Dr. Mehmet Genç's Blogposts

Blue Ocean Strategy: What Is New?

These days we hear about Blue Ocean Strategy (BOS) a lot, and I regularly devote a class session on the topic in my MBA and EMBA classes. The creators of BOS, Professors Chan Kim and Renee Mauborgne, have definitely worked hard to make BOS concepts both accessible and practicable, with a series of influential and popular Harvard Business Review articles, engaging case studies, multimedia, a book with the same name, and even a website dedicated to popularizing the topic, complete with tools and frameworks for practitioners, and teaching materials, ideas for teaching modules, and syllabi, available only to educators.

If we put all this aside however, is there anything essentially different or new about Blue Ocean Strategy? If so, what is it? While BOS authors offer many tools, creating a blue ocean strategy requires two essential tools, and two important principles. These can help us answer this question. The first of these tools is called the strategy canvas. The strategy canvas is basically a drawing of the business landscape that highlights (1) what do existing rivals compete on, and (2) their level of offering to the buyers on each factor. The resulting line is called a value curve, and reflects the value proposition of the firm in question. In most of the successful Blue Ocean Strategy examples, existing competitors tend to converge on the same factors, and firms in the same strategic group tend to converge in terms of their level of offering as well.

In this way however, the strategy canvas revisits an old theme in strategy research: the dangers of convergence. Michael Porter’s famous article, “What is Strategy?” mentions convergence as a subtle, insidious, and mutually destructive force (p.64) that will ultimately destroy industry profitability. As such, competitive convergence and its dangers are not new. The strategy canvas, then, can be seen at best as a new tool to alert managers to convergence, perhaps by visualizing it. Both Kim and Muauborgne, and Porter (as well as other “conventional” thinkers) focus on divergence (Porter refers to this as crafting a unique position) as a principle of competitive advantage. One could argue that Porter doesn’t show how to be different, but other articles that build on it do (such as “Can you Say What Your Strategy Is?” by David Collis and Michael Rukstad). Furthermore, the strategy canvas on its own doesn’t show the way out of convergence either – which brings us to the second fundamental tool of BOS: ERRC.

The second tool, ERRC, stands for Eliminate, Reduce, Raise, and Create. These correspond to four questions (and 4 actions): which of the factors that rivals compete on should be eliminated? Which factors’ level of offering should be greatly reduced? Which factors’ level of offering should be significantly raised? And finally, which new factors that don’t exist yet should be created? At first look, the ERRC seems a brand new way of evaluating competition. A closer look at these four actions, however, reveals that at its core, these are restatements of the principles of value-based business strategy[1]. Let’s recall what value-based business strategy is:

Value Created = WTP – Suppliers’ Opportunity Costs[2]

Value-based business strategy states that in order to create competitive advantage, a firm needs to drive a bigger wedge between its customers’ willingness to pay and their suppliers’ opportunity costs. How is this similar to BOS’s 4 actions? Well, how does one decide to eliminate which factors that competitors compete on? BOS states that those factors which do not create value for customers but add costs to the system should be eliminated. For example, a very wide product range may increase costs by complicating production and inventory control, but may not be creating buyer value, especially if too much choice confuses the customers or the customer is not well-informed about the product. By greatly reducing this factor, one could reduce costs without reducing WTP, thereby driving a bigger wedge between WTP and cost. This is a classic case of over-delivery of product attributes – a common mistake mentioned by Porter as well (he mentions it as activities being over-designed). Similarly, one can emphasize a factor which is under-designed, i.e., whose level of offering can safely be raised to increase WTP, without concomitant increase in costs, for example by increasing frequency of flights but doing it by utilizing existing planes more effectively. These are all ideas present in value-based business strategy. Once again, perhaps BOS has made these tools more accessible to students and executives by providing an intuitive and original way of thinking about how to increase WTP or reduce costs, without raising or reducing the other proportionally. The innovation is not in the theory, but rather in the approach.

So, what is new about BOS? You may have noticed that in the analysis above, I omitted ‘create’, the fourth action. Create asks the company to discover new factors along which existing competitors do not compete yet. To find out these new factors of competition, as well as to identify factors that fall into the other three, BOS asks the executive to focus on the substitute providers instead of rivals, and on noncustomers rather than the customers. To me, this is the critical innovation of the BOS framework: that it asks the questions above with respect to nonusers. Why do nonusers not buy the industry’s product? Were they users in the past but fled away? Which attributes that the rivals offer do they not care about? Which attributes are important for them but not offered? The four actions all have to be evaluated with respect to the noncustomers. Many times, these noncustomers tend to go for the substitute products. As such, BOS also prods managers to look across industries, chiefly to substitutes. For this, ask yourself: “why do noncustomers not purchase my industry’s product? What other products do they purchase instead?” The conventional strategists of course are not against bringing new customers into the market; however, they tend to focus on positioning within the current set of customers. This is not stated explicitly, but those frameworks do not tend to focus on noncustomers explicitly. BOS does that.

But what about industries where there are not many noncustomers – can you create a BOS in those industries as well? That will have to wait for another blog entry.

For your comments and ideas, please contact Dr. Mehmet Genç at mehmet.genc@ozyegin.edu.tr.

Dr. Genç’s research focuses on how institutional environments affect the strategic behavior and performance of firms. Specifically, he studies the implications of home and host country institutional environments for firms’ international expansion strategies and subsequent performance, competition between multinationals from developed and developing countries, and the impact of foreign direct investment on local firms.