Blue Ocean Strategy

How Does the Blue Ocean Strategy Work?

The blue ocean strategy is a strategic framework for businesses to attain highly profitable growth by creating new, uncontested market spaces.

Originally, INSEAD professors W. Chan Kim and Renée Mauborgne introduced the strategy’s fundamental concepts in the 1990s, which later became formally published in their book Blue Ocean Strategy in 2005.

The blue ocean strategy is a systematic method in which companies are encouraged to undertake the burden of risk to introduce a differentiated product offering for the sake of creating and capturing uncontested market space, as well as making the competition irrelevant.

Conceptually, the blue ocean strategy is rooted in the principle of value innovation, which refers to the simultaneous pursuit of differentiation and low cost.

The product or service sold must balance offering a unique, differentiated offering that fulfills unmet customer needs in the target end market while reducing (or eliminating) the costs incurred that are deemed low-value.

Of course, the removal of competition is momentary, considering the fact that the risk of new market entrants is an inevitable outcome. Still, the blue ocean strategy allows companies to create new, uncontested market spaces, so the risk of market competition is a trivial matter for the time being.

The first mover actively pursuing the blue ocean strategy is presented with an opportunity to establish itself in the market with no competition.

The potential upside for growth is practically uncapped since the company creates demand for the product rather than competing for market share. Likewise, there is no ceiling on the profit that could be obtained because of the fact that there are no other competitors in the market.

Therefore, the first mover can set prices to ensure each conversion (i.e. sale) is profitable — albeit the value received by the customer must warrant the pricing (or else market demand will drop).

Blue Ocean vs. Red Ocean Strategy: What is the Difference?

The difference between the blue ocean and red ocean strategy is as follows:

• Blue Ocean Strategy ➝ The blue ocean strategy encourages businesses to create new markets that might not yet exist. Therefore, the total addressable market (TAM) and implied revenue opportunity are merely estimates with a wide variance between the “upside” case and the “downside” case. The risk is concentrated on the market opportunity (i.e., market sizing) and whether there is sufficient consumer demand, so the decision ultimately belongs to the individual (or management team) on the best course of action.
• Red Ocean Strategy ➝ The red ocean strategy, on the other hand, strives to outperform competitors in an established market to accumulate more market share in a saturated competitive landscape. Red oceans are characterized by competition in saturated markets, which is unfavorable for all companies operating in the industry. The cutthroat competition reduces the profitability of the entire industry, which impacts most, if not all, market participants, who are collectively fighting for a piece of a shrinking profit pool. Hence, the statement that the red ocean strategy is denoted as red because of the bloody competition (i.e. “bloody red ocean”).

^{Blue Ocean Strategy vs. Red Ocean Strategy Chart (Source: Chan Kim + Renee Mauborgne)}

Blue Ocean Strategy: What are the Pros and Cons?

The blue ocean approach is a riskier endeavor, considering the market size is a relatively unknown variable. Still, the risk-return trade-off could be worth taking a bet on.

• Downside Risk ➝ From the perspective of an entrepreneur, the downside risk is the loss of contributed capital (or owner’s equity).
• Upside Potential ➝ In contrast, the upside potential is immeasurable because the market created presents an untapped opportunity.

Certain risk-averse investors will expectedly view the uncertainty as an unfavorable attribute and pass on the opportunity, whereas others might perceive the uncertainty surrounding the company (and target end market) as a potential investment opportunity.

Why? Early-stage investors are in search of an investment with the potential to “return the fund” (i.e. the return on one investment in the portfolio outweighs the losses on the other holdings).

In effect, a startup in pursuit of the blue ocean strategy should be able to raise capital from institutional investors with relative ease, as risk is inherent to early-stage investors, such as venture capital (VC) firms.

Most companies nowadays, even early-stage startups, are unable to break free from the traditional train of thought regarding business strategies.

Case in point, the focal point of most startups is too often an established market with incumbents and cut-throat competition. The industry players, consisting of startups to established incumbents, try to outperform each other (i.e. their rivals) to grab more share of existing demand, at the expense of eroding profit margins and declining revenue growth.

