Blue ocean strategy (Kim and Mauborgne)

Kim and Mauborgne argue that strategy need not accept the conventional trade-off between differentiation and low cost. Value innovation seeks to increase buyer value while simultaneously removing or reducing the factors that create unnecessary cost.

When to use it

• Use the approach when a red-ocean position offers limited prospects for profitable growth. In their twenty fifteen work on “red ocean traps,” Kim and Mauborgne identified six mental models that obstruct market creation:
• Treating market creation as ordinary customer orientation instead of converting noncustomers, as Amazon’s broader Kindle catalogue helped do relative to Sony’s reader.
• Confusing market creation with niche strategy, even though a niche such as a specialist airline may be too small to sustain the business.
• Equating it with technology innovation rather than connecting technology to buyer value, as Uber did.
• Assuming all market creation destroys an existing category, when new demand can emerge non-destructively, as Viagra helped create a market for lifestyle drugs.
• Equating it with differentiation alone, when Yellow Tail illustrates the intended combination of differentiation and low cost.
• Equating it with low cost alone, when Dyson’s vacuum cleaners created distinctive value while redesigning category economics.

Origins

W. Chan Kim and Renée Mauborgne introduced the strategic logic of “value innovation” in a nineteen ninety-seven Harvard Business Review article. Their two thousand and five book Blue Ocean Strategy, built from an examination of one hundred and fifty strategic moves across thirty industries and more than a century, developed the red-and-blue ocean metaphor and a family of practical tools. The book was expanded in 2015, followed by Blue Ocean Shift in twenty seventeen.

The argument drew on cases such as Apple’s iTunes, which worked with music companies to establish a convenient legal download market after Napster, and Cirque du Soleil, which combined circus with theatrical and balletic elements to appeal to a different audience at a different price point.

The authors created a set of frameworks for applying the principles—see www.blueocean.com. Three are examined here: the Strategy Canvas and Value Curve, the Pioneer–Migrator–Settler map and the value-innovation four-actions framework.

What it is

What if the industry boundary itself is the constraint?

One criticism of Michael Porter’s Five Forces analysis in The five forces (Porter) is that defining an industry too rigidly can narrow the strategist’s field of view. Analysing competition inside the boundary may hide opportunities to reconstruct the boundary and create value across categories.

Kim and Mauborgne argue that head-to-head competition in crowded industries produces a red ocean in which rivals fight over a shrinking profit pool. Their analysis of 150 moves across roughly a century suggested that stronger growth often came from opening relatively uncontested space instead.

In a red ocean, firms compete for known demand under established rules. In a blue ocean, the strategic move creates new demand and temporarily makes current competitors less relevant because the basis of value has changed.

Such a move aims at value innovation: a leap in benefit for buyers paired with attractive economics for the firm.

iTunes created a legal, convenient system for buying digital music through agreements with record companies. Cirque du Soleil removed costly conventional circus elements and blended acrobatics with theatre, creating an offer that attracted adults as well as families.

The core equation is:

Differentiated buyer value + lower cost = value innovation.

Six principles organise formulation and execution:

Reconstruct market boundaries.

Focus on the big picture rather than numbers alone.

Reach beyond existing demand.

Get the strategic sequence right.

Overcome organisational hurdles.

Build execution into the strategy.

The tools available at www.blueocean.com translate those principles into analysis. Three are central here:

the Strategy Canvas and Value Curve;

the Pioneer–Migrator–Settler chart;

the four actions that generate value innovation.

How to use it

The Strategy Canvas and Value Curve provide the visual foundation for the other tools.

Strategy canvas and value curve

High

Level of offering

Key

Your value curve X

Industry value curve

Low

A B C D E F G

Key success factors

The Strategy Canvas depicts the present competitive landscape. Along one axis it lists the key success factors (KSFs) on which the industry competes; along the other it shows how heavily each company invests in or delivers those factors.

The Value Curve is each company’s plotted profile across those factors. Kim and Mauborgne describe a strong curve as focused, divergent from the industry and expressible through a compelling tagline.

The canvas is intended to shift attention from direct competitors towards alternatives and from current customers towards noncustomers. In substance, it resembles Rating competitive position, though that tool weights each KSF and produces an overall competitiveness assessment. The unweighted value curve is less conclusive but may be more useful for provoking a strategic conversation rather than generating a score.

The Pioneer–Migrator–Settler map examines the growth profile of the portfolio.

The pioneer-migrator-settler shift

Pioneer

Value innovation

Migrator

Value improvement

Settler

Value imitation

Key

The experience curve (BCG) Strategic repositioning and shaping profit growth options Making the strategic investment decision Blue ocean strategy (Kim and Mauborgne)

Current segment

New segment

Profit

Plot each product–market segment as a settler, migrator or pioneer.

Settlers imitate established value, migrators improve value and pioneers create a distinctive leap. A portfolio dominated by settlers remains deep in the red ocean and offers weak prospects for durable profitable growth. Future investments should move positions towards migrator and, where evidence supports it, pioneer status.

A mix of settlers and migrators may support reasonable growth but remains vulnerable to a pioneer that changes what buyers expect.

In the example, most segments are migrators and only two are settlers. The proposed plan exits segment B, improves and differentiates the remaining positions and enters segment F as a pioneer.

The third tool addresses how to improve a weak portfolio by searching for potential pioneer segments.

Rethinking key success factors for value innovation

Which KSFs should be reduced well below the industry’s standard?

Which KSFs that the industry takes for granted should be eliminated?

Which KSFs that the industry has never offered should be created?

Which KSFs should be raised well above the industry’s standard?

Kim and Mauborgne ask managers to reconstruct the industry’s assumptions. Revisit the KSFs developed in Deriving key success factors and Profiling the ideal player, starting with the possibility that some should disappear entirely:

Which taken-for-granted KSFs should be eliminated?

Which should be reduced far below the industry standard?

Which should be raised far above it?

Which entirely new factors should be created?

Use the answers to design a value curve that raises buyer utility while removing cost, breaking the assumed trade-off between differentiation and low cost.

Top practical tip

Draw the industry curve and the company’s curve on one canvas, then force a concrete eliminate–reduce–raise–create decision for every factor. A curve is useful only when it changes resource allocation.

Top pitfall

Do not infer causality from retrospective cases or assume an attractive curve guarantees demand. The canvas is unweighted and omits market size, willingness to pay, capability, response and imitation; test each before investing.

Further reading

• Kim, W.C. and Mauborgne, R. (nineteen ninety-seven). “Value Innovation: The Strategic Logic of High Growth.” Harvard Business Review.
• Kim, W.C. and Mauborgne, R. (two thousand and five). Blue Ocean Strategy. Harvard Business School Press.