Blue ocean strategy is the idea that, instead of fighting competitors in crowded markets (“red oceans”), a company can create new, uncontested market space (“blue oceans”) by offering buyers a leap in value at a lower cost, which makes competition irrelevant.
Introduction
Blue Ocean Strategy is a concept that has been pioneered by INSEAD professors W. Chan Kim and Renée Mauborgne, first in a 2004 Harvard Business Review article and then in their 2005 book of the same name. This strategy, which is based on research into 150 strategic moves spanning more than 100 years and 30 industries, proclaims that instead of battling competitors, companies can create new markets for themselves.
In other words, rather than competing in Red Oceans, which are saturated markets where differentiation or cost competition is prevalent, companies can create Blue Oceans, or entirely new markets, for themselves through value innovation. This creates value for the entire stakeholder chain, including employees, customers and suppliers.
The key premise of the Blue Ocean strategy is that companies must unlock new demand and make the competition irrelevant instead of going down the beaten track and focusing on saturated markets.
Blue Ocean vs. Red Ocean
If we compare the Blue Ocean with the Red Ocean, we find that whereas the former denotes all the industries not in existence now, and hence potential opportunities for companies to enter and unlock demand, the latter denotes the existing industries and the known market space, which is characterized by reduced profits and growth because of saturation. This results in the commoditization of products, which means that the intense and cutthroat competition in the existing markets turns them bloody, or makes the ocean red. On the other hand, Blue Oceans represent many opportunities for growth, where competition is irrelevant because the markets are yet to be saturated.
Further, Blue Oceans represent markets where demand is large and unmet and where growth and profits can be actualized through value innovation, which is the simultaneous pursuit of differentiation and low cost.
Indeed, the cornerstone of the Blue Ocean Strategy is the creation of new playing fields, which entails opening up entirely new markets, as opposed to the Red Ocean, where the existing market conditions are such that companies must pursue either differentiation or low-cost strategies.
In other words, Blue Ocean strategy represents a game-changing idea of creating new markets and unlocking the inherent demand in these markets. Whereas Red Oceans are all about battling the competition, Blue Oceans are all about making the competition irrelevant.
| Red ocean strategy | Blue ocean strategy |
|---|---|
| Compete in existing market space | Create uncontested market space |
| Beat the competition | Make the competition irrelevant |
| Exploit existing demand | Create and capture new demand |
| Make the value-cost trade-off | Break the value-cost trade-off |
| Choose either differentiation or low cost | Pursue differentiation and low cost together |
Examples of Blue Ocean Strategy in Practice
The authors of the Blue Ocean concept insist that their strategy is different from Porter’s Five Forces, which they reckon is all about battling the sharks in the red oceans.
Further, they point to the fact that Red Ocean competition is characterized by merciless competition, whereas Blue Ocean represents the redefinition of the terms of competition, where one can have the ocean all to oneself, and therefore the waters are blue.
For instance, the authors provide the example of the Canadian circus company Cirque du Soleil, which came up with a game-changing business model in the 1980s (it was founded in 1984) and which resulted in the altering of the dynamics of the circus industry.
The Five Forces model, when applied to the circus industry, predicted that it was doomed to failure because of the high power of suppliers (star performers) and the increase in alternative forms of entertainment that were eating into the market share of the circus industry.
Further, concerns and pressure from animal rights groups and increased awareness of customers about the consequences of conventional circuses were beginning to spell trouble for the circus industry.
However, Cirque du Soleil followed what can be called a Blue Ocean strategy, wherein it replaced the animals, reduced the importance of individual stars and created an entirely new business model based on a combination of music, dance and athletic shows to innovate and create value for itself. It drew adults and corporate clients who would pay theater-level prices, while its costs were lower than a traditional circus without animals and star performers.
In other words, what this means is that instead of tweaking the existing strategies, Cirque du Soleil pursued an entirely new strategy of creating a new market altogether by redefining its core competencies (see Core Competency Theory of Strategy) and taking “Four Actions”, which are described in the next section.
Other well-known examples:
- Nintendo Wii (2006): instead of competing on graphics and processing power, Nintendo created simple motion-controlled games that attracted families and older people who had never played video games.
- [yellow tail] wine (2001): this Australian brand dropped wine jargon, aging and complexity, and created an easy-to-drink, fun wine for beer and cocktail drinkers. It became the best-selling imported wine in the US within a few years.
- Southwest Airlines: offered the speed of air travel at prices close to driving, taking customers from cars and buses as well as from other airlines.
