blue ocean strategy starbucks case study

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• Howard Schultz and Starbucks Coffee Company
• Innovation & Entrepreneurship / MBA Resources

Introduction to Blue Ocean Strategy

EMBA Pro Blue Ocean Strategy for Howard Schultz and Starbucks Coffee Company case study

Investigates the entrepreneur's strategic initiatives to develop a mass market for specialty coffee in the 1980s and 1990s. These initiatives included the development of premium products, rapid expansion of company-owned stores--each with attractive retail environments and responsive customer service--and, especially, the creation of a strong brand. Also devotes considerable attention to how Schultz built the Starbucks organization, examining the consistent emphasis that he and his colleagues placed on the company's relationship with its employees, how Schultz financed Starbucks' early expansion, how vertical integration ensured quality control, and how--strategically and operationally--the company managed its phenomenal domestic and international growth after 1993.

Case Authors : Nancy F. Koehn

Topic : innovation & entrepreneurship, related areas : collaboration, customers, entrepreneurship, government, innovation, it, leadership, leading teams, mergers & acquisitions, emba pro blue ocean strategy approach for howard schultz and starbucks coffee company.

At EMBA PRO , we provide corporate level professional Marketing Mix and Marketing Strategy solutions. Howard Schultz and Starbucks Coffee Company case study is a Harvard Business School (HBR) case study written by Nancy F. Koehn. The Howard Schultz and Starbucks Coffee Company (referred as “Schultz Starbucks” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Marketing Mix, Product, Price, Place, Promotion, 4P, Collaboration, Customers, Entrepreneurship, Government, Innovation, IT, Leadership, Leading teams, Mergers & acquisitions. Our immersive learning methodology from – case study discussions to simulations tools help MBA and EMBA professionals to - gain new insight, deepen their knowledge of the Innovation & Entrepreneurship field, company, context, collaborators, competitors, customers, Marketing Mix factors, Products related decisions, pricing strategies and more.

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What is Blue Ocean Strategy and how it is relevant to "Howard Schultz and Starbucks Coffee Company" case study?

Who invented blue ocean strategy and why it is called blue ocean strategy.

EMBA Pro Definition - As a strategy concept Blue Ocean strategy was first introduced by W.Chan Kim and Renee Mauborgne, INSEAD Business School professors, in their book - "Blue Ocean Strategy - How to Create Uncontested Market Space & Make Competition Irrelevant"

It is called Blue Ocean Strategy (BOS) because it provides managers a toolbox to create, identify uncontested market space instead of competing in the prevalent market with cut throat competition and decreasing margins.  BOS makes competitors irrelevant & creates new consumer value propositions.

What is the cornerstone of Blue Ocean Strategy?

The cornerstone of Blue Ocean Strategy is - "Value Innovation" . Value Innovation puts equal emphasis on both Value and Innovation. Schultz Starbucks needs to not only redefine the value proposition it is providing to existing customers (clients) but also needs to create new value proposition for target segments (customers) that at present are not Schultz Starbucks's clients. Value innovation can open up new uncontested market space for Schultz Starbucks.

Four Critical Factors that Managers at Schultz Starbucks can use for Value Innovation are -

Buyer Utility - It underlines the core values, features or utility Schultz Starbucks's products or services deliver to the buyer. The benefits can be both perceived and real.

Price - In traditional scenarios competitors compete in the Innovation & Entrepreneurship following traditional approach of pricing - ‘Offer customer more for less’. This can provide serious challenge to company’s bottomline (profitability).

Cost - Managers at Schultz Starbucks can use value innovation to overcome limitations suggested by Michael Porter (management guru, strategy guru) in his value cost trade-off as part of competition based strategy. Using Blue Ocean strategy Schultz Starbucks managers can pursue both differentiation and low cost simultaneously.

Adoption - When innovation is pursued in isolation of the value then it can lead to very low level of adoption no matter how significant technological breakthrough is.

Red Ocean Vs Blue Ocean Strategy

What is the difference between blue ocean strategy and red ocean strategy how can schultz starbucks break out of the red ocean of bloody competition.

In the current business environment , Red Ocean is often defined as a competitive environment where industry boundaries are clearly defined, and existing and new players are trying to out-perform each other using Value-Cost Trade Off. This leads to cut-throat competition and race to the bottom, resulting in lower profitability and higher cost structure as component of total price.

Factors that are leading to Red Ocean of bloody competition -

Niche markets and local monopolies that company’s like Schultz Starbucks able to exploit are fast disappearing. The firms in Innovation & Entrepreneurship industry are required to continuously come up with new solutions.

Globalization has also opened doors to suppliers from China, India, Turkey, Brazil, Taiwan, Malaysia, and other emerging economies to compete in the high cost market such as United States & European Union.

Various product categories in Innovation & Entrepreneurship are becoming more similar, leaving firms to compete only through pricing strategy.

Increasing commoditization of the products and services have also put pressure on companies such asSchultz Starbucks.

Consumer behavior in the Innovation & Entrepreneurship is also fast evolving because of -greater access to information, market transparency, technological innovations and promotional incentives by competitors)

Accelerated technological innovations and advances are improving industrial productivity, enabling suppliers to manufacture vast array of products and services.

Breaking out of Red Ocean of Bloody Competition

Examples of how blue ocean strategy can be used for schultz starbucks case study.

Schultz Starbucks can use following Blue Ocean Strategy (BOS) tools and techniques to overcome the red ocean of cut throat competition in Innovation & Entrepreneurship industry.

What is Eliminate-Reduce-Raise-Create Grid?

Eliminate-reduce-raise-create, mapping schultz starbucks on blue ocean strategy canvas grid, six path framework for schultz starbucks, strategy alignment.

Schultz Starbucks BOS should have three critical qualities -- a compelling tagline, divergence, and focus .

The four actions of Schultz Starbucks strategy canvas should be guided toward enforcing these critical qualities. Without these critical qualities, Schultz Starbucks strategy is most likely to be muddled, undifferentiated, and hard to communicate with a relatively high cost structure. The four actions of creating a new value curve should be well guided toward building a company’s strategic profile with these characteristics. These three characteristics serve as an initial litmus test of the commercial viability of blue ocean ideas

Schultz Starbucks Needs to Avoid these Six Red Ocean Strategy Traps

Trap 1 - Equating Creative Destruction with Market Creation

Trap 2 - Confusing Technology Innovation with Market-Creating Strategies

Trap 3 - Equating Market-Creating Strategies with Differentiation

Trap 4 - Making Existing Customers Happier

Trap 5 - Equating Market-Creating Strategies with Low-Cost Strategies

Trap 6 - Treating Market-Creating Strategies as Niche Strategies

5C Marketing Analysis of Howard Schultz and Starbucks Coffee Company

4p marketing analysis of howard schultz and starbucks coffee company, porter five forces analysis and solution of howard schultz and starbucks coffee company, porter value chain analysis and solution of howard schultz and starbucks coffee company, case memo & recommendation memo of howard schultz and starbucks coffee company, blue ocean analysis and solution of howard schultz and starbucks coffee company, marketing strategy and analysis howard schultz and starbucks coffee company, vrio /vrin analysis & solution of howard schultz and starbucks coffee company, pestel / step / pest analysis of howard schultz and starbucks coffee company, case study solution of howard schultz and starbucks coffee company, swot analysis and solution of howard schultz and starbucks coffee company, agile management solution of howard schultz and starbucks coffee company, references books on blue ocean strategy.

W. Chan Kim and Renée Mauborgne (2017) Blue Ocean Shift: Beyond Competing - Proven Steps to Inspire Confidence and Seize New Growth, Sep 26, 2017 W. Chan Kim and Renée Mauborgne (2015) Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant, Jan 20, 2015 Nancy F. Koehn (2018) , "Howard Schultz and Starbucks Coffee Company Harvard Business Review Case Study. Published by HBR Publications.

Kotler & Armstrong (2017) "Principles of Marketing Management Management", Published by Pearson Publications.

M. E. Porter , Competitive Strategy(New York: Free Press, 1980)

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How Starbucks Became Everyone's Cup Of Coffee

Table of contents.

Starbucks Coffee Company boasts impressive stats:

• Owns 40% share of US Coffee Market
• Earns $24,72 billion worldwide
• Has 29,324 stores worldwide in 72 countries
• Over 14,000 of total stores in the United States / over 27,000 worldwide
• Conducts over 90 million transactions per week
• So popular in China, a new store opens every 15 hours
• Following McDonald's as the most valuable fast food brand worldwide (valued at $44.5 billion)

It will be very hard to achieve something Starbucks did since 1971 when the company started. There’s a lot of firsts when it comes to the company. First to introduce the new coffee culture, the first privately owned company which offered all their employees health insurance AND the share of the company.

The CEO, Howard Schultz, who might even run for president at some point , achieved something that is almost impossible — appeal to shareholders, employees, and customers at the same time. This is my giant case study on how to achieve world domination in case you want to bring an old product to the new market.

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The Starbucks Idea

The coffee culture in the United States before the 80s was nonexistent. 

Americans were used to huge cans of ground coffee and they couldn’t care less about the flavor. Even if you’d go outside your household to a dinner you would be met with a generic drip coffee or styrofoam cups of foul-tasting joe at the workplace. No one even thought about the flavor, the origin, or anything more sophisticated tied to the drink.

The 70s coffee culture didn’t exist at all.

In 1970 three college friends: Gordon Bowker, Jerry Baldwin, Zev Siegl went into the coffee business together. They set up a shop and sold roasted beans. They received the knowledge from a man named Alfred Peet (if that rings a bell, yes he is the owner of Peet’s Coffee). Alfred was one of the most knowledgeable people in the country about coffee. He knew where to source it, how to roast it. He was the first to introduce dark roasted and french roasted beans.

In 1971, the three friends opened the roastery and bean shop in Pike’s Place, Seattle’s famous tourist destination known for the Pike’s Public Market Center. Peet helped the young entrepreneurs by providing them with beans and connecting them with reliable bean providers.

The name Starbucks stuck because it’s easy to say, impossible to misspell, and has a vaguely British overtone to it. Really, we picked it because our lawyer called and told us we had to submit papers and needed a name. We didn’t know at the time, but Starbuck is the name of the first mate on the Pequod in Moby Dick. That might explain the siren logo. Some might even say it comes from Mount Rainier's Mining company Starbo . According to Gordon Bowker, they were initially going for the name Cargo House Coffee .

The business was successful enough for the trio so they opened 4 more shops in Seattle. However, no coffee drinks were being served. This was still a roasted bean retail shop intended for home use.

At that time Starbucks was competing against instant coffee cans. The quality was stark and thus the business went well. Things were about to change when the founders hired the head of marketing and sales, Howard Schultz in 1982.

The Inclination for Grit and Determination Fix Social Injustice

Howard Schultz was a child raised in poverty. After seeing his father injuring himself doing grueling manual labor, he decided he wanted to get rid of the injustice of the working class. An idea of creating and striving for an environment where employees are fairly compensated and taken care of has been set in.

In Masters of Scale interview with Reid Hoffman, Schultz described seeing his father stretched out on the sofa after suffering an injury. Howard Schultz swore to himself to make a company his father had never worked for.

“I saw my father losing his sense of dignity and self-respect. I am sure that this was caused mostly by the fact that he has been treated as an ordinary working man.” – Howard Schultz, AstrumPeople article

Schultz started working at the age of 12 selling newspapers. Since he was being athletic, Howard earned an athletic scholarship at Northern Michigan University where he received his Bachelor’s degree in Communications in 1975.

After his graduation, Howard Schultz spent three years as a sales manager at Xerox, and then he started working at a Swedish company Hammarplast , where he was selling home appliances, including coffee grinders to businesses like Starbucks.

The Starbucks founder trio took him amidst to grow the company.

In 1983, Howard Schultz gets an epiphany. He travels to Milan, Italy for some sort of conference and what he sees there changes his perception of coffee forever. In certain European countries, especially Italy, coffee was one of the more important things in life. It served as a social lubricant and the third place of dwelling between home and work. Schultz discovered what it means to have a high-quality espresso served in a proper way in a relaxed environment.

He was determined to bring this piece of coffee culture back to the United States. The founders gave in after continuous pressure from Schultz to open an espresso bar. Eventually, they gave him an opportunity to open up a coffee bar inside a store. It was incredibly popular. But the owners didn’t want to turn the coffee retail business into a cafe.

“After Milan I flew back to the United States, excited to share what I experienced. But my bosses, the first founders of Starbucks, for whom I had tremendous respect, did not share my dream of re-creating the coffee bar experience in Seattle. I was crushed, but my belief was so powerful that, in April 1986, I left Starbucks and raised money from local investors to found my own retail coffee company. I named it Il Giornale after Milan’s daily newspaper.

In 1985 Howard Schultz opened his own cafe chain - Il Giornale . He wanted to pursue the dream and went back to Starbucks owners and offered to buy all 6 stores that were operational at that time. With the help of raised venture capital he succeeded and became the CEO after the successful acquisition with $3.6M.

The hyper-growth began.

Key takeaway #1 — change is good

The determination and unrelenting belief to change the current situation is not just a helpful attribute but a prerequisite for cultural change. Staying true to the “one thing” without flinching will be the cause and the driver of change.

“An Old Product in the New Market”

Whenever something works out on an incredible scale in one market, there’s a potential of seeing it succeed in a new one. This is called introducing an old product to a new market.

For example, Uber and Lyft built an incredible business about ride-sharing. Because they have to contain the growth before they are spread too thin, that gives the opportunity to copy-cats in different markets. In the United Arab Emirates, you have Careem ( just recently acquired by Uber ), in Croatia you’ve got have Cammeo and in India, you’ve got sRide .

After something experiences great success, there is only a matter of time before someone else sees the potential and brings it back to the new market, and starts eating out the market share

Coffee was a big opportunity in the United States at that time. Howard Schultz saw with his own eyes how effective and important it is in Italy and he knew he could do something similar in the United States. To perform a similar innovative (for the new market) service you would need to take the entire concept and localize it to the new market.

Even the trends from 2004 to this day shows an upward trend in coffee:

This go-to-market product strategy was first introduced In 1957 by Russian American mathematician and business manager Igor Ansoff. The Ansoff Matrix was published in Harvard Business Review in the article “Strategies for Diversification”. In his opinion, there are only two ways to develop a growth strategy — varying what is sold (product growth) and to whom it is sold (market growth).

Market development — new market, existing product

The Starbucks go-to strategy was to bring the already established product in different cultural and geographical spaces into the new market — the coffee-culture deprived United States.

Howard Schultz’s task was to closely observe how Italians treat the product and figure out a way to bring it home with minor changes. It was impossible to expect that the new market is going to slurp macchiatos from tiny espresso cups but everyone could understand comfort and better quality. That was going to be Starbucks’s trump card.

Market penetration — old market, old product

The most obvious strategy is to sell the existing product to the existing market. With this concept there’s a little risk since the companies don’t have to educate the market with the new product, however, the growth is inhibited by competition or decreasing trends.

Diversification - new market, new product

By far the riskiest approach is introducing a new product in new markets. Not only the product needs to provide clear values, but it also has to educate its use in the new market.

Imagine bringing augmented reality technology to a country where there’s no practical use for it yet. Since there’s a great risk, it can also result in amazing success where you’re the only provider in the blue ocean market.

Most of the startups are banking on this strategy.

Product development - old market, new product

This strategy is most often used by established brands that are already known as leaders in their field. If a washing machine company introduces a new technology that also folds your clothes after washing and drying, that would be much easier to understand and adapt to their existing users.

Key takeaway #2 — do market research

When developing the new market, learn as much as possible about the product itself in the location where it’s mostly used and established. Identify all the major benefits and think of the most significant values that would succeed in the new market

Eco-Conscious, Friendly People, and Profitable — Starbucks’ Triple balancing act

Howard Schultz had an idea to build something that is almost impossible to imagine and can exist only in Utopia. From the start, he wanted to serve with equal importance towards customers and employees.

This is almost impossible to achieve since on one end the business investors want to see money coming in, which in most cases means lean running staff with lower wages and higher-priced products. The staff, or “ partners ” as Howard Schultz calls its employees, are not only compensated a fair wage ( between $10 to $15/hour according to Glassdoor ) but also have healthcare insurance and discounted stock options for company shares.

Howard went even further, offering full tuition coverage through Arizona State University's online degree program .

This idea was most likely outrageous to shareholders. Everyone will get a piece of the company’s pie?

In a Tim Ferriss interview with Jim Collins, the author of Built to Last and Good to Great mentioned the final lesson of his mentor and all-around management superhero Peter Drucker:

“The management isn’t about being more efficient all the time, but it’s also being more humane at the same time.

Striving for workplace quality for the employees was thus one of the main values the CEO implemented in the company.

The interesting analogy is Jordan Peterson’s theory of order and chaos (yin and yang) where one side represents the profit that company must achieve by ruthlessly cutting back the cost in the workforce and the other side where the conscience of doing the right thing for your people brings satisfaction and peace to the workplace which is a proven necessity for customer-facing businesses.

Key takeaway #3 — happy employees make happy clients

Treat your people well. When you’re in the service industry the customer satisfaction and treatment are at times more important than the actual product. And happy employees make happy clients.

The Product

Better coffee.

To coffee drinkers, there are not a lot of things more important than a good coffee in the morning or during the day. By today’s standards, Starbucks drinks aren’t at the level of barista artisans and coffee aficionados. But when the shops started opening in the early 70s, 80s, and 90s, the espressos and lattes were vastly different from all the other stuff people were drinking.

Coffee is generally roasted in three ways: light, medium, or dark, depending on the time dedicated to the coffee beans’ roasting.

In a light roast, you would notice a fruity and acidic taste. Coffee beans are actually considered fruit and are sometimes called cherries. That is the reason you taste light roast as acidic with fruit notes.

In Medium roast, the coffee tastes the sweetest. The glucose levels reach the point where the glucose starts to break. Coffee roasters would say the medium roast is the most balanced since it’s not bitter nor acidic but something in between.

In dark roast, you can taste the bitterness due to burned beans.

Coffee quality comparison

Starbucks predominantly use dark roast coffee which also represents the majority of the coffee that is being consumed in North America. As mentioned, the coffee quality was much better than instant abominations in the early 80s; however, it definitely cannot measure up to artisan roasters.

