Frequently Asked Questions about Blue Ocean Strategy

What is the main idea behind Blue Ocean Strategy?
What is meant by red and blue oceans, and why use the colors red and blue?
How does blue ocean strategy fundamentally differ from competition based strategies?
What is the significance of the analytical tools and frameworks of Blue Ocean Strategy?
How does the concept of “value innovation” relate to creating a blue ocean strategy?
Blue ocean strategy may be perceived as involving high risk. How does blue ocean strategy address the issue of risk?
What are the common mistakes that companies make when they define their competitive strategy? How can these be avoided when formulating Blue Ocean Strategy?
What is meant by building execution into strategy formulation. How is it achieved with Blue Ocean Strategy?
How durable is the advantage associated with a blue ocean strategy and what is the process for defending it?
Is blue ocean strategy applicable to all types of industries and companies?

Q. What is the main idea behind Blue Ocean Strategy?

The central contention of Blue Ocean Strategy is that in today’s world of hyper-competition, declining price points, and commoditization, competing for share in existing markets tends to lead to a ‘red ocean’ of bloody competition with limited opportunities for profitable growth. Instead of competing within these “red oceans” of bloody competition, Blue Ocean Strategy navigates how companies can break out of existing market boundaries, leave the competition, and unlock all new demand by creating blue oceans of new market space. Blue Ocean Strategy is based on over a decade of research and provides a set of analytical tools and frameworks for formulating and executing blue ocean strategy that any company can apply. The good news is these tools do not require any special capacities, creative genius, vision or foresight, which makes the ideas accessible to all companies.

Q. What is meant by red and blue oceans, and why use the colors red and blue?

The terms red and blue oceans denote the market universe. Red oceans are all the industries in existence today – the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody. Hence, the term “red” oceans.

Blue oceans, in contrast, denote all the industries not in existence today -- the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. Like the “blue” ocean, it is vast, deep, powerful –in terms of profitable growth, and infinite.

Q. How does blue ocean strategy fundamentally differ from competition based strategies?

Red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within a finite market space. Taking market structure as given, companies are driven to try to carve out a defensible position against the competition in the existing industry terrain. To sustain themselves in the marketplace, practitioners of red ocean strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy.

Such strategic thinking leads firms to divide industries into attractive and unattractive ones and to decide accordingly whether or not to enter. After it is in an industry, a firm chooses a distinctive cost or differentiation position. Here, cost and value are seen as trade-offs. Because the total profit level of the industry is also determined exogenously by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.

Under blue ocean strategy, however, the strategic challenge looks very different. Recognizing that structure and market boundaries exist only in managers’ minds, practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there, largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation—that is, the creation of innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost.

Under blue ocean strategy, there is scarcely an attractive or unattractive industry per se because the level of industry attractiveness can be altered through companies’ conscientious efforts. As market structure is changed by breaking the value/cost tradeoff, so are the rules of the game. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created. Such a strategy therefore allows firms to largely play a non–zero-sum game, with high payoff possibilities.

Q. What is the significance of the analytical tools and frameworks of Blue Ocean Strategy?

Indeed, it is one thing to say that there is untapped market space devoid of any competition, but it is another thing to have practical tools and methodologies to create blue oceans. These analytical frameworks fill a central void in the field of strategy. For the past 25 years academics and consultants have developed an impressive array of tools and frameworks to compete in red oceans, such as the five forces to analyze existing industry conditions and three generic strategies. Yet the field has remained virtually silent on practical tools to excel in blue oceans. What executives have received instead are calls to be brave, to celebrate failure, and to seek out revolutionaries. While thought provoking, these are hardly substitutes for practical analytics to navigate successfully in blue waters. In the absence of these, executives cannot be expected to act on the call to break out of existing competition.

These tools and analytical frameworks redress this imbalance and make the formulation and execution of blue ocean strategy as systematic and actionable as competing in the red waters of known market space.

Q. How does the concept of “value innovation” relate to creating a blue ocean strategy?

A Blue Ocean Strategy is created when a company achieves value innovation – the simultaneous pursuit of differentiation and low cost. A company achieves value innovation by aligning its: value proposition (utility minus price) by creating an offer that dramatically raises buyer utility at the right price for the mass of the market; profit proposition (price minus cost) by creating a leap in value for the company itself by making a tidy profit; people proposition by practicing fair process and building execution into strategy formulation.

Q. Blue ocean strategy may be perceived as involving high risk. How does blue ocean strategy address the issue of risk?

Above all, blue ocean strategy is about risk minimization and not about risk taking. Of course, there is no such thing as a riskless strategy. Any strategy, whether red or blue, will always involve risk. Nonetheless, when it comes to venturing beyond the red ocean to create and capture blue oceans there are six key risks companies face: search risk, planning risk, scope risk, business model risk, organizational risk, and management risk. The first four risks revolve around strategy formulation, and the latter two around strategy execution.

Each of the six principles in Blue Ocean Strategy expressly addresses how to mitigate each of these risks. The first blue ocean principle - reconstruct market boundaries - addresses the search risk of how to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. The second principle - focus on the big picture, not the numbers - tackles how to mitigate the planning risk of investing lots of effort and lots of time but delivering only tactical red ocean moves. The third principle - reach beyond existing demand – addresses the scope risk of aggregating the greatest demand for a new offering. The fourth principle - get the strategic sequence right – addresses how to build a robust business model to ensure that you make a healthy profit on your blue ocean idea, thereby mitigating business model risk. The fifth principle - overcome key organizational hurdles – tackles how to knock over organizational hurdles in executing a blue ocean strategy addressing organizational risk. The sixth principle - build execution into strategy – tackles how to motivate people to execute blue ocean strategy to the best of their abilities, overcoming management risk.

