What Is Blue Ocean Strategy — and Where Does It Go Wrong?

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. What do Ralph Lauren, Salesforce.com, and Cirque du Soleil have in common?  Give up? They’re all brands that have successfully created “blue oceans” – uncontested, new markets where success is all about differentiation and lower costs. Blue ocean strategy is a landmark business idea, first introduced in 2004 right here at HBR. But its co-creator Renée Mauborgne says it’s not a guaranteed win. Today, we bring you a conversation about what can go wrong when you try to implement blue ocean strategy. You’ll learn about some of the common traps managers fall into – like trying to please existing customers OR focusing on adjacent market niches. AND why knowing who your non-customers are is as valuable as knowing your customers. This episode originally aired on HBR IdeaCast in March 2015. And just a note — we recorded this by phone. While the audio quality isn’t great, the conversation is. I think you’ll enjoy it. Here it is.

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. Today I’m talking with Renee Mauborgne. Professor at INSEAD and co-author with W. Chan Kim of the bestselling and newly updated and reissued Blue Ocean Strategy. They’re also the authors of a new article in HBR called Red Ocean Traps. Renee, thank you so much for talking with us today.

RENEE MAUBORGNE: Thanks, Sarah.

SARAH GREEN: So many of those listening may already know, but some may not know, what is blue ocean strategy?

RENEE MAUBORGNE: So Blue ocean strategy is about how can any company or organization break out of the red ocean of bloody competition or existing market space, which tends to be very crowded and competitive these days, and create uncontested market space where you make your competition irrelevant. So it’s really about how do you create uncontested market space and align your value profit and people proposition to achieve that around differentiation and low cost, and thereby you create a win for the market, a win for the company, and a win for your employees as well.

SARAH GREEN: So in the article especially, you’re identifying several traps that managers fall into when they’re trying to do this, to create and execute a blue ocean strategy. And it seems like one of the common ones is trying to focus on making existing customers happier. So tell me a little bit about why is that a problem? Why does that not help you reach the blue ocean?

RENEE MAUBORGNE: So in the expanded edition of Blue Ocean Strategy, we’ve actually added about two, really almost three new chapters to it. And one of the critical ones is what we call this red ocean traps, which is also the focus of the new Harvard article. And what we found is that many managers increasingly recognize obviously, the need to break out of red oceans of bloody competition. But that despite putting funding behind it, and having an intent to do it, they often find that they’re unsuccessful in that achievement. And what we’ve found is that managers’ existing mental models, the assumptions about what works in competing in existing industry space, they often apply to their efforts to create new markets. And that creates the failure. The issue is, creating new markets isn’t about better satisfying, necessarily your existing customers, it’s about creating all new demand. And to create all new demand, your aim is, of course, talking to noncustomers of the industry. So, if you look at the case of e-readers, Sony came out and they thought, you know this new e-reader technology, let’s unlock the mass of buyers to start using e-readers for reading books. And they went to the existing early adopters of e-readers, who were the customers of that small industry. And they said, how can we make you happier? And what they said is, the device is a bit clunky and the reading screen, it doesn’t work very well. Can you make it have a slicker image, a slicker look and be better to handle. And they did that and they actually made existing customers very happy. The problem is, that wasn’t the reason the majority of people didn’t come to the industry. And as we know, Kindle then went with Amazon, looked to noncustomers and they found out the real reason wasn’t the screen of the existing e-readers. It’s just that there were no titles and you couldn’t download them effectively. And so what did Kindle do? Of course they created a lot more titles, today of course, over 2 million titles and they made it very easy to download. And today, Kindle sets the standard of the industry and has exploded the amount of e-reader users for books as we all know. And unfortunately, in the case of Sony, they have exited that industry. So that’s the kind of insights you get by looking to noncustomers.

SARAH GREEN: So do most companies even know what their noncustomers want and how might you get a better handle on what noncustomers want?

