Blue Ocean Strategy: The value of value innovation

One common misperception about Blue Ocean Strategy is that it increases one's Cost Of Goods Sold (COGS). This couldn't be further from the truth: value innovation always reduces COGS. Nintendo sells the Wii for $250 retail: they make money on every console sold and have since the console first went on sale. Sony and Microsoft, in contrast, sell their own consoles for a higher price point and lose money on every unit sold. It cost Microsoft less to produce early versions of DOS then Windows than it did to crank out VMS or the Macintosh OS, both because of volume and also because the lack of hardware lock-in made it possible to focus on high-margin software rather than lower-margin hardware. Despite the lower cost -- and the lack of an integrated locked-in ecosphere -- Microsoft's OS's went on to be much more valuable than the coupled operating systems they replaced.

Value Innovation -- the realization that less is oftentimes more -- is the centerpiece of Blue Ocean Strategy. At the core exists the understanding that a few really valuable key factors -- where value is defined in terms of utility to the buyer -- is better than a smörgåsbord of stuff. Put simply, a a two course meal created with the best ingredients, prepared by a talented chef, and served in a plain atmosphere by a friendly and prompt server has more appeal than a lousy eight-course meal served by a crank in a palace. The former has a lower price point, but since the Cost of Goods Sold is dramatically lower the gross margin and the volume of sales will be higher.

This isn't to say that value innovation involves deceiving the consumer into believing they're receiving something more valuable than they actually are. Steve Jobs put it best: "...it's not about pop culture, and it's not about fooling people, and it's not about convincing people that they want something they don't. We figure out what we want. And I think we're pretty good at having the right discipline to think through whether a lot of other people are going to want it, too."

Buyers realize when purchasing a Wii that the graphics won't be as sharp as a PS3, the physics as accurate as an XBox 360, and they understand the console won't play movies. These buyers probably like movies, sharp graphics, and accurate simulations. They just don't value these features as much as they like Mii's and the Wii remote. Nintendo doesn't try to convince buyers that they're receiving the best graphics, the best chip, or the best home entertainment system. Instead they're marketing the game system that's the most fun, with the realization that fun is the primary utility that buyers receive from any game console.

Blue Ocean Strategy & Technology Innovation

I can't count the number of times I've heard marketers rant on to say that technology has nothing to do with innovation and that Blue Ocean Strategy somehow supports this notion.

Summarizing: Blue Ocean Strategy puts customer value at the center of any new offering. Customer value is never defined in terms of raw technology, but the technology is catalytic to the value: the value will never get realized without the technology.

Let's examine some examples:

• The Wii wouldn't be without its small, inexpensive accelerometer driving the Wii remote. The accelerometer allows the creation of the magic wand: no accelerometer = no magic wand. However, Nintendo is not marketing accelerometers.


• Google reads a users mind to return relevant search results. However, these results are driven by a brilliant search algorithm and massive data centers. No brilliant algorithm and no enormous infrastructure = no mind reading web search. However, the end users never see the technology.


• The Toyota Prius is an engineering masterpiece. A user drives around with more computing power than the entire world had not long ago powered by computer-designed technology no human with a slide-rule could ever have mastered. No computers to design and run the Prius = no magic high mileage car. However, end users never see the technology.


• Even the Blue Ocean Strategy case studies in the book all have technology driving them. Starbuck's uses extremely sophisticated GIS systems and water filtration technology, Cirque du Soleil low noise, portable power generation and stage technology, the NYPD well documented crime tracking software; the list is endles...

All of these ... virtually every Blue Ocean business has one element in common: catalytic technology that is invisible to the end user. Blue Ocean Strategy demands the technology in itself rarely, if ever, has value but the value the technology brings to the consumer does. And, in almost all case studies, no technology means much less value. There are exceptions, but they're extremely rare.

I'll give marketers who say the technology doesn't matter the benefit of the doubt that they're not just trying to cover-up their own unwillingness or inability to learn about the technology driving their industry. However, when these people pipe-up and start shouting that "technology doesn't matter" tell them that they're absolutely wrong. It's just that technical innovation must be defined in terms that drive utility to the end user, but that doesn't mean the technology is unimportant.