Blue Ocean Strategy Formulation and Execution
The four actions framework, also called the ERRC grid (Eliminate, Reduce, Raise, Create), asks four questions about the factors an industry competes on. Eliminating and reducing factors lowers costs, while raising and creating factors increases buyer value; together, they break the value-cost trade-off. The Four Actions that Cirque du Soleil followed were the following:
- Eliminating the factors that the industry takes for granted, which in the case of Cirque du Soleil was to eliminate the animal shows, the multiple show arenas (three separate rings), the star performers and aisle concession sales.
- Reducing the factors below the industry standard, which meant that the company ensured that much of the danger and thrill, and the fun and humor, that characterize conventional circuses were reduced, and this resulted in the company creating a new market for itself that was different from the conventional market for circuses.
- Raising the factors which should be raised well above the industry standard meant that Cirque du Soleil pioneered original and unique approaches such as developing its own distinctive tents and venues and moving out of the confines of existing venues, which meant that it was able to create demand for its product from scratch.
- Finally, creating aspects of novelty such as dramatic themes, music and dance combined with artistic renditions, multiple productions and an environment that was geared to be more upscale and niche meant that Cirque du Soleil ensured that it combined differentiation with value creation.
The strategy canvas is the second key tool. It is a simple chart: the horizontal axis lists the factors the industry competes on (price, star performers, animals, thrill, theme and so on), and the vertical axis shows how much each competitor offers. When all competitors’ lines look alike, the industry is a red ocean. A blue ocean move produces a different “value curve” that stands apart from the rest.
The authors also suggest six paths to look for blue oceans: look across alternative industries, across strategic groups, across buyer groups, across complementary products and services, across functional or emotional appeal, and across time (trends).
How to Apply Blue Ocean Strategy
- Draw the current strategy canvas of your industry and see where everyone competes.
- Look for non-customers: people who do not buy from the industry at all, and why.
- Explore the six paths to find new sources of value.
- Use the ERRC grid to design a new value curve that is both different and lower in cost.
- Test the idea for buyer utility, price, cost and adoption hurdles.
- Execute with people on board: explain the strategy fairly and involve employees, which the authors call “fair process”.
Spreading a new offer to non-customers also depends on how innovations are adopted (see Rogers’ Theory of Diffusion of Innovations).
Checking the New Value Curve
Kim and Mauborgne suggest that a strong blue ocean value curve has three qualities:
Focus: it does not try to compete on every factor, but invests heavily in a few.
Divergence: its shape stands apart from the industry’s typical value curve.
A compelling tagline: the offer can be summed up in a clear, simple message.
The authors also recommend setting the price first, at a level that attracts the mass of target buyers, and then working back to the cost the business must achieve (target costing):
Criticisms and Limitations
- Blue oceans do not stay blue: successful moves attract imitators, so the company must keep innovating. Cirque du Soleil itself faced competition and, when the pandemic closed its shows in 2020, filed for creditor protection before being restructured.
- Hindsight: critics argue that many examples are chosen after the fact, and that some “new” markets were not really free of competition.
- Risk: creating new demand is uncertain and can be costly; many attempts fail.
- Not a replacement for competitive analysis: most firms still need tools such as the five forces and SWOT analysis to compete in existing markets while they look for new ones (see Competitive Advantage).
Conclusion
The example of the Blue Ocean strategy described above clearly indicates that Cirque du Soleil did not try to battle the competition but instead created an entirely new market for itself. In short, this is the essence of the Blue Ocean Strategy, which hinges on creating value and taking it to the next level by a game-changing approach to competition (see also Innovation and Product Management).
In conclusion, once a company actualizes the Blue Ocean Strategy, it usually results in opening up new markets instead of stagnating in the existing markets.
FAQs
What is blue ocean strategy in simple words?
It is a strategy of creating a new market with little or no competition, by offering something different and better value at a lower cost, instead of fighting rivals in a crowded existing market.
What is the difference between red ocean and blue ocean?
A red ocean is an existing, crowded market where companies compete for the same customers. A blue ocean is a new market space where demand is created rather than fought over.
What is the ERRC grid?
It is the blue ocean tool that asks which factors to Eliminate, Reduce, Raise and Create, to build a new value curve that is both different and lower in cost.
What are examples of blue ocean strategy?
Cirque du Soleil, Nintendo Wii, [yellow tail] wine and Southwest Airlines are classic examples.
