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Copyright

Copyright © 2017 by W. Chan Kim and Renée Mauborgne

Jacket design by Amanda Kain Jacket photograph © Marta Nardini / Getty Images Cover copyright © 2017 by Hachette Book Group, Inc.

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First Edition: September 2017

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ISBNs: 978-0-316-31404-6 (hardcover), 978-0-316-31405-3 (ebook), 978-0- 316-39679-0 (large print)

E3-20170919-JV-PC

Contents

Cover Title Page Copyright Epigraph Preface

PART ONE

Blue Ocean Shift

1. Reach Beyond the Best 2. The Fundamentals of Market-Creating Strategy 3. The Mind of a Blue Ocean Strategist 4. Humanness, Confidence, and Creative Competence

PART TWO

The Five Steps to Making a Blue Ocean Shift

Step One: Get Started

5. Choosing the Right Place to Start 6. Constructing the Right Blue Ocean Team

Step Two: Understand Where You Are Now

7. Getting Clear About the Current State of Play

Step Three: Imagine Where You Could Be

8. Uncovering the Hidden Pain Points That Limit the Size of Yourkindle:embed:0002?mime=image/jpg

Industry 9. Discovering an Ocean of Noncustomers

Step Four: Find How You Get There

10. Reconstructing Market Boundaries—Systematically 11. Developing Alternative Blue Ocean Opportunities

Step Five: Make Your Move

12. Selecting Your Blue Ocean Move and Conducting Rapid Market Tests 13. Finalizing and Launching Your Blue Ocean Move

Epilogue: A National Blue Ocean Shift in Action

Acknowledgments About the Authors Bibliography Notes Newsletters

To strive, to seek, to find, and not to yield.

–Alfred Lord Tennyson

Preface

In the poem “O Me! O Life!” Walt Whitman, the American poet and essayist, reflects on the trials and tribulations that define the human experience. “What good amid these, O me! O life?” he asks. His answer—that all of us, individually and collectively, may contribute a verse to the powerful play that is life—has never left us.

Life has its challenges and tribulations, no doubt. But it is not beyond our ability to shape. By our very existence, we all are able to contribute a verse and, in doing so, influence life’s course, and maybe even its beauty, if only by an inch.

What will your verse be? What will ours? We have never stopped asking ourselves this question. What do we want to stand for? What narrative arc do we want to focus our efforts on in the hopes of adding a small verse to the powerful play that is life that can help our world to advance?

For us, as business scholars, the world we aspired to help advance wasn’t one defined by competing and dividing up markets or the globe, where one’s gain comes at the expense of others. Competition exists, and win-lose scenarios abound, but they weren’t what captured our imaginations, nor what we believed our world needed more of. What we admired, what inspired us, were the organizations and individuals that went beyond competing to create new frontiers of opportunity, growth, and jobs, where success was not about dividing up an existing, often shrinking pie, but about creating a larger economic pie for all—what we refer to as blue oceans. Blue oceans are less about disruption and more about nondisruptive creation, where one’s gain doesn’t have to come at the expense of others.

But how do you translate aspiration into action, intention into reality? We need a road map that can shift our perspective and free our imaginations,

allowing us to suspend belief in the limits of today so we can see and create the possibilities of tomorrow. And for that we need to inspire confidence in

ourselves and in our people because, although we all are replete with creative energy and resilience, at our core, most of us are also incredibly tender and vulnerable. Without the confidence to act, few will venture down a new path, no matter how clear the road map. We aspire to make a difference, yet at the same time fear we cannot. Confidence is that magical quality that allows us to transcend the quiet self-doubts that tug at us. It shows us the emotional way forward by allowing us to believe in ourselves and trust the process.

The book you are holding in your hands is our answer to this challenge. It is based on our nearly 30-year research journey to the blue ocean in which we studied organizations large and small, for-profit, nonprofit, and governments that moved beyond competing in existing crowded markets—what we think of as red oceans—to new heights of confidence, market creation, and growth. What we learned in studying those who succeeded in making this shift as well as those who failed is that for any process to work, it must acknowledge our doubts and build our confidence as much as unlock people’s requisite creativity with proven steps.

In Blue Ocean Shift, people and our human spirit are put on an equal plane with a tested process and market-creating tools to move you, your team, and your organization from red to blue oceans in a way that people own and drive the process to succeed. It provides a step-by-step guide anyone can follow with battle-tested lessons learned from the field on what works, what doesn’t, and how to avoid potential pitfalls along the way.

We made our choice of what verse we want to bring to the world. We firmly believe that we all are capable of creating new frontiers and verses of our own. As Nelson Mandela once noted, “It always seems impossible until it’s done.” We hope that this book can help you make yours.

PART ONE

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 Mahler. 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’