40

Blue ocean 07
strategy
Kick-starting innovation and new
product development

What the model looks like and how it works

Blue ocean strategy is to guide and stimulate innovation. It is the brain-
child of W Chan Kim and Renée Mauborgne, two professors from INSEAD.
They observed that companies tend to engage in head-to-head competition
in their search for growth and this leads to a bloodbath – a red ocean. They
suggest that an alternative and more profitable strategy for growth comes
from tapping new opportunities in ‘the blue ocean’. They argue that a blue
ocean strategy allows the simultaneous pursuit of differentiation and low
cost (and not either/or). By moving into a blue ocean (a new market) a
company creates new market space and in so doing makes the competition
irrelevant.
The starting point for developing the model is to examine why some
companies succeed while others fail. Their study of successful and less
successful companies shows that some markets are overcrowded and this
limits everyone’s growth. Market spaces or blue oceans can be created by
value innovation while at the same time driving down costs. These two
strategies will beat the competition or make the competition irrelevant so it
is not necessary to fight them head-on. Every market was once new and the
key to success is to find a market that you can make your own.
A key aspect of the model is understanding how value is perceived and
how this affects both suppliers and customers. From the supplier’s point of
view, Michael Porter suggested they could position themselves as having a
differentiated product or a low-cost product. This is challenged by the blue
ocean model. The blue ocean model says that costs are always under pres-
sure from competitors. Over time the differentiating factors are eliminated
 Blue Ocean Strategy 41

as suppliers copy each other and seek to compete by making cost savings.
The buyer is the winner as they reap the benefits of superior value. With a
blue ocean strategy it is possible to pursue a strategy of both low costs and
differentiation.
As part of the process for finding a blue ocean, the authors suggest asking
four searching questions about customers and the marketplace. This leads to
actions that could all point to a new blue ocean:

●● Reduce: which factors that are offered to customers should be reduced

well below industry standards?
●● Eliminate: which factors offered to customers are taken for granted and
should be eliminated?
●● Create: which factors offered to customers should be created because
they have never been offered and they will be valued?
●● Raise: which factors offered to customers should be raised well above the
industry standard?

The search for a blue ocean is likely to extend the market beyond those
customers served at the present. Non-customers are seen in different tiers.
Beyond customers a company targets at the present, there are three tiers.
The first tier buys a minimal amount of product out of necessity. The second
and third tiers are non-customers who choose an alternative solution or
have never thought of the offering as an option. It is to all of these tiers of
customers that you look for a viable blue ocean idea.
The search for the new idea is based on a sequence of four questions
(Table 7.1), each designed to determine its commercial viability. Each ques-
tion requires the answer ‘yes’, before the idea can pass to the next step. If an

Table 7.1 Sequence of the blue ocean strategy (adapted from original source)

Step 1 Utility Is the new idea really useful to people? Is Yes/No

there a strong reason why someone should
buy the new product?
Step 2 Price Is the proposed price of the product one that Yes/No
most potential customers will pay?
Step 3 Cost At the price you want to charge and with the Yes/No
anticipated volumes you will sell, will you
make a profit?
Step 4 Adoption Will there be any major barriers that will stop Yes/No
you attaining your goals?
42 The Business Models Handbook

idea receives the answer ‘no’ on any of the steps, the idea must be reconsid-
ered or eliminated.

The origins of the model

In 2004, W Chan Kim and Renée Mauborgne outlined their theory in a
book entitled Blue Ocean Strategy: How to create uncontested market space
and make the competition irrelevant.1 The book was based on a study of
150 different strategies carried out by companies across 30 industries.

Developments of the model

There is no doubt that the blue ocean model has been successful. The book
has sold more than 3.6 million copies worldwide. The metaphors of the
red and blue ocean are striking and memorable. As is often the case, blue
ocean theory has similarities to previous business models. Gary Hamel and
CK Prahalad in 1994 wrote a book entitled Competing for the Future,2 in
which they talked about whitespace, a place where businesses could create
and dominate emerging opportunities.
The idea of searching for ‘the new bottled water’ has obvious appeal.
In practice it is much more difficult. Most of the examples of blue oceans
are business concepts developed before the model was available. They are
promoted as post-rationalization models. That said, the concept has many
fans and there are success stories that can be attributed directly to it. In
2006 Nintendo declared in a press conference for the launch of their highly
successful Wii video game that the blue ocean strategy was used in its devel-
opment. In comparison to the Microsoft Xbox or the Sony PS3, the Wii
product was much cheaper and it had a motion stick, which placed it in a
different space in the field of computer games. It brought into the market
people who were not big computer-game players and opened up a new blue
ocean.3

The model in action

W Chan Kim and Renée Mauborgne use numerous examples to show how
companies have developed blue oceans for themselves.
 Blue Ocean Strategy 43

Yellow Tail, an Australian brand of wine, considered the traditional wine

market as one that is complicated, patronizing, heavy on terminology and
as a result frightening to certain groups of consumers. Yellow Tail created
an offer that comprised just one red wine (a Shiraz) and one white wine
(a Chardonnay). Theirs was a simple offer with a product that was appeal-
ing because it was sweeter and easier to drink. As a result, the Yellow Tail
product did not focus on traditional wine drinkers but extended into a
larger group of people looking for something easy to drink as an alternative
to beer, cocktails or even a soft drink.
Cirque du Soleil has been identified as a blue ocean company. Traditional
circuses offer a product that is widely recognized but very similar. Clowns,
jugglers and animals are the circus’s formula for entertaining families.
Cirque du Soleil broke this mould by creating exceptional and surprising
acts of gymnastic and artistic theatre, which still had appeal to families
but also attracted a wider range of adults who marvelled at the completely
different circus performances.
In the airlines industry, NetJets has been identified as a blue ocean
company. NetJets saw a market for point-to-point travel in which commer-
cial airlines and corporate jets competed. However, corporate jets have a
very high cost even though they offer less hassle. Commercial airlines offer
a pay-as-you-use service but at the expense of high travel time and not
necessarily to desired destination points. NetJets saw blue ocean space in
the middle of this market and offered the ability to buy 50 hours of travel
per year, providing a point-to-point service that is faster than commercial
flights, less hassle and providing increased productivity to business travel-
lers. They opened up a new market for air travel.4

Some things to think about

●● Really understand your customers. Look at what they buy, see how they
use the products, find out what frustrates them and how they overcome
these frustrations.
●● Look at the outliers and extremes of your customers. What do they do? It
is here that you may find your blue ocean rather than in the mainstream
middle ground.
●● Aim for the stars and be happy if you land on the moon! Most realizable
opportunities lie with tier one customers rather than in tiers two or three.
44 The Business Models Handbook

Notes
1 Chan Kim, W and Mauborgne R (2004 [2015, expanded edn]) Blue Ocean
Strategy: How to create uncontested market space and make the competition
irrelevant, Harvard Business School Publishing Corporation, Boston
2 Hamel, G and Prahalad, CK (1994) Competing for the Future, Harvard
Business School Press, Boston
3 Chan Kim, W, Mauborgne, R and Hunter, J [accessed 6 October 2017] Nintendo
WII, Lessons Learned From Noncustomers [Online] https://www.blueoceanstrat-
egy.com/teaching-materials/nintendo-wii/
4 [Online] https://www.blueoceanstrategy.com/bos-moves/netjets/