I recently finished reading Blue Ocean Strategy by W. Chan Kim and Rene Mauborgne, a paper introducing a new approach to building strong businesses. The concept of a Blue Ocean business is quite old, but reading the paper shed light on how to systematically analyze which category a business falls under (blue or red). The term “red” ocean comes from the blood drawn into the waters within a highly competitive landscape. The essence to any successful blue ocean strategy is the ability to create one as well as protect it from being exploited by others.

Before going further, it’s probably helpful to explain what a blue ocean strategy is. A blue ocean strategy is one in which a business creates a leap in value for the customer while simultaneously reducing its cost. The Ford Model T is a prime example. When Henry Ford released the Model T in 1908, the game in town were cars that were expensive and not very durable. They were cars the rich bought to drive in the countryside on weekends. The Model T redefined the industry boundaries of cost and value by making a car that was highly durable and much cheaper than the competition. Ford did this by ignoring the competition and rather focused on how he could create untested demand for his car (the tested demand being rich people who wanted cars for recreational purposes). In this case, the mainstream mode of transport were horse-drawn carriages and for good reason. They were much cheaper to maintain than cars and broke down less often (e.g. it’s easier to replace/ fix a horse than a car engine). Also, they were much more durable on the type of terrain the majority of America’s roads were made of at the time - loose dirt, bumps everywhere and hard rocks. If a car could solve these two problems of durability and maintenance while providing a lower cost of acquisition, it would be able to tap into large, untested demand. Rather than converting other car owners, it converted horse-drawn carriage owners to Ford car owners.

The way he solved the cost problem was by having a highly standardized design (“it comes in any color as long it’s black”), interchangeable parts and an assembly line that didn’t require skilled labor to put the car together and produced a car much faster - 4 days vs. the norm of 21 days. He did not invent a new technology, he just took existing ones and connected them to consumers that would reap large amounts of value from it.