5.2 Blue Ocean Strategy

Blue Ocean Strategy challenges companies to create uncontested market space and make competition irrelevant. By focusing on value innovation, firms can simultaneously pursue differentiation and low cost, breaking free from the traditional value-cost trade-off.

This approach contrasts with conventional "red ocean" strategies that compete in existing markets. Blue Ocean Strategy provides tools like the strategy canvas and four actions framework to help companies discover new demand and redefine industry boundaries.

Blue Ocean Strategy Fundamentals

Value Innovation and Strategy Canvas

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• Value innovation involves creating a leap in value for buyers and the company, opening up new and uncontested market space
• Value innovation occurs only when companies align innovation with utility, price, and cost positions
• The strategy canvas is an analytic framework and diagnostic tool for building a compelling blue ocean strategy
  • Captures the current state of play in the known market space (industry or strategic group)
  • Allows you to understand where the competition is currently investing and the factors the industry currently competes on in products, services, and delivery
  • The horizontal axis captures the range of factors the industry competes on and invests in
  • The vertical axis captures the offering level that buyers receive across all these key competing factors

Red Ocean vs. Blue Ocean Strategy

• Red oceans represent all the industries in existence today, the known market space where industry boundaries are defined and accepted, and the competitive rules of the game are known
  • In red oceans, companies try to outperform their rivals to grab a greater share of existing demand
  • As the market space gets crowded, prospects for profits and growth are reduced (mobile phone industry)
• Blue oceans denote all the industries not in existence today, the unknown market space, untainted by competition
  • In blue oceans, demand is created rather than fought over
  • There is ample opportunity for growth that is both profitable and rapid (Cirque du Soleil)
  • Competition is irrelevant because the rules of the game are waiting to be set

Tools for Creating Blue Oceans

Four Actions Framework and Eliminate-Reduce-Raise-Create Grid

• The four actions framework poses four key questions to challenge an industry's strategic logic and business model:
  1. Which of the factors that the industry takes for granted should be eliminated?
  2. Which factors should be reduced well below the industry's standard?
  3. Which factors should be raised well above the industry's standard?
  4. Which factors should be created that the industry has never offered?
• The eliminate-reduce-raise-create grid pushes companies to simultaneously pursue differentiation and low cost to break the value-cost trade-off
  • The grid encourages companies to act on all four to create a new value curve (strategy canvas)
  • By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the four actions framework breaks companies out of the "compete within" and "value-cost trade-off" mentalities (Yellow Tail wine)

Noncustomers and Creating New Demand

• To maximize the size of their blue oceans, companies need to look to noncustomers as well as existing customers
• There are three tiers of noncustomers that can be transformed into customers:
  1. "Soon-to-be" noncustomers who are on the edge of your market waiting to jump ship
  2. "Refusing" noncustomers who consciously choose against your market
  3. "Unexplored" noncustomers who are in markets distant from yours
• By looking across these three tiers of noncustomers and focusing on key commonalities, not differences, companies can understand how to pull them into their new market and expand the blue ocean (Nintendo Wii appealing to moms and seniors)

Implementing Blue Ocean Strategy

Tipping Point Leadership and Overcoming Organizational Hurdles

• Tipping point leadership allows leaders to overcome the key organizational hurdles that block the implementation of blue ocean strategy
  • Cognitive hurdle: Waking employees up to the need for a strategic shift
    • Get managers out of the office to see how people use products and services (Bratton riding NYC subways)
  • Resource hurdle: Freeing up resources for the strategic shift
    • Assess which activities consume the greatest amount of resources yet have the potential to unlock the greatest savings (Southwest Airlines serving no meals)
  • Motivational hurdle: Motivating key players to move fast and persevere
    • Redistribute resources to "kingpins", the key influencers in the organization
    • Shine a spotlight on actions that exemplify the new strategy (Bratton's broken windows)
  • Political hurdle: Dealing with powerful vested interests that resist the impending strategic shift
    • Leverage your kingpins to build a coalition that has the power to knock down political roadblocks
    • Isolate those who resist the new strategy (Tipping Point #3 in Bratton's turnaround of the NYPD)