Blue Ocean Strategy: The Complete Guide
Raquel Alberdi
Many businesses are like sheep.
Walking around and grazing in the same field as their competitors, flocking aimlessly to the sound of new industry trends and statistics with the rest of the herd.
When looking over the pasture it’s almost impossible to tell one business from another. Their thick wooly coats form a sea of white as far as the horizon can see.
Nobody’s offering anything different, nobody’s product or service stands out. They all look, act, and feel more or less the same.
But what if you could turn your business into a black sheep? One that went against the herd. One that stood out on the industry pasture to customers by offering a new, diverse, and differentiated product or service?
It would take a bold move going so sharply against the grain.
Historically, the best business strategies have been Darwinian in nature, with companies battling it out and the winners taking home the largest market share.
The beverage industry is a great example of this. Will anyone ever seriously challenge Coca Cola?
However, intense competition has led industries to become saturated, meaning increased market share does not always result in higher profit margins.
So under such conditions, why not try establishing new markets where demand is created, not squabbled over, and the competition is made almost irrelevant?
Why not try finding your “blue ocean”?
What is the Blue Ocean Strategy?
Blue Ocean Strategy is a business term that first appeared in the book (of the same name) by W. Chan Kim and Renee Mauborgne.
Its methodology provides companies with an escape route from the intense competition over the same market space, as we just discussed.
It leads to unchartered territory. Somewhere exciting, never before explored.
Is it risky? Yes…
But if you can pull it off. If you uncover an untapped, uncontested market space then the opportunities are truly limitless.
Difference Between Blue Ocean and Red Ocean Strategy
To understand the difference between Red and Blue Oceans we need to swap our tranquil, sheep-filled pastures for the rougher seas of the ocean.
Imagine your company as a fishing boat setting out for sea.
As you leave port and head for the rich fishing waters just off the coast, you notice several other fishing boats heading in the same direction.
It’s no secret. The spot you’re heading to produces some big catches under the right conditions, and therefore no surprise to see intense competition.
This is your Red Ocean.
Lots and lots of companies (boats in this case) competing against each other in the same space for the same customers.
Now as more and more boats enter this space, the less fish there are to go around and the more difficult it becomes for each boat to stay “commercially” afloat.
And so the battle begins...
Blood is spilled as you and your competitors continuously hack each other to pieces over pricing, quality, and low-margin profits until finally, a victor emerges.
However, there is an alternative business strategy.
Instead of taking your boat out of port to the well-known fishing grounds you turn left, in the opposite direction. Your destination is an unknown stretch of water further up the coast that nobody has fished before.
Because it’s never been fished you can’t be sure you’ll catch anything, but you have a strong hunch you will.
This is your Blue Ocean.
With no competition, you find yourself in clear, open water. An entirely new, exciting, but ultimately untested market space that if proven right, could bring you uncounted success in the future - a future where your competition is made entirely irrelevant.
By competing in an established, yet saturated market space you are forced to duel it out with your competitors for the same pool of customers.
The inevitable battle for their attention is tiresome, sluggish, with no end in sight. By creating a Blue Ocean there aren’t only more customers, but you’re the only one “fishing” for them.
Blue Ocean Strategy Framework
The entire Blue Ocean Strategy framework is built around the rejection of traditional business strategy: that there must be a tradeoff between COST and VALUE.
This school of thought suggests companies have a choice between two options:
They can provide greater value for their customers but at higher costs
They can provide lesser (but still reasonable) value to their customers but save on expenditure.
Conventional supermarkets are a perfect example of this traditional business method.
In the UK, Marks and Spencer’s would be considered a high-end brand to do your grocery shopping.
They differentiate themselves from competitors by offering exclusive, high-quality products difficult to find anywhere else. The trade-off is of course price - the higher the quality of the product, the more customers will have to pay for it.
Conversely, you have supermarket chains such as Lidl and Aldi with lower pricing points.
Arguably, the product is of inferior quality to what you would find at a Marks and Spencer’s, but it comes at a far cheaper cost.
