Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant

Chapter 4 introduces the second principle for capturing blue oceans, which asks businesses to consider the big picture and think outside the box to avoid falling into the same conventional strategic habits typical of red ocean competition. It proposes an alternate approach to designing strategy canvases, plans that consider a company’s current market conditions—including identifying competitors, key aspects of competition, and value curves—and helps chart future paths. There are four steps to drawing a strategy canvas. They are called, in order: visual awakening, visual exploration, visual strategy fair, and visual communication.

The first step, visual awakening, entails drawing a concrete value curve table, detailing the company’s current focus and that of its competitors. Doing so provides not only a visual guideline to help understand a company’s current strategies, it can also provide specific information about where to incentivize change, especially for larger companies whose executives, shareholders, and managers might resent change or disagree with each other.

EFS, an international foreign exchange company on which this value curve is modeled, initially fought along very similar value curves to their competitors. After drawing this chart, executives from across its various national offices realized they did not have a core strategy and were more willing to accept new ideas for breaking into blue oceans.

The second step is visual exploration, which asks managers to personally step onto the field and assess how their customers use their products, why noncustomers choose alternatives, how to expand the buyer chain, and what adjacent industries to branch into. This process cannot be outsourced for fear of reduced accuracy. EFS asked its managers to investigate in the field for four weeks and realized the main feature their customers valued was receiving a quick confirmation of their transactions, a service that no other businesses in the industry considered worthwhile for investment. After realizing this, managers returned to step 1 and visualized a new value curve considering information they gathered in the field.

The third step, visual strategy fair, involves gathering key executives, managers, and invitees acting as judges. The goal is to present the various new strategy curves conceived in step 2 and observe which appeal the most to customers. This process benefits from open communication and transparency. Judges are encouraged to share why they cast their vote for a specific strategy.

In EFS’s case, hosting a strategy fair allowed them to confirm that their buyers from across the globe did not display that many regional differences in their consumption pattern. They had a set of needs and were interested customers if those needs were met. Hosting this fair allows businesses to concretely assess which values are worth keeping and whether one strategic plan is superior to another. EFS revised their value curve. To reprise the “four action principles” discussed in Chapter 2, they eliminated “relationship management”; reduced “account executives” and “corporate dealers”; raised “ease of use,” “security,” “accuracy,” “speed,” and “market commentary”; and created two new values in “confirmation” and “tracking.”

 The fourth step is visual communication, which asks businesses to convey this strategic change to each of its employees in a clear and succinct manner. This is to ensure that efforts are concentrated toward the same common goal and there is a clear reference point for people to use moving forward. Communicating the new strategy is especially important if the company is separated into a corporate center and individual business units spread across different locations.

One method to assess the potential profit and impact of a new strategy is to draw a pioneer-migrator-settler (PMS) map, in which settlers symbolize producing an item of similar value to what is offered by competitors, migrators are defined as offerings that are superior in the market, and pioneers are defined as products with value innovation. If the new portfolio does not contain the latter, then it risks falling back into the trap of red ocean competition. Nevertheless, a balance can be struck, given that settler products often generate cash flow in the short term. In the end, visual planning allows these pros and cons to be clearly perceived and made concrete, which is a key step toward encouraging change across all levels of the company.

Chapter 5 explains how reaching beyond existing demand can help maximize the size of the blue ocean created while limiting risk. While businesses have traditionally focused on increasing their existing customer base and accommodating buyer differences, in red oceans where competition is fierce, this typically only causes their products to be fragmented without experiencing remarkable growth. Businesses must practice the exact opposite to grow blue ocean spaces and create new demand: They must reach noncustomers and build commonalities in their products based on what buyers value.

Blue Ocean Strategy separates noncustomers into three tiers, based on their distance from the market the business occupies. The first tier is made up of noncustomers who are on the fence. They may buy the company’s product out of necessity, but they do not consider themselves proper clients of the industry. They will leave if an alternate option presents itself but will stay to be loyal customers if they are given a leap in value. The second tier consists of people who refuse to use the business’s products because they see no appeal to it or cannot afford it. The third tier is defined by people who have never even considered the business’s products as an option because they are traditionally seen as operating in distant markets.

To retain and expand first-tier customers, businesses must look at the common reasons they might leave. For example, a growing demand for fast, healthy, and cheap take-out in Europe turned sit-in restaurants into competitive red oceans. Amidst this change in mentality, Pret à Manger, a fast-food chain, decided to sell restaurant-quality sandwiches made the same day, which could be picked up in seconds and were very affordable. This grew their sales and buyer base at a time when other restaurants struggled to retain customers, especially during lunch hours.

