In the book, Business Model Generation, the authors talk about grouping Business Model Canvas with Blue Ocean Strategy, so let’s take a quick look at this strategy!
What is strategy?
The word “Strategy” comes from the military language and it means “the art of planning and directing overall military operations and movements in a war or battle over a specific place with known boundaries”.
Then what are Red Oceans and Blue Oceans?
Imagine the world market is made of two oceans, Red and Blue. Most companies are at war, mainly over the price to survive in the market where oligopoly exists. as an example, we can see the competition between Pepsi and Coca Cola where they don’t let smaller companies breathe easily, and yet at the same time they attack each other. This is a specific sign of Red Oceans where you see mass blood loss in the industry over a bigger market share. The boundaries are specific and accepted and the rules of the game are known.
At the same time, Blue Oceans are the complete opposite. The market spaces are new and untouched, and the competition is meaningless because the rules and boundaries are not specific. You can say the Red oceans were once Blue as not all industries have been available since the Big Bang. Even now the blue oceans are being created continually. 20 years ago who could have imagined something as abstract as cryptocurrencies could be traded and companies could start making wallets to make a profit.
The Blue Ocean strategy is focused on value innovation which is defined as “making the competition irrelevant by creating a leap in value for your buyers and your company, thereby opening up new and uncontested market space”. It means not cutting costs or adjusting your product to be able to compete but changing your value proposition.
Now let’s get to the point on how to reach the blue oceans
- Ask some questions
- Use frameworks to get where you are compared to your competitors
Four Action Framework
Some questions will help you redesign your company’s strategy and make a new value curve:
- Which of the factors that the industry takes for granted should be eliminated?
- Which factors should be reduced well below the industry’s standard?
- Which factors should be raised well above the industry’s standard?
- Which factors should be created that the industry has never offered?
But what is a value curve?
A value curve is a simple chart that can help you compare your strategy with other competitors, see if it has a real impact, and develop a simple value proposition. (My note: Please keep in mind that it mostly considers the external environment and not internal, intangible factors such as human resources!)
So to answer the elimination question, consider the companies you have been trying to compete with. Most of them don’t add value to the customer’s experience. The second question shows if the company is exaggerating certain products or services in an attempt to serve customers, which can show extra costs. The third one makes you think about sacrifices that can result in a value proposition to customers. And the last question is about finding components to add value that hasn’t been in the industry which changes your pricing strategy. So basically the first two questions are talking about cost reduction and the other two questions want to add new values. (This is similar to what we do in Flexiana, offering new customer experiences while lowering the cost structures for our clients).
“Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates.”
How it looks on a Business Model Canvas
After answering the questions, try not to focus on defining industry and customers, instead, try to challenge the current approaches where the focus is on current customers and buyer preferences.
Think about noncustomers as they are essential in the Blue Ocean. The noncustomers are identified in three different tiers:
- The first tier is soon-to-be noncustomers as they slightly use your offerings but perhaps not satisfied so are looking for something better.
- The Second-tier is refusing noncustomers who consciously either do not accept or cannot afford to use the current offerings.
- The Third-tier customers are the unexplored noncustomers who are never thought of as potential customers for the industry.
Do not try to make any strategy to reach these customers, as you don’t want to return to a segmentation approach as normal-red-ocean-competitors do. Try to “reach beyond existing demand to noncustomers and desegmentation opportunities as you formulate future strategies”.
However, there are no fixed rules to suggest which group of non-customers you should focus on and when. But you can check whether there are common characteristics among these three groups. In this way, you can expand the scope of hidden and unexploited demand.
If your goal is to create a strategic movement, you need to expand the area you cover.
You should also be aware that when competitors succeed in creating a value innovation to attract non-customers to their market, they may also attract many of your current customers. Because many of these customers are not loyal and are willing to give up their different custom features in exchange for value-added leaps from competitors.
The Blue Ocean Will Turn Red
When a new mindset starts to go viral, and value innovation is accepted properly, it will create a huge shift in the whole business strategy. It’s not just a simple modification. In old days people used to archive everything in huge rooms, then computers happened, and then hard drives and now cloud storage. When we innovate value, we disregard the practical wisdom of the industry. Although the old way of archiving exists, now people are changing their mindset to adopt the ease of technology. This change in this field has been happening over the past years and more and more people got into the blue ocean of cloud storage.
You can see with the passage of time the blue color of the ocean starts to change into red as people start to adopt the new strategy. And the loop of fighting to survive and keeping the highest market share starts again. If you are in the blue ocean early, then try to monitor the value curves to make sure that your product is always differentiated enough from other competitors. If the difference is not big enough then you should start value innovation again.
The Six Principles of Blue Ocean Strategy
|Formulation principles||Risk factor each principle attenuates|
|Reconstruct market boundaries||Search risk|
|Focus on the big picture, not the numbers||Planning risk|
|Reach beyond existing demand||Scale risk|
|Get the strategic sequence right||Business model risk|
|Execution principles||Risk factor each principle attenuates|
|Overcome key organizational hurdles||Organizational risk|
|Build execution into strategy||Management risk|
Three Characteristics of a Good Strategy
Focus: the focus of the strategy should be obvious in the value curve or the strategic profile
Divergence: The strategy should be active to stay unique
Compelling Tagline: “ A good tagline must not only deliver a clear message but also advertise an offering truthfully, or customers will lose trust and interest”.
Some tools to use:
The Strategy Canvas: A Strategy Canvas visualizes how the competitors attract customers and how your customers choose a product in your category to buy.
The Four Actions Framework which is discussed earlier.
The Eliminate-Reduce-Raise-Create Grid: It completes the Four Actions Framework and has immediate benefits:
“ It pushes companies to pursue differentiation and low costs to break the value-cost trade-off.
It immediately ﬂags companies that are focused only on raising and creating and thereby lifting their cost structure and often overengineering products and services—a common plight in many companies.
It is easily understood by managers at any level, creating a high level of engagement in its application.
Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor the industry competes on, making them discover the range of implicit assumptions they make unconsciously in competing.”
Which factors that the industry has long competed on should be eliminated?
Which factors should be raised well above the industry’s standard?
Which factors should be reduced well below the industry’s standard?
Which factors should be created that the industry has never offered?
The Buyer Utility Map: This map lets you map out the buyer’s journey with certain measures
We believe if you learn about BCG Matrix as well, you will know when to start innovation and when to launch a new product more accurately.
Downloads for Blue Ocean Strategy
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