Blue Ocean Shift

CHAPTER 1

Reach Beyond the Best

"WHEN I PLAY MUSIC, I feel like I'm in a beautiful world that is endless."

In 2008, amid the devastation that is Iraq—a country of religious and ethnic divisions, hardship, and war—Zuhal Sultan had a dream. The 17-year-old Iraqi pianist wanted to create her country's first national youth orchestra and travel with it abroad. Iraq, however, had few formally trained musicians or music teachers, and few quality instruments to speak of, not to mention cultural chasms dating back centuries that divided Iraqi youth.

Where to begin? Using the Internet, Zuhal reached out to find a conductor. Paul MacAlindin, a Scottish conductor and classically trained musician, responded and signed on to lead the National Youth Orchestra of Iraq (NYOI).

It didn't take Paul long to see that he would need to be a strategist as well as a musician, since the orchestra would have no chance if it competed on the same terms as other national youth orchestras. The industry was intensely competitive, dominated by venerable European youth orchestras from countries such as France, Italy, Spain, and the UK. Comprised of highly trained young musicians with great technical skills, these orchestras engaged world-class guest soloists and conductors, and featured polished performances of classical masterpieces by composers such as Brahms, Beethoven, and Chopin. To stand apart, while keeping costs low, Paul realized that NYOI would have to break with industry tradition and redefine what it meant to be a national youth orchestra.

Rather than focus on technical excellence and musical sophistication, NYOI would focus on the power of music to heal, bridge the deepest divides, and showcase the hidden glory of Iraq's rich heritage. To this end, Paul reduced the orchestra's reliance on musical excellence and a sophisticated European repertoire, and eliminated renowned guest soloists and guest conductors, which dramatically dropped its cost structure.

In its place, Paul and Zuhal assembled a group of youthful musicians who would play original Iraqi music of both Kurdish and Arab origin and put it on an equal footing with the likes of Haydn, Beethoven, and Schubert, which they also played. Much to the disbelief of many, NYOI brought together young men and women musicians who were Sunni and Shia, Arab and Kurdish. In this way, Paul and Zuhal built an orchestra that demonstrated the young Iraqis' hope and commitment to building a brighter future together out of the destruction of war. As NYOI member Mohammed Adnan Abdallah put it, "Music is the language of peace, and it makes people love each other. When musicians sit and play together, they communicate that."¹

The result: NYOI became known as the "Bravest Orchestra in the World," a title first bestowed on it by the British broadcaster Sky News. It might not be the most technically accomplished group of young musicians. But it was, perhaps, the most inspired. It broke away from other national youth orchestras, winning accolades, standing ovations, and attention across the globe. It attracted new audiences who had never gone to classical music concerts before and enjoyed one of the largest social media followings of any youth orchestra. More than that, it showed young Iraqi people they could create a different narrative for their country other than one of destruction, hate, and war—one of peace, hope, and solidarity.²

Paul MacAlindin is smart and a fine conductor. He is hardworking, strives to do his best, and has a passion for making a difference. He will be the first to admit, though, that he is not a genius or your typical entrepreneur. In many ways, Paul is just like most of us. Yet, despite organizational constraints, ranging from scant resources to limited top talent, Paul and his young orchestra members developed a strategy that was both creative and low cost, allowing the orchestra to stand apart from fierce, entrenched competition.

Paul and NYOI's youthful musicians are not alone.

From Orchestras to French Fry Makers

Take Groupe SEB, the French multinational founded in 1857. Like most large, well-established multinationals, Groupe SEB is run by professional managers, many of whom have been with the company for years, with an established culture and its share of bureaucracy and internal politics. Like most small appliance makers at the time, its businesses were facing increasingly intense competition and margin pressure. In particular, its electric French fry makers, struggling to stand apart in a market that was shrinking 10 percent a year in value, were a case in point.

Recognizing the need to break out of this intense competition, Christian Grob, the head of electric cooking at the time, and his team set out to turn the situation around. The professional managers of Groupe SEB were somewhat skeptical. After all, what could you do with a French fry maker when price was the only thing that seemed to drive sales?

Christian and his team reasoned differently. What if all the players in the industry were operating under the same set of assumptions, but those assumptions limited the attractiveness of and the demand for their products? What would happen if those assumptions were rethought? Christian and his team set about to do just that—to identify and challenge the industry's most basic assumptions. When they did, they had a revelation.

Christian's team discovered that there were two facts that everyone accepted without question—two facts that in essence defined the industry. The first was that making fresh French fries required frying. The second was that frying required a lot of oil.

