I intend to publish series of article/study related to Blue Ocean Strategy in combination with the Business Model Canvas described in the book Business Model Generation by Osterwalder and Pigneur (2010). I will also try to provide examples from different industries and explain them using this interesting combination of Blue Ocean and Business Model Canvas. Before that, we need to have a good understandanding of the concepts around Blue Ocean Strategy and the Business Model Generation Canvas.
“Strategy is the determination of the basic long-term goals and objectives of an Enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler, 1962) or it is defined as “the direction and scope of an organization over a long term: which achieves advantage for the organization through its configuration of resources within a changing environment, to meet the needs of markets and to fulfill stakeholder’s expectations” (Johnson & Scholes, 1999).
This is in congruence with Michael Porter (1985) words on defining strategy as:
“How a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals”.
“How a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals”.
Blue Ocean Strategy, (Chan Kim & Mauborgne, 2005)
Different companies adopt different strategies depending upon the industry and the environment they operate in. Creating a unique value proposition and attaining a competitive advantage is the heart of any strategy.
The metaphor of Red and Blue oceans describes the market space.
Red oceans strategy is where the industry boundaries are defined and accepted, and the competitive rules of the game are known. The companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the ocean bloody.
There is a “value-cost” trade off of creating greater value to customer at a higher cost or creating reasonable value at a lower cost. This red ocean strategy involves the aligning of whole system of a firm’s activities with its strategic choice of differentiation or low cost.
Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. Many rapid and profitable opportunities for growth are available, away from the “value-cost” tradeoff. Instead of dividing up existing and often shrinking demand and benchmarking competitor, blue ocean strategy is about growing demand and breaking away from the competition.
Red oceans strategy is where the industry boundaries are defined and accepted, and the competitive rules of the game are known. The companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the ocean bloody.
There is a “value-cost” trade off of creating greater value to customer at a higher cost or creating reasonable value at a lower cost. This red ocean strategy involves the aligning of whole system of a firm’s activities with its strategic choice of differentiation or low cost.
Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. Many rapid and profitable opportunities for growth are available, away from the “value-cost” tradeoff. Instead of dividing up existing and often shrinking demand and benchmarking competitor, blue ocean strategy is about growing demand and breaking away from the competition.
The Strategy Canvas
The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on and invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition.
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| Strategy Canvas, (Chan Kim & Mauborgne, 2005) |
The Four Actions Framework
The quest for “differentiation” and “low cost” at the same time is possible and can be understand through the four actions framework with 4 key “factored questions” as shown in the below diagram. In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean.
The four actions framework offers a technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered.
This diagram sheds insights to challenge industry’s strategic business model and to break the trade-off between differentiation and low cost to create a new value curve (Chan Kim & Mauborgne, 2005).
The quest for “differentiation” and “low cost” at the same time is possible and can be understand through the four actions framework with 4 key “factored questions” as shown in the below diagram. In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean.
The four actions framework offers a technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered.
This diagram sheds insights to challenge industry’s strategic business model and to break the trade-off between differentiation and low cost to create a new value curve (Chan Kim & Mauborgne, 2005).
In today’s rapid changes in environment and customer mindsets, the firms have to revisit their strategic options and move to blue ocean strategy by creating new & uncontested market space with less competition, and innovation is one of the ways to adapt to this blue ocean strategy.
The Eliminate-Reduce-Raise-Create grid 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. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.
Value Innovation
The corner-stone of Blue Ocean Strategy is Value Innovation. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.
Check the coming posts with concrete cases from different industries.
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| The Four Actions Framework, (Chan Kim & Mauborgne, 2005) |
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| The Four Actions Grid, (Chan Kim & Mauborgne, 2005) |
Value Innovation
The corner-stone of Blue Ocean Strategy is Value Innovation. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.
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| Value Innovation,(Chan Kim & Mauborgne, 2005) |
I'm also interested in the combination of Blue Ocean method with Osterwalder's Business Model Canvas. Have you experience doing this and can share your experience?
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