There are two main reasons:

1— Dark roast is cheaper and can be produced in mass quantities. Similarly to green tea, the light roast-worthy beans are grown in shady, high-altitudes where it produces the most sweetness. High-quality matcha (powdered green tea leaves) is intentionally kept in the shade so it produces more photosynthesis and better taste. Since Starbucks has to supply tens of thousands of shops, they have to bring the mass supply to the cafes. Brian Stoffel from El Toledo roastery in Costa Rica says: “It would be financially stupid for a large chain to buy high-quality coffee beans and use them for dark roast coffee.”

This brings us to…

2— The coffee has to taste the same across the cafes to guarantee uniformity. With dark roast, the flavors of the beans are getting covered up in the same way as overseasoning a dish or overcooking a steak.

But it wasn’t just about the coffee alone. The branding kicks in and people pay for something they want to eventually become. Drinking Starbucks drinks meant they are sophisticated, culturally progressive individuals who enjoyed the premium experience of coffee-drinking culture from fashionable Milano streets.

The slim and elegant takeaway cups proudly wore the green siren logo so the passers-by noticed the person drinking that exact coffee. These cups were different from styrofoam cups in the office or fast food joints.

A similar tactic was used by Apple with the launch of iPods and white earbuds. The iPod was a cool new gadget you had to wear to be relevant in modern society. Apple made it in such a way that people noticed which users had iPods — because they plugged white earbuds into them.

This was a genius idea because the users were immediately differentiated from other less-cool mp3 gadget-using people. Secondly, this was a perfect silent word-of-mouth strategy. If local influencers were seen using white earbuds, everyone else wanted to get on that trend. This strategy is viral in concept and is used by many companies; however, it’s harder to implement it on a distinctive level.

Later on, Starbucks adapted to the marketing with something called “horizontal offer”. It wasn’t just about the dark roast and espresso shots. Young budding students wanted something sweet and mocha just hit the note between coffee and rich chocolate fudge. Why not having both in one product?

Later on, Starbucks started offering teas and snacks. Snack is bringing in a substantial amount of revenue. The shops are using the display of sweet pastry or savory egg sandwiches like any expert pastry shop in Europe. And there are not many people who can resist a croissant, cinnamon roll, or blueberry muffin with their americano or latte.

The food is bringing in more than 20% of all revenue . The pasty was the start, but the company followed up by offering breakfast sandwiches. The adaptation to the market goes even further.

With the recent diet trends in health and fitness, Starbucks has you covered with gluten-free, protein-rich snacks.

With all the addition and expansions to serve a larger audience, it’s inevitable to create resistance groups who blame Starbucks as a commodity coffee provider. And they would be right, it has become that because their system of sourcing beans has to ensure the stock supplies for thousands of shops. But by becoming the main coffee dealer to the masses all the micro-roasters and man-bun wearing, tattoo-sleeved barista artists can fall on their knees and thank the mighty green Siren for creating a market for them.

The need for coffee has increased substantially with the introduction of better coffee, so it created another pocket of niche providers of premium roasted bean roasters.

The price of a cup

Most of the coffee shops live well because they can afford hefty margins. An 80% markup is a standard in the coffee business, especially on the higher-end brews. According to the Small Business Development Center’s 2012 report, food costs take up about 15 percent of revenues on average. The average coffee shop then has a gross margin of 85 percent.

Starbucks margins must be pretty loaded then since they buy tons of coffee from a few sources. According to Coffee Makers USA, the actual coffee in a grande Starbucks cappuccino costs about 31 cents.

For a commodity product such as coffee, Starbucks drinks are quite up there on the more expensive tier ranging from $2.15 for a tall drip to $5.95 for a seasonal frappuccino concoction. But taking into consideration the physical positioning ( Chapter 5 — Coffee Locations ), paying off employees and staff the actual margin per coffee sold are 7% .

Historically, Starbucks has been raising the prices per cup over the years. Since it has poured a lot of equity into maintaining the brand image, it can afford to have a steeper price than its competitors (McDonald's and Dunkin Donuts). Instead of losing the price-sensitive customers, Starbucks differentiates itself from the before-mentioned companies and thus keeping the brand image of a premium java provider.

However, as Tucker Dawson from PriceIntelligently mentions, the prices aren’t increased across the whole product offering . The high-margin items have stayed the same.

Product differentiation

By having a strong and recognizable brand, the company can afford to put out merchandise. Starbucks holiday-themed mugs and localized artwork on them are a big part of the exposure. The merch cabinets and tables are usually near the counters or areas where there’s a longer dwelling time.

The revenue isn’t coming just from the beverages alone. Starbucks did an amazing job of offering non-caffeinated beverages including kids drinks and teas which were introduced after partnerships or acquisitions of Tazo and Teavana.

Starbucks started to diversify its products, pushed them into retail space, and also added teas.

The big drivers are also snacks, wholesale beans, before-mentioned merch, and coffee equipment.

Key takeaway #4 — diversify and expand

While the product is one of the key components of a successful business think about its potential upgrades. Keeping the core you can diversify the offering (and acquire new revenue channels) by expanding into different verticals but staying inside your core company values.

Experience is More Important Than The Product Itself

With a distinctive brand identity, Starbucks shops are easily recognizable anywhere in the World. For a global brand, this is one of the mandatory elements. Each franchise is slightly different than the other — Starbucks in the posh downtown area will have a different feel than the one on the Student campus or at an airport.

But each store follows certain guidelines which are prescribed. In tech and startups, product development follows a concept called minimal acceptance criteria . In other words, what are the lowest common denominators the dev team needs to do before it can be rolled out as a published version.

For Starbucks Cafes, even though the store managers have a certain freedom to run and maintain the facility, they have to ensure to deliver the core Starbucks qualities.

• Indie playing music
• Comfortable (community) tables for remote work
• Reliable wireless connection
• Charging Outlets

These shouldn’t just be taken for granted. People love some sense of predictability in their lives. How many times have you been on the lookout for Starbucks when visiting a new country just to take advantage of their wi-fi connection and use of restroom? From that perspective, Starbucks serves as a transactional facility offering other services which don’t have much to do with coffee.

The main idea is, coffee is not the product that is being sold at Starbucks cafes — the whole thing is a social experiment of creating a meeting place between people. It serves as some sort of oasis for meeting up with friends, having a snack and a cup of coffee in a comfy chair while listening to the latest Indie playlists . Starbucks is less in the coffee business as is in people’s business as well.

“It’s not Starbucks coffee you are getting, it’s the Starbucks experience. “

By calling your name and writing it on the cup, it doesn’t just inform the customer that their drink is ready. It allows a more personalized service since we love hearing and seeing our name.

Smells and sounds

Starbucks Sounds

Chances are when you go to Starbucks you don’t ever hear the music. But it plays an important role nevertheless. Starbucks playlists are carefully curated to help create that ambiance of a neighborhood coffee shop.

It has been a piece of the Starbucks experience for over 40 years already . The songs and tracks are carefully curated way ahead of time. These handcrafted playlists usually consist of indie, feel-good songs, pop, alt-country to season-themed or even classical playlists during holidays.

In 1999, Starbucks even acquired a Bay Area music store to launch its own branded coffeehouse and later on, even a record label. In the early 2000s, Starbucks sold CDs in the store until the format decline. In 2016, Starbucks partnered with Spotify . Through the mobile app integration, Spotify plays music as part of the app. In-store listeners can take a look inside to identify the artists and save the tracks to their playlists.

Holly Hinton and David Legry, the in-house music curators, are responsible for what gets played. What sounds like the best job in the world, actually is. Their sole work is searching for the right tracks and artists that they can see are fit to be played in the coffee shop.

In an interview with Fast Company , Holy Hinton said:

“We want our customers to walk in and have a ‘What’s that song?’ moment. We want them to hear interesting, cool music that they might not hear when they turn the radio on. It’s music that we think is cool and would sound beautiful in the coffee shop. It’s the music that we’d want to hear on Sunday morning when we’re reading the paper and drinking coffee. It’s a friend-to-friend personal. And we’re lucky to be able to be a part of that.”

To localize the experience, every region is slightly customized regarding the music, while still carrying the same vibe Starbucks customers are used to. This way, whenever a customer comes to the cafe, within the first few seconds, they feel accustomed based on the music alone.

The interior design

Every piece of furniture and interior is carefully planned to conform to the standards of the homey coffee place.

To get their store right, Starbucks interviewed hundreds of coffee drinkers to get as much information which they could use to build a perfect coffee shop. The overwhelming consensus actually had nothing to do with coffee; what consumers sought was a place of relaxation, a place of belonging.

If we go back to Howard Schultz’s deciding moment from the Milanese coffee shops, it shows he managed to do just that. Create a community space as a second home. It’s somewhere where people meet, it’s where you can take someone for a first date or even get some work done at the large community table.

In the book Starbucked, freelance journalist Taylor Clark claims, that “The round tables in a Starbucks store were strategically created in an effort to protect self-esteem for those coffee-drinkers flying solo. After all, there are no “empty” seats at a round table.”

If we looked at the interior, the counters, chairs, and wardrobes are built out of natural materials like warm woods and stone. In some stores, you would find cozy armchairs as well. With the Shared Planet initiative , they doubled down with environmental sustainability in mind and employing local craftsmen to do the job. The stores are built from reused and recycled materials wherever possible.

Most of the new stores that are being built are a part of the LEED Certification program (Leadership in Energy and Environmental Design).

Starbucks differentiates from three general looks with the addition of concept designs:

• Heritage coffee houses reflect the history of the place where the store is located. At Pike Place, the coffee shop reflects the merchant trading roots with worn wood, stained concrete or tiled floors, metal stools, and factory-inspired lighting. Even more sophisticated is the New Orleans inspired coffeehouse showing the rich music history.
• A “Louisian merchant in the early 1900s” inspired heritage coffeehouse with vintage trombones light fixtures. Located in French Quarter, New Orleans.
• Artisan stores echo the industrial past of urban markets, taking inspiration from the Modernism of the 1930s. This motif celebrates simple materials like exposed steel beams, masonry walls, factory casement glass, and hand-polished woodwork in a creative gathering place for culture and the arts.

• Regional Modern are localized stylized coffee shops. The interior is spacious. comfortable and welcoming. The bright, loft-like, light-filled spaces punctuated with regionally inspired furniture and culturally relevant fabrics create a calm and contemporary respite from the clamor of the fast-paced world.

• Experimental — with growth and a plethora of locations comes more daring and innovative designs. Unique designs such as the reimagined drive-thru in Colorado , the Swiss Train contemporary mobile coffee space from Geneva Airport to St. Gallen or one of the beautiful Shinto shrine-inspired coffee shops in Japan

‍ Starbucks Reserve

To combat the upscale coffee market which ironically has to thank Starbucks for creating fertile grounds of demand for premium coffee, Starbucks started opening up so-called Starbucks Reserve stores. These are luxurious, beautiful, and magnificent stores where they roast premium, rare beans and experiment with different brewing techniques.

CNN Money described the store concept as "an open, marketplace-style" with a Princi bakery counter, a full liquor bar, and a Reserve coffee bar, with tables, lounge areas, and two fireplaces.

"Our Reserve store takes the best of coffee craft as well as artisan baking and layers in a marketplace-style customer experience creating a space that has both energy and moments of intimacy," — Liz Muller, VP of Creative, Global Design & Innovation at Starbucks

Coffee shop locations

In any high-traffic area in the city where Starbucks is located, you almost have a feeling their shops are everywhere. You would be partially right — Starbucks are strategically located in areas with high appeal. Similarly to Walgreens, Starbucks chose the concept of the convenience store, always located in an area of larger foot-traffic .

Source | A snapshot of Starbucks shops in Seattle

Arthur Rubinfeld who is responsible for Starbucks’ location selection, explained there are about 20 or so analytic experts around the world who are assessing different factors of the appropriate area for the new Starbucks shop .

Key takeaway #5 — spoil your customers

Think beyond the product and identify what else can you do for the customer to add you in their daily, weekly routine. Customer support excellence is mandatory, so think further and in the direction of the place’s ambiance including smells and sounds.

Breaking down the Brand and Messaging

Bill Macaitis, former CMO of Slack said it best - “The brand is the sum of all customer touchpoints your customers have with you at any point”. With the food and beverage category, this is even more important.

By introducing and creating a culture of coffee drinking, Starbucks had a major opportunity to create intimacy with the customer. In Italy, coffee culture is a part of every day and the same culture was slowly getting familiar to the new audience.

Because of the personal nature of coffee and frequency of visits, this relationship-bonding happened much faster than in other fast-food joints, especially since in the early years of Starbucks there was no competition.

Brand and product

The bright white cups with the green siren are the first noticeable brand. But it goes beyond that. You will notice that Starbucks never offers any sort of discounts or actions like buy-one-get-one-free. That’s sort of action dilutes the premium feel of the brand. You can get a free coffee drink for your birthday, but the underlying reason for that is for a customer to develop a positive connection with the brand and company.

The most valuable assets of the regular Starbucks coffee shop can be broken down:

☕Free reliable Wifi - besides oxygen, water, and sleep, the online connection has become a necessity in modern civilization. Whenever you’re in a new place and you need to connect, one of the first options would be a Starbucks shop.

☕Comfortable seats and community tables - whether you’re there to take a breather or putting some hours of online work or organizing an impromptu study group, there’s a Starbucks location that can provide those demands. Most of the Starbucks are generously equipped with charging outlets as well, so you can get another drink after your focus is starting to drop… and then another… And another...

☕Friendly baristas - customer service is ingrained in the retail work description yet rarely done the right way. With L.A.T.T.E. method (Chapter 8 - Disciplined Action) and general training of Starbucks partners , each interaction with the customer is there to provide a positive experience. Calling people by their name, timely service, and the patience of crafting ridiculously complex drink orders .

☕Brand colors and materials — the nature-influenced interior with dark colors and wood finishes are giving a feel of hominess. Sometimes a Starbuck visit is just a pause you take in a day to relax your eyes.

☕Music and smells — coffee and snacks just smell amazing. Let’s take that for granted. The music serves a purpose as well as bringing an ambiance that is great for having a conversation or focusing on work (or your date).

Key takeaway #6 — positive interactions

The brand is the sum of all touchpoints the customer has with the company. This goes beyond the product and customer service. Think about every single interaction customers have with you and make them positive.

Starbucks Master Example of Mobile Retention and App Rewards

Starbucks mastered the mobile game at the right time. Dabbling with mobile technology since 2007, Adam Brotman spearheaded the platform to maximize the effect. The big challenge was to align it with the brand.

“We don't look at mobile in a vacuum. We have an overall digital strategy that's all about building relationships with our customers, and that strategy runs across a number of digital touchpoints. We're looking at mobile, Web and social to think more holistically about how we engage with our customers and tell our story." — Adam Brotman, Chief Digital Officer

In the Manifest survey in 2018, 500 smartphone owners rated their satisfaction using food apps. Starbucks had the most popular and regularly used loyalty rewards app — 48% of users used it on a daily basis.

Four years later, Starbucks remains one of the most popular apps, ranking number 6 on the list of most downloaded Food & Drink apps. 

The mobile switch paid dividends with time. Instead of support and enhancing physical visits to the store, the channel began bringing in 23% of all the revenue.

Ordering ahead of time and user experience

For a food mobile app to be successful, it must bring value to the user, be easy or even fun to use and it should have entertaining, dynamic content.

The design has to adhere to rules of the brand, achieve a consistent visual look and continuity across all touchpoints.

The mobile app design is no different than the rest of the materials Starbucks uses.

Digital Engagement paid tremendous dividends for the company.

Starbucks CFO Scott Maw said almost all of the company’s same-store sales growth has come from customers that have digital relationships with the company and those that are in the Starbucks Rewards program.

User-friendly design

This is the minimal and easiest thing to leverage on. With a strong brand, it should not be hard to create an appealing visual interface and create logic flow and transitions or continuation to the desired action.

Engaging loyalty program

Retention is the name of the game. If a customer trusts you well enough to download your app, you have a unique opportunity to convert him or her to be a regular user.

Starbucks has a similar strategy with the reward system. Every day there’s a slight reward, whether it’s collecting points or showing the current mouth-watering warm drink inside the app. It’s sticky and you can’t help but wish for a warm beverage.

Mobile pay and ordering

The North American market is known for heavy mobile use . By prepaying and using the device to quickly go through the ordering process, the customers feel more efficient and slightly more an advantage than the other poor souls who still buy their coffee with credit cards or cash.

Integration with other platforms and services

Partnerships are ways to get tons of new users with one big swoop. Spotify acquired one million users a few days after partnering with Facebook (Source) and Facebook had one sexy product update from it as well. For similar reasons, Starbucks used Spotify to enrich the experience of the mobile app.

Now playing highlight in Starbucks stores (Music is a big part of the brand and having perennial "Shazam" embedded brings seemingly insignificant, yet positive experience.

UX/UI — breaking down the mobile app design

Out of this world personalized experience.

The app remembers your favorite order. This is ingenious. We’ve mentioned how coffee represents a daily habit - if Starbucks manages to infiltrate itself into your habit loop, they’ve won. They have become a part of your daily routine. Stacy always stops at the same drive-through Starbucks, orders her Grande Latte with Soy Milk at 6:15 am before she checks-in at her job. When that’s her daily or even only a few time per week routine, the LTV for that kind of customer is absolutely amazing!

Every little detail counts. For instance, here’s the customized greeting each time a user opens the app’s Home tab.

Gamification

Most addictive phone games always give you something to do if you’re not using them for a while. From Candy Crush Saga to Supercell’s engineered mobile drugs like Clash of Clans and Boom Beach, the mechanics of engagement are carefully predicted for maximum time and cash spend. These games start with low difficulty. They are fun, colorful, and offer an entertaining introduction to their mechanics. But you can play all day, and after a while (on a free tier) you’re locked out of the game.

To continue playing, you can either (literally) buy your time or increase your chances of success with extra loot, power levels, or something similar.

Starbucks uses a similar principle of gamifying its mobile app. There’s a lot of value upfront (pay with a card, skip the line, earn credits for free drinks) but it serves the company’s profit. You get hooked to those stars (credits) which are stacking in your beautifully designed mobile app.

There are also challenges for extra Starbucks points (who can say no to double credit days?)

