Using a value creation compass to
discover ‘‘Blue Oceans’’
Norman T. Sheehan and Ganesh Vaidyanathan
Norman T. Sheehan is an
Associate Professor at the
Edwards School of
Business, University of
Saskatchewan (Sheehan@
Edwards.usask.ca).
Ganesh Vaidyanathan is
Head of Accounting and an
Associate Professor at
Edwards School of
Business (Vaidyanathan@
Edwards.usask.ca).
DOI 10.1108/10878570910941172
n their landmark 2005 book Blue Ocean Strategy and the research articles that
I preceded it, W. Chan Kim and Renee Mauborgne convincingly argue that corporations
can earn greater profit by creating unique offerings for new markets than by competing
with rivals in existing ones.[1] In essence, Blue Ocean Strategy asks managers to change
their perspective from that of field generals battling competitors head-to-head for market
share or repeatedly seeking to grow by endless market segmentation. Instead they should
see themselves as explorers, looking to discover new customer demand. Kim and
Mauborgne draw from numerous case studies to make their argument, including Chrysler’s
recasting the family station wagon as a mini-van, Cirque du Soleil’s redefinition of the circus
and Build-A-Bear Workshop’s new approach to marketing stuffed animals. Companies that
have successfully discovered Blue Oceans enjoy a number of first-mover advantages,
including gaining economies of scale, building reputation and user loyalty, and the ability to
fund the search for the next Blue Ocean.
Blue Ocean strategies are most appropriate for companies whose products are in the
mature or decline phase of the product-life cycle. These companies, which exist in what Kim
and Mauborgne label, highly competitive ‘‘Red Oceans,’’ usually suffer from little or no
revenue growth because of the increasing commoditization of their offerings and decreasing
customer loyalty.[2] Companies facing these pressures typically attempt to increase
profitability by cutting production costs while at the same increasing marketing efforts.
These value renovation tactics typically meet with little success because competitors are
attempting the same moves, resulting in a zero sum game. Instead of focusing on besting
current competitors, Kim and Mauborgne believe that firms in mature markets should aim for
value innovation by redefining their offerings to provide unique attributes and experiences to
a set of unserved customers.
Discovering ‘‘Blue Oceans’’
Kim and Mauborgne believe that customers make purchase decisions based on the
offering’s attributes, such as quality, availability, and price.[3] They advise that managers
discover Blue Oceans by experimenting with and developing innovative bundles of
attributes which break the accepted cost-differentiation trade-off. Kim and Mauborgne put
forward ‘‘The Eliminate, Reduce, Raise, Create Grid’’ to help managers conceive and design
new bundles of attributes. (See Kim and Mauborgne’s ‘‘The Eliminate, Reduce, Raise,
Create Grid’’ in Exhibit 1.) While it is relatively easy to analyze which attributes to eliminate,
reduce or raise, the tougher challenge for managers is to create unique value for new
buyers. Kim and Mauborgne correctly argue that benchmarking current competitors is not
likely to generate ideas for Blue Oceans. While benchmarking is an appropriate value
renovation tactic, it does not lead to value innovation.
As guidance for generating sets of attributes that may lead to the discovery of Blue Oceans,
Kim and Mauborgne offer the ‘‘Six Path Analysis,’’ which involves looking in and outside the
VOL. 37 NO. 2 2009, pp. 13-20, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 13
 Exhibit 1 The four actions framework

industry for ideas (See Kim and Mauborgne’s exhibit, ‘‘Six Paths’’ in Exhibit 2). However,
there are other tools that managers can use to search for new market opportunities. For
example, Ian MacMillan and Rita Gunther McGrath outline how firms can find new points of
differentiation by looking up and down the supplier-buyer chain.[4] David Aaker offers
advice on how to pursue new customers, arguing that firms need to focus on changing the
buyer experience.[5] Procter & Gamble CEO R.G. Lafley outlines how his firm employs
market researchers who study how consumers use its products in order to get ideas for
innovations, a practice Harvard researcher Clayton Christensen advocates for all
innovators.[6] As an alternative to these tools, we propose that businesses locate Blue
Ocean opportunities by using the fundamental building blocks of value creation.

