Much literature on strategy is centered around competition and addresses questions such as: How do we beat the competition? How do we become better than our rivals? How do we gain a competitive advantage? In their book ‘Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant‘ W. Chan Kim and Renée Mauborgne challenge these conventional ideas of strategic success and argue that competition should NOT occupy the centre of strategic thinking. Instead strategy should be about the capacity to create new uncontested market space by creating a leap in value for your customers. Blue Ocean Strategy presents a systematic approach to making the competition irrelevant: how does your company get out of the red oceans of bloody competition and into a blue ocean of uncontested market space? In this article we will summarize the ideas behind it.
Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne
Red Ocean Strategy
Red Oceans are described as all the industries in existence today: the known market space. In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. In these industries, companies try to outperform their rivals to grab a greater share of the existing demand. Swimming in a Red Ocean is about beating the competition and exploiting existing demand. However, as the market space gets more crowded due to increased competition, prospects for profits and growth are reduced. Hence, cutthroat competition results in nothing but a bloody Red Ocean of rivals fighting over a shrinking profit pool. Often used frameworks within this line of thinking are Porter’s Five Forces, Generic Strategies and the Value Disciplines. It is believed that companies should make a clear choice between differentiation and cost leadership as a strategy in order to be better able to compete with rivals for market share.
Figure 1: Red Ocean Strategy versus Blue Ocean Strategy
Blue Ocean Strategy
Blue Oceans, in contrast, denote all the industries not in existence today: the unknown market space, untainted by competition. In Blue Oceans, demand is created rather than fought over. According to the Blue Ocean Strategy principles, companies should not only try to compete in existing markets (Red Oceans), but also find or create new markets where competition does not yet exist (Blue Oceans). In these unexplored and untapped markets, there is ample opportunity for growth that is both profitable and rapid. In addition, competition is irrelevant because the rules of the game are waiting to be set. Where Red Ocean Strategy is a zero-sum game that is all about splitting up the pie between rivals, Blue Ocean Strategy is about creating the pie and/or enlarging it. In order to create this shift in attention from Red Oceans to Blue Oceans the authors came up with a concept called ‘Value Innovation‘ that allows for a simultaneous pursuit of both differentiation and low-cost.
Unlike conventional approaches towards strategy, Chan Kim and Mauborgne have put the customer, not the competition, at the core of strategy. In their strategic logic they place equal emphasis on value creation and innovation: Value Innovation. The combination of these two make sure that innovation is not just technology-driven and futuristic, but keeps in mind what is really adding value to customers and what not. Value Innovation occurs only when companies align innovation with utility, price and cost position. This means that companies should abandon the commonly accepted ‘value-cost trade-off‘ dogma of competition-based strategy (like Porter’s Generic Strategies) which states that companies need to make a choice between differentiation and low cost. Those that seek to create Blue Oceans pursue differentiation and low cost simultaneously: it is about driving costs down while simultaneously driving value up for buyers. Improving utility and price will incease Buyer Value, while enhancing the cost structure will reduce the costs. Together, they will allow for Value Innovation that benefits both the customers and the company. In order to discover how Value Innovation can be achieved the The Strategy Canvas is being used.
Figure 2: Value Innovation
The Strategy Canvas
The Strategy Canvas serves two purposes: The first one is to capture the current state of play in the known market space i.e. identifying what factors current players in the industry are competing on. The resulting ‘industry value curve’ is therefore a good representation of what aspects competitors are currently focussing on and what kind of value buyers are receiving (see Figure 3 for an example). The second purpose of the Strategy Canvas is to visualize how to refocus from competitors to alternatives and from customers to noncustomers of the industry. This basically means that each of those factors is being re-examined: what factors are not so valuable for customers and can therefore be reduced or eliminated, which in turn would decrease costs? And what factors should be raised or created in order to lift buyer value or create new demand? With the aid of the Four Actions Framework (Figure 4) and the Eliminate-Reduce-Raise-Create Grid, a new value curve can be drawn within the Strategy Canvas that breaks away from the industry value curve thereby creating a blue ocean. Note that while drawing a new value curve, both differentiation and low cost have been taking into account.
Figure 3: Strategy Canvas (Example: Cirque du Soleil)
Figure 4: Four Action Framework (Eliminate-Reduce-Raise-Create)
An Example: Cirque du Soleil
To illustrate their ideas, Chan Kim and Mauborgne used several real-life examples in their book. Cirque du Soleil is one of those examples they used to show the relevance of Blue Ocean Strategy. How did Cirque du Soleil manage to become a successful and prominent player in the declining circus industry? While other circuses were focusing on benchmarking similar traditional circuses in order to steal market share from a shrinking demand pool, Cirque du Soleil reinvented the circus experience by eliminating and reducing factors that were costly and didn’t add much value to customers anymore. They for example quit using animals during their shows. Apart from the increasing public discomfort people had with the use of animals, it was also very expensive to feed, move and train animals for the show. Eliminating this factor alone was therefore a massive improvement in Value Innovation. In addition, Cirque du Soleil wanted to elevate the customer experience by focusing on adults as well instead of the usual focus on kids. They therefore borrowed elements from Broadway shows in order to make the shows more theatrical and magical. Funny enough, because of these changes Cirque du Soleil was able to strategically raise the prices of their tickets to match those of the theater industry. Through both differentiation and low-cost Cirque du Soleil jumped out of the Red Ocean of the circus industry and created a new Blue Ocean concept that was never seen before.
What’s next in the BOS-process?
Of course, visualizing the industry value curve is only the starting point of strategic repositioning. Once a blue ocean is discovered, management must clearly formulate the Blue Ocean Strategy and take the actual actions to implement the new strategy. Chan Kim and Mauborgne have therefore constructed more frameworks that can help with this process like: the Six Paths Framework, the Three Tiers of Noncustomers, the Buyer Utility Map and the Four Hurdles of Strategy Execution. For the scope of this article we will not go into explaining all of these frameworks. More info on those frameworks and Blue Ocean Strategy in general can be found through the references below.
- Chan Kim, W. and Mauborgne, R. (2005). Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant.
- Chan Kim, W. and Mauborgne, R. (2017). Blue Ocean Shift: Beyond Competing ‑ Proven Steps to Inspire Confidence and Seize New Growth.