A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created.
At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
| Aspect | Description |
|---|---|
| Definition | Blue Ocean Strategy is a business approach that focuses on creating new market spaces with limited or no competition, known as “Blue Oceans,” by offering innovative products, services, or solutions that stand out from existing offerings in the market. |
| Process | 1. Market Analysis and Identification 2. Identification of Market “Red Oceans” 3. Identification of Untapped Market “Blue Oceans” 4. Value Innovation 5. Cost Consideration 6. Strategy Formulation 7. Implementation 8. Continuous Monitoring and Adaptation 9. Evaluation and Measurement 10. Learning and Iteration |
| Metrics | Key performance indicators (KPIs) may include market share in the “Blue Ocean,” customer acquisition rate, revenue growth, profitability, and return on investment (ROI). |
| Benefits | – Expansion into new markets with limited competition – Higher profit margins due to reduced price competition – Enhanced brand reputation as an innovator – Sustainable growth and long-term success |
| Drawbacks | – Requires significant research and analysis – Risk of market acceptance for entirely new offerings – May face challenges in scaling operations – Competition may eventually enter the “Blue Ocean” |
| Applications | Blue Ocean Strategy is applicable across various industries and sectors where businesses seek growth opportunities by offering unique value propositions in untapped market spaces. |
| Use Cases | – Cirque du Soleil’s reinvention of the circus industry – Nintendo’s creation of the Wii gaming console – Yellow Tail wine’s entry into the wine market – Southwest Airlines’ low-cost, point-to-point service model |
| Examples | – Netflix’s shift from mail-order DVDs to streaming – Apple’s introduction of the iPhone – Airbnb’s disruption of the lodging industry – Tesla’s innovation in electric vehicles |
How does a red ocean look like?
The blue ocean strategy is the fruit of the homonym book, and research conducted b
To understand and appreciate what makes a blue ocean strategy so powerful, it makes sense to look at a place called the red ocean.
A red ocean is a place where competition is the norm. Players in a red ocean are all fighting for the same contested space.
This is usually an accepted market, with well-defined boundaries and where players either provide a service at a lower cost. Or they differentiate it through higher quality by making that service less accessible.
It is a place where rules are well defined as well, and everyone plays according to them. Innovation is marginal, and even if that happens, it is not a breakthrough.
By nature, a red ocean, as it is a very crowded space, it is also a place where profit margins are narrow, and products and services are commoditized. And where differentiation mostly happens on pricing.
The anatomy of a blue ocean
A blue ocean is any industry that is not yet defined, where boundaries are still to be built and where competition doesn’t exist. There is a new demand ready to be molded and captured. And the rules of the game are still to be written.
The new market forming within a blue ocean has exponential growth potential, and it is ready to grab to those players able to see it. Those creating this new market will be able to tap into a new demand, which will have them enjoy higher margins and lower competition.
The first able to create and also capture that demand will also be the one able to create a lasting advantage.
To understand the blue ocean strategy, it is essential to retrace how such strategy reinterpreted the process of value innovation in business.
The former value-cost trade-off
In the old days, companies would usually compete by either creating higher value for customers, thus charging more. Or by creating a more standardized value proposition, leveraging on operational efficiency, and offering decent value for a lower cost.
That was the old days. Digital businesses today can break this trade-off and innovate by offering more value at a more reasonable price. That is the whole point of companies like Amazon.
The new era of more value at lower costs
If you look at the core principles of Amazon business model design, you’ll notice that its flywheel starts from customer experience, which can be summarized as more selection of items, coupled with a fast delivery service, and the ability to find almost anything.
In short, Amazon wasn’t just offering much better customer experience. It was offering a better customer experience at a lower price. The same applies to platforms like Airbnb or Booking and the whole logic of their value proposition design.
More value at a lower cost is the key to understand how to build a successful digital business model.
Value innovation in a blue ocean strategy
Therefore, value innovation looks slightly different in a blue ocean model. More precisely, it looks at five core concepts:
- create an uncontested market: the whole point of a blue ocean strategy is to look beyond the conventional boundaries of existing markets to create an uncontested market.
