blue-ocean-strategy

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Red Ocean Strategy

Blue Ocean Strategy

Compete in existing market space

Create uncontested market space

Beat the competition

Make competition irrelevant

Exploit existing demand

Create and capture new demand

Make value-cost trade-off

Break value-cost trade-off

Align whole system with strategic choice of differentiation OR low cost

Align whole system in pursuit of differentiation AND low cost

Examples:

Red Ocean:

• Airlines competing on routes, amenities, price

• Smartphone makers adding features competitors have

• Restaurants in same category fighting for customers

Blue Ocean:

• Cirque du Soleil: Not circus vs. circus, but new form of entertainment

• Netflix: Not video rental, but streaming entertainment

• Nintendo Wii: Not graphics power, but accessible motion gaming

See: references/blue-ocean-examples.md for detailed case studies.

Value Innovation

Value innovation = the cornerstone of blue ocean strategy.

Definition: Simultaneous pursuit of differentiation and low cost, creating a leap in value for both buyers and company.

Value Innovation = Utility × Price × Cost

The value innovation logic:

Traditional View

Value Innovation View

High value = High cost

High value CAN = Low cost

Differentiate OR cut costs

Differentiate AND cut costs

Better performance on established factors

New factors, eliminate old factors

How it works:

• Eliminate factors the industry takes for granted → Reduces costs

• Reduce factors below industry standard → Reduces costs

• Raise factors above industry standard → Increases value

• Create factors industry has never offered → Increases value

Result: Lower cost structure AND superior value proposition.

Example: Cirque du Soleil

• Eliminated: Animal shows, star performers, multiple show arenas (reduced costs)

• Reduced: Fun and humor, thrill and danger (less important for target audience)

• Raised: Unique venue, artistic music and dance (differentiation)

• Created: Theme, refined watching environment, multiple productions (new value)

• Outcome: Higher prices than circus, lower costs than theater, new market created

See: references/value-innovation.md for value innovation frameworks.

Strategy Canvas

The diagnostic tool for understanding current strategic position and discovering blue oceans.

How to create a Strategy Canvas:

Step 1: Identify Competing Factors

List all the factors the industry competes on.

Example: Wine industry

• Price

• Prestige/awards

• Aging quality

• Vineyard legacy

• Marketing

• Complexity (tasting language)

• Range (selection)

• Above-the-line marketing

Step 2: Map Current State

Plot how you and competitors score on each factor (low to high).

Typical result: Everyone's curves look similar (red ocean).

Step 3: Analyze

Questions:

• Which factors does the industry compete on but buyers don't care about?

• Which factors could be eliminated or reduced?

• Which factors could be raised or created?

• Where are there points of pain in the buyer experience?

Example: Yellow Tail Wine

Factor

Industry Average

Yellow Tail

Price

Medium-High

LOW

Prestige

High

LOW

Aging quality

High

LOW

Vineyard legacy

High

LOW

Complexity

High

LOW

Range

High

LOW

Easy drinking

Low

HIGH

Fun/adventure

Low

HIGH

Accessibility

Low

HIGH

Result: Different curve = blue ocean.

See: references/strategy-canvas.md for templates and examples.

Four Actions Framework (ERRC Grid)

The tool for creating value innovation.

The framework:

ELIMINATE                      RAISE

- Which factors the           - Which factors should be

  industry takes for            raised well above the

  granted should be             industry standard?

  eliminated?

REDUCE                         CREATE

- Which factors should        - Which factors should be

  be reduced well below         created that the

  the industry standard?        industry has never

                                offered?

How to use:

1. ELIMINATE

Question: What can we eliminate that the industry competes on but adds no value for customers?

Examples:

• Cirque du Soleil: Animals, star performers

• Southwest Airlines: Meals, seat assignments, hub transfers

• IKEA: Sales staff, assembly service, delivery

Benefits:

• Reduces cost structure

• Simplifies operations

• Often removes friction customers don't want anyway

Warning: Don't eliminate factors buyers truly value. Test assumptions.

2. REDUCE

Question: What can we offer well below industry standard?

Examples:

• Yellow Tail: Aging quality, prestige, complexity

• Jet Blue: Route flexibility (focused on key routes)

• Salesforce: Customization (v1.0 was simple)

Benefits:

• Lowers costs

• Removes over-served aspects

• Focuses resources on high-value factors

3. RAISE

Question: What should we raise well above industry standard?