A unique methodology for discovering Blue Oceans

Using Stabell and Fjeldstad’s value creation logics, we propose that there are three types of
value that firms can offer its customers.[7] By combining parts of two or more of the value

Exhibit 2 Six paths framework: from head-to-head competition to Blue Ocean creation
Head-to-head competition Blue Ocean creations

Industry Focuses on rivals within its industry ! Looks across alternative industries
Strategic group Focuses on competitive position within strategic ! Looks across strategic groups within industry
group
Buyer group Focuses on better serving the buyer group ! Redefines the industry buyer group
Scope of product or Focuses on maximizing the value of product and ! Looks across to complementary product and
service offering service offerings within the bounds of its industry service offerings
Functional-emotional Focuses on improving price performance within the ! Rethinks the functional-emotional orientation
orientation functional-emotional orientation of its industry of its industry
Time Focuses on adapting to external tends as they ! Participates in shaping external trends over
appear time

Note: Published with permission; q Harvard Business Press, all rights reserved; Blue Ocean Strategy by W. Chan Kim and
Renee Mauborgne (HBSP, 2005)

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creation logics, managers can put together innovative bundles of attributes to design unique
offerings:
B Industrial efficiency logic. This creates value for customers by producing a high volume of
low cost, standardized offerings.[8] The industrial efficiency logic creates new buyer
value by reducing cost and passing on these savings in the form of lower prices. There
are a number of tools managers can use to increase the industrial efficiency of their
operations including Lean Production, Six Sigma, Supply Chain Management, Total
Quality Management, Just-in-Time Inventory, and Enterprise Resource Planning Systems.
Companies that use industrial efficiency logic as a focal point of their offerings include
fast food restaurants, and producers of private label products and most items found in
Discount Dollar Stores. For example, Huish Detergents, Inc is the largest manufacturer of
private label dish and laundry detergents in North America (including the Kirkland brand
for Costco and the Safeway Select brand for Safeway). Huish invested heavily in business
process improvements and vertical scope which allows it to offer comparable quality at
lower prices than the branded detergent brands.
B Network services logic. This creates value for customers by connecting them to other
members within the firm’s network.[9] A positive network effect occurs when increasing
numbers of people purchase the offering and participate in the system, thus increasing
the offering’s value.[10] Companies can create direct and indirect network effects for its
buyers in a number of ways: As a start, it can ensure that after-sale service and parts are
available. Next, the firm can encourage other entities to offer accessories that
complement the offering’s value. Apple’s iPod is successful due to the large of amount
of complementary products available which increase the value of its product to its
customers. Going further, the firm can create virtual and physical communities of users.
For example, Amazon invites readers to post reviews of products it sells on its website.
J Boats, Inc. sells high-end sailboats to racing enthusiasts. The company increases its
buyers’ value by establishing and involving them in J Boat’s racing class associations,
which organize regattas for owners to race their J Boat sailboats. Its involvement in the
racing class associations allows J Boats to link fellow J Boat owners together as well as
get ideas on how to improve its boat designs. Lastly, many successful companies have
taken advantage of the Internet to create value. For example, eBay became the world’s
largest online auctioneer by enabling connections between buyers and sellers,
Monster.com became the largest recruitment service firm by linking applicants and
employers, and Match.com became the world’s largest online dating service by
connecting people seeking to be matched appropriately.
B Knowledge intensive logic. This creates value by using expertise to tailor offerings to
match the customer’s unique specifications.[11] Firms employing a knowledge intensive
logic create buyer value by customizing the offering to fit the buyers’ needs. A basic way
to improve the purchase experience is to invest in closer relationships with buyers using a
customer relationship database. Customer relationship marketing allows the firm to better
serve its customers before, during, and after the sale. For example, high end hotels use
their client database to ensure their best customers always get the right room, bed
sheets, and even their preferred type of pillow. A higher level of customization permits
customers to customize their offerings by choosing from a pre-set menu of choices, such
as with Dell Computers. Perhaps the ultimate in knowledge intensiveness is having a
complex value chain produce for a market of one, a concept named ‘‘co-creating unique
customer value’’ by strategist C.K. Prahalad.