Blue Ocean Strategy says to hell with all that, we’re going to find a way to create value for both the company and our customers by simultaneously pursuing product differentiation and lower costs.
Nevermind what our competitors are doing, let’s discover a market space that makes them completely irrelevant.
This process is known as finding VALUE INNOVATION.
To truly break away from your competition and find this blue ocean market space you are first going to have to analyze your current market situation. This can be done by completing a Blue Ocean Strategy Canvas
Creating a Blue Ocean Strategy Canvas (Value Curve)
What is a Blue Ocean Strategy Canvas?
Essentially, it is a tool that visually analyzes an existing market to identify potential Blue Ocean spaces within the industry.
It identifies:
Key competitors in the market
The factors they compete for over
How each company scores against those factors
It’s typically formatted as a linear graph where the X-Axis indicates customer value (the services, products, and other factors companies compete over) and the Y-Axis offering level (how much of this competing factor does a company offer).
The higher the offering level, the higher the price point.
Let’s look at an example from the traditional higher education industry:
The traditional higher education industry competes over 6 customer value offerings:
Professors (Industry recognition and cost of hiring course tutors)
Price (Cost to complete the degree)
Campus (Quality, size, and space of campus buildings)
Accreditation (Certified by an accredited educatory board)
Prestige (Think Ivy League vs. local junior college)
Course material (Application and relativity of the learned material)
Once you’ve settled upon the most important customer value offerings from your industry, you can start to plot competitors’ value curves on the chart.
This is the most basic component of the entire strategy canvas and helps you better understand which strategic elements your competitors (and in the industry as a whole) are hedging their bets on.
So let’s plot a couple of different universities on our Blue Ocean Strategy Canvas:
Looking at the two value curves, we can see there’s a stark difference between the offering levels of the two university tiers.
The industry recognition of Ivy League professors is higher than those at local state schools.
As a result, those professors will expect that experience and recognition to be reflected in their wages.
To cover this cost Ivy League universities charge a premium fee to attain their degrees, something made possible by the group’s prestige. They are world-renowned educational institutions that attract some of the brightest students from across the globe.
Both university tiers offer traditional campus life for students and of course, official accreditation. The course material’s relevance and applicability to real-life scenarios vary from industry to industry, with some universities specializing in different fields.
If we continued to plot university value curves on our strategy canvas we would undoubtedly find variation in their offering levels across these competing factors.
Some may have slightly smaller campuses with lower price points and accreditation (junior colleges) while others have higher prestige and professor wage bills (Stanford, California Berkley).
However, they all adhere to the classic differentiation strategy.
To find our Blue Ocean we have to shift our focus away from our competitors to alternatives and seek out noncustomers - people not currently targeted on our strategy canvas.
This means no more benchmarking in the pursuit of differentiation or cost leadership, but an analysis of the pain points an industry is trying to solve and how we can uncover new customer value factors.
How to Identify Noncustomers
According to Kim and Mauborgne, there are three tiers of noncustomers we need to better understand to redefine our customer values.
The first tier or “soon-to-be” group are those hovering just on the edge. They typically engage with your market out of necessity, and will eagerly move on as soon as a viable alternative is offered to them.
When looking to create new market space, you need to ask yourself why are they looking for viable alternatives? What are they dissatisfied with the current market offerings? Focusing on these points and uncovering alternatives could unleash a huge amount of latent potential.
The second tier or “refusing” group are those who are aware of your industry’s offerings but have made a conscious effort not to engage with them. This could be down to pricing or other similar barriers to entry.
Again, go back to your particular industry and ask yourself why people refuse to engage with it? Are there any common barriers to entry that could be lowered or better yet, completely removed?
The third and final tier is the “unexplored” group. These are people your industry has completely disregarded as potential customers probably due to long-held assumptions that their needs are better fulfilled by other markets.
The goal here is to find commonalities across these 3 different tier groups. If there are, you can then start to think about how you can redefine your industry’s customer values to serve these groups.