Examples:

• Cirque du Soleil: Artistic value, unique venues

• Dyson: Suction power, design

• Apple: User experience, design aesthetics

Benefits:

• Creates differentiation

• Justifies premium pricing (if aligned with customer value)

• Hard for competitors to match

4. CREATE

Question: What new factors should we create that the industry has never offered?

Examples:

• Cirque du Soleil: Theatrical themes, refined environment

• Netflix: Unlimited streaming, no late fees, recommendation algorithm

• Uber: Real-time tracking, cashless payment, driver ratings

Benefits:

• Opens new value sources

• Attracts non-customers

• Creates competitive moat

Putting it together:

Action

Effect on Cost

Effect on Value

Eliminate

⬇ Reduces

— (no loss if done right)

Reduce

⬇ Reduces

— (over-served area)

Raise

⬆ May increase

⬆ Increases significantly

Create

⬆ May increase

⬆ Increases significantly

Net result: Value increases more than cost (value innovation).

See: references/errc-grid.md for ERRC templates and exercises.

The Six Paths Framework

Six ways to identify blue ocean opportunities by looking beyond existing boundaries.

Path 1: Look Across Alternative Industries

Principle: Customers choose between alternatives in different forms.

Question: What are the alternative industries to yours?

Example:

• Movie theaters compete with restaurants, bars, concerts (entertainment alternatives)

• NetJets (fractional jet ownership): Alternative to commercial airlines AND owning private jets

How to apply: Map alternatives → identify unmet needs across them → create solution

Path 2: Look Across Strategic Groups

Principle: Industries have clusters of companies pursuing similar strategies.

Question: What are the strategic groups, and can you create a new one?

Example:

• Car industry: luxury vs. economy

• Lexus: Created "luxury at accessible price" group

How to apply: Map strategic groups → identify over/under-served needs → position between groups

Path 3: Look Across the Chain of Buyers

Principle: Who influences the purchase may not be the end user.

Question: Can we target a different buyer in the chain?

Chain: Purchasers → Users → Influencers

Example:

• Novo Nordisk insulin pens: Targeted doctors (influencers) not patients (users)

• Bloomberg terminals: Targeted traders (users) not IT departments (purchasers)

How to apply: Identify all buyers in chain → explore unmet needs of overlooked groups

Path 4: Look Across Complementary Products/Services

Principle: Value is often affected by complementary products.

Question: What happens before, during, and after using your product?

Example:

• Babysitting is complementary to movie theaters → AMC: "Date night" package

• Installation/training complements software → Salesforce: Built-in onboarding

How to apply: Map customer's total experience → identify pain points → bundle solutions

Path 5: Look Across Functional or Emotional Appeal

Principle: Industries compete on either functional or emotional appeal, rarely both.

Question: Can we add emotional appeal to functional industries (or vice versa)?

Examples:

• Add emotion to functional: Swatch (watches as fashion, not just time-telling)

• Add function to emotional: The Body Shop (cosmetics with ethical sourcing story)

How to apply: Identify current appeal → explore opposite dimension → create hybrid

Path 6: Look Across Time

Principle: Trends shape industries over time.

Question: What trends are shaping your industry, and how can you act on them now?

Example:

• Apple iPod/iTunes: Anticipated digital music trend before others

• Tesla: Bet on electric vehicles before mainstream adoption

How to apply: Identify irreversible trends → project future state → build for it today

See: references/six-paths.md for detailed path exercises.

Three Tiers of Non-Customers

Blue oceans are created by converting non-customers, not stealing competitors' customers.

Tier 1: "Soon-to-be" Non-Customers

• On the edge of your market

• Minimally using offerings

• Ready to jump ship

Opportunity: Small shifts could win them over

Example: Pret A Manger won busy professionals who were "soon-to-be" non-customers of fast food (wanted healthy, fast)

Tier 2: "Refusing" Non-Customers

• Considered your industry but consciously rejected it

• See offerings as unacceptable or beyond their means

Opportunity: Understand why they refuse, eliminate barriers

Example: JCDecaux bus-shelter advertising—cities refused outdoor ads until JCDecaux offered free bus shelters in exchange

Tier 3: "Unexplored" Non-Customers

• In markets distant from yours

• Never considered your offerings as an option

Opportunity: Reframe offering to serve distant needs

Example: Callaway Big Bertha golf clubs—expanded market to beginners and occasional golfers (unexplored)

Process:

• Map all three tiers

• Find commonalities across tiers

• Identify what would unlock massive demand

• Build offering to convert non-customers

See: references/non-customers.md for non-customer analysis frameworks.

