Blue Ocean Strategy

Copyright ©2017 Pearson Education, Inc.

9-1
Blue Ocean Strategy

© JOHN ABBOTT © JOHN ABBOTT

Prof Chan Kim Prof Renee

Mauborgne
 The Blue Ocean Strategy
In 2004, W Chan Kim and Renee Mauborgne suggested
the Blue Ocean Strategy (BOS), a systematic
approach of making the competition irrelevant and
this was different from other approaches.

They proposed that tomorrow’s leading companies

succeed not by battling competitors, but by creating
‘blue oceans’ of uncontested market space where no
competitor exist (at least for a short while).
To win in the future, companies must stop
competing with each other.
 Red Ocean
Compete in crowded markets

Red Oceans represent all

industries in existence today.

They have defined rules,

competitors, and market
boundaries.

Key words might include

competition, price wars,
market share,
commoditization,
benchmarking, strategic
positioning, value add.
 Blue Ocean
Create and capture new market space

This is undefined market

space, otherwise known as
OPPORTUNITY.

Key words might be value

innovation, focus,
differentiation, creation of
demand, new marketplace
Two worlds …
Red Ocean
Compete in
crowded
markets

Blue Ocean
Create and
capture new
market space

Most blue oceans are created from red ocean

companies expanding industry boundaries.
 The premise is simple:

To win in the future, companies must stop

competing with each other.

The only way to beat the competition is to

stop trying to beat the competition.
 Red Oceans vs. Blue Oceans
Red oceans
• Industry boundaries defined and accepted
• Competitive rules of game known
• Companies try to outperform rivals; cutthroat competition
• As market space gets crowded, prospects for profit and growth
reduced
• Products become commodities
• Red ocean strategy is a market-competing strategy
Blue oceans
• Undefined market space, demand creation, opportunity for highly profitable
growth
• Most are created from within red oceans by expanding existing
industry boundaries
• Rules of game waiting to be set
• Competition irrelevant
• Blue ocean strategy is a market-creating strategy
 The Blue Ocean Strategy
Instead of focusing on beating the competition, you focus on
making it irrelevant by creating a leap in value for buyers and
creating uncontested market space.

There are two ways to create blue oceans:

1. To launch a completely new industry as eBay did
with online auctions
2. To create a blue ocean from within an industry
(red ocean) when it expands the boundaries of an
existing industry
The focus is on both differentiation and low cost to provide
value to both customers and the organization
The Blue Ocean Strategy
Other instances of Blue Ocean Strategy

Dell's computers (1990s) It created a radically different

retail and delivery system
(i.e., direct sales at low cost,
customisable machines, and
about 4 days delivery time)
with respect to competitors

It attracted those who had not

bought computers before
because of ease of access,
customisation, and low price
 Example TESLA
Tesla Motors - World's first electric car that can out-perform
some of the world's fastest cars. There is no competition for
Tesla in the market and this company is reaping the benefits.
Value innovation is the “new” strategic
logic behind Blue Ocean Strategy.

Instead of focussing on beating the competition,

you focus on making it irrelevant by creating a
leap in value for buyers and creating
uncontested market space.
Value innovation only occurs when organizations
have aligned innovation with utility, price and
costs.

The market must be ready to accept the product,

meaning that timing is key.

The focus is on both differentiation and low cost to

provide value to both customers and the
organization.
Graph of Value Innovation
 Principles of Blue Ocean Strategies
 It is presented in a chart form termed as strategic
canvas.
 This chart or canvas is made up of:
– An x-axis which has the various factors (both external and internal)
that are considered as significant for the company.
– A y-axis that indicates the values of the customers on the factors
identified in the x-axis.
 Principles of Blue Ocean
Strategies (cont.)
For example, in Figure 1,
seven factors were
considered important:
1. Price
2. Quality
3. Packaging and advertising
4. High-tech science
5. Glamorous image
6. Halal ingredient
7. Halal status
Figure 1 The BOS strategic canvas
 Four Actions Framework: Key to Value Curve
Reduce
The key to discovering a What factors should
new value curve lies in be reduced well
answering four basic below the industry
questions standard?

Eliminate Create/Add
Creating
What factors that the What factors that the
new markets:
industry has taken for industry has never
A new value
granted should be offered should be
curve
eliminated? created or added?

