Blue Ocean Strategy: How to Compete Without Competing
Blue ocean strategy is a good way to ask a hard question and a poor way to predict who will win. The question is what your customers would value if you stopped copying your competitors.
The weakness is the evidence, because most of it comes from success stories picked after the fact.
So I treat the framework as a disciplined brainstorm. It forces you to question what your industry takes for granted. It says nothing about whether your answer will sell, and you still have to test that with real buyers.
This article argues the point in three rounds: the case for the idea, the case against it, and what is left for a small business after both. A worked example with exact numbers sits in the third round.
The Idea in Plain Terms
W. Chan Kim and Renée Mauborgne, professors at INSEAD, introduced the idea in a 2004 Harvard Business Review article, then in their 2005 book Blue Ocean Strategy, expanded in 2015.
A red ocean is an existing market where companies fight over the same customers, and profits shrink as competition grows. A blue ocean is new market space where demand is created and the old rivalry does not apply yet.
Their central concept is value innovation: raising the value buyers get and lowering your cost at the same time.
The usual strategy choice is between charging more for something different and charging less for something similar. The authors argue that you can sometimes escape that trade-off.
Their opening example is Cirque du Soleil, founded in Quebec in 1984. It dropped the animal acts that defined the traditional circus and borrowed from theater instead.
According to INSEAD's summary of the 2004 article, it increased revenue 22-fold over ten years in an industry that had been in long-term decline.
Round One: The Case for It
The strongest argument for the framework is a simple observation. Companies in the same industry watch each other, copy each other and end up offering almost the same thing.
The authors' strategy canvas makes that visible. You plot each competitor on the factors buyers compare, such as price, speed or service level, and the lines tend to bunch together.
The four actions framework then asks four questions about every factor:
- Eliminate: Which factors that the industry takes for granted could you remove entirely?
- Reduce: Which could you cut well below the industry standard?
- Raise: Which could you lift well above it?
- Create: What could you offer that the industry has never offered?
The first two cut your costs and the last two raise buyer value. Doing all four together is what the authors say breaks the trade-off between low cost and differentiation.
A third idea is to study noncustomers. The authors describe three tiers: people who use the category minimally and are ready to leave, people who considered it and refused, and people who never considered it. Learning why they stay out can show demand that current customers never reveal.
Then there is the number everyone quotes. In their study of 108 business launches, 86% were incremental improvements inside existing markets, and those produced 62% of revenues and 39% of profits.
The 14% aimed at creating new market space produced 38% of revenues and 61% of profits, as StrategyU's summary of the book reports it.
The authors also offer six paths for finding new space, each a way of looking across a boundary that competitors usually respect.
You can look across alternative industries, across the strategic groups inside your industry, across the chain of buyers, across complementary products and services, across the appeal to function or to emotion, and across time.
The chain of buyers is a good one for a small firm. The person who pays is not always the person who uses the result. A bookkeeper's output may matter most to the accountant who files the restaurant's taxes, and designing for that person is a different offer from designing for the owner.
For a small business, the appeal is that the questions cost nothing. "What do we do only because everyone does it?" does not need a research budget.
Also Read: How to Build a Competitive Advantage That's Hard to Copy
Round Two: The Case Against It
Start with the evidence. The 108-launch figures come from the authors' own study, and the authors classified the launches.
Independent researchers have pointed out the wider problem. In a paper on blue ocean and competitive strategy, Andrew Burke, André van Stel and Roy Thurik note that empirical analysis of the idea has focused on case studies and so lacks generality, as their abstract states.
Their own test is worth reading. Using data on Dutch retail, they found evidence that blue-ocean-style strategy has prevailed over the long term, so the idea has some independent support. They also found that blue ocean and competitive strategy overlap, and that managers face no clean either/or choice between them.
Second, a blue ocean rarely stays blue. Success attracts imitators, and the framework says little about how to defend a new position once others arrive.
Third, even the flagship case shows the limits of any strategy.
Cirque du Soleil filed for creditor protection in June 2020, after the pandemic closed all its shows and left it with reported debts of nearly $1 billion, as Reuters reported.
The pandemic caused that filing, whatever one thinks of the strategy. It still shows that a distinctive position does not protect a company from shocks or from heavy debt.
Fourth, the central tool depends on a subjective step. Someone chooses which factors to plot on the strategy canvas, and I have seen a canvas make whatever case its author wanted. A canvas is only as honest as the factors someone picks.
