BLUE OCEAN STRATEGY. A Practical Guide ©️2022 Logic Figures Pty Ltd. All Rights Reserved
Blue Ocean Strategy (BOS) is a book published in 2004 (revised in 2015 and 2017) written by W. Chan Kim and Renée Mauborgne, professors at INSEAD. They allege that there are strategic moves that create a leap in value for the company, its buyers, and its employees while unlocking new demand and making the competition irrelevant.
And while many still pose critical questions such as whether this book and its related ideas are descriptive rather than prescriptive, or if the authors’ said examples of successful innovations, as explained from their Blue Ocean perspective are nothing but personal interpretation of success through their lenses – I happen to be a believer in the Blue Ocean Strategy and have applied its principles successfully in one of my previous ventures.
Allow me to explain.
The theory behind BOS is that the business universe consists of two kinds of markets:
- Red Oceans and
- Blue Oceans
Red oceans represent existing industries and markets by industry boundaries and the rules of competition are well defined. Companies strive to outperform rivals and grab a bigger share of existing demand, and as the space gets crowded fierce competition turns the water bloody. Competitive or market competing strategy is today designed around how to occupy red oceans.
By contrast blue ocean or market creating strategy is about how to create and capture unknown markets where demand is created rather than fought over. In some cases, this spawns entirely new industries, but most blue oceans emerge when a company pushes the boundaries of an existing industry.
The question now becomes how can we invent a new and profitable market space without making the typical trade-off between value and cost? Better still: can we define a market where we can pursuit both differentiation and low cost in what Renée Mauborgne called value innovation? The simultaneous pursuit of value and cost is the logic of blue ocean strategy based on the study of more than 30 industries. Companies that can create blue oceans usually reap the benefits for some 10 or even 15 years because they are hard for rivals to copy. To realise blue ocean potential companies should charge a strategic course past traditional industry boundaries to create a new market space.
In the red ocean the primary goal is to create a marginally better product or offer a slightly superior service in an existing market to capture a share of that market from your competitors. Things are a little bit different in the blue ocean because instead of looking to compete in a merciless competition of marginal incremental improvements just to capture market share, blue ocean strategies seek to create new market space and reap the rewards of an entire ocean of uncontested market space. Creating uncontested market space doesn’t always mean creating a totally new and shiny, technologically advanced, superior product (although this is still one way of going on about it). Instead, what you should aim for is capturing non-customers of your industry from adjacent markets.
The speed of technological change in the next five years is expected to be 32 times more advanced than what we’re experiencing right now (as a in the world that we live in today). In 10 years if we experience an accelerated exponential growth, those initial five years will potentially look relatively flat compared to the next five years, so any businesses should have to start thinking today about how technology is going to impact and change their company moving forward.
The below just shows you a little bit about company growth and stalling out.
It’s incredibly common as over 85% of Fortune 100 companies have experienced stagnant revenue and only 12-13% of those saw their growth return.
Perhaps they had a blue ocean when they started their business, but it became a red ocean over time. What they did then- is they focused more and more on their competition rather than what they could offer consumers in an innovative way.
Remember – in all these – innovation is key.
To succeed, one must stop for a minute and look at the market with a fresh set of eyes, without the blinders on. So, it requires a visual awakening.
Understanding this further, we must look at four distinctive element: (1) factors of competition as we try to determine which ones we are going to eliminate, (2) which factors we are going to raise, (3) which factors we are going to reduce and most importantly (4) what are we going to create that’s brand new, so we createdemand rather than fulfilldemand.
This is called the ERRC – Four Action Framework (Eliminate, Reduce, Raise, Create). Or the ERRC Grid.
The grid pushes companies to act on all four elements to create a new value curve.
The ERRC grid has both sense and purpose and:
- Allows for simultaneously pursuit of cost reduction and product differentiation with the higher goal of value innovation
- It is easily understood by managers and leaders at all levels, allowing for high degree of engagement during its application
- Recognition of companies with core target to “create and increase” which often leads to cost increase and over engineering
Completing the grid allows companies to actively scrutinize all competitive factors. This promotes the ability to recognize some preconceived assumptions, which have been made unconsciously within the current competition and must to be changed.
- Which of the factors that the industry takes for granted should be eliminated?
- Which factors are irrelevant for our core competencies and should be erased?
- Is there a cost factor that is not creating an appropriate income?
- What factors do buyers care about the most? And should those be raised?
- What factors should be raised above industry standards?
- Which elements can be emphasized?
- What are those factors in our business that we are really good at and we can potentially increase?
- Which factors should be reduced below industry standard?
- What factors does the industry over-provide? Does the buyer care that much about those? Are they really that important?
- Which of the factors can be reduced that your business does not want to eliminate completely?
- Are there any elements of your business that you don’t want to be a defining factor of your products or services?
- Which factors should be created that the industry has never offered?
- What can be added in order to provide a new value innovation to our products or services?
- Which is an important element in the business that no other company offers?
- Any other factors that might increase profits, maximise buyer value or create a strong business proposition (perceived value)?
The way to succeed in creating a blue ocean is by focusing on value innovationin ways that will render your competition irrelevant.
Value innovation is created in a region where companies actions favorably affect its costs, its structure, and its proposition to buyers.
Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time costs are reduced further as scale economics kick in due to the high sales volumes that superior value generates thus creating value innovation.