Raise
What factors should
be raised well above
the industry
Cirque du Soleil example
standard?
 Principles of Blue Ocean
Strategies (cont.)
BOS only have four basic strategies:
1. Eliminate: Those that are considered as of very low value
and can do without to the eyes of the consumers and
which the company would also love to get rid of.
2. Reduce: Those that are of relatively low value too but
which the consumers would still want them or difficult to
get rid of.
3. Raise: Existing factors that are valued by the customers.
4. Create: New factors that are given high value by
customers if offered but which are non-existent at the
moment; the latter is supposed to be the blue ocean factor.
 Example TESLA
Tesla Motors - World's first electric car that can out-perform
some of the world's fastest cars. There is no competition for
Tesla in the market and this company is reaping the benefits.
 Principles of Blue Ocean Strategies
The framework and tools include:
• Strategy canvas: Diagnostic and action framework
• Four actions framework: Value innovation analysis
• Eliminate-Reduce-Raise-Create grid
• Six paths framework: Market reconstruction analysis
• Four steps visual strategies: Big picture analysis
• Tier of non-customers: Demand expansion framework
BOS sequences
Buyer utility map
Buyer experience cycle
 Principles of Blue Ocean
Strategies (cont.)
To pursue a ‘blue ocean’ character,
• determine characteristics valued by
customers and those that they don’t value.
• get feedback from diverse sources.
• give a value score for each factor considered:
• Low value and costly factors are candidates for
elimination.
• High value, not yet available and yet affordable
(benefit–cost concept) are potentials for creation.
• small sampling is enough to get a pattern and
a meaningful and rational deduction.
 Strategy Canvas
BACHELOR OF
INNOVATION
™

high

low

Industry Variables
 Principles of Blue Ocean
Strategies (cont.)

Figure 8.2 BOS for a communication company

Principles of Blue Ocean
Strategies (cont.)

Figure 8.3 BOS for four private hospitals

Principles of Blue Ocean
Strategies (cont.)

Figure 8.4 BOS used on two banks

 Principles of Blue Ocean
Strategies (cont.)

Figure 8.5 The four actions framework of BOS for AirAsia

 Take Aways
Red ocean strategy is a market-competing
strategy, while blue ocean strategy is a
market-creating strategy

As red oceans are becoming bloodier, we

need to create more blue oceans

“The only way to beat the competition is to

stop trying to beat the competition!”
Six Principles of Blue Ocean Strategy

1.Reconstruct market boundaries

2.Focus on the big picture, not the numbers
3.Reach beyond existing demand
4.Get the strategic sequence right
5.Overcome key organizational hurdles
6.Build execution into strategy
 Exercise
• 1. List Factors of
Competition
• 2. Top 2 or 3 in ERRC
Grid Quadrants

• Clearly define the

group of “non-
customer” that you are
going after.
Examples
 Exercise
3. Write on
Worksheet:
E left, C right
4. Draw “As Is”
5. Draw “To Be”
Examples
Tutorial
Discuss the differences between the
blue ocean strategy and the red
ocean strategy
1. Focus on current customers vs. focus on noncustomers. In most
industries - little effort to attract new buyers to the industry, thus the
focus on the customers currently purchasing in that industry. In the
BOS, there is a focus on trying to increase the size of the industry by
attracting people who have never purchased in that industry.
2. Compete in existing markets vs. Create uncontested markets to
serve. Existing markets are all the customers doing business in the
industry right now, whether they are doing business with you or your
competitors. If someone wins a customer, then it is assumed, someone
will lose a customer. In uncontested markets, there is only a winner,
you. No one else is fighting for the business because either they don’t
know about it, or they don’t know how. They will try, of course, but if
you have done things the Blue Ocean Strategy way, they will not be
successful for a very long time.
3. Beat the competition vs. Make the competition irrelevant. The
competition becomes irrelevant because they cannot duplicate the
ideas in a way that is a commercial success. Idea of Blue Ocean
Strategy is to have high value at low cost.
4. Exploit existing demand vs. create and capture new demand. You will be
creating value so high that you will be attracting customers that never before
would have considered entering the market.

5. Make the value-cost tradeoff vs. break the value cost tradeoff. If you cut
your strategy teeth on Michael Porter’s Competitive Strategy concepts, you
understand that there were only two strategies to chose from, value or low cost.
It was understood that you could not have both value and low cost. Kim and
Mauborgne have broken that concept and said that you can have high value
and low cost and developed the tools to do it.

6. Align the organization with differentiation OR low cost vs. aligning the
organization with differentiation AND low cost. In the Blue Ocean strategy,
the organization have differentiation and low cost. The organization must strip
away unnecessary cost and anything that doesn’t create or contribute to value,
gets eliminated or reduced.
Explain the four actions in the BOS that
an organization can take to strengthen
their competitive advantage in a
market.
Eliminate:
Which of the factors that the industry takes for granted Factors which your
industry has long competed on
Factors of competition intended for a Red Ocean Strategy.
Reduce:
Factors which are pushing to hard to stay competitive but yield little or no gain
over the competition
High development costs but little or no profit
Raise:
Which competing factors should be raised well above the industry’s standard
Eliminate compromises your industry forces consumers to make
Create:
Which factors should be created that the industry never offered
Find a new source of value for the customer
Shift demand and/or create new demand
Shift strategic pricing in the industry