Blue Ocean Strategy: value innovation, the strategy canvas and the four actions framework

Most strategy tools help you compete better in a market as it is. Blue Ocean Strategy asks a different question: could you change what the market competes on, so that the usual comparisons with rivals stop mattering? The idea comes from W. Chan Kim and Renée Mauborgne, professors at INSEAD, who introduced it in Harvard Business Review in 2004 and then in their book of the same name.

This guide explains the three ideas most people use from the approach: value innovation, the strategy canvas and the four actions framework. It then works through an illustration and looks at where the method is weak.

Red oceans and blue oceans

The official Blue Ocean Strategy site describes red oceans as existing industries, where boundaries are defined and accepted and companies fight over existing demand. As more firms compete, profits and growth shrink. Blue oceans are market spaces not yet contested, where demand is created rather than fought over.

In their 2004 HBR article, Kim and Mauborgne argue that most blue oceans are not new industries. They usually open up inside a red ocean, when a company stretches the boundaries of an existing industry. Their example is Cirque du Soleil, which grew revenue 22-fold over ten years while the circus industry as a whole was in long-term decline. The authors base the approach on a study of more than 150 blue ocean moves across more than 30 industries, and they argue that the right unit of analysis is the “strategic move”, not the company or the industry.

Value innovation

Value innovation is the core idea. The official definition is “the simultaneous pursuit of differentiation and low cost”. This is a direct challenge to Porter’s view that firms must choose between the two.

The logic works through four levers. Costs fall when you remove or shrink factors the industry has always competed on. Buyer value rises when you push some factors well above the industry standard and create factors the industry has never offered. If you do both at once, you can offer more value at lower cost.

The site also warns that innovation without value tends to be driven by technology and can go further than buyers will accept or pay for. Value alone, without innovation, gives only small improvements.

The strategy canvas

The strategy canvas is a one-page chart. The horizontal axis lists the factors an industry competes on and invests in. The vertical axis shows the level buyers receive on each factor, from low to high. Each competitor’s scores, joined into a line, form its value curve.

To draw one:

1. List the factors customers use to compare offers in your industry: price, range, speed, service and so on. Aim for six to ten.
2. Score the main types of competitor on each factor, using a simple scale such as one to five.
3. Plot each competitor as a line across the factors.
4. Look at the shape. If the lines look much alike, the industry is competing on the same terms and buyers see little difference. That is a sign of a red ocean.
5. Ask what non-customers and people who use alternatives value. The official site describes this as shifting focus from competitors to alternatives, and from customers to non-customers.

The four actions framework and the ERRC grid

To build a new value curve, the four actions framework asks four questions:

• Eliminate: which factors that the industry takes for granted should be removed?
• Reduce: which factors should be reduced well below the industry standard?
• Raise: which factors should be raised well above the industry standard?
• Create: which factors that the industry has never offered should be created?

The official site stresses that all four should be answered together. The ERRC grid records the answers in four boxes and makes the trade-offs visible. Its main benefit is that it exposes teams who only raise and create, which adds cost and leads to over-engineered offers. Filling in all four boxes forces a look at every factor the industry competes on, including assumptions nobody has questioned.

A worked illustration

An example (illustration only). A driving school in Manchester competes with dozens of others on the same factors: hourly price, instructor availability, car model, flexible booking and pass rates. Its value curve looks like everyone else’s.

The owner talks to people who have put off learning to drive and finds two common reasons: they are anxious, and they find the total cost unpredictable. The team fills in an ERRC grid.

The new value curve drops on factors rivals compete hard on and rises sharply on factors they ignore. Whether it is a blue ocean depends on evidence: do anxious non-drivers sign up, and does the fixed price leave a margin? The owner tests the offer with a small group before changing the whole school.

Common mistakes

• Only raising and creating. Without eliminating and reducing, costs rise and value innovation does not happen.
• Listing factors from the company’s view. Use the factors buyers actually compare, in their words.
• Ignoring non-customers. The best ideas often come from people who do not buy from anyone in the industry yet.
• Calling any new product a blue ocean. A new feature on the same value curve is still competing in a red ocean.
• Assuming customers will find you. One early critic, Wayne Pollard, argued that the approach takes marketing success for granted. A new value curve still has to be explained and sold.

When to use it, and its limits

The tools are most useful when an industry has become crowded and offers look alike, when you need a structured way to question old assumptions, or when a team needs a shared picture of where it competes. The strategy canvas is quick to draw and easy for people at any level to understand.

The research has critics, summarised on Wikipedia. They point out that the study had no control group, that failed attempts to create blue oceans were not counted, and that examples may have been chosen to tell a winning story. Others argue that ideas such as finding “white space” appeared in earlier strategy writing. Treat the method as a disciplined way to generate and test options, not as proof that an option will work. Pair it with an industry analysis and real customer testing before committing money.