The Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne is based on the premise of "how to create uncontested market space and make the competition irrelevant." A blue ocean strategy is in contrast to a red ocean strategy.
A red ocean represents the known market space which includes all industries in existence today. The rules of business here are well defined and companies within the red ocean play within accepted industry boundaries. The key to performing well in red oceans is to outperform the competition and gain greater share in the market space. The red ocean gets overfilled with competitors and products start to become commodities. This commoditization means that customers will become extremely price sensitive and price wars will drive down profit margins. Every industry either is or will become a red ocean and traditional well known strategies such as Porter's Five Forces Model are used by companies to help them survive in bloody red ocean environments.
Blue oceans on the other hand are created outside the boundaries of red oceans and denote markets that are not in existence today. Here competition is irrelevant as the rules of the game have not yet been set. A blue ocean represents an untapped market space with opportunity for highly profitable growth and demand creation. Indeed it is the capacity to create a new uncontested market space that lies at the very heart of a blue ocean strategy. This is contrary to traditional strategic thinking which would have the company fight over a given market which is constrained within the confines of a red ocean. A blue ocean is created by identifying an unserved set of customers and then delivering to them a compelling new value proposition. The authors call this value innovation which focuses on creating a leap in value for the consumer while ignoring the competition. Value innovation places equal emphasis on value and innovation with companies aligning innovation with utility, price, and cost positions. Value innovation is the cornerstone of a blue ocean strategy. The value innovation proposition is in direct contrast with the traditional concept of a value-cost-tradeoff which contends that there must be a compromise between low cost and value added differentiation. Conversely a blue ocean strategy creates differentiation and low cost simultaneously.
It is important to note that it is the strategic move rather than the company or industry which is the appropriate unit of analysis for explaining the creation of blue oceans. This is evident through looking at industry leaders from the 70's and 80's such as Atari, Ponds and National Semiconductor which slowly faded into obscurity. Instead of looking at the company or industry, the authors focus on the strategic move which allow companies to deliver products and services which capture a new market space and create a major increase in demand.
The strategy canvas is the first tool used in building a blue ocean strategy. The horizontal axis of a strategy canvas lists all the factors on which the industry currently competes on. The vertical axis shows the offering level that the consumer receives across each competing factor. A line is plotted along the strategy canvas which sums up the benefits offered on average by the competition. Imagination and creativity is then needed to plot a new line called the value curve which captures a new combination of particular benefits which will hopefully produce a value proposition attractive enough to create a new untapped market. The value curve should effectively break the trade-off between differentiation and low cost, and as a result benefit an unserved group of customers. An effective value curve therefore will be a stark departure from the status quo.
To aid with the construction of the value curve, the authors developed the Four Action Framework which outlines four key actions: 1.Eliminate what is not valued;2.Raise what...