Blue Ocean Strategy - Explained
What is a Blue Ocean Strategy?
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What is Blue Ocean Strategy?
The blue ocean strategic concept was developed by Profs. Kim and Mauborgne of INSEAD Business School. It posits that creating a new market can be more beneficial than competing in an existing market with established competitors. These new markets are blue oceans.
Creating a blue ocean is difficult and generally requires the company to innovate (a concept coined as value innovation) in a way that creates a previously non-existent or unrealized demand. Value innovation involves the pursuit of both differentiation and low-cost strategies to open up new and non-competitive markets. This innovation may take place at any or all stages of the value chain.
The result is the development of a market that is devoid of competition and allows for extensive growth or growth potential without the need for competitive differentiation or cost advantage.
Back to: STRATEGY & PLANNING
Blue Ocean vs Red Ocean Strategy
The counter to the blue ocean is the red ocean. A red ocean is a saturated market with industry competitors. These competitors may possess a competitive advantage driven by cost, differentiation, or niche market strategies. The result of the competition is destruction, which draws the analogy of red blood in the ocean water. Thus, the red ocean generally offers less opportunity for growth.
A blue ocean strategy seeks to avoid competition completely; thus, competitive strategies are less important. Competitive strategies are necessary, but they are not adequate to grow a market position. In a red ocean strategy, a structuralist view is that a competitive market is structured by conditions that force firms to compete. This is also known as environmental determinism. Gaining advantage in a red ocean is a supply-side focus where cost and differentiation strategies are trade-offs. A blue ocean strategy adopts the belief that markets and industries are not structured to beget competition. They can be reconstructed by industry players. This is a reconstructionist view. This is a focus on generating additional demand rather than improving or increasing supply through value innovation.
Four Principles of Blue Ocean Strategy
Blue ocean strategy is based upon four unique principles:
- Creating new markets without competition by reconstructing the boundaries of an existing market.
- Thinking outside of the common understanding of value generation and delivery (value innovation).
- Creating new demand and generating supply in new markets.
- Sequencing the businesss strategic approach to new market generation.
Profs. Kim and Mauborgne developed numerous frameworks and approaches to help a firm implement these principles.
Blue Ocean Strategic Approach
Profs. Kim and Mauborgne propose using multiple frameworks in developing and implementing a blue ocean strategy. The objectives of these frameworks is to allow the firm to look beyond the traditional boundaries to competition (six paths framework); aid planning and reduce risk by visualizing the strategic considerations; generating new demand through the three tiers of non-customers; and overcoming hurdles to launch a value offering in a newly created market (through utility or differentiation, pricing, and cost reduction). The effect is to break away from structuralist strategic approaches (competing a red ocean) toward a reconstructionist strategic approach (creating and operating in a blue ocean).
Blue Ocean Frameworks
Notable frameworks are:
Six Paths Framework
This framework helps guide a company to look beyond existing markets for the potential for new markets. It asks the company to think creatively and question assumptions about the existing market with the purpose of identifying new value (or value innovation). Remember, the purpose is to move beyond the tendency to compete on known value drivers in a red ocean. The paths to examine are as follows:
- Chain of Buyers - To attract a new market of consumers, a company must fully understand the value proposition for all buyers. Understanding buyers helps understand how the company can seek to further differentiate or reduce costs to meet the need/want of buyers.
- Complimentary Services and Offerings - Look to the value traditionally delivered or required along with the companys value proposition. That is, what do customers generally purchase or use together with the companys core product or service? Understanding the complimentary values will allow the company to innovate in its core value proposition. The objective is to eliminate the complimentary value or combine it in a way that creates a new market for the core product.
- Functional/Emotional Appeal - You may have hear the adage that, buying is an emotional decision. Research indicates that individuals purchase for functional or utility and to meet or generate an emotional response. A blue ocean strategy posits that when a customer changes the purpose of purchasing, a new market is created. For example, and individual may purchase cloths of a vehicle for its functional purpose. If that individual changes purchasing habits based upon aesthetics or fashion, there is a new customer market.
