Blue Ocean Strategy A Small Business Case Study

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I read "Blue Ocean Strategy" by Kim & Mauborgne recently and thought it was compelling. I
thought I'd give you some excerpts from the book and use my current startup as a case study
to explain some of the Blue Ocean concepts. I'm hoping it will spur thinking and feedback from
you.

The theme of the book reminds me a lot of what my strategy professor from MIT Sloan
(Arnoldo Hax) used to talk about when he quizzed us on cases. He repeated over and over
again that we should "watch our competitors, but never follow them" and that we should "play
a different game on the same field as the competition." This professor used to stress that
within marketplaces, conventional wisdom about the rules of competition build up and that
over time, those rules become irrelevant to potential customers.

Blue Ocean Strategy Synopsis

Rather than summarize, I thought I would give you a few quotes that lay out the theme in the
authors' words:

"The only way to beat the competition is to stop trying to beat the competition. In red oceans,
the industry boundaries are defined and accepted, and the competitive rules of the game are
known. In blue oceans, competition is irrelevant because the rules of the game are waiting to
be set. ...The companies caught in the red ocean followed a conventional approach, racing to
beat the competition by building a defensible position within the existing industry order. The
creators of blue oceans, surprisingly, didn't use the competition as their benchmark. ...Instead
of focusing on beating the competition, they focus on making the competition irrelevant by
creating a leap in value for buyers and your company, thereby opening up new and
uncontested market space. …Value innovation is based on the view that market boundaries
and industry structure are not 'given' and can be reconstructed by the actions and beliefs of
industry players. …To fundamentally shift the strategy canvas of an industry, you must begin
by reorienting your strategic focus from competitors to alternatives, and from customers to
non-customers of an industry. As you shift your strategic focus from current competition to
alternatives and non-consumers, you gain insight into how to redefine the problem the
industry focuses on and thereby reconstruct buyer value elements that reside across industry
boundaries"

The first example in "Blue Ocean Strategy" is Cirque de Soleil. The criteria/boundaries/rules
for the circus industry that were "taken for granted" for decades included: animal shows,
star/famous performers, multiple shows at the same time (i.e. 3 rings), and pushing
concession sales. Rather than keeping a high emphasis on all the existing rules and then
creating new ones, they either eliminated or reduced many of those rules and created a
bunch of new ones. In the process, they increased value for their target market while lowering
their own costs.

A key thing they did at Cirque de Soleil was that they looked across market boundaries to
alternatives to the circus. It ended up being part circus and part theatre. Rather than focus on
the market boundaries, they focused on the job the customer was hiring for -- in this case, it
was adults looking for sophisticated entertainment. Another key thing they did was not
targeting the existing market (i.e. children), rather they targeted non-consuming adults. Blue
ocean strategy is all about creating and capturing net new demand by ignoring boundaries
defined by traditional competitors.

The authors are big on stressing that new technology rarely turns into a great company. They
state that unless the technology makes buyers lives dramatically simpler, more convenient,
more productive, less risky, or more fun/fashionable, it will not attract the masses.

Blue Ocean Strategy Framework

The Blue Ocean Strategy authors propose a graphical framework for helping readers
understand the book and for helping businesses create blue oceans of their own. Here's an
example of the tool applied to Southwest Airlines, who are an interesting case. Southwest
entered a terrible marketplace that a Porter five forces analysis would have said was a blood
bath. The criteria/rules/boundaries of the airline industry are listed along the x-axis. Most of
the major airlines played the same game with only the slightest of nuances. Southwest
eliminated many of the rules/criteria in the industry, reduced focus on some of the rules
below industry standard, raised focus on some of the rules above industry standard, and
created a new rules of their own. The way they were able to do that was they targeted non-
consumers (family/shorter trips v. business trips) and they looked across industry boundaries
at alternatives (cars v. planes) as their competition v. looking at traditional airlines. Only by
de-emphasizing some of the existing rules were they able to lower costs enough to compete in
this new market.
They encourage the reader to come up with their industry's "standards." They then give the
reader four questions to which you can start thinking about your company/market from a blue
ocean perspective:

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?

The book suggests that an ideal strategy has 3 qualities: focus (not too many criteria),
divergence (from the alternatives in the framework), and a compelling tagline.

HubSpot Blue Ocean Strategy Case Study

I used their framework/4-questions to create a draft of how we think about the Customer
Managed Relationships (as opposed to CRM) marketplace. HubSpot, an Internet Marketing
company, is targeting a non-consuming market (small businesses only) vs. targeting
companies who already have information technology tools in place. The job HubSpot is
focused on being hired for is not "tracking" customers, but helping these very small businesses
(VSBs) grow revenue. In our target customer's mind, the competition for HubSpot probably
isn't Salesforce.com, but rather is alternatives like hiring an SEO consulting firm, hiring an
outsourced lead generation firm, hiring a new VP of Sales, etc. In fact, _____ is hiring a new
VP of Sales, hired an outsourced lead generation company, hired me as a consultant, and
implemented Salesforce.com.

