Redefine Your Market Boundaries

by W. Chan Kim and Renée Mauborgne

The first principle of blue ocean strategy is to reconstruct market boundaries to break from the competition and create blue oceans. This principle addresses the search risk many companies struggle with. The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. This challenge is key because managers cannot afford to be riverboat gamblers betting their strategy on intuition or on a random drawing.

In conducting our research, we sought to discover whether there were systematic patterns for reconstructing market boundaries to create blue oceans. And, if there were, we wanted to know whether these patterns applied across all types of industry sectors—from consumer goods, to industrial products, to finance and services, to telecoms and IT, to pharmaceuticals and B2B—or were they limited to specific industries?

We found clear patterns for creating blue oceans. Specifically, we found six basic approaches to remaking market boundaries. We call this the six paths framework. These paths have general applicability across industry sectors, and they lead companies into the corridor of commercially viable blue ocean ideas. None of these paths requires special vision or foresight about the future. All are based on looking at familiar data from a new perspective.

These paths challenge the six fundamental assumptions underlying many companies' strategies. These six assumptions, on which most companies hypnotically build their strategies, keep companies trapped competing in red oceans. Specifically, companies tend to do the following:

• Define their industry similarly and focus on being the best within it
• Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in
• Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry)
• Define the scope of the products and services offered by their industry similarly
• Accept their industry's functional or emotional orientation
• Focus on the same point in time—and often on current competitive threats—in formulating strategy

The more that companies share this conventional wisdom about how they compete, the greater the competitive convergence among them.

To break out of red oceans, companies must break out of the accepted boundaries that define how they compete. Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time. This gives companies keen insight into how to reconstruct market realities to open up blue oceans. Let's examine how each of these six paths works.

Path 1: Look across alternative industries
In the broadest sense, a company competes not only with the other firms in its own industry but also with companies in those other industries that produce alternative products or services. Alternatives are broader than substitutes. Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose.

For example, to sort out their personal finances, people can buy and install a financial software package, hire a CPA, or simply use pencil and paper. The software, the CPA, and the pencil are largely substitutes for each other. They have very different forms but serve the same function: helping people manage their financial affairs.

In contrast, products or services can take different forms and perform different functions but serve the same objective. Consider cinemas versus restaurants. Restaurants have few physical features in common with cinemas and serve a distinct function: They provide conversational and gastronomical pleasure. This is a very different experience from the visual entertainment offered by cinemas. Despite the differences in form and function, however, people go to a restaurant for the same objective that they go to the movies: to enjoy a night out. These are not substitutes, but alternatives to choose from.

In making every purchase decision, buyers implicitly weigh alternatives, often unconsciously. Do you need a self-indulgent two hours? What should you do to achieve it? Do you go to movie, have a massage, or enjoy reading a favorite book at a local cafe? The thought process is intuitive for individual consumers and industrial buyers alike.

For some reason, we often abandon this intuitive thinking when we become sellers. Rarely do sellers think consciously about how their customers make trade-offs across alternative industries. A shift in price, a change in model, even a new ad campaign can elicit a tremendous response from rivals within an industry, but the same actions in an alternative industry usually go unnoticed. Trade journals, trade shows, and consumer rating reports reinforce the vertical walls between one industry and another. Often, however, the space between alternative industries provides opportunities for value innovation.

Consider NetJets, which created the blue ocean of fractional jet ownership. In less than twenty years NetJets has grown larger than many airlines, with more than five hundred aircraft, operating more than two hundred fifty thousand flights to more than one hundred forty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a multibillion-dollar business, with revenues growing at 30-35 percent per year from 1993 to 2000. NetJets' success has been attributed to its flexibility, shortened travel time, hassle-free travel experience, increased reliability, and strategic pricing. The reality is that NetJets reconstructed market boundaries to create this blue ocean by looking across alternative industries.

