Blue Ocean Strategy

Overview

Blue Ocean Strategy, developed by W. Chan Kim and Renée Mauborgne, is a market-creating approach that makes competition irrelevant by creating uncontested market spaces. Rather than competing in existing industries (red oceans), organizations create new demand in untapped markets (blue oceans) through value innovation.

Core Concepts

Red Ocean vs. Blue Ocean

Red Ocean Characteristics

Compete in existing market space
Beat the competition
Exploit existing demand
Make value-cost trade-off
Align activities with strategic choice of differentiation OR low cost

Blue Ocean Characteristics

Create uncontested market space
Make competition irrelevant
Create and capture new demand
Break the value-cost trade-off
Align activities in pursuit of differentiation AND low cost

Value Innovation

Value Innovation = Simultaneous pursuit of differentiation + low cost

Traditional Logic:
Value ↑ = Cost ↑ (Differentiation)
Value ↓ = Cost ↓ (Cost Leadership)

Blue Ocean Logic:
Value ↑ + Cost ↓ = Value Innovation

Strategic Framework

The Four Actions Framework

1. Eliminate

Which factors that the industry takes for granted should be eliminated?

2. Reduce

Which factors should be reduced well below the industry standard?

3. Raise

Which factors should be raised well above the industry standard?

4. Create

Which factors should be created that the industry has never offered?

ERRC Grid Application

Example: Cirque du Soleil
┌─────────────┬─────────────┐
│  ELIMINATE  │   REDUCE    │
├─────────────┼─────────────┤
│ • Animals   │ • Fun &     │
│ • Star      │   humor     │
│   performers│ • Danger &  │
│ • Multiple  │   thrill    │
│   shows     │             │
├─────────────┼─────────────┤
│    RAISE    │   CREATE    │
├─────────────┼─────────────┤
│ • Unique    │ • Theme     │
│   venue     │ • Refined   │
│ • Price     │   environ-  │
│             │   ment      │
│             │ • Multiple  │
│             │   produc-   │
│             │   tions     │
│             │ • Artistic  │
│             │   music &   │
│             │   dance     │
└─────────────┴─────────────┘

Six Principles of Blue Ocean Strategy

Formulation Principles

1. Reconstruct Market Boundaries

Six Paths Framework:

Look across alternative industries
- Not just competitors but alternatives
- Different form, same function
- Example: NetJets vs. first-class flights
Look across strategic groups
- Different segments within industry
- Performance/price trade-offs
- Example: Curves fitness clubs
Look across the chain of buyers
- Purchasers vs. users vs. influencers
- Different value priorities
- Example: Bloomberg terminals
Look across complementary offerings
- Total solution consideration
- Before, during, after use
- Example: NABI bus financing
Look across functional/emotional appeal
- Flip orientation
- Add emotion to functional
- Example: Swatch watches
Look across time
- Trend projection
- Future value migration
- Example: Apple iTunes

2. Focus on the Big Picture

Strategy Canvas

Customer Value
    ^
    |     Your Offering
    |    /\
    |   /  \    Industry Average
    |  /    \  ___________
    | /      \/
    |/
    +-------------------------> Competing Factors

Visual Strategy Process:

Visual awakening
Visual exploration
Visual strategy fair
Visual communication

3. Reach Beyond Existing Demand

Three Tiers of Noncustomers:

Tier 1: "Soon-to-be" noncustomers
- On edge of market
- Minimally use current offerings
- Ready to jump ship

Tier 2: "Refusing" noncustomers
- Consciously choose against market
- See no value in current offerings
- Needs not addressed

Tier 3: "Unexplored" noncustomers
- Never considered as customers
- Distant from current market
- Untapped potential

4. Get the Strategic Sequence Right

Buyer Utility → Price → Cost → Adoption
     ↓            ↓        ↓        ↓
Is there     Is price    Can you   What are
exceptional  accessible  hit cost  adoption
buyer        to mass     target?   hurdles?
utility?     market?

Execution Principles

5. Overcome Key Organizational Hurdles

Four Hurdles:

Cognitive Hurdle
- Status quo mindset
- Solution: Make people experience need
Resource Hurdle
- Limited resources
- Solution: Focus on hot spots
Motivational Hurdle
- Demoralized employees
- Solution: Engage kingpins
Political Hurdle
- Internal resistance
- Solution: Build coalitions

6. Build Execution into Strategy

Fair Process:

Engagement: Involve people in decisions
Explanation: Clarify thinking and rationale
Expectation clarity: Specify new rules

Tools and Analytics

Strategy Canvas

Components

Value Curve: Visual depiction of company’s relative performance
Competing Factors: Key factors of competition
Performance Level: Investment level in each factor

Analysis Process

Identify key competing factors
Score current industry players
Identify gaps and opportunities
Design new value curve

Buyer Utility Map

         Purchase | Delivery | Use | Supplements | Maintenance | Disposal
Customer    ↓         ↓        ↓         ↓            ↓           ↓
Productivity □         □        □         □            □           □
Simplicity   □         □        □         □            □           □
Convenience  □         □        □         □            □           □
Risk         □         □        □         □            □           □
Fun/Image    □         □        □         □            □           □
Environment  □         □        □         □            □           □