What is Value Innovation?

Value innovation is the simultaneous pursuit of differentiation and low cost, contradictory to conventional wisdom on business strategy.

Businesses that prioritize differentiation and low cost at the same time are overall beneficial for delivering value to buyers (or consumers) and the company itself.

• Cost Savings ➝ The elimination and reduction of low-value factors can remove distractions, which enables the company to focus on its core operations (and main set of priorities) with minimal waste of time and resources.
• Buyer Value ➝ The creation and distribution of a product or service that no other company in the industry offered in the past is a net positive for consumers (and vice versa, since the company collects payments).

While the revenue opportunity in the market can be quantified, the startup’s priority becomes its competitors rather than value innovation.

Value without innovation is merely value creation, wherein the value of the product or service is incremental relative to other offerings in the market.

Irrespective of the product improvement, the incremental value is insufficient to truly stand out in the marketplace.

Countless startups strive to disrupt a market, which is certainly an achievable objective. But the startups that managed to completely disrupt a long-standing industry—such as Uber, Lyft, Grubhub, Instacart, and Airbnb—offered an entirely different product (or service) that provided substantially more value to the end-user relative to the traditional, alternative options in the market.

^{Value Innovation (Source: Chan Kim + Renee Mauborgne)}

How to Create Blue Oceans

The blue ocean strategy requires companies to strategically outmaneuver the risk of competition, which can be achieved by circumventing the competition entirely.

Initially, the overarching objective is not to steal market share from incumbents or even competing head on with other industry players, but rather to make competition irrelevant.

The blue ocean strategy is predicated on the notion that market boundaries and industry structure are not fixed and can be reconstructed.

Capturing uncontested market space is the cornerstone of a profitable blue ocean, so identifying opportunities in new market spaces and capitalizing on the market demand will open the door to ample opportunities for profitable growth.

One of the core concepts to understand with blue ocean strategies is that new demand in unexplored market space, not existing demand in an existing market space, is the most profitable pathway to achieve growth.

In short, market demand is created in blue oceans, not fought over with competitors, and more importantly, there is ample opportunity for growth that is profitable and rapid.

By prioritizing value innovation, sound strategic moves, and systematic tools and frameworks to guide decision-making, companies can create new demand in the market and differentiate themselves from competitors (or peers).

How to Sustain the Benefits of Blue Ocean Strategies

Once a blue ocean is created, it is essential to sustain the market position by continuously improving upon the product offering, innovating, and adapting to changing market conditions.

Why? Blue oceans will inevitably attract imitators, turning the competitive landscape into red oceans.

Therefore, to continue to benefit from the strategy’s initial success, companies must pursue a two-fold strategy comprised of continuous improvement to remain ahead of competitors and leveraging barriers to entry to impede imitators.

For instance, intellectual property (IP), such as patents, and securing long-term contracts with customers represent two methods of maintaining competitive advantage.

The market leader must eventually shift its priorities from continued growth and market expansion to risk mitigation, minimizing downside risk, and maintaining a profitable blue ocean.

What is the Four Actions Framework?

The Four Actions Framework is composed of four questions to convert industry insights into well-crafted strategies to apply:

1. Raise ➝ Q. “Which factors should be raised well above the industry’s standard?”
2. Create ➝ Q. “Which factors should be created that the industry has never offered?”
3. Eliminate ➝ Q. “Which factors that the industry takes for granted should be eliminated?”
4. Reduce ➝ Q. “Which factors should be reduced well below the industry’s standard?”

^{Four Actions Framework (Source: Chan Kim + Renee Mauborgne)}

Blue Ocean Strategy Example: NVIDIA (NVDA) and AI Chips

Jensen Huang, the CEO of NVIDIA, is widely recognized for his visionary approach to business strategy, in particular his concept of “zero-billion-dollar markets.”

The term “zero-billion-dollar markets” refers to markets that currently have no quantifiable total addressable market (TAM) but could become a substantial growth segment later down the road.

Huang’s philosophy is rooted in the belief that by investing in these markets in the earlier stages of development, NVIDIA can position itself as a leader once these markets (and the underlying technologies) mature.

