Blue Ocean Strategy

Hi All,

Thanks for stopping by. In this post I am going to get all business nerdy on you and explain a bit of the approach I took when deciding how to come up with my idea for brohseets. I recently completed an MBA and this helped me greatly in analysing the market place as a whole. It gave me perspective and clarity on how to approach business, particularly from a macro viewpoint. Using the knowledge gained from the MBA is by no means a guarantee of success in business but I do believe that it helps in reducing the risk!

Brosheets was borne out the the frustration I had with my industry of choice, the home textile industry. It was rooted in traditional supply chain models and dominated by a few big players. I felt that I could do something different, do it better and target a demographic (men) that had been more or less totally ignored by many players.

Blue Ocean strategy was very helpful in giving me the tools to analyse the current market situation, its competitors and allowed me to think about what new area we could create to compete and disrupt the status quo within the market place.

The next part of the post is very long so feel free to skip to the end if you get bored of it 🙂

What is Blue Ocean Strategy?

Blue ocean strategy is a method employed by companies to set themselves apart from their competition. It’s roots lie in the emerging school of economics called endogenous growth, whose idea, put forward by Joseph A. Schumpeter, is that the actions of individual players can shape the economic and industrial landscape (1). The terms strategy is derived from the word stratagem, which is derived from a military context. Hence we see the use of many military related words in everyday business language. Troops, headquarters, defend our position etc. are all words that we closely associate with business and war.

For far too long business has been all about focusing on the competition. How can we beat the guys next door? How can we compete on price, value, service etc? Countless hours are spend analysing ways in which to get one up on your competitors. Kim and Mauborgne argue that instead of focusing on the elements highlighted above, companies should instead explore the less well travelled, and potentially more lucrative, route of blue ocean thinking. This type of mindset involves taking the competition out of the equation completely, making them irrelevant and creating a new market. By focusing more on the customer instead of the competition companies can gain a greater understanding of their needs and wants and then go about developing an appropriate strategy to capitalise on that information.

This new space is an untapped market that companies can create a demand for their products. In practice, to create a brand new blue ocean can be very difficult. The real world dictates that more often than not organisations find blue oceans within existing red oceans. The crowded space that is a red ocean is an important fact of life and a reality that is faced by the majority of business people every single day. Finding that blue dot amongst a sea of red is what marketing strategists aspire to achieve each time they set out to beat the competition.

Blue ocean strategy is about creating demand in an untapped market space that contains an opportunity for high profit.

So, how is a blue ocean strategy created?

Assessing The MarketThe first step to creating a blue ocean strategy is assessing the current market situation (indeed this should be the first step employed by any company in creating ANY strategy). An assessment of the marketplace is an exercise in gaining an understanding of the topography of a market and its various participating constituents.

Traditionally there have been two paths used to understand the marketplace. The first of these is from the competitor’s point of view (red ocean). This red ocean, or structure shapes approach, involves identifying competitors within the market place and developing a strategy around them. The red ocean is crowded, less profitable and is more difficult to show a meaningful point of difference between you and your competitors. Usually there will be some sort of trade off between differentiation or costs. Use of Porters five forces tool (2) is prevalent within this approach. This often quoted model places, at its core, the idea that a company wants to beat their competitors by examining and analysing the competitive forces that operate in that area under the following headings; Threat of new entrants, Buyer Power, Threat of Substitution and Supplier Power. Porter suggests that to sustain long term profitability you must strategically respond to the competition. Keeping an eye on your established rivals is important and he says that by analysing the market based on his five forces adequately equips a company to gain a complete picture of the industry in which they operate. It has the added benefit, he says of giving companies the potential to spot emerging trends and take actions to combat new threats in order to protect their position.

Agile thinking is at the cornerstone of what Hill wants modern marketing strategists, practitioners and enthusiasts to engage with and adopt within their business practices. Being limited by what your competitors are doing is a common approach but one that will ultimately lead to stagnation.

The second approach is referred to as the strategy shapes approach. This approach throws out the traditional view point of the competition and brings in to play a method of questioning every single aspect of a company’s offering with a view to making the competition irrelevant. If the structure shapes approach is known the structuralist approach then the strategy shapes approach can be viewed as the re constructuralist approach.