Sequence of Blue Ocean Strategy

The right strategic sequence:

1. Buyer Utility → 2. Strategic Price → 3. Target Cost → 4. Adoption

1. Buyer Utility

Question: Is there exceptional utility?

Test: Does your offering unlock a leap in buyer utility for each of the six utilities?

Six utility levers:

• Customer productivity

• Simplicity

• Convenience

• Risk reduction

• Fun and image

• Environmental friendliness

Buyer Experience Cycle: Purchase → Delivery → Use → Supplements → Maintenance → Disposal

Goal: Identify where the biggest blocks to utility are, and solve them.

2. Strategic Price

Question: Is pricing accessible to mass of buyers?

Approach: Price against alternatives (not costs or competitors in same industry)

Steps:

• Identify alternatives (different forms, not just direct competitors)

• Map price/performance of alternatives

• Price within reach of mass buyers

Example: Cirque du Soleil priced higher than circus, lower than theater

3. Target Cost

Question: Can we achieve target cost while preserving utility?

Formula: Strategic Price - Target Profit Margin = Target Cost

Approach:

• Work backward from price

• Use ERRC to eliminate/reduce costs

• Partner to achieve cost target

• Refuse to sacrifice utility

Anti-pattern: "We'll achieve cost target later" (usually doesn't happen)

4. Adoption

Question: What are the adoption hurdles?

Common hurdles:

• Employees resist change

• Partners resist change

• General public resists

• Regulatory/legal barriers

Solutions:

• Educate stakeholders on benefits

• Build pilot programs

• Engage partners early

• Proactively address concerns

Goal: Clear path to scalable adoption.

See: references/sequence.md for detailed sequence templates.

Common Mistakes

Mistake

Why It Fails

Fix

Competing on same factors

Stuck in red ocean

Use ERRC to eliminate/create factors

Differentiation without cost focus

Not value innovation

Eliminate/reduce while raising/creating

Incrementalism

No leap in value

Aim for 10x improvement on key factors

Imitating competitors

Red ocean thinking

Look across six paths for alternatives

Ignoring adoption

Great idea, no execution

Plan for adoption hurdles upfront

Quick Diagnostic

Audit any strategy:

Question

If No

Action

Does Strategy Canvas show different curve?

Still in red ocean

Apply ERRC framework

Are we eliminating AND creating?

Not value innovation

Use all four actions

Are we breaking value-cost trade-off?

Traditional competition

Identify over-served factors to cut

Are we converting non-customers?

Fighting for share

Map three tiers of non-customers

Is there a leap in buyer utility?

Incremental improvement

Aim for 10x on key utility factors

Reference Files

• blue-ocean-examples.md: Cirque du Soleil, Netflix, Yellow Tail, Nintendo Wii case studies

• value-innovation.md: Value innovation frameworks and formulas

• strategy-canvas.md: Templates, examples, how to create

• errc-grid.md: Four Actions Framework exercises and templates

• six-paths.md: Detailed exercises for each path

• non-customers.md: Three-tier analysis frameworks

• sequence.md: Utility, price, cost, adoption templates

• implementation.md: Execution, organizational alignment

Further Reading

This skill is based on Blue Ocean Strategy developed by W. Chan Kim and Renée Mauborgne. For complete methodology:

• "Blue Ocean Strategy" by W. Chan Kim & Renée Mauborgne (Expanded Edition)

• "Blue Ocean Shift" by W. Chan Kim & Renée Mauborgne (practical guide to making the shift)

About the Authors

W. Chan Kim and Renée Mauborgne are professors of strategy at INSEAD and co-directors of the INSEAD Blue Ocean Strategy Institute. Their research on value innovation and blue ocean strategy has been published in top academic journals. Blue Ocean Strategy has sold over 4 million copies, been translated into 46 languages, and is one of the best-selling business books of all time. They work with companies and governments worldwide on strategic renewal and growth.