- Competition is made irrelevant: a blue ocean also makes competition irrelevant. Not because you compete and win. But as you’re creating a new market, you’re are creating the rules of the game. This also implies another key aspect.
- Create and capture new demand: a blue ocean strategy is not just about creating new demand. We know now that the so-called first-mover advantage is just an illusion. And the key to success here is actually to capture that same demand. In short, roll out a business model with a strong distribution strategy to take hold of that new market. Otherwise, the risk is that a first-mover is creating a market to see latecomers take it over.
- Break the cost-value trade-off: the central concept of the blue ocean strategy is to break the cost-value trade-off. Thus, you not only can offer more value. But as you leverage on a more efficient cost structure, you can pass lower prices to your end customers. You are thus making your value proposition as more value at a lower cost.
- Align the organization around the more value at lower cost principle: as blue ocean players are aware of the possibility of breaking the cost-value trade-off. They need to make this principle a built-in feature of the overall organization. So that all can be aligned around these principles.
Key takeaway
A blue ocean strategy enables the creation of new markets, buy moving beyond the boundaries of existing red ocean markets to create uncontested markets. A key concept of this blue ocean strategy is value innovation.
In this context, value innovation is built around the break down of the cost-value trade-off. Thus a successful business model needs to be offering more value at a lower cost.
That’s the key to a blue ocean strategy.
The Four Actions Framework: A Blue Ocean Strategy companion framework
Read: The Four Actions Framework
An alternative to the Blue Ocean Strategy view
In a saturated web, where most verticals have become highly competitive and commoditized, a Blue Ocean Strategy has become much more complex to execute. Also, while it might be possible for companies or individuals with massive resources to create and define new markets.
For those companies that have to bootstrap their way through, I argue that a different approach might work out. This approach I called Blue Sea where rather than looking for a new ocean, we can find a small space within the Sea, which is so small, that is unreachable by the existing waves, and not much interesting to sharks.
That is going to be the place to kick off the business, and the entrepreneurial lab to validate your business idea and make your business gain traction and gather the needed resources to evaluate options to scale later on. This is at the core of the Blue Sea Strategy.
And it alls starts by searching for your Minimum Viable Audience.
Future trends in value chain innovation
A value chain innovation doesn’t just happen anymore for increased convenience and reduced price, it also comes with the build-up of ecosystems that help this value to be delivered in the first place.
The key to understanding where this value will be provided is about understanding the platform where consumption will happen.
To gain a bit of context, new uncontested markets – eventually turned mature – have born and evolved thanks to the creation of what we can call business platforms.
Business platforms are the combination of the physical, software platforms where consumption happens. But also the place where an entrepreneurial ecosystem forms.
The classic example is that of Apple’s ability to build successful products, that only in part is the cause of its success.
Those products, indeed, come coupled with a platform business model, that incentivized third-party developers to build their applications, that can be plugged into Apple’s devices, thus enhancing their capabilities.
This is the core of sustained success. And the company who manages to build the next business platforms, or surf them, might, for a while taking advantage of those uncontested markets.
Yet as they mature, they will need to be on the lookout for the next platform that will take over.
Blue ocean strategy examples
Casella Wines
After Casella Wines implemented the blue ocean strategy, it became the fastest growing wine brand in United States history after just three years.
How was this achieved in such a short space of time?
The company realized that most of its competitors were moving in a fiercely competitive wine market where each brand was more or less the same as the others.
Most brands, for example, would wax lyrical about their wine-making heritage or talk about the quality of their vineyards.
To create a blue ocean for itself, Casella abandoned these traditional talking points. It also avoided using complex wine jargon on its bottles which many consumers found intimidating and difficult to understand.
While Yellow Tail will never be to everyone’s tastes, it was sweet enough to appeal to beer and spirit drinkers and not just wine aficionados.
The company also simplified the range by selling one red varietal and one white varietal.
Yellow Tail was the most loved wine brand in the world for a fourth straight year with million of cases sold around the world.
Cirque du Soleil
Canadian circus company Cirque du Soleil was founded in the 1980s at a time when traditional circus companies dominated.
The circuses themselves were family-oriented and featured clowns, animal performances, and aerial acts, but this was very much a red ocean industry.