Remember, this doesn’t mean dreaming up senseless innovations. The whole point of the Blue Ocean Strategy is the satisfaction and fulfillment of real customer needs.
Which brings us nicely on to our third tool - the Four Actions Framework
Four Actions Framework (EICC)
To completely reevaluate and construct a new value curve, Kim and Mauborgne designed the Four Actions Framework.
It’s a simple grid that challenges you to answer four questions about the current state of your industry:
Eliminate - Which factors that have long been competed for should be eliminated?
Raise - Which factors should be increased well above the industry’s standard?
Reduce - Which factors should be reduced well below the industry’s standard?
Create - Which factors should be created that the industry has never offered before?
Eliminate
This question challenges you to think about what customers value in your industry. Look over all the factors you compete over and ask yourself, do they truly offer value? Are they really what’s drawing customers into the market?
You’ll often find that companies are so busy benchmarking each other that they miss changes in buyer value.
This means traditional value factors (often established and competed over for decades) are no longer considered important by consumers and could be removed without detracting from the value offered.
If you can eliminate these factors, it’s going to drastically reduce your required investment and allow you to redirect resources into other areas.
Raise
The second question gets you analyzing existing factors. Which offers the most value to consumers? If money were no limiting factor, where would you like to raise your offering level?
Reduce
This question forces you to again analyze competing factors. However, this time you need to identify areas where you could reduce your offering level investment.
For example, are there any products or services introduced to the market that are overcomplicated? Have they become too complex (and overly expensive) in fulfilling a simple customer need?
These factors differ from elimination because they continue to offer value to consumers, yet investment can still be reduced to strengthen your cost structure.
Create
The fourth and final question requires you to get creative. How and where can you find new sources of value for your customers?
Now, this is far more difficult as there’s nothing to benchmark your efforts against.
You're blazing a trail into the unknown as you flex, bend, and break the conventional rules that bind your industry.
It’s certainly risky, but the rewards far outweigh the costs.
To show you a recent example of how the three tools can be combined to find Blue Ocean market space, let’s continue with the higher education industry and how the online business school ThePowerMBA (that’s us!) were able to discover true value innovation.
Remember, value innovation is about creating more value for customers while finding ways to simultaneously reduce costs.
Starting with the Four Actions Framework, we can identify where ThePowerMBA reduced costs and how they created additional value for students:
The co-founders realized that the largest overhead costs for traditional business schools were campus maintenance and teaching hours. If they could find a way to eliminate or reduce both of these competing factors, there may be a way to offer untapped value in other areas.
The video recording of tailor-made classes offered online would achieve this goal.
For the content to remain relevant and applicable to the real-life business world, it would have to be constantly updated. Traditional accreditation boards make the rapid review and amendment of course material difficult, so this was another factor that could be eliminated.
As course content and the profile of the lecturers delivering it forms the backbone of any business school, these would be two areas where ThePowerMBA would make a significant investment by bringing onboard executives and co-founders from forward-thinking companies such as Tesla, YouTube, and Google X.
After further analysis of the three tiers of noncustomers, the co-founders realized that competitors in the business school sector were fighting over people seeking a master's degree.
But what about all those people wanting to further their business education without a master’s degree? Is it really a mandatory prerequisite?
It turned out that the common pain points across all three tiers were access (pricing was just too high for the majority of people at $60,000 - $100,000 for a 2-year MBA program) and convenience (the time and sacrifices required to complete the program).
ThePowerMBA proposed to create this value by breaking down complex business topics into bitesize, 15-minute classes (Microlearning) at an affordable price point ($850) delivered by world-class business leaders.
As we can see from the Blue Ocean Strategy Canvas, by drastically reducing variable costs associated with professors' hours and campus maintenance ThePowerMBA were able to offer an accessible, yet affordable business program to a group of previously discarded noncustomers.
Blue Ocean Strategy Examples
There’s no better way to fully grasp a business concept than analyzing successful case studies. With that said, let’s look at a few classic Blue Ocean Strategy examples as well as some more recent success stories.