RENEE MAUBORGNE: Well, the truth is you’re right. I think most companies really aren’t clear on who their noncustomers are. And when they think of noncustomers, it’s sort of a big blob out there of everyone else. But that’s not true. So in our book, the first critical thing is, how do you define your noncustomers? And in the expanded edition, we have a chapter focused on defining the three tiers of noncustomers out there. And the first tier is people that occasionally use their product. How can I get them to use it much more? Second tier is people who refuse your industry. So they’ve thought about patronizing it, but they choose against it. And the third tier, unexplored. So the book really provides a strong conceptual framework any company can look at or organization to define who are the nontiers. That’s the first thing, who they are. Then the second is that your rightful point is, how do I then know what to do to unlock them. And in our book as well, we have two analytic tools that empower executives in terms of finding those pain points, blind spots, and points of intimidation. And one is called the buyer utility map. And that really allows you to map out and identify those points that keep people away from the industry. But beyond that, we have a supplementary tool called the Six Paths Framework. And that allows us to reframe the question from existing customers to noncustomers and think about, could I take a functional industry and make it emotional, to pull in young people that care about cool, hip things for example. So really to empower executives to act on that concept, the book goes beyond the red ocean traps to the three tiers to help you identify who they are, and then provides two very powerful and practical analytics that you can work with your executives or your team around to start to find these pain points. And I think, usually it creates an exciting conversation and a lot of insights in its application.

SARAH GREEN: So when some companies are sort of working through this and trying to identify those blue oceans, it seems like one of the things that they try to do is try to find an adjacent niche. Companies are always talking about adjacent niches. But one of the things that I sort of picked up on in the revised edition of the book and the article is that that’s not actually always a safe bet. So maybe just walk us through some of the dangers there.

RENEE MAUBORGNE: Yeah. I think that first of all, carving out a niche is how you create a unique space in the existing market space. But that’s not the same thing as creating new market space and growing all new demand for an industry. And what you find is that when companies think of new markets, they often do think of niche intuitively. Because that’s how you create small safe havens within an existing industry space. But the issue is, the more that you think about a niche, and the more we look for differences, the more we tend to find them, which leads to smaller and smaller segments of the industry. And the second thing as well as often, especially when higher fixed costs are involved to go after the niche, the niche is too small to support it and you can not only not create a niche, but you can’t justify the cost. So if you look at Delta Airlines, for example, they launched Song Airlines. And it was a concept, and they said, well, no one has looked at high-moving, fast-advancing professional women. What do they want? They fly more. What are they looking for? No one in the industry has focused on that distinct segment of fliers. And they created a product and a service with Kate Spade uniforms and designer cocktails on the flight and they gave exercise bands for women. And while in the low cost segment, that did well, the size of the market wasn’t big enough to support the cost structure. And in the end, I think it was after 36 months, they had to close that airline down. And so the issue is, has the niche become too small to support the cost? And the second thing is, are we really growing it? And what we found, companies that create new markets, what they do is, instead of looking for differences across segment customers, they look for commonalities. And in doing that thinking about not segmentation or niching, but desegmenting and industry. And that is what we found is how you create these broader market segments and grow demand for an industry.

SARAH GREEN: That’s really interesting. And I find that Delta Song example one that’s sort of really puzzling and perplexing. Because on the one hand, I think you’re totally right. It seems like they were focused on this niche that wasn’t necessarily big enough to support what they were doing. On the other hand, when you sort of hear that what their big plan was of the flight attendants were going to be wearing Kate Spade uniforms, I mean as a woman who travels for business, I don’t think I particularly care what my flight attendant is wearing. I mean, so I wonder to what extent is that really an execution problem and to what extent is it really a strategy problem?

RENEE MAUBORGNE: Well, I think that the airline, it was not– of course, Kate Spade is something I’m mentioning now, is much more than just Kate Spade to be fair to the airlines. So they had a number of different elements which I think were interesting. And I think the airline was fairly well-received by people that used that airline. It was just too small a segment for them in and a bit too focused at that price point that they were after.

SARAH GREEN: So I guess one of the questions that I think I’ve heard people ask in regard to this idea is, like wait a minute, when you’re talking about market creation, is that the same thing as differentiation or are they different themselves?

