Blue Ocean Strategy Primer

A Primer to Blue Ocean Strategy - 1 -
Blue Ocean Strategy | Primer
The soul never thinks without an image
Aristotle

Introduction ⎥ Key concepts underlying blue ocean strategies
THE DIFFERENCE BETWEEN RED AND BLUE OCEANS
In red oceans, industry boundaries are defined and accepted. The
competitive rules of the game are known. Companies try to
outperform their rivals in order to increase their share of the existing
demand.
As the market space gets crowded, profit and growth opportunities
are reduced. Products become commodities, and cutthroat
competition turns the ocean bloody, i.e. red.
Blue oceans are defined by untapped market space, demand
creation, and the opportunity for highly profitable growth. Some blue
oceans are created well beyond existing industry boundaries. Most
are created within red oceans, by expanding industry boundaries.
In blue oceans, competition is irrelevant because the rules of the
game are yet to be set as we create a new market space.
Red oceans will always matter. Traditional competitive strategy will
continue to be a point of reference for growing and maintaining
revenues at acceptable profit levels. But once supply exceeds
demand, competing for a share of an existing market will not be
sufficient to sustain high performance. This is when we also need to
go beyond competing. This is when, in order to seize new profit and
growth opportunities, we also need to create blue oceans.
Each ocean has its own approach to strategy. Red oceans call for
building a defensible position within an existing industry. They focus
on value creation, i.e. an incremental approach to delivering value to
the existing customers of an industry. Blue oceans follow a different
strategic logic called value innovation.
VALUE INNOVATION: THE HEART OF BLUE OCEAN STRATEGY
Value without innovation tends to focus on value creation on an
incremental scale, i.e. something that improves value but is not
sufficient to make us really stand out in the marketplace.
Innovation without value tends to be technology-driven, market
pioneering, or futuristic, often shooting beyond what buyers are ready
to accept and pay for.
Value innovation occurs only if we align innovation with utility, price,
and cost positions. The focus here is not time-to-market, bleeding-
edge technology or best practices. It is the ambition to break one of
the most commonly accepted dogmas of competition-based strategy:
the value-cost trade-off.
It is conventionally believed that companies can either create greater
value to customers at a higher cost, or create reasonable value at a
lower cost. Here strategy is seen as making a choice between
differentiation and cost. In contrast, to create blue oceans, we need to
pursue differentiation and low cost simultaneously, by looking within
and beyond our industry boundaries and redefining a market
altogether.
Instead of focusing on beating the competition, value innovation
focuses on making the competition irrelevant by creating a leap in
value for buyers and our company, thereby opening up new and
uncontested market space. The objective here is not to increase our
competitiveness in the market as we know it. Rather, it is to create a
whole new market where the rules of the games are yet to be
created, by us!
In red oceans, our efforts are focused on the conventional logic that we must outpace the competition with a better solution to a
given problem. Blue ocean strategy invites us to redefine the problem itself. It does so by breaking the value-cost trade-off in view
of creating new uncontested market places. Places where no one has been and where we would be the one defining the rules!
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1. Reconstruct market boundaries
The six paths framework challenges the fundamental assumptions underlying many companies’ strategies. It encourages to look at
alternative industries, strategic groups, chain of buyers, complementary offerings, functional and emotional appeal, and time.
Focus on the purpose of a product or service and
consider alternatives, not substitutes.
Substitutes are those that have a different form but offer
the same functionality.
Alternatives are those that have different functions and
forms but fulfill the same purpose.
• What are the alternative industries to our
industry?
• How do customers make trade-offs across them?
• What makes them jump from an industry to
another?
Focus on the key factors that lead buyers to trade across
alternative industries and eliminate or reduce everything
else.
LOOK ACROSS
ALTERNATIVE INDUSTRIES
1
In most industries you can capture the fundamental
differences among players within a small number of
strategic groups (i.e. group of companies pursuing a
similar strategy).
As a minimum, you can generally rank them on the basis
of price and performance.
When looking for a blue ocean, the key is to break out of
a strategic group and understand which factors drive
customers’ decisions to trade up or down among groups.
• What are the strategic groups in our industry?
• Why do customers trade up for the higher group?
• Why do they trade down for the lower one?
LOOK ACROSS STRATEGIC GROUPS
WITHIN INDUSTRIES
2
We should always consider the multiple players directly or
indirectly involved in the buying decision: the purchasers
(who pay for the product or service); the users; and the
influencers. Although these groups may overlap, they
often differ and hold different definitions of value.
Challenging our industry’s conventional beliefs about
which buyer group should be targeted can lead to the
discovery of new, locked values. For this, we should look
across buyer groups to gain new insight and draft new
value curves.
• What is the chain of buyers in our industry?
• Which buyer group does our industry focus on?
• If we shifted the attention to another buyer group
of our industry, how could we unlock new value?
LOOK ACROSS
THE CHAIN OF BUYERS
3
The total solution buyers seek when they choose a
product or service may be composed of hidden
complementary products and services.
A way to define the total solution is to explore what
happens before, during and after our product or service is
used.
We should thus ask ourselves:
• What is the context in which our product or
service is used?
• What happens before, during and after?
• Can we identify the pain points?
• Can we eliminate these pain points through a
complementary product or service offering?
LOOK ACROSS COMPLEMENTARY
PRODUCT & SERVICE OFFERINGS
4
Competition in an industry tends to converge not only on
the scope of product and services, but also in terms of
functional /rational and feeling/emotional appeal. Yet the
appeal of most products or services is rarely one or the
other.
• Does our industry compete on functionality or on
emotional appeal?
• If we compete on emotional appeal, what elements
can we strip out to make it functional?
• If we compete on functionality, what elements can
be added to make it emotional?
LOOK ACROSS FUNCTIONAL OR
EMOTIONAL APPEAL TO BUYERS
5
Blue ocean strategies rarely come out from projecting
industry trends. Instead, they arise from business insights
into how trends will change value to customers and
impact the company’s business model.
The idea is to look across time: the value a market
delivers today, vs. the value it might deliver tomorrow.
When looking at trends, we must focus on those that are
decisive to our business, that are irreversible and have a
clear trajectory. Having identified these trends, we can
look across time at what the market would look like if they
were taken to their logical conclusion. Working back, we
can identify what must be changed today to unlock a new
blue ocean.
LOOK ACROSS TIME6
SIX PATHS TO RECONSTRUCT MARKET BOUNDARIES, BREAK FROM COMPETITION AND CREATE BLUE OCEANS
Blue ocean strategy principles ⎥ Strategy Formulation

