Blue Ocean Strategy

What is Blue Ocean Strategy ?


Blue Ocean Strategy is a business strategy which is aimed at establishing new marketplaces for the organisation at the stage of product development. It is designed in a way to stimulate organizations towards the development of new and uncontested markets for their products. A majority of strategic models are centered around creating competitive advantage for the organizations with the central theme of how to beat the market competition. Contrary to such models, the blue ocean strategy attempts to make the competition irrelevant by establishing 'blue ocean' opportunities in the marketplace, rather than focusing upon beating the market rivals.

Blue oceans can be considered as uncontested marketplaces where the main focus is on satisfying the new demands of customers. Contrary to this, the concept of 'red oceans' signifies severely contested marketplaces, where organizations are in constant battle for market shares and sales.

The blue ocean strategy affects the focus of strategy development and promotes innovation. It forces the organizations to go beyond their horizons of what their immediate competitors are doing and focus upon new opportunities having potential of creating new value for the customers. Thus, according to blue ocean strategy, managers must try to develop new offerings through innovation and new concepts,. thereby creating new marketplaces, instead of trying to contest with competitors for the existing market.

Blue ocean strategies are different from other strategies as they do not consider the practices of any existing industry as benchmark. Conventional strategy tends to suggest that an organisation should either try to provide greater value at a greater cost (differentiation approach) or provide the same product or service at a lower cost (cost leadership approach). These assumptions were opposed by Kim and Mauborgne as they suggested that organizations should strive for uncontested markets, create new demands and attempt to provide superior value to customers by reducing costs.

Principles of Blue Ocean Strategy


The six main principles guide companies through the formulation and execution of blue ocean strategy in a systematic, risk-minimizing manner. Blue ocean strategy can be formulated on the basis of following six main principles :

Six Principles of Blue Ocean Strategy

Formulation Principles Attenuates

Risk Factor of each Principle

Recreate market boundaries

⇩ Search risk

Focus on the big picture, not the numbers

⇩ Planning risk

Reach beyond existing demand

⇩ Scale risk

Get the strategic sequence right

⇩ Business model risk

Execution Principles Attenuates

Risk Factor of each Principle

Overcome key organizational hurdles

⇩ Organizational risk

Convert execution into strategy

⇩ Management risk

The first four principles focus upon the blue ocean strategy ideation and formulation, while the last two. principles are based on the execution of the blue ocean strategy. These are as follows :

1) Recreate Market Boundaries : 
Recreating market boundaries means to identify new avenues through which the managers can steadily develop untapped marketplaces across various industrial dimensions so as to minimize the search risk. This is based on a six paths framework.

2) Focus on the Big Picture, not the Numbers : 
Conventional strategic thinking is often criticized as being incremental in nature and for the kind of improvements that it seeks to create. Very often it is relegated to a number crunching exercise. Using a four step approach, the blue ocean strategy looks at the larger picture in front of the organisation with the objective of identifying uncontested spaces in the market where blue ocean strategies can be conceptualized and implemented.

3) Reach beyond Existing Demand : 
According to this principle, the organizations must challenge the traditional business practices of focusing upon segmenting the consumer markets and try to customize their product offerings and services to meet the needs of the identified segments. They need to aggregate common traits of customers instead of looking for differences. This also eliminates the scale risk.

4) Get the Strategic Sequence Right : 
The fourth principle of the blue ocean strategy suggests a sequence that the organisation should employ so that the devised business model is sustainable and profitable. This sequence is as follows :
  • Utility
  • Price
  • Cost
  • Adoption requirements

5) Overcome Key Organizational Hurdles : 
With the help of tipping point leadership, managers know how the organisation can be mobilized to overcome key managerial obstacles that usually restrict the implementation of blue ocean strategy. This reduces the organizational risks and also allows the organisation to overcome various political, logical and motivational issues confronting it.

6) Build Execution into Strategy : 
This principle aims at that part of the management risk which is concerned with the motivations and attitudes of the people. It suggests that the organizations must make attempts to motivate its employees for participating in the execution of the blue ocean strategy. This can be done by integrating execution into strategy formulation.

Difference Between Blue Ocean and Red Ocean Strategies 


Red ocean strategy means to compete in the existing market space, beat the competition through some unique offers, win more share of existing demand, and reach customers through attractive value cost trade-off. The red color signifies the bloody war (or intense competition) that exists in the regular markets between different market players. Under 'red ocean' circumstances, companies fight for the same market share and try to outlast each other by adopting different market strategies such as giving more discounts and schemes, spending more on advertising, etc. As a result, the profits for all the market players are reduced. In a nutshell, red ocean strategy is focused at snatching market share from the competitors and driving them out of the market.

red ocean strategy and blue ocean strategy

On the other hand, the concept of 'blue ocean' is very large and deep. Under blue ocean situations, there is no competition as no company is focusing on the existing market. There are no market segments and there is complete freedom for the new entrants to enter. The objective of blue ocean strategy is to create new demand by focusing on innovation, thereby creating greater value propositions for the customer. The distinction between red ocean strategy and blue ocean strategy is as follows :

No.

Red Ocean Strategy

Blue Ocean Strategy

1

Companies compete with each other in the existing marketplace.

Companies tend to create new and uncontested marketplace.

2

Defeating the competition.

Creating situations where the competition is irrelevant.