Price Corridor Analysis

Step 1: Identify price corridor of mass market
Step 2: Specify level within corridor
- Upper level: Difficult to imitate
- Mid level: Some protection
- Lower level: Easy to imitate

Industry Applications

Technology: Nintendo Wii

ERRC Analysis:
Eliminate:
- Hard disk
- DVD functionality
- Ethernet port

Reduce:
- Processing power
- Graphics quality

Raise:
- Ease of use
- Physical activity
- Family involvement

Create:
- Motion control
- Casual gaming focus
- Social gaming experience

Result: Expanded market beyond traditional gamers

Retail: IKEA

Value Innovation:
Traditional Furniture → IKEA

Eliminate:
- Sales assistance
- Home delivery (initially)
- Assembled products

Reduce:
- Product variety
- Store locations
- Material quality

Raise:
- Design aesthetics
- Immediate availability
- Store experience

Create:
- Self-service model
- Flat-pack concept
- Swedish restaurant
- Children's play area

Aviation: Southwest Airlines

Strategic Positioning:
Airlines ← Southwest → Car Travel

Innovation Elements:
- Point-to-point travel (vs. hub-and-spoke)
- Secondary airports
- No frills service
- Quick turnaround
- Fun atmosphere
- Frequent departures

Result: Created new market between air and car travel

Implementation Process

Phase 1: Exploration

1. Current State Analysis

Map current strategy canvas
Identify pain points
Analyze competing factors
Understand value delivery

2. Market Exploration

Study noncustomers
Explore alternatives
Identify trends
Question assumptions

Phase 2: Formulation

1. Opportunity Identification

Apply six paths framework
Generate blue ocean ideas
Evaluate market potential
Test assumptions

2. Strategy Development

Create ERRC grid
Design new value curve
Validate buyer utility
Set strategic price

Phase 3: Execution

1. Business Model Design

Align operations
Redesign value chain
Build partnerships
Create barriers

2. Market Launch

Communicate vision
Build fair process
Monitor adoption
Scale rapidly

Success Factors

Strategic Success Factors

1. Focus

Clear value proposition
Concentrated resources
Avoided complexity
Strategic discipline

2. Divergence

Unique value curve
Clear differentiation
Break from competition
New market space

3. Compelling Tagline

Clear message
Customer language
Value communication
Memorable positioning

Organizational Success Factors

1. Leadership Commitment

Vision championship
Resource allocation
Political support
Long-term perspective

2. Cultural Alignment

Innovation mindset
Customer centricity
Collaborative approach
Risk tolerance

Common Pitfalls

1. Confusing Innovation with Blue Ocean

Not all innovation creates blue oceans
Technology ≠ Blue Ocean
Must unlock new demand
Value innovation required

2. Ignoring Execution

Strategy without alignment
Underestimating hurdles
Poor communication
Inadequate resources

3. Static Thinking

Blue oceans become red
Continuous innovation needed
Monitor imitators
Evolve strategy

Measurement and Metrics

Blue Ocean Index (BOI)

Components:
1. Market Creation Index
   - New customer acquisition
   - Noncustomer conversion
   - Market expansion rate

2. Value Innovation Index
   - Customer value delivery
   - Cost structure efficiency
   - Differentiation level

3. Competition Irrelevance Index
   - Substitution rate
   - Competitive response time
   - Market share without fight

Performance Indicators

Revenue from new customers
Market space expansion
Profit margin improvement
Customer acquisition cost
Competitive response lag

Case Studies

Cirque du Soleil

Industry Redefinition:
Circus → Theater Entertainment

Key Innovations:
- Eliminated animals and star performers
- Created theatrical storylines
- Raised artistic quality and venue
- Targeted new audience (adults)

Results:
- 20x revenue growth in 20 years
- Global expansion
- Premium pricing achieved
- New industry created

Yellow Tail Wine

Market Creation:
Wine Industry → Casual Social Drinking

Strategic Moves:
- Eliminated wine complexity
- Reduced wine varieties
- Created easy drinking
- Fun, approachable image

Impact:
- Largest imported wine in US
- Attracted beer/cocktail drinkers
- Simplified selection process
- Mass market penetration

Future Evolution

Digital Blue Oceans

Platform business models
Data-driven value creation
AI-enabled personalization
Virtual experience markets

Sustainability Blue Oceans

Circular economy models
Shared value creation
Environmental innovation
Social impact markets

Action Steps

For Strategists

Week 1-2: Map current industry
Week 3-4: Explore six paths
Week 5-6: Identify opportunities
Week 7-8: Develop strategy

For Organizations

Month 1: Build awareness
Month 2: Pilot projects
Month 3: Refine approach
Month 4+: Scale success

Conclusion

Blue Ocean Strategy offers a systematic approach to escaping competitive battles through value innovation. Success requires both analytical rigor in identifying opportunities and organizational capability in execution. While blue oceans eventually turn red, the methodology provides a repeatable process for continuous market creation and business renewal.