ADOPTION
Identify the bandwidth
that captures the largest
group of target buyers
while making it difficult
for our competitors to
imitate us.
Stick to to the logic that
our strategic price drives
our target profit that
drives our target cost.
Hit target costing via
streamlining, partnering
and/or pricing
innovation.
Educate the fearful:
employees, business
partners and public
opinion at large. Openly
discuss to solve issues
upfront and get
maximum buy in.
Look at the six stages of
the buyer’s experience
cycle and identify blocks
to buyer’s utility. Identify
the value proposition
that removes the biggest
blocks allowing us to
turn non-customers into
customers.
4. Get the strategic sequence right
We should not let costs drive prices. Nor should we scale down utility because high costs block our ability to profit at a strategic
price that is easily accessible to the mass of target buyers. The right sequence for creating value innovation is (1) buyer utility, (2)
price, (3) profit, (4) costs, and (5) adoption.
A
COMMERCIALL
Y VIABLE BLUE
OCEAN IDEA
Does our offering unlock exceptional
utility?
Is there a compelling reason for the
mass of people to buy it?
Is our offering priced to attract the
mass of target buyers so that they
have a compelling ability to pay for it?
Can we produce our offering at the
target cost and still earn a healthy
profit margin?
Can we profit at the price easily
accessible to the mass of target
buyers?
What are the adoption hurdles in
actualizing our business idea?
Are we addressing them up front?
Create a leap in Net Buyer Value
Creation of Value Innovation and capturing of healthy profits
No, rethink No, rethink No, rethink
COSTPRICEBUYER UTILITY 321 4
Each step is further detailed in the pages hereafter.

4. Get the strategic sequence right ⎥ 3. TARGET COST
Can we produce our offering at the target cost and still earn a healthy profit margin? Can we profit at the price easily accessible to
the mass of target buyers?
STRATEGIC
PRICE
TARGET
PROFIT
STREAMLINING
AND COST
INNOVATIONS
PARTNERING
PRICING
INNOVATION
If you are to arrive at a cost structure that is
both profitable and hard for potential followers
to match, you must tackle the price equation
as price-minus costing, not cost-plus pricing.
Three levers to hit
the cost target￭ Can the service’s or product’s
raw materials be replaced by
unconventional, less expensive
ones?
￭ Can high-cost, low-value added
activities in our value chain be
significantly eliminated, reduced
or outsourced?
￭ Can the physical location of our
product or service be shifted from
prime real estate locations to
lower-cost locations?
￭ Can we truncate the number of
parts of steps used in production
by shifting the way things are
made?
￭ Can we digitize activities to
reduce costs?
￭ In bringing a new product or
service to market, many
companies mistakenly try to carry
out all the production and
distribution activities themselves.
￭ Partnering provides a way for
companies to secure needed
capabilities fast and effectively
while dropping their cost
structure. It allows a company to
leverage other companies’
expertise and economies of
scale.
￭ Partnering includes closing gaps
in capabilities through making
small acquisitions when doing so
is faster and cheaper, providing
access to expertise that has
already been mastered.
1 2
3
￭ If streamlining and cost innovation and/or partnering does
not bring us to the desired target cost, is changing the
pricing model of the industry a viable alternative?
￭ The aim is not to compromise on the strategic price, but to
hit the target through a new price model, e.g.
renting/leasing vs. selling, equity interest in the customer’s
business, etc.
TARGET
COST