With the app, Starbucks gets you to try new products and thus increase the range of products you are consuming AND it gives the company an opportunity to increase the average order revenue per customer.

There’s a thin line between being overbearing and being just enough engaging. And at the same time, they have to be very strategic on the number of features offered. Sean Ellis , the OG Growth hacker said the product is ready to ship once all the unnecessary features are taken away (kind of the same mentality as per good design). Luckily with MILLIONS of users, Starbucks can apply some Data Science magic and figure those timings for every type of person.

Personalization goes even further - it tries to give a similar experience as to visiting the store ( source )

Starbucks Loyalty Program on triple-caffeine nitro power

The Starbucks Rewards are dead simple - the more you spend the more stars you get. Besides the stars, the rewards program offers birthday rewards, phone payments, paying ahead, free in-store refills and special offers and events for members. As expected the experience is personalized for each user.

The Rewards work like gangbusters! More than 14.2 million active members in the U.S. are invested in the loyalty program and the mobile strategy has seen an 11% growth in users in Q2 2018 . The gamification of the program and “spend more, earn more” in some cases represent 39% of the entire chain's sales .

Here’s what’s ingenious about the mobile program. Even though there are people who prefer to have the minimum number of apps on their phone and think twice before opening the doors for the elite club on their smartphone storage, the Starbucks app is a trojan horse of benefits - even if you don’t care about collecting stars, it’s tough to say no to the free birthday drink or the convenient mobile pay.

Online Ordering and easy payments flatten the friction of getting the product. Just like the Amazon 1-click purchase or Slack’s onboarding sequence , the same goes for picking up a mocha and Petite Vanilla Bean Scone. At first, Starbucks had some issues, since the mobile members had to wait in line just like the others, but Starbucks responded by adding dedicated stations for mobile order-ahead customers.

Members can skip the waiting line and enjoy the jealous looks while feeling elite of themselves.

The beauty of the app isn’t giving one big benefit of a quicker caffeine shot to the member, but it serves as an upsell marketing tool. The Starbucks app is a delivery method for presenting new items ahead of time. These generate interest and coupled with email notifications, it gives their customers something to look forward to.

To keep the retention flat, the Rewards program has “punishment” traits tied into it. If you’re not using the stars for visiting the cafes you start losing them. This psychological trick, known as The Endowment Effect , helps to nudge those people who are affected more about losing something they already have.

The Mobile part is one of the main drivers of customer retention and has proven to raise the average order size per customer. Since the frequency of orders and visits is so high, the LTV per customer contributes to that impressive double-digit growth in the first years.

Key takeaway #7 - APP A mobile app for a product that is being used on a daily basis and is in the lifestyle category is not a nice to have, but almost mandatory. If you want to stay a part of your customer's daily lives, bring the entertainment, rewards, and gamification to keep retention and customer satisfaction high. You will be rewarded with increased LTV.

The Success Flywheel of Starbucks

The easiest way to figure out and identify the success of a company is to apply the try-and-true framework. Jim Collins, the author of Good to Great, Built to Last claims all mega-successful companies have to figure out the Flywheel principle .

To become an unstoppable juggernaut in its own field, Starbucks had to align 5-6 different elements in three categories:

• Disciplined People
• Level 5 Leadership
• First Who… Then What
• Disciplined Thought
• Face the Reality
• Hedgehog Concept
• Disciplined Action

Culture of Discipline

• Leveraging the Technology

Imagine the concepts as drivers of one giant flywheel. Let’s say you’d want to move a giant stone wheel that sits on an axle. It would take a lot of effort to get it moving at first. After gaining speed it would need less and less power to keep it going. After gaining momentum, the same wheel would run on its own with little interaction. Just like the extremely simplified quote says; “If it ain’t broke, don’t fix it.”

Disciplined people - Starbucks Level 5 Leadership

Excerpt from Good to Great -> “Level 5 leaders display a powerful mixture of personal humility and indomitable will. They're incredibly ambitious, but their ambition is first and foremost for the cause, for the organization and its purpose, not themselves. While Level 5 leaders can come in many personality packages, they are often self-effacing, quiet, reserved, and even shy. Every good-to-great transition in our research began with a Level 5 leader who motivated the enterprise more with inspired standards than inspiring personality.”

There’s no doubt, Starbucks CEO Howard Schultz possesses the characteristics and personality traits of a Level 5 leader. The ambition alone to introduce a new cultural concept in a new market sounds incredibly daunting, but to play it right with the shareholders, customers and their own people sounds impossible.

But that was the initial idea, a moral standard. The mission statement of Starbucks is:

“to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”

Let’s break this down into two pieces.

Inspire and nurture the human spirit .

The people, customers, and partners (staff) are the most important assets of any company. The first part of the mission statement explains that in a split-second. The relationships within the company have to be nurtured and supported while exuding warmth and friendliness.

Howard Schultz has shown respect for the mission by developing programs for their own people, which include free education, health insurance and even a share in the Starbucks company.

“One person, one cup and one neighborhood at a time .”

The second part stresses the importance of gradual improvement. Each interaction with a customer, each cup of coffee made hold a large amount of responsibility to deliver the right experience. The neighborhood part reminds the staff and the customers that the stores pay special respect and attention to the place where they are located.

In the article Inside Starbucks’s $35 Million Mission , author Sarah Kessler describes how Starbucks runs the “ Leadership Lab ” — part leadership, part training conference for 10,000 store managers.

Disciplined thought

Face the Reality — When stuff gets hard, leaders don’t turn away from the problem or worse, get busy with mundane tasks, deceiving themselves they are working. Closing your eyes to the reality means you’re on a great way to a downward spiral.

In 2008, Howard Schultz got reinstated by the board as CEO. The sales and shares were dropping. The brand and the culture of Starbucks were deteriorating rapidly. The magical experience was a shadow of its former self.

Schultz decided on a radical idea to close all the stores and retrain in order to inflict the importance of the Starbucks vision and mission. Tied into this transition was closing numerous shops and letting go of hundreds of employees. The ordeal cost the company 6 to 7 million dollars .

In 2018, Starbucks closed the doors again in order to put the staff through racial anti-bias training. The temporary closure cost the company between $15 - $20 million dollars

But it was necessary and long needed. The company picked up from the bottom just like in Drake’s song and has been rapidly growing in the world’s map as well as on index stock charts.

The Hedgehog Concept

The term Hedgehog concept introduced by Collins is some sort of a marriage consisting of a Venn diagram and three major ideas. Jim Collins thinks that in order to have a chance to be the best in the world you have to possess all three:

• The Elite Skill - You will have to be the best in your area of expertise. Constant learning, innovating and moving the boundaries are expected from the movers and shakers of the world.
• Deep Passion - Someone who grows a business will eventually (and continuously) encounter major obstacles where the skill isn’t going to be enough. The grit, powered with a deep passion and a reason why is arguably even more important than the knowledge alone.
• Ability to generate revenue - Understanding of what drives the economic engine is the third piece of the puzzle that completes the concept. No business can survive without sustaining itself and its people financially.

Schultz possesses all three: the Stanford education armed him to become shrewd and dangerous in the business world with a deep understanding of the economic machine while he stayed in love with the company and continued to deeply care for its people and the customers.

The second part of the hedgehog concept is the sheer simplicity of your objective. When it comes to specializing and becoming the best in the world, you need one clear statement which completely prevails over all the others.

The hedgehog is the exact opposite of the fox concept. Foxes are cunning, smart and resourceful animals who take any opportunity to get ahead using any tactic they can think off. Yet when they encounter and attack the hedgehog, the hedgehog simply rolls up into a ball and protects itself with its spiky hide.

The hedgehog companies have one major driving goal that is ingrained as the cornerstone of its business. In Starbucks, it’s not the coffee quality, but it’s the deep desire to create an experience for their customers. Everything is tied into this.

Sometimes, achieving massive rapid growth for the growth sake reveals cracks in the system if it’s not solid. In 2008, when the company was on the decline, Schulz looked at the strategy of the past few years and, in a letter penned company-wide, explained that Starbucks had “invested in infrastructure ahead of the growth curve” and it was time to “shift our emphasis back onto customer-facing initiatives.”

Imagine, the Starbucks insane growth pace required to hire 1,500 new employees a week.

Disciplined action

The success of anything in our lives is in the hands of people. It always is the #1 element in any company.

“In determining the right people, the good-to-great companies placed greater weight on character attributes than on specific educational background, practical skills, specialized knowledge, or work experience.”

When the quality of the work started slipping. Schultz had to close down hundreds of shops for a training day. It was a necessary decision to refocus, restructure and boost Starbucks employees to work and deliver on the right things and to deliver the experience as it was intended in the first place.

When faced with a difficult customer or a problem, the Starbucks partners (employees) are taught customer service by using a L.A.T.T.E. system. The acronym helps baristas deal with any situation in the store.

• L isten to the customer
• A cknowledge the problem/situation
• T ake actions and solve the problem
• T hank the customer
• E xplain what you did

The simple system isn’t there just to provide clear guidelines but it also boosts motivation and willpower among employers. In the book, The Power of Habit , Charles Duhigg wrote that the LATTE system prevented the customer service meltdown , and sustained willpower throughout the day.

In the end, customer service is there to deliver and exceed the experience which is tied to the brand. Nothing is as important as delivering the service. 

“[Employees] are the true ambassadors of our brand, the real merchants of romance and theater, and as such the primary catalysts for delighting customers. Give them reasons to believe in their work and that they’re part of a larger mission, the theory goes, and they’ll in turn personally elevate the experience for each customer–something you can hardly accomplish with a billboard or a 30-second spot.” — Excerpt from book Onward, Howard Schultz

Technology Accelerators

For a globally recognizable brand like Starbucks technology plays a major role in the expansion. The Starbucks app and the emails alone played a significant role in the company’s growth.

According to Collins, technology accelerators have to be carefully selected. Companies had to sift through the emerging technology, identify and select the right ones and gradually introduce them in the business model.

The Hedgehog Concept would drive the use of technology, not the other way around — Jim Collins

Companies that jumped the gun burned badly.

In fact, Jim Collins discovered that more than 80% of great companies didn't rank technology as one of the top five ranking factors for success.

“Those that stay true to these fundamentals and maintain their balance, even in times of great change and disruption, will accumulate the momentum that creates breakthrough momentum. — Jim Collins

Down to the core, Starbucks has one secret ingredient to thank for — knowing their customers. Data analytics. According to Starbucks, this function uses “ methodologies ranging from ethnography to big data analytics … that help support Starbucks pricing strategy, real estate development planning, product development, trade promotion optimization, and marketing strategy.”

Starbucks contracts with a location-analytics company called Esri to use its technology platform that helps analyze maps and retail locations. It uses data like population density, average incomes, and traffic patterns to identify target areas for a new store.

The Crawl, Walk, Run Concept

The gradual introduction of technology is a part of the hedgehog concept. Technology is a major proponent of business growth however if it doesn’t tie into the one simple concept , the company has to be disciplined enough to say no to new opportunities.

Eventually, they can adapt the technology in their concept which turns the massive flywheel forward.

In Starbucks sense, they seem like they embrace technology. They started out with gift cards and pay-ahead mobile purchases. The next step was adding the Starbucks Rewards program to cultivate upsells and raise the LTV per customer. And today with big data, AI, and predictable algorithms they maximize the relationship with the customers.

Key takeaway #8 — the flywheel concept

Successful companies that persevered and thrived with time have found and adopted the Flywheel concept. Focusing on the essentials of the business, working with the right people in the right places, and maintaining discipline is the only way for continued sustainable growth.

Starbucks Vs the World

Competitors.

Starbucks enjoyed the blue ocean marketplace as a premium coffee culture experience provider. 

But as soon as competitors noticed Starbucks discovering a new opportunity they had to react quickly. McDonald's and Dunkin’ Donuts were the big ones that introduced their own versions of coffee-to-go. Better than instant coffee and convenient while on the go, the two competitors did enjoy new revenue stream of introducing coffee; however, as companies, they had to keep the focus on what they are good at — McDonald's with their fast food burgers and fries and Dunkin’ Donuts with well… donuts. DD does serve coffee but had no intention to put more emphasis on it until the late 1990s .

Starbucks kept the lead in the coffee concept because of its focus on the coffee culture and holistic concept of their brand, especially customer service. This point can be seen as soon as you look at international markets. Dunkin' Donuts’ international revenue in 2018 contributed less than 4% of total sales, while roughly 30% of Starbucks' consolidated net revenues in the same period were attributed to markets outside America.

When international expansion goes right

When you get it right and you know you have the brand, processes, and culture down, you can move outside. When Starbucks expanded its adopted “Coffee culture” to new markets it could follow its own tracks again. In many countries, especially Asian nations the idea of a coffee culture was new, fresh, and exciting.

To overcome the culture gap, Starbucks sought partnership through direct investments and joint ventures instead of direct franchising . This solved two major problems.

First, they relied on local retailers who already had experience and experience in the local markets. They married the coffee culture idea with market research of the new areas to discover regional customers’ tastes and preferences. After that, they just had to deliver the employee training, workflows, and the product itself.

Secondly, they acquired and absorbed the entire pieces of coffee markets , such as Coffee Partners in Thailand and Bonstar in Singapore. All in one big swoop.

But even today a Starbucks café is opened every 15th hour in China. It already operates more than 3,000 stores in China and plans to add 2,000 more by 2021 . Seoul has the most Starbucks cafes in any city ( 284 ).

Starbucks is present in 6 continents and in more than 72 countries and territories. But it wasn’t always smooth sailing for the old Starbuck.

And when it doesn’t go so well

While Starbucks had amazing success in Asian countries, they hit a snag in Australia.

In 2008, they closed two-thirds of all stores.

The reason?

Australia is already known as one of the hardest markets to get into in the first place and they are very proud of their coffee culture. The flat whites, coffee art in ceramic lattes have been served for dozens of years at beloved local cafes and by baristas who knew what they are doing.

What Starbucks was doing in the United States was introducing the coffee culture in the new market because it was non-existent before. But in Australia, this model didn’t fit in at all.

In 2008, Starbucks closed two-thirds of all the stores. The prices of Starbucks’ relatively common-tasting coffee (compared to established coffee shops) were pricier than the local solutions and managed by young students who didn’t have the level of appreciation of either the coffee culture and/or Starbucks as a brand.

Key takeaway #9 — establish yourself

Follow the winning formula of developing the markets first and turning into a product innovator after you have established yourself. Forcing the innovation where it’s not perceived as such, is waging a losing battle.

Starbucks on Social Media

The website is simply designed with an intention to present the latest seasonal product in the Starbucks shops in the first fold. The focus of the homepage is also on advertising the Starbucks Rewards program.

According to SimilarWeb, it attracts 18.9M visits per month, with an average of 2 minutes and 3.2 page views per session. Starbucks site is the 9th top ranked site for Food and Drink category in the world

The Youtube channel was established at the end of 2005. After 16 years it managed to acquire 335,000 subscribers, which isn't’ that much if we take the size of the company into consideration.

The most successful videos are close to 10 million views; however, they are short, 15-seconds clips of the product. The channel moderators are not participating in the comment sections.

Luckily there’s not much competition on YouTube; however, as a highly visual channel, Starbucks could advertise their mobile app and Starbucks reward program using socially-conscious values, product innovation, or sustainability programs.

On the other hand, Instagram is doing absolutely amazing. Naturally, since the best Starbucks customers are the ones who have been using their mobile devices for ordering and participating in the Starbucks Rewards program

Starbucks Instagram uses a mix of images and video clips mostly displaying their well-designed cups. The posts are mostly re-shared (“regrams”) of other Instagram users. With this tactic, Starbucks incentivizes UGC (user-generated content), since Instagram users have the chance to be regrammed and have their Starbucks shot seen by 17.8 million followers.

Pinterest is another great visual platform where images are split into different categories: from coffee recipes, coffee photography to store designs and world-recognized Starbucks cups.

Pinterest receives 10+ million monthly views and has 443,600 followers.

Even though their daily support is dropping, Facebook is still being used as one of the channels where Starbucks shows its videos and posts.

On Twitter , Starbucks shares its globally conscious ideas, news, and stories about the company and its products. Twitter also serves as a chance to (as in Instagram) retweet other users’ posts.

Starbucks likes to reshare the positive messages of happy users who had a positive experience at one of their stores

Since Starbucks' success mainly lies in their visual branding, they use social media for their brand awareness and in a Facebook sense, pushing the mobile app downloads.

Key takeaway #10 — delegate your resources

When using social media, identify which social media platform brings the best results. If your users are primarily on mobile devices, Instagram would be a smart choice. Delegate your resources to the best-performing channel.

Starbucks Corp. has become a worldwide success by sticking to its hedgehog concept. The realization of being customer-centric in the practical, not just theoretical sense laid the foundation of expansion in North American markets as well as international ones.

When all of the decisions are catered to the concept of serving their customers, including using technology as accelerators, there’s nothing to worry about in their future.

Blue Ocean Strategy

This article is a comprehensive exploration of the Blue Ocean Strategy that provides organizations with the frameworks and analytical tools to create and capture uncontested markets and unlock vast growth opportunities.

The term Blue Ocean Strategy (BOS) was first coined by Professors Chan Kim and Renée Mauborgne, who set out to understand what it takes in a competitive, global environment for business to not just to cope and survive but thrive.

Over three decades of their combined research culminated in the book called “ Blue Ocean Strategy ”, first published in 2005.

By definition, “Blue Ocean Strategy is the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand. It is about creating and capturing uncontested market space, thereby making the competition irrelevant. It is based on the view that market boundaries and industry structure are not a given and can be reconstructed by the actions and beliefs of industry players.” [1]

What is Blue Ocean Strategy

What are oceans.

Businesses operate in two kinds of market space called oceans – Red and Blue.

Red oceans denote the known market space in which all industries currently operate. This is where industry boundaries are defined and accepted, and competitive rules are set. Companies try to outperform rivals to grab a greater share of existing demand.

This market space is crowded with competition and prospects for profits and growth are limited. Products are commoditized, and cut-throat competition turns the ocean “bloody” – hence the word Red.

Blue Oceans , in contrast, denote the unknown market space – all the industries that are not currently in existence. This is an untapped area where demand is yet to be created and opportunities for highly profitable growth exist.

In blue oceans, competition is irrelevant as the rules of the game are waiting to be set. Any business that enters this space can address the market without competition.

