figure 1-4 highlights the six principles driving the successful

formulation and execution of blue ocean strategy and the risks that

these principles attenuate.

Chapter 9 discusses the dynamic aspects of blue ocean strategy—

the issues of sustainability and renewal.

Let’s now move on to chapter 2, where we lay out the basic ana-

lytical tools and frameworks that will be used throughout this book

in the formulation and execution of blue ocean strategy.

22 B L U E O C E A N S T R A T E G Y

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( ) ( ) ( ) ( ) C H A P T E R 2

Analytical Tools

and Frameworks

WE H AV E S P E N T T H E PA S T D E C A D E 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 fill 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 strate-

gies, 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 revolution-

aries. 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.

( ) ( ) ( ) ( )

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To address this imbalance, we studied companies around the

world and developed practical methodologies in the quest of blue

oceans. We then applied and tested these tools and frameworks in

action by working with companies in their pursuit of blue oceans,

enriching and refining them in the process. The tools and frame-

works presented here are used throughout this book as we discuss

the six principles of formulating and executing blue ocean strat-

egy. As a brief introduction to these tools and frameworks, let’s

look at one industry—the U.S. wine industry—to see how these

tools can be applied in practice in the creation of blue oceans.

The United States has the third largest aggregate consumption

of wine worldwide. Yet the $20 billion industry is intensely compet-

itive. California wines dominate the domestic market, capturing

two-thirds of all U.S. wine sales. These wines compete head-to-head

with imported wines from France, Italy, and Spain and New World

wines from countries such as Chile, Australia, and Argentina,

which have increasingly targeted the U.S. market. With the supply

of wines increasing from Oregon, Washington, and New York state

and with newly mature vineyard plantings in California, the number

of wines has exploded. Yet the U.S. consumer base has essentially

remained stagnant. The United States remains stuck at thirty-first

place in world per capita wine consumption.

The intense competition has fueled ongoing industry consolida-

tion. The top eight companies produce more than 75 percent of the

wine in the United States, and the estimated one thousand six hun-

dred other wineries produce the remaining 25 percent. The domi-

nance of a few key players allows them to leverage distributors to

gain shelf space and put millions of dollars into above-the-line mar-

keting budgets. There is a simultaneous consolidation of retailers

and distributors across the United States, something that raises

their bargaining power against the plethora of wine makers. Ti-

tanic battles are being fought for retail and distribution space. It is

no surprise that weak, poorly run companies are increasingly being

swept aside. Downward pressure on wine prices has set in.

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In short, the U.S. wine industry faces intense competition,

mounting price pressure, increasing bargaining power on the part

of retail and distribution channels, and flat demand despite over-

whelming choice. Following conventional strategic thinking, the

industry is hardly attractive. 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 cre-

ation 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 pur-

poses. First, it captures the current state of play in the known mar-

ket space. This allows you 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. Figure 2-1 cap-

tures all this information in graphic form. The horizontal axis cap-

tures the range of factors the industry competes on and invests in.

In the case of the U.S. wine industry, there are seven principal

factors:

• Price per bottle of wine

• An elite, refined image in packaging, including labels an-

nouncing the wine medals won and the use of esoteric enologi-

cal terminology to stress the art and science of wine making

• Above-the-line marketing to raise consumer awareness in a

crowded market and to encourage distributors and retailers

to give prominence to a particular wine house

Analytical Tools and Frameworks 25

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• Aging quality of wine

• The prestige of a wine’s vineyard and its legacy (hence the

appellations of estates and chateaux and references to the

historic age of the establishment)

• The complexity and sophistication of a wine’s taste, includ-

ing such things as tannins and oak

• A diverse range of wines to cover all varieties of grapes and

consumer preferences from Chardonnay to Merlot, and 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 industry from

the market perspective. Now let’s turn to the vertical axis of the

26 B L U E O C E A N S T R A T E G Y

FIGURE 2-1

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

Premium Wines

High

Low

Budget Wines

Price Above-the-line Vineyard prestige Wine Use of enological marketing Aging and legacy Wine range terminology and quality complexity

distinctions in wine communication

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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, and hence invests more, in that

factor. In the case of price, a higher score indicates a higher price.

We can now plot the current offering of wineries across all these

factors to understand wineries’ strategic profiles, or value curves.

The value curve, the basic component of the strategy canvas, is a

graphic depiction of a company’s relative performance across its

industry’s factors of competition.

Figure 2-1 shows that, although more than one thousand six

hundred wineries participate in the U.S. wine industry, from the

buyer’s point of view there is enormous convergence in their value

curves. Despite the plethora of competitors, when premium brand

wines are plotted on the strategy canvas we discover that from the

market point of view all of them essentially have the same strategic

profile. They offer a high price and present a high level of offering

across all the key competing factors. Their strategic profile follows

a classic differentiation strategy. From the market point of view,

however, they are all different in the same way. On the other hand,

budget wines also have the same essential strategic profile. Their

price is low, as is their offering across all the key competing factors.

These are classic low-cost players. Moreover, the value curves of

premium and low-cost wines share the same basic shape. The two

strategic groups’ strategies march in lockstep, but at different alti-

tudes of offering level.