A case: value creation logics in action

For years, the plush toy animal market was dominated by companies such as Gund which
operates at the middle to upper end, while low cost manufacturers operate at the bottom
end. These two groups of firms compete on the following buyer attributes: price, quality and
plushness, availability, and animal cuteness. Companies in the middle to upper end, such as
Gund which patented a stuffing technique to increase its animals’ softness and
‘‘huggability,’’ clearly dominate the lower cost manufacturers on every buyer attribute (see

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 Potential extension of a concept: creating new market spaces using value co-creation
C.K. Pralahad’s concept of value co-creation is similar to the knowledge-intensive logic discussed
above because both use a similar process to generate unique offerings, what Kim and Mauborgne
call ‘‘Blue Oceans.’’ In his two recent books, The New Age of Innovation (2008) and The Future of
Competition: Co-creating Unique Value with Customers (2004), Prahalad demonstrates that firms
can enhance performance by enabling its customers to uniquely customize their value
propositions. The old model for consumer products firms was to design, mass produce and sell
completed products. The new purpose of all firms is to interactively collaborate with customers to
co-create unique value using the Prahalad’s DART model:
B Dialogue – Create meaningful dialogue between the customer and the company,
B Access – Provide mediums for customers to communicate with the company and fellow users,
B Risk-Return Relationship – Manage the risk/benefit relationship for the customer and the
company,
B Transparency – Share all relevant information with customers.
In this new world, Prahalad argues firms only have one sustainable advantage; the ability to
continually meet customer needs through value co-creation.

Exhibit 3). The market was clearly a Red Ocean as any move to capture more market share
using the existing buyer attributes would have resulted in a bloody fight. The only successful
way for a new or existing firm to capture market share would be to create a Blue Ocean.
The first competitor to attempt a Blue Ocean strategy within the plush toy market was
Build-A-Bear Workshop in 1997. Build-A-Bear Workshop developed a Blue Ocean by
exploiting the ‘‘knowledge intensive logic’’ to increase the customization of its offerings (see
Exhibit 4). Build-A-Bear developed a unique value proposition by allowing customers to
experience the joy of creating their own bear, for which Build-A-Bear charges $60-100 per
bear depending on the number and type of accessories purchased. Offering this innovative,
knowledge intensive value proposition, which lets customers co-create the value,[12]
allowed the retail chain to grow very quickly – it sold over 50 million bears in its first ten years.
In 2005, Ganz Inc. successfully created another Blue Ocean in the plush toy market when it
introduced Webkinz, cuddly plush animals, retailing for $12-15 each. The price includes one
year of access to Webkinz’s website, where children can purchase accessories for virtual
versions of their Webkinz, play online edutainment games, and connect with other children
through Kinzchat. Ganz developed this opportunity by exploiting a network services logic. It

Exhibit 3 The strategy canvas for the plush toy market prior to 1997

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Exhibit 4 The strategy canvas for the plush toy market 1997-2005

created new buyer value via Webkinz website’s interactive games and social networking
features (see Exhibit 5).

Which value creation logic?

Evaluating which offerings have the highest potential to execute a Blue Ocean strategy
depends on a number of factors, including the profit potential and sustainability of their
attributes.
Profit potential. Economic principles drive the profit potential of each value creation
technology. The amount of value created by firms employing an industrial efficiency logic
depends on its ability to produce standard products at low cost. The larger the potential for
firms to maximize its economies of scale and scope, given the size of the target market, the
larger the offering’s profit potential. The amount of value created by firms using the network
service logic depends on the number of members in the network, who is in the network and
the type of connections available.[13] The more quality connections the firm can make
available to its members, the larger the value created for the network members,[14] and the
higher the prices the firm can charge. The amount of value created by firms employing a