Quoting the book "[acting] on the assumption that bleeding-edge technology is equivalent to bleeding-edge utility for buyers ... is rarely the case." Blue Ocean Strategy, pg. 120. That doesn't mean technology doesn't matter; it means the technology must always be described for it's utility and value to the buyer.

There would be no Nintendo Wii, Google, or Toyota Prius without extremely sophisticated new technology. The NYPD would be chasing down muggers aimlessly, Cirque du Soleil wouldn't be the same without the dramatic lighting, and Starbucks wouldn't magically be located in great locations. Just because the end-user never sees, understands, or appreciates the technology doesn't mean the business/product developer doesn't need to.

Blue Ocean Strategy: Non-Customers

One of the primary components of a successful six-path study is the focus on customers and non-customers. Non-customers, which are divided into three tiers, each of which has a specific definition, are especially important.

Paraphrasing from the book, the first tier of non-customers are current customers who are getting ready to leave. The second tier are people who consciously decide against your product. The third tier are people in distant markets.

Let's bring that back to earth using the the Nintendo Wii and -- more importantly -- it's predecessor, the Nintendo Game Cube. Young boys loved the Game Cube: it was small and cute and cheap; it even had a handle so they could pick it up and carry it to play with friends. The problem is that the core group of boys who played the Game Cube would "graduate" to a Sony PS2 or Microsoft XBox. These boys were the first tier of non-customers: current customers who were likely to leave. The second tier of non-customers were girls: they were the same age, had access to the same resources, but just didn't show interest in the Game Cube. Finally, geriatrics in nursing homes were the third tier: they thought a Game Cube was the box containing the checkers board.

Nintendo of course turned those tiers of non-customers entirely on their head. By studying the six-paths and applying what they learned to redefine the market boundaries they built the Wii and the Nintendo DS to appeal to both customers and non-customers alike. Boys love the Wii, but so do girls, young men, mom's, and just about everybody who tries it. Changing the key factors to attract girls to play the DS was especially inexpensive albeit brilliant: they came out with a version in pink. As for the Wii, it was renamed from it's code-name the Nintendo Revolution. Boys loved the name "Revolution" -- my son still does -- but they could live with the Wii. Girls went for the Wii, they had no interest in their brothers revolution.

One company that has a massive swarm of first tier non-customers is Microsoft. Vista is a disaster. One commentator, writing about the merits of Vista, described a key benefit as the inclusion of Snipping Tool, an application that takes screen-shots. That is, the strongest proponents of a multi-billion dollar project that took years to complete, greatly increased the hardware requirements needed to run, and cost almost double its predecessor were reduced to citing the inclusion of a trivial piece of freeware.

People are getting ready to flee Vista. I personally have a Vista "Ultimate" computer, a Macintosh, and I just ordered an Ubuntu (Linux) machine from Dell. Long term, putting up with the sluggish speed and instability of Windows just doesn't make sense, especially given that I'm sure Microsoft will soon enough want even more than the $400 I already paid for this awful operating system. In the case of Vista, it's not that the advantages outweigh the disadvantages: there are no advantages I can think of except that I need to use this computer to test software because Windows is what most of my clients use. If my clients change, so will I. I'll probably change anyway, and keep a Windows computer only for testing.

I'm a vocal and classic first-tier non-customer for Windows. Microsoft has literally millions more like me. I'm not being alarmist or anti-Microsoft: Gartner calls the current state of Windows "untenable" and has announced that Windows is "collapsing." Microsoft engaged in classic technical innovation: innovation for the sake of innovation, when releasing this awful beast. Now they're driving away their customers in droves.

Yahoo & Tipping Point Leadership

No matter what one's thoughts on the mideast former Israeli diplomat Abba Eban once famously said "Arabs never miss an opportunity to miss an opportunity." I won't get into whether I agree or disagree, except to say that his insight can be focused on plenty of business organizations. One of my favorites lately comes from perennial red ocean punching bag Yahoo.

I'm quoting from a news.com article here: Google deal gets 'big eye roll' from Yahoo employees.

One source inside Yahoo said it's not uncommon for executives to hold planning meetings for follow-up planning meetings, Dilbert-style. That bureaucracy could cause more Yahoo talent to leave for opportunities elsewhere.