This type of thinking is more important than ever due to increased economic difficulties and the need break out from the pack and challenge the status quo. Within this strategy formulation, existing rules are to be discarded; making may for new ones that generally put the consumer at the focal point of the thinking. Freed by the shackles of focusing on the competition, as in red ocean thinking, companies can explore and demonstrate agility by honing their skills and resources on the one focal point that matters in blue ocean strategy, the consumer.

When adopting such an approach Kim & Mauborgne say that success will hinge on the development and alignment of three propositions;

A value proposition that attracts buyers

A profit proposition that enables the company to make money out of the value proposition; and

A people proposition that motivates those working for or with the company to execute and realise the strategy.

The first two of these propositions set out what the company will offer to the consumer and how it, the company, will benefit from that offering. The people proposition will determine how successful that strategy will be executed. Companies may often get some of these propositions right and experience some degree of success but according to Kim & Mauborgne this success will be limited. Unless all three are aligned correctly sustained success is unlikely. Additionally they argue that under a reconstructionist strategy approach high performance is achieved when all three strategy propositions pursue both differentiation AND low cost.

Red Ocean V Blue Ocean Strategy

 

Blue Ocean v Red Ocean

By first assessing the market and adopting a strategy shapes approach companies can advance towards developing an overall Blue Ocean Strategy.

The next steps in blue ocean strategy formulation involve the use of a strategy canvas, four actions framework and The eliminate-reduce-raise-create grid.

Strategy Canvas – A strategy canvas is central to building a compelling blue ocean strategy. According to Kim and Mauborgne (4) “The strategy canvas enables companies to see future in present”. It offers a consumer assessment of what is available to them from the current market offerings. This gives any company valuable insight as a basis to enter (or not) any new market space. It is made up of two axes. The horizontal axis will capture the ways in which a company’s offering differentiates from its competitors (e.g. price, quality, convenience etc) whilst the vertical (y axis) captures the market position in terms of value for each x axis point. The objective of this strategy canvas is to give us a value curve for a company.

B V R

Once a value curve has been created it can be used as a basis and in conjunction with the four actions framework and The eliminate-reduce-raise-create grid to create a new market or new value curve.

Once the value curve has been established a company may then assess how they will compete within the chosen marketplace. Kim & Margaune argue that it is no use benchmarking competitors and then competing against them on just one or two factors. This kind of strategy may lead to short term success but the ultimate goal of long term sustainable profits can only be achieved through a fundamental shift in the value curve.

To do this a company must turn its focus to alternatives instead of competitors and non customers instead of customers. As they begin to think in this way companies gain insight in to the problems within their chosen industry which, in turn, leads them to understanding how to reconstruct buyer value.

By assessing the current market offerings via a strategy canvas companies can identify a new value curve in which to pursue.

Four Actions Framework –By asking four key questions companies can challenge an industry’s strategic logic and progress along the route to their blue ocean strategy

Eliminate – This challenges the company to eliminate factors that other companies, within their industry, have competed on. It focusing a company to examine what buyers value and whether there has been a change in this buyer value perception over time;

Reduce – What can a company take out of their offering that make no difference to their customers;

Create – This helps a company discover what new values a customer wants from their products or service;

Raise – Is a company forcing customers to compromise on any element of their offering? If so, then raise the bar. Don’t enforce compromise on a buyer, give them the best of both worlds instead i.e. better quality and lower price.

The purpose of the reduce and eliminate elements of your offering have the benefit of lowering the company’s cost structure. In contrast the other two elements serve to lift buyer value and create new demand. When all questions are thought through correctly it has the power to create a new, compelling, offering to an untapped set of values within a particular market.

The eliminate-reduce-raise-create grid – This third tool, as put forward by Kim and Mauborgne but not Mark E Hill is similar to the four actions framework but instead of just asking the questions it encourage companies to act on all four elements to create a new value curve.

Grid

By driving companies to fill in these question is gives them four benefits

  1. It pushes them to, at the same time, pursue differentiation and low costs to break the value/cost trade off.
  2. It highlights companies that are focused on raising and creating thereby lifting the cost structure. These companies tend to over engineer products and services when it is unnecessary. These are classic examples of red ocean thinking where product is put before consumer.
  3. It’s ease of understanding makes it understandable by managers at any level, ensuring a high level of engagement.
  4. As it a challenge to complete the grid companies are forced to robustly scrutinize their industry. Old held beliefs may be discarded in the wake of new, open, honest discussion.

Finding that new value curve via a strategy canvas is central to indentifying new market opportunities.

Characteristics of a solid blue ocean strategy.

