Marketing

Blue Ocean Strategy

Lab7X Business & IT Consulting

The concept of Blue/Red Ocean Strategy is quite simple to understand and is so important. The Red Ocean is where every industry is today. There is a defined market, defined competitors and a typical way to run a business in any specific industry. The researchers called this the Red Ocean, similar to a shark infested ocean where the sharks are fighting each other for the same prey.
The Blue Ocean, on the other hand, is calm, smooth, with lots of food and little or no competition. This is where everyone would like to be and it is possible for you to have a Blue Ocean.
Consider some of the well-known Blue Oceans created by Southwest Airlines, Nintendo (Wii), NTT DoCoMo Japan, KPN Netherlands, and many others. These organizations created their Blue Ocean and so can you.

Let us understand in high-level the difference in the following comparison table

BLUE OCEAN STRATEGY Focus on non-customers	RED OCEAN STRATEGY Focus on current-customers
Create uncontested markets to serve	Compete in existing markets
Make the competition irrelevant	Beat the competition
Create and capture new demand	Exploit existing demand
Break the value-cost trade-off	Make the value-cost trade-off
Align the whole system of a firm’s activities in pursuit of differentiation AND low-cost	Align the whole system of a firm’s activities with its strategic choice of differentiation OR low-cost

Strategy Canvas case study

YouTube Canvas

Air Asia Canvas

So just what does this mean?
Let’s take the differences one at a time.

Focus on current-customers versus focus on non-customers: In most industries there is little effort to attract new buyers to the industry, thus the focus on the customers currently purchasing in that industry. In the Blue Ocean, there is a focus on trying to increase the size of the industry by attracting people who have never purchased in that industry.

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. For someone to win, someone must lose.

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. Take Cirque du Soleil, for example. There have been about 150 companies trying to compete with them, everyone went out of business as they didn’t have the same level of success.

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. The whole idea of Blue Ocean Strategy is to have high-value at low cost. If you are doing that, how can anyone compete with you?

Exploit existing demand vs. create and capture new demand. You will be creating such high-value that you will be attracting customers that never before would have considered entering the market as in the case of Nintendo’s Wii that appealed to families and seniors, and Southwest Airlines appealed to auto travelers.

Make the value-cost trade off vs. break the value cost trade off. It was understood that most Competitive Strategy concepts could not have both value and low cost. Kim and Mauborgne have broken that concept and said that you can have both high-value and low-cost. They have developed the tools for doing that. In fact, if you don’t break the value cost trade off, competitors will easily duplicate what you are doing and the ocean will once again become very Red.

Align the organization with differentiation OR low cost vs aligning the organization with differentiation AND low cost. You must strip away unnecessary costs. The entire organization must be aligned this way; anything that doesn’t create or contribute to value, gets eliminated or reduced. It is just the most efficient way to run an organization whether in a blue or red ocean.

Blue Ocean Strategy (BOS) Management Tools

The proven BOS management tools, frameworks and methodologies that were developed by Kim and Mauborgne will guide you through the step-by-step process of creating uncontested market space:

Value Innovation: it is the cornerstone of Blue Ocean strategy; must focus on making competition irrelevant as opposed to focusing on beating the competition. You can make the competition irrelevant by creating a leap in value for buyers and your firm thereby opening up new and uncontested market space. Those who seek to create blue oceans should simultaneously pursue differentiation (by raising and creating elements the industry has never offered) AND low-cost (by eliminating and reducing the factors an industry competes on).

Strategy Canvas (Drawing the value curve): A tool for building a compelling blue ocean strategy; It captures the current state of play in the known market space; it allow you to understand where the competition is investing; the factors the industry currently competes on in product, service and delivery; what customers receive from existing competitive offerings on the market.

Four Actions Framework: Eliminate Raise Reduce and Create (ERRC).

Which factors that the industry takes for granted should be eliminated?
Which factors should be reduced well below the industry’s standard?
Which factors should be raised well above the industry’s standard?
Which factors should be created that the industry has never offered?

The Four Hurdles to Execution:
overcome key organizational hurdles

Cognitive Hurdle (status quo)
Resources Hurdle (redistribute resources )
Motivational Hurdle ( change management)
Political Hurdle (secure buy-in in your top-management team)

Sequence of Blue Ocean Strategy:

Buyer-utility Map
Price (accessible by mass of buyers)
Cost (cost target to profit at strategic price)
Adoption (what are the hurdles)
A commercially Viable Blue Idea

Transform non-customers into customers

There are three tiers of non-customers that can be transformed into customers. They differ in their relative distance from your market.

The first tier: is closest to your market. They sit on the edge of the market. They are buyers who minimally purchase an industry’s offering out of necessity but are mentally non-customers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself; always in search of better solutions.
The second tier: is buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them. These are refusing non-customers, people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. Their needs are either dealt with by other means or ignored.
The third tier of non-customers: is farthest from your market. They are non-customers who have never thought of your market’s offerings as an option. Typically, these unexplored non-customers have not been targeted or thought of as potential customers by any player in the industry. That’s because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets. Just think of the long-held assumption that tooth whitening was a service provided exclusively by dentists and not by oral care consumer product companies. When they did, they found an ocean of latent demand waiting to be tapped; they also found that they had the capability to deliver safe, high-quality, low-cost tooth whitening solutions, and the market exploded.

Minimizing Risk and Maximizing Opportunity (Blue Ocean Six Principles)

So is blue ocean strategy inherently more risky? Any strategy, whether red or blue, involves risk. But when it comes to venturing beyond the red ocean to create and capture blue oceans, there are six key risks companies will face: Search risk Planning, risk Scope, risk Business model, risk Organizational risk, and Management risk.

The first four risks revolve around strategy formulation and the latter two around strategy execution. Each of the six principles in Blue Ocean Strategy expressly addresses how to mitigate each of these risks.

The following six principles aim to make the formulation and execution of blue ocean strategy as systematic and actionable as competing in the red ocean of existing market space. In summary, in creating blue oceans, they guide companies in a way that is both opportunity maximizing yet risk minimizing.

The first blue ocean principle Reconstruct market boundaries Addresses the search risk of how to successfully out of the haystack of possibilities that exist, commercially Compelling blue ocean opportunities.	The fourth principle Get the strategic sequence right Addresses how to build a robust business model to ensure that you make a healthy profit on your blue ocean idea thereby mitigating business model risk.
The second principle Focus on the big picture; not the numbers Tackles how to mitigate the planning risk of investing lots of effort and lots of time but generating only red ocean type moves.	The fifth principle Overcome key organizational hurdles Addresses how to knock over organizational hurdles in executing a blue ocean strategy addressing organizational risk.
The third principle Reach beyond existing demand Addresses the scope risk of aggregating the greatest demand for the new offering.	The sixth principle Build execution into strategy Tackles how to motivate people to execute blue ocean strategy to the best of their abilities, overcoming management risk.