Strategic Management Insights

May '08

Blue Ocean Strategy:
How Opposite Thinking Can Lead to Breakthrough Strategy
This post is an overview of an increasingly popular strategy formulation process, and highlights the steps to finding ‘Blue Oceans’ where competitors are few and profits are large. The concepts covered in this article are Noncustomers, Strategy Canvas, and Four Action Framework.

What if you could charge $4 for a cup of coffee?

Most companies compete in crowded, undifferentiated markets where volume is tied to price and price is usually a function of cost. What if you could get away from all that? What if you could uncover a new market chock full of enthusiastic new customers who love your new product or service and are unable to find it anywhere else? What if you could set your price simply by what your excited customers are willing to pay? Well if you could do that, you’d have a Blue Ocean strategy, and you could charge $4 for a cup of coffee.

According to the Blue Ocean originators, a study of 108 companies found that 86% of new ventures were line extensions of existing products to existing markets, while 14% were aimed at creating new markets. In the end, the 14% generated 38% of total revenues and 61% of total profits!

So how do we uncover a Blue Ocean strategy? Well, it’s not that easy. We can’t exactly count on developing the next Cirque du Soleil, McDonalds, Nintendo Wii, or Southwest Airlines. But according to Renee Mauborgne and W. Chan Kim, authors of the 2005 book Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant, we can substantially increase our chances by systematically thinking about our products and services through their Blue Ocean framework. I call it opposite thinking. Doing so, they assert, will move us out of the bloody Red Ocean of competition.

Of course the authors didn’t invent the concept of breakout strategies. Blue Ocean strategy companies they point to like Cirque du Soleil and Southwest Airlines preceded the book’s 2005 launch. But I believe Mauborgne and Kim have made an important contribution to strategy by a) focusing attention on breakthrough strategy, b) giving it a name and a stronger identity, and most of all c) offering a useful process to increase our chances of creating one. (Where they are somewhat less helpful, in my opinion, is on the subject of execution, where they identify four internal hurdles - resource, cognitive, motivational, and political - and suggest a “Tipping Point leader” solution.)

So what is this process? Let’s look at the 3 core concepts:

1. Noncustomers
Instead of fighting over existing customers and risking commoditization or overly-fine segmentation to the point that markets are too small, Blue Ocean recommends seeking out noncustomers that your industry currently doesn’t serve. Blue Ocean lists three categories of noncustomers:

Soon To Be - who are about to buy
Refusing - who consciously choose not to buy
Unexplored - who have not even considered our offerings as an option

The greatest opportunity lies in the Refusing and Unexplored categories, but only if we offer them something they value highly. For example, Nintendo Wii appeals to people who never considered buying video games until they were offered family-fun virtual tennis, golf, softball, and fitness options. Southwest Airlines’ short haul service appeals to people who might otherwise travel by car by offering low prices on frequent, friendly, and speedy flights.

2. Strategy Canvas
To build a Strategy Canvas we first place traditional industry value factors (e.g. speed, selection, price, friendliness, ease of use, delivery) along a horizontal axis. Then we plot in relative terms the extent to which the industry emphasizes each factor. This generates a Value Curve that describes the current state. In the Blue Ocean illustration below, the 1 Star and 2 Star curves define the state of the industry before McDonalds.

3. Four Action Framework
By applying the Four Action Framework (Eliminate-Create-Raise-Reduce) we can systematically explore variations to the traditional value curves and the potential impact on noncustomers. For example, if the restaurant industry currently emphasizes menu selection, waiters, and table settings at the expense of speed and consistency, we can explore the consequence of eliminating waiters, reducing menu selection and perhaps eliminating table settings while increasing speed and consistency. Is there a large market of Refusing or Unexplored customers who would respond to this new offering? Obviously, yes.

The Blue Ocean process requires that we not only understand our existing customers but that we extend that knowledge to include noncustomers. We don’t have to know absolutely everything about them to start the process, but it’s obviously important to develop a thorough understanding over time and certainly before we make a large investment in a new product or service. (A helpful new book on the value of market research is Your Gut Is Still Not Smarter Than Your Head, by Kevin Clancy and Peter Krieg.)

Admittedly we can’t count on coming up with a breakthrough strategy just because we go through the Blue Ocean process, although doing so will improve the odds. But even if we can’t uncover a Blue Ocean ourselves, we can still make it a point to look for other companies that may have found one … and then jump in. Oceans are big. Starbucks spawned a host of imitators some of which, like Caribou Coffee, have done very well. That said, jumping in may not always be a smart idea because those who go first may be uniquely qualified. Take for instance Southwest Airlines. Delta tried to jump into that Blue Ocean with their low-cost, short haul TED airlines but cost structures, cultures, etc. prevented them from succeeding.

In the end competitors do enter Blue Oceans making them more crowded, competitive and, well … Red. Because of that, and because Blue Ocean strategies come along only once in a while, it’s worth making opposite thinking a regular part of the ongoing strategy process so that we have the best chance of coming up with a winner when we need it.

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- Brian Kinahan

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