Blue Ocean Strategy

Red oceans and blue oceans

W. Chan Kim and Renée Mauborgne are professors of strategy at INSEAD. They first published Blue Ocean Strategy in 2005 and released an expanded edition in 2015 with new chapters. The book rests on their study of 150 strategic moves across more than 30 industries, spanning more than 100 years.

They divide the business world into two kinds of space. Red oceans are the industries that exist today. Their boundaries are defined and accepted, and the rules of competition are known. Companies try to beat rivals to win a larger share of existing demand. As the space gets crowded, profits shrink, and the water turns red from the fight.

Blue oceans are industries that do not exist yet, or market space that no one has claimed. Demand is created, not fought over. In a blue ocean, competition is irrelevant, because the rules have not been set.

The authors give data from a study of 108 business launches. About 86% were line extensions, small improvements inside red oceans. They produced 62% of total revenue and only 39% of total profit. The other 14% created blue oceans. They produced 38% of revenue and 61% of profit.

They also argue that the right unit of analysis is the strategic move, not the company or the industry. No company is excellent forever, and no industry stays attractive forever. What lasts is the pattern of moves that open new markets.

Value innovation and the analytical tools

The cornerstone of the book is value innovation. Most strategy assumes a trade-off: you can offer more value at a higher cost, or reasonable value at a lower cost. Kim and Mauborgne argue that blue ocean companies break this trade-off. They pursue differentiation and low cost at the same time.

They do this by dropping or reducing the factors an industry competes on that customers do not truly value. That lowers costs. They then raise or create factors that customers do value but the industry has never offered. That raises value. The result is a leap in value for buyers and for the company.

Their lead example is Cirque du Soleil. The circus industry was in decline, with rising costs for star performers and animals and falling audiences. Cirque did not try to beat Ringling Bros. It dropped animal shows and star performers, which were the largest costs. It kept the tent, clowns and acrobatics, but gave them artistic style. Then it added theater elements: a theme, a refined setting, artistic music and dance. It reached a new group of customers, adults and corporate clients, who were willing to pay theater prices.

The book gives a set of practical tools to apply this idea.

The strategy canvas is a chart. The horizontal axis lists the factors an industry competes on. The vertical axis shows how much each company offers on each factor. The line that connects a company's scores is its value curve. In a red ocean, most companies have similar curves. A blue ocean move produces a curve that looks very different.

The four actions framework asks four questions:

• Eliminate: which factors that the industry takes for granted should be removed?
• Reduce: which factors should be reduced well below the industry standard?
• Raise: which factors should be raised well above the standard?
• Create: which factors should be created that the industry has never offered?

The eliminate-reduce-raise-create grid (ERRC grid) puts the answers into four boxes, so that teams must act on all four, not only on raising and creating.

The authors show the tools with [yellow tail], an Australian wine made by Casella Wines. The US wine industry competed on complex tastes, wine jargon, aging and prestige. [yellow tail] eliminated the jargon and aging qualities, and reduced complexity and the range of wines. It created easy drinking, ease of selection, and a sense of fun and adventure. It became one of the fastest-growing wine brands in the US by attracting people who had found wine intimidating.

A good blue ocean strategy has three features: focus, divergence from competitors, and a compelling tagline that tells customers the message clearly. If a strategy lacks these, it is likely muddled.

Formulating strategy: six paths and the big picture

How do you find a blue ocean? The authors describe six paths to reconstruct market boundaries:

1. Look across alternative industries. NetJets combined the convenience of a private jet with the lower cost of first-class flights through fractional ownership.
2. Look across strategic groups within an industry. Curves built a fitness business for women that combined the low cost of exercising at home with the support of a gym.
3. Look across the chain of buyers. Novo Nordisk designed the NovoPen for insulin users, not only for doctors. Bloomberg focused on traders and analysts, not on IT managers who bought the terminals.
4. Look across complementary products and services. Think about what customers need before, during and after using your product.
5. Look across the functional or emotional appeal to buyers. QB House in Japan stripped the emotional rituals from haircuts and offered a fast, cheap ten-minute cut.
6. Look across time. Spot trends that will shape the industry, and act on them early. Apple's iTunes acted on the trend toward digital music downloads.