Fifth, teams tend to fill in the canvas from their own office. A canvas built from assumptions about what buyers value is a guess with a diagram around it, and it comes out looking more rigorous than it is. The tool works only if the factors and the scores come from conversations with buyers and noncustomers.
Also Read: How to Pivot Your Business Without Losing Your Core Customers
How to Read the Next Blue Ocean Success Story
You will meet more of these stories, usually told by the company, a consultant or a book. Ask four questions before you let one change your plans.
Did profit rise, or only revenue? A new offer can grow sales while the margin shrinks. Is the company still ahead after imitators arrived, or is the story frozen at the moment of launch? Who is telling it, and what do they sell? And how many companies tried a similar move and failed, since nobody writes up those?
None of this makes the stories useless. It makes them a source of ideas, and weak evidence for what will work in your market.
Round Three: What a Small Business Can Keep
My conclusion is to keep the questions and drop the promises. The framework is a way to generate hypotheses about what buyers might value, and a hypothesis is all you get from it.
Here is how that works for a hypothetical firm that does bookkeeping for restaurants.
Typical firms in its market visit the restaurant, send twelve monthly reports and focus on recording what already happened. The firm charges $900 a month and spends 15 hours serving each client, valued at $40 an hour, which is $600 and leaves a $300 margin, or 33.3%.
The firm applies the four actions. It eliminates on-site visits, which saves 4 hours. It reduces monthly reports from twelve to three, which saves 2 hours. It raises the depth of its cash-flow forecasting, which adds 2 hours. It creates a weekly 15-minute cash call, which adds 2 hours with preparation.
Serving time falls from 15 hours to 13. Cost per client falls from $600 to $520, which is 13.3% lower, and the margin at the same $900 price rises from $300 to $380, from 33.3% to 42.2%. Or the firm can cut its price to $780 and keep its old margin percentage.
The framework's pricing logic helps here, in a simplified form. Set the price from what buyers already pay for the alternatives, such as a spreadsheet, a part-time accountant or a large firm.
Then work backward to a target cost that leaves a margin. If the new offer cannot be served at that cost, the idea fails on paper before you spend anything.
That is a hypothesis and nothing more. It works only if restaurant owners value the weekly call and do not miss the visits, and the way to find out is to ask them.
The three tiers of noncustomers map onto this example cleanly. Soon-to-be noncustomers are restaurants that pay a bookkeeper only for compliance and would leave if something better came along. Refusing noncustomers are owners who do their own books because bookkeepers seem too slow or expensive. Unexplored noncustomers are new restaurants and food trucks that never considered hiring one.
Start with the refusing group. They considered the category and said no, so they can tell you exactly what would change their minds.
Also Read: How to Choose a Profitable Niche in a Saturated Market
Before you commit to a new position, run it through five questions:
- Buyer evidence: Have people who do not buy today described the new value in their own words?
- Cost logic: Can you show, with numbers, that eliminating and reducing factors lowers your cost?
- Price: Would buyers pay a price that leaves you a healthy margin?
- Copying: What stops a competitor from matching you within a year?
- Adoption: What would make a skeptical buyer switch, and what does that cost you?
When a Red Ocean Is the Better Place to Be
Most small businesses enter crowded markets, and most of the ones I have watched succeed did it through better execution.
A red ocean has one great advantage: the competition proves that buyers exist. If demand is proven, margins are healthy and you can serve customers better or cheaper than the others, you can skip inventing a new category.
The framework earns its place when a market is commoditizing, when every offer looks alike and price is the only lever. In that situation, asking which factors to eliminate or raise can open a door.
Also Read: How to Choose Between a Service Business and a Product Business
A First Test You Can Run This Month
Draw a strategy canvas from what your competitors say on their own websites, using eight or so factors that buyers compare. Look at where the lines bunch together. Then talk to ten people who buy from no one in your category, and ask what they do instead and why.
From those conversations, sketch your four actions, and pre-sell the new offer to three buyers before you build anything. If none of them will commit, the idea needs more work, and you have spent an afternoon rather than a year.
Conclusion
Blue ocean strategy is worth using as a set of questions about what your market takes for granted. It predicts success poorly, because its evidence is thin, its best cases are selected, and even a distinctive position faces imitators and shocks.
Use the strategy canvas and the four actions to generate ideas, put numbers on the cost side, and test the value side with people who are not already your customers. That keeps the best part of the framework and drops the parts that cannot be proven.
Also Read: How to Build a Business Model That Actually Scales
