Business Policy Blue Ocean Strategy

BLUE OCEAN STRATEGY 1
History and Background
Blue Oceandiscipline has been developed by W. Chan Kim and Renee Mauborgne,
professors at INSEAD, who are co-authors of the book, Blue Ocean Strategy, and are co-
directors of the Blue Ocean Institute in 2005. It is based on a study of 150 strategic moves
spanning more than 100 (1880 – 2000) years and 30 industries. Such industries include hotel,
cinema, retail, airline, energy, computer, broadcasting, home construction, automobile, steel
manufacturing, chemicals, cosmetics, software, etc. The variables considered in the study are
industrial, organizational and the strategic operations of the participant industries.Blue Ocean
Strategy (BOS) is the simultaneous pursuit of differentiation and low cost. The aim of Blue
Ocean Strategy is not to out-perform the competition in the existing industry, but to create new
market space or a blue ocean, thereby making the competition irrelevant. Blue Ocean Strategy
offers systematic and reproducible methodologies and processes in pursuit of innovation by both
new and existing firms. Blue Ocean Strategy frameworks and tools are designed to be visual in
order to not only effectively build the collective wisdom of the company but also to effectively
execute through easy communication. (Harvard Business School Club of Washington DC, 2009).
Concepts
Industry history teaches us that blue oceans are not about technology innovation per se. It
also teaches us that incumbents often create blue oceans – and usually within their core
businesses. It also further teaches us that company and industry are the wrong units of analysis
and creating blue oceans builds brands (Kim &Mauborgne, 2005). Kim &Mauborgne
differentiates Blue Ocean Strategy from Red Ocean Strategy:

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space Create uncontested market space
Beat the competition Make the competition irrelevant
Exploit existing demand Create and capture new demand
Make the value-cost trade off Break the value-cost trade-off
Align the whole system of a firm’s activities Align the whole system of a firm’s activities
with its strategic choice of differentiation or with its strategic choice of differentiation and
low cost low cost
Six Principles of Blue Ocean Strategy
Formulation Principles 1. Reach beyond existing demand
2. Reconstruct market boundaries
3. Focus on the big picture, not the numbers
4. Get the strategic sequence right

Execution Principles 5. Overcome key organizational hurdles
6. Build execution into strategy
Reach Beyond Existing Demand
First Tier “Soon-to-be” non-customers who are on the
edge of your market, waiting to jump ship.

Second Tier “Refusing” non-customers who consciously
choose against your market.

Third Tier “Unexplored” non-customers who are in
markets distant from yours.
Value Innovation
Value Innovation is the cornerstore of blue ocean strategy. Value innovation is the
simultaneous pursuit of differentiation and low cost. Value innovation focuses on making the
competition irrelevant by creating a leap of value for buyers and for the company, thereby
opening up new and uncontested market space. Because value to buyers comes from the
offering’s utility minus its price, and because value to the company is generated from the
offering’s price minus its cost, value innovation is achieved only when the whole system of
utility, price and cost is aligned.
Four Actions Framework
In the Blue Ocean Strategy methodology, the Four Actions Framework and ERRC
gridassist managers in breaking the value-cost tradeoff by answering the following questions:
What factors can be eliminated that the industry has taken for granted?
What factors can be reduced well below the industry’s standard?
What factors can be raised well above the industry’s standard?

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BLUE OCEAN STRATEGY
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What factors can be created that the industry has never offered?
Eliminate-Reduce-Raise-Create Grid (ERRC). It is complementary to the four actions
framework. It pushes companies not only to ask all four questions in the four actions
framework but also to act on all four to create a new value curve, essential for unlocking a new
blue ocean.
4

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BLUE OCEAN STRATEGY 1

History and Background

differentiates Blue Ocean Strategy from Red Ocean Strategy:

Red Ocean Strategy Blue Ocean Strategy

low cost low cost

Six Principles of Blue Ocean Strategy

Formulation Principles 1. Reach beyond existing demand

2. Reconstruct market boundaries

3. Focus on the big picture, not the numbers

4. Get the strategic sequence right

6. Build execution into strategy

Reach Beyond Existing Demand

First Tier “Soon-to-be” non-customers who are on the

edge of your market, waiting to jump ship.

choose against your market.

markets distant from yours.

utility, price and cost is aligned.

Four Actions Framework

In the Blue Ocean Strategy methodology, the Four Actions Framework and ERRC

What factors can be reduced well below the industry’s standard?

What factors can be raised well above the industry’s standard?

Eliminate-Reduce-Raise-Create Grid (ERRC). It is complementary to the four actions

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