Blue ocean strategy

The Blue ocean strategy was developed by W. Chan Kim and Renée Mauborgne in their research in 2005. By analyzing 150 business strategies during over 100 years in 30 different industrial sectors, Kim and Mauborgne (2005) propose that firms succeed not because of fighting with their rivals, but because they have created “blue ocean” in the market space. This method makes a leap in value for firms, customers, and employees by creating new needs with almost no competition in these markets.

1. Basic concepts

Blue and red ocean metaphors are intended to describe the entire market system. The red ocean represents all existing industries or known market space. In the red ocean, all boundaries are defined and accepted, and rules of competition have been established. Firms in this environment must make effort to outperform their rivals for gaining market shares in different ways. As the market gets larger in quantity, the potential for profits and product development tend to decrease face to competition. Products and services will quickly become popular goods or niche markets; fierce competition will increase to the destructive level in the market; so, these industries are called the red oceans.

In contrast, the blue ocean includes industries that do not yet exist. They are market spaces that are not known and not yet destroyed by competition. In blue oceans, market demand is created by the firm rather than won. There are many opportunities and potentials for rapid growth with high profit rates. In the blue ocean, the competition is minimum or do not exist, because the competitive rules are not established. The blue ocean is a metaphor describing the immense potential of unexploited market spaces. Some blue oceans are created outside the existing industry boundaries, but most are created from the red oceans by expanding the current industry boundaries.

Firms look for blue oceans for some key reasons. Firstly, the continuous and strong development of technology allows them to produce higher quality products and services with diverse models and categories. Secondly, firms do not want to come into red oceans, that are considered as the battlefield of life and death while the profitability and growth are low. Thirdly, blue oceans attract firms both in profits and high growth.

The key factor that allows firms to create blue oceans is the concept of “Value Innovation”. Value innovation is the result of an effort to pursue a differentiation strategy and low-cost strategy; thereby creating value for customers, firms themselves, and employees due to the profits gained from the new market space. The purpose of value innovation is not competition but for making competition no longer by changing the strategic environment.

It should be emphasized that, in the blue ocean strategy, value innovation includes both value improvement and innovation. By focusing only on value, that is the correlation of low price and quality, firms can make profit in short term, but cannot achieve a sustainable competition in long term. On the other hand, if innovation does not come with value, it will not be enough to convince customers to buy and consume products and services of the firms. Value innovation is established only when firms successfully combine innovation and usefulness, price, and cost. Otherwise, technology is merely a technology of “beauty”.

Figure 1: Value innovation in Blue ocean strategy

Source: Kim and Mauborgne (2005)

Creating a blue ocean means reducing costs for firms while increasing customer value; thereby achieving the goal of improving value for both firms and their customers. Product market value is a combination of price and customer utility; similarly, firm value is a combination of selling price and cost structure. Therefore, the value innovation is achieved only when all three factors of utility, price and cost are properly combined. These are the factors that make up a sustainable blue ocean strategy (Kim and Mauborgne, 2005).

Red ocean strategy is based on competition, and standardized and immutable conditions. Firms in red oceans compete each other on the basis of fitness with these conditions and the “best strategy” common rule. Strategic orientations can be either differentiation or low cost. This is a “structuralism view” or “environmental determinism”. In contrast, the value innovation relies on the belief that market boundaries and structures are not standardized and can be created by the actions and beliefs of the competitors. The strategic goal is to create new standards for “best strategy”. This view is called the “deconstructionists view”.

Table 1: Red Ocean Versus Blue Ocean Strategy

Source: Kim and Mauborgne (2005)

2. Analytical tools of blue ocean strategy

Kim and Mauborgne (2005) have developed three tools allowing firms to develop their blue ocean strategy. Specifically:

2.1. Strategic Canvas

Strategic canvas, the most basic analytical tool, throughout the blue ocean strategy, is an image that includes value line of a firm and that of its competitors. Value here is understood as interests and expectations of customers. The value line is represented on a coordinate axis consisting of horizontal axis (Ox) of evaluating industry competitiveness; and vertical axis (Oy) of evaluating high or low level of value that firms bring to their customers. Through market research, firms can assess the competitiveness of products compared to that of their competitors. A value line is a line that folds through the points representing the value that a firm’s products bring to customers located on the coordinate axis.

Figure 2: The Strategy canvas of car

Source: Kim and Mauborgne (2005)

The Strategic canvas explain what its competitors of the firm are as well as what competition factors firm should be focused on. If its value line is different from that of the competitors, the firm has succeeded in creating a “blue ocean” in the market. In contrast, if the firm’s value line is similar to the one of competitors, it means that the firm is in the “red ocean”; so, it is necessary to “curve” the value line to create a new blue ocean.