Obvious? Yes. However, these unexamined assumptions drove the industry to overlook a host of problems. The 2.5 liters of cooking oil that were required were expensive. Once hot, the oil makes fryers dangerous. When the fries are done, it's hard to dispose of the cooking oil, making cleanup difficult. To top it off, all that oil makes fries both unhealthy and incredibly fattening.

Challenging this accepted wisdom led the team to redefine the problem from the one the industry focused on—how to make a best-in-class fryer—to how to make mouthwatering, healthy, fresh fries without frying. The result was ActiFry—a whole new type of French fry maker, first launched in France in 2006 and since rolled out globally. ActiFry requires no frying, and uses only one tablespoon of oil to make two pounds of fries, with roughly 40 percent fewer calories and 80 percent less fat than the same size serving of traditional fries. What's more, the appliance is easy to clean and has no safety or oil disposal issues. The fries are great, too—crunchy on the outside and soft on the inside. The winning combination of healthy, lower-calorie, yet yummy fries inspired Oprah Winfrey to tweet about how much she loves her ActiFry. "This machine… actifry has changed my life," she tweeted, "And they're not paying me to say it."³ Not only did demand outstrip supply across Europe, but after Oprah's comments, Groupe SEB's stock price jumped 5 percent based on this one product. It took competitors five years to dive into the market, and even so they didn't succeed in capturing a significant share, since they couldn't match what ActiFry offered, thanks to the patents Groupe SEB secured. To this day, more than ten years out, ActiFry remains the global market leader. With the launch of ActiFry, the industry also grew by nearly 40 percent in value, pulling into the market brand-new customers who had never bought an electric fry maker before.

The industries of national youth orchestras and French fry makers are clearly worlds apart. They deliver different offerings, compete in different ways, and have completely different sets of players. The two organizations are also different. The National Youth Orchestra of Iraq is a new nonprofit, essentially a start-up. Groupe SEB is a for-profit multinational with over 150 years of history behind it.

As different as these two organizations and their industry settings are, however, they succeeded in the same way. Both shifted from competing in crowded existing markets to creating new market space. And while both faced organizational hurdles—as all organizations do—they overcame them by winning people's confidence and cooperation. This is what we call blue ocean shift. Blue ocean shift is a systematic process to move your organization from cutthroat markets with bloody competition—what we think of as red oceans full of sharks—to wide-open blue oceans, or new markets devoid of competition, in a way that brings your people along.

To deepen our understanding of blue ocean shift, let's look at another example, this one launched by government, arguably one of the most bureaucratic, resistant-to-change entities, and one that few would describe as creative or innovative.

The Gift of a Second Chance

Many countries today face rising crime, overcrowded prisons, and high recidivism rates. The implications of this situation are huge. It is costly to taxpayers. It threatens the security of citizens. It is debilitating to people who have turned to crime and can't break out of its vicious cycle. It is also heartbreaking for their families.

Most governments deal with overcrowded prisons in conventional ways: by building more of them, or maximizing utilization by mixing petty criminals in with harder-core inmates. Neither option works very well. Building more prisons is expensive and time-consuming, and mixing petty and harder-core criminals turns prisons into crime schools.

Either way, the focus is mainly on incarceration and providing a strict security environment, not on rehabilitation. California, for instance, has built 22 prisons since 1980. Its annual prison budget is now some US$9 billion. Yet its prisons remain massively overcrowded, and its recidivism rate hovers at a whopping 65 percent. In short, the existing strategies for managing prisons may succeed at punishment, but they fail at what society needs most—rehabilitating inmates to become productive members of the community.

When the government of Malaysia faced this precise challenge in 2010, it recognized that only a shift in strategy and organizational focus could break the vicious cycle of incarceration and reduce crime. To that end, the government turned to the National Blue Ocean Strategy (NBOS) Summit. The government had created the NBOS Summit in 2009 to pioneer innovative strategies and new practices that could achieve high social impact at low cost. Each month the NBOS Summit brings together national leaders like the prime minister, the deputy prime minister, and other top ministers, as well as the highest-level civil servants, including those from the nation's security forces. Depending on the issue, Summit participants vary and relevant private sector leaders are also involved.

In seeking a creative solution to the prison problem, the Summit stopped using global best practices as the benchmark. Instead, as Paul MacAlindin did at NYOI and Christian Grob did at Groupe SEB, it sought to identify and challenge the industry's fundamental assumptions. Chief among these was the long-held assumption that all criminals need to be put in prisons. Was there an alternative to very costly, high-security prisons, which could have high impact at far lower cost?

