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Swimming in the Blue Ocean
How to Create Uncontested Market Space and Make the Competition Irrelevant
This is the review for the fifth edition of the Flyby Book Club — Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne.
This post is about an 8-minute read.
You can find the rating I gave on the main book club page.
There are two types of markets— red oceans and blue oceans.
Red oceans are shark-infested waters full of competition, price wars, and thin margins. This is the land of commodities and cookie-cutter products. When someone creates a product just to make a quick buck or because someone else is doing something without adding any unique value to the world, they are usually swimming in the red ocean. This is akin to going pro in a highly competitive sport. The rules are defined, and all you need to do to get ahead is to see what others at the top of the game are doing and copy that. Of course, this is going to be a fierce battle of the sharks. While some people might enjoy this structure, the advantage in business is that you can set your own rules entirely and potentially sidestep the cutthroat dynamics altogether. All it takes is a little bit of creativity.
That is the territory of the blue oceans. These are the pure and unadulterated waters. This is where you find differentiated products and uncontested market space. A blue ocean product creates and captures new demand. That's the core of this book, and it's also in the subtitle— How to Make the Competition Irrelevant and Create Uncontested Market Space.
The answer is simple, and if you think about it, quite obvious — Innovation. Creating something novel where there isn't anyone else to compete with. If you build something that didn't exist before, there can't really be any competition, can there? You'll have a category of one. Eventually, the waters might turn red as copycats and competitors start showing up… sure, but they'll always be one step behind the innovator. They'll really just be competing with each other in their own red oceans, whereas the innovators will always be swimming ahead in the cool blue. It's about challenging the status quo instead of being the status quo.
Now this doesn't mean innovation for innovation's sake. That can often lead to high costs or a product nobody wants (We discussed this in Book Club #2). The book makes it clear that the focus here is on Value Innovation. That is, innovating on value while at the same time reducing costs.
"Effective blue ocean strategy should be about risk minimization and not risk-taking."
Value Innovation involves thinking creatively and from first principles in both the input (production) and the output (selling) side of things. Or, more simply, there is a component of addition (new elements) and reduction (costly components) to the process.
These components can be used to modify the value curve of a product against the industry and potentially catapult it from the red ocean into open blue waters. The book defines the value curve as —
"a graphic depiction of a company's relative performance across its industry's factors of competition."
This is similar to the value attributes we discussed in Book Club #3.
You list each attribute or market factor for your product across the industry in a chart and then modify them (eliminate, reduce, improve, create) to invent an entirely new product. But.. instead of targeting existing customers, you are also targeting non-customers who were not even interested in the market before.
The first example in the book is Cirque du Soleil. The founder combined the existing concept of a circus with elements from theater to create an entirely new genre and broaden the target market to much more than just circus goers. Adults who were just looking for a fun night out were now suddenly interested. Pulling this off involved adding and removing several attributes to the circus' value curve. They eliminated several factors like animal acts, star performers, and concurrent arenas. They also added themes, an element of refinement, lights, and an artistic component. You could say they borrowed the latter from the theater world, so it’s a bit like blending the two value curves across industries. They ended up with a circus performance priced on the high-end entertainment side of things and still going strong today. This was all done in an industry that was arguably dying.
The value curve or "Strategy Canvas" would look something like this. I've reconstructed it based on the book to give you a rough idea.
The book describes a four actions framework to keep in mind when building a value curve to pursue value innovation, i.e., raising value while reducing costs.
Eliminate: “Which of the factors that the industry takes for granted should be eliminated?” i.e., What isn't necessary? (Simplify)
Reduce: “Which factors should be reduced well below the industry’s standard?” i.e., What can I streamline give my brand a cost advantage?
Raise: “Which factors should be raised well above the industry’s standard?” i.e., What can be done to improve the product?
Create: “Which factors should be created that the industry has never offered?” i.e., What can I add that the market didn't know it needed before? (Innovate)
Really, this is just tweaking the attributes up and down in the value curve to lower costs and improve user experience simultaneously. It's like a DJ trying to create an entirely new sound from existing pieces of work.
We can see a similar mixing of ingredients across industries later in the book with Southwest Airlines. They combined the speed of traditional airlines and the convenience and price of automobiles to disrupt the airline industry. They reduced costs (and price) by focusing on essentials and greatly improved user experience by going over the top on customer service, branding, and speed.
"The speed of a plane at the price of a car—whenever you need it."
I recommend creating your own strategy canvas for your product and adjusting the values as you see fit to fine-tune the details. This will help bring clarity to areas you can simplify and ones you can innovate on.
You can make these charts in Excel, but I find it a bit annoying and hard to customize, so I decided to try out the GPT-4 Code Interpreter instead. I got it done in record time, had a blast, and was completely blown away. If you aren't aware, the code interpreter can run, execute and debug Python code in a sandboxed environment and can be used for things like data processing, analysis, visualization, etc, and output the results to an image. In fact, all the pictures in this post are AI-generated. I'll create another post detailing the behind-the-scenes workings of this soon. Stay tuned!
