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.
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 companies traditionally work in "red ocean"conditions, where businesses viciously fight against each other for a share of the marketplace. Instead, according to the blue ocean strategy, organizations should find a way to work in a marketplace that is free of competitors.
Summary of blue ocean strategy
According to the website Blue Ocean Strategy, the book is based on a study of 150 strategic moves spanning more than 100 years and 30 industries. In the book, 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.
To support their theory, Kim and Mauborgne invite readers to consider the business climate of 20 years ago, and the numerous new business opportunities that have arisen since then.
"How many industries that are unknown today will exist [in the future]?" Kim and Mauborgne wrote in the Harvard Business Review. "If history is any predictor ... the answer is many. Companies have a huge capacity to create new industries and re-create existing ones, a fact that is reflected in the deep changes that have been necessary in the way industries are classified."
The authors say that blue ocean strategy is successful because it simultaneously 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.
The book offers businesses and entrepreneurs the framework and the tools for creating and capturing "blue oceans," including a strategy canvas, value curve, four actions framework, six paths, buyer experience cycle, buyer utility map and blue ocean idea index.These visual frameworks and tools are designed to not only effectively grow the collective wisdom of a company, but also facilitate effective strategy execution through fluid communication.
Finding blue oceans
To discover an elusive blue ocean, Kim and Mauborgne argue that businesses and entrepreneurs should consider what the authors call the "Four Actions Framework." This is used to reconstruct buyer value elements in crafting a new value curve. To break the trade-off between differentiation and low cost, and to create 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. This exercise also pushes leaders to simultaneously pursue differentiation and low cost in order to break the value-cost trade-off. The questions also spotlight companies that are focused only on raising and creating, in the process lifting the cost structure and often over-engineering products and services.
Blue ocean vs. 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 or not 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.
"While avoiding use of Mr. Porter's name, Mr. Kim and Ms. Mauborgne nevertheless attack him head on, arguing that the five forces analysis is a formula for remaining in 'red oceans,' where the sharks compete mercilessly for the action," Murray wrote in his book. "The key to exceptional business success, they say, is to redefine the terms of competition and move into the 'blue ocean,' where you have the water to yourself."
Murray writes 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.
Examples of blue ocean strategy
One popular example of blue ocean strategy, which Kim and Mauborgne review in their book, 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.
Additional resources for blue ocean strategy can be found on the following websites: