Blue Ocean Shift is innovation framework to create new market categories where there is no competition. This new submarket is created by discovering new opportunities that balance the cost of production with customer value.
In a nutshell, the book says that when people think about strategy, they usually think they have to compete with either higher value or lower price. The Blue Ocean Strategy suggests that there is a 3rd option, which is creating a new market category when you are the only player (at least for a while).
1. Blue Ocean Market Creation Theory
Let’s start by talking a little bit about how markets are created. The general assumption is that a new market is created when a new idea arises andit'sa better idea of those currently in the market.
The Blue Ocean Shift proposes that there are 3 more specific strategies to create a new market — or at least a new category within a market.
- Disruptive Innovation: Creative Destruction, a new product completely replaces a previous one.
- Non-Disruptive Innovation: A new product is created, meeting a previously unsolved need.
- “New Category” Innovation: It reframed a problem to create a better product for a specific sub-market.
The 3 Components of Blue Ocean
The idea of creating a new category is to move away from a very saturated market to a new space where there is no competition at all. In order to make such move, your strategy needs to use three key components. It’s pretty much like the Triforce in Hyrule.
- Perspective: to see beyond current market limitations.
- Team: to help you make the shift a reality.
- Market Creating Tools: to help translate the idea into an attractive value proposition.
The idea behind the "Perspective" component is to gain a new advantage point over other competitors by being able to see a problem further and wider, or even from different angles. This will allow us to question the status quo that can limit the creation of new forms of value.
Every Blue Ocean Strategist uses 4 principles in order to gain perspective:
- Every Industry is malleable: think of every pre-conception of all elements of as building blocks that can be replaced, modified, added (or even removed) by other building blocks.
- **Don’t try to beat the competition:**our goal should be to render the competition obsolete, not just to be better at then at certain characteristics of our value proposition. If you simply try to be better than the others, you will only be able to make small improvements. Real progress comes from trying to figure completely new ways of solving a problem.
- Create new demand: Rather than simply trying to get a percentage of a pre-existing market share, blue ocean strategies try to create a new market by itself where people are currently being under or over-served.
3. The Human Element
The human element is a fundamental part of any innovation and transformation process. Especially when it comes to making important changes in a strategy or an organization, we need to take humans as the source and end goal of the process.
In this case, involving our employees in the process will provide them with the trust in the strategy; and will provide the strategy with the insights we need to properly identify new ways of creating value.
These are the 3 principles for including the human element in blue ocean strategy
Adopting a shifting strategy can be daunting. One of the best ways to approach the challenge is by taking each part of the problem and break it into smaller parts. Until eventually we have small, manageable and clear series of challenges we can provide to everyone.
2.2 First-Hand Discovery:
New ways of thinking can either break or make the strategy. Coming up with valuable insights depends on them coming from a first-hand experience, and not from isolated people that came up with it without being in direct contact with the part of the process they want to improve.
Additionally, everyone involved in the process needs to feel that the changes they are sharing are a direct result of their own thinking and experience.
2.3 Fair Process:
Finally, everyone who is involved in the process should have a clear understanding of how decisions are being made and what to expect. This comes from three actions.
A) Set the rules of engagement**.** That is how will information emerge and how will people collaborate.
B) Explanation: when decisions are made, everyone should be able to access an explanation of the reasoning behind it.
C) Expectations**:** finally, everyone should have a clear idea of what they can expect from the process and what is expected from them.
- Blue Ocean Market Creating Tools
The first two components of a Shifting Strategy (perspective and humanness) allow us to set the mindset and scenario. The third component is where the actual journey towards a shifting strategy begins.
This component is comforted my 5 Market Creation Tools that will provide the necessary knowledge and abilities to succeed in our efforts to create a brand new market category.
Tool 1: Pioneer - Migration - Settler Map
This is a map of your current products (or services) organized by three categories based on the innovation value they provide.
This will allow your organization to understand what does your offerings to your customer looks like in from the innovation perspective.
1. Pioneers: Theseare products with clear innovation value. Customers not only purchase them, they LOVE them. These kinds of products drive the organization culture and the future profits. You can tell which products belong in this category by their NPS and loyalty. 2. Settlers: Theseare products on the opposite side of the map. They are products quite similar to what your competitorsoffer they might or might be more valuable to your customers but they are not truly an innovative value proposition. 3. Migrators:These products are in the middle of the map.Their value proposition is clearly more innovative than those of the competition but they are not that innovative and the competition can replicate the value easily.
Here is the catch, if most of your revenue comes from products in the settler category the harder it will be for your organization to be relevant in the future. This is why you should aim to push your revenue sources all the way to the right on the Pioneer category.
Tool 2: The Strategy Canvas
This canvas is designed to help you gain a good overview of your current strategy and computer it to those of your competitors. This Strategy Canvas shows your industry competitive factors and how much value can consumers get from each factor from which company.
The way it works is by placing a horizontal axis indicating the main competing factors. Then a vertical axis indicating the amount of value-driven for consumers. I personally like to go from 0 to 5. Zero being nonexistent in a company’s offering and 5 the best option for that factor.
Each industry factor indicates a characteristic of the product or service that consumers enjoy, or at least expect to receive during their experience. Select anything between 5 and 12. If there is a clear industry leader, start by mapping out them. Then you can continue with your close competitors, those organizations that are the closest or more similar to you.
In this strategy curve, we can see 5 industry variables for a graduate business school: Campus, Tuition, Faculty, Community, Quality and Relevance.
What the Graph Tells
Here’s the catch:
• If you see that the graphs look pretty much the same across competitors, you know there is a red ocean competition going on. • If your graph is inferior... you really need to innovate. But don’t worry, this is the reason we are doing this exercise, answers will come clear as we progress. • If your graph is superior... great job, this is the time to think about what’s next. By now your competitors are aware of your current strategy and while they play catch-up it’s the perfect time for you to prepare your next move.
In this graph, we can see how Collective Academy took advantage of the white space of Business Graduate Schools, where there was no option for high quality and low cost.
It manages to do so, by eliminating one of the largest cost generating elements of the industry: Having a Great Campus. Instead, they give classes at corporate offices and boardrooms and with all the money saved they can offer low-cost tuition fees and high-quality education.
Tool 3: User Journey Map
The user/customer journey map helps us understand all the touch points in the experience of consuming our products and services. That includes everything from awareness of its existence all the way down to customer support and everything in between. To make this map more insightful we can combine several journey maps into a single graph.
The way to works is we draw a line across the touch points and highlight the low points (parts of the experience that can improve or courses discomfort) and the high points, (parts of the experience that people enjoy).
Tool 4: The Value Innovation Curve
Value Innovation is a way to map where is the meeting point between the cost of producing a new product and value that the buyer can expect from the industry, but it has never been offered before: a value-cost trade-off if you will.
Traditional strategies go into marketing thinking of two options, they can provide higher value at higher costs, or they can provide reasonable value at lower costs. Blue Ocean Strategies buy contrast explore new ways of providing new forms of value that help organizations differentiate themselves at the same time that they keep low costs of production.
Tool 5: Four Actions Framework
The tool will help us reconstruct the customer value curve. This is a quite simple process that allows us to figure out how we should modify the elements of the curve. The framework consists of 4 simple and direct questions that challenge current business models.:
- What can be Eliminated: elements of the value curve that can we remove altogether because they just add costs and don’t add much value.
- What can be Reduced: Which elements could be reduced from the industry standard but still manage to provide acceptable value.
- What should be Increased: What are the elements that provide the most value and won’t add unacceptable costs.
- What should be Added: What are elements that no one in the industry is offering and we could add to create a new market. That is including a totally new group of people that otherwise wouldn’t be consumers.
Tool 6: Six Path Framework
We can think of the Six Path framework as a series of questions that will allow us to challenge the underlying assumptions of how an industry or market category should work.
Most importantly, it can help us break through industry boundaries by identifying new clients and value propositions which can result in the creation of new markets.
By questioning the general convention we will be able to gain new insights on how to redefine our industry boundaries in order to create a new sub-market all for ourselves.
6.1 This six questions (or paths) are:
1. Alternative Industries Groups:
These are different industries or services that can substitute our product but normally we wouldn’t consider them as direct competition. Yet they solve the problem or get the job done. (Think Jobs to Be Done of Clayton Christensen).
For example, think of about the last time you wanted to have a good night out of fun and entertainment with your friends. Perhaps you decided to go out for a drink at a local bar, but you might as well have chosen to go to the cinema to catch a movie, or even take a quick road trip to the countryside.
All this are three different industries yet compete to get the same job done: weekend entertainment.
Understanding what are we really competing against can help us out identify what strengths this kind of offerings have and how we compare to them. This would allow us to come up with new and better ways to redesign our products and services in order to create a new category.
2. Strategic Product Groups
Strategy groups are small groups of companies, brands, product or services that can be considered to be part of the same category given the price or value they provide. Think of this as direct competitors for any given product. For example, BMW, Mercedes and Jaguar all offer luxury vehicles, at a high price.
If we would like to have a blue ocean shift in the luxury automotive industry, we could think of how to redesign what does luxury vehicle means in order to provide more of the luxury characteristics and remove those elements that are considered obsolete in order to provide a lower point of entry. Going back to Collective Academy, it offers a high-level masters program at a cost similar to low-cost colleges. The way the university manages to do so is by eliminating the elements of high education that are now obsolete, such as expensive campuses and classrooms and instead, replacing them with better alternatives such as boardrooms within high growth companies.
3. Chain of Buyers
The chain of buyers is everyone who influences the purchase decision. That is not only the person who consumes the product but might include someone who actually pays for it, or even third-party influencers such as celebrities that can sway the perception or awareness of a given product.
