Blue Ocean Strategy [Review]

Dec 24, 2012

Table of contents:

1. Analytical frameworks
2. Reconstructing Market Boundaries
3. Formulating a Blue Ocean strategy
4. Reach beyond existing demand
5. Strategic Sequencing
6. Overcome key organisation hurdles
7. Conclusion

“Blue Ocean Strategy: How to create uncontested market space and make the competition irrelevant” is an international best seller from W. Chan Kim and Renée Mauborne. The book centres on seeking out new business opportunities as a source of growth, rather than fighting over the current market space. If you have read any of the seminal business management books of the past couple of years, they all seem to reference the Blue Ocean Strategy that was introduced by Kim and Mauborgne.

Blue Ocean Strategy is a strategy to create new opportunities where the rules over pricing, technology and disruption have not been set. Red Oceans, the current state of hotly contested industries are a constant battlefield of lowering cost structures, comoditisation of products and services and increasing competition. Blue Ocean Strategy offers a way to reinvent an industry, or create a new one where this competition and downward spiralling of profits are not a problem. By creating a new industry, you can create a cost structure and distribution platform that releases you from the shackles of the old incumbent rules.

One of the first example companies that is highlighted as one who seized the opportunity of a Blue Ocean is Guy Laliberté’s Cirque du Soleil which took the falling demand of the International Circus and mixed it with the high value opportunity of Theatre, Ballet and Performance. Whilst the traditional circus had the restrictions and costs of animal welfare, falling demand and a loss of relevance, Cirque du Soleil managed to create a new industry that mixed the mystic of the Circus with the traditional high value of other forms of Entertainment. This meant that they could offer a product that was greater in price, and with a much better experience than the traditional circus.

Kim and Mauborgne cite this “Value Innovation” as “The cornerstone of Blue Ocean Strategy”. By creating a new industry, you can mix the value of the current industries whilst reducing the cost implications of servicing that industry. The costs can then be further reduced as the economies of scale become more favourable.

Whilst most traditional strategy favours the known elements of Red Ocean Strategy, Blue Ocean Strategy is the path towards profitability and Innovation. Over the past 100 years, many industries have arisen, and many more have died. It is this constant drive towards innovation and improvement that creates the Blue Ocean opportunities.

Analytical frameworks

Although there are a couple of frameworks for analysing Blue Ocean opportunities, the real strategy behind the theory can be boiled down to The Four Actions Framework. The Four Actions consist of the four key question to ask yourself when looking for a Blue Ocean opportunity.

1. Which of the factors that the industry takes for granted should be eliminated?
2. Which factors should be reduced well below the industry’s standard?
3. Which factors should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered?

Answering these four questions can reveal the overlooked Blue Ocean opportunities.

The first question challenges you to question the assumptions of the industry to see where costs can be saved by completely eliminating the costly structures that your competitors take for granted.

The second question forces you to question in what areas have the existing competitors over compensated in the pursuit of competition and what can be reduced.

The third question asks you to uncover which parts of the proposition should be raised in order to create differentiation.

And the fourth question challenges you to find new factors that you can introduce to the industry.

Kim and Mauborgne also highlight the three characteristics of a good strategy. These are focus, divergence and a compelling tagline. Focus ensures that you concentrate on the elements of your Blue Ocean opportunity strategy that you have uncovered. Divergence ensures you don’t end up competing in the same areas as your competitors. And a compelling tagline ensures that your strategy is clear, concise and understandable to your customers.

Reconstructing Market Boundaries

One of the key themes of The Blue Ocean Strategy is breaking out of the current market boundaries to create new opportunities. When you break out of the existing boundaries you create a new opportunity because you are fundamentally changing the traditional industry proposition.

Through their research, Kim and Mauborgne found 6 common approaches to breaking out of the existing market boundaries known as The Six Paths Framework.

Path 1: Look across alternative industries

The first path encourages you to look at the alternative industries to find new opportunities. Just about every industry has an alternative. An alternative is not necessarily a competing industry, but they accomplish a similar outcome. For example, Cinema and Restaurants both accomplish the goal of entertaining and leisure actives, but they are in two different industries.

By looking across alternative industries, you can challenge the preconceived accepted notions of one industry by discovering what consumers trade when they choose one for the other. This can allow you to strip away the unnecessary aspects of an industry to completely reignite the opportunity.

