Blue Ocean Strategy

The book in one minute

Every industry alive today is what the authors call a red ocean. The boundaries are known, the rules of competition are agreed, and everyone is fighting over demand that already exists. As the space fills up, products converge, margins compress, and the water turns red.

A blue ocean is market space that does not exist yet. Demand is created rather than divided. Growth is fast and profitable, and for a meaningful period there is no relevant competition, because you set the terms of comparison.

The way in is value innovation: pursuing differentiation and low cost at the same time, by rebuilding what the offering consists of rather than tuning what already exists. You eliminate and reduce the factors your industry has always competed on but customers never really valued, and you use the savings to create and raise factors the industry has never offered.

The rest of the book is the toolkit for doing that on purpose rather than by luck: a picture that shows you where you actually stand (the strategy canvas), a grid that forces the trade-off apart (eliminate-reduce-raise-create), six systematic places to go looking (the six paths), three groups of people you are ignoring (the tiers of noncustomers), and a four-gate test that kills bad ideas before they cost you anything (utility, price, cost, adoption).

Red oceans versus blue oceans

The authors are careful about one thing that readers routinely miss: red oceans are not a mistake. Most businesses live in one, and competing well inside an existing market is a legitimate and often correct activity. The argument is that companies over-invest in red ocean competition to the point where it becomes the only move they know, and that the risk-adjusted returns on the alternative are much better than the rhetoric of "playing it safe" suggests.

The big idea: value innovation

Classical strategy says you must choose. Deliver more value at a higher cost, or acceptable value at a lower cost. Attempt both and you end up stuck in the middle, beaten at the top by the differentiators and at the bottom by the cost leaders.

Value innovation refuses the choice. The claim is that when a company genuinely reconstructs its offering, buyer value goes up and the cost structure goes down, because the two movements fund each other:

• Cost falls when you eliminate and reduce the factors your industry competes on out of habit rather than customer demand.
• Value rises when you create and raise factors the industry has never offered.
• Over time cost falls further as the volume that new demand brings drives scale economies.

The word innovation here is doing something specific, and it is not technology. A technical breakthrough with no buyer utility, no accessible price and no viable cost structure is an invention, not a strategy. Value innovation only occurs where innovation lines up with utility, price and cost simultaneously.

The authors also change the unit of analysis. Not the company, and not the industry - because no company is excellent forever and no industry is permanently attractive. The right unit is the strategic move: the set of decisions involved in creating a major new market offering. Study moves, not heroes.

Underneath this sits a philosophical position the appendices spell out. The structuralist view holds that industry conditions are given and strategy is about positioning within them. The reconstructionist view holds that market boundaries and industry structure exist only in managers' minds, and can therefore be reshaped by the actions and beliefs of the players. Blue ocean strategy is the reconstructionist case.

The most popular ideas in the book

If people remember twelve things from Blue Ocean Strategy, these are the twelve.

1. Red ocean vs blue oceanThe market universe splits into contested industries that exist today and uncontested space that does not exist yet. Competition is a choice, and most firms make it by default.
2. Value innovationDifferentiation and low cost pursued together, not traded off. The cornerstone of the whole book, and the single idea most often quoted incorrectly.
3. The strategy canvasOne chart that plots what your industry competes on and how much of each factor each player offers. When every curve has the same shape, you are looking at a red ocean.
4. The four actions frameworkEliminate, reduce, raise, create. Two questions attack cost, two attack value, and asking all four is what breaks the trade-off.
5. The ERRC gridA four-box worksheet anyone in the business can fill in. Its real value is that vague answers are immediately visible as vague.
6. Focus, divergence, and a compelling taglineThe three tests of a good strategy, all readable straight off the canvas. If you cannot write the tagline, you have a budget, not a strategy.
7. The six paths frameworkSix boundaries every industry treats as fixed - alternative industries, strategic groups, the buyer chain, complementary offerings, functional/emotional appeal, and time - and a method for looking across each one.
8. The three tiers of noncustomersThe soon-to-be, the refusing and the unexplored. The biggest growth is usually sitting in the group your market research has never spoken to.
9. The strategic sequenceBuyer utility, then price, then cost, then adoption - in that order, each a pass/fail gate. Setting price before cost is the counter-intuitive move that makes it work.
10. The buyer utility mapSix stages of the buyer experience against six utility levers: thirty-six places to look for value, most of which your industry has never touched.
11. Tipping point leadershipFour organisational hurdles - cognitive, resource, motivational, political - cleared by acting on the few people and places with disproportionate influence rather than on everybody.
12. Fair processEngagement, explanation, expectation clarity. The reason people execute a strategy they had no part in choosing, or quietly refuse to.