"There's a lot of pent-up creativity," the source said. "Morale is in the sh**ter."

Yahoo has shown the opposite of leadership: they're mired in the red ocean, flaying around and being eaten alive. Recent releases showed their share of the search market continues to shrivel.

Yahoo destroyed their search engine with pay-to-play, but has some other great products like Flickr, Messenger, Groups, and Answers. They had good market timing. They used to have some really good people. But the documentation is overwhelming that this company is falling apart, in a death spiral of red ocean competition that's steadily increasing in strength and velocity like one the hurricanes that occasionally wash up on the shores of my state.

Yahoo has the raw stuff needed to reform itself into a strong Blue Ocean company, but lacks the willpower needed to complete the task. During the first dot-com bust I saw lots of companies fall apart; many were poorly managed, but others just had lousy timing. Yahoo put in place things like pay-for-play in their search engine that they never quite recovered from, and still haven't removed. While it hurts on an individual basis -- the people personally affected -- Yahoo deserves the fate that awaits.

Blue Ocean Strategy: Adding Value to Value Innovation

Blue Ocean Strategy is comprised of two primary pieces. I've focused the last few posts on the managerial components, because most people don't pay attention to those. But this is a blog for product and business developers, and most are focused on the concept of value innovation.

To reiterate, value innovation involves finding the key factors of an offering then eliminating and reducing factors that consumers can live without. Some of the cost savings used to eliminate and reduce are used to raise and create key factors that make an offer truly compelling and unleash a business that makes competitors irrelevant. Think the Nintendo Wii, Google's search engine, the Toyota Scion, and the entire open-source movement.

I've found the biggest challenge to the implementation of Blue Ocean Strategy is the accurate identification of the key factors and then having the guts to eliminate and reduce those key factors. If you do not eliminate and reduce substantive key factors, you are not practicing Blue Ocean Strategy. The whole point is to be able to create a Wii then sell it profitably for $250 at retail, while your red ocean competitors make machines that people want less and that sell for considerably more while taking a large loss.

I've seen too many value curves where people simply identify a plethora of key factors and raise them. This is a predicable recipe for what is, at best, a mediocre offering and at worst a disaster. The focus groups and internal marketers will probably be happy: "hooray -- this 'new' thing is like the old one's but there's more of it." But the market will, at best, shrug. Think Microsoft Vista, Yahoo search, or Dell's relentless pursuit to gut their respective companies. [In all fairness, I just purchased a pre-configured Ubuntu laptop from Dell. The fact the sell such a thing suggests they're once again trying, but it took me an hour to complete my purchase once I made my buying decision, thanks to an ineffective, frustrating, and ultimately useless phone-tour of India].

Ensure the "value" in value innovation: use the Four Actions Framework to eliminate and reduce key factors that consumers don't care about. Is Blu-Ray movie playing cool? You betcha. Do the movies look great? Sure they do. The physics and high-definition graphics are slick: they're so real an early PS3 critic said the absence of real-life made basketball players look like zombies. Still -- even with, or maybe despite all the neat gadgetry -- my kid still doesn't seem to have much interest in a PS3 or XBox360, despite that he loved his PS2. His attention is entirely on the Wii.

Blue Ocean Strategy: Seeing through the clutter

As the original Clinton campaign would have put it, "it's the six-path framework, stupid." Seriously ... a lot of people ask how to actually use Blue Ocean Strategy to make a new business. I've written a longer post that goes into each specific step, but realized that I skipped an executive summary that may be even more important.

Summarizing the 240 page academic book into one sentence: use the six-path framework to find the key factors of a business through the lens of customers and non-customers, then use the four actions framework to redefine the market boundaries of that business while adhering to tipping-point leadership and fair process to increase the chances your organization will be able to execute your new business. OK ... it was a run-on sentence, and it greatly oversimplifies. Still, it's a start.

As a product/business developer I'll take things a step farther. Listen to the Harry Chapin song "Six String Orchestra" where a young man dreams of being a great singer. In reality, he can't play his instrument and receives nothing but negative feedback from everybody around him. But in his mind, he hears the beautiful songs of the future, knowing that he'll have to do the hard work, practice a lot, and find the right people to make music with.