How effective is the blue ocean strategy?

Professors Kim and Mauborgne, in their study spanning over three decades, quantified the impact of creating blue oceans on a company’s growth in both revenues and profits.

Their analysis covering 108 companies showed that 14% of the launches that aimed at creating blue oceans contributed to 38% of the revenue and 61% of the total profits.

Netflix as an example of BOS

Blue ocean examples show around us all the time. Consider Netflix’s initial years. In an age where streaming movies was unheard of, Netflix entered a blue ocean by offering just that. It was able to create a new market space for itself by going beyond the conventional DVD rental market (red ocean).

By simultaneously offering low prices and the convenience of streaming with a vast content library, Netflix quickly become the dominant player in an uncontested market space. By the time competition followed, it was already a dominant player with an established name.

In contrast, Blockbuster – Netflix’s primary competitor swam too long in the red ocean (DVD rental market) and eventually headed towards bankruptcy.

A history of blue oceans

Though BOS is a new term, it has been a feature of business for a very long time. A hundred years ago, some of the most basic industries of today didn’t exist. Many of these started as blue ocean strategic move at some point before the boundaries disappeared and competition took over.

Ford’s Model T, introduced in 1908, is a classic example of a market-creating blue ocean strategic move that challenged the conventions of the automotive industry.

Same can be said about the future. As industries continuously evolve, operations improve, markets expand, and players come and go. In future, many of the industries unknown today will come into existence. These are the blue oceans waiting to be explored.

Why is BOS more important than ever?

Accelerated technological advances substantially improve industrial productivity. While suppliers can produce an unprecedented array of products and services, limited demand raises the bar for competition.

As globalization shrinks trade barriers between nations and regions, information on products and prices become instantly available. This breaks down niche markets that were once havens for monopoly. As brands tend to become more and more similar, consumers increasingly select based on price.

The business environment in which most strategy and management approaches of the twentieth century evolved is increasingly disappearing. As red oceans become increasingly bloody, businesses will need to focus on blue ocean strategies than competing within the saturated existing markets.

Value innovation – cornerstone of BOS

Traditionally, companies choose to either differentiate their products or services from the competition (by offering higher quality, more features, or better customer service) or to compete on price. This is known as the value-cost trade-off.

Value innovation challenges this convention by creating a new value curve that offers both higher value and lower costs than the competition.

By the simultaneous pursuit of differentiation and low cost, Value Innovation creates a leap in value for both buyers and the company.

Red and Blue Ocean – the key differences

Competition-based red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them.

Blue Ocean’s Value Innovation-based approach assumes that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players.

Analytical Tools And Frameworks

The strategy canvas.

Strategy Canvas is a one-page visual analytic that depicts the way an organization configures its offering to buyers in relation to those of its competitors.

It communicates four key elements for a given business:

• The factors of competition
• The offering level buyers receive across these factors,
• Business’s strategic profiles and cost structures
• Competitors’ strategic profiles and cost structures

The Strategy Canvas of Apple’s iPhone from the early 2000s (in the figure below) shows the state of play in the handset industry (at the time). The horizontal axis shows key competitive factors the handset phone industry competed on.

In the Strategy canvas, it can be seen how Apple’s value curve differed from its competitors.

Red ocean players follow a similar profile competing on the established norms while blue ocean players stand out by creating new value areas for their customers.

The early iPhone combined PC-like performance with internet connectivity in a stylish design. It was easy to use and did not confuse buyers with too many buttons or models. It offered value in the areas the buyer cared about most and hence commanded a higher price.

Four Actions Framework

Having developed the strategy canvas, a business can use the four actions framework to challenge its strategic logic and business model.

This framework is used to reconstruct buyer value elements in crafting a new value curve or strategic profile. It poses four key questions, shown below and challenges an industry’s strategic logic.

Eliminate : This question forces to consider eliminating factors that companies in the industry have long competed on. Often, these are factors taken for granted even though they no longer offer value. Sometimes there is a fundamental change in buyer’s value perception, but companies focused on benchmarking each other fail to notice the change.

Reduce : This question forces to determine whether products or services have been overdesigned in the race to match and beat the competition. Are companies overserving customers in areas they do not care about and increasing costs for little to no gain?

Raise: The third question pushes to uncover and eliminate the compromises customers are forced to make because of the way the industry is set up.

Create: This question helps to discover entirely new sources of value for buyers and create new demand and shift the strategic pricing of the industry. (Until the company Novo Nordisk invented NovoPen, administering insulin required a visit to the doctor)

By pursuing the first two questions (eliminate and reduce), companies gain insight into how to drop cost structure vis-à-vis competitors while the last two questions (raise and create) provide insight into how to lift buyer value and create new demand.

Eliminate-Reduce-Raise-Create grid

Eliminate-Reduce-Raise-Create (ERRC) grid is a supplementary analytic to the Four Actions Framework that pushes companies not only to ask four questions in the framework but also to act on each to create a new value curve. It offers four immediate benefits:

• It pushes to simultaneously pursue differentiation and low costs to break the value-cost trade-off.
• It immediately flags companies that are focused only on raising and creating and thereby lifting their cost structure and often overengineering products and services.
• It is easily understood by managers at any level, creating a high level of engagement in its application.
• It drives companies to robustly scrutinize every factor the industry competes on, thus discovering the range of implicit assumptions made unconsciously in competing.

An example of the Eliminate-Reduce-Raise-Create grid for Netflix’s early days when DVD rental was the norm:

Characteristics of a Good Strategy

A strategy formulated using the tools discussed thus far should exhibit three characteristics – Focus, Divergence, and a Compelling Tagline. These three criteria serve as an initial litmus test of the commercial viability of blue ocean ideas.

Focus : Every great strategy must have focus and a company’s value curve should clearly show it.

For example, Southwest Airlines emphasize only three factors: friendly service, speed, and frequent point-to-point departures. By maintaining its focus, it doesn’t make unwanted investments in meals, lounges, and seating choices and keeps its prices competitive.

Divergence : On a strategic canvas, the value curves of blue ocean strategies must stand apart.

For example, Southwest pioneered point-to-point travel between midsize cities in an industry that mainly operated through hub-and-spoke model.

Compelling Tagline : A good strategy must have a clear-cut and compelling tagline that not only delivers a clear message but also advertises an offering truthfully.

For Southwest Airline, it could be – “The speed of a plane at the price of a car – whenever you need it.”. A regular airline with a conventional offering cannot come up with such a tagline unless there is focus and divergence.

Formulating Blue Ocean Strategy

The six-path framework to reconstruct market boundaries.

Blue Ocean Strategy is about reconstructing market boundaries to break from the competition and create blue oceans. The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities.

There are six basic approaches to remaking market boundaries – called the six paths framework. They are:

Path 1: Look at alternative industries:

Company competes not only with the other firms in its own industry but also with companies in those other industries that produce alternative products or services. Alternatives are broader than substitutes and include products and services that have different forms but offer the same functionality or core utility.

For example, to address their financial planning, customers could buy a financial software package, hire a professional, use a mobile app or simply use pencil and paper. Each of these have very different forms but serve the same function.

Path 2: Look across strategic groups within industries:

Strategic groups refer to a group of companies within an industry that pursue a similar strategy. Fundamental differences among industry players are captured by only a small number of strategic groups.

For example, in the US fitness industry of 1995, there were only two kinds of health clubs.

First were high-end clubs that offered both men and women a full range of exercise and sporting options at high prices. Second were low-cost home exercise programs that offered exercise videos, books, and magazines.

This changed when Curves [5] , a women-focused fitness company introduced reasonably priced clubs and built a blue ocean market for itself.

Path 3: Look Across the Chain of Buyers

Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of a new blue ocean.

For example, Novo Nordisk [6] , the Danish insulin producer created a blue ocean in the insulin industry by shifting their buyers from doctors to the patients themselves. With the creation of its NovoPen, the first user-friendly insulin delivery solution, patient could easily self-administer insulin safely.

Similarly, Bloomberg [7] found a blue ocean by shifting its focus from the IT managers to whom it sold trading software to actual traders and analysts.

Path 4: Look Across Complementary Product and Service Offerings

Products and services are seldom used in a vacuum. In most cases, other products and services affect their perceived value. But in most industries, rivals tend to stay within the bounds of their industry’s product and service offerings.

For example, in the airline industry, ground transportation time after flight can affect customer’s choice of whether to fly or to drive.

By thinking in terms of solving the major pain points in customers’ total solution, there could be an opportunity to create a blue ocean.

Dyson, for example, leapfrogged the competition by eliminating the need for vacuum cleaner bags and all the cost and hassle of buying new bags [8] .

Path 5: Look Across Functional or Emotional Appeal to Buyers

Some industries compete principally on price and function largely on calculations of utility – their appeal is rational. Other industries compete largely on feelings; their appeal is emotional.

Over time, functionally oriented industries become more functionally oriented and emotionally oriented industries become more emotionally oriented. When companies challenge this functional-emotional orientation of their industry, they often find blue oceans.

Japan’s QB House (Quick Beauty) [9] for example, did just that. When it started in 1996, the time it took for a haircut was over an hour due to a long process of ritualistic activities. This also led to higher prices, typically between 3,000 to 5,000 yen ($27 to $45).

QB recognized that many, especially working professionals, did not wish to waste an hour on haircut. By stripping away the emotional (ritualistic) elements, and staying focused on speed, it saw immense success for decades. Prices too dropped to 1,000 yen ($9).

Likewise, Starbucks [10] did the reverse and turned the commoditized coffee industry (rational) into an emotional experience. Customers now choose Starbucks to spend quality time and socialize over a good cup of coffee.

Path 6: Look Across Time

By looking across time from the value a market delivers today to the value it might deliver tomorrow, businesses can actively shape their future and enter a new blue ocean. Usually, these are driven by a discontinuity in technology, rise of a new lifestyle, or a change in regulatory or social environment.

For example, in the late 1990s, Apple observed the flood of illegal music on file sharing platforms like Napster. [11] With the technology allowing anyone to digitally download music free instead of paying $19 for an average CD at the time, the trend toward digital music was clear.

In response, Apple launched iTunes [12] which offered legal, easy-to-use, and flexible à la carte song downloads. With a collection of over two hundred thousand songs, consumers could download an individual song for as low as 99 cents or an entire album for $9.99. For Apple, this was a blue ocean that shaped consumer habits.

Likewise, using this path, CNN created the first real-time twenty-four-hour global news network based on the rising tide of globalization.

Summary of the Six Paths

The process of discovering and creating blue is a structured process of reordering market realities in a fundamentally new way. By reconstructing existing market elements across industry and market boundaries, businesses can free themselves from head-to-head competition in the red ocean.

Focus on the big picture, not the numbers

While most managers have a strong impression of how they and their competitors fare within their scope of their responsibility, they often fail to see the overall industry dynamics. BOS provides a four-step strategy visualization tool that serves to unlock people’s creativity.

Step 1: Visual Awakening

This involves comparing a business with its competitors by drawing “as is” strategy canvas and finding where the strategy needs to change. Asking executives to draw the value curve of their company’s strategy brings home the need for change. It serves as a forceful wake-up call for companies to challenge their existing strategies.

Step 2: Visual Exploration

This step is about going into the field to explore the six paths to create blue oceans. By observing the distinctive advantages of alternative products and services, businesses can realize what factors to eliminate, create, or change.

Sending a team into the field puts managers face-to-face with what they must make sense of and helps realize how customers use or don’t use their products or services. A company must avoid outsourcing this step or substituting it with intelligence reports.

Step 3: Visual Strategy Fair

This step involves drawing the “to be” strategy canvas based on insights from field observations and getting feedback on alternative strategy canvases from customers, competitors’ customers, and noncustomers. This feedback will then be used to build the best “to be” future strategy.

Step 4: Visual Communication

This last step involves distributing the before-and-after strategic profiles on one page for easy comparison. The new strategic profile should become the reference point for all investment decisions. It is important to support only those projects and operational moves that allow a business to close the gaps to actualize the new strategy.

The Pioneer-Migrator-Settler (PMS) Map

Assessing a company’s portfolio offerings according to the innovative value they offer to buyers lets a company see how strategically vulnerable or healthy its portfolio is. The pioneer-migrator-setter map helps achieve this by dividing a company’s offerings into three segments: Pioneers, Migrators, and Settlers.

Pioneers are businesses that offer unprecedented value. These are the blue ocean offerings that are the most powerful sources of profitable growth. These businesses have a mass following of customers and their value curve diverges from the competition on the strategy canvas.

Settlers are the other extreme businesses whose value curves conform to the basic shape of the industry’s. As me-too businesses, Settlers will not generally contribute much to a company’s future growth. They are stuck within the red ocean.

Migrators lie somewhere in between. These businesses extend the industry’s curve by giving customers more for less, but they don’t alter its basic shape. These businesses offer improved value, but not innovative value. These are businesses whose strategies fall on the margin between red oceans and blue oceans.

If a company’s current portfolio and planned offerings consist mainly of settlers, the company has a low growth trajectory, is largely confined to red oceans. If it consists of a lot of migrators, reasonable growth can be expected.

Companies must strive to push their businesses toward pioneers.

Reach Beyond Existing Demand

Challenging the conventional strategies.

Maximizing the size of a newly created blue ocean requires reaching beyond the existing demand. This requires challenging the two conventional strategies:

(1) Focus on existing customers: Instead of concentrating on existing customers, companies need to look to noncustomers.

(2) Drive for finer segmentation to accommodate buyer differences: Instead of creating finer segmentations, companies must build on powerful commonalities around what customers value. That allows them to reach beyond existing demand to unlock a new mass of customers that did not exist before.

For example, when the US golf industry fought to win a greater share of existing customers, Callaway [13] created a blue ocean by asking why sports enthusiasts and people in the country club set had not taken up golf as a sport. It found that hitting the golf ball was perceived as too difficult with the small size golf club.

By offering a golf club with a large head, it converted noncustomers of the industry into customers. Even the existing customers, who took the norm for granted were pleased with the new offering.

The three tiers of Noncustomers

Noncustomers fall under three categories.

Tier 1 : “Soon-to-be” noncustomers who are on the edge of the market, waiting to jump ship. These are the closest to the current market. They sit on the edge of the market and are buyers who minimally purchase an industry’s offering out of necessity but are mentally noncustomers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself.

However, if offered a leap in value, not only would they stay, but also their frequency of purchases would multiply, unlocking enormous latent demand.

For example, Pret [14] , a British fast-food chain (with focus on fresh food) expanded its blue ocean by tapping into the huge latent demand of tier-1 noncustomers who were professionals frequenting restaurants for lunch. The appeal of fresh food served in under 90 seconds and at a reasonable price captured the restaurant-goers’ attention who otherwise did not consider fast food.

Tier 2 : “Refusing” noncustomers who consciously choose against the market. These are people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. But, harboring within these is an ocean of untapped demand waiting to be released.

For example, JCDecaux [15] , a vendor of French outdoor advertising space pulled the mass of refusing noncustomers into its market by creating a new concept in outdoor advertising called “street furniture”. Up until then, the outdoor advertising industry was about billboards (usually installed on city outskirts) and transport advertisement that exposed people for a very short time to get influenced by advertisements.

JCDecaux realized this was the key reason the industry remained unpopular and small. It found that municipalities could offer stationary downtown locations, such as bus stops, where people tended to wait a few minutes and hence had time to read and be influenced. It introduced street furniture with integrated advertising panels that were offered free to municipalities including maintenance and upkeep. Mass of refusing noncustomers flocked towards JCDecaux and the idea took-off as a profitable medium of advertisement.

Tier 3 : “Unexplored” noncustomers who are in markets distant from the one in question. These are the farthest from the market and have never thought of the current market’s offerings as an option.

Typically, these unexplored noncustomers have not been targeted or thought of as potential customers by any player in the industry. This can be because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets.

For example, for a very long time, tooth whitening was a service provided exclusively by dentists and not by oral care consumer-product companies.

While there is no hard-and-fast rule as to which tier of noncustomers a company should focus on and when, companies must focus on one that represents the biggest catchment and is close the capability to act on.

Getting the strategic sequence right

Buyer utility, price, cost, and adoption.

Companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.

Buyer Utility is the starting point. Does the offering unlock exceptional utility? Is there a compelling reason for the target mass of people to buy it? Without this, there is no blue ocean potential to begin with. In this case, either park the idea, or rethink it until an affirmative answer is reached.

Arriving at the right strategic Price is the second step. A company does not want to rely solely on price to create demand. The key question here is this: Is the offering priced to attract the mass of target buyers so that they have a compelling reason and ability to pay? If it is not, they cannot buy it.

Together, these first two steps address the revenue side of a company’s business model.

Cost is the third step. Can the company produce its offering at the target cost and still earn a healthy profit margin?

Costs should not drive prices, nor should the utility be scaled down because high costs block the company’s ability to profit at the strategic price. If the target cost cannot be met, the company must either forgo the idea or innovate its business model to hit the target cost.

The last step is to address Adoption hurdles. What are the adoption hurdles in rolling out the idea? Are they addressed up front? Because blue ocean strategies represent a significant departure from red oceans, it is key to address adoption hurdles up front.

Buyer utility map

The buyer utility map helps to think from a demand-side perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. This mindset helps managers identify the full range of utility spaces that a product or service can potentially fill.

It has two dimensions: The Buyer Experience Cycle (BEC) and the Utility levers.

The six stages of the buyer experience cycle

A buyer’s experience can usually be broken into a cycle of six stages, running sequentially from purchase to disposal. At each stage, managers can ask a set of questions to gauge the quality of buyers’ experience.

For example:

The six utility levers

Cutting across the stages of the buyer’s experience are six utility levers: Productivity, Simplicity, Convenience, Risk Reduction, Fun & Image, and Environment friendliness.

Together, these help companies explore ways to unlock exceptional utility for customers.

Simplicity, fun and image, and environmental friendliness are self-explanatory. A product must reduce a customer’s financial, physical, or credibility risks. It must also offer convenience by being easy to obtain, use, or dispose of.

The most used lever is that of customer productivity, in which an offering helps a customer do things faster or better. Companies must check whether their offering has removed the greatest blocks to utility across the entire buyer experience cycle for customers and noncustomers. The greatest blocks to utility often represent the greatest and most pressing opportunities to unlock exceptional value.