The frameworks, in detail

1. The strategy canvas

The strategy canvas is both a diagnostic and an action framework. It captures the current state of play in a known market space, and it shows you where a new value curve could go.

The horizontal axis lists the factors the industry competes on and invests in. The vertical axis shows the offering level a buyer receives on each factor, low to high. Plot each player and you get their value curve. The revealing moment is usually how closely the curves track each other.

Three tests tell you whether a value curve is any good, and you can apply all of them by eye:

• Focus - the curve is not high across the board. It commits to a few things and deliberately underperforms on others.
• Divergence - the shape genuinely differs from the industry curve, rather than tracking it slightly above or below.
• A compelling tagline - the strategy can be stated in one true sentence that also functions as a promise to a buyer. Southwest Airlines: the speed of a plane at the price of a car, with the flexibility of frequent departures.

A curve without focus means a bloated cost structure. A curve without divergence means a me-too business. A tagline that is not true is marketing that will be found out. And a canvas whose factor names are internal jargon that no customer would recognise is a warning that the industry has stopped listening to anyone outside it.

2. The four actions framework and the ERRC grid

The canvas diagnoses. The four actions framework redesigns. It asks four questions about the factors your industry takes for granted:

The first two questions attack cost. The second two attack value. Most companies only ever ask the raise and create questions, which is precisely why their cost base grows every year. Filling in all four boxes is what makes differentiation and low cost simultaneously achievable.

Two worked examples, both from the book:

Animals are expensive to buy, house, transport, feed, care for and insure. Removing them stripped out an enormous cost while also removing something a modern audience had grown uneasy about. The saving funded theatrical production values, which let Cirque charge theatre prices rather than circus prices, and opened up an adult corporate audience the circus had never had.

Casella Wines aimed at people who found wine intimidating rather than at wine drinkers, and became the fastest-growing brand in the history of both the Australian and the United States wine industries.

3. The six paths framework

The most practical chapter in the book. Each path is a boundary that industries treat as fixed, and each one can be looked across systematically rather than hoped over.

Path six carries a warning worth repeating: this is not forecasting. The authors set three tests before you act on a trend. It must be decisive to your business, it must be irreversible, and it must have a clear trajectory. A trend that fails any of the three is a distraction dressed up as foresight.

4. The three tiers of noncustomers

Two habits that feel like best practice quietly keep companies in the red ocean: focusing on existing customers, and ever-finer segmentation to serve them better. Both push you toward customisation and away from the scale a blue ocean needs. The move is to de-segment - find the powerful commonalities in what people value and aggregate demand rather than slicing it.

The instruction is not to pick a tier. It is to look for the largest catchment of new demand, and to check the commonalities across all three tiers before committing.

5. The strategic sequence

The commercial spine of the book. Four gates, in strict order, each of which can kill the idea:

Utility. The buyer utility map gives you thirty-six places to look: six stages of the buyer experience cycle against six utility levers. Most companies compete in two or three squares and never examine the rest.

The six stages of the buyer experience cycle are purchase, delivery, use, supplements, maintenance and disposal. You run each of the six utility levers below across all six stages, which is where the thirty-six squares come from.

The book's failure case is Philips CD-i, a technically impressive product that asked too much of buyers at almost every stage of the cycle at once.

Price. You set a strategic price aimed at the mass of buyers from day one, rather than skimming high and cutting later. The price corridor of the mass is found by listing products of a different form that do the same job, and products of a different form doing a different job that serve the same objective. Where the volume clusters is your corridor. Then choose a level within it based on how easily you can be copied: weak legal or resource protection means price at the lower end and take the market before imitators arrive.

Cost. Target costing runs backwards from the price: strategic price minus required profit margin equals the cost you must hit. If you cannot hit it, there are three levers, and cutting quality is not one of them - streamlining and cost innovation, partnering rather than building, and changing the pricing model itself (leasing, subscription, slicing ownership) when the real problem is affordability rather than cost.

