Chapter 12
Blue ocean strategy
Most firms compete in established ‘red ocean’ markets, with well-entrenched competitors and a clearly defined set of customer expectations. Occasionally, a firm will create a ‘blue ocean’ market for a product or service that has not previously been recognised – a strategy that typically yields far greater profitability.
When to use it
- To understand what is distinctive (if anything) about your current strategy.
- To make your existing strategy more distinctive.
- To identify opportunities for entirely new offerings.
Origins
Researchers have understood for many years that successful firms are often the ones that ‘break the rules’ in their industry. For example, in the 1970s, Swedish furniture manufacturer IKEA rose to prominence thanks to its new way of making and selling furniture.
The emergence of the internet in the mid-1990s made it easier for new firms to break the rules in established industries, and it was during this era that the term ‘business model’ became widely used. Amazon.com, for example, competed against traditional book retailers with a distinctive business model – its formula for making money was very different to that of Barnes & Noble or Waterstones.
Many researchers studied the process of business model innovation during this period and into the 2000s, with a view to providing advice to firms about how they could develop new business models themselves, or protect themselves against entrants with new business models. Important publications were Leading the Revolution (Hamel), and All the Right Moves (Markides). But the most influential work on business model innovation was probably Blue Ocean Strategy by INSEAD professors Chan Kim and Renée Mauborgne. While the underlying ideas across these publications are similar, Blue Ocean Strategy provides the most comprehensive guide to how to define and develop new market opportunities.
What it is
Kim and Mauborgne divide the world of business opportunities into red and blue oceans. Red oceans are the established industries that exist today, typically with well-defined boundaries. Firms compete for market share using the well-understood rules of the game, but as this market gets crowded, the prospects for profits and growth are reduced. Red-ocean industries include automobiles, consumer products and airlines.
Blue oceans are those industries that do not exist today – they are an unknown market space, untainted by competition. In a blue ocean, demand is created rather than fought over, and there are bountiful opportunities for growth. Competition in blue oceans is irrelevant because the rules of the game are waiting to be set. Apple is famous for identifying blue oceans – for example, it created the market for legal online music-selling (iTunes) and the market for tablet computers (the iPad).
How to use it
Blue ocean strategy is a set of tools to help firms identify and colonise these blue-ocean opportunities. The starting point is to understand customer values – the underlying wants or needs that customers have – and to seek out novel ways of addressing these values. This can best be done using a ‘strategy canvas’, which lists the range of customer values on the horizontal axis and then the extent to which each value is being met on the vertical axis (see the figure below). By plotting your own firm’s profile on the strategy canvas, and then comparing it to the profile of close and distant competitors, you can see visually how distinctive your current strategy is. In the figure, firms A and B have very similar strategies, while firm C has a distinctive strategy.
The strategy canvas captures the current state of play in the known market space, which allows you to see what factors the industry competes on and where the competition currently invests. It also opens up a conversation about what might be changed – it helps you explore areas where firms are satisfying existing customer needs poorly, and it allows you to brainstorm possible new sources of value that no firm has yet addressed. These four questions are used to guide such a conversation:
Source: Based on data from Kim, C. and Mauborgne, R. (2005) Blue Ocean Strategy. Boston, MA: Harvard Business School Press.
- What factors can be eliminated that the industry has taken for granted?
- What factors can be reduced well below the industry’s standard?
- What factors can be raised well above the industry’s standard?
- What factors can be created that the industry has never offered?
The objective of this analysis is ‘value innovation’, which is about pursuing differentiation and low cost at the same time, and creating additional value for your firm and for your customers at the same time. Note that this is very different to the original notions of competitive strategy developed by Michael Porter, in which firms were advised to choose differentiation or low cost. As a general rule, you can be differentiated and low-cost at the same time while you are in a blue ocean, but gradually blue oceans are colonised by other firms, the industry rules become set and the ocean turns to red. Once the ocean is red, Porter’s original arguments about having to choose between differentiation and low cost are once again valid.
Top practical tip
Blue ocean strategy provides you with a comprehensive set of tools for analysing your customers, their met and unmet needs, your competitors’ offerings and so forth. However, the heart of blue-ocean thinking is about coming up with some sort of creative insight about a product or service that doesn’t currently exist. And this is really hard to do, because we are all, to some degree, prisoners of our prior experience. Breaking out from this experience involves looking for inspiration in unusual places. For example, you can look at solutions provided in alternative industries or by other firms. One useful guideline is to say to yourself ‘What would Steve Jobs do?’ or ‘What would Richard Branson do?’ in this industry, as they are both famous for challenging the normal rules of the game in whatever market they have entered.
Another approach is to make sure that the team of people involved in the discussion are very heterogeneous, and include people who are fairly new to your firm and therefore more open to unusual ideas.
Top pitfall
While the concept of blue ocean strategy is attractive, one important limitation is that the number of genuinely blue-ocean opportunities out there is small. Many potential blue oceans end up being mirages or actually fairly small markets. The process of developing a blue ocean strategy for your firm can therefore be a bit frustrating, and often yields less exciting benefits than you had hoped for.
Further reading
Hamel, G. (2000) Leading the Revolution. Boston, MA: Harvard Business School Press.
Kim, C. and Mauborgne, R. (2005) Blue Ocean Strategy. Boston, MA: Harvard Business School Press.
Markides, C. (1999) All the Right Moves. Boston, MA: Harvard Business School Press.