Various companies endeavored to outdo each other with exotic animals and famous entertainers, but this increased costs for attendees without providing much in the way of extra value.
Circuses were also in competition with other forms of entertainment such as television and cinema and there was increasing pressure from animal rights groups over animal welfare.
Cirque du Soleil founder Guy Laliberté decided to start a company that combined circus with adult theatre, aerobatics, music, and an original storyline.
In the process, he entered a blue ocean where costs were lower and consumer value was higher.
Costs were lower because Cirque du Soleil:
- Avoided having to pay for animal care, housing, food, transport, and training.
- Performed their shows on one stage instead of three-rings like a traditional circus, which reduced the number of performers on payroll, and
- Did not name its performers. This meant individuals could not leverage their popularity to start a bidding war with a rival company.
The company was also able to increase customer value with the following initiatives:
- Increased production value that incorporated music, illumination, stories, and various forms of artistic expression. The production quality of Cirque du Soleil shows is now comparable to many Broadway shows with prices to match.
- Theatres with comfortable seats replaced traditional circus tents with hard bench seating and sawdust floors.
- Performances based on different themes. Alegria is a show about the transfer of power and the evolution of ancient monarchies into modern democracies, while Quidam is based on an examination of real people with real-life concerns. Cirque du Soleil also offers a Michael Jackson tribute show and one based on a night in New York City. The important thing to note here is that multiple productions increase demand since many fans want to watch multiple shows. In a traditional circus, the acts and show format tend to be much more static.
Cirque du Soleil created a blue ocean for itself by taking the best bits from circus and theatre productions and discarding the rest.
In the process, it created a new market of its own and made competition with traditional circuses irrelevant.
Additional blue ocean strategy examples
Let’s take a look at some more blue ocean strategy examples below.
Netflix
Netflix emerged at a time when Blockbuster was at the peak of its powers. That Blockbuster would ultimately fail is beside the point since Netflix created a new market with its online mail-order DVD service.
It also implemented a flat fee monthly subscription model that overcame the two major pain points of Blockbuster’s model: return deadlines and late fees.
Netflix customers could in theory rent a movie or television series indefinitely provided they did not miss a monthly payment.
They could also select a title from the comfort of their living room and not have to make returns at a bricks-and-mortar store.
In more recent years, the company has used the blue ocean strategy to move into streaming and then content production.
This has enabled Netflix to capture demand in new, uncontested markets and stay ahead of the curve.
iTunes
When iTunes burst onto the scene in 2003, the platform revolutionized the music industry and how consumers listened to their favorite artists.
At the time, illegal music sharing was rife with billions of individual tracks shared each month on platforms such as Napster, Kazaa, and LimeWire in the late 90s and early 2000s.
While tracks and albums were shared via nefarious means, it became clear to Apple that the shift toward digital music was here to stay.
This was underscored by increasing demand for the company’s iPod mp3 player.
iTunes was developed in partnership with major record labels such as BMG, EMI, Sony, Universal, and Warner Brothers Records.
The platform allowed consumers to purchase individual songs at a reasonable price instead of having to purchase the whole album.
The iTunes user experience – like most Apple products – also added value to the product’s appeal.
While iTunes was no doubt a profitable venture for the company, its success relied on Apple creating a new market where record companies could make money and music artists were fairly compensated for their work.
Uber
Rather than confine itself to the taxi industry, Uber created a new market itself that made taxis almost irrelevant.
Before Uber was founded, consumers needed to find a taxi, determine whether it was occupied, hail it, and then hope the driver stopped.
This process would often be carried out in bad weather and taxi availability tended to be poor over the holiday period or during major events.
Calling a taxi company to book a ride was even worse, with many consumers unable to reach anyone in the dispatch center.
Uber’s app is built on a trust system established between drivers and riders. In the early days, it attracted a mostly tech-savvy millennial crowd who were used to instant gratification and wanted to see exactly how far away their ride was.
The company also removed much of the hassle associated with a traditional cab.
When an Uber ride is over, the passenger simply exits the vehicle and carries on with their day without having to pay for the fare or tip the driver.