Adoption. Every blue ocean move threatens somebody. Employees fear for their roles, partners fear for their channel, and sometimes the public has a stake. The answer offered is open discussion before the fact rather than persuasion after it.

6. The pioneer-migrator-settler map

A portfolio tool that turns all of this into an early warning system. Plot each business you own, and each project in the pipeline, into one of three groups:

• Settlers - me-too businesses whose value curves match the industry. They may be profitable today; they will not drive growth.
• Migrators - offering more than the industry, but not fundamentally different. Value improvement, not value innovation.
• Pioneers - real blue ocean value curves with a mass following. These are the growth engines.

If today's portfolio and tomorrow's pipeline are both crowded with settlers, you can see your future growth problem years before it shows up in the accounts.

7. Tipping point leadership

The execution half of the book opens with four hurdles: cognitive (waking people up when nothing appears to be on fire), resource (doing it without more money), motivational (moving the mass rather than the willing few) and political (surviving those with something to lose).

Tipping point leadership holds that disproportionate change follows from acting on the small number of people, acts and activities that carry disproportionate influence. You do not move the mass. You move the hinge points. The case study is Bill Bratton's turnaround of the New York City Police Department in the mid-1990s, where felony crime, murders and thefts all fell sharply within two years without a budget increase:

8. Fair process

The quietest chapter, and in practice the one that decides whether any of this survives contact with real people. A blue ocean strategy asks employees to work differently in ways that cannot be fully specified or monitored, which means it depends on voluntary cooperation - and voluntary cooperation cannot be instructed.

What produces it is fair process, in three parts:

• Engagement - involve people in the decisions that affect them, ask for input, and let them challenge the reasoning. This improves the decision, and it changes how the decision is received.
• Explanation - everyone affected should understand why the final decision was made as it was. People will accept an outcome they disagree with, even one that costs them, if the reasoning is genuinely explained. What they will not accept is a decision that appears arbitrary.
• Expectation clarity - state plainly what the new rules are, what people will be measured against, and what the consequences are. Ambiguity reads as a trap, and people respond by protecting themselves.

The chain runs: fair process produces trust and commitment, trust and commitment produce voluntary cooperation, and voluntary cooperation is what makes execution possible. Its absence produces the familiar pattern of a strategy everyone agrees with in the room and nobody enacts outside it.

Chapter-by-chapter summary

The 2015 expanded edition runs to eleven chapters in three parts, plus three appendices. Chapters 9, 10 and 11 were added to the expanded edition in response to a decade of watching people apply the framework.

Part One - Blue Ocean Strategy

Part Two - Formulating Blue Ocean Strategy

Part Three - Executing Blue Ocean Strategy

Part Four - Added in the 2015 expanded edition

The case studies, at a glance

Where the book is weakest

A summary that only repeats the authors' case is not much use, so here is the reasonable criticism.

• Selection. The research identifies successful moves and reconstructs the logic behind them. That is retrospective, and it does not tell you how many companies applied similar thinking and failed. The framework's explanatory power is strong; its predictive power is unproven.
• Durability. Several showcase cases were substantially imitated or overtaken within a decade, which suggests the barriers to imitation described in chapter 10 are thinner in practice than the argument implies.
• Ex-ante ambiguity. The line between a blue ocean and a well-executed differentiation strategy is much easier to draw after the fact than before it. In the moment, most teams cannot tell which one they are attempting - which is exactly when the distinction would be worth money.
• Execution is thin. The book is far stronger on diagnosis than delivery. The canvas, the grid, the six paths and the utility map are excellent instruments. The execution chapters are shorter, more anecdotal, and rest on a small number of cases.
• The vocabulary has been diluted. "Blue ocean" has become a synonym for "new idea" in general business usage, which is precisely the misreading chapter 11 was written to correct.

None of this makes the book less useful. It makes it a set of instruments rather than a guarantee, which is the right way to hold it.

How to actually use it

Frequently asked questions

About this summary. This is an original summary and commentary on Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne (Harvard Business Review Press, expanded edition 2015), written and narrated for the AIEIO book library. It paraphrases the book's ideas and frameworks and contains no reproduced text. All trademarks and case study companies belong to their respective owners. If the frameworks were useful to you, buy the book - it is worth owning, and the worked examples repay a proper read. The authors' follow-up, Blue Ocean Shift (2017), covers the implementation process in more depth.