As the Summit explored these questions, it saw an opportunity that the ministers and security professionals had never previously recognized. Many military bases around the country had idle land. These bases had a robust security infrastructure, meant to keep trespassers out. But it was equally well suited to keeping prisoners in. For petty criminals, who were the largest inmate population, this idle land could be converted into an effective, low-cost security environment.

Summit participants also surfaced a second long-held practice that was keeping the government from recognizing rehabilitation opportunities; that is, the key expertise to rehabilitate prisoners lay outside the domain of the ministry in charge of prisons. Traditionally, prison officials were put in charge of rehabilitation, but their expertise was in confinement and high security—not in education, training, employment, and family needs. These were the keys to rehabilitation, and they could be much better provided by other ministries.

As the Summit challenged and overturned these long-held assumptions, it made a blue ocean shift, and the Community Rehabilitation Program (CRP) was born. Instead of building more expensive prisons, the Summit created CRP centers for petty criminals on the military bases' idle land, a first in the world. CRP offered a solution to overcrowding that could be delivered quickly and cheaply, and it ensured that petty criminals would be separated from, and not influenced by, hardened criminals. That was just the start.

At the CRP centers, the Ministries of Agriculture and Higher Education were brought in to provide high-value vocational training in cultivating fish and growing high-yield crops, which are then sold in open markets. The inmates earn and save money through the sale of the products they produce. Such training not only teaches valuable skills, but also shows these minor offenders a financial alternative to crime. CRP also reaches out, via the human rights commissioner, to inmates' family members, encouraging more regular contact and even providing housing facilities nearby to allow visiting families to stay longer.

Visitation at conventional prisons normally occurs behind a glass window for 30 minutes. By contrast, at the CRP centers, inmates and their spouses and children are allowed to not only hug and hold each other but also play together. This heals wounds and reminds inmates how much they are loved and how important their rehabilitation is. Upon release, the Ministry of Human Resources provides departing prisoners with job-matching services, and loans are available from the Ministry of Women, Family and Community Development, should they wish to start their own business.

The result: CRP delivered a leap in value to prisoners, their families, and society while keeping costs to the government low. Here are the facts: Since the CRP centers started in 2011, the recidivism rate for petty criminals has dropped around 90 percent and stands at some 0.6 percent of California prisons. Their families are thrilled. Society is safer. As for cost, compared with a conventional prison, a CRP center is 85 percent cheaper to build and 58 percent cheaper to run. Based on the current rehabilitation level, CRP is expected to deliver over US$1 billion in reduced costs and benefits to society in its first decade.

Perhaps the greatest gift, however, is how CRP transforms the lives of former inmates, giving them hope, dignity, and the tools to restart their lives and become productive members of society. As one former CRP inmate put it, "I really feel like I've been given a second chance. I've learned new skills and have been able to set up my own motorcycle repair business with the funds I made at CRP. I now see a new future for myself."

From Market Competing to Market Creating

Organizational leaders often accept and act on two fundamental assumptions. One is that market boundaries and industry conditions are given. You cannot change them. You have to build your strategy based on them.⁴ The other is that, to succeed within these environmental constraints, an organization must make a strategic choice between differentiation and low cost. Either it can deliver greater value to customers at a greater cost and hence a higher price, or it can deliver reasonable value at a lower cost. But it can't do both. Hence, the essence of strategy is seen as making a value-cost trade-off.⁵

Is it, though? Can't organizations shape the market boundaries and industry conditions they face? Can't organizations create strategies that break the value-cost trade-off in pursuit of differentiation and low cost?⁶

Think about CRP. Did the NBOS Summit accept the industry or environmental conditions of escalating prison costs, high recidivism rates, and rising crime as givens? No. It redefined the boundaries of what it means to incarcerate and rehabilitate criminals. It looked across prisons, police, military, and other ministries, and made a strategic and organizational shift that changed and reshaped these environmental conditions.

As for differentiation and low cost, CRP didn't make the value-cost trade-off. It broke it. It created a leap in value for petty criminals, families, and society at low cost to the government. By not benchmarking and following the existing global best practices, CRP made a blue ocean shift beyond what the prison industry had ever known while winning the confidence and support of all members of the relevant ministries.

Figure 1-1 captures this dynamic visually. The solid curve shows the productivity frontier depicted by Michael Porter, which defines the existing boundary of an industry, the sum total of all its best practices.⁷ The curve represents the highest levels of value and the corresponding costs an organization can achieve, given currently available technology and business best practices. As such, the frontier is the edge at which strategy in an existing market space, or red ocean, takes place. On this edge, all industry players have equal productivity—the ratio of value to cost. Hence changes in buyer value and cost are positively related: More of one necessarily means more of the other. What this means is that for a market-competing or red ocean strategy to succeed, an organization has to make a value-cost trade-off: It can stand out either in value, which is called differentiation (position 1), or in low cost (position 2). But it cannot stand out in both.⁸ If an organization's offering is positioned behind its industry's productivity frontier it will inevitably be outperformed by its competitors positioned on the frontier. Hence, the strategic focus is on how to compete and win in existing market space.

