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: It's Work, but Worth It

I don't remember the names of many of my teachers, but one that stands out is a high-school teacher named Constance Holland. Ms. Holland was a civil rights activist that marched with Dr. Martin Luther King then turned teacher. After doing her best to explain something, then staring at the blank faces around the room, she stopped and roared the only quote I remember from any high-school teacher:

Wake Up! You're better than this .. this spaced-out indifference. Reach for the stars kids, and remember that anything else is beneath you.

I come across a lot of product and business developers; engineers and MBA's and people with degrees that end in "D." I feel like many US-doctors: people wait until their company is hurting then come looking for a pill to fix what ails them while they continue their same lousy health habits. They want the benefits of regular exercise and a good diet, but without the work.

Business leaders, entrepreneurs, students, workers, government officials ... everybody. Wake up. Listen to Ms. Holland: reach for the stars. Build great businesses. Jack Welsch famously used to say "Be #1 or 2 or get out." Come on Jack, you don't want to be #2: who wants to be #2? Art Rock, the early VC who funded Intel and Apple, once lectured something along the lines of "'A' people hire 'A' people and rarely 'B' people. They're happy when their hires pass them by, and they're quick to get rid of the 'B' people. 'B' people hire 'B' and 'C' people, on purpose. Run the process through a few hundred iterations to see it's so important to get the best and the brightest."

The US economy is going into the tank, largely on incompetence, indifference, indiscretion, and laziness. We have nobody else but ourselves to blame. But we also have the strongest entrepreneurial engine in world history: the right people and policies will fire it up and we'll eventually be fine. Other countries can keep cranking out low-cost labor, loosen their environmental and monetary regulations, or force workers to subsidize business through immoral tax structures. It doesn't matter: these commodities are inherently Red Ocean spasms. Some other country will come along that has even cheaper labor, is willing to pollute their water and air even more, or lets you run amok. It's like the hypothetical walk to the wall where the distance is always halved: we'll never quite get there, and even if we did who wants to walk into a wall?

Be Blue. Don't commoditize to compete in a Red Ocean but, rather, redefine the rules of the game; the boundaries of the market. Any company or country or individual can reach for the stars or slouch for the sewer: they can be Red or they can be Blue. But they can't be both. If they choose to go Blue they have to do the work; there's just no magic way to get there, but the results are worth it. The choice is entirely ours, and it's about time our business and government leaders started to take it more seriously.