Anyway, back to our dive into the deep blue ocean…
We can see this in action again later in the book in the Wine industry. This is an industry supposedly known to be fiercely competitive and exclusive. There are high barriers to entry due to the aging process involved in creating the wine. A market observer of the US wine industry would notice that existing wine brands prided themselves on tradition and the long histories of the vineyards, chateaus, and wine estates. All this would make it sound like the bloodiest red waters you could find. Perhaps, but not if you approach the problem from first principles and apply the innovation lens. Enter Yellow Tail Wine— An Australian wine brand that decided to enter the US market… in style. They challenged the status quo and simplified everything about their wine to create a unique and remarkable product.
They eliminated the aging process (this reduced costs), simplified selection (just a red and a white), fixed pricing, and designed a fun/trendy brand (yellow kangaroo on the cover with a bold outback theme). Furthermore, both wine bottles looked the same, just with a different label, thus reducing their cost per SKU. Traditional wine manufacturers used different bottles for each variant. The lack of aging, which would have been regarded as inferior, made the wine taste sweeter than usual, but this was instead a hit. The wine industry indeed mocked them, but the market said otherwise. With the simplicity of price, taste, and selection, Yellow Tail soon became a market leader in the US wine industry. An industry that was ripe for disruption. This is usually the case in any industry where things are supposed to be done a certain way. Yellow Tail not only captured wine drinkers frustrated by the complexity of existing wines but also brought in customers who were previously interested only in cocktails or beer.
As I mentioned before, much of this comes down to first principles thinking. Instead of thinking about how things are usually done, it's about deconstructing them down into their essence and then reconstructing the product back up with only the essentials, and a bit of added spice and personal touch. Kind of like a chef creating a new recipe from existing ingredients.
We can see this again later in the book with the NABI bus company.
Most bus manufacturers at the time were competing over the initial price of the buses. Realizing that buses have a 12-year lifecycle and that it didn't make sense to compete over the initial price when the shelf life was so long, NABI created a new type of bus entirely. This had a higher initial cost but was more durable and cost-friendly over the lifetime of the bus, thus saving the municipalities purchasing them more money over time.
They broke down the construction into individual parts and analyzed what made sense with this goal in mind. Instead of steel, which was heavy, prone to rust, and hard to repair, they went with fiberglass, which was rust-free and lighter while at the same time being cheaper, faster, and easier to repair. The lighter weight also made it more fuel efficient and environmentally friendly. It also allowed them to pack more space inside the bus.
With this new type of construction, they carved themselves a blue ocean in the bus market by targeting both differentiation (environmentally friendly, design, more spacious) and lower costs.
While not in the book, Tesla and SpaceX would be two modern examples of this type of thinking and strategy in action. Both compete in highly competitive and hard-to-enter markets (automobiles and rockets), look at things from first principles, and build them up again using only what makes sense.
The book suggests a good strategy has three characteristics: focus, divergence, and a compelling tagline.
Focus is the vision or what the product stands for. These are the factors that are the most important for the brand to focus on.
Divergence is breaking away from the status quo and differentiating your product. It's thinking about what makes sense and what doesn’t.
A compelling tagline is the pitch to the market about why they should buy. This is where branding comes into play.
The book has several other examples of blue ocean products scattered throughout, which show these characteristics. Here are a few of them:
The Phillips tea kettle added a water filter to the mouth of the kettle to prevent limescale from getting into the tea. Suddenly, everyone needed a new tea kettle. That's one way to create demand. Solve a complex problem with a simple solution.
Dyson vacuums eliminated cleaning bags to create a premium and unique product. While the cleaner itself was more expensive initially, customers would no longer have to buy cleaning bags, thus potentially saving money over time while also enjoying a nicer experience throughout.
Starbucks, which added an emotional experience to coffee drinking and converted non-coffee drinkers into die-hard aficionados.
Callaway created a golf club with a large head called Big Bertha, making it easier for beginners to strike the ball. This lowered the learning curve and made the entire sport less intimidating to the golf curious. I recently found out about inkless printers, which are a similar concept.
Nintendo Wii added a sports and fitness component to the industry they were already in— video games and brought in people interested in the home fitness aspect or multi-player sports. That's precisely why I ended up buying one as well.
The book details multiple more examples. I recommend checking it out.
Another key way many of these blue ocean products lower costs is to reduce or eliminate advertising. That is, by focusing on word-of-mouth growth and igniting network effects. This was the subject of Book Club #1 and something we have seen over and over again in great brands. Building something so good that happy customers do the marketing for you. The less time and money you have to spend on advertising, the more you can spend on improving the product, thus building even more fans.
In short, the product is the marketing.
To recap, here are the differences between red and blue ocean strategies:
And that's a wrap!
Overall, this was a great book, full of examples, charts, graphs, and insights. Give it a read if you haven’t already. (Oh, and check out the appendix for some fascinating industry histories and timelines.)
Until then, see you next time!
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