Path 2: Look across strategic groups within industries

A lot of industries are segmented into strategic groups. For example, the automobile industry has high-end and low-end cars that compete on luxury and affordability respectively.

By Looking across the strategic groups of an industry, you can find new opportunities and new untapped markets. For example, you might find that many of the features of a “luxury” car are actually superfluous to the buyer. By stripping away these unwanted features, you can build a luxury car at an affordable price.

Path 3: Look across the chain of buyers

Purchasing decisions are not always made by the actual end user of the product. This is a common theme in enterprise buying decisions where the actual purchase is made by one person, whilst the product will be used be a totally different group of people. The buyer wants the best price, whilst the user wants the product to actually improve their work.

Traditional buying decisions within industries can be turned on their head by choosing to target a different member of the chain of buyers.

For example, instead of trying to sell to the one person in the organisation with purchasing power, you could directly target the actual users of the product by allow them to use it for free within a limited capacity. Once the product has become embedded into the organisation, the purchases decision becomes a lot clearer because the product has already proven itself.

Path 4: Look across complementary products and service offerings

When you sell to a customer, you usually only focus on your product, and not on the complementary products that the consumer also needs to buy.

For example, if you sell Sports Equipment, there is also a wealth of other equipment, help and advice that the consumer needs in order to make the most of their purchase.

By combining complementary products together, you can find new opportunities to differentiate yourself from the existing competitors.

Path 5: Look across functional or emotional appeal to buyers

When we purchase something, we usually do so for function or emotional reasons. A can opener has a clear functional use, whilst planning a holiday has a strong emotional ties.

New opportunities can be found by either adding emotion to the purchase or by stripping it away.

For example, you might want to add emotional appeal to the purchase of furniture so that the consumer falls in love with the hand-crafted, high quality workmanship of the product.

On the other hand, you might want to reduce the emotional appeal of booking a holiday and therefore strip away the extra features, hassle and price that comes with booking a trip abroad.

Path 6: Look across time

And finally, by observing the trends of a particular industry or the convergence of technology you can discover new opportunities that were not possible not so long ago.

Technology and globalisation are disrupting entire industries around the world. Whilst these two factors are destroying many traditional industries, they are also opening up windows of opportunity for entirely new industries to flourish. Spotting these windows of opportunities early will be key to realising this new market space.

Formulating a Blue Ocean strategy

Understanding the 6 paths to a Blue Ocean, and actually taking one of those paths are two very different things. At just about any large bureaucratic company, inertia will be a driving force to prevent any substantial shift from a Red Ocean to a Blue Ocean. It’s difficult to create a strategy when each part of the company is focused on their own problems.

Kim and Mauborgne propose creating a Strategy Canvas to map out your current situation, and document your future strategy. A Strategy Canvas is essentially a single piece of paper that encapsulates your strategy. In this way you “focus on the big picture, not the numbers”.

Your Strategy Canvas should break down into the following 4 key areas:

Visual Awakening

Your company’s current state of play, including your customers, competitors, market and the problems that you are facing today. This stage should highlight what is wrong with your company and what is not working and should bring home the reality of the situation you face.

Visual Exploration

The next step is to “Get out of the building” (as Steve Blank would say, The Startup Owner’s Manual). Before you can make any type of future decision you need to understand who is using your product, why they are using it, what are the advantages of competitor’s products and what complementary products or other factors are important to the customer or the user.

Visual Strategy Fair

Once you have formulated many possible strategies, you need to present those ideas to your customers and stake holders. It is likely that you have misinterpreted or completely over looked certain aspects that are critical to future success. You need to use this feedback to pick the “best” future strategy.

Visual Communication

Finally you need to communicate your new strategy with the rest of the company. Your strategy should be simple and can be completely explained on a single page.

Future strategic decisions must only be approved if they directly help push the company from the old strategy and towards the new one.

Reach beyond existing demand

Making the leap from the Red Ocean to the unexplored waters of the Blue Ocean should only be taken when there is a large enough market to attack.

Most companies will look to their existing customers, and how they can further segment them in order to grow. However, this is not the right strategy if you want to create new uncontested opportunities.

