Blue Ocean Strategy – Part 1

Comparative of Red Ocean and Blue Ocean

Red Ocean Blue Ocean

Compete in existing market
Concern with competition
Focus on existing customers
Work with existent demand/ market share
Deal with value and cost trade-off
(creating value at higher cost OR creating
reasonable value at low cost)
Whole company is aligned with the
strategy of differentiation OR low cost
Create a new market
Make competition irrelevant
Focus on non-customers
Create a new demand and market share
Don’t use value/cost trade-off
(create both, greater values and low cost)
Company is aligned with the strategy of
differentiation AND low cost.

The first highlighted case from the Blue Ocean Strategy book is the Cirque du Soleil.

• They created a new market. One of the first shows was titled “We Reinvent the
Circus”.

• They didn’t compete in the same market from the conventional circus.

• They didn’t use animals or Hollywood stars.

• They focused on other customers: adults and corporation clients, and, by

consequence, caused a different perspective about prices and motivation/capacity to
pay for a different experience.

Why it is so important, nowadays, the Blue Ocean Strategy?

With the current technological stage, productivity is at high levels, the supply exceeds the
demand, so the prices are falling, the globalization adds a component that facilitates new
entrants and low production cost, and to make it worst, the rich countries (with more
consuming power/demand) have their population decreasing.

So to create new markets and develop focus on non-customers to create demand, blue ocean
strategy will be a fundamental approach, besides other aspects.

One key point of Blue Ocean Strategy is how to create value and how to make customer
comfortable and willing to pay for it.

Innovation has a key role on this matter, but not only. It must be aligned with utility, price
and cost.
Principles of Blue Ocean strategy

Formulation Risk Factor Attenuated

Reconstruct market boundaries Search risk
Focus on big picture, not numbers Planning risk
Reach Beyond existing demand Scale risk
Get the strategy sequence right Business model risk
Execution
Surpass organizational barriers Organizational risk
Build execution into strategy Management risk

IF followed correctly those principles the mentioned risks are attenuated.

Effective blue ocean strategies should be about risk minimization and not risk taking.

About Strategy, to shift the strategy of an industry, you must reorient the focus from
competitors to alternatives and from customers to noncustomers.

To use value and cost approach, it must not be used benchmarking competitors, because, it
will return to differentiation or to cost approach, in the conventional way.

Moving the focus from competitors and customers, it will be possible to develop insights to
create new solutions, better buyer value elements and to create market across industry
boundaries.

The Eliminate-Reduce-Raise-Create Grid, to create a new value curve.

Eliminate
Which of the factors that industry takes
for granted should be eliminated?
Reduce
Which factors should be reduced well
bellow the industry’s standard?
Raise
Which factors should be raised well
above the industry’s standards?
Create
Which factors should be created that the
industry has never offered?

The Cirque du Soleil exemple:

Eliminate Raise
Star performers, animals shows, aisle Unique venue
concession sales, multiple show arenas
Reduce Create
Fun and humour, thrill and danger Theme, refinement environment, multiple
productions, artistic music and dance

A good strategy should have focus demonstrated on a clear company’s strategic profile and
value curve. Also, must diverge from competition. And, it should have a compelling motto.
Reconstructing market boundaries, the First Principle

To move from red oceans, companies must not accept boundaries that define how they
compete. They must look across alternative industries, look across strategic groups within
industries, look across the chain of buyers, look across complementary product and services,
look across functional and emotional appeal, and look across time. This will give some
insights to reconstruct market and to open up blue oceans.

Focus on the Big Picture, not Numbers, the Second Principle

The conventional strategic planning tends to drive companies to red oceans.

A typical strategic planning starts with current industry conditions and competitors analysis.
Then goes to how increase market share, new segments or cut costs, followed by goals and
actions. It goes through SWOT, PEST, BCG, McKinsey, and so on, analysis coupled with
some spreadsheets, and graphics.

The perspective must change, must think outside the box and develop a clear picture of how
to break from competition.

To see the Big Picture, it needs a visual awakening, a visual exploration, a visual strategy fair
and a visual communication.

Visual awakening: compare your business with your competitors and see where your
strategy needs to change.

Visual exploration: go to the filed to explore the six paths to creating blue oceans; observe
the distinctive advantages of alternative products; see which factors should eliminate, create
or change.

Visual strategy fair: draw your strategy based on field observations; get feedback on
alternatives from customers, competitors’ customers and noncustomers; use feedback to
design the best future strategy.

Visual communication: distribute your “best future strategies” on one page for ease
comparison; choose only those that allow the company to close the gaps to actualize the new
strategy.

The Pioneer-Migrator-Settler (PMS) Map

According to the authors of the Blue Ocean Strategy book, all companies in their studies, that
created blue oceans, have been pioneers in their industries.

Pioneers are businesses that offer unprecedented values, they are blue ocean strategists. Their
value curve diverges from competition.

Settlers are the other extreme, they are the me-too business. Their value curve is similar to
the basic one of the industry.

Migrators lie between both and they extend the industry’s curve by giving more for less, but
they have the same basic curve shape. They improve value but not an innovative value.
Testing the Growth Potential

Pioneers

Migrators

Settlers

Today Tomorrow

Reach Beyond the Existing Demand, the Third Principle

The conventional strategic initiatives are the focus on existing customers to retain and
expand the market share, which usually takes to greater tailoring and offerings, and finer
segmentation, with the risk of creating small target markets.

To maximize blue oceans, companies need to focus on noncustomers. Instead of focusing on

customer differences, the seeking must be on same interests that they value, which will
allows companies to reach beyond existing demand and will aggregate a new mass of
customers.

The Three Tiers of Noncustomers

First the companies need to understand the universe of noncustomers.

The three tiers are related with the distance, that they are, from the current market.

Third Tier

Second Tier

First Tier

Your
Market

First Tier: “Soon-to-be” noncustomers who are on the edge of the market.
Second Tier: “Refusing” noncustomers who consciously choose against your market.
Third Tier: “Unexplored” noncustomers who are in markets distant from yours.
These soon-to-be customers they almost don’t use your market offerings because they search
better offers. If they find a better alternative they will go after it and leave this market. A
market stops growing when there are many soon-to-be customers. The insight is to figure out
what they are searching.

The refusing noncustomers are people that can’t afford or don’t use the market offerings.
Their necessities are attended by other means or are ignored. It is a vast ocean to pursue.

The unexplored noncustomers have not been explored or thought by industry players. They
are seen as participants of other markets. It is an unexplored ocean, where results could be
outstanding.

As the authors mentioned, that there is no magic formula to suggest which tier should be
focused. The blue ocean opportunities, in a specific tier, may be different, across time and
industries. The ideal would be to unlock the potential across tiers, discover the
commonalities across all three tiers.

A fundamental aspect to maximize the scale of Blue Ocean, first, is to reach beyond existing
demand to noncustomers and desegmentation opportunities, as you develop futures
strategies.

Next article, second part, it will be discussed the other three principles.

Reference: Kim, W.Chan. Mauborgne, Renée. Blue Ocean Strategy.