In fact, Huang encourages NVIDIA employees to develop products to target “zero-billion-dollar markets”, which is exemplified by NVIDIA’s historical track record as an innovative market leader, and early investments in chips for the emerging AI market.

^{Jensen Huang Biography (Source: NVIDIA Newsroom)}

The forward-thinking mentality has been critical to NVIDIA long-term success (and recent outsized success), which enabled the company to remain ahead of the curve and capitalize on emerging opportunities before competitors could even recognize the market potential.

Based on the strategic guidance led by Huang, NVIDIA placed a substantial bet early on AI, even when the technology’s commercial viability was uncertain and deemed too risky to most.

The outcome?

• The AI chip market is projected to reach $400 billion by 2027, with NVIDIA expected to capture $280 billion of that market (70%).
• Global spending on AI is estimated to grow 37% annually to reach over $500 billion by 2030.
• AI is forecasted to contribute more than $15 trillion to the global economy by 2030.

Before AI became mainstream, NVIDIA was already developing GPUs optimized for AI workloads. That sort of foresight is one reason, among many others, that NVIDIA is currently dominating the AI chip market.

Once demand surged, NVIDIA managed to capture an estimated 80% to 95% market share in data center AI chips.

^{NVIDIA Investor Presentation May 2024 (Source: NVIDIA Presentation)}

One of the most recent examples of NVIDIA’s zero-billion-dollar market strategy is the development of the Omniverse, an “industrial metaverse” designed to simulate the real world at an incredibly fine level.

Huang believes the Omniverse could revolutionize industries by enabling advanced simulations for robotics, self-driving cars, and other applications.

While the market for such a platform may not yet exist, the investment in the Omniverse positions the company to be at the forefront when the demand for industrial metaverse applications inevitably grows.

^{NVIDIA Omniverse Cloud APIs (Source: NVIDIA Press Release)}

Huang’s approach to zero-billion-dollar markets is not just about technology but also about fostering a culture of innovation within NVIDIA, where employees are encourage to think creatively and develop products for untapped markets (i.e. break the conventional norm).

The culture of innovation is supported by NVIDIA’s robust ecosystem of developers, startups, and enterprise customers, all of whom contribute to the company’s virtuous cycle of innovation and adoption.

By nurturing a work environment based around innovation, NVIDIA ensures that it will continue to remain at the forefront of technological advancements and can quickly adapt to new market opportunities.

The risks associated with investing in zero-billion-dollar markets are significant, as these markets may take years to develop or may never materialize at all.

The decision to invest in AI—which at that time was undeveloped and a risky bet—was scrutinized by investors. Considering the proven markets that NVIDIA could continue to invest in, Huang decided to allocate time and resources to setting up the infrastructure for a market that could not even be sized.

That risky long-term bet certainly paid off for NVIDIA, as its products are now adopted by the leading tech giants, including Amazon, Alphabet (Google), Meta Platforms, OpenAI, Microsoft, Oracle, and Tesla, to name a few.

However, Huang’s track record implies that the potential rewards far outweigh the risks. NVIDIA’s recent successful bet in AI (and gaming) demonstrates that early investments in emerging technologies can lead to substantial long-term gains.

Jensen Huang’s concept of zero-billion-dollar markets has been instrumental in shaping NVIDIA’s strategic direction and ensuring its continued success.

By investing in undervalued or nonexistent markets, NVIDIA positions itself as a pioneer in emerging technologies, and was evidently in the right position to capitalize on new opportunities in the AI market, considering the industry-wide adoption of NVIDIA’s offerings (and strategic collaborations and partnerships).

The continued growth of the generative AI industry will serve as a major tailwind for NVIDIA, considering the reliance of its product offerings for each respective company’s technologies to function.

In conclusion, the commitment by NVIDIA to pursue zero-billion-dollar markets will likely remain a core driver of its positive growth trajectory as the pace of innovation continues to evolve and new opportunities arise.

^{NVIDIA Historical Market Cap Chart (Source: Arcana Analytics)}