Instead of looking at your existing customers, you need to look at your non-customers and what are the commonalities amongst them that would make them your customers.

Non customers can be categorised into three different areas, based upon how far they are away from becoming your customer.

First tier

First tier non customers are occasional customers who use your product only out of necessity. Given the opportunity they would quickly move to a competing product if the other product had some greater value.

Second tier

Second tier non customers are those that refuse to use your product because they feel it is inadequate for their problems or beyond their needs.

Third tier

Third tier non customers are completely untapped customers where no-one in the industry has targeted them at all. They do not use your product or any product in your industry.

In order to convert these non customers into customers, you need to discover what are the commonalities between them that would convert the latent demand into new customers. It’s easy to resegment your existing customers to try to raise the perceived value of your product, it is much harder to dispel the existing accepted values of an industry to capture an untapped market.

For example, your product might be too costly, to complex and not easily distributed. By reducing the complexity of a product, and therefore reducing the cost and the mode of distribution, you could find a new untapped market of customers who want your product but it is currently inaccessible.

Strategic Sequencing

Once you have decided upon a Blue Ocean opportunity, you need to formulate a business model that will enable you to capture the value of the opportunity and build a future model for profitable growth.

Getting this stage of the process correct comes down to getting the strategic sequence right.

Strategic sequencing is essentially 4 questions you must explore before beginning your Blue Ocean strategy. If any of your answers to the questions are not sufficient, you must go back and rethink the opportunity.

Is there exceptional buyer utility in your business idea?

Often companies will create new “innovative” products for innovation’s sake. For example, you might release a product that has a lot of new technological features, but non of them actually solve the real problems of the customer. This is not real innovation because it does not provide exceptional buyer utility.

In order to provide this value to the customer, you product must provide greater value across the 6 stages of the Buyer Experience Cycle and across the 6 Utility Levers.

The 6 Stages of the Buyer Experience Cycle are:

1. Purchase
2. Delivery
3. Use
4. Supplements
5. Maintenance
6. Disposal

And the 6 Utility Levers are:

1. Customer productivity
2. Simplicity
3. Convenience
4. Risk
5. Fun and image
6. Environmental Friendliness

By plotting these points on a matrix you can see how your innovation fairs for exceptional utility for the lifetime of the product. If your product does not significantly reduce the blocks to utility across the buyer experience cycle, your offering is probably innovation for innovation’s sake.

Is your pricing easily accessible to the mass of buyers?

When pricing your product, it is crucial that you aim to price it for the mass market of customers. Many knowledge intensive products benefit from the economies of scale, but spend the majority of their investment in product development.

In order to effectively price your product, you need to be able to introspectively analyse your product and the competing products within the same, or adjacent industries. For example, low cost, short-haul flights are competing with taking the car, and not with long-haul flights and so they should be priced accordingly.

And secondly, you must set your price according to what protection you have in either switching costs or legally protecting patents. If you have this kind of protection, you can afford to set your prices at a premium.

Can you attain your cost target to profit at your strategic price?

When calculating the price of a product, many companies will look at the cost it takes to manufacture and add on an additional profit margin to come to a market price. However this is the opposite to the strategy you actually want to take.

When you find an untapped market opportunity within an incumbent industry that can be unlocked at a lower price point, you must use that amount and work backwards to find your cost amount. This enables you to reduce the superfluous aspects of the product and significantly reduce the cost of manufacturing in order to gain a competitive advantage that can not be matched by your incumbent competitors.

What are the adoption hurdles in actualising your business idea? Are you addressing them up front?

And finally, when introducing a significant Blue Ocean opportunity, you will have to fight against the natural inertia that will occur from key stakeholders.

Employees can become an adoption hurdle if you are not open and transparent with what you are doing and where you are taking the company.

Business partners can be an adoption hurdle if they feel your strategy is cutting their opportunity or reducing their place in the ecosystem.

The general public can also be an adoption hurdle if they do not understand why you are taking the action, and how it will effect them.

Part of dealing with these adoption hurdles comes down to having clear and open communication and ensuring that your strategy is simple and concise.

Overcome key organisation hurdles

Now that you have your Blue Ocean strategy finalised, you need to plan your strategy for transforming your company and engaging with this new opportunity. However, this is easier said than done, especially in large bureaucratic organisations that suffer from inertia.

More often that not, the current Red Ocean strategy has enabled the organisation to get to where it is at today, so why would you want to change? This can be a difficult argument to win, particular if the organisation is comfortable with the status quo.

The four main hurdles to executing a Blue Ocean strategy within an existing organisation are:

1. Cognitive - Waking up employees to the need to change
2. Limited resources - More often than not you will have less resources to make the change, not more.
3. Motivation - How do you motivate employees to want to make the change in strategy?
4. Politics - Within every organisation politics can seriously derail an initiative for change.

Each of these areas are critical to making a Blue Ocean strategy possible. Whilst not every organisation suffers from all four, each on their own is a monumental challenge. Each of these hurdles would traditionally consume a large amount of time and resources. In order to effectively get over these hurdles, you need to concentrate your efforts on areas that will have disproportionate results.

Cognitive

The problem with any major shift in the strategy of a large organisation is that many key stakeholders will not see the need for change. When evaluation is based purely on data, the real pain points of a strategy are often missed.

In order to challenge this cognitive problem, you need to show the problem to the influencers, and not just show them numbers that represent the problem. This might include customer interviews, or real world examples of the current problems the organisation is facing. Numbers and data do not have the emotional impact of seeing something with your own eyes.

Limited resources

Most organisations already have limited resources, particularly if the organisation isn’t performing well. At the outset, a major shift in strategy will probably seem like it requires a large investment of resources that the organisation just does not have.

In order to combat this problem you need to focus your limited resources on the hot spot areas that will yield disproportionate results and cut investment to cold spots that have very poor results.

Investing in the right areas is key to maximising your limited resources.

Motivation

When you are dealing with a large amount of employees, it can be difficult to really motivate everyone at the various levels of the organisation. In order to scale this kind of motivation, you need to create an environment for it.

Firstly you need to target the key influencers that can then influence the employees below them. In order to scale motivation, you need to target these influencers who in turn will need to target the next rung of the ladder down.

Secondly you need to create a level playing field that highlights action or inaction of everyone in the organisation. This creates a culture of performance as everyone can explicitly see who is letting the team down. This transparency also prevents people from blaming each other for lack of results and encourages people to want to perform at a higher level because everyone in the organisation can see the results.

Politics

And finally, you need to prevent politics from creeping in and derailing your strategy. Every organisation has politics and political influencers who have the power to sway others.

To combat the political problem in an organisation you need to have a key advisory who knows the key players, and the likely challenges you will face. This advisor will be able to tell you where the problems lie, and how you can mitigate those problems before they arise.

Secondly, you need to identify who will likely gain from the change in strategy and who will lose out. You need to get the people who will gain on your side and you need to work with the people who will lose out so as to not allow them to prevent your shift in strategy.

Again, it is difficult to change your entire mass of employees. It is far easier to target those key influencers that will have disproportionate results.

Conclusion

Blue Ocean strategy is an important concept to understand for companies of all sizes and positions. Blue Ocean strategy does not favour startups or established companies and it does not necessarily mean an innovation in technology.

Creating Blue Oceans should be a continuous movement. After successfully creating a Blue Ocean you will benefit from a period of competitive advantage. However, whilst there are certain high boundaries for imitation, any successful strategy will eventually be imitated by competitors. You will once again find yourself in a Red Ocean. It is at this point when you need to once again find a Blue Ocean opportunity.

Blue Ocean strategy is one of the most cited Business books of the last couple of years. It charts the course of finding new opportunities for marketing innovation and how to create competitive advantages that enable organisation to break away from their competitors. The act of continuous reinvention using Blue Ocean strategy is critical for a company to stay relevant and at the top of the market. History shows countless examples of companies that have enjoyed early success, only to have the market taken away from them when a competitor creates a Blue Ocean. Creating successful, lasting company is about creating an environment for search for new opportunities and exploring innovation.

Blue Ocean strategy is an excellent book if you are interested in creating an innovative organisation, or you are looking to take your company and create a significant competitive advantage. Whilst Blue Ocean at times reads like a dense managerial text, it provides actionable frameworks for not only finding, but also executing on Blue Ocean opportunities.

Buy Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant on Amazon (Affiliate link).