From exceptional utility to strategic pricing

To secure a strong revenue stream for its offering, a company must set the right strategic price. This step ensures that buyers not only will want to buy its offering but also will have a compelling ability to pay for it.

Companies can also take a reverse course, first testing the waters of a new product or service by targeting novelty-seeking, price-insensitive customers and drop prices later on to attract mainstream buyers. (Example: Tesla electric vehicles)

There are two reasons for this change.

First, companies discover that volume generates higher returns than it used to. For knowledge-intensive products (like software), companies bear most of their costs in product development than in manufacturing which makes volume the key.

A second reason is that to a buyer, the value of a product or service may be closely tied to the total number of people using it. Online auction / networking sites fall under this category.

If a company’s offering belongs to the category of knowledge-intensive products, the pricing must also consider the potential for free riding.

In some cases, free riding can be protected by the nature of the goods/services (difficult to replicate, investment heavy etc.) or by the legal systems like patent protection, but most business innovations cannot eliminate free riding. Strategic price must not only attract buyers in large numbers but also help to retain them. Earning a reputation quickly is also a key. Companies must therefore start with an offer that buyers can’t refuse and keep it that way to discourage any free-riding imitations.

Setting the strategic price

Price corridor of the target mass is a tool managers used to determine the right price to unlock the mass of target buyers. When setting a strategic price for a product or service, it is important to evaluate the trade-offs that buyers consider when making their purchasing decision, as well as the level of legal and resource protection that will block other companies from imitating its offering.

Source: SlideTeam.net [16]

Step 1: Identify the price corridor of the target mass.

In setting a price, companies look first at the products and services that most closely resemble their idea in terms of form. While looking at other products and services within own industries is a necessary exercise, by itself, it is not sufficient. Customers will compare the new product or service with a host of very different-looking products and services offered outside the group of traditional competitors.

A good way to look outside industry boundaries is to list products and services that fall into two categories:

Category 1 : Those that take different forms but perform the same function. For example, the horse-drawn carriage had the same core utility as the car: transportation for individuals and families. But it had a very different form: a live animal versus a machine.

Category 2 : Those that take different forms and functions but share the same overarching objective. For example, bars and restaurants have few physical features in common with a theater but might compete for customers’ time.

Step 2: Specify a level within the price corridor.

How high a price a company can set within the corridor without inviting competition depends on two principal factors.

The degree to which the product or service is protected legally through patents or copyrights and the degree to which the company owns some exclusive asset or core capability, such as an expensive production plant or unique design competence that can block imitation.

Companies with their offerings falling under this category can use upper-boundary strategic pricing to attract the mass of target buyers. As for companies that have no such protection, lower-boundary strategic pricing becomes necessary.

From strategic pricing to target costing

To maximize the profit potential of a blue ocean idea, a company must start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost.

This price-minus costing, and not cost-plus pricing, is critical to arrive at a cost structure that is both profitable and hard for potential followers to match. This also forces a company to strip out unnecessary costs.

To achieve the cost target, companies have three principal levers:

First – streamline operations and introduce cost innovations from manufacturing to distribution.

The second – partnering with other companies to secure needed capabilities by leveraging other companies’ expertise and economies of scale.

The third – achieve the desired profit margin without compromising on the strategic price. NetJets, for example, changed the pricing model of jets from complete ownership to time-share based to profitably deliver on its strategic price. Freemium is another pricing strategy that companies use (typically for a digital offering such as software, media, games, or web services) where a service is provided free of charge to pull in the target mass, but a premium is charged for proprietary features, functionality, or virtual goods.

The profit model of the blue ocean strategy

From Utility, Price, and Cost to Adoption

Before companies go public with an idea and set out to implement it, making a concerted effort to communicate to employees is crucial. It is important that employees are aware of the threats posed by the execution of the idea.

When Netflix was transitioning from a DVD-by-mail business to providing video streaming, great emphasis was put on engaging employees by explaining the necessity of the shift, what it means to them, and preparing them for the change.

Business Partners

Potentially even more damaging than employee disaffection is the resistance of partners who fear that their revenue streams or market positions are threatened by a new business idea. Openly discussing the issues with partners and convincing them to see the value in the shift is equally crucial to ensure business co-operation.

The General Public

Opposition to a new business idea can also spread to the public, especially if the idea threatens established social or political norms. The effects can be dire. For example, when Monsanto [17] , (An agrochemical and agricultural biotechnology corporation, now part of Bayer) introduced genetically modified crop seeds, debate on genetically modified foods intensified around the globe, with Monsanto often at the heart of the attacks.

Executing Blue Ocean Strategy

Compared to red ocean, blue ocean strategy represents a significant departure from the status quo. It hinges on a shift from convergence to divergence in value curves at lower costs thus raising the bar of execution challenge.

Overcoming organization hurdles

The four organizational hurdles to strategy execution.

Cognitive hurdle : The challenge of waking employees up to the need for a strategic shift. While red oceans may not be the paths to future profitable growth, they feel comfortable and have served organizations well thus far. Hence rocking the boat becomes difficult.

Resource hurdle : The greater the shift in strategy, the greater is the need for resources to execute it. But resources are often cut and not raised.

Motivation hurdle : How to motivate key players to move fast and tenaciously to carry out a break from the status quo? Sometimes it takes years, and companies don’t have that time.

Political hurdles : Getting shot down before you stand up.

Use of tipping point leadership

Tipping point leadership builds on the rarely exploited corporate reality that in every organization, there are people, acts, and activities that exercise a disproportionate influence on performance. The key is conserving resources and cutting time by focusing on identifying and then leveraging the factors of disproportionate influence in an organization.

Breaking the Hurdles:

Build execution into strategy.

A company needs to invoke the most fundamental base of action – the attitudes and behavior of its people. This creates a culture of trust and commitment that motivates people to execute the agreed strategy not just in letter, but in spirit. In blue ocean, this challenge is heightened.

Fair Process

Fair process is a key variable that distinguishes successful blue ocean strategic moves from those that failed. The presence or absence of a fair process can make or break a company’s best execution efforts.

Fair process builds execution into strategy by creating people’s buy-in up front. By exercising fair process in the strategy formulation phase, people develop trust that a level playing field exists, inspiring voluntary cooperation during the execution phase.

Three mutually reinforcing elements define the fair process:

Engagement : Involve individuals in the strategic decisions that affect them by asking for their input and allow them to refute the merits of one another’s ideas and assumptions. This communicates management’s respect for individuals and their ideas.

Explanation: Everyone involved and affected should understand why final strategic decisions are made as they are. This allows employees to trust managers’ intentions even if their own ideas have been rejected. It also serves as a powerful feedback loop that enhances learning.

Clarity of expectation: After a strategy is set, managers must clearly state the new rules of the game. Employees should know up front what standards they will be judged by and the penalties for failure. It is important to clearly communicate the goals of the new strategy, its targets, and milestones and who is responsible for what.

The consequences of the presence and absence of fair process:

Aligning Value, Profit, and People Propositions

At the highest level, there are three propositions essential to the success of strategy: the value proposition , the profit proposition , and the people proposition .

Figure below explains each of these propositions and how they play out differently in a blue ocean strategy vs a red ocean strategy.

Source: http://kimboal.ba.ttu.edu [19]

In red ocean strategy, the three strategy propositions need to be aligned with the distinctive choice of pursuing either differentiation or low cost within given industry conditions. Here, differentiation and low cost represent alternative strategic positions in an industry.

In a blue ocean strategy, an organization achieves high performance when all three strategy propositions pursue both differentiation and low cost. It is this alignment in support of differentiation andlow cost is critical to success and sustainability.

For example, consider Napster and Apple’s iTunes in the digital music industry. Both started out to create and capture uncontested market space with digital music. Napster had a clear first-mover advantage, pulled in over 80 million registered users, and was generally loved for its value proposition, but its strategy ultimately failed. It had no sustainability.

In contrast, iTunes achieved sustainable success and both dominated and grew the blue ocean of digital music.

What was lacking in Napster was its failure to align external people – its partners to support the compelling value it unlocked. When the record labels approached Napster to work out a revenue-sharing model, Napster balked while Apple partnered with major music companies.

Renew Blue Oceans

Creating a blue ocean is a dynamic process. Once a company creates a blue ocean and its powerful performance consequences are known, imitators appear on the horizon. If the imitators succeed and expand the blue ocean, competition intensifies and eventually turns the ocean red.

Hence renewal is key to ensure that the creation of blue oceans is not a one-off occurrence but is institutionalized as a repeatable process in an organization.

A blue ocean strategy brings with it considerable barriers to imitation that effectively prolong sustainability. These are:

Eventually, almost every blue ocean strategy will be imitated. If the company is obsessed with hanging on to existing market share, it tends to fall into the trap of focusing on the competition, and not the buyer. With time, the shape of its strategic canvas will begin to converge with those of the competition.

To avoid this trap, monitoring value curves on the strategy canvas is essential. These value curves signals when to value-innovate and when not to. It alerts a company to reach out for another blue ocean when its value curve begins to converge.

For more details on Blue Ocean Strategy, refer the author’s published book and official website. An online course is also available on the official website.

1. “WHAT IS BLUE OCEAN STRATEGY?”. Chan Kim & Renée Mauborgne, https://www.blueoceanstrategy.com/what-is-blue-ocean-strategy/ . Accessed 03 Jun 2023

2. “ABOUT THE BOOK: BLUE OCEAN STRATEGY”. Blueoceanstrategy.com, https://www.blueoceanstrategy.com/books/blue-ocean-strategy-book/ . Accessed 03 Jun 2023

3. “Winning the Customer Journey Battle: Netflix vs Blockbuster Case Study”. Strategyjourney.com, https://strategyjourney.com/winning-the-customer-journey-battle-netflix-vs-blockbuster-case-study/ . Accessed 02 Jun 2023

4. “The Strategy Canvas of Apple iPhone”. Blueoceanstrategy.com, https://www.blueoceanstrategy.com/blog/strategy-canvas-examples/ . Accessed 03 Jun 2023

5. “Women’s Health & Fitness Clubs”. Curves, https://www.curves.com/ . Accessed 06 Jun 2023

6. “What we do”. Novonordisk, https://www.novonordisk.com/about/what-we-do.html . Accessed 06 Jun 2023

7. “Bloomberg Terminal”. Bloomberg, https://www.bloomberg.com/professional/solution/bloomberg-terminal/ . Accessed 06 Jun 2023

8. “vacuum-cleaners”. Dyson, https://www.dyson.com/vacuum-cleaners . Accessed 06 Jun 2023

9. “SERVICES”. QB House, https://qbhouseusa.com/ . Accessed 06 Jun 2023

10. “Our Heritage”. Starbucks, https://www.starbucks.co.id/about-us/our-heritage . Accessed 06 Jun 2023

11. “Napster”. Wikipedia, https://en.wikipedia.org/wiki/Napster . Accessed 06 Jun 2023

12. “iTunes”. Wikipedia, https://en.wikipedia.org/wiki/ITunes . Accessed 06 Jun 2023

13. “Homepage”. Callawaygolf, https://www.callawaygolf.com/ . Accessed 07 Jun 2023

14. “About Pret”. Pret, https://www.pret.com/en-US/about-pret . Accessed 07 Jun 2023

15. “OUT-OF-HOME ADVERTISING”. Jcdecaux, https://www.jcdecaux.com/group/activities . Accessed 08 Jun 2023

16. “BUYER UTILITY MAP”. SlideTeam.net, https://www.slideteam.net/blue-ocean-strategy-price-corridor-of-the-target-mass-ppt-powerpoint-presentation-icon-guidelines.html . Accessed 07 Jun 2023

17. “Monsanto”. Wikipedia, https://en.wikipedia.org/wiki/Monsanto . Accessed 07 Jun 2023

18. “TIPPING POINT LEADERSHIP”. Blueoceanstrategy.com, https://www.blueoceanstrategy.com/tools/tipping-point-leadership/ . Accessed 07 Jun 2023

19. “Align Value, Profit, and People Proposition”. Danielle Bodette, Cole Tacker, D’Vonta Hinton, Joey King, http://kimboal.ba.ttu.edu/MGT%204380%20Fall%2008/New_Folder2/Team2_10am_BOS_10222018.pdf . Accessed 07 Jun 2023

• Strategy Map: All You Need to Know
• Go-To-Market Strategy
• Hambrick & Frederickson’s Strategy Diamond

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Unlocking the Power of the Blue Ocean Strategy: A Comprehensive Guide for SaaS Businesses [2023]

14 min read

Blue ocean strategy has become an increasingly popular business framework over the past two decades, especially in the SaaS industry. But what exactly is it and why does it matter? This article will provide an in-depth look at the blue ocean strategy, including its origins, core principles, implementation, and measurement of success.

As experts note, while blue oceans promise lucrative opportunities, not every new market lives up to expectations. At the upcoming Product Drive Conference, seasoned entrepreneur Melissa Kwan will share invaluable insights in her talk on the potential pitfalls of over-relying on blue ocean strategy. Register here for FREE!

• Blue ocean strategy is about creating uncontested market space instead of competing directly with rivals.
• It focuses on differentiation and low cost simultaneously to break the value-cost tradeoff.
• Properly implementing the blue ocean strategy can help companies achieve rapid growth and increased profits.
• However, many firms fail at successful implementation due to common pitfalls.
• Key metrics like revenue growth, customer acquisition costs, and net promoter score can indicate the success of a blue ocean strategy.

What is the Blue Ocean Strategy? Definition and Origin

The concept of blue ocean strategy was first introduced in the 2005 book " Blue Ocean Strategy : How to Create Uncontested Market Space and Make Competition Irrelevant" by professors W. Chan Kim and Renée Mauborgne.

In their book, Kim and Mauborgne argue that successful businesses should not look to beat the competition but rather make the competition irrelevant by creating "blue oceans" of uncontested market space.

This strategy rejects traditional competitive business frameworks focused on outperforming rivals. Instead, it is about capturing new demand and reconstructing market boundaries.

The terms "red ocean" and "blue ocean" are used as metaphors to describe the market universe. Red oceans represent all existing industries with defined boundaries and known rules of competition. Blue oceans denote industries not yet in existence.

Whereas red oceans are crowded with competition fighting over limited demand, blue oceans offer ample opportunity for growth and profits since demand is created rather than fought over.

Blue ocean strategy is especially relevant today as many industries are seeing declining profits and growth due to commoditization and saturation. The need to break out of hyper-competitive red oceans into blue waters where demand is untapped is rising.

As the book Blue Ocean Strategy notes, blue oceans have always been a key engine of growth for companies and entire economies. But their creation depends on the right strategic mindset and set of principles.

What is the Red and Blue Ocean Strategy? A Comparison

Red Ocean's strategy focuses on taking market share from competitors in overcrowded, saturated markets. Companies try to seize greater demand by exploiting existing offerings better than rivals.

Blue Ocean's strategy is about creating a completely new uncontested market space by reconstructing industry boundaries. The competition becomes irrelevant as new demand is unlocked.

The table below summarizes the key differences between red and blue ocean strategies:

Under the red ocean strategy, companies accept industry conditions as a given and strive to outperform competitors. The focus is on dividing up existing demand.

Blue Ocean's strategy sees market boundaries and structures as flexible and shaped by companies' actions. The focus is on developing new demand and reconstructing market landscapes to make rivals obsolete.

The Significance of the Blue Ocean Strategy

In an increasingly crowded marketplace, the blue ocean strategy offers companies the opportunity to break out of hypercompetitive red oceans. By creating new market spaces, they can unlock new demand and achieve high growth and profits.

The business world has seen numerous examples of blue ocean strategies delivering exceptional results over the past century across a range of industries from automotive to entertainment.

With globalization and advancing technology, products and services are becoming commoditized faster than ever. This makes the blue ocean strategy vital for companies to sustain high performance and carve out their blue oceans before competitors catch up.

However, adopting a blue ocean mindset requires challenging long-held assumptions about strategic planning. Companies must shift from a focus on competition to a focus on innovation.

The reward for this shift is the potential to become an industry leader and benefit from strong first-mover advantages before imitation kicks in.

Core Principles and Benefits

Now that we've covered the basic foundations of the blue ocean strategy, let's explore some of its central tenets and why it can be highly advantageous for businesses.

What Are the 4 Strategies of Blue Ocean Strategy?

The core of the blue ocean strategy is value innovation. This is about creating a leap in value for buyers and your company while also driving down costs.

Value innovation is achieved by applying the four key blue ocean strategies:

• Raise – Factors that should be raised well above the industry standard
• Reduce – Factors that should be reduced well below the industry standard
• Eliminate – Factors that should be eliminated that the industry has taken for granted
• Create – Factors that should be created that the industry has never offered

This Four Actions Framework guides companies through reconstructing buyer value elements to develop a breakthrough value proposition. It pushes businesses to question long-standing industry and strategic assumptions.

The four actions open up new value-cost frontiers by helping companies disentangle the trade-off between differentiation and low cost. Value is increased through raising and creating actions while focus and clarity are sharpened through reducing and eliminating actions.

What Are the Benefits of the Blue Ocean Strategy?

Done right, implementing a blue ocean strategy offers several compelling benefits:

• Strong profitable growth – By creating new demand, companies can achieve rapid growth and healthy profits. High perceived value allows for strong pricing power.
• New customer segments – Blue ocean strategies unlock demand from demographics outside existing industry segments. Entirely new markets can be born.
• Competitive differentiation – The competition becomes irrelevant as the company carves out its blue ocean market. Imitation is difficult due to new capabilities and branding.
• First-mover advantage – Being first in an untapped market provides advantages in branding, pricing power, proprietary assets, and cost.
• Improved value proposition – Buyer utility is increased substantially while costs are reduced. This supports premium pricing and customer loyalty.
• Long-term sustainability – Blue Oceans builds brands and high perceived value that can last for decades. Continued innovation maintains the Blue Ocean advantage.
• Enhanced employee motivation – Pursuing a transformative strategic vision can drive greater employee engagement, creativity, and morale.

Adopting a blue ocean strategy requires shifting from competitive benchmarking to a market-creating strategy. But done successfully, the payoff can be tremendous and sustainable.

However, veteran tech entrepreneur Melissa Kwan warns in her Product Drive Conference talk that the allure of undiscovered market potential can sometimes prove deceptive. Her firsthand experience offers important lessons for innovators. Register here for FREE to hear what secrets she spills!