Putting our CMR money where our mouth is, we will eliminate the large sales force to push
this type of thing as is used by much of the industry. Rather, we should spend the same
amount of cycles a traditional software company would on building a "sales force" to creating
an innovative "referral force" which provides rich incentives for our customers to refer us to
other small businesses as that is the way small businesses tend to make decisions.
Our target market has not moved over to running their businesses on the internet because
they simply don't know how to do it and do not have anyone to help them. The existing tools
are just too hard.

Therefore, I think we should reduce emphasis relative to the industry on feature

richness/depth and on platform/add-ons (small companies do not have resources to deal with
the complexity of multiple vendors products). For the same reasons, I think we should
increase emphasis ease of use, help (video, audio, searchable via most frequently asked or
tag cloud), integration (key features from several apps selected by HubSpot and provided to
small businesses), and familiar user interface (i.e. like Office). We should also think about
increasing emphasis on "handholding" and "advice" which is apart from traditional support
and consulting.

We should look across industry boundaries and provide some of what our target market gets
when they hire a consultant or a new employee -- good advice and hard to obtain knowledge.
Our blog should not drone on about web2.0 and whatever else pops into our head like others'
do, rather it should be "how to" advise on growing revenue by leveraging easy-to-use
technology. Since we are passionate about strategy, we should weave some of that stuff in
there as well as it is directly relevant to how to grow revenues.

We might steal a page from other types of service companies and provide our customers with
a monthly email on their progress on the top of their sales funnel relative to when we first
came across them (pagerank, visitors, RSS subscribers, avg pages/visitor, etc.), metrics
relative to their peer group, some standardized advice based on how well/poorly they are
doing like the way realage.com does it, potentially a grade (maybe a red, yellow, green would
suffice), and we might give them an hour a year for a "how we doin'" checkup with one of our
MIT-trained consultants.

We have talked a few times about creating an eBay for small service companies. This idea
reaches across market boundaries and helps our customers with the job they are hiring us for:
growing revenues. When you think about HubSpot itself, we are a very small business and we
have spent money with several other very small businesses: outside accountant, outside law
firm, a video producer, several designers, freelance developers, etc. About half of these
services are examples of long-tail services where we found the vendor over the internet. Why
not create a section on our website that helps remove friction from the process of connecting
long-tail service firms with each other using the internet. We could start with it being just a
simple external facing tracker application where companies can enter information on service
firms they do business with, share comments, and rate them just like they would do a movie
or restaurant (1-5 stars), with the ratings simply doing a moving average.

One other aspect of this CMR angle that I like is that there are shifts happening in the
marketplace that companies are starting to become aware of that they will need to take action
on. For example, in two years, the Google PageRank will become a common topic of
conversation at the operations committee meeting of almost every company in our target
market. It reminds me a bit of selling software to manufacturing companies in the mid-90's.
All of them knew they needed to get their product catalogues on the web, but didn't have any
idea how to do it.
Posted by Brian Halligan on Fri, Sep 15, 2006 @ 10:32 AM

COMMENTS
Brian-
This is a great post and the author raises a terrific case for why many companies fail to
innovate. I kept thinking of Clay Christenson's "Innovators Dilemma" as I read your post..the
challenging part of established companies is that they, by their natures, are caught in a Red
Ocean, and unable to challenge market boundries. To them, the map is the territory, which is
not the way to think about how to one up the competition.
On a more personal level, as I work to launch my own company, we are continually asked the
question by established players in our industry as to "How will you compete with company xyz
which has enormous share!" The answer is, as your correctly point out, create a new value
proposition, define your product/service as something different, and grow in a fundamentally
different direction. Thanks for the post-very enlightening.
posted on Friday, September 15, 2006 at 12:17 PM by Brian Harrington

Line graphs for data that has no sequential relation?! You have to be kidding!
posted on Friday, September 15, 2006 at 12:22 PM by ChartJunkie

Great case study for applying the Blue Ocean Strategy. The first part of the book was
awesome, but I felt like the second half focused more on established large companies than
start-ups. I used the Elimited, Reduce, Raise, and Create method for coming up with the
business model for fizboflorida.com. But that was a little over 5 months ago and your article
reminded me to refocus and make sure our Strategy Canvas is where we want it to be.
posted on Friday, September 15, 2006 at 2:50 PM by Eric Allam

This is a great model. I used it many moons ago to with great success. Another way to think
of it might be simpler. Company "A" competes with other company A's. Company "B" ...
Company "C". Now if you create a company or process that contains all 3 company types,
you'll have no competitors, a unique offering, and can charge a good price!

When I owned a copy shop, I sustained this model against Kinlos and other competitors in the
area for years. We not only did copies, but also banking and pre-registration for 500+ person
seminars. My competitors would only do copies because they were in the "copy" business. We
would collect 500 individual checks for $120 before we bought one ream of paper. And easily
charged 5 cents a copy for a 500,000 copy run job.