Yellow Tail
The story of Casella Wines’ groundbreaking introduction of its Yellow Tail brand into the US market remains one of the most frequently studied success stories to date.
The Australian wine company carved out Blue Ocean market space for itself back in 2001 by taking an unconventional approach to the wine industry. Traditionally, the US wine suppliers would have competed over the following factors:
Price
Intriguing wine terminology
Marketing
Vineyard prestige
Aging quality
Complexity
Range
With the value curve appearing as follows:
It was a fairly simple market.
You had your premium wine offerings who charged a high price but delivered an equally high offering level across all competing factors.
At the other end of the scale, you had your budget wines. They offered less over all the competing factors but the price point was consequently a lot lower.
This is another example of a classic differentiation strategy.
However, Casella Wines found a chink in the traditional market’s armor. They understood that wineries were over competing in areas such as vineyard prestige, wine complexity, and technical jargon they used in their marketing materials.
To edge out the competition over any one of these factors required a significant amount of investment for almost zero gain.
Why?
The US population at that time consumed far more beer, spirits, and ready-to-drink cocktails.
The majority of people weren’t interested in which of the Nebbiolas, Syrah, or Montepulcianos contained the most tannins.
They found this complexity pretentious and off-putting - curious considering most wineries competed over this very factor.
Understanding this, Casella Wines took to the drawing board and built out their Four Actions Framework model to uncover both value innovation and noncustomers:
They did away with all the complexities (aging, technical jargon, wine ranges, vineyard prestige) and created an entirely new, sweeter wine palatable for the majority of the US population.
It was easy to drink (like beer and read-made cocktails) with only two different initial offerings - one red (a Syrah) and one white (a Chardonnay).
Not only did reducing the range of wines drastically cut production costs, but again, the majority of people at the time found the supermarket wine racks intimidating.
Finally, they introduced a fun and adventurous brand to the market. Yellow Tail was bottled with nontraditional labeling that featured a bright kangaroo under lower case lettering in brackets:
After the industry reworks the Business Ocean Strategy Canvas looked as follows:
Initially, traditional market competitors cried out and accused Casella of butchering high-quality grapes in its production and making a mockery of one of the world’s most historic crafts.
Were these accusations valid?
Hmmm, maybe. But Casella Wines won’t care.
In just under three years their Blue Ocean market space had produced the #1 best seller of red wine in a 750-ml bottle across the entire US.
Cirque du Soleil
The other classic example from the Blue Ocean Strategy book is the Canadian entertainment group Cirque du Soleil.
What makes this case so compelling is that it was undertaken in a declining industry.
Circuses were coming under increasing pressure from the public to remove acts that involved the training or usage of animals. Children, the circuses’ traditional mainstay audience, found home entertainment systems such as video games more appealing.
As a result, show numbers and profits steadily contracted, making the circus an unappealing market to get involved with (on paper at least).
At the time the market leaders were undoubtedly Ringling Bros. and Barnum & Bailey, who competed against local regional circuses over the following factors:
Price
Star performers
Animal shows
Aisle concessions
Multiple arenas
Fun and humor
Thrills and danger
Looking at these value curves, how could Cirque du Soleil rekindle the magic of a dying industry while finding true value innovation?
Cirque du Soleil understood that they had to remove animals if the future of the industry was to be secured.
Not only were they expensive to maintain, but as we mentioned previously growing public scrutiny made their inclusion impossible.
Running multiple show arenas and aisle concessions could also be discarded. Audiences were frustrated at having to constantly flick between simultaneous acts on different stages while being sold overpriced popcorn. The more acts you ran the costlier it was, too.
They also gambled on a new audience - adults.
The proposed reduced cost structure enabled them to take the circus in a new direction, away from clownery and animal acts towards opera, theatre, and the hit Broadway shows:
It was believed this group of noncustomers could be enticed back into the circus rings if the experience was more sophisticated and included artistic elements of dance, music, and enchantment.
This also meant a reduction in fun and humor, thrill and danger, as well as expensive star circus performers.
