Yesterday my MBA students and I discussed “Blue Ocean Strategy”, a popular book on strategic management by Kim and Mauborgne. A good thing about the book is that it encourages managers to be innovative and to pursue new markets rather than competing in highly competitive existing arenas, i.e., playing in “blue oceans” instead of “red oceans”. According to the authors, this way of thinking has served well for companies like Cirque du Soleil, Nintendo and Casella, an Australian firm that has succeeded in selling easy-to-drink wine in the US. Managers are encouraged to use the Strategy Canvas as an organizing framework (see here for an example). This encourages managers to ask themselves whether their products and services are really distinct after all, and along what dimensions they actually differ from the competition.
So far so good. But the problem is that in their enthusiasm, Kim and Mauborgne go on to make a tantalizing claim that the blue ocean approach allows you to break the tradeoff between pursuing differentiation and low costs. This puts them at odds with many leading strategy textbooks, which argue that it is often difficult for firms to increase consumer “willingness to pay” (WTP) while simultaneously reducing cost, all else being equal. You usually have to spend money on R&D, marketing and better execution in order to increase WTP. The “blue ocean” claim leads to all sorts of confusion among MBA students.
Does the blue ocean approach actually offer a silver bullet? Unfortunately not. The truth lies in the details. For a blue ocean strategy to work, you aren’t just supposed to add new activities that increase willingness to pay. You are also supposed to look for opportunities to eliminate or reduce others in order to cut costs. This is presented as the “ERRC” framework (pg 35 of the book) which asks managers to raise and create new dimensions for their product/service, while eliminating or reducing others. For example, Cirque du Soleil increased willingness to pay by introducing broadway-style themes, artistic music and dance, and better stage lighting to their productions. Meanwhile they reduced costs by eliminating animal shows and star performers, both of which are expensive cost components for a circus.
From the above it should be apparent that you still face a tradeoff between costs and willingness to pay. But you are just avoiding it by removing some of the costly activities. In other words, it isn’t the case that all else is equal. If Cirque du Soleil were able to offer all the new features in addition to having animals and circus stars (but at no marginal cost), then it would be legitimate to make a claim that the cost-WTP tradeoff had been broken. But fundamentally this tradeoff remains, and while the exciting new features enabled Cirque du Soleil to differentiate themselves from ordinary circuses and to increase ticket prices, the removal of animal shows and star performers inevitably meant that some customers who valued those things were now less willing to pay for a show.
Overall, the strategy map and blue ocean approach are useful because they encourage managers to think outside the box when looking for new competitive opportunities. But personally I find the distinction between blue and red oceans somewhat forced, especially when you realize that a firm produces multiple products, and these are likely to fall along a spectrum ranging from red to blue and beyond. So while the Nintendo Wii was blue ocean in approach, other Nintendo products at that time such as the DS were clearly not. In a fundamental sense, increasing WTP and reducing costs are complementary (Athey & Schmutzler, 1995). Hence, finding new and innovative opportunities to increase WTP and reduce costs should be something a manager ought to do anyways, regardless of whether their ocean is blue, red, purple or some other colour.
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I have a vested interest as I am a representative of Blue Ocean Strategy, but I beg to differ.
I believe there are a number of flaws in what you write and some misrepresentations of what the Profs Kim and Mauborgne wrote and say. I don’t think you are being malicious, just inaccurate, and not embracing of divergent strategic thinking.
You write that other strategic experts say it is “often difficult” to increase willingness to pay while reducing cost and you “usually” have to increase spending. But then you write as if it is categorically impossible. Your own quoted experts say it is not impossible, just “often difficult” and “usual”. The Profs never said it was easy and if you read the forward to the book they say it is not for the feint hearted (or words to that effect). It is possible, just not usual, which is why Blue Oceans are more rare and more profitable that red ones.
Also, they don’t mention what you call “differentiation and low cost”. They write about “simultaneous value up and cost down” and not necessarily price down. Pricing is strategic, as you even concede with Cirque, and not necessarily low compared to the “old industry” paradigms, but possibly low in a new industry paradigm or context. The end result of your new trade-off decisions could even be a cost base identical to your old competitors, but invested in features that are now offering unique customer value which also allows for strategically higher pricing.
Specifically regarding elimination, what business doesn’t look for lean ways to do what the industry expects of them? Elimination is sensible strategy. What is ludicrous is blindly following benchmarking and keeping your costs tracking to those of your competitors to maintain the industry value/cost status quo. As i mentioned earlier you seem to imply this iis necessary and you specifically suggest that anything else is impossible.
And the fact is that smaller industry players don’t have the budget to replicate what larger players can spend on things like advertising. So in fact their value/cost trade-off choices must be different to the behemoths of the industry. Nintendo being much smaller that Sony and MS at the time of launching the Wii meant they had to do something different. They still decided to spend a fortune on global advertising, but they cut back significantly on their R&D spend by using low tech motion sensors, low res graphics etc. vs their competitors high tech, hi res graphics with no motion sensors etc. And went for a different target audience. This is strategic decision making between value creation and cost management.
You are correct in stating that the Profs talk about “breaking the value cost trade-off”. But they never say that broken then means that it then fails to exist, like you imply. They just say you can break the industry paradigm and come up with a new basis, that will take some time for substitutes and alternative competitors to replicate in your new found market. Call it avoiding it if you like, but your point about some people now not going to Cirque because they liked seeing circus animals is a bit ridiculous given Cirque now outsells every traditional circus on the planet. The Profs never say your blue ocean needs to get every human being on earth to like your product. Just that you should aim to craft it for attracting as large a group as you can profitably attract (value up, cost down, strategic pricing).
And they never say that you should throw out your red ocean strategic skills and replace it with blue ocean for every aspect and product of your business. They say that blue ocean skills are additional, complementary skills that managers need to add to their kitbag for use in the right context. But in any event, are you saying that the DS, with the introduction of Brain Training games targeted at the elderly who want to keep their minds active, was not blue ocean thinking and not bringing noncustomers into the market compared to the competitors who were still selling their gaming machines to the 8-28 year boys boys and men?
If your MBA students are confused by this, you have a role to explain it clearly to them. This is strategic thinking, which sometimes means divergent thinking and not simply accepting and acting out all that has previously been accepted. Why should long held practices continue to be acceptedwhen they are all just constructs of the human mind.
As you can see I disagree with you somewhat.
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