AMERICAN companies spend too much time competing in narrowly defined industries and, as a result, face relentless downward pressure on profits, say W.Chan Kim and ReneÃ© Mauborgne, professors at Insead, the French business school, and authors of a new book, “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant” (Harvard Business School Press). Here are excerpts from a conversation:
Q. Has globalization helped create the brutal competition that you describe as a red, or money-losing, ocean?
Kim: Absolutely. There are three tiers in the international production system. One is the United States and other industrialized nations. The second is emerging countries like South Korea. The third is China and other countries with such low wages and cost structures.
Technology can now go to the cheapest country. That is an impetus for American companies to cut costs and shift their global production sourcing. It results in ever-intensifying competitive pressure.
Our argument is that you need to create blue oceans, or areas where you have clear competitive advantage, so that we can keep jobs in the United States, and that we can upgrade the way we think of value.
Q. Why don’t you think American companies are doing a good job of strategic planning?
Mauborgne: They are always benchmarking the competition, in terms of cost and quality. That means they will tend to compete head-on within existing industry boundaries. That’s bloody. Strategic planning is usually focused on numbers rather than getting out of existing boundaries to leave the competition behind.
Q. You seem to think that Cirque du Soleil successfully escaped existing boundaries. What was its secret?
Kim: Yes, they challenged the conventional way of thinking. The conventional wisdom was that in the traditional circus industry, everybody was competing with each other on the basis of bringing in more exotic animals and more acrobatics. They tried to improve the thrill of the circus. But Cirque du Soleil totally redefined the problem. They wanted more artistic sophistication. They asked, “How can you produce an intellectually sophisticated show?”
Q. Did that mean that Cirque du Soleil started reaching a different audience?
Mauborgne: Yes, they saw that people go to the theater or ballet more than the circus because those venues provide intellectual sophistication. And they decided not to focus only on children, whom the traditional players were trying to please. Cirque du Soleil targeted noncustomers who had refused to go to the circus. They escaped the no-win red ocean.
Q. Who else has created a blue ocean strategy?
Kim: We mention Yellow Tail wine, Starbucks, Southwest Airlines, NetJets, the Sony Walkman, the Swatch watch and the Body Shop, among others.
Q. What was Starbucks’s plan?
Mauborgne: All the major coffee retailers, including NestlÃ©, Maxwell and Folgers, were competing against each other to offer higher-quality coffee at a lower cost. They only focused on each other as competitors, and they all thought their customers were people making coffee in the home.
Starbucks, on the other hand, actually thought about why people go to hotels to drink coffee. They go for the atmosphere and conversation. Many of those people who want to have conversation refuse to go to mom-and-pop shops. For these people, the problem is not the quality or the cost. It’s about drinking high-quality coffee in a nice atmosphere.
Q. What’s another good example of a blue ocean strategy?
Kim: Callaway Golf and the Big Bertha driver. They recognized that there is a market of professional golfers who have no problem hitting the ball, but that there is another market of people who go on family outings and vacation and want to play golf. They have trouble hitting the ball. A majority probably don’t really know how to play golf, but they’re still out there playing. So Callaway redefined the problem and created a club with a bigger sweet spot that’s easier to hit with.
Q. What’s wrong with the approach to innovation commonly taken by corporations?
Mauborgne: We’re hesitant to use the word “innovation” because it implies skunk works, where a few bright people get together. Silicon Valley is really a skunk-works kind of place. But there are problems with this model. One is that there is a lot of trial and error, and therefore failure. The second thing is that this model assumes that innovation is very technology-driven. They talk about technology, not about creating value for customers.
Q. Are you saying that true innovation is not necessarily based on new technology?
Kim: That’s right. Starbucks’s strategy wasn’t about technology. What Dell and Yellow Tail and Cirque du Soleil did had nothing to do with new technology. The lesson we learned is that a blue ocean strategy is not about technology per se.
Q. Are you suggesting that breakthrough innovations are not just trial and error?
Mauborgne: Absolutely. We should never see innovation as a random process. That’s not the way to do it. Silicon Valley has a huge failure ratio.
There should be a systematic, repeatable pattern that maximizes opportunities while minimizing the risks.