Four Actions Framework
This framework looks at the value and cost drivers within a companys offerings and seeks to reduce or eliminate unnecessary or incongruent products. This approach allows the company to then focus on develop differentiated products that have the ability to generate a new customer market. The four individual actions include:
- Raise: Identify value drivers in a companys value chain that must become more important - generally through operational efficiency or product/service differentiation.
- Eliminate: Identify aspects of the value chain that are superfluous or unnecessary in the value delivery process. This eliminates costs and inefficiency while allowing focus on value drivers.
- Reduce: This step looks at the end value proposition (product or service) and seeks to identify aspects of these offerings that are not necessary to the companys goals or objectives. It seeks to reduce these offerings or identify cost drivers in the production process that are necessary but could be reduced.
- Create: Focus on product or service innovation through differentiation or novelty. It focuses upon finding new value propositions that could appeal to a new customer market.
The factors identified in four-action framework must be organized and employed efficiently for use. The Eliminate-Reduce-Raise-Create Grid (ERRC) is a four-quadrant grid that allows the company to list and categorize value drivers in a visual format.
The next step is to employ the the strategy canvass to visualize aspects of the value chain. This tool asks a business to identify all of the functions or factors of the value chain and place them along the x-axis of a graph. The y-axis represents value or importance to the business. Each of these factors represent some aspect of a business's operations and value delivery process that stands to be changed. Then the company must plot a point on the graph a point that represents the value or importance of this factor. Connecting these dots shows a linear representation of the importance of these factors. Now, the business will overlay a competitor (either direct competitor or substitute product or service) or industry benchmarks to see a comparison of the value of each factor. This helps the business visualize the importance that competitors or the industry in general places on the factor versus the importance the company places. Seeing the comparison of importance will demonstrate the potential sources of competitive advantage for competitors. The business does not try to compete on a competitors advantage, as this is a traditional red ocean strategy. This visualization allows the company to adjust its own priorities accordingly to reduce costs for the factor or differentiate it from existing competitors. That may include focusing on different value drivers or creating new value drivers. In any event, adequate cost advantage or differentiation can provide information used to create or open up new markets for the business.
Pioneer Migrator Settlor Map
This framework allows a company to visualize the value drivers (products or services) contribute to the firms growth or market potential. In summary, it is a snapshot of the company's value drivers that allows for strategic decision-making with regard to pursuing growth. The company's value offerings are characterized as Pioneers, Migrators, or Settlers. Pioneers provide lots of value and offer significant growth potential. Generally, pioneers have some level of competitive advantage or are not subject to competition in the monopolized market. Migrators are value offerings with significant value for the company, but lack significant competitive advantage in the market. These offerings demonstrate grow potential but require strategic orientation to achieve it. Settlers are value offerings with little competitive advantage in the market. These offerings compete in traditional red oceans where the potential for growth in the existing market is small.
Three Tiers of Non-Customers
- Soon-to-be Customers - These are customers in an existing market that are not recurring customers or fail to closely identify with the companys brand. Reaching these customers requires additional value offering or brand awareness.
- Refusing Non-Customers - These customers, for whatever reason, consciously avoid the companys value offerings. To reach these customers, a firm must seek to identify and remove the barriers to customer acquisition. Barriers may be any source of strategic advantage held by another firm or value proposition (cost, function, brand awareness, geography, etc.).
Unexplored Non-Customers - These are customers who have never been a customer, does not see the companys offerings as a need or want, and may be unaware of the companys value offerings.
- Unexplored Non-Customers - These are customers who have never been a customer, does not see the companys offerings as a need or want, and may be unaware of the companys value offerings.
Sequence of Blue Ocean Strategy
Profs. Kim and Mauborgne established the sequence of blue ocean strategy, as the name states, to guide companies in the development and implementation. The sequence is as follows:
- Buyer Utility - The value proposition must provide exceptional utility to the customer.
- Price - Is the offering priced in a manner that meets customer expectations and demonstrates demand.
- Cost - The cost structure for delivering the value proposition must allow for an adequate profit margin.
- Adoption - The hurdles to allowing for adoption of the value proposition.