Figure 1-1

From Market Competing to Market Creating

This strategic logic doesn't stand, however, when we consider CRP. In business terms, CRP did not take the existing industry boundary as a given and stake a claim on the productivity frontier of existing prison best practices. Instead, it made a blue ocean shift that broke the value-cost trade-off. It pioneered a new strategy that opened up a new value-cost frontier through a step change in the kind and degree of value offered. This is how new market space is created. The dashed curve in figure 1-1 captures this alternate dynamic. Here strategy is in pursuit of both differentiation and low cost. By opening up a new value-cost frontier that is a leap beyond the existing industry productivity curve, a blue ocean is created and competition on the existing frontier is made irrelevant.⁹

While achieving a blue ocean shift may seem like magic, it is not. There is actually a systematic process that is accessible to everyone, whether you see yourself as particularly creative or not. The process not only maps out the path from red to blue oceans, but does so in a way that inspires people's confidence and brings them along from the beginning, so that they understand it and feel invested in the shift. Groupe SEB's ActiFry, the National Youth Orchestra of Iraq, and the Malaysian government's Community Rehabilitation Program are just a few of the blue ocean shifts made by organizations across the globe that have been applying this process, either in whole or in part.

Our Journey to the Blue Ocean

Our understanding of blue ocean shift and the process to achieve it did not come overnight. It is the result of a nearly 30-year research journey that we ventured together, often against all odds. Three decades ago we witnessed a disconcerting phenomenon that captured our minds and hearts and set us on this path. Back in the mid-1980s, global competition was heating up as never before, and, for the first time in history, American companies were fast losing ground in industry after industry. From motorcycles to cars, from earthmoving equipment to consumer electronics, they were being overtaken by a new set of competitors—Japanese corporations.

As researchers based in Ann Arbor, Michigan, at the time, we not only read about this, we witnessed it firsthand. The auto capital of America, just next door in Detroit, was devastated. The Big Three—General Motors, Ford, and Chrysler—were hemorrhaging jobs. Businesses were shutting down. People were scared. In Michigan, some had even taken to vandalizing Japanese cars on the street out of fear and anxiety over the onslaught of the new, strong competitors. Never was this more apparent to us than when we drove into Detroit. Street after street felt like a ghost town, slowly falling to ruin. We were both broke at the time, driving beat-up old cars. The city felt beat up, too—both its spirit and its economy.

Essentially, the economy of the developed world was easing into a new phase that posed a new challenge. It was shifting from a situation of demand outstripping supply following World War II to a tougher game of supply outstripping demand, which meant ever-greater competition. American companies may have been the first to feel the brunt of this emerging challenge, but we were convinced it was only a matter of time before companies throughout the developed world would face it too—including the Japanese. Unless prepared, they would fall like once-powerful Detroit.

With this perspective, and disheartened by what we saw, we set out to understand not how to cope with or slow this emerging reality, but what it would take to thrive, not merely survive, as competition heated up across the globe. With growing clarity and focus, our research questions emerged. Specifically, how can a company break out of this red ocean of bloody competition and generate strong, profitable growth? What does it take to reach beyond the best, to create new market space and make the competition irrelevant?

The initial results of our research were a series of articles on strategy and management published in Harvard Business Review as well as academic journals.¹⁰ They culminated in our first book, Blue Ocean Strategy. Originally published in 2005, and updated and expanded in 2015, Blue Ocean Strategy was translated into 44 languages and became a bestseller across five continents. Long years of dogged focus, struggle, and persistence are the true story behind this "overnight" global bestseller.

In a nutshell, Blue Ocean Strategy articulated a view of the market universe as composed of two types of oceans—red oceans and blue oceans. Red oceans are all the industries in existence today that most organizations fight over. Blue oceans are all the industries yet to be created, where profit and growth increasingly come from. Based on our study of 150 strategic moves, spanning more than 100 years and 30 industries, the book laid out the conceptual differences and underlying patterns that separate market-competing moves—what we call red ocean strategy—from market-creating moves—what we call blue ocean strategy. It provided analytic tools to create blue oceans and highlighted why red ocean strategy is a theory of market competition and blue ocean strategy is a theory of market creation that makes competition irrelevant. The terms red oceans, blue oceans, and blue ocean strategy soon entered the business vernacular.