"Blow out of the water" is an idiomatic expression that means to defeat an opponent overwhelmingly. The term isn’t used to describe a narrow victory, it's used only to describe a victory of monumental proportions. Most commonly found in discussions of military engagements and sports contests, the term has its origins in naval warfare.
In World War II, naval warfare and munitions reached the point where ships, particularly submarines, had such destructive weapons and delivery systems that when they hit a target, it would sometimes literally blow out of the water. The phrase appeared in battle reports and newspaper accounts, and soon came to symbolize overwhelming victory. The term was especially applicable to sports contests that ended in lopsided victories.
Idioms are terms or phrases that cannot be understood by strict definition of their component words. "Blow out of the water" or its variations are easily understandable when used to describe the outcome of a naval battle: "HMAS Canberra was blown out of the water by the Japanese task force." It would be impossible for someone to understand its use in a different context, though, without a native speaker’s understanding of the idiom. For instance, "the defense blew the district attorney’s case out of the water" will confuse most non-native speakers.
This particular idiom presents an additional challenge to the non-native speaker: it’s rarely expressed as "blow out of the water." Instead, it’s used most frequently in the past tense, to describe an event that’s already occurred. For example, a sports report might read, "The hometown baseball team blew the visiting team out of the water." It might also be used in the present tense as a threat or prediction: "We’re going to blow them out of the water!"
Sports is the most common arena in which the idiom can be found in modern use, but it can be applied to any competitive situation. "The dark horse candidate blew the incumbent out of the water in last weekend’s debate," might aptly describe a political confrontation. "The new department store moved into town and blew the trendy little boutiques right out of the water," would similarly describe a trend in a town’s retail district. And in the field of modern communication, "This new app blows all others out of the water!"
US General George Patton is reputed to have said, "Next to war, all other forms of human endeavor shrink to insignificance." It’s often the case that wartime provides the environment within which technological and medical advances are made that ultimately benefit mankind at peace. It’s fitting, then, that even the terms and phrases used to describe actual events in war become the foundation of the idioms used to describe the less lethal competitions that characterize peacetime.