It’s already been more than 10 years since Chan Kim and Renee Mauborgne wrote their book Blue Ocean Strategy. Now more than ever their theory is relevant, with a shrinking economy - the result of delocalisation of manufacturing (and brains) - the automation of manufacturing, and the digitalization of a plethora of services.
What are the principles of the Blue Ocean Strategy?
Instead of developing your company or service into an existing market, where you will spend your energy and resources to beat the competition to an overly exploited audience, instead you must envision the path to new opportunities.
The authors take as an example the Cirque du Soleil which reinvented the Circus. To attract the crowds, circuses had to face high cost mainly caused by performance artists and animals. And despites centuries of practice, the business model was failing.
The Cirque du Soleil reinvented the circus. They did not try to compete within the same existing industry or steal customers from the traditional Ringlings. Instead it targeted a whole new group of customers, mainly adults and corporate clients who enjoyed theater, opera and ballet. That market segment had already a higher budget to enjoy a superior entertainment experience.
Cirque du Soleil broke the boundaries that separated the traditional circus from the theater and invented a new very profitable market space.
Another current example is typically UBER. It’s a great example of visionary leadership. They saw the opportunity created by the fast increasing mobile penetration, lowering mobile data tariffs combined with an centuries old industry that is the taxi market. These new forms of services such as Airbnb, Lyft or Uber are very disruptive and are often victims of the latent change of mentality from the industries they disrupt, but this is for another blog post.
It is important to note though that blue oceans are not always the results of a new technological breakthroughs, as in the case of Cirque du Soleil. They do, however, definitely enhance opportunities. For instance, in the case Cirque, the sale via the Internet definitely played a huge role in their success. When was last time you bought your traditional circus tickets online? In my case, ... never.
Why do companies still focus on the Red Ocean Strategy?
Red oceans are right under our noses. They already exist and there are many differents inspirational examples. It’s easier to copy and enhance, than to create from scratch. Our X and Y generations have been taught the big theories, we know them by heart. So, basically we do what we know best with what we have under our noses.
Moreover, in the Red oceans, the demand already exist. The users know the service, there is no learning curve. Blue ocean on the other hand require to be visionary. It asks you to be able to look at the big picture and imagine new opportunities with what does not exist yet. In the case of Uber, they need to educate their customers, build value (nicer cars, fast pick-up, cheaper) and trust (people pay with their mobile, the drivers are often not officially licenced, etc). No need to say that you’d better nail your timing. If Uber was launched too early customers would not have yet a smartphone and would not be familiar with apps. With the increase in smartphone penetration, the decrease in data plan tariffs and the improvement of user ergonomy, Uber was ready. They could test on a smaller sample and iterate over and over again.
So, most companies today will focus on incremental innovations, instead of daring to untap a blue ocean. The reason is simple, the cost of the risk is lower, but the profit is also lower.
What are the advantages of the Blue Ocean strategy?
You create a new market space and it gives you 10 to 15 years ahead of potential competition. Something I learned at Google, when you are first on a market, you test and iterate and repeat indefinitely. Every test teaches you something. eBay, Google, Facebook, Netflix, What’s App or Twitter are pioneers. They all created a service that we didn’t even know we needed. At first it was basic and with time and many alterations, they have all become large part of our lives.
Is the Blue ocean strategy profitable?
It’s indeed an interesting paradox. Most companies continue to compete in Red oceans, as the graph here below illustrate: 86% of all new projects are a line extension, or an incremental improvement of an existing offer. These projects bring 62% of the revenue share but only 39% of the profit. While Blue ocean proves it all by taking the lion’s share of 61% of the profit.
What are the Key steps to get to your Blue ocean strategy?
What to remember from this Strategy?