Kim and Mauborgne (5), from their research, put forward three characteristics of good blue ocean strategy. They say that any good blue ocean strategy should use these criteria as an initial test of the commercial viability of any blue ocean idea.

Focus – Companies must fully commit to realising and delivering on a new value curve once it has been established. Deviating or compromising on any aspect is not encouraged, to do so would limit the chances of success;

Divergence – As a result of looking at alternatives instead of benchmarking competitors the new value curve will be significantly different from it’s competitors; and

A compelling tagline – a clear and concise tagline that communicates core values to a buyer is an important element of the overall strategy.

Execution of Blue Ocean Strategy and its hurdles.

Once a strategy has been formulated it must then be executed. In terms of execution blue ocean strategy, because of it’s focus on lowering costs and increasing buyer value, is a step above, in terms of effort, to red ocean strategy implementation. According to Kim & Mauborgne (6) managers face four hurdles in the steep challenge that is blue ocean strategy implementation;

  1. Cognitive – employees may not often realise the need for change and thus have difficulty in adapting to it. Resistance to any sort of change can be commonplace in many organisations. Changing a mindset is hard!;
  2. Limited resources – current economic difficulties have resulted in budgets being cut and resources being curtailed. Many companies enter “survival” mode with blue ocean strategising often at the bottom of a long list of priorities. In addition, the greater the shift needed for a company to enter the blue ocean the greater the resources needed;
  3. Motivation –motivating key players to move from the status quo takes time – which many companies do not have;
  4. Politics – because resistance to change can be deeply embedded within a company’s culture any deviation from the norm can be seen as a threat and many managers can be quick to shoot down new ideas.

 

Limitations of Blue Ocean Strategy

According to Hill (7) the main limitations with blue ocean strategy are

  1. If you create a new market eventually other will join you. As sure as night follows day new entrants to a virgin market will appear quickly. The potential for large profits in an untapped market rarely is left to a lone supplier.
  2. Once you have created a new market then you let  your guard down and become complacent. The creation of a new product/market is only the beginning and staying on the innovation pathway is a never ending cycle of always trying to stay ahead of the competition.

 

In addition to these limitations Burke (8) suggests that it may be better to be a follower than a pioneer. According to him being the first to explore a new landscape can often pave the way for better resourced companies to come in and benefit from that initial exploration e.g. Apple with itunes. It can often be the case that the first to enter a market may find that the market or consumer is not ready for their product, even though the product may be fantastic, at that particular time.

 

Conclusion

Blue Ocean strategy dictates that in order for companies to obtain high performance, in a crowded marketplace, they must go further than just competing for an existing share of their market. Instead they should go after that uncrowded, potentially lucrative, blue ocean. The reality is that most blue oceans exist within red oceans and many companies successfully survive by never giving consideration to blue ocean thinking. They are quite happy to swim in the bloodied waters of the red ocean. The truly great, innovative, forward looking organisations however adopt and execute blue ocean strategies to keep ahead of the competition and build a sustainable competitive advantage within their chosen industry.

 

References

  1. Kim, Chan W., and Renee Mauborgne (2005), “Blue Ocean Strategy – How to create uncontested market space and make the competition irrelevant”, Harvard Business School Press, 209.
  2. Porter, Michael E. (2008), “The Five Competitive Forces That Shape Strategy”, Harvard Business Review, January
  3. Hill, Mark E.  (2013), “Marketing Strategy – The Thinking Involved”, Sage Publications, 56.
  4. Kim, Chan W., and Renee Mauborgne (2005), “The Blue Ocean Strategy: From Theory To Practice” California Management review, 119
  5. Kim, Chan W., and Renee Mauborgne (2005), “The Blue Ocean Strategy: From Theory To Practice” California Management review, 118
  6. Kim, Chan W., and Renee Mauborgne (2005), “Blue Ocean Strategy – How to create uncontested market space and make the competition irrelevant”, Harvard Business School Press, 147-148.
  7. Hill, Mark E.  (2013), “Marketing Strategy – The Thinking Involved”, Sage Publications, 61-62.
  8. Burke, Andrew (2010), “Blue Ocean v Five Forces Strategy”, Cranfield University School of Management, http://www.som.cranfield.ac.uk/som/p14789/Think-Cranfield/2010/July-2010/Blue-Ocean-v-Five-Forces-Strategy

By the way the most used text for this article was the Chan & Mauborgne book and this is available from any good shop or amazon right here