This stuff works well when you truly focus on combining 2 or 3 "critical" customer needs in one
business. And it's very hard for the old guard to copy you.
posted on Friday, September 15, 2006 at 2:54 PM by Stacy

Great write up - thanks for sharing. I know you guys are also fans of Professor Christensen's
work of which this seems to be reminiscient. For example, Christensen find that challengers
("innovators", "disruptors", etc) can compete if they realize that “3. Markets that Don’t Exist
Can’t be Analyzed”. Established companies have effective market research and planning
organizations and processes. Yet these organizations and processes are not effective ways to
discover new markets. As a small business owner, I am encouraged by trends and findings
such as these and your analysis. (Related note: I agree with ChartJunkie - what's up with line
graphs here?).
posted on Friday, September 15, 2006 at 8:16 PM by Scott Meade

I look forward to reading the book.

Competitor analysis is a key area of strategy that can be difficult to undertake. More
importantly, it can be difficult to easily display results and areas of differentiation - I do believe
that high-level analyses of this sort should be readily shown on a whiteboard with coloured
markers. Otherwise, results can be muddled and resulting decisions misguided.

Without straying off post, the line graphs could have meaning if there were a continuum in the
matrix from left to right (eg, needs of small business through needs of large corporations).
This may be somewhat limiting, however, which would defeat the point of "fundamentally
shifting the strategy canvas".

There's also room to codify what is Low, Medium, and High within a business - unclear terms
can lead to unclear decisions that, in small businesses, can be life or death.
posted on Friday, September 15, 2006 at 11:12 PM by Jacob Aldridge

Thanks for a very enlightening post! It's the first useful framework I have seen that one can
apply towards creating a potentially disruptive business model in any industry.

I think the Hubspot model looks promising, particulary for international emerging markets that
need much easier, lower cost solutions with a lot of advice. Most of them find Salesforce.com
too difficult. Some analytics after lead generation might be good, eg. why a large percentage
are not turning into sales (salesforce effectiveness, website, etc.).
I can think of plenty of customers for a small business services eBay!
posted on Saturday, September 16, 2006 at 11:31 AM by Shaheen Husain

It's nice to see more people talking about this wonderful book. If you liked Blue Ocean
Strategy, another book you'll probably find useful is Jim Collins' Good To Great. Althought it's
an analysis of established business (rather than of startups), the lessons in there apply to all
organisations.
posted on Tuesday, September 19, 2006 at 9:27 AM by Stuart Herbert

Brian, one more thing about competition. A while back, I read and posted about another book
http://therainmakermaker.com/2006/07/03/inside-the-magic-kingdom-at-disney-world.aspx.
The author suggests that we not define our competition too narrowly, rather our competition is
"anyone the customer compares you with".
posted on Saturday, September 23, 2006 at 11:13 AM by Rick Roberge

I have read the book and found it quite interesting. But when I wondered about how to gather
the knowledge you need to create new markets, I had a (big) cost problem, specially for
SMEs. I got interested in how to use the existing knowledge of your company's employees
rather than building a brand new department, and a solution that seems promising is to use
an internal wiki to consistently pursue a blue ocean strategy inside your company.

I wrote an article on the topic at http://wikibc.blogspot.com/2006/10/how-can-wiki-help-you-

build-blue-ocean.html, you might be interested in reviewing it.
posted on Thursday, November 02, 2006 at 7:44 AM by Guillaume

Great case study for applying the Blue Ocean Strategy. The first part of the book was
awesome, but I felt like the second half focused more on established large companies than
start-ups. I used the Elimited, Reduce, Raise, and Create method for coming up with the
business model for fizboflorida.com. But that was a little over 5 months ago and your article
reminded me to refocus and make sure our Strategy Canvas is where we want it to be.
posted on Wednesday, July 18, 2007 at 1:19 PM by Mohamed

Mohamed,
I kind of agree w/ you that the second half of the book fizzled a bit. I generally find w/ a lot of
business books that you get the gist of it within 100 pages. ...I also find that most popular
business writers really have one breakthrough concept in their career and that their follow-on
book usually aren't that valuable after their first big hit.
Bh.
posted on Wednesday, July 18, 2007 at 1:53 PM by Brian Halligan

I too am executing a blue ocean strategy. I agree with the points about the book. I took the
standpoint that there were too many self-service accounting programs and if people didn't
have the discipline or the time, they would be stuck with the same old problem.
posted on Tuesday, October 23, 2007 at 6:43 AM by Jack Stack

So, I completed my grid against the 6 blue ocean tenants. Its in a post on my site. Check out
http://epaper.hubspot.com
posted on Thursday, October 25, 2007 at 3:47 PM by Jack Stack

Jack -- I read your article...sounds like an interesting application of the blue ocean framework!
Brian.
posted on Thursday, October 25, 2007 at 6:50 PM by Brian P Halligan

I was asked by a client to perform a Blue Ocean Srategy project in a very Red Ocean industry.
In 3 months, the key staff had created a new product set that wowed their major suppliers
and satisfied the immediate needs (scorching pain) of their clients and prospects. I am free all
December to help anyone who has questions regarding Blue Ocean product development.
posted on Wednesday, November 28, 2007 at 10:25 AM by eagleforce