At last year's Face to Face conference, Frank O'Dea told the story of how he and a partner created the Second Cup coffee chain, conceiving of the upscale café franchise concept even before Starbucks. This story has a lot in common with the founding of many other early industry leaders, including the Ford Motor Company, Southwest Airlines, and Cirque du Soleil, to name a few. They are all examples of something called “blue ocean strategy.”

The phrase “blue ocean” was coined by W. Chan Kim and Renée Mauborgne, authors of the best-selling business book by the same name and professors at INSEAD business school near Paris.
The essence of the theory is this: In the search for profitable growth, most companies engage in head-to-head competition for market share. They eventually become virtually indistinguishable commodities that are forced to compete on price. The market is a “red ocean”—a bloody sea of rivals fighting over a shrinking profit pool.

Kim and Mauborgne argue that companies succeed over a longer term not by battling competitors but by creating “blue oceans of new and uncontested market space.” You create new demand by “reconstructing market boundaries.” In the process of “value innovation,” you focus on creating new value and lowering costs at the same time. You reduce costs by not doing everything your industry does. As you eliminate or reduce elements of conventional strategy, you liberate resources that can be focused on new initiatives. Your set of strategic initiatives is a “strategy canvas” that now differs radically from the rest of the industry.

Henry Ford created a blue ocean—affordable, reliable cars for an untapped mass market. Before Ford, there were 500 automakers in the United States, but they all made temperamental luxury cars that only the rich could afford to buy and maintain. Ford made his Model Ts rugged enough for the primitive roads of the day and easy for owners to work on.

He made them affordable by cutting costs; there was only one model in one colour, and the assembly line made them much cheaper to produce. (He borrowed the assembly-line concept from the meat-packing industry.) This blue ocean strategy reinvented the industry and gave Ford a competitive advantage that took the rest of the industry decades to match.

Cirque du Soleil reconstructed the boundaries of the circus industry by dropping the animal acts entirely, creating huge cost savings, and by borrowing new elements from theatre to make the circus an experience that brought in a new audience: theatregoers. It is now a successful public company with virtually no competitors.

The book also tells the story of the assault on crime in New York City, a story I heard firsthand in New York last fall at a presentation by co-author Chan Kim and Bill Bratton, the former chief of the NYPD. In the mid-1990s, New York had one of the highest crime rates in the U.S.; then Bratton came to town and crafted a new strategy that was both top down and bottom up.

At the top he made structural changes. With the support of Mayor Rudy Guiliani, he got the city judiciary onside to make processing the bad guys more efficient. One program put special “court buses” on the streets so patrol officers could lay charges during their shifts instead of spending days waiting in courtrooms. He allocated far more resources to narcotics, which contributed to about 50% of the city's crimes. At the bottom, he set quantifiable goals and made each precinct commander responsible for meeting them. The commanders then worked with the beat officers to make plans tailored literally to each city block.
Within two years New York had experienced a dramatic turnaround. The blue ocean strategy was a new way at looking at policing. As Chan Kim said, there are a lot of lessons here for executives, whose business challenges generally pale in comparison to cleaning up the mean streets of New York.