Buyer Utility Map
As stated, the blue ocean strategy requires the creation of exceptional value for the customer. The buyer utility map allows managers to visualize the aspects of utility across the buyers or potential buyers entire experience cycle. More specifically, it allows the firm to focus on the demand-side (customer side) of the value offering. Common stages of buyer utility include: orientation, evaluation, options, purchase, delivery, usage, maintenance, and disposal. The core utility levels include: productivity, simplicity, convenience, risk, fun & image, social responsibility. These levels help the company to visualize the areas of utility that a value offering does or could potentially fill.
Price Corridor Map
Pricing is an important aspect of optimizing revenue for a value proposition. To secure a strong revenue stream for your offering, you have to set the right strategic price. The price corridor map involves understanding the customer sensitivity to price when comparing the product to similar value propositions. The company will categorize offerings as different form/same function (firearm vs bow and arrow) or different form and function/same objective (ceiling fan vs air conditioner) as other offerings. The company must then identify a price range for the value offering that identifies the largest group of buyers. This is the price corridor. The next step involves identifying the highest price level within the corridor that maximizes revenue. This will include strategic decisions, such as intellectual property protection, ownership of key assets, and relevance of core capability. This assessment process will allow the firm to categorize the offering in a lower, middle, or upper price range. The company will analyze pricing to target costing, which involves starting with a strategic price and deducting the desired profit margin to arrive at the target cost. Meeting these target costs might involve streamlining operations, employing cost innovations, partnering, or changing the price model of the industries.
Four Hurdles to Strategy Execution
This framework seeks to identify the organizational hurdles to executing a blue ocean strategy. The relevant hurdles include:
- Remaining with the Status Quo
- Limited Available Resources
- Employee Motivation
- Internal Opposition
- Industry - Look at the core assumptions about value delivery (product, service, or business model) in the existing industry. This helps us look objectively at the industry with the hopes of fostering the ability to dissociate ones own activities from these core assumptions.
- Look Across Time - Blue ocean strategy seeks to look across time for trends that are on the horizon (or with immediate potential). Competitors tend to react to changes in the competitive environment as they become important. Companies that generate new markets tend to look further into the future for future customer need or wants. This allows the innovative company to create value for customers that do not yet fully recognize or demonstrate the need or want.
- Strategic Grouping - Look at how the company or industry tend to group value offerings. For example, a value offering may be value, efficiency, quality, appearance, ease of use, etc. Remember, strategy regards an orientation toward achieving goals of objectives. This generally regards meeting an identified need or want of a consumer. Understanding the current strategic positioning helps the company think of the value proposition outside of this grouping or in terms of other strategic groups. This helps the business generate new markets by orienting the value offering to achieve an alternative strategic objective or goal.
Strategy of Implementation
Implementing the blue ocean strategy is generally achieved through tipping point leadership and fair process. Implementation requires company to address and overcome any or all of the hurdles to strategy execution.
Tipping Point Leadership
Tipping point leadership is about going against conventional wisdom to effectuate change. It calls for a manager to overcome hurdles in implementing a strategy. Managers generally face four types of hurdle in implementing a blue ocean strategy, as follows:
- Cognitive Hurdle - Managers face the task of convincing internal staff of the need for the strategic change.
- Limited Resources - Traditionally, a shift in strategy can require additional resources that may be difficult to secure.
- Motivation - Changing strategies may require all stakeholders to work diligently toward that point.
- Politics - Internal politics often leads to fighting over strategic decisions.
This involves communicating goals and objectives to the individuals involved in the implementation process. Three elements define the fair process framework:
- Engagement - This means involving individuals in the implementation process by asking their opinions and allowing them to challenge ideas, assumptions, and proposals.
- Explanation - This means transmitting information adequately. All individuals involved should understand the objectives and reasoning behind any strategic decision. It builds trust and allows for employee learning.
- Expectation Clarity - This means making certain that all individuals realize and understand the expectations of them and the standards to which they will be held in their performance. This means adequately communicating goals, milestones, and individual responsibilities.
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