What if your business could be in a league of its own? Instead of competing with others in your industry, what if you were setting the pace, creating unique products and profiting from lucrative new markets?
Generating that kind of environment is the goal of blue ocean strategy, a business theory that suggests companies are better off searching for ways to gain "uncontested market space" than engaging in traditional competition.
What if you could set the own pace of your business, creating unique products and profiting from lucrative new markets? Blue Ocean strategy, a business theory that suggests companies are better off searching for ways to gain "uncontested market space" than engaging in traditional competition, allows your company to do just that.
The term is derived from the book "Blue Ocean Strategy" (Harvard Business Review Press, expanded edition, 2015), by W. Chan Kim and Renee Mauborgne. It describes how, instead of viciously competing with other companies, organizations should find a way to work in a marketplace that is free of competitors.
According to the Blue Ocean Strategy website, the book is based on a study of 150 strategic moves spanning more than 100 years and 30 industries. The authors argue that leading companies will succeed not by battling competitors, but by systematically creating "blue oceans" of uncontested market space ripe for growth.
The strategy represents the simultaneous pursuit of high product differentiation and low cost, thereby making competition irrelevant. The authors say it is successful because it attracts large numbers of customers while raising the cost of competition.
"When imitation requires companies to make changes to their whole system of activities, organizational politics may impede a would-be competitor's ability to switch to the divergent business model of a blue ocean strategy," Kim and Mauborgne wrote in the Harvard Business Review.
In an article in Forbes, Kim said, "Our study shows that blue ocean strategy is particularly needed when supply exceeds demand in a market. This situation is applying to more and more industries today and will be even more prevalent in the future."
Finding blue oceans
To discover an elusive blue ocean, Kim and Mauborgne recommended that businesses consider what the authors call the "Four Actions Framework" to reconstruct buyer value elements in crafting a new value curve. The framework poses four key questions:
- Raise: What factors should be raised well above the industry's standard?
- Eliminate: Which factors that the industry has long competed on should be eliminated?
- Reduce: Which factors should be reduced well below the industry's standard?
- Create: Which factors should be created that the industry has never offered?
Kim and Mauborgne said that this exercise forces companies to scrutinize every factor of competition, helping leaders discover the range of assumptions they unconsciously make while competing.
Blue Ocean vs. Porter's Five Forces
The theory opposes Harvard Professor Michael Porter's five forces model, which helps businesses determine how they can best compete in the existing marketplace. The Porter model looks at five specific factors that help determine whether a business can be profitable, based on other businesses that are already in the industry.
In the "Wall Street Journal Essential Guide to Management" (HarperBusiness, 2010), author Alan Murray says that the rapid pace of innovation and change in recent years has led to a search for a strategy that is more dynamic than Porter's five forces.
"The key to exceptional business success, [Kim and Mauborgne] say, is to redefine the terms of competition and move into the 'blue ocean,' where you have the water to yourself," Murray wrote.
Murray notes that blue ocean strategy encourages companies to focus less on their competitors and more on alternatives, while at the same time focusing less on their current customers and more on potential new customers.
"While competitive strategy would advise companies to enter attractive industries and avoid unattractive ones, blue oceans can be created in any industries, be they attractive or unattractive, stagnant or fast growing, high tech or low tech," Kim wrote in the Forbes article. "Here we talk about creating new market space instead of selecting a market, as blue ocean strategists set out to reconstruct market boundaries across conventional boundaries of competition rather than letting an existing market structure confine their strategic choices."
Examples of blue ocean strategy
One popular example of blue ocean strategy is Cirque du Soleil. By completely reinventing the circus, Cirque du Soleil achieved revenues that it took Ringling Bros. and Barnum & Bailey more than a century to attain.
"Cirque did not make its money by competing within the confines of the existing industry or by stealing customers from Ringling and the others," Kim and Mauborgne wrote in the Harvard Business Review magazine. "Instead, it created uncontested market space that made the competition irrelevant. It pulled in a whole new group of customers who were traditionally noncustomers of the industry – adults and corporate clients who had turned to theater, opera or ballet and were, therefore, prepared to pay several times more than the price of a conventional circus ticket for an unprecedented entertainment experience."
Southwest Airlines is another example of successful blue ocean strategy execution. According to consulting firm Blue Ocean Strategy Partners, Southwest tapped into a customer base who preferred driving to air travel due to the lower cost. Instead of competing with other airlines, Southwest positioned itself as an alternative to cars and offered reduced prices, improved check-in times and increased flight frequency.
"This new combination created an offering that enabled the customer to benefit from the high traveling speeds of an airplane at low prices combined with the flexibility of traveling by car," Blue Ocean Strategy Partners writes on its website.