What Is Blue Ocean Strategy?

Kim and Mauborgne published the article "Blue Ocean Strategy" in Harvard Business Review in October 2004, and the book followed in 2005. The central idea, which they call value innovation, had already appeared in an article of theirs from 1997. According to their website, it rests on a study of more than 150 strategic moves in more than 30 industries over 100 years.

Red oceans are all the industries that exist today, with known boundaries and rules, where companies take share from one another. Blue oceans are the industries that don't exist yet, where demand gets created. The authors study moves and set companies and industries aside as the unit, because, as they write, no company is consistently excellent.

Two misreadings come up with this topic, and you can check both against the original.

The first is believing you have to invent something. The 2004 article says the opposite: blue oceans seldom result from technological innovation, and it's much more common for one to be created from within a red ocean, when a company expands the boundaries of its industry.

The second is believing the water stays blue. The authors write that such companies usually go ten to 15 years without credible challenges, and their main example was Cirque du Soleil, whose revenue had grown 22-fold in ten years. On 30 June 2020 Cirque obtained creditor protection in Canada, with liabilities of about $1.6 billion. The pandemic had closed all its shows, and it was already heavily indebted after a series of acquisitions. In November 2020 it left the process through a sale to its secured lenders. That doesn't refute the method, because the cause lay elsewhere, but it shows that a good move doesn't protect a company from whatever comes next.

First, draw the strategy canvas of your industry. The horizontal axis holds the factors companies compete on, and the vertical axis the level buyers receive. If all the curves look alike, everyone is competing for the same thing.

Second, look at the people who don't buy. The authors distinguish three tiers: those who buy the minimum out of necessity, those who have decided against the offering, and those who have never considered it. Ask what they have in common with your current customers.

Third, apply the four actions to each factor:

• Eliminate: which factors does the industry take for granted that no longer add value?
• Reduce: which factors sit well above what buyers need?
• Raise: which factors should sit well above the industry standard?
• Create: which factors has the industry never offered?

Cirque dropped animal acts and aisle concessions, and created themes, original scores and sets drawn from theatre. That cut its costs and brought in adults who had stopped going to the circus.

Fourth, draw the new curve and check that it's different and can be explained in one sentence. The table of the four actions, which the authors call ERRC, puts it in writing.

Fifth, test demand before you invest. An MVP answers whether anyone will pay better than a drawing does. Check the cost too, because the method asks for differentiation and low cost at once.

An invented example: a language school competes on number of levels, central classrooms and official exams. Many professionals never sign up because they can't attend at fixed times. The school eliminates the classrooms, reduces the levels, raises speaking practice and creates 20-minute sessions on work situations. Before giving up its premises, it tests this with a paying group.

The most quoted figures come from the authors themselves. In a study of business launches in 108 companies, 86% were line extensions, with 62% of revenue and 39% of profit. The 14% aimed at new markets delivered 38% of revenue and 61% of profit. That's their own data, and we found no replication. English Wikipedia sums up the criticism of their method this way: no control group, no way of knowing how many companies tried and failed, and examples selected to tell a winning story.

There is an independent test with data. Burke, van Stel and Thurik studied 41 shop types in the Netherlands from 1982 to 2000. In more than half, average profit and the number of firms rose and fell together, which fits growing markets. They also saw competition erode that profit, over about 15 years. They warn themselves that one study isn't proof, and they conclude that you don't have to choose between the two strategies. It can happen much faster: in the case of the Wii, Svend Hollensen describes Sony and Microsoft turning the market red again within one or two years with similar motion controls, though that's a single case.

So use it alongside other tools. Porter's five forces show how much profit the industry leaves as it stands, and competitive advantage explains how to defend a position. Brand positioning comes afterwards: how you tell buyers about the difference. Porter warns in the competitive advantage entry about the risks of pursuing cost and differentiation at once, so read both sides.

• Draw the canvas with factors that buyers recognise.
• Talk to people who don't buy before deciding what to create.
• Apply all four actions, and not only create.
• Work out the cost and price of the new curve before you invest.
• Test demand with people who pay.
• Check each year whether imitators have arrived.
• Compare the result with the five forces of the industry you're entering.

• Calling any new product a blue ocean.
• Adding factors without eliminating or reducing anything, which raises costs.
• Taking the absence of competitors for the presence of demand.
• Looking for new technology when the problem lies in the offering.
• Counting on ten to 15 years without challengers.
• Quoting the authors' percentages as if they were an independent measurement.
• Copying the Cirque example without checking debt and your own costs.