Breaking the Value-Cost Tradeoff

A key principle of the blue ocean strategy is the simultaneous pursuit of differentiation and low cost. This breaks the traditional value-cost tradeoff.

Companies can offer buyers greater value while keeping costs low by eliminating and reducing factors the industry competes on but add no real value to buyers. Higher value is created by introducing innovative new factors the industry has never offered before.

As buyer utility is increased and costs reduced, demand escalates rapidly. This results in fast growth, high profits, and barriers to imitation. Competitors struggle to replicate differentiated value propositions without high costs.

According to Blue Ocean Shift, some ways companies can break the trade-off include focusing on eliminating pain points, pursuing simplicity, embracing transparency, and more.

The most successful blue ocean strategies create “value innovation” – substantial new value at affordable pricing through a leap in buyer utility and strategic low costs.

Implementation and Examples

The principles behind the blue ocean strategy are promising. But how can companies implement the approach successfully? This section will cover techniques and case studies.

How to Create a Blue Ocean Strategy?

Creating commercially compelling blue oceans that unlock new demand and growth requires the right tools and processes.

Here are some key steps:

• Assess the current state of play in your industry using analytical frameworks like the strategy canvas.
• Understand where you can create value for current non-customers by unlocking unmet needs.
• Use the four actions framework to reconstruct elements that generate a leap in value and reduce costs.
• Develop creative “what-if” scenarios to design potential blue ocean offerings.
• Refine and select the most promising blue ocean ideas based on commercial viability.
• Build alignment around the new strategic direction and train employees on required capabilities.
• Rapidly test and refine the blue ocean offering while mitigating risk.
• Leverage first-mover advantage and partner ecosystems to scale rapidly after launch.
• Continuously improve and innovate new complementary offerings to stay ahead.

Following a deliberate process for blue ocean creation while allowing creative room for exploration is key.

What is the Blue Ocean Strategy with Examples? A Case Study

Let's examine a real-world example of successful blue ocean strategy implementation.

In the late 1990s, the circus industry was stagnant and circuses were losing money. The industry focused on traditional shows with animal acts, three rings, and concession stands.

Cirque du Soleil took a blue ocean approach by creating a new type of circus. It eliminated animals, three-ring shows, and reduced concession stands while adding artistic music, elegant acrobatics, and a crafted story narrative.

Rather than compete directly with existing circuses catering to kids, Cirque targeted adult and corporate entertainment segments willing to pay much more. It maximized differentiated value while eliminating unnecessary elements that added cost but not value.

The results were remarkable. Between 1990 and 2000, Cirque du Soleil multiplied its revenues by over 31 times from $40 million to $1.26 billion. By 2011, it achieved revenues of $850 million with only 20 shows. The approach created a highly profitable blue ocean.

Cirque du Soleil is one of the most legendary examples of a market-creating strategy done right. Its blue ocean is executed on the core principles of value innovation and strategic alignment.

Why Do Many Firms Fail to Successfully Implement a Blue Ocean Strategy?

Despite the compelling benefits promised by the blue ocean strategy, many companies fail in implementation. Common reasons include:

• Lack of understanding – Leadership does not fully comprehend the approach or commits needed resources.
• Risk avoidance – Firms are unwilling to pivot from existing business models that still produce revenue.
• Poor planning – No structured approach is taken to generate and test blue ocean ideas.
• Bias toward competition – Companies cannot shake off competitive mindsets and benchmarks.
• Imitation obsession – Attempts are made to imitate successful blue ocean models rather than innovate.
• Loss of nerve – The resolve to see the new strategic direction through wavers after initial resistance.

Executing a commercially successful blue ocean strategy requires knowledge, structured creativity, conviction, and patience. Understanding common implementation pitfalls is the first step to avoiding them.

Challenges and Measuring Success

Even with proper implementation, blue ocean strategies involve overcoming hurdles and uncertainties. We’ll cover ways to address challenges as well as measure success.

Common Mistakes and How to Avoid Them

Here are some common mistakes companies make with blue ocean strategy and techniques to avoid them:

• Muddling execution – Maintain focus on the swift, flawless execution of the complete blue ocean package.
• Focus drift – Continuously improve and expand upon the initial blue ocean to stay ahead as imitators enter.
• Pricing errors – Price too high and adoption is stifled. Price too low leaves profit opportunities.
• Over-customizing – Proliferating offerings try to please everyone, diluting the blue ocean value.
• Complacency – Resting on initial success rather than continuing innovation invites new competition.
• Isolation – Collaborate with partners and suppliers to maximize reach and adoption.

Creating new market space involves trial and error. However, being cognizant of common missteps can help prevent them.

Overcoming Obstacles

Every transformative strategy meets resistance, both externally and internally. Leaders must address obstacles head-on to drive adoption.

Externally, negative press and criticisms from industry incumbents may arise. Firms should ensure customers understand the core value proposition and not get distracted by skeptics protecting the status quo.

Internally, present a compelling vision and logic for employees. Provide sufficient training and incentives. New capabilities and skill sets will need development.

There may also be inertia from established processes optimized for current business models rather than the new blue ocean strategy. Streamlining or replacing legacy systems can address this.

Key Performance Indicators

Given the risks involved, companies need to carefully monitor a new blue ocean strategy rollout. Relevant key performance indicators include:

• Revenue growth – How fast is total revenue increasing as new demand is unlocked?
• Profit margins – Are margins healthy from value-cost alignment and lack of competition?
• Customer acquisition costs – How much does it cost to acquire new customers attracted to the offering?
• Customer retention – Are new Blue Ocean customers repeat purchasing rather than one-time trying?
• Net Promoter Score – How willing are customers to recommend the product or service to others?
• Brand awareness – Is brand recognition increasing in new target segments?

Leaders should define targets and monitor KPIs to ensure successful blue ocean execution. Corrective actions can address any gaps.

Continuous Improvement

Blue Ocean's strategy requires rapid iteration after the initial launch. Leaders must continuously improve the offering, service, and business model to retain the blue ocean advantage.

Ongoing innovation keeps imitation at bay. New complementary products or partnerships further widen moats. Employees should be empowered to identify areas for improvement.

Analytics and customer insights are invaluable for guiding enhancement efforts. The initial blue ocean will eventually face competition without sustained innovation.

Companies that rest on their laurels invite new disruptive entrants. Blue ocean creators must relentlessly deepen their advantage over time.

The best tools for executing customer insight strategies

Of course, none of this is possible without choosing the right tool for the job. Let’s explore some of the options available on the market.

Userpilot – for collecting, analyzing, and acting on customer insights

Userpilot is a powerful digital adoption tool.

It allows you to easily analyze user behavior , collect customer feedback , and drive product engagement with engaging in-app experiences . This makes it a comprehensive product management solution that will satisfy the needs of most product folks.

Features and Events dashboard in Userpilot .

Userpilot also offers a powerful array of UI patterns: including modals, tooltips , checklists, slideouts, and more. What makes it particularly effective? You can build any of these without writing a single line of code.

And because Userpilot offers in-depth brand customization options, the UI patterns you create will be on-brand every time.

Microsurvey modal created in Userpilot.

Frankly, considering the value for money, Userpilot is one of the most attractive options on the market.

Amplitude – for granular customer insights analysis

Amplitude is another powerful product analytics tool offering an even more extensive range of analytics than Userpilot.

Some of Amplitude’s robust analytics features include:

• Milestone analysis
• Retention analysis
• Custom dashboards displaying the data you need
• Predictions and behavioral analytics
• User segmentation patterns
• Pathfinder (helps you find all the possible user paths leading up to an event)

Amplitude offers access to a range of these capabilities in its free plan, so you can easily try it out and see if it works for you. You can even book a live demo to get to know the product offering before you commit.

However, Amplitude doesn’t let you act on customer insights data. For the latter, you would need a separate product engagement tool.

Hotjar – for collecting qualitative customer data

Hotjar is another excellent tool for granular analysis of user in-app behavior.

The product offers two main features; heat maps and session recordings.

Heat maps are visual representations of user engagement in the product. The warmer the color of the spot on the screen, the more popular the feature is. This shows you which parts of the UI attract the most attention and which parts to optimize.

Session recordings are screen recordings of what users do. You can either use them for user testing , where they have a specific task to perform, or simply watch user interactions with the product, for example, to identify friction.

The Future and Expert Opinions

Blue Ocean's strategy has seen tremendous success over the past 20 years. How will it evolve moving forward? Let’s examine emerging trends and expert advice.

Emerging Trends in Blue Ocean Strategy

Some evolving directions related to the blue ocean strategy include:

• Adopting blue ocean mindsets in traditionally “red ocean” sectors like manufacturing and infrastructure.
• Using advanced analytics and AI to identify attractive white spaces backed by data.
• Leveraging strategic partnerships rather than going it alone.
• Taking environmental and social factors into account in the strategy innovation process.
• Tapping into growing consumer segments like older demographics and the middle class in emerging economies.
• Hybrid approaches that balance incremental improvement with big-bang disruption.

Blue ocean thinking must keep evolving as markets, technologies, and business environments change. What remains constant are the principles of breaking trade-offs and not benchmarking competitors.

Expert Opinions and Advice

Here are some tips on succeeding with blue ocean strategy from leading experts:

"Keep developing new blue oceans. Competition eventually erodes their advantages. Market-creating strategy is not a one-time effort but a continuous process." – Renée Mauborgne, Co-author of Blue Ocean Strategy

"Take small steps forward while also planting seeds for big-bang blue oceans. Not every idea will work. Build a portfolio of strategic experiments.” – W. Chan Kim, Co-author of Blue Ocean Strategy

"Rather than seeking to disrupt competitors, disrupt yourself before others do. Be willing to make your existing business model obsolete." – Mark Johnson, Seizing the White Space

"Don’t just ask people what they want. Guide them to imagine breakthrough experiences that address unarticulated needs." – Clayton Christensen, The Innovator's Dilemma

Expert guidance reminds firms that a blue ocean mindset must be sustained despite early successes or failures.

To learn more about balancing blue ocean strategy with finding true product-market fit, be sure to catch Melissa Kwan's eye-opening Product Drive Summit talk "Finding PMF and Why the Blue Ocean isn't a Good Thing." Register today here for free !

As competition continues to intensify across industries, the need for companies to break out of congested red oceans is clear. Adopting blue ocean strategy principles focused on value innovation offers a pathway to finding and capturing new uncontested markets.

However, balancing differentiation and low cost to unlock new demand also requires challenging dominant paradigms. A deliberate approach must be taken to identify promising opportunities, develop commercially compelling new offerings, and rapidly iterate.

While the risks of new market creation are real, the rewards for successful blue ocean strategy implementation can also be enormous. Uncontested market space offers fast growth and strong profitability based on new demand rather than competing for existing customers.

The likes of Cirque du Soleil and Netflix found their blue oceans. With the right mindset and principles, your company can follow suit. Reconstruct existing market landscapes. Make rivals irrelevant. Develop high-value offerings at accessible price points to tap into underserved customer segments. You may just find a lucrative blue ocean.

To explore how Userpilot can empower your team in implementing the blue ocean strategy, book a demo today . Our team would be happy to discuss how our platform can help you gain clarity into your users and iterate new offerings to maximize adoption and value.

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Blue Ocean Strategy

• W. Chan Kim
• Renée Mauborgne

Despite a long-term decline in the circus industry, Cirque du Soleil profitably increased revenue 22-fold over the last 10 years by reinventing the circus. Rather than competing within the confines of the existing industry or trying to steal customers from rivals, Cirque developed uncontested market space that made the competition irrelevant.

Cirque created what the authors call a blue ocean, a previously unknown market space. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In red oceans—that is, in all the industries already existing—companies compete by grabbing for a greater share of limited demand. As the market space gets more crowded, prospects for profits and growth decline. Products turn into commodities, and increasing competition turns the water bloody.

There are two ways to create blue oceans. One is to launch completely new industries, as eBay did with online auctions. But it’s much more common for a blue ocean to be created from within a red ocean when a company expands the boundaries of an existing industry.

In studying more than 150 blue ocean creations in over 30 industries, the authors observed that the traditional units of strategic analysis—company and industry—are of limited use in explaining how and why blue oceans are created. The most appropriate unit of analysis is the strategic move, the set of managerial actions and decisions involved in making a major market-creating business offering.

Creating blue oceans builds brands. So powerful is blue ocean strategy, in fact, that a blue ocean strategic move can create brand equity that lasts for decades.

Competing in overcrowded industries is no way to sustain high performance. The real opportunity is to create blue oceans of uncontested market space.

The Idea in Brief

The best way to drive profitable growth? Stop competing in overcrowded industries. In those red oceans , companies try to outperform rivals to grab bigger slices of existing demand. As the space gets increasingly crowded, profit and growth prospects shrink. Products become commoditized. Ever-more-intense competition turns the water bloody.

How to avoid the fray? Kim and Mauborgne recommend creating blue oceans —uncontested market spaces where the competition is irrelevant. In blue oceans, you invent and capture new demand, and you offer customers a leap in value while also streamlining your costs. Results? Handsome profits, speedy growth—and brand equity that lasts for decades while rivals scramble to catch up.

Consider Cirque du Soleil—which invented a new industry that combined elements from traditional circus with elements drawn from sophisticated theater. In just 20 years, Cirque raked in revenues that Ringling Bros. and Barnum & Bailey—the world’s leading circus—needed more than a century to attain.

The Idea in Practice

How to begin creating blue oceans? Kim and Mauborgne offer these suggestions:

Understand the Logic Behind Blue Ocean Strategy

The logic behind blue ocean strategy is counterintuitive:

• It’s not about technology innovation. Blue oceans seldom result from technological innovation. Often, the underlying technology already exists—and blue ocean creators link it to what buyers value. Compaq, for example, used existing technologies to create its ProSignia server, which gave buyers twice the file and print capability of the minicomputer at one-third the price.
• You don’t have to venture into distant waters to create blue oceans. Most blue oceans are created from within, not beyond, the red oceans of existing industries. Incumbents often create blue oceans within their core businesses. Consider the megaplexes introduced by AMC—an established player in the movie-theater industry. Megaplexes provided movie-goers spectacular viewing experiences in stadium-size theater complexes at lower costs to theater owners.

Apply Blue Ocean Strategic Moves

To apply blue ocean strategic moves:

• Never use the competition as a benchmark. Instead, make the competition irrelevant by creating a leap in value for both yourself and your customers. Ford did this with the Model T. Ford could have tried besting the fashionable, customized cars that wealthy people bought for weekend jaunts in the countryside. Instead, it offered a car for everyday use that was far more affordable, durable, and easy to use and fix than rivals’ offerings. Model T sales boomed, and Ford’s market share surged from 9% in 1908 to 61% in 1921.
• Reduce your costs while also offering customers more value. Cirque du Soleil omitted costly elements of traditional circus, such as animal acts and aisle concessions. Its reduced cost structure enabled it to provide sophisticated elements from theater that appealed to adult audiences—such as themes, original scores, and enchanting sets, all of which change year to year. The added value lured adults who had not gone to a circus for years and enticed them to come back more frequently—thereby increasing revenues. By offering the best of circus and theater, Cirque created a market space that, as yet, has no name—and no equals.

A onetime accordion player, stilt walker, and fire-eater, Guy Laliberté is now CEO of one of Canada’s largest cultural exports, Cirque du Soleil. Founded in 1984 by a group of street performers, Cirque has staged dozens of productions seen by some 40 million people in 90 cities around the world. In 20 years, Cirque has achieved revenues that Ringling Bros. and Barnum & Bailey—the world’s leading circus—took more than a century to attain.

Cirque’s rapid growth occurred in an unlikely setting. The circus business was (and still is) in long-term decline. Alternative forms of entertainment—sporting events, TV, and video games—were casting a growing shadow. Children, the mainstay of the circus audience, preferred PlayStations to circus acts. There was also rising sentiment, fueled by animal rights groups, against the use of animals, traditionally an integral part of the circus. On the supply side, the star performers that Ringling and the other circuses relied on to draw in the crowds could often name their own terms. As a result, the industry was hit by steadily decreasing audiences and increasing costs . What’s more, any new entrant to this business would be competing against a formidable incumbent that for most of the last century had set the industry standard.

How did Cirque profitably increase revenues by a factor of 22 over the last 10 years in such an unattractive environment? The tagline for one of the first Cirque productions is revealing: “We reinvent the circus.” Cirque did not make its money by competing within the confines of the existing industry or by stealing customers from Ringling and the others. Instead it created uncontested market space that made the competition irrelevant. It pulled in a whole new group of customers who were traditionally noncustomers of the industry—adults and corporate clients who had turned to theater, opera, or ballet and were, therefore, prepared to pay several times more than the price of a conventional circus ticket for an unprecedented entertainment experience.

To understand the nature of Cirque’s achievement, you have to realize that the business universe consists of two distinct kinds of space, which we think of as red and blue oceans . Red oceans represent all the industries in existence today—the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody.

Blue oceans denote all the industries not in existence today —the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry. As will become evident later, this is what Cirque did. In breaking through the boundary traditionally separating circus and theater, it made a new and profitable blue ocean from within the red ocean of the circus industry.

Cirque is just one of more than 150 blue ocean creations that we have studied in over 30 industries, using data stretching back more than 100 years. We analyzed companies that created those blue oceans and their less successful competitors, which were caught in red oceans. In studying these data, we have observed a consistent pattern of strategic thinking behind the creation of new markets and industries, what we call blue ocean strategy. The logic behind blue ocean strategy parts with traditional models focused on competing in existing market space. Indeed, it can be argued that managers’ failure to realize the differences between red and blue ocean strategy lies behind the difficulties many companies encounter as they try to break from the competition.

In this article, we present the concept of blue ocean strategy and describe its defining characteristics. We assess the profit and growth consequences of blue oceans and discuss why their creation is a rising imperative for companies in the future. We believe that an understanding of blue ocean strategy will help today’s companies as they struggle to thrive in an accelerating and expanding business universe.