3

Exploiting the existing consumer demands.

Creating and capturing new consumer demands.

4

Making the trade-off between cost and value.

Breaking the trade-off between cost and value.

5

The firms activities are centered on achieving either differentiation or low cost.

The firms activities are centered around innovation and thereby creation of superior value propositions.

Strategy Canvas and Value Curves


The strategic structure of an organisation is carved by the blue ocean strategy so as to generate new demand and high growth. For creating as well as executing such a strategy, various analytical frameworks and tools are used. Strategy canvas is one of the basic tools used for this purpose.

The value curve or snake plot is the fundamental element of value curve. It is a graphical representation of the existing state of play of the company and its competitors in the recognized marketplace. It helps in understanding where the competitors are targeting, critical success factors in the industry, various service and delivery norms, and key customer expectations from distinct product offerings in the marketplace.

The blue ocean strategy canvas helps the organisation to re establish the value perceptions of its customers by shifting the focus from customers to non-customers of the industry and from competitors to alternatives so as to build a cost-value trade-off.

How to Read a Value Curve ?


The horizontal axis of the strategy canvas captures the various critical success factors in which the industry invests and upon which it competes. On the other hand, the vertical axis is a rating scale responsible for capturing the current state of critical success factors.

With the help of this diagnostic tool, the organisation can recognize the characteristics of current range of products and services. The intrinsic factors that reveal the investment areas of competitors and influence customer values are mapped: The horizontal axis recognizes every factor whereas the vertical axis depicts the value received by the customers. The graphical representation of the resultant value curve reflects the relative performance of the company for each factor. The process helps in recognizing the differences in the companies and how they are able to differentiate from each other. In the next stage, the strategists try to rebuild the value constructs and shift the focus from existing completion to alternate offerings for non customers. This often includes re-outlining the industry's intrinsic problems and finding new solution which are of greater importance to the non-customers.

An example of wineries in the United States is taken to explain value curve. In this strategy canvas, the value curves for budget wines and premium wines converge regardless of having many competitors. In comparison to budget wines, premium wines have high prices and high degree of offering across all critical success factors, which forms a classic case of cost vs differentiation strategy. The value curves of both premium and budget wines have a similar shape with the only difference in the degree of product offering.

Offering little more at lower cost, or bench marking other firms does not create a blue ocean opportunity. For that purpose, the company needs to create a new value curve which is entirely different from that of its competitors.

Value Curve

Four Actions Framework


After the strategy canvas is mapped, the next step is to reconstruct the element of customer value and add new elements so that a new value curve is created. For building a new value curve and breaking the trade off between cost and differentiation, the organisation needs to ask four questions : 
  1. Which of the factors that are taken for granted by the industry can be removed? (Which factors no more add value or distract from value, or are taken for granted by the industry?) 
  2. Which of the factors can be brought down below the industry standard? (Which of the products/services have been over designed to match and beat the competition thereby resulting in cost addition for no profit?) 
  3. Which factors can be raised above the industry standard? (What compromises have been made by the customers when forced by the industry?) 
  4. What new factors should be developed by the industry? (What are the new avenues through which value can be created for customers?) 
First two questions aim at lowering the level of costs while the remaining questions aim at increasing customer value.

This tool stimulates the strategists to act on the result of complying the strategy canvas and four actions framework. Kim and Mauborgne say that by assessing a grid describing the various factors which can be moved, created or eliminated, managers tend to involve in the process of developing a new value curve and instantaneously realize the advantages of newly formed strategic focus.

Kim and Mauborgne have given a framework which is useful for identifying new and unoccupied marketplaces. They specifically mention the example of Cirque de Soleil using blue ocean strategy to create value under a declining industry. Cirque de Soleil identified that many of the factors that were considered important were actually not required and actually costly in a circus. Traditionally, circuses usually lend to attract a small audience by offering same programs at higher prices. Another example is Casella Wines which has created a blue ocean strategy in the US by focusing on: 
  1. Easy drinking
  2. Ease of selection
  3. Fun and adventure
It has eliminated and reduced many features for identifying a new segment of its wine among beer and cocktail drinkers. Consequently, it has 1 different value carve in comparison to its competitors.

Four Actions Framework

Blue Ocean Strategy 4 Actions Framework : Eliminate-Reduce-Raise-Create Grid


This grid is an additional tool to the four action framework. Along with asking organizations to compile the four questions, it also compels them to take necessary actions for building new value curve. The grid for a wine manufacturer is shown below :

Eliminate
Raise
1) Enological terminology and distinction
2) Aging qualities
3) Above-the-line marketing as these are expensive
1) Price versus budget wines
2) Involvement in the retail store environment
 
Reduce
Create
1) Complexity in product
2) Excessive Range
3) Vineyard prestige
1) Easy drinking
2) Easy to choose
3) Image of fun

By adopting this grid, the organizations can gain following advantages or Importance of Four Actions Framework :
  • It forces them to adopt both differentiation and low costs approach and thus breaks the trade-off between value and cost.
  • It identifies the companies which are constantly engaged in designing new and extravagant features in products and as a result increase their cost structures.
  • It is easily understood by the entire organisation and thus brings about organizational congruence. 
  • Since completing the grid is a challenging activity, it forces the organisation to look at the various factors upon which the industry competes. This makes them to discover a set of inherent assumptions on which they have been operating so far.