1.2. The Four Forces Frame

After positioning the business situation through a strategic canvas, the next step of firm managers is to redraw the value line of the firm for achieving both the low cost and differentiation goals. To do this, the firm needs to cut down the factors that are not important by increasing the ones that bring higher value to customers. This is the core of the blue ocean strategy. During the implementation process, the firm needs to answer four big questions, called The Four Forces Frame, as shown below:

Figure 3: The Four Actions Framework of Blue Ocean Strategy

Source: Kim and Mauborgne (2005)

Answering the first two questions allow firms to find a more effective way to cut down its costs than that of the competitors. The next two questions allow firms to identify which factors strengthen customers’ benefit. Excess resources, resulting from the first two questions, will be used to invest in other factors, that firm deems more necessary in the remaining two questions for greater performance and greater benefits to customers.

1.3. The Elimination – Reduction – Improvement – Creation Net

The Elimination – Reduction – Improvement – Creation Net is an analytical tool that complements the Four Forces Frame. After answering four questions in the frame, firms fill the answers in the net model.

Figure 4: Eliminate-Reduce-Raise-Create Grid

Source: Kim and Mauborgne (2005)

Filling in the net model allows firms to see what they should to do for creating a blue ocean strategy. Firms need to consider the equal importance of actions. This model also warns firms not to just focus on growth and branding, because these factors easily increase the cost structure and often makes the function of products and services redundant in comparison to those of customer requirements. Instead, firms should pay attention to the factors of elimination and reduction.

3. Six principles of formulating and executing blue ocean strategy

There are six principles of formulating and executing blue ocean strategy, associated with different types of risks. Specifically summarized in the table below:

Table 2: The Six Principles of Blue Ocean Strategy

Source: Kim and Mauborgne (2005)

There are four basic and relatively independent principles that allow firms to successfully formulate a blue ocean strategy, including:

• Principle 1: Reconstruct market boundaries

The first principle of blue ocean strategy is to destroy the old market boundaries and redraw the new ones of the blue ocean. To reconstruct market boundaries by minimizing risks in the search process, firms can apply one or several or all of the following 6 paths: (1) look across alternative industries; (2) look across strategic groups within industries; (3) look across the chain of buyers; (4) look across complementary product and service offerings; (5) look across functional or emotional appeal to buyers; (6) look across time.

• Principle 2: Focus on the big picture, not the numbers

After understanding the basic way to break the boundaries of red ocean, firms need to research the market carefully to make a specific action plan. The second principle requires firms to use an analysis tool “strategic canvas”. By sticking to the “strategic canvas”, firms can take consistent action for the set goals and avoid confusion.

• Principle 3: Reach beyond existing demand

There are two common ways to implement a competitive strategy that the firms immersed in the red ocean using. Firstly, they compete by capturing customer preferences in smaller market segments. Secondly, instead of focusing on customers, they pay attention to those who have not purchased. Instead of focusing on the differences between customers, they need to explore the similarities in customer value assessments. That allows them to go beyond current needs to reach new customers, who are actually non-customers can offer firms the opportunity to open a new blue ocean.

• Principle 4: Get the strategic sequence right

The right strategic sequence ensures that both firms and customers benefit when the blue ocean strategy is formulated. In which, products allow high satisfaction to customers; and customers can buy products at appropriate prices and firms are profitable. The right strategic sequence consists of four steps, namely: (1) determine exceptional buyer utility in business idea; (2) determine price easily accessible to the mass of buyers; (3) determine costs to profit at strategic price; (4) determine the adoption hurdles in actualizing business idea (see Appendix for details).

Once the blue ocean strategy has been formulated, firms should quickly follow the next two principles of executing blue ocean strategy:

• Principle 5: Overcome key organizational hurdles

The organizational hurdles that firms face when executing the blue ocean strategy are often: cognitive, limited resources, motivation, and politics (opposition from powerful vested interests).

• Principle 6: Build execution into strategy

Principle 6 of building a 3E management process includes engagement, explanation, and clarity of expectation, which allows firms to effectively manage the blue ocean strategy. This management process must be applied to all employees from senior to lowest level. The 3E management process has positive impact on the psychology and behaviors of employees. They will feel their opinions are valued, thereby will complete work beyond the requirements of obligations, by gradually taking initiative in creativity at work.