The authors also say strategy should focus on the big picture, not the numbers. Many strategic plans are long reports full of data, which rarely lead to bold moves. Instead, they suggest a four-step visual process: visual awakening (draw your current strategy canvas), visual exploration (go into the field to see how customers use and avoid your product), a visual strategy fair (present new value curves and get feedback from customers and noncustomers), and visual communication (share the new canvas so everyone sees the change).

Reaching noncustomers and getting the sequence right

Most companies focus on existing customers and try to serve them better. Blue ocean strategy looks at noncustomers. The authors describe three tiers:

• First tier: "soon-to-be" noncustomers on the edge of the market. They buy only out of need and are ready to leave. Pret A Manger attracted office workers who did not like their lunch options.
• Second tier: "refusing" noncustomers who have consciously chosen not to use the industry's offerings. JCDecaux built street furniture, such as bus shelters, and sold advertising space on it to companies that had avoided outdoor advertising.
• Third tier: "unexplored" noncustomers in distant markets that no company has thought to target.

The aim is to find what these groups have in common and build an offer they all want.

Next comes the strategic sequence. A blue ocean idea must pass four tests, in this order:

1. Buyer utility: does the offer give buyers exceptional value? The authors provide a buyer utility map, which crosses six stages of the buyer experience (purchase, delivery, use, supplements, maintenance and disposal) with six utility levers (customer productivity, simplicity, convenience, risk, fun and image, and environmental friendliness).
2. Price: is the price within reach of the mass of target buyers? The price corridor of the mass helps set a price that attracts many buyers quickly.
3. Cost: can you make a profit at that price? Work backward from the price to set a target cost.
4. Adoption: what hurdles stand in the way? Plan for employees, business partners and the public before you launch.

Executing strategy

A strategy is worthless if the organization does not carry it out. The authors name four hurdles:

• Cognitive: people do not see the need for change.
• Resource: there is not enough money or staff.
• Motivational: people are not motivated to act.
• Political: powerful interests resist.

To overcome them, they describe tipping point leadership, based on Bill Bratton's work as police commissioner in New York City in the 1990s. Bratton made senior officers ride the subway, so they saw the problems for themselves. He moved resources to the "hot spots" where most crime happened. He focused on key influencers in the department and made their results visible. He identified allies and opponents and worked to secure support before he faced resistance.

The authors also argue that execution depends on fair process. People commit to a strategy when they believe the process behind it was fair, even if the result is not what they wanted. Fair process has three parts: engagement (involve people and invite their input), explanation (explain the final decision and its reasons) and expectation clarity (state the new rules and targets clearly).

Aligning, renewing and avoiding traps

The expanded edition adds three chapters. The first argues that a blue ocean strategy must align three propositions: the value proposition to buyers, the profit proposition for the company and the people proposition for the staff and partners who carry it out. The authors use Comic Relief, the UK charity, as an example of strong alignment.

The second explains how to renew blue oceans. Every blue ocean is eventually copied and turns red. The authors suggest using a map of the business portfolio, the pioneer-migrator-settler map. Pioneers are businesses that offer new value. Settlers are businesses that copy the industry. Migrators sit between them. A healthy company keeps enough pioneers in its future portfolio.

The third lists red ocean traps: common mistakes in how people understand blue ocean strategy. Examples include believing that a blue ocean is only about technology, about serving customers better, about a niche, or about low cost alone. The authors stress that a blue ocean requires both higher value and lower cost.

What the critics say

Critics say many of the cases are chosen in hindsight, so the method looks more predictive than it may be. Several featured companies later faced strong competition or decline, which shows how quickly blue oceans can turn red. Others note that the core ideas overlap with older thinking on differentiation and new market creation, and that the book offers less help with the hard step of judging which new idea will actually work.

Who should read it

This book is for managers, founders and strategy teams who feel trapped in price wars or copycat products. Its tools are simple enough to use in a single workshop, and they work best with a cross-functional team.