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Blue Ocean Strategy for Entrepreneurs and Intrapreneurs

by edavis on 01/04/10 at 3:48 am

In today’s competitive business environment, companies are constantly looking for ways to continually gain an edge in order to improve their competitiveness and differentiate themselves from the competition. As a result, management teams are researching and applying the latest management systems into its operations. One such management system gaining notoriety and acceptance is the Blue Ocean Strategy developed by W. Chan Kim and Renée Mauborgne.

Blue Ocean Strategy centers on how to create uncontested market space that makes competition irrelevant. It focuses on creating value for the customer while increasing profit margins for companies. In short, companies accomplish this by simultaneously pursuing differentiation and low cost. This paper will define what Blue Ocean strategy is; determine and define the characteristics needed to operate in a Blue Ocean environment; discuss whether this strategy applies to start-up ventures; examine which companies, start-up ventures or established firms, benefit more from this strategy; and discuss whether Blue Ocean strategy is actually new and innovative.

What is Blue Ocean Strategy and What Is Its Value?

The concept of Blue Ocean strategy was popularized by Kim and Mauborgne in their book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Blue Ocean strategy can be defined as a strategy that can be used to create uncontested market space that makes competition irrelevant. This rise in market space can give rise to completely new industries, or more commonly, can alter the boundaries of an existing industry.

Companies that operate in a Blue Ocean environment typically pull in new groups of customers who were traditionally noncustomers of both the company as well as the industry. These Blue Ocean companies accomplish this by pursuing differentiation and low cost simultaneously, thus creating considerable economic barriers to imitation. They essentially create demand for their products and/or services rather than fight with other companies over market share.

Blue Ocean strategy is valuable because it forces companies to potentially alter the way they operate. First, it forces a company to properly align their system of production, price, and cost activities in order to simultaneously achieve low cost and differentiation. It also encourages companies to remake industry boundaries. And lastly, Blue Ocean strategy forces companies to listen to their customers and identify unattractive markets, find a niche, and exploit it.

What are the Characteristics Needed to Operate in a Blue Ocean Environment?

There are several distinct characteristics associated with companies who successfully operate in a Blue Ocean environment. The primary characteristics include recognizing new opportunities, attracting customers in large volume, and taking risks.

Recognizing Opportunities

Recognizing new opportunities is a vital component that Blue Ocean companies need to possess. Recognizing new opportunities can range from finding and developing markets where there is little or no competition to finding a niche in an unattractive market and exploiting it. Companies such as Netflix, Match.com, and NutriSystem serve as examples of Blue Ocean companies that recognized new market spaces. For instance, the founders of NutriSystem saw an opportunity to enter into the lucrative weight loss industry by developing meal plans that included selling and shipping pre-packaged foods to customers who wanted to lose weight but either lacked the knowledge or willpower to follow a diet or who were too embarrassed to visit a brick-and-mortar store for weight loss advice. Likewise, match.com realized early on that the Internet was the perfect medium to use online personal ads as a better way for people to find one another. Similarly, Netflix identified that customers were growing increasingly frustrated with their neighborhood video rental stores limited selection of movies as well as the fees they charged for not returning a movie on its due date. As a result, Netflix launched a national online video rental store that satisfied customers needs for a large volume of movies from which to select from as well as the complete removal of late fees from its business operations. These Blue Ocean companies were experts in thinking of new ways to reach out to new customers in new markets.

Attracting Customers in Large Volumes

Another key characteristic needed by Blue Ocean companies is the ability to attract customers in large volumes. The ability to attract a large volume of customers is important in that allows companies to generate large economies of scale which can then lead to lower costs. These lower costs can then be passed on to customers, thus creating economic barriers that other companies may have difficulty in duplicating.

Netflix, match.com, and NutriSystem are all examples of Blue Ocean companies that excelled at attracting customers in large volumes. These companies were successful in drawing in new and large groups of customers, thus making it more difficult for their competitors such as Blockbuster, eharmony.com, and BistroMD, to compete in these markets. By attracting customers in large volumes, these Blue Ocean companies made it extremely difficult for their competitors to imitate their business operations and practices.

Taking Risks

Taking risks is another characteristic seen in Blue Ocean companies. These companies are initially more focused on seeing the big picture and “creating new land” than they are about satisfying the financial numbers. These companies are undaunted in entering unattractive markets, finding a niche, and exploiting it. A prime example of a Blue Ocean company that was not afraid to take risks is Starbucks.

Starbucks was originally launched to sell coffee equipment and coffee-beans to individual customers. At that particular time, Americans were more inclined to consume coffee in the comforts of their own homes. Howard Schultz decided to take a risk to develop a coffee house where customers would purchase and consume their beverages in a unique coffeehouse setting. Schultz’s decision to create a blue ocean has allowed him to establish Starbucks as the leading multinational coffeehouse company.

Does Blue Ocean Strategy Apply to Start-Up Ventures and Who Benefits More: New Ventures or Established Firms?

Although both start-up ventures and established firms can benefit from following the principles of Blue Ocean strategy, start-up ventures can usually benefit more from following this Strategy. These benefits include the ability to build and sustain a brand as well as the ability to build and align a venture’s corporate culture and strategy to the principles associated with Blue Ocean Strategy.

One of the benefits for a start-up venture is the ability to create and sustain brand image and equity. Typically, established firms have to be cognizant of their current brand image and proceed with caution in building a new brand image because this new brand image may tarnish or diminish their existing brand. For instance, when Netflix established itself as an online video rental store that never charges late fees, it made it difficult for Blockbuster to compete the same way because Blockbuster prided itself on being the neighborhood brick-and-mortar store. Blockbuster could not position itself to quickly counter Netflix’s brand of using the Internet to rent movies rather than visiting the local video store. As a result, Netflix branded themselves as the online video store of choice and Blockbuster is still struggling to compete with Netflix in this market.

Another reason why a start-up venture is more likely to benefit from the adhering to the principles of Blue Ocean Strategy is that these new ventures can more easily develop and align their corporate strategy and culture to pursue and develop new markets. Start-up ventures are not typically confined by the organizational politics that established firms may have to deal with and thus, these new companies can more easily change their course of direction to continue to pursue new markets and not feel constrained by the actions and beliefs of established firms in an industry.

Is Blue Ocean Strategy New and Innovative?

Blue Ocean Strategy is really nothing new and/or innovative. According to Kim and Mauborgne, Several companies who could be classified as Blue Ocean companies were already following similar principles well-before the Blue Ocean Strategy became popular. For instance, if one looks at the history of the Apple iPod, Netflix, NutriSystem, Starbucks, and match.com, one would see that these companies and products were not influenced by the Blue Ocean strategy. It just so happens that these companies’ characteristics were similar in nature to those characteristics of Blue Ocean companies identified by Kim and Mauborgne. However, Kim and Mauborgne should receive credit in placing the idea of creating new market space by simultaneously pursuing differentiation and low cost into the forefront of many companies’ key decision-makers.