6. Build execution into strategy
Our company will (continue to) stand apart as a great and consistent executor when our people embrace our new strategy with their
minds and hearts. When of their own accord they will be willing to go beyond compulsory execution to voluntary cooperation. When
trust and commitment will align attitudes and behavior to the spirit of our strategy, not to its letter. Adopting a fair process to strategy
execution will help us achieve this goal deep into all the ranks of our company, across teams and departments.
Emotional recognition:
Our colleagues want to be appreciated for
their value, for their individual worth,
regardless of the hierarchical level. They
are not “resources”, “labor factor” or
“personnel”. They are human beings who
want to and should be treated with full
respect and dignity.
Intellectual recognition:
Our colleagues may have brilliant ideas
and new points of view. We must
leverage their willingness to be consulted
and show that their perspective is
appreciated and given thoughtful
reflection.
INTELLECTUAL AND
EMOTIONAL RECOGNITION
TRUST
& COMMITMENT
VOLUNTARY COOPERATION
IN STRATEGY EXECUTION
EXCEED EXPECTATIONS
Building such an intrinsic and
extrinsic motivation within our
colleagues can help us pull
together our collective wisdom and
generate brilliant new ideas,
processes and tricks to make us
achieve our goals. People will be
almost in an auto-pilot mode
because they will understand what
we are aiming for, they are
emotionally bound to the result,
they are being valued for their
intelligence and skills and trust that
this is done in a clear and equal
way in the best interest of all of us.
Potentially, such a momentum can
be further fuelled by a
transcendent motivation, one that
goes beyond the goals of the
individual and of our company. For
example, a goal that is linked to a
humanitarian cause linked to our
project, to the well being of
customers beyond our products
and services, or, to the extent our
products and services allow us to,
to the improvement of the society
we live in.
FAIR PROCESS: ENGAGEMENT, EXPLANATION, EXPECTATION CLARITY
ENGAGEMENT: We make sure that we involve our colleagues in the strategic decisions that affect them. We do so by asking for their input
and by allowing them to refute the merits of one another’s ideas and assumptions. Our teams show respect for individuals and for their ideas;
they encourage refutation in order to sharpen our thinking and leverage collective wisdom.
EXPLANATION: We want every employee involved and affected by our strategy to understand why final strategic decisions are made as they
are. By sharing the thinking underlying our decisions, our colleagues will be confident that we have considered all options and opinions, and
that decisions have been made impartially in the best interest of the company.
EXPECTATION CLARITY: Once our strategy is set, we must clearly set the new rules of the game. Goals, targets and milestones must be clearly
communicated. So must responsibilities and rewards. As a result, political jockeying and favoritism should be killed, letting our people focus
on executing strategy rapidly.
Blue ocean strategy principles ⎥ Strategy Implementation
Our employees care as much about the justice of the process
through which our outcome will be produced as they do about the outcome itself!
It is only through actions, not words, that
we will gain the trust and commitment of
all involved parties. We must walk our talk
and make others walk their talk.
Indeed, we must create an environment
of trust towards those leading the new
initiative as well as among those
participating to it and being affected by it,
directly or indirectly.
Recognition and feedback will allow us to
build a strong sense of commitment.
Ideally it will drive ourselves and our
colleagues to override personal self-
interest.
When you and I are being considered,
valued and feeling recognized, we want
to share. Recognizing our intellectual
worth inspires us and makes us want to
impress and confirm the expectations of
those who trust us and in whom we trust.
Additionally, if there is an emotional
component to the recognition, we feel
emotionally tied to the strategy and the
end result. We are much more willing to
go the extra mile and give all we’ve got.
Open & collaborative strategic planning Positive and optimistic attitude Proactive and determined behavior

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