Process to identify a Blue Ocean
| Process | Description |
|---|---|
| Market Analysis and Identification | Conduct a comprehensive analysis of the existing market space to identify the current competitive landscape and key players. |
| Identification of Market “Red Oceans” | Identify the saturated, competitive market spaces known as “Red Oceans” where businesses often engage in fierce competition. |
| Identification of Untapped Market “Blue Oceans” | Explore and identify untapped market spaces, known as “Blue Oceans,” where competition is limited or non-existent. These areas represent opportunities for innovation and growth. |
| Value Innovation | Develop a strategy for creating unique value for customers in the identified “Blue Ocean” by offering innovative products, services, or solutions that stand out from existing offerings. |
| Cost Consideration | Evaluate the cost structure and efficiencies required to deliver value in the “Blue Ocean” while maintaining profitability. |
| Strategy Formulation | Create a strategic plan that focuses on capturing market share in the “Blue Ocean” by offering distinctive value and differentiating from competitors. |
| Implementation | Execute the strategy by launching new products or services, targeting the identified “Blue Ocean” market, and effectively communicating the unique value proposition to customers. |
| Continuous Monitoring and Adaptation | Continuously monitor market dynamics, customer feedback, and competition to make adjustments to the strategy and stay competitive in the “Blue Ocean.” |
| Evaluation and Measurement | Assess the success of the “Blue Ocean Strategy” by measuring key performance indicators (KPIs), such as market share, customer acquisition, and profitability. |
| Learning and Iteration | Incorporate lessons learned from the strategy implementation and evaluation into future iterations of the “Blue Ocean Strategy” to maintain its relevance and effectiveness. |
Key Highlights
-
Blue Ocean Strategy:
- Focuses on creating new, uncontested markets rather than competing in existing ones.
- Involves value innovation by offering more value at a lower cost, breaking the cost-value trade-off.
- Results in higher margins, lower competition, and innovation.
-
Red Ocean vs. Blue Ocean:
- Red Ocean: Competitive markets where companies fight for the same space and compete on costs or quality.
- Blue Ocean: New markets with no competition, high growth potential, and higher margins.
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Anatomy of Blue Ocean:
- Blue ocean is an undefined industry with no existing boundaries or competition.
- Offers exponential growth potential and high margins for early entrants.
-
Value Innovation in Blue Ocean:
- Creates uncontested markets, makes competition irrelevant, captures new demand, and breaks the cost-value trade-off.
- Requires alignment of the organization around the principle of offering more value at a lower cost.
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Blue Ocean Strategy Examples:
- Casella Wines (Yellow Tail): Simplified wine offerings, targeted a broader audience, and introduced sweet wine.
- Cirque du Soleil: Combined theatre, music, and aerobatics to create a new entertainment form with higher value and lower costs.
- Netflix: Introduced online DVD rental and streaming, capturing demand in new markets.
- iTunes: Shifted the music industry by allowing individual song purchases at reasonable prices.
- Uber: Created a new market by offering convenient and hassle-free ride-hailing.
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Additional Insights:
- Blue ocean strategies remain relevant but might be more complex due to market saturation.
- “Blue Sea Strategy” suggests finding a niche within an existing market as a starting point.
- Value chain innovation involves building ecosystems for effective value delivery.
- Business platforms play a role in fostering ecosystems and sustained success.
Connected business frameworks
BCG Matrix
Benchmarking
SWOT Analysis
PESTEL Analysis
Porter’s Five Forces
Scenario Analysis
VRIO Framework
Additional business frameworks
Below a set of other business frameworks, you can use to improve your business acumen.
Ansoff Matrix for a context-based expansion strategy
Expand, extend or stretch your business model with the FourWeekMBA Growth Matrix
Allocate and prioritize on business experiments with the FourWeekMBA Speed-Reversibility Matrix
Prioritize your digital marketing activities with the FourWeekMBA Digital Strategy Mix Matrix
Connected Strategy Frameworks
Main Guides:
- Business Models
- Business Strategy
- Marketing Strategy
- Business Model Innovation
- Platform Business Models
- Network Effects In A Nutshell
- Digital Business Models