The most lucrative mass of customers in the aviation industry are corporate travelers. NetJets looked at the existing alternatives and found that when business travelers want to fly, they have two principal choices. On the one hand, a company's executives can fly business class or first class on a commercial airline. On the other hand, a company can purchase its own aircraft to serve its corporate travel needs. The strategic question is, Why would corporations choose one alternative industry over another? By focusing on the key factors that lead corporations to trade across alternatives and eliminating or reducing everything else, NetJets created its blue ocean strategy.

Consider this: Why do corporations choose to use commercial airlines for their corporate travel? Surely it's not because of the long check-in and security lines, hectic flight transfers, overnight stays, or congested airports. Rather, they choose commercial airlines for only one reason: costs. On the one hand, commercial travel avoids the high up-front, fixed-cost investment of a multimillion-dollar jet aircraft. On the other hand, a company purchases only the number of corporate airline tickets needed per year, lowering variable costs and reducing the possibility of unused aviation travel time that often accompanies the ownership of corporate jets.

So NetJets offers its customers one-sixteenth ownership of an aircraft to be shared with fifteen other customers, each one entitled to fifty hours of flight time per year. Starting at $375,000 (plus pilot, maintenance, and other monthly costs), owners can purchase a share in a $6 million aircraft.1 Customers get the convenience of a private jet at the price of a commercial airline ticket. Comparing first-class travel with private aircraft, the National Business Aviation Association found that when direct and indirect costs—hotel, meals, travel time, expenses—were factored in, the cost of first-class commercial travel was significantly higher. In a cost-benefit analysis for four passengers on a theoretical trip from Newark to Austin, the real cost of the commercial trip was $19,400, compared with $10,100 in a private jet.2 As for NetJets, it avoids the enormous fixed costs that commercial airlines attempt to cover by filling larger and larger aircraft. NetJets' smaller airplanes, the use of smaller regional airports, and limited staff keep costs to a minimum.

To understand the rest of the NetJets formula, consider the flip side: Why do people choose corporate jets over commercial travel? Certainly it is not to pay the multimillion-dollar price to purchase planes. Nor is it to set up a dedicated flight department to take care of scheduling and other administrative matters. Nor it is to pay so-called deadhead costs—the costs of flying the aircraft from its home base to where it is needed. Rather, corporations buy private jets to dramatically cut total travel time, to reduce the hassle of congested airports, to allow for point-to-point travel, and to gain the benefit of having more productive and energized executives who can hit the ground running upon arrival. So NetJets built on these distinctive strengths. Whereas 70 percent of commercial flights went to only thirty airports across the United States, NetJets offered access to more than five thousand five hundred airports across the country, in convenient locations near business centers. On international flights, your plane pulls directly up to the customs office.

With point-to-point service and the exponential increase in the number of airports to land in, there are no flight transfers; trips that would otherwise require overnight stays can be completed in a single day. The time from your car to takeoff is measured in minutes instead of hours. For example, whereas a flight from Washington, D.C., to Sacramento would take 10.5 hours on a commercial airline, it is only 5.2 hours on a NetJets aircraft; from Palm Springs to Cabo San Lucas takes 6 hours commercial, and only 2.1 hours via NetJets.3 NetJets offers substantial cost savings in total travel time.

Perhaps most appealing, your jet is always available with only four hours' notice. If a jet is not available, NetJets will charter one for you. Last but not least, NetJets dramatically reduces issues related to security threats and offers clients customized in-flight service, such as having your favorite food and beverages ready for you when you board.

By offering the best of commercial travel and private jets and eliminating and reducing everything else, NetJets opened up a multibillion-dollar blue ocean wherein customers get the convenience and speed of a private jet with a low fixed cost and the low variable cost of commercial airline travel. And the competition? According to NetJets, in the past seven years, fifty-seven companies have set up fractional jet operations; of those, fifty-seven have gone out of business.

