Imagine two companies setting out to sea.

The first sails into a red ocean. It is crowded with competitors offering roughly the same products to the same customers at competitive prices.

The second company looks for a blue ocean: a market space in which the established rules of competition matter less because the company offers a fundamentally different form of value.

This is the central idea of blue ocean strategy. Rather than asking, “How can we beat our competitors?”, the company asks, “How could we make the existing competition less relevant?”

But finding a blue ocean often requires more than creating a novel product. It may require an entirely new business model.

A New Product, Or A New Way Of Doing Business?

A business model describes how a company creates value for customers, how it delivers that value, and how it captures some of the value for itself.

A company can introduce a new product without changing its business model. A furniture manufacturer may launch a clever new chair but continue designing, producing, and selling furniture in the usual way.

Business model innovation goes further. The company may stop selling chairs and begin providing furnished workplaces through a subscription. It may retain ownership, repair and relocate the furniture, and reuse it across several customers. Now the customer is no longer buying a chair but accessing a continuously maintained workplace. The value proposition, customer relationship, revenue model, operations, and partner network have all changed.

Red-Ocean Business Models

In a red ocean, companies generally work within an established industry logic. Airlines sell seats. Construction companies deliver completed projects. Manufacturers sell products. Consultancies sell hours.

Companies can still innovate, but their improvements usually concern familiar dimensions:

• a lower price;
• higher quality;
• faster delivery;
• additional features;
• better service;
• greater convenience.

Consider a conventional gym. It owns or rents a facility, fills it with equipment, employs instructors, and sells monthly memberships. Competing gyms add newer machines, longer opening hours, more classes, friendlier trainers, and increasingly creative forms of discomfort involving ropes and very large tyres.

In the end, the gym still competes for existing gym customers using established industry criteria.

There is nothing inherently wrong with this, as this can still generate real revenues. The problem begins when every competitor improves along the same dimensions, leading to what we call “competitive convergence”

How blue oceans can inspire new business models

Blue ocean strategy asks companies to reconsider what their industry takes for granted. For business model innovation, the key is to apply this logic not only to the product or service, but to the entire way the company creates, delivers, and captures value. A blue ocean may therefore emerge when a firm changes what customers pay for, how value is delivered, which assets it owns, which partners it relies on, or how revenues are generated over time.

Cirque du Soleil is a classic example. Traditional circuses compete through animals,  inexpensive family entertainment, and travelling shows. Cirque du Soleil eliminated costly animals and celebrity performers, reduced some conventional circus elements, and combined acrobatics with theatre, music, and distinctive artistic productions.

It consequently reached adults and corporate customers willing to pay prices closer to theatre tickets than traditional circus tickets. Changing the value offered to customers also changed the cost structure, target market, pricing logic, capabilities, and sources of revenue. The blue ocean was supported by a different business model.

A similar shift occurs when a manufacturer moves from selling products to selling access or performance. A traditional power-tool producer sells drills and earns money whenever a customer purchases or replaces one. Hilti’s fleet-management model instead allows professional customers to pay regularly for access to a managed portfolio of tools, including repair, replacement, and maintenance. As a result, the customer is no longer merely buying equipment but buying reliable access to functioning equipment. For Hilti, this creates recurring revenue and a continuing customer relationship, but  also requires new service capabilities, information systems and asset management

Red versus blue models

Red-ocean model	Possible blue-ocean model
Sell power tools	Provide guaranteed access to functioning tools
Sell office furniture	Provide adaptable furnished workplaces as a service
Sell hotel rooms owned or operated by the company	Connect travellers with unused accommodation through a platform
Construct a building and leave	Maintain, adapt, recover, and reuse building components over their lifecycle
Sell machinery	Charge for availability, output, or performance

Blue Oceans Do Not Remain Blue Forever

There is, however, a small problem with beautiful blue oceans: other boats eventually arrive.

Airbnb initially created a new market space by enabling ordinary people to offer unused rooms and homes to travellers. Its platform model differed fundamentally from that of traditional hotels. But short-term accommodation platforms are now intensely competitive and increasingly regulated. Yesterday’s blue ocean can become tomorrow’s red ocean!

That’s why we encourage that managers continuously question their existing business models and ask “What value could we create if we stopped accepting the established business model of our industry as inevitable?”

Questions for managers:

• Where are we competing on the same dimensions as everyone else?
• What customer problem are we solving only partially today?
• What would change if customers paid for access, outcomes, or performance instead of products?
• Which parts of our current business model prevent us from making that shift?

Note. This article builds on the concept of blue ocean strategy, developed by W. Chan Kim and Renée Mauborgne, and applies it to business model innovation.

About the author:

Tina Saebi is Professor of International Strategy at NHH Norwegian School of Economics and Principal Investigator at the DIG Research Centre.  She is an internationally recognized scholar of business model innovation. Her award-winning and widely cited work examines how established companies develop and implement new business models in response to technological change, sustainability pressures, and shifting competitive environments.

• Share on Facebook
• Share on Twitter
• Share on LinkedIn
• Share by e-mail