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.