The biggest telecommunications success in Japan since the 1980s also has its roots in path 1. Here we are speaking of NTT DoCoMo's i-mode, which was launched in 1999. The i-mode service changed the way people communicate and access information in Japan. NTT DoCoMo's insight into creating a blue ocean came by thinking about why people trade across the alternatives of mobile phones and the Internet. With deregulation of the Japanese telecommunications industry, new competitors were entering the market and price competition and technological races were the norm. The result was that costs were rising while the average revenue per user fell. NTT DoCoMo broke out of this red ocean of bloody competition by creating a blue ocean of wireless transmission not only of voice but also of text, data, and pictures.

NTT DoCoMo asked, What are the distinctive strengths of the Internet over cell phones, and vice versa? Although the Internet offered endless information and services, the killer apps were e-mail, simple information (such as news, weather forecasts, and a telephone directory), and entertainment (including games, events, and music entertainment). The key downside of the Internet was the far higher price of computer hardware, an overload of information, the nuisance of dialing up to go online, and the fear of giving credit card information electronically. On the other hand, the distinctive strengths of mobile phones were their mobility, voice transmission, and ease of use.

NTT DoCoMo broke the trade-off between these two alternatives, not by creating new technology but by focusing on the decisive advantages that the Internet has over the cell phone and vice versa. The company eliminated or reduced everything else. Its user-friendly interface has one simple button, the i-mode button (i standing for interactive, Internet, information, and the English pronoun I), which users press to give them immediate access to the few killer apps of the Internet. Instead of barraging you with infinite information as on the Internet, however, the i-mode button acts as a hotel concierge service, connecting only to preselected and preapproved sites for the most popular Internet applications. That makes navigation fast and easy. At the same time, even though the i-mode phone is priced 25 percent higher than a regular cell phone, the price of the i-mode phone is dramatically less than that of a PC, and its mobility is high.

Moreover, beyond adding voice, the i-mode uses a simple billing service whereby all the services used on the Web via the i-mode are billed to the user on the same monthly bill. This dramatically reduces the number of bills users receive and eliminates the need to give credit card details, as on the Internet. And because the i-mode service is automatically turned on whenever the phone is on, users are always connected and have no need to go through the hassle of logging on.

Neither the standard cell phone nor the PC could compete with i-mode's divergent value curve. By the end of 2003 the number of i-mode subscribers had reached 40.1 million, and revenues from the transmission of data, pictures, and text increased from 295 million yen ($2.6 million) in 1999 to 886.3 billion yen ($8 billion) in 2003. The i-mode service did not simply win customers from competitors. It dramatically grew the market, drawing in youth and senior citizens and converting voice-only customers to voice and data transmission customers.

Ironically, European and U.S. counterparts who have been scrambling to unlock a similar blue ocean in the West have so far failed. Why? Our assessment shows that they have been focused on delivering the most sophisticated technology, WAP (wireless application protocol), instead of delivering exceptional value. This has led them to build overcomplicated offerings that miss the key commonalities valued by the mass of people.

Many other well-known success stories have looked across alternatives to create new markets. The Home Depot offers the expertise of professional home contractors at markedly lower prices than hardware stores. By delivering the decisive advantages of both alternative industries—and eliminating or reducing everything else—The Home Depot has transformed enormous latent demand for home improvement into real demand, making ordinary homeowners into do-it-yourselfers. Southwest Airlines concentrated on driving as the alternative to flying, providing the speed of air travel at the price of car travel and creating the blue ocean of short-haul air travel. Similarly, Intuit looked to the pencil as the chief alternative to personal financial software to develop the fun and intuitive Quicken software.

What are the alternative industries to your industry? Why do customers trade across them? By focusing on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, you can create a blue ocean of new market space.

Excerpted by permission of Harvard Business School Press from Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renée Mauborgne. Copyright 2005 Harvard Business School Publishing Corporation.

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W. Chan Kim is the Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management at INSEAD.

Renée Mauborgne is the INSEAD Distinguished Fellow and a professor of strategy and management.