Blue Ocean Strategy: Getting a Competitive Edge through Value Innovation

By Roch Parayre, Ph.D.
Managing Director of Executive Education, DSI

The Roots of Strategy as Warfare

The roots of Business Strategy lie in Warfare: Battling in known competitive waters, along well-defined rules, where adversaries fight for the same territory, using similar competitive weapons. What results is a “red ocean”, turned red by the blood of battle, where all who participate suffer losses.

Over the years business gurus have explored this view of strategy and offered a variety of approaches to differentiation. From SWOT analysis to Michael Porter, from Core Competencies to Value Disciplines, from TQM to Reengineering to Six-sigma, these offerings have fed an incessant hunger to find that elusive silver bullet that will generate a sustainable competitive edge -- in traditional red oceans. Larry Bossidy and Ram Charan’s recent bestselling book entitled Execution: The Discipline of Getting Things Done highlights the continued value and appetite for outdoing your red ocean opponents. You just need to visit your local airport bookstore for evidence of the breadth of red ocean offerings.

These approaches have certainly led to efficiency gains and economic progress. Businesses and the economy are better off because of improved efficiencies and reduced waste brought upon by reengineering, overall quality improved by TQM and Six-sigma, etc. The problem, of course, is that it becomes self-defeating for everybody to use the same strategy tools and approaches. Relative to each other, individual firms don’t generally get long-lived competitive advantages from these excursions into navigating known waters more efficiently. The temporary advantage bestowed upon you by your most recent red ocean strategy simply becomes a table stake or ticket to play in the near term as your competition follows suit, and then try to outdo you.

Driven by the strategic moves of competitors, industries pursue their relentless march towards commoditization. Under hypercompetition, where imitation is fast and furious, this takes place faster than ever before. The aim of business strategy is to stem the tide of commoditization – or delay it as much as possible.

An Alternative View: Strategy as Exploration

An alternative view is one of Strategy as Exploration: Searching for undiscovered waters, “blue oceans” where the aim is to reinvent your value offering away from that of your competition. In the extreme, the goal is to make your value offering so uniquely distinctive that it makes the competition irrelevant. This is the premise of the recently published book entitled Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant by our INSEAD colleagues Professors W. Chan Kim and Renée Mauborgne.

Ironically, they argue that the best way to reach that blue ocean and beat the competition is to stop trying. Instead, you need to rethink and re-imagine your offering, making it so distinctive that the competition no longer matters. New market space can be created by examining existing customers and equally important non-customers, and then rethinking what customers really want by identifying the dimensions where there are currently blocks to customer utility; unlocking value along these dimensions by focusing on eliminating these utility blocks; and further lowering costs by eliminating or reducing low value-added components.

The last point is worth reiterating. Strategy is as much about what NOT to do as it is about what to do. Too many organizations, when pursuing strategic improvements, simply add to their current value proposition and don’t make the conscious (and difficult) choice of eliminating some lower-value components. True value innovation involves eliminating some aspects of your offerings in order to release the resources required to pursue in earnest the new and higher value-added components.

The Strategy Canvas

The analytic framework central to value innovation and to the creation of blue oceans is the Strategy Canvas, which plots the value curves of the different players in an industry. We illustrate it in the context of an industry which one would not have considered ripe for reinvention – the circus.

Figure 1 shows the strategy canvas for two traditional types of circus – Big League Circus playing out in three rings in large venues, and little league circus playing out in one ring under a tent and typically traveling through smaller communities. We are dealing here with a mature industry with clearly defined segments, and populated by well-entrenched incumbents.

The chart lists the different components or dimensions of value that are offered to customers of the circus horizontally, and on the vertical axis it shows the quality or performance (on a 1 to 5 scale) for each competitor on these various value dimensions.

Figure 1 – Strategy Canvas Example (Adapted from Kim and Mauborgne. Blue Ocean Strategy, 2005)

Then in 1984, an upstart circus out of Montreal, Cirque du Soleil, reinvented the circus business by going not after the incumbents along traditional competitive dimensions, but by borrowing new dimensions from opera, rock music, the theater and ballet to construct an entirely new value curve (shown in Figure 2). This new value curve shows that Cirque du Soleil let go of some of the traditional circus offerings, which “made room” for some new and unorthodox dimensions to be added. In the end, the value curve of Cirque du Soleil resembles much more that of the opera or theater than that of a traditional circus, and thus found new space.