To capture second-tier noncustomers, businesses need to find commonalities in their refusal to use their products and circumvent them. For example, JCDecaux reinvented outdoor advertising by providing opportunities to post ads on street furniture, such as at bus stops. Previously, companies found outdoor advertising unattractive because their main options were to place ads in transitory locations, like highway billboards, which did not allow for deep messages or attention-retention. JCDecaux realized this was the main issue and offered to provide municipalities with free street furniture at their own cost, on which they could install stationary advertisement panels. This new method of outdoor advertisement increases customer exposure time and allows for more profound marketing messages, which quickly convinced second tier-noncustomers—such as businesses and even other municipalities—to purchase or partner with JCDecaux.

Third-tier noncustomers can be captured by thinking outside the box. For example, oral care industries long assumed dentists were the primary customers for tooth-whitening products, when in fact the industry boomed when they targeted the average buyer. In sum, while it is not wrong to value retaining and expanding existing customer circles, growth only seen in blue ocean spaces can only be generated by challenging these traditional strategies and looking beyond existing demand.

The final step to the planning stage of blue ocean strategy is to build a business model that can flesh out and validate blue ocean ideas, so they are commercially viable in practice. Companies do this by analyzing the following four factors in sequence: buyer utility, price, cost, and adoption. The new product or service attempting to capture blue ocean spaces must first provide exceptional utility. Then, its price needs to be accessible to a broad target audience. Its cost of production must be reasonable given the strategic price set in the above step. Finally, adoption hurdles such as resistance from retailers or customers due to the product’s novelty must be accounted for.

Buyer utility and price are factors that influence the company’s revenue, as balancing the two elements will ensure maximum buyer value and maximum sales. In contrast, cost is a factor that influences the company’s profit. The authors caution that prices should not be determined solely based on costs, and buyer utility must not be compromised to balance these two ratios, otherwise companies risk falling back into red oceans. Blue ocean strategies avoid these compromises through innovation, such as through cutting unnecessary steps on the value curve.

To assess how much a product offers in terms of buyer utility, businesses can refer to the table (available in the book), which details the six stages of the buyer experience cycle (purchase, delivery, use, supplements, maintenance, and disposal) and the six utility levers (productivity, simplicity, convenience, risk, fun and image, and environmental friendliness).

Businesses must remove blockages at each of these levels to ensure they reach customers and noncustomers alike. For example, the purchase stage includes factors such as where the product is placed during sale, how the transaction is made, and how quickly it can be purchased. If every step is facilitated for the potential buyer, then it significantly increases the likelihood of purchase. The authors offer a detailed view of questions to ask at each stage of this assessment.

To offer strategic pricing, businesses must consider marketing to the masses from launch, rather than appeal to a niche audience only to drop prices later. There are two main arguments for this reasoning. The first is that technology has significantly reduced the cost of manufacturing, while research and development become increasingly expensive. Without any barrier to production, then, rival companies can free-ride and capitalize on ideas developed by others, which often cannot be patented. It becomes of crucial importance, then, for brands to establish their reputations early on to retain customer loyalty. The second reason points out that potential customers may only buy in if the userbase for a product is already large. Optimal pricing must therefore target the masses while providing high buyer value.

In practice, pricing can be assessed by using a method called “the price corridor of the target mass” (128). There are two steps to using this method. The first involves identifying the price points and market size of similar products (such as substitutes and alternatives) and finding a price corridor that will capture the largest target mass. The second step is to divide that price corridor into an upper-level, a mid-level, and a lower-level pricing tier. Businesses can pursue upper-level pricing if their product enjoys legal protections against copycats. However, if they are difficult to patent or easy to imitate, then companies should consider mid-level or lower-level pricing.

After determining pricing, businesses find the target cost for their product by subtracting their desired profit margin from the envisioned ideal price. Because blue ocean spaces are characterized by products that offer unbeatable buyer value at a low price, businesses must innovate to reach their aggressive target cost. They can do so by streamlining operations (as was the case when Ford implemented the assembly line as the main method to mass produce the Model T at a fraction of the cost of skilled labor), partnering with other companies for their expertise (such as through outsourcing to other countries), or shifting the pricing model of the industry (as NetJets did by allowing corporate customers to purchase a share of a jet). 

Once a company has assessed both the potential for revenue and profit in their business model, they move on to the final step for ensuring commercial success: anticipating and addressing cost to adoption. First, they must ensure their employees and business partners fully understand the reasoning behind this new product, so they can adequately promote it or so they do not resist the idea. Then, businesses must remove barriers to entry for the general public, especially because blue ocean spaces are often unconventional. This requires the company to educate and expose the public to these new ideas and their merits. When all these steps are met and addressed, companies can move on from planning to execution.