RENEE MAUBORGNE: That’s a great question. That’s a point of confusion sometimes. So market creation is not the same thing as differentiation, just as it’s not the same thing as a niche strategy. If you think about it in academic terms, differentiation is really a position, what economists call the productivity frontier, which is the range of value cost trade offs available to any company. Given the industry structure and best known practices at the time. And basically, differentiation is really about offering premium value on that curve. And when you do, your cost structure tends to go up and so that’s the price point of an industry. Market creation however, market creating strategies, are really about breaking the trade off by reconstructing industry boundaries. So if you think about Yellow Tail, one example in the book, or part of our database, is it the most differentiated wine out there? Is it a differentiated wine? You bet it is. But is it low cost? Yes, it is. Salesforce.com, is it differentiated in what they did in the software industry? Yes, it is. But is it also low cost? Yes, it is as well. And the issue with differentiation alone, which is a very effective strategy in existing market space, is that it tends to allow you to carve out a premium position in the existing industry. And what you tend to do is focus only on what you can raise and create, which is what lifts your price structure, your cost structure. And you forget about what you can eliminate and reduce simultaneously to drop your cost structure as well and really shift that productivity frontier as opposed to positioning on it. So they are not the same. Market creation is about differentiation and low cost at any price point in the marketplace, market creating strategies, versus being a premium player in the existing market as well.

SARAH GREEN: OK. So I just want to sort of hover over this topic for just another moment here because I think it’s interesting to think about the need to be differentiated and cost competitive. I guess I’m wondering is it possible, if there’s someone listening who’s in, say a business that’s a premium product or a high end business, is it possible for that person to be doing blue ocean strategy or are they doing something different according to different rules?

RENEE MAUBORGNE: So you can– the same logic applies, whether you want to create a blue ocean at the high end of the market or low end of the market, so you can think of Cirque de Soleil, right, listed as the price point of circuses multiple times versus a Ringling Brothers Circus. And what they did effectively– it’s one of those Six Paths I was talking about to pull in noncustomers. –is they looked across alternative industries of theater, opera, and ballet versus circus, they priced against it. Are they the most differentiated player? Yes, of course, they’re out there. But to drop their cost structure, in doing that of course, they eliminated animals, which has insurance implications, food implications, travel implications, and star performers as well. So they were high priced, differentiated low cost. Ralph Lauren did the same thing. They created a whole new blue ocean at the high end by taking the best of haute couture, which is a designer name, not the name of a house, using fine materials and they had a higher price point as well, and not a low cost price point. Ralph Lauren, to keep his cost structure reasonable at the time, of course, unlike an haute couture house, which is having seamstresses, he, of course, used more factory manufacturing and the details of course, might have been some done touched by hand in the very higher price points, but most of it was done lower cost via factory. So he had a price point of a Brooks Brothers at the time and of course the name brand, the allure, the image, all of that of a high end and the beautiful fabrics, creating at the high end of the market. So if you look at expanded edition of Blue Ocean Strategy, you’ll find we are talking about companies that create blue oceans at the high end of the market using the logic, at the low price point of the market, and the right smack in the middle price points of an industry.

SARAH GREEN: So, Renee, one of the things I’m kind of noticing as we’ve walked through a number of examples and talked about this is that I don’t think any of these examples so far has been technological examples. And I find that remarkable, just because so often when people are talking about strategy today, they’re sort of talking about innovation and technology innovation. And people seem to sort of conflate all these things together. And yet it seems like here we’re not really talking about break through technologies, so why when we’re talking about the need to create new markets, do we so often end up focusing on technological innovation instead of actually just strategy?

RENEE MAUBORGNE: Well, I think you make a great point. So the key to opening up new markets, it can be with or without technology. And technology’s purely a huge trend in the marketplace today that a lot of companies can act on to open up new market space. But what matters systematically is whether we lock it to value. And that’s where the discrepancy often occurs. So if you look at Apple, why do we love their products and services? They have highly technologically advanced products and services. It’s not because of the technology per se, it’s because actually they’ve made those products so stylish, fun, easy to use, reliable, they make us productive, that we love them. In fact, they make the technology almost disappear. Salesforce.com is a technology company that created a blue ocean, but again, the software very effectively linked to value. And I think the problem for organizations becomes when they see this technology and they think that’s a trend in the market you can act on to create a blue ocean, but it’s not what unlocks the blue ocean per se. What unlocks it is whether or not a company systematically unlocks and links it to value for the buyer groups that you’re going for in the marketplace. So we always say it’s value innovation, not technology innovation. And in our book, we have the buyer utility map which I mentioned earlier, which really allows you to assess, am I linking that technology to value to what people care about. And in essence, I think most ionization, technology innovations which unlock value they almost make the technology disappear from buyer’s mind. It’s so seamlessly done from a customer’s perspective. Intuit’s Quicken, it has such a wonderful user interface. And it even mimicked the initial checkbook when they came out, making it so intuitive for people to use, people fell in love with it. And so that’s the challenge for organizations.