Blue and Red Oceans

Although the term may be new, blue oceans have always been with us . Look back 100 years and ask yourself which industries known today were then unknown. The answer: Industries as basic as automobiles, music recording, aviation, petrochemicals, pharmaceuticals, and management consulting were unheard-of or had just begun to emerge. Now turn the clock back only 30 years and ask yourself the same question. Again, a plethora of multibillion-dollar industries jump out: mutual funds, cellular telephones, biotechnology, discount retailing, express package delivery, snowboards, coffee bars, and home videos, to name a few. Just three decades ago, none of these industries existed in a meaningful way.

This time, put the clock forward 20 years. Ask yourself: How many industries that are unknown today will exist then? If history is any predictor of the future, the answer is many. Companies have a huge capacity to create new industries and re-create existing ones, a fact that is reflected in the deep changes that have been necessary in the way industries are classified. The half-century-old Standard Industrial Classification (SIC) system was replaced in 1997 by the North American Industry Classification System (NAICS). The new system expanded the 10 SIC industry sectors into 20 to reflect the emerging realities of new industry territories—blue oceans. The services sector under the old system, for example, is now seven sectors ranging from information to health care and social assistance. Given that these classification systems are designed for standardization and continuity, such a replacement shows how significant a source of economic growth the creation of blue oceans has been.

In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.

Looking forward, it seems clear to us that blue oceans will remain the engine of growth . Prospects in most established market spaces—red oceans—are shrinking steadily. Technological advances have substantially improved industrial productivity, permitting suppliers to produce an unprecedented array of products and services. And as trade barriers between nations and regions fall and information on products and prices becomes instantly and globally available, niche markets and monopoly havens are continuing to disappear. At the same time, there is little evidence of any increase in demand, at least in the developed markets, where recent United Nations statistics even point to declining populations. The result is that in more and more industries, supply is overtaking demand .

This situation has inevitably hastened the commoditization of products and services, stoked price wars, and shrunk profit margins. According to recent studies, major American brands in a variety of product and service categories have become more and more alike. And as brands become more similar, people increasingly base purchase choices on price. People no longer insist, as in the past, that their laundry detergent be Tide. Nor do they necessarily stick to Colgate when there is a special promotion for Crest, and vice versa. In overcrowded industries, differentiating brands becomes harder both in economic upturns and in downturns.

The Paradox of Strategy

Unfortunately, most companies seem becalmed in their red oceans. In a study of business launches in 108 companies, we found that 86% of those new ventures were line extensions—incremental improvements to existing industry offerings—and a mere 14% were aimed at creating new markets or industries. While line extensions did account for 62% of the total revenues, they delivered only 39% of the total profits. By contrast, the 14% invested in creating new markets and industries delivered 38% of total revenues and a startling 61% of total profits.

So why the dramatic imbalance in favor of red oceans? Part of the explanation is that corporate strategy is heavily influenced by its roots in military strategy. The very language of strategy is deeply imbued with military references—chief executive “officers” in “headquarters,” “troops” on the “front lines.” Described this way, strategy is all about red ocean competition. It is about confronting an opponent and driving him off a battlefield of limited territory. Blue ocean strategy, by contrast, is about doing business where there is no competitor. It is about creating new land, not dividing up existing land. Focusing on the red ocean therefore means accepting the key constraining factors of war—limited terrain and the need to beat an enemy to succeed. And it means denying the distinctive strength of the business world—the capacity to create new market space that is uncontested.

The tendency of corporate strategy to focus on winning against rivals was exacerbated by the meteoric rise of Japanese companies in the 1970s and 1980s. For the first time in corporate history, customers were deserting Western companies in droves. As competition mounted in the global marketplace, a slew of red ocean strategies emerged, all arguing that competition was at the core of corporate success and failure. Today, one hardly talks about strategy without using the language of competition. The term that best symbolizes this is “competitive advantage.” In the competitive-advantage worldview, companies are often driven to outperform rivals and capture greater shares of existing market space.

Of course competition matters. But by focusing on competition, scholars, companies, and consultants have ignored two very important—and, we would argue, far more lucrative—aspects of strategy: One is to find and develop markets where there is little or no competition—blue oceans—and the other is to exploit and protect blue oceans. These challenges are very different from those to which strategists have devoted most of their attention.

Toward Blue Ocean Strategy

What kind of strategic logic is needed to guide the creation of blue oceans ? To answer that question, we looked back over 100 years of data on blue ocean creation to see what patterns could be discerned. Some of our data are presented in the exhibit “A Snapshot of Blue Ocean Creation.” It shows an overview of key blue ocean creations in three industries that closely touch people’s lives: autos—how people get to work; computers—what people use at work; and movie theaters—where people go after work for enjoyment.

A Snapshot of Blue Ocean Creation

This table identifies the strategic elements that were common to blue ocean creations in three different industries in different eras. It is not intended to be comprehensive in coverage or exhaustive in content. We chose to show American industries because they represented the largest and least-regulated market during our study period. The pattern of blue ocean creations exemplified by these three industries is consistent with what we observed in the other industries in our study.

*Driven by value pioneering does not mean that technologies were not involved. Rather, it means that the defining technologies used had largely been in existence, whether in that industry or elsewhere.

We found that:

Blue oceans are not about technology innovation.

Leading-edge technology is sometimes involved in the creation of blue oceans, but it is not a defining feature of them. This is often true even in industries that are technology intensive. As the exhibit reveals, across all three representative industries, blue oceans were seldom the result of technological innovation per se; the underlying technology was often already in existence. Even Ford’s revolutionary assembly line can be traced to the meatpacking industry in America. Like those within the auto industry, the blue oceans within the computer industry did not come about through technology innovations alone but by linking technology to what buyers valued. As with the IBM 650 and the Compaq PC server, this often involved simplifying the technology.

Incumbents often create blue oceans—and usually within their core businesses.

GM, the Japanese automakers, and Chrysler were established players when they created blue oceans in the auto industry. So were CTR and its later incarnation, IBM, and Compaq in the computer industry. And in the cinema industry, the same can be said of palace theaters and AMC. Of the companies listed here, only Ford, Apple, Dell, and Nickelodeon were new entrants in their industries; the first three were start-ups, and the fourth was an established player entering an industry that was new to it. This suggests that incumbents are not at a disadvantage in creating new market spaces. Moreover, the blue oceans made by incumbents were usually within their core businesses. In fact, as the exhibit shows, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters. Blue oceans are right next to you in every industry .

Company and industry are the wrong units of analysis.

The traditional units of strategic analysis—company and industry—have little explanatory power when it comes to analyzing how and why blue oceans are created. There is no consistently excellent company; the same company can be brilliant at one time and wrongheaded at another. Every company rises and falls over time. Likewise, there is no perpetually excellent industry; relative attractiveness is driven largely by the creation of blue oceans from within them.

Further Reading by the Same Authors

Blue Ocean Leadership

The most appropriate unit of analysis for explaining the creation of blue oceans is the strategic move—the set of managerial actions and decisions involved in making a major market-creating business offering. Compaq, for example, is considered by many people to be “unsuccessful” because it was acquired by Hewlett-Packard in 2001 and ceased to be a company. But the firm’s ultimate fate does not invalidate the smart strategic move Compaq made that led to the creation of the multibillion-dollar market in PC servers, a move that was a key cause of the company’s powerful comeback in the 1990s.

Creating blue oceans builds brands.

So powerful is blue ocean strategy that a blue ocean strategic move can create brand equity that lasts for decades. Almost all of the companies listed in the exhibit are remembered in no small part for the blue oceans they created long ago. Very few people alive today were around when the first Model T rolled off Henry Ford’s assembly line in 1908, but the company’s brand still benefits from that blue ocean move. IBM, too, is often regarded as an “American institution” largely for the blue oceans it created in computing; the 360 series was its equivalent of the Model T.

Our findings are encouraging for executives at the large, established corporations that are traditionally seen as the victims of new market space creation. For what they reveal is that large R&D budgets are not the key to creating new market space. The key is making the right strategic moves. What’s more, companies that understand what drives a good strategic move will be well-placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action.

The Defining Characteristics

Our research shows several common characteristics across strategic moves that create blue oceans. We found that the creators of blue oceans, in sharp contrast to companies playing by traditional rules, never use the competition as a benchmark. Instead they make it irrelevant by creating a leap in value for both buyers and the company itself. (The exhibit “Red Ocean Versus Blue Ocean Strategy” compares the chief characteristics of these two strategy models.)

Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost. According to this thesis, companies can either create greater value for customers at a higher cost or create reasonable value at a lower cost. In other words, strategy is essentially a choice between differentiation and low cost. But when it comes to creating blue oceans, the evidence shows that successful companies pursue differentiation and low cost simultaneously.

To see how this is done, let us go back to Cirque du Soleil. At the time of Cirque’s debut, circuses focused on benchmarking one another and maximizing their shares of shrinking demand by tweaking traditional circus acts. This included trying to secure more and better-known clowns and lion tamers, efforts that raised circuses’ cost structure without substantially altering the circus experience. The result was rising costs without rising revenues and a downward spiral in overall circus demand. Enter Cirque. Instead of following the conventional logic of outpacing the competition by offering a better solution to the given problem—creating a circus with even greater fun and thrills—it redefined the problem itself by offering people the fun and thrill of the circus and the intellectual sophistication and artistic richness of the theater.

In designing performances that landed both these punches, Cirque had to reevaluate the components of the traditional circus offering. What the company found was that many of the elements considered essential to the fun and thrill of the circus were unnecessary and in many cases costly. For instance, most circuses offer animal acts. These are a heavy economic burden, because circuses have to shell out not only for the animals but also for their training, medical care, housing, insurance, and transportation. Yet Cirque found that the appetite for animal shows was rapidly diminishing because of rising public concern about the treatment of circus animals and the ethics of exhibiting them.

Similarly, although traditional circuses promoted their performers as stars, Cirque realized that the public no longer thought of circus artists as stars, at least not in the movie star sense. Cirque did away with traditional three-ring shows, too. Not only did these create confusion among spectators forced to switch their attention from one ring to another, they also increased the number of performers needed, with obvious cost implications. And while aisle concession sales appeared to be a good way to generate revenue, the high prices discouraged parents from making purchases and made them feel they were being taken for a ride.

Cirque found that the lasting allure of the traditional circus came down to just three factors: the clowns, the tent, and the classic acrobatic acts. So Cirque kept the clowns, while shifting their humor away from slapstick to a more enchanting, sophisticated style. It glamorized the tent, which many circuses had abandoned in favor of rented venues. Realizing that the tent, more than anything else, captured the magic of the circus, Cirque designed this classic symbol with a glorious external finish and a high level of audience comfort. Gone were the sawdust and hard benches. Acrobats and other thrilling performers were retained, but Cirque reduced their roles and made their acts more elegant by adding artistic flair.

Even as Cirque stripped away some of the traditional circus offerings, it injected new elements drawn from the world of theater. For instance, unlike traditional circuses featuring a series of unrelated acts, each Cirque creation resembles a theater performance in that it has a theme and story line. Although the themes are intentionally vague, they bring harmony and an intellectual element to the acts. Cirque also borrows ideas from Broadway. For example, rather than putting on the traditional “once and for all” show, Cirque mounts multiple productions based on different themes and story lines. As with Broadway productions, too, each Cirque show has an original musical score, which drives the performance, lighting, and timing of the acts, rather than the other way around. The productions feature abstract and spiritual dance, an idea derived from theater and ballet. By introducing these factors, Cirque has created highly sophisticated entertainments. And by staging multiple productions, Cirque gives people reason to come to the circus more often, thereby increasing revenues.

Cirque offers the best of both circus and theater. And by eliminating many of the most expensive elements of the circus, it has been able to dramatically reduce its cost structure, achieving both differentiation and low cost. (For a depiction of the economics underpinning blue ocean strategy, see the exhibit “The Simultaneous Pursuit of Differentiation and Low Cost.”)

By driving down costs while simultaneously driving up value for buyers, a company can achieve a leap in value for both itself and its customers. Since buyer value comes from the utility and price a company offers, and a company generates value for itself through cost structure and price, blue ocean strategy is achieved only when the whole system of a company’s utility, price, and cost activities is properly aligned. It is this whole-system approach that makes the creation of blue oceans a sustainable strategy. Blue ocean strategy integrates the range of a firm’s functional and operational activities.

A rejection of the trade-off between low cost and differentiation implies a fundamental change in strategic mindset—we cannot emphasize enough how fundamental a shift it is. The red ocean assumption that industry structural conditions are a given and firms are forced to compete within them is based on an intellectual worldview that academics call the structuralist view, or environmental determinism . According to this view, companies and managers are largely at the mercy of economic forces greater than themselves. Blue ocean strategies, by contrast, are based on a worldview in which market boundaries and industries can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view.

The founders of Cirque du Soleil clearly did not feel constrained to act within the confines of their industry. Indeed, is Cirque really a circus with all that it has eliminated, reduced, raised, and created? Or is it theater? If it is theater, then what genre—Broadway show, opera, ballet? The magic of Cirque was created through a reconstruction of elements drawn from all of these alternatives. In the end, Cirque is none of them and a little of all of them. From within the red oceans of theater and circus, Cirque has created a blue ocean of uncontested market space that has, as yet, no name.

Barriers to Imitation

Companies that create blue oceans usually reap the benefits without credible challenges for 10 to 15 years, as was the case with Cirque du Soleil, Home Depot, Federal Express, Southwest Airlines, and CNN, to name just a few. The reason is that blue ocean strategy creates considerable economic and cognitive barriers to imitation.

For a start, adopting a blue ocean creator’s business model is easier to imagine than to do. Because blue ocean creators immediately attract customers in large volumes, they are able to generate scale economies very rapidly, putting would-be imitators at an immediate and continuing cost disadvantage. The huge economies of scale in purchasing that Walmart enjoys, for example, have significantly discouraged other companies from imitating its business model. The immediate attraction of large numbers of customers can also create network externalities. The more customers eBay has online, the more attractive the auction site becomes for both sellers and buyers of wares, giving users few incentives to go elsewhere.

When imitation requires companies to make changes to their whole system of activities, organizational politics may impede a would-be competitor’s ability to switch to the divergent business model of a blue ocean strategy. For instance, airlines trying to follow Southwest’s example of offering the speed of air travel with the flexibility and cost of driving would have faced major revisions in routing, training, marketing, and pricing, not to mention culture. Few established airlines had the flexibility to make such extensive organizational and operating changes overnight. Imitating a whole-system approach is not an easy feat.

The cognitive barriers can be just as effective. When a company offers a leap in value, it rapidly earns brand buzz and a loyal following in the marketplace. Experience shows that even the most expensive marketing campaigns struggle to unseat a blue ocean creator. Microsoft, for example, has been trying for more than 10 years to occupy the center of the blue ocean that Intuit created with its financial software product Quicken. Despite all of its efforts and all of its investment, Microsoft has not been able to unseat Intuit as the industry leader.

In other situations, attempts to imitate a blue ocean creator conflict with the imitator’s existing brand image. The Body Shop, for example, shuns top models and makes no promises of eternal youth and beauty. For the established cosmetic brands like Estée Lauder and L’Oréal, imitation was very difficult, because it would have signaled a complete invalidation of their current images, which are based on promises of eternal youth and beauty.

A Consistent Pattern

While our conceptual articulation of the pattern may be new, blue ocean strategy has always existed, whether or not companies have been conscious of the fact. Just consider the striking parallels between the Cirque du Soleil theater-circus experience and Ford’s creation of the Model T.

At the end of the 19th century, the automobile industry was small and unattractive. More than 500 automakers in America competed in turning out handmade luxury cars that cost around $1,500 and were enormously un popular with all but the very rich. Anticar activists tore up roads, ringed parked cars with barbed wire, and organized boycotts of car-driving businessmen and politicians. Woodrow Wilson caught the spirit of the times when he said in 1906 that “nothing has spread socialistic feeling more than the automobile.” He called it “a picture of the arrogance of wealth.”

Instead of trying to beat the competition and steal a share of existing demand from other automakers, Ford reconstructed the industry boundaries of cars and horse-drawn carriages to create a blue ocean. At the time, horse-drawn carriages were the primary means of local transportation across America. The carriage had two distinct advantages over cars. Horses could easily negotiate the bumps and mud that stymied cars—especially in rain and snow—on the nation’s ubiquitous dirt roads. And horses and carriages were much easier to maintain than the luxurious autos of the time, which frequently broke down, requiring expert repairmen who were expensive and in short supply. It was Henry Ford’s understanding of these advantages that showed him how he could break away from the competition and unlock enormous untapped demand.

This article also appears in:

HBR’s 10 Must Reads on Strategy

Ford called the Model T the car “for the great multitude, constructed of the best materials.” Like Cirque, the Ford Motor Company made the competition irrelevant. Instead of creating fashionable, customized cars for weekends in the countryside, a luxury few could justify, Ford built a car that, like the horse-drawn carriage, was for everyday use. The Model T came in just one color, black, and there were few optional extras. It was reliable and durable, designed to travel effortlessly over dirt roads in rain, snow, or sunshine. It was easy to use and fix. People could learn to drive it in a day. And like Cirque, Ford went outside the industry for a price point, looking at horse-drawn carriages ($400), not other autos. In 1908, the first Model T cost $850; in 1909, the price dropped to $609, and by 1924 it was down to $290. In this way, Ford converted buyers of horse-drawn carriages into car buyers—just as Cirque turned theatergoers into circusgoers. Sales of the Model T boomed. Ford’s market share surged from 9% in 1908 to 61% in 1921, and by 1923, a majority of American households had a car.

Even as Ford offered the mass of buyers a leap in value, the company also achieved the lowest cost structure in the industry, much as Cirque did later. By keeping the cars highly standardized with limited options and interchangeable parts, Ford was able to scrap the prevailing manufacturing system in which cars were constructed by skilled craftsmen who swarmed around one workstation and built a car piece by piece from start to finish. Ford’s revolutionary assembly line replaced craftsmen with unskilled laborers, each of whom worked quickly and efficiently on one small task. This allowed Ford to make a car in just four days—21 days was the industry norm—creating huge cost savings.

Blue and red oceans have always coexisted and always will. Practical reality, therefore, demands that companies understand the strategic logic of both types of oceans. At present, competing in red oceans dominates the field of strategy in theory and in practice, even as businesses’ need to create blue oceans intensifies. It is time to even the scales in the field of strategy with a better balance of efforts across both oceans. For although blue ocean strategists have always existed, for the most part their strategies have been largely unconscious. But once corporations realize that the strategies for creating and capturing blue oceans have a different underlying logic from red ocean strategies, they will be able to create many more blue oceans in the future.