Figure 2 – Value Curve for Cirque du Soleil (Adapted from Kim and Mauborgne. Blue Ocean Strategy, 2005)

How does one go from a present-day offering to a future and breakthrough value curve? Four distinct sets of actions need to be considered:

Eliminate: What factors should be eliminated that the industry has taken for granted?

 

Reduce: What factors should be reduced well below the industry standard?

 

Raise: What factors should be raised well beyond the industry standard?

 

Create: What factors should be created that the industry has never offered?

These four questions must be answered for each dimension on your strategy canvas, as well as new ones.

Six Paths to Explore

But where can we turn to answer these four questions? The short answer is … look around you. If the strategy canvas is the “hardware” of Value Innovation, the “software” is the exploration of the six paths which can provide guidance into redefining your value curve.

You can travel down six different paths to explore how you can begin to construct a very different value story.

• Look across alternative industries. Cirque du Soleil borrowed concepts from the opera, theater, rock music and ballet. Are there neighboring industries from which you can learn?
• Look across strategic groups within your industry. Different companies in the same industry offer products and services targeted at different customer segments. These companies are known as strategic groups. Can you combine some of the offerings from different strategic groups into an innovative value offering? Formule 1 hotels, in Europe, value innovated a new hotel concept for the highly profitable business traveler segment by combining some of the features from the strategic group of one-star hotels with other features from the strategic group of three-star hotels. The result: Hotels with little or no eating facilities, architectural aesthetics, food, lounge or other amenities, but superior bed quality, hygiene and silence – for a very modest price. The concept has had tremendous success with the weary road warrior who wants little more than a comfortable night’s sleep.
• Look across the chain of buyers. In any buying decision, three groups can get involved -- the user, the purchaser and the influencer. Companies often focus on just one group. But what would happen if you targeted a different group? Financial information company Bloomberg value innovated by focusing on traders and asset managers – the end users -- instead of the IT department and CIO – the purchasers -- who had been the traditional focus of suppliers of financial information systems.
• Look across complementary service and product offerings. What products or services could be viewed as complementary to yours? Barnes & Noble revolutionized the bookstore business by recognizing that the act of browsing for books could be monetized – and made more pleasant -- by putting Starbucks coffee shops in their bookstores. Is there a service or product that would be a natural complement to yours?
• Look across functional or emotional appeals to buyers. The Body Shop value innovated the cosmetics industry by playing down the traditional glamour, packaging, advertising, and high price of cosmetics and replaced it with inexpensive, healthy and environmentally friendly products. How could you functionalize -- or emotionalize -- your value offering?
• Look across time and trends. What external trends and uncertainties will affect your industry or business environment? Constructing industry scenarios can help identify the winning value curves under different possible futures.

How Blue Is Your Ocean?

Is the approach sketched above simply be too good to be true? Possibly. But value innovation need not lead to a complete revolution in your offerings, and the staggering results that can come from doing so successfully. More modest applications of value innovation can lead to more incremental yet significant improvements in business performance. The basic idea is to enhance value, reduce cost and compete less head-on. The result: less red ink.

Obviously, even blue ocean players will also need to have red ocean features. In a world where information flows rapidly and imitators come at you quickly, even the bluest of strategies will ultimately get imitated and start to bloody the waters – driving the need for the next round of value innovation.

Yet as some of the preceding examples suggest, being first to reach blue waters can lead to long-lived advantage because of a unique brand (as in Cirque du Soleil), or an organizational structure optimally adapted to the strategy (as in Southwest Airlines) which can create entry barriers to competition moving into your blue waters.

But ultimately, the courage it takes to pursue a blue ocean strategy may be the highest entry barrier to finding new market space. Organizational inertia, risk aversion, fear of cannibalization and other forms of inflexibility may delay imitation just long enough to create significant competitive distance away from your rivals.

In a world where the need for strategic reinvention has now become commonplace, those firms who use a structured and disciplined approach to innovation will have greater odds of finding blue ocean -- not just once, but as they gain experience in using the process, can do so again and again. And that skill can become a long-lasting and sustainable organizational core competency.

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