SARAH GREEN: So I’m wondering, this idea of blue ocean strategy has become one of the classic ideas that HBR has ever published. The book sells ridiculously well. Why update the book? I mean, what was your sort of process like? Why come back to this idea? Why keep fleshing it out? There are many, many, many business books out there that don’t get updated and people continue to refer back to them. So why did you guys decide to sit down and do that and how did you do it?

RENEE MAUBORGNE: Well, thanks for that question. First, we’ve never stopped our research on blue ocean strategy. It’s a very long journey for us. If anyone wants to visit our blueoceanstrategy.com website, we have videos on there and we have an e-library with all companies around the world that have been applying the ideas. So obviously it’s a passion. We don’t see the idea of blue oceans going away at all. In fact, we’re growing. And really our research has not stopped. So we’ve been talking with companies around the world. And whether they were applying blue ocean or just in this space wanting to, we were documenting what their struggles were in trying to create new markets. What were the areas? Were there questions they had left unanswered? So, we went much more in the new book about, how do you align the organization, the people proposition, to execute on that? So, it’s not just about the analytics of strategy. We had a part about humans and execution in the initial book. But we really wanted to go much more in that to create sustainability. So this value profit in people, we really developed more. And then we saw companies putting the money behind this red ocean trap idea. But they would go in it to apply blue ocean strategy or any idea and they were talking to the same customers. And they were coming back with modified versions or improved of the existing offering of the industry and not breaking out or not going to too small niches. So this whole idea, as you just last questioned, technology innovation, they’re getting so excited about technology, they’re winning awards, but they’re not unlocking markets because it’s not linked to value for buyers. We don’t understand how to use it or there’s no ecosystem. So that was obviously a really critical impetus for us as well in thinking about it. And the third is people are saying to us, well, what if I create a blue ocean? Many them, like JCDecaux, the blue ocean that was created and has expanded since, some of them have lasted 50 years. Now some of them 30, some of them 20. So the companies have all done quite well, even though our unit of analysis strategic move that company.

That said however, people are saying well, what? Because imitation occurs for everybody, right? Every blue ocean eventually becomes red. So they said, can you expand on how do I, as an organization, institutionalize this as a systematic process? And we thought, that’s very valid. So, we talked more about barriers to imitation, how do you build those? But more also at the corporate level, for a multi-business firm and at the individual level, how do you know when to reach for a new blue ocean? What kind of tool and framework can you, to channel and have discussions with your head business leaders on doing it? So, the book really came out to our continuing conversation and our growing database of companies applying the ideas and governments, nonprofits, in action, and our curiosity to understand what were their stumbling blocks and where could we add further value. So it’s just sharing some of the conversations and our passion and our growing research database made us want to do this.

SARAH GREEN: Well, Renee, thanks again for talking with us today.

RENEE MAUBORGNE: Well, thank you very much for having us. And I’m sorry my colleague, Chan Kim, could not be a part it, but it is long career journey we’ve gone on together and we look forward to continuing that with passion. So thank you for the time and thank you for every one that has been interested in Blue Ocean Strategy.

HANNAH BATES: That was Renée Mauborgne, co-author of Blue Ocean Strategy – in conversation with Sarah Green Carmichael on the HBR IdeaCast. If you liked this episode, check out HBR IdeaCast wherever you get your podcasts.  We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. If you’re looking for another weekly dose of hand-curated business and management expertise, check out HBR On Leadership to help you unlock the best in those around you. We’re a production of the Harvard Business Review – if you want more articles, case studies, books, and videos like this, be sure to subscribe to HBR at HBR.org. This episode was created and produced by Anne Saini, Ian Fox, and me, Hannah Bates. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.