This article is also included in the book HBR at 100: The Most Influential and Innovative Articles from Harvard Business Review’s First Century (Harvard Business Review Press, 2022).

• W. Chan Kim is a professor of strategy and management at INSEAD and a codirector of the INSEAD Blue Ocean Strategy Institute, in Fontainebleau, France. He is a coauthor, with Renée Mauborgne, of the books Blue Ocean Strategy and Beyond Disruption: Innovate and Achieve Growth Without Displacing Industries, Companies, or Jobs (Harvard Business Review Press, 2023).
• Renée Mauborgne is a professor of strategy and management at INSEAD and a codirector of the INSEAD Blue Ocean Strategy Institute, in Fontainebleau, France. She is a coauthor, with W. Chan Kim, of the books Blue Ocean Strategy and Beyond Disruption: Innovate and Achieve Growth Without Displacing Industries, Companies, or Jobs (Harvard Business Review Press, 2023).

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Blue Ocean Strategy of Starbucks

Posted by Matthew Harvey on Oct-01-2020

1. Blue ocean strategy: introduction

The blue ocean strategy seeks to bring differentiation to organizations and brands like Starbucks to create awareness and presence in a new market place and create demand amongst consumers. The blue ocean strategy focuses on creating demand in the uncontested market space, and by doing this, it makes the competition unrelated and irrelevant. Through the blue ocean strategy, industry players like Starbucks are able to reconstruct the market boundaries as well as the industry structure through their strategies and actions. Under the blue ocean model and framework, the industry structures are assumed to be flexible, and not rigid.

With Starbucks, the blue ocean model and framework has allowed the company to explore new market spaces that have not been competitive, or actively utilized by players existing in the present business environment. By doing so, Starbucks has been able to create new demand, rather than fight over and encroach existing competitive space. In doing so, Starbucks has been able to experience rapid growth as well as enjoy increased profits. When Starbucks adopts the blue ocean strategy, it changes the rules of the game and eradicates the competition – rendering them unimportant, and irrelevant factors of the environment. 

For businesses, the blue ocean signifies a deeper section of the ocean that is unexplored and holds unlimited potential and opportunities for growth and expansion. Starbucks adopts the broader blue ocean strategy through different means and frameworks.

2. Blue vs Red Ocean

Starbucks differs in its adoption of the blue ocean strategy to achieve rapid growth in unexplored market spaces. While Starbucks also actively pursues the red ocean strategy, it is also an avid follower of the blue ocean strategy. The choice of strategy differs based on the product nature and offerings, as well as the business goals, and market development.

The red and the blue ocean strategy for Starbucks are different in the following ways

3. Four action framework

The four actions framework by Starbucks has helped the company explore and refine buyer value more intricately. The Starbucks Company has made use of the four actions framework in reconstructing or developing new value curves or strategic profiles for the company and its various offerings in uncontested market spaces. However, when a new value curve is created, companies typically face a trade-off between differentiation and low cost. Starbucks has also been able to break this tradeoff by challenging the strategic formation, foundation and logic of the industry – thereby challenging the industry boundaries and working at large. 

3.1. The four strategic actions for developing new buyer value curves

Starbucks breaks the tradeoff through four simple strategic processes and ways – highlighted as the four actions in the four action framework. 

3.1.1. Eliminate

With elimination, Starbucks identifies and shortlists the factors through which a given industry has competed over a long period of time, and which may be eliminated now. These factors include, for example, obsolete technology, mundane operational processes, and stringent human resource policies.

3.1.2. Raise

Under this option, Starbucks is able to identify the factors that it wants to rise well above the industry’s average in its own settings and operations. These factors will give the company an edge over other players and will provide it with a competitive advantage. Starbucks, therefore, focuses on developing these factors for a sustainable advantage. These factors include, for example, its organizational culture, human resource training and policies, technological innovation, and market research capabilities – for example. 

3.1.3. Create

Under the action of create, the Starbucks is able to develop and identify strategic factors and capacities that are new to the industry at large, and have never been introduced before. With these capacities, the company is able to maintain and control costs, and is at the same time, able to offer higher value to the buyers. The company is also able to create sustainable advantage and a refined first-mover advantage through the development of these capacities that will give it a sustainable advantage.

3.1.4. Reduce

Under this strategic option and choice, Starbucks assesses and reviews a given industry, and identifies factors and aspects that it should reduce in its expansion plans to be able to maximally benefit from untapped market spaces and related opportunities. These factors are reduced considerably in comparison to industry standards.

4. Six path framework

Starbucks makes use of the six paths framework under the blue ocean model and framework to reduce, contain and identify the search risk that many businesses are challenged within their expansion plans. By using this framework, Starbucks is able to identify the numerous possibilities associated with expanding into an untapped market space, which allows it to reconstruct the industry boundaries and structures towards innovation and new value creation.

4.1. Six paths 

The six paths that Starbucks makes use of are:

4.1.1. Industry

Compared to red ocean players who focus on competing with exiting rivals within an industry, blue ocean players like Starbucks are able to expand beyond existing players. Starbucks looks at alternative industries, and alternate possibilities in its expansion and growth plans, and as such, renders existing competition irrelevant.

4.1.2. Strategic group

Red ocean players focus one existing strategic groups for positioning possibilities, Starbucks, on the other hand, looks beyond the existing strategic groups within an industry, and in turn, creates new strategic positioning and groups with first-mover advantage, and through exploring new market possibilities ad spaces.

4.1.3. Buyer group

Red ocean players continually eek to serve better-existing consumer groups. Starbucks in turn also focuses on creating new demand and creating new consumer groups to be able to expand its overall customer base. In doing so, Starbucks is able to redefine the buyer group and consumers for the industry – by identifying new and potential consumer groups as well.

4.1.4. Scope of product or service offering

Red ocean players focus on improving the core product offering to e babel to better serve the consumers. Starbucks, in turn, seeks not only to meet consumer expectations but to move across to be able to delight them. This is done by the company by focusing on consumer service, adding complementary offerings, as well as enhancing the service offerings for the consumers.

4.1.5. Functional-emotional orientation

Starbucks is able to innovate the functional-emotional orientation of the industry through its strategic choices and direction, as well as creativity and foresight. Starbucks is able to develop and create new market spaces and new demand for its products and offerings – highlighting innovation which is needed for redefining the industrial focus, and changing the balance of emotional and functional orientation within a given industry to better appeal to the target consumer groups. 

4.1.6. Time 

Red ocean players adapt to external trends and patterns in the external environment and incorporate them in their strategic decisions and directions. Starbucks in turn, seeks to influence the external trends and patterns in an industry’s environment. Instead of being reactive, it is more proactive in nature and actively seeks to enhance the business environment through influencing it over time with its actions, strategies and philosophies. 

5. Three tiers of non-customers

To tap into unexplored market spaces and create new demand, Starbucks has invested considerably in market research, and in understanding consumer trends and behavioral patterns. This research is especially focused on non-customers, and how to unlock them to create new demand for the company’s offerings. While Starbucks strives to maintain and expand its current consumer base, it must do so by tapping into new consumer groups. 

Figure 1 non-consumer groups of an industry

The first group of non-consumers for Starbucks are those who make minimal purchases of industry products – only out of necessity and are deemed to be non-customers. The second group involves those consumers who decline an industry’s offerings. This group has awareness about the industry’s offerings and benefits, but refuse to participate as active consumer groups., and instead, refuse to make the purchases altogether. The third group is the most away from the company, and have not considered the industry’s offerings as a possibility al att. These consumers are not interest or non-aware of the offerings. 

Starbucks makes use of blue ocean networks and models to pull in the non-consumers and convert them into customers through strategic decisions and planning. 

6. The sequence of creating a blue ocean value innovation 

Starbucks has made use of the blue ocean strategy optimally by making use of the framework to sequence its strategy to be able to gain the highest benefit and profit from it. Starbucks makes use of the optimal sequencing for value innovation under the blue ocean strategy i.e. buyer utility, price, cost, and adoption. By making use of this sequence, Starbucks is able to tap into the blue oceans of untapped market places and make sure that its growth is coming from unused market spaces, and is organic in terms of demand creation. With this sequence, Starbucks has also been able to reduce the risks of expansion and internationalization, and at the same time, also ensured that maximum value is created and enjoyed not only by the customers but also by the company itself in the untapped and new market spaces.

Figure 2 sequence of creating buyer value under the blue ocean model

6.1. Blue ocean value creation sequence

The sequence adopted by Starbucks makes perfect sense for expansion and business development. 

• Starbucks ensures that its product offerings are developed, and marketed to convey exceptional utility for buyers and consumers in its markets. Though Starbucks manufactured products that require a low emotional attachment, the offerings and products are often repeatedly purchased for the gratification they offer. For Starbucks, this is achieved through marketing activities, where the company markets, and advertises its products to deliver exceptional buyer utility.
• Based on the product offerings, its nature, and its characteristics, Starbucks ensures that the offerings are appropriately priced. This pricing strategy is maintained not only to attract new consumers, and penetrate existing consumer groups, but also to attract, and appeal to the masses. The products are priced to attract the maximum number of buyers from the target audience groups of the Starbucks Company’s products to determine the affordability of its audience. This affordability and purchase will lead to a ripple effect in terms of buzz generation for the product. 
• After securing the revenue aspects of the model in the sequencing, Starbucks also ensures that it contains the costs of operations and manufacturing so as to derive a profit from its operations. Profit here is defined as the price of the products less the cost of production for the company – and involved fixed and variable costs. Starbucks ensures that its costs are maintained through economies of scale and that its product prices are not driven up because of the increase in costs. This price maintenance is important to attract the target consumers and benefit from the blue ocean maximally. 
• Finally, Starbucks assesses the business environment and the consumer market and reviews it for any obstacles or hurdles in the process of adoption of the products in the blue ocean region. The company eliminates these hurdles and obstacles earlier along the way to prevent Starbucks form actualizing its goals and targets. 

7. Buyer Utility Map

Starbucks also makes use of the buyer utility map in its exploration of untapped market spaces for purposes of growth and expansion. The buyer utility map helps Starbucks understand consumer’s betters, and also allows Starbucks to think, and perceive from a buyer's point of view. As such, the company is able to explore the demand side better, and also allows Starbucks to devise innovative ways to enhance the buyer utility that are different dim the conventional utility measures. Exploration of the demand side also helps Starbucks develop new experiences for buyers with its offerings – to help enhance their relation and interaction with the products, and increase the offerings’ appeal. Starbucks is thus able to identify different and various utility spaces that its offerings can potentially fill. 

Figure 3 utility maps under the blue ocean model

The utility maps are based on two dimensions - The Buyer Experience Cycle (BEC) and the Utility levers.

7.1. Buyer experience cycle and utility levers

The BEC is the cycle or process through which a consumer interacts, consumers, and disposes of the product. It generally occurs in six phases – and runs from purchase to disposal stage.  The utility levers, in turn, are the ways through which Starbucks can increase and enhance the utility of its offerings across the six stages of BEC for the consumers – thereby increasing the overall utility of the product.

7.2. Utility maps and value creation in the blue ocean

By identifying new and different utility spaces for consumers, Starbucks is able to identify new ideas and concepts that will help it tap into new consumer groups, and convert non-consumers onto avid consumers of its offerings. At the same time, the buyer utility amp also helps Starbucks in identifying spaces for differentiation of its products and creating new value propositions for the consumers – playing on the differentiation aspect as well.  

8. Value innovation

One of the tools that Starbucks employs in its application of the blue ocean strategy is the value innovation model or framework. With the value innovation framework, Starbucks is able to continually and simultaneously pursue a strategy of differentiation and low cost. By doing this, Starbucks is able to create enhanced and increased value for not only itself but also for its customers. This enhanced and increased value is developed because of value innovation. 

8.1. Creating value innovation: buyer vs. manufacturer

Value innovation is the pivotal factor that has helped Starbucks in developing and creating new demand by identifying and tapping into unexplored market spaces. With value innovation, the company has been able to continually refine its market-creating strategy, and develop new markets for its products, and product invocations. For value innovation, it is important to understand that customers gain value from the product’s utility less than the price paid. In contrast, value for manufacturers or companies – such as Starbucks, is derived based on the product’s price less the cost. Value innovation for Starbucks is achieved by aligning the aspects of price, cost, and utility. With this value innovation, a value leap is developed which enhances the value of the product for the customer as well as for Starbucks. 

Figure 4 value innovation under the blue ocean model

9. References 

Agnihotri, A., 2016. Extending boundaries of blue ocean strategy. Journal of Strategic Marketing, 24(6), pp.519-528. Mebert, A. and Lowe, S., 2017. Blue Ocean Strategy: How to Create Uncontested Market Space. Macat Library.

Alam, S. and Islam, M.T., 2017. Impact of blue ocean strategy on organizational performance: A literature review toward implementation logic. IOSR Journal of Business and Management, 19(1).

Bowonder, B., Dambal, A., Kumar, S. and Shirodkar, A., 2010. Innovation strategies for creating competitive advantage. Research-technology management, 53(3), pp.19-32.

Burke, A., van Stel, A. and Thurik, R., 2010. Blue ocean vs. five forces. Harvard Business Review, 88(5), pp.28-29.

Burke, A.E., Van Stel, A.J. and Thurik, R., 2009. Blue ocean versus competitive strategy: theory and evidence. ERIM Report Series Reference No. ERS-2009-030-ORG.

Hyde, A., 2013. Innovation–The Way Forward for Competitive Advantage? A Critical Review of Blue Ocean Strategy, Disruptive Innovation, and Strategic Innovation. OTAGO MANAGEMENT GRADUATE, p.31.

Jacobides, M.G., 2010. Strategy tools for a shifting landscape. Harvard Business Review, 88(1), pp.76-84.

Kim, S., In, H.P., Baik, J., Kazman, R. and Han, K., 2008. VIRE: Sailing a blue ocean with value-innovative requirements. IEEE software, 25(1), pp.80-87.

Kim, W.C. and Mauborgne, R., 2005. Value innovation: a leap into the blue ocean. Journal of business strategy.

Kim, W.C. and Mauborgne, R., 2014. Blue ocean leadership. Harvard business review, 92(5), pp.60-72. 

Kim, W.C. and Mauborgne, R., 2014. Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard business review Press.

Kim, W.C. and Mauborgne, R., 2015. Red ocean traps. Harvard business review, 93(3), pp.68-73.

Kim, W.C., 2005. Blue ocean strategy: from theory to practice. California management review, 47(3), pp.105-121.

Knowles, L., 2019. Blue Ocean Shift: Beyond Competing, Proven Steps to Inspire Confidence and Seize New Growth. Journal of Multidisciplinary Research, 11(1), p.119.

Lindič, J., Bavdaž, M. and Kovačič, H., 2012. Higher growth through the Blue Ocean Strategy: Implications for economic policy. Research policy, 41(5), pp.928-938.

Mauborgne, R. and Kim, W.C., 2005. Blue ocean strategy. Harvard Business Review, 1, p.256.

Mi, J., 2015. Blue ocean strategy. Wiley Encyclopedia of Management, pp.1-1.

Parvinen, P., Aspara, J., Hietanen, J. and Kajalo, S., 2011. Awareness, action and context‐specificity of blue ocean practices in sales management. Management Decision.

Rafique, M., Evans, R.D. and Nawaz, M.T., 2015, November. Absorptive capacity: A hub of Blue Ocean and red ocean strategies and capability transformation in innovative business environments. In 2015 2nd International Conference on Knowledge-Based Engineering and Innovation (KBEI) (pp. 60-65). IEEE.

TN, S.K., 2008. Blue ocean strategy: how to create uncontested market space and make the competition irrelevant. South Asian Journal of Management, 15(2), p.121.

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TEACHING MATERIALS

Blue ocean pedagogical materials, used in nearly 3,000 universities and in almost every country in the world, go beyond the standard case-based method. Our multimedia cases and interactive exercises are designed to help you build a deeper​ understanding of key blue ocean concepts, from blue ocean strategy to nondisruptive creation, developed by world-renowned professors   Chan Kim and Renée Mauborgne . Currently, with over 20 Harvard bestselling cases .

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The Marvel Way: Restoring a Blue Ocean

Author(s):   KIM, W. Chan, MAUBORGNE, Renée, OLENICK, Michael

Best Strategy and General Management Case Winner

Case study trailer

The Marvel Way: Restoring a Blue Ocean explains one of the greatest turnarounds in modern business history. This case comes with a two-part video interview with then Marvel CEO Peter Cuneo who turned around the business and launched a blue ocean. Founded in 1939, Marvel Comics initially struggled in a red ocean producing primarily me-to knock-off comic books. In the early 1960s, Marvel took a blue ocean turn by focusing on noncustomer college students. Marvel invented characters that were people first and superheroes second: Spider-Man, The Hulk, Iron Man, the X-Men. The business thrived. By the 1980s value extractors took over Marvel, badly misaligning value, profit, and people. In late 1996 Marvel filed for bankruptcy, a victim of red ocean management practices. New management purchased the business out of bankruptcy in 1998 but faced a daunting task: Marvel owed $30 million in annual interest payments on a $250 million loan, cash was so tight that they almost missed payroll, and movie rights for many of their best characters were licensed to others. First managers stabilized the business then Marvel created a new type of blue ocean that went on to produce the most profitable movie franchise in history. Just over a decade after exiting bankruptcy a debt-free Marvel sold itself to Disney for $4.2 billion. Exclusive two-part video interview with CEO Peter Cuneo and Lecture Slides can be obtained below.

Available in English, Chinese, Spanish and Korean.

Learning objective:

• Learn how to use Blue Ocean Strategy to pivot from a red to a blue ocean.
• Teach the importance of aligning value, profits and people.
• Explain the difference between value extraction and value innovation , and the financial and ethical ramifications of each.

English: HBSP  |  Case Centre  |  INSEAD

Chinese: Case Centre  |  INSEAD

Spanish: Case Centre  |  INSEAD

Korean: Case Centre  |  INSEAD

Teaching Note

HBSP  |  Case Centre  |  INSEAD

Lecture Slides

English, Chinese, Korean, Spanish: Available to download for free in the Educators’ Space