Product and business development is like that. I once had an early version of a product that went on to do great generously described as a "mud hut" by a seasoned software developer. He wasn't being negative: just saying that he understood my vision but that a lot of work is needed to turn that vision into reality.

Some people will disparage or sabotage your ideas out of petty jealousy, or because they fear their livelihood or relevance will be threatened either by the business you create, or the fact you (and not they) created it. But I've found many aren't acting in bad faith: they just don't understand where you're going and don't have the brainpower to see the end of the path.

Blue Ocean Strategy helps you not only figure out where that path should lead to, but gives us a series of powerful tools that help communicate that to others. Blue Ocean Strategy provides a roadmap, but isn't magic: you, the product and business developer have to figure out where that road is leading to and push your organization down that path.

The six-path framework is how you, the person trying to redefine a business or industry, find those key factors that are vital to the success of your business: it's the music you hear in your head, that you know you're capable of.

In the search for key factors, it's not uncommon to quickly jot down a list of factors: don't do this. Remember the old software engineering term GIGO: Garbage In, Garbage Out. The process of identifying and isolating key factors should be long and painstaking: there's nothing easy about it. You should really be uncomfortable with the key factors you eliminate and reduce. Making things worse, the longer you've been in the industry the more difficult the process will be, because you'll be steeped in the standard boundaries by which companies are already competing.

But if you use the six-path framework to find those key factors, then apply the four actions framework against them, you'll find that music you knew was there will come alive in real life. You'll invent a Wii, create the Prius, or launch the next Google. But never underestimate the amount of raw effort that went into each of these individual efforts, or that must go into yours if it has a chance of succeeding.

Nintendo Wii Blue Ocean Strategy -- Strategy Canvas

In April I'll try to show some Strategy Canvases built with the Blue Ocean Strategy (BOS) practitioner's tool I developed, BOS Createware. I'll start with the Nintendo Wii. Nintendo has never released the strategy canvas they used, but the canvas above is a good guess of what it probably looks like.

Let's look at the Key Factors, and examine how Nintendo likely arrived at them:

Eliminated Movie Playing. The PS3 plays Blu-Ray disks. The XBox 360 plays HD-DVD. Both play DVD's. The Wii plays ... nothing. Only games. Nintendo realized that high-resolution movies on a game machine are Technological Innovation: innovation solely for the sake of innovating. High-resolution movie-playing adds cost that doesn't align with the added consumer value.

Reduced Graphics & Physics. The Wii has good-enough graphics: they're fine. Using the six-path category of Strategic Groups shows people trade-up on entertainment to TV and movies or down to board-games. Nintendo obviously realized the cost of trying to invent a widget that traded up to the higher strategic group, movies, didn't outweigh the cost. Physics is similar: balls bounce just fine but if you're looking for real-time rendering of wind rustling through leaves look outside your window: this isn't something important enough to justify the added cost.

Raised Fun. This one almost seems obvious but, in retrospect it's probably the biggest six-path key factor responsible for the Wii's success. Microsoft and Sony concentrated entirely on functional elements: great graphics processors, physics engines, specialized chips, etc... Nintendo used the six-path element of Functional/Emotional to turn that around. Everything about the Wii is Fun: Fun -- an emotion element -- was placed over chips, a functional element. Mii's are fun; the fact the PS3 does a petaflop of calculations is cool, but not especially fun. Besides raising the Fun element Nintendo created the Virtual Console to take advantage of that giant game library they had lying around.

Created the Wiimote: Nintendo's Magic Wand. I've written an entire post just about the Wiimote: here's a link -- http://www.valueinnovation.net/2008/02/create-tech-innovation.html.

Repeating the well-known end-result, the Wii blew out of stock the day it was released and has remained unavailable ever since. PS3's and XBox 360's are stacked up as tall as a person on showroom floors, but you still have to show up at store opening times for the chance of landing a Wii. At last count the Wii was outselling the PS3 4:1 in Japan and is projected to overtake the XBox 360 in total volume of consoles by year-end despite that the 360 had a year head-start. Nintendo didn't compete in the Red Ocean: they created a Blue Ocean that rendered the competition irrelevant.