An Introduction to Blue Ocean Strategy

Blue Ocean Strategy

Blue ocean strategy was coined by professors W. Chan Kim and Renée Mauborgne in their book “Blue Ocean Strategy: How to Create Uncontested Market Space and the Make Competition Irrelevant” (2005). Based on 15 years of research, the authors used 150 successful strategic moves spanning 120 years of business history and across 30 industries to bring the Blue Ocean Strategy theory to life. This strategy gives a new approach to the formation of new business strategies for all businesses. Blue ocean strategy is a way to make the competition irrelevant by creating a leap in value for both the company and its customers.

Blue ocean strategy is to defined, in red oceans, existing industries and businesses, an unknown market space that has never been tapped by any player in the current industry. In Red oceans, competition is severe; existing players try to outperform their rivals by using a “zero-sum game”; the market place is defined and exploited by all players; industry boundaries are defined and accepted by all players. Products become commodities, and cutthroat competition turns the Red Ocean bloody.  Hence, the term “red” oceans. Blue oceans are markets that have never been created. Therefore, competition is irrelevant; market potential is vast and has never been exploited by existing players. Like the “blue” ocean, it is untouched, vast and deep in terms of profitable growth.

Blue Ocean Strategy provides a systematic approach to break out of the Red Ocean of severe competition and make the competition irrelevant by reconstructing market boundaries to create a leap in value for both the company and its buyers.  Instead of competing in existing industries, Blue Ocean Strategy equips companies with frameworks and analytic tools to create their own Blue Ocean of uncontested market space.

Blue Ocean Strategy Concepts

The objective of blue ocean strategy is to make competition irrelevant by creating a new value curve for both customers and the company itself.

The Strategy Canvas

The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on and invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition.

How to do?

  • Look across strategic groups within the industry
  • Redefine the buyer group
  • Look at the complementary products and service offerings in the industry
  • Rethink functional-emotional orientation of the industry
  • Try to shape external trends overtime

The Strategy Canvas - Blue Ocean Strategy

The Four Actions Framework

The four actions framework in Blue ocean strategy offers a technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions:

  1. What to reduce: Which factors should be reduced well below the industry’s standard?
  2. What to eliminate: Which factors that the industry takes for granted should be eliminated?
  3. What to raise: Which factors should be raised well above the industry’s standard?
  4. What to create: Which factors should be created that the industry has never offered?

The Four Actions Framework

The four actions framework pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve.

Value Innovation

The corner-stone of Blue Ocean Strategy is Value Innovation. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. Value innovation is a strategic move that allows a market player to create a blue ocean and help companies make giant leap in the value provided to customer through the simultaneous pursuit of differentiation and low cost. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.

Value Innovation - Blue Ocean Strategy

The creation of blue oceans is to drive cost down while driving value up for buyers. This will create a leap value for buyers and the company. After creating a blue ocean, companies should create compelling execution strategy to align prices and costs to create true value to buyers.

To conclude, the difference between Red Ocean Strategy and Blue Ocean Strategy are summarized below.

Red Ocean Strategy Blue Ocean Strategy
Compete in existing market space Create uncontested market space
Beat the competition Make the competition irrelevant
Exploit existing demand Create and capture new demand
Make the value-cost trade-off Break the value-cost trade-off
Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost Align the whole system of a firm’s activities in pursuit of differentiation and low cost

Principles of Blue Ocean Strategy Formulation

The authors identify the following six principles necessary for Blue Ocean strategy formulation and execution:

1. Reconstructing market boundaries – by analyzing six paths:

  1. Alternative industries – What are the alternative industries to the current industry? Why do customers trade across them? By applying focus on the key factors that lead buyers to trade across alternative industries and eliminating or reducing everything else, it is possible to create a blue ocean of new market space.
  2. Strategic groups within industries – Look across strategic groups within the industry
  3. Buyer Group – Redefine the buyer group for the industry
  4. Scope of Products and Offerings – Look across complementary products and services that go beyond the boundary of the organization
  5. Functional-emotional Orientation of the industry – Rethink the fundamental orientation of the industry
  6. Time/Trends – Participate in shaping or creating external trends.

2. Focusing on the big picture, not on the numbers.  Authors define four steps to focus on the big picture, they are:

  1. Visual Awakening – compare the current strategy using the strategy canvas tool.
  2. Visual Exploration – get into the field and explore alternatives that exist for the product or service, the advantages and what needs to be eliminated, reduced, raised, or created.
  3. Visual Strategy Fair – review results and create new alternative strategy canvases for group feedback, discussion, observation and then build the future strategy.
  4. Visual Communication – incorporate and distribute the old and new strategy canvas to the employees and only approve projects and initiatives that will implement the new strategy canvas.

3. Reaching beyond existing demand – Expand the thinking to potential customers.  Determine the three tiers of potential customers and develop strategies to generate mass appeal.

  1. First Tier – soon to be customers, determine what they looking for and identify commonalities.
  2. Second Tier – customers who refuse current services and products, determine the reasons for the refusal and identify commonalities.
  3. Third Tier – waters of the Blue Ocean where there is no competition, identify future possibilities.

4. Getting the right strategic sequence – Evaluate the strategy against four criteria.

  1. Buyer Utility – Determine if there is exceptional buyer utility.
  2. Price – Determine the right strategic price to generate the critical mass volume; price determination should be on value rather than the traditional methods of cost plus approach. The price calculation should be:  (SP) strategic price – (PM) desired profit margin = targeted costs.
  3. Cost – Determine the estimate cost and design product or service to meet the defined cost, this will make it difficult for competitors to copy. Meet the estimated cost by working and customer value.
  4. Adoption – Identify adoption hurdles and address the adoption hurdles.

5. Overcome key organizational hurdles – Spread the message and communicate to employees to help them understand the change in strategy and organization. Organizations have limited resources so pursuing the Blue Ocean strategy will require strategically reallocating resources to the most important areas. To increase accountability and motivation, leadership should utilize the concepts of kingpins, fishbowl management, and atomization.

6. Building execution into strategy – Include stakeholders, key staff and implementers in the strategy process and planning initiatives.

Nintendo’s Blue Ocean Strategy

The most recent company that has applied blue ocean strategy is Nintendo. Nintendo has found a new console game that Microsoft and Sony, its two main competitors, in the console game market. Going beyond the boundary of the industry, Nintendo has created a game console, Nintendo Wii, a shift from “hardcore” to casual gamers, which allowed the company to reduce console performance and add a new element of motion control that created more fun; elimination of state-of-the-art chip development and increased of use of off-the-shelf components; reducing cost and allowing lower console prices; elimination of console subsidies resulting in profit on each console sold.This invention has helped Nintendo surpass Microsoft and Sony to occupy more than 80% of console game market.

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