The resulting combination of circus and theatre created an unconventional, uncontested market space for the Canadian entertainment group.
They didn’t try to compete with traditional circuses. Instead, they made them completely irrelevant.
Cirque du Soleil appealed to a brand new audience, embedding a sophisticated storyline behind each of its productions. This not only lured customers back for a different experience but also enabled them to significantly increase their pricing model.
Another great example of the power of the Blue Ocean Strategy.
Starbucks
Before Starbucks began to take off in the mid-90s, coffee in America was fairly uncomplicated. It came in a porcelain cup accompanied by a hearty morning’s helping of sausage, eggs, and bacon.
If you were lucky, there may have even been the option between small, medium, and large sizes.
Wherever you were in the country, it was a cheap commodity at around $1.95 a cup.
However, Starbucks was about to change how Americans viewed coffee forever.
Contrary to popular belief, Howard Schultz (not the co-founders) introduced the coffeehouse concept to the company in the mid-1980s after a buying trip to Milan.
Schultz, the company’s retail and marketing director at the time, was completely blown away by how the Italian’s viewed coffee.
For them, an early morning espresso signaled a time to discuss news, meet friends, and socialize more than it did a short caffeine-injected wake-up call.
So on his return, he pleaded desperately with the co-owners to shift their way of thinking.
Yet, despite a successful pilot in 1984, they remained unconvinced. Starbucks would continue to sell its cup of good ol’ Joe!
However, just three years later Schultz’s fortune would change as Starbucks was abruptly put up for sale. Needless to say, he grabbed the opportunity with both hands and wasted no time in implementing his new vision.
Using the Four Actions Framework, we can see exactly how Starbucks went about creating there Blue Ocean market space:
Starbucks wanted to change how American’s perceived coffee, turning it into an “experience” rather than a morning commodity.
To do so, they completely refurbished their coffee shops.
Instead of the morning diner, customers were welcomed with large comfy sofas, a variety of morning newspapers, different coffee drinks, pastries, a free wifi network, modern artwork, and jazz music playing softly over the morning bustle of commuters.
This encouraged people to stay and chat, creating the community atmosphere Schultz experienced in Milan.
Starbucks also realized that for their new strategy to work location would be key.
They wanted to have stores placed along the busiest thoroughfares to maximize their customer reach, along with baristas receiving a mandatory 40 hours of training before being allowed to make drinks unsupervised.
To make the production of multiple different coffee drinks they’d have to reduce the quality of the product served (in a sense).
Starbucks initially came under criticism for the “burnt” aftertaste left in the mouth after a sip of their coffee, earning them the nickname Charbucks.
The reality was that well-roasted coffee beans (the culprit behind that burnt sensation) can be processed a lot faster and complement sugary drinks better than traditional roast.
Along with its community atmosphere, Starbucks created two new value factors in employee care and social responsibility.
Employees can opt for insurance plans that include dental, health, and vision available after 3 months of working with the company. Stock option plans also allowed employees to invest 10% of their base earnings at an 85% reduction in market cost, giving them a much higher stake in the company’s overall performance.
Continuing its brand focus on people, Starbucks contracts their own farmers and harvesters offering them great health and pay benefits and committing to purchasing only ethically sourced products.
By ultimately changing the atmosphere and experience coffee is consumed in, Starbucks reached a noncustomer group of previous non-drinkers and created a Blue Ocean market space.
Finding Your Blue Ocean
Although the business strategy term may be new, Blue Oceans have been around for decades.
Look back over the past 20, 30, 40 years or so. How many industries born through value innovation exist now that didn’t back then? Ecommerce, commercial space travel, AI, next day delivery…
Almost all of these would have been unthinkable just a short time ago.
So what if you reverse this and wind the clock forward to another 10, 20 years. Which companies do you think would exist then that would be laughed at now? Which brand new industries will be formed after the pursuit of true value innovation?
Will it be you taking the leap of faith and heading into uncharted waters?
Let us know in the comments
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