Exhibit 5 The strategy canvas for the plush toy market 2005-2008

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 knowledge intensive logic depends on the size of the capability gap between the firm and its
customers. The greater the information asymmetry between the firm’s knowledge intensive
offerings and its customers’ capabilities, the greater the value for its customers, and the
greater the potential the firm has to leverage this in the form of higher prices.[15]
Profit sustainability. The profit sustainability of the offering depends on the type and amount
of value creation logics employed. The industrial efficiency logic is typically the easiest to
copy as there are many consultants who are willing to help firms implement the latest cost
reduction tools. Even with first mover advantages, such as supply side economies of scale,
or patents, it is difficult to sustain the competitive advantage of a Blue Ocean offering solely
based on an industrial efficiency logic. Introducing knowledge intensive attributes enhance
sustainability because fulfilling buyer needs typically engenders buyer loyalty. In addition,
the capabilities needed to manage the complexity that ensues from customization are
difficult for rivals to imitate. One threat to knowledge intensive offerings is the likelihood of
commoditization by industrial efficiency producers who manage to improve the offering’s
customization without a corresponding increase in cost. From the Build-A-Bear workshop
example above, we can see perhaps the biggest threat to mainstream knowledge intensive
offerings is from companies that enable its users to connect with each other using a network
services logic.
A network services logic offers the greatest potential for sustainability, especially if the firm
gains a critical mass of users, and there are strong demand-side economies of scale. EBay
is an example of a network services firm that has a sustainable competitive advantage due to
its large base of buyers and sellers. The biggest threat to an emerging Blue Ocean strategy
based on network attributes is from other network service firms. For example, Webkinz is
currently facing new competition from Hasbro’s Littlest Pet Shop, which offers a VIP (Virtual
Interactive Pet) website with similar functionality to Webkinz’s website. In addition, Mattel’s
Barbie, which already operates a freely accessible Barbie website, plans to offer a closed
website for Barbie owners. The longer term success of Ganz’s Webkinz will depend on a
number of factors, such as the size and loyalty of its customer base.

Own your Blue Ocean: combine value creation logics

Firms that enjoy longer-term competitive advantage in the Blue Ocean markets they have
created are those which competently combine two or more value creation logics. For
example, VistaPrint combines an industrial efficiency logic with a knowledge intensive logic
to dominate the $19 billion small-business printing industry. VistaPrint uses web
technologies to allow its customers to design their own products and then employs
innovative printing technologies that significantly reduce its production costs. This has
allowed VistaPrint to price 80-90 percent below its competitors thereby capturing 80 percent
of the online printing market. In other industries, companies are hoping to emulate
VistaPrint’s success by incorporating a second value creation logic as part of its offering.
Jenny Craig is a firm that has mastered all three value creation logics. Employing an
industrial efficiency logic it produces pre-portioned, packaged menu items for individuals
desiring to lose weight. But what makes its offering unique, an enables it to charge a
premium, is that it has also included knowledge intensive and network services attributes.
Jenny Craig customizes its offerings by providing individual client counselling as to menu
planning and lifestyle changes. It reinforces this advice by connecting clients with
company-managed peer support groups, which act to increase an individual dieter’s
commitment. Successfully offering two or more value creation logics as part of the firm’s
bundle of attributes involves mastering different dominant logics,[16] something which can
be challenging for managers. But it also can be very rewarding, if executed properly.

Game changing
Kim and Mauborgne argue that if managers are not happy with their industry’s profitability, it
is not enough to change the rules of the game. To be successful managers have to also
change the game their firms play. We offer three game-changing ways that firms can add
new buyer value. Firms can:

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‘‘ We propose that there are three types of value that firms can
offer its customers. By combining parts of two or more of the
value creation logics, managers can put together innovative
bundles of attributes to design unique offerings.

B Offer lower prices by employing an industrial efficiency logic.

B Enhance the offering’s fit with customer needs using a knowledge intensive logic.
B Connect users using network services logic.
Firms that successfully combine two of more of the logics have the highest potential to enjoy
long-term profitability sailing in a Blue Ocean market of their own creation.

