Blue Ocean Strategy: create new demand instead of competing on price

Put the quotes in your industry side by side. If they promise the same things in the same order, customers compare the only thing left: the price. Price cuts are expensive. Take a firm with an operating margin of 8%: a 2% lower price at the same volume and costs takes a quarter of its operating profit. Blue Ocean Strategy offers a way out: stop competing on the same factors and build an offer that makes the comparison pointless.

W. Chan Kim and Renée Mauborgne introduced the idea in Harvard Business Review (October 2004) and worked it out in the book Blue Ocean Strategy (Harvard Business School Press, 2005). Below: the strategy canvas, the four actions, a worked example and the critique.

What is Blue Ocean Strategy?

Kim and Mauborgne divide markets into two kinds. Red oceans are the industries that exist today: the rules are known and companies fight for a bigger share of limited demand. Blue oceans are market spaces that do not yet exist, where demand is created rather than fought over. Their evidence came from more than 150 blue ocean creations in over 30 industries (source: Harvard Business Review, October 2004). The best-known case is Cirque du Soleil, which opened a previously unknown market space by reinventing the circus instead of fighting other circuses for the same audience.

The core idea is value innovation: pursuing differentiation and low cost at the same time. That challenges the view, associated with Michael Porter, that a firm must choose between the two. You drop or reduce what buyers do not value, which lowers costs, and invest part of the savings in what they do value.

Kim and Mauborgne stress that creating a market is not the same as technological innovation. The people to study are non-customers: those about to leave your industry, those who refuse its offer and those who never considered it.

The strategy canvas: your market in one drawing

The strategy canvas is the diagnostic tool of the method. The horizontal axis lists the factors your industry competes on and invests in, such as price, range, advice, speed or service. The vertical axis shows the level buyers receive on each factor, usually scored from low to high. Connect one provider's scores and you get its value curve, a picture of its strategy.

In a red ocean the curves of competitors run almost parallel. Kim and Mauborgne look for three qualities in a new curve: focus on a limited number of factors, divergence from competitors' curves, and a tagline that captures the strategy for staff and buyers alike. If you cannot say in one sentence what is different, the curve is not yet different enough.

The four actions framework: eliminate, reduce, raise, create

The four actions framework turns the canvas into a new curve. It asks four questions about the factors on the horizontal axis, and the answers go into the eliminate-reduce-raise-create (ERRC) grid.

Eliminate and reduce lower your costs; raise and create add value. Pay for every raise and create with an eliminate or reduce, or the new curve simply costs more than the old one.

How to apply Blue Ocean Strategy in five steps

1. 01

   Draw the current canvas

   Choose five to ten factors, score your firm and your main competitors, and check the scores with customers rather than in the meeting room.

2. 02

   Look beyond your industry

   Include what customers use instead: doing it themselves, another kind of provider, or nothing. Talk to people who considered you and did not buy.

3. 03

   Fill in the four actions

   For each factor, decide whether to eliminate, reduce, raise or keep it, and add one or two new factors.

4. 04

   Draw the new curve and test it

   Is it focused, clearly different, and can you say it in one sentence? If not, go back to the four actions.

5. 05

   Calculate and pilot

   Work out the cost structure, compare it with your industry figures, and test the offer with a small group of customers before you change the whole firm.

Blue Ocean Strategy example: a landscaping firm

A landscaping firm with 15 staff works mostly for private homeowners. Its quotes look like those of every other landscaper in the region: a site visit, a custom design, a long list of materials and a price that is hard to compare. Many requests never become orders. When the firm asks why, those who dropped out either did the work themselves or left the garden as it was. Those non-customers are the starting point.

Fictitious Firmfocus example. Scores from 0 (none) to 5 (very high), based on interviews with customers and with people who did not buy.

The new offer: three garden modules, from a small city garden to a family garden with a terrace, chosen online from photos and measurements, for a fixed price and laid in two working days. The savings come from hours the firm used to give away. It made about 220 quotes a year, each with a site visit and around six hours of unpaid design work, and won roughly one in four. That is 1,320 unpaid hours a year, worth €59,400 at an internal cost of €45 an hour. In the new model that time goes into installation, and standard modules allow bulk buying of materials and plants.

Fictitious Firmfocus example. Unpaid hours = 220 quotes x 6 hours = 1,320; value = 1,320 x €45 = €59,400. Amounts in euro; the logic works in any currency.

The firm decides not to run both models side by side: custom design continues only for existing customers, so the new curve stays clear. It tests the modules in two towns for one season first.

Critique and limits of Blue Ocean Strategy

Red and blue are not either-or

Andrew Burke, André van Stel and Roy Thurik tested the theory statistically on retail in the Netherlands (Erasmus Research Institute of Management, May 2009). They found that blue ocean and competitive strategies overlap, so managers do not face an either-or choice; in Dutch retail, blue ocean strategy held up as a viable long-term strategy. In practice most firms combine a new curve on some factors with ordinary competition on others.

Success stories in hindsight

The case base consists of moves that worked. Attempts that failed with the same tools are not in the sample, so the method helps you generate options but does not predict which one will win. Test before you commit.

Blue water turns red

A successful new curve attracts imitators, so the advantage needs things that are hard to copy, such as relationships, know-how or a cost structure rivals cannot match quickly. Porter's warning about straddling applies too: trying to match a new position while keeping the old one rarely works (Harvard Business Review, November 1996).

Not the same as disruption

A blue ocean does not have to start at the low end of the market or push out incumbents, as Christensen's disruption does; it creates demand that did not exist before. See value proposition and jobs to be done for the difference.

When Blue Ocean Strategy fits, and when it does not

Blue Ocean Strategy in a small business and a larger organisation

A new curve is an option, not yet a decision. Weigh it against other routes with evaluate and choose and check it against what good strategy is. Porter's generic strategies give the opposite view on trade-offs. All models for this decision are in strategic choices, part of the strategy overview.