The Blue Ocean Strategy is built on eight principles:
The formulation principles:
- reconstruct market boundaries
- focus on the big picture
- reach beyond existing demands
- get the strategic sequence right
The execution principles:
- overcoming key organisational hurdles
- building execution into strategy
- aligning value, profit, and people propositions
- renew blue oceans
And developing a Blue Ocean Strategy follows The Six Paths Framework
There are six basic approaches to remaking market boundaries, so let’s examine how each of these six paths work.
- First Path : Alternative Industries
Can you look across industries for insights that could lead to solutions around the pain points you identify in your current market?
The alternative industries are those industries of products and services that your customer could switch to, if your industry did not exist today.
To identify those you have to ask the following questions:
- What are the alternatives to the products or services of your company?
- What is the customer’s decision
- What could cause a change for your customer
- Second Path :Strategic Groups
Strategic Groups are those groups within an industry who follow the same strategy; for example to be price or quality market leaders.
Questions to identify strategic groups:
- Which strategic groups does your company belong to?
- What factors might determine the customer to switch from one group to another?
- Third Path: Buyer Groups
Target groups are usually divided into three distinct buyer groups: Purchaser, Userand Influencer.
Questions to identify buyer groups:
- Which buyers exist in the industry?
- The industry focuses on which one of these groups?
- How can a shift in buyer group can cause a new value in the industry?
- Fourth Path: Complementary Products and Services
The complementary products and services have no immediate connection or relation to the company or product/service but they are often used in combination.
Questions to identify complementary products and services:
- In which context is the product or service used?
- What happens before and after usage?
- Are there obvious fault lines?
- How can these products be eliminated by a complementary offer?
- Fifth Path: Functional and Emotional Buying Motives
By reviewing your own product or service, you understand and recognise if your customer’s buying decision is mainly emotional or functional.
Questions to identify your client’s functional or emotional buying motives:
- Does my product or service create an emotional or functional attraction?
- If my product or service has an emotional attraction, are there ways to improve its functionality?
- If my product or service has a functional attraction, which element can improve its emotional attraction?
- Six Path: Sustainable Trends
When reviewing the trends and developments it is important to anticipate and use them consciously to discover new markets.
Questions to understand what are the sustainable trends:
- Which trends seem irreversible, develop in a clear direction and will most likely have effect on my industry?
- How could this trend affect the industry?
- Based on this trends and knowledge how can we create a new value for our customers?
The Blue Ocean Journey: From Customers to Non-customers
Customers: Usually companies aim to keep and expand their customer base. When you have (or aim to have) a high number of customers, this leads to mode differentiation and to custom-made offers (thus reducing the ability to further productise the offer) that may result in inefficient micro-markets.
Non-Customers. On the contrary, the Blue Ocean Method focuses on non-customers and tries to create a strong, common value for a large customer base. There are three distinct types of non-customers that differ in the distance from current market.
One of the most prominent examples of Blue Ocean Strategy is the case of Cirque du Soleil.
Circuses back in the 1980s were dominated by Ringling Bros. and Barnum & Bailey. They featured three-ring circuses, animal acts, acrobatics and clowns and their traditional customers were small children and families.
However, competition was very strong. The market was shrinking. Circuses competed to secure more famous entertainers and exotic animal acts, raising costs without dramatically changing buyer value. Buyers had appealing substitutes for entertainment in TV and emerging video games. Furthermore, there was increasing public concern about (wild) animals’ conditions.
A former street performer, Guy Laliberté decided to escape the red ocean of circuses to create a blue ocean of new theatrical entertainment: Cirque du Soleil. Its shows combine the circus with adult theater, showing incredible acrobatics and physical feats set to a story-line and original music.
Cirque du Soleil’s blue ocean strategy distinguished itself from traditional circuses, leading to distinctly different operational forces:
- Cirque du Soleil changed the nature of the show and thus decreased significant costscommon to the industry.
- They completely removed animal acts and their associated care, training, transportation, and housing.
- Instead of three rings, their shows feature one stage, reducing the number of performers needed.
- Instead of featuring star clowns and lion tamers, they anonymize the performers, thus preventing performers from gaining leverage and starting a bidding war with competitors.
Cirque du Soleil increased value to the buyerwith an innovative show and increased demand.
- Production value increased with music, lighting, story-lines, and artistry. This increased sophistication to match prestigious theater shows, allowing for higher ticket prices to match theater levels, well above the mass-market circus pricing. This allowed for non-customers (theater folk) to become customers of Cirque du Soleil.
- The performance theater was upgraded with more comfortable seats, avoiding circus hard benches and sawdust floors.
- Traditional circuses very similar, whereas Cirque du Soleil could create multiple unique productions around different acts, story-telling and music. This increased demand so a viewer could happily see multiple shows.
Cirque du Soleil essentially offered the best of both circus and theater, creating a new form of entertainment, while stripping away everything unnecessary. In doing so, it created a new product that made competition with circuses irrelevant.
The BOS canvas Cirque du Soleil vs Ringling Bros:
Now look at where Cirque du Soleil’s blue ocean strategy differs drastically, and where it offers similar value.
- It ELIMINATED costly expenses that didn’t provide customer value – star performers and animal shows. It also change the multiple stages requirements
- Cirque du Soleil’s REDUCED acrobatic wonderment and thrill as circuses.
- It RAISED the price of admission tickets and venue uniqueness (every venue and show are different)
- It CREATED entirely new elements like high production value, premium seating (for theater folk) and artistry, which were important to their customers but completely absent from normal circuses.
This strategy canvas clearly shows how Cirque du Soleil offered superior customer value while lowering certain costs.
BLUE OCEAN STRATEGY. A PRACTICAL GUIDE ©️2022 Logic Figures Pty Ltd. All Rights Reserved