Hence, as much as blue ocean strategy is about maximizing opportunities it is also about minimizing risk. That is why blue ocean strategy speaks the language of executives. Executives cannot afford to be riverboat gamblers.

Q. What are the common mistakes that companies make when they define their competitive strategy? How can these be avoided when formulating Blue Ocean Strategy?

First of all, it is important to realize that practicing competitive strategy, or what we call Red Ocean Strategy, is essential to the success of a business. One still must compete in the marketplace. However, competitive strategy often makes companies too focused on benchmarking against the competition, focusing on their existing assets and capabilities, and generally trying to react to the circumstances of their industry. These are the most common mistakes companies make in formulating their strategies. To avoid these mistakes, Blue Ocean Strategy asks companies to first stop benchmarking and put aside any conception of their own assets and capabilities. We believe that the moment you take an environmentally deterministic view of your company you are a victim of your environment. Companies find this challenge inspiring. Learning to think differently about opportunities and risks, daring to move forward into the future, that is what keeps people and companies alive, young, and growing.

Blue ocean strategy first asks how can I create exceptional buyer utility that will change the lives of the mass of the market? Once answered, they ask, what is the price that will unlock the mass of buyers? Here you have achieved your value proposition. Next they ask given the strategic price what is the cost target I need to achieve to make a tidy profit. This is the company proposition. Finally they ask, what are the internal adoption hurdles to executing my strategy and how do I overcome them? This is the people proposition.

The moment you sit back and say how can we create a whole new industry, by asking just a few simple questions, then you start to break that cycle. All industries are created not by big resources but by big ideas. Blue Ocean Strategy proposes a different approach whereby new market space is built by cognitively reordering and reconstructing existing market realities and existing data in a fundamentally new way. Not by focusing on your current assets and capabilities.

Q. What is meant by building execution into strategy formulation. How is it achieved with Blue Ocean Strategy?

Great strategy is not about excellent strategy and bad execution; nor is it about bad strategy and excellent execution. Excellent strategic outcomes are the product of excellent strategic content plus excellent execution. To ensure this, leaders must create a culture of trust and commitment that motivates people to execute the agreed strategy. People’s minds and hearts must align with the new strategy so that at the level of the individual, people embrace it of their own accord and willingly go beyond compulsory execution to voluntary cooperation in carrying it out.

It is not good enough to formulate a blue ocean strategy; you must execute it. Yet, this can be especially difficult as blue ocean strategy represents a significant departure from the status quo. Trepidation builds as people are required to step out of their comfort zones and change how they have worked in the past. To execute blue ocean strategy effectively companies must abandon perceived wisdom on effecting change. To build people’s trust and commitment deep in the ranks and inspire their voluntary cooperation, companies need to build execution into strategy from the start. In the blue ocean strategy process, leadership is built into every stage. Moving from strategy formulation to strategy execution is not a sequential process, but rather, it is a simultaneous pursuit of strategy formulation (intellectual input) and strategy execution (emotional input).

Q. How durable is the advantage associated with a blue ocean strategy and what is the process for defending it?

Creating blue oceans is not a static achievement but a dynamic process. Once a company creates a blue ocean and its powerful performance consequences are known, sooner or later imitators appear on the horizon. However, a blue ocean strategy brings with it considerable barriers to imitation. Some of these are cognitive, and others are operational.

The first barrier is often cognitive. Competitors are often blocked from imitating because of brand image conflicts, or the blue ocean strategy just does not fit conventional strategic logic. For many years CNN, for example, was ridiculed by the industry as chicken noodle news by established players. The second barrier is organizational. Because imitation often requires companies to make substantial changes to their existing business practices, politics often kick in, delaying for years a company’s commitment to imitate a blue ocean strategy. The third level includes the economic forces of blue oceans. The high volume generated by a value innovation leads to rapid cost advantages, placing potential imitators at an ongoing cost disadvantage.

The best way to defend blue oceans and to block new entrants into the market you have created as long as possible is to heighten these barriers with constant improvement on your initial blue ocean strategy of value, profit and people propositions.

Q. Is blue ocean strategy applicable to all types of industries and companies?

Yes, blue ocean strategy applies across all types of industries from the typical suspects of consumer product goods to b2b, industrial, pharmaceutical, financial services, entertainment, IT, and even defense. Blue Ocean Strategy drives this point home by highlighting a rich array of companies creating blue oceans across diverse, and unexpected industry domains from NetJets in jet travel, to NABI in the municipal bus industry, to Cemex in cement, to Joint Striker Fighter in defense, to Cirque du Soleil in entertainment.

Also, although blue ocean strategies create new market space and change industry dynamics, they are not necessarily initiated by entrants to an industry. In our work we found that blue oceans were created by both industry incumbents and new entrants, challenging the lore that start-ups have natural advantages over established companies in creating new market space. In the auto industry, think of GM which created the blue ocean of emotional, stylized cars in the 1920s, or the Japanese which created the blue ocean of small, gas efficient autos in the 70s, or Chrysler which created the blue ocean of minivans in the 80s – all were incumbents. Blue oceans created profitable growth for every company launching them, start-ups and incumbents alike.

Our research also reveals that large R&D budgets are not the key to creating new market space. The key is making the right strategic moves. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action not the size or age of the firm and therefore is the prerogative of any company in any industry.