If we think of preteens buying clothes, the chain of buyers might be composed by three types of buyers, the teens who choose the clothes, the parents who actually pay for them and maybe a pop star that decides to promote or use a certain style of clothes. For Collective Academy that might include the person who wants to accelerate their professional career. His or her employer that might offer to pay a % of the tuition fee, or even give a pay rise with their new credentials, and a publication that decided to rank universities based on student performance rather than in past brand equity.
4. Across Complementary Offerings
Most products we consume interact with one or more complementary products or services. This complements can add or subtract value before and after a purchases decision. Think of your phone, you probably have one accessory for it, that be a screen or cover protection, or sometimes you might have to give it maintenance or send it to repair service.
The quality of this complementary offerings affects your value.
5. Balance Functionality vs Emotion
All products compete for functionality or emotional value, sometimes a combination of those. Functional Value comes from the relationship between utility and the price. The Emotional Value in another hand derives from the feelings that the experience can derive to consumers.
An interesting case of switching is the watch company Swatch. They were initially a functional brand that offered budget watches, and then made a pivot to be an emotional brand that offered users the ability to make fashion statements with the same low priced products.
6. External Trends
In order to find great Blue Ocean Strategy insights, we need to go beyond current industry trends. Instead, we should examine how trends will change future perceptions of value and how those impact our organization’s business model.
That is... change the focus from the value that we can deliver today to future forms of value. That will help us understand how we should shape the future of our products and even our industry.
6.2 Different Non-Customer Tiers
Creating new markets imply that we will be creating products and services that can transform non-consumers into consumers. We manage that is by identifying commonalities between what consumers and non-consumers consider valuable.
We can organize our non-consumers into three categories
Soon to Be:
- Closest to our current market.
- They purchase out of necessity for lack of options.
- Will stop buying as soon as they have an alternative
- A considerable increase in value can make them stay.
- Refuse to buy from your industry after they evaluated it.
- Find the value unacceptable (usually because of price).
- Decide to use an alternative industry offering
- Furthest from your current market
- Never been targeted before by your industry
- Never considered themselves as potential customers
- They represent an untapped potential for a new market in your industry.
Companies are used to design products first for “Soon-to-Be” (tier 1) then, outward to “Unexplored” (tier 3). Actually, most of the time companies tend to get stuck in “Soon-to-be” markets. While this can provide an easier path to revenue, it tends to get companies stuck in a price-oriented red ocean.
This is because just as it’s easier to sell something to someone who is already a customer, it’s easier to sell someone who is almost-customer.
The problem with that thinking is that other companies are not that far away from those products and services. Our focus should be backward. Start by focusing on “Unexplored” market segments, where the real untapped opportunity and new markets are.
6.3 Validating Blue Ocean Strategy Ideas
Trying to develop a complete strategy out of mere blue ocean ideas without proper validation is risk-business (ha ! pun intended). Before even considering an idea as an option, we should make sure that the idea is viable enough to attract non-consumers and that we are able to create and market our value proposition.
The Blue Ocean Validation process consists of 4 steps. Actually, any business idea validation has this steps that should be validated in the proper sequence.
- Utility: Can our new product provide enough value to convince non-consumers to buy it?
- Pricing: Is our value proposition priced at a level that seems reasonable for our potential customers?
- Cost: Can we produce, market and deliver our product at a reasonable cost that allows us to keep decent revenue?
- Adoption: Can we address the adoption challenges fast enough?
The idea behind this sequence is to reduce the risk of launching a new product that might sound good on the whiteboard but actually won’t get any traction from the market.
7. Blue Ocean Fair
Finally, now it’s time to identify which of the Blue Ocean Strategies alternatives your organization should develop further.
To do so, the authors suggest we create a “Blue Ocean Fair”. It’s an event where we invite top key people across your organization. This usually includes a head of marketing, HR, Finance, Tech and the unit department who would be involved in R&D. Heck, you can even invite partners and customers. To start with this exercise, you share the process you followed to come up with each option. This should be done by explaining and showing the visual reference to your journey maps, strategy canvas and six path framework and four actions framework. The ideas are presented as if they wereidea advertisements. That is with strong visual reference and taglines that help convey the general idea. Think of this event as something like a pitch night. After all involved participants had a chance to walk around the place and take a good look at the visual references of the tools and the options “advertisements”, they will gather and be pitched each option. During this phase, they will have the opportunity to make questions and clarify all their doubts. Finally, everyone is provided with a visual voting mechanism such as small round stickers or post its, which they can stick into the ideas they like. It’s suggested that people get something between 5 and 10 votes. (Or no more than half of the total ideas). People can decide whether to use all their votes on a single idea or distribute them across several.
People can also use larger post its to provide written feedback on all of the ideas to help improve them or even combine them.
Make sure to take a look at DotMocracy to learn how to properly implement voting systems with this approach.