Notes
1. W.C. Kim and R. Mauborgne, ‘‘Blue Ocean strategy,’’ Harvard Business Review, October, 2004 and
W.C. Kim and R. Mauborgne, ‘‘Blue Ocean strategy: from theory to practice,’’ California
Management Review, Vol. 47 No. 3, 2005.
2. Lancaster was one of the first to argue that consumers make their purchase decisions based on
which attributes the product offers. See K.J. Lancaster, ‘‘A new approach to consumer theory,’’
Journal of Political Economy, Vol. 4 No. 2, 1966.
3. S. Abraham, ‘‘Blue oceans, temporary monopolies, and lessons from practice,’’ Strategy &
Leadership, Vol. 34 No. 5, 2006.
4. I.C. MacMillan and R. Gunther McGrath, ‘‘Discovering new points of differentiation,’’ Harvard
Business Review, Vol. 75 No. 4, 1997.
5. D. Aaker, ‘‘Think Big: To win market share, don’t try to influence what brand of product people buy:
change how they use the product in the first place,’’ Business Insight (A Special Report), Wall Street
Journal, 15 September, 2007.
6. A.G. Lafley and R. Charan, The Game-changer: How You Can Drive Revenue and Profit Growth with
Innovation, Crown Business, New York, NY, 2008.
7. For the original work on value creation logics see C.B. Stabell and Ø.D. Fjeldstad, ‘‘Configuring
value for competitive advantage: on chains, shops and networks,’’ Strategic Management Journal,
Vol. 19 No. 2, 1998. The authors have published articles which build on Stabell and Fjeldstad’s value
creation logics, including N.T. Sheehan and G. Vaidyanathan, ‘‘The path to growth,’’ The Wall Street
Journal, Business Insight: The Journal Report, A Joint Venture with MIT Sloan Management Review,
3 March, 2007; N.T. Sheehan and C.B. Stabell, ‘‘Discovering new business models for knowledge
intensive firms,’’ Strategy & Leadership, Vol. 35 No. 2, 2007; N.T. Sheehan, G. Vaidyanathan and
S. Kalagnanam, ‘‘Value creation logics and the choice of management control systems,’’ Qualitative
Research in Accounting and Management, Vol. 2 No. 1, 2005.

8. The industrial efficiency logic uses a long-linked technology. See J.D. Thompson, Organizations in
Action, McGraw-Hill, New York, NY, 1967.
9. The Network services logic uses a mediating technology. See J.D. Thompson, Organizations in
Action, McGraw-Hill, New York, NY, 1967.
10. M. Katz and C. Shapiro, ‘‘Network externalities, competition and compatibility,’’ American Economic
Review, Vol. 75, 1985.
11. The knowledge intensive logic uses an intensive technology. See J.D. Thompson, Organizations in
Action, McGraw-Hill, New York, NY, 1967.
12. For more on value co-creation see C.K. Prahalad and M.S. Krishnan, The New Age of Innovation,
Harvard Business Press, Cambridge, MA, 2008 and C.K. Prahalad and V. Ramaswamy, The Future

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VOL. 37 NO. 2 2009 STRATEGY & LEADERSHIP PAGE 19
 of Competition: Co-creating Unique Value with Customers, Harvard Business Press, Cambridge,
MA, 2004.

13. Ø.D. Fjeldstad and K. Haanes, ‘‘Strategy tradeoffs in the knowledge and network economy,’’
Business Strategy Review, Vol. 12 No. 1, 2001.

14. M. Katz and C. Shapiro, ‘‘Network externalities, competition and compatibility,’’ American Economic
Review, Vol. 75, 1985.

15. See, for example, N.T. Sheehan and C.B. Stabell, ‘‘Discovering new business models for knowledge
intensive firms,’’ Strategy & Leadership, Vol. 35 No. 2, 2007 and N.T. Sheehan, ‘‘Why old tools won’t
work in the ‘new’ knowledge economy,’’ Journal of Business Strategy, Vol. 26 No. 4, 2005.

16. The concept that managers struggle to manage more than one value creation logic was developed
by C.K. Prahalad and R.A. Bettis, ‘‘The dominant logic: a new linkage between diversity and
performance,’’ Strategic Management Journal, Vol. 7 No. 6, 1985. This concept is also featured in
Pralahad’s new book, C.K. Prahalad and M.S. Krishnan, The New Age of Innovation, Harvard
Business Press, Cambridge, MA, 2008.

Corresponding author
Norman T. Sheehan can be contacted at: Sheehan@Edwards.usask.ca

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