Strategy & competition
Blue Ocean Strategy
A strategy logic that seeks uncontested market space through value innovation, pursuing differentiation and lower cost at once. The ERRC grid is its working tool: decide which factors of competition to eliminate, raise, reduce and create, then redraw your value curve.
Also known as ERRC Grid, Eliminate-Reduce-Raise-Create Grid, Four Actions Framework, Value innovation. First set out by W. Chan Kim and Renee Mauborgne in 2005; the primary source is cited in full below.
- Format
- 2×2 matrix
- Level
- Business unit · Product
- Best for
- Position against competitors · Evaluate options · Understand customers
- Decision stage
- Explore options · Decide
- Difficulty
- Intermediate
- Time to apply
- Two or three workshops spread over several weeks, with buyer and noncustomer research between them.
Plate · The model
The components
Eliminate
Factors the industry has long competed on that should be removed altogether. These usually persist by convention and benchmarking rather than because buyers still value them, and they carry real cost.
Signals of strength
Buyers never mention the factor unprompted in research · The factor exists because every competitor has it · Cost is incurred with no measurable effect on purchase decisions · Serving it constrains the rest of the offer
Raise
Factors that should be pushed well above the industry standard. These are the compromises buyers have been forced to accept, where the whole industry under-delivers and complaints are treated as normal.
Signals of strength
Buyers routinely work around the industry's standard level · Complaints recur across all competitors, so no one loses share over them · A materially higher level would change the purchase decision · Noncustomers name the factor as a reason to stay away
Reduce
Factors that should be cut well below the industry standard. These are the products of over-design in the race to beat rivals, where the industry serves its most demanding segment by default and everyone else pays for it.
Signals of strength
Features or service levels used by a small minority of buyers · Specification rises each year while satisfaction does not · The factor was raised to match a competitor, never because buyers asked · A lower level would go unnoticed by most of the market
Create
Sources of value the industry has never offered. These come from looking across substitute industries, buyer groups and noncustomers rather than from inside the existing offer, and they are what generates new demand rather than reshuffled share.
Signals of strength
The idea addresses why noncustomers refuse the whole category · An adjacent industry solves the underlying need a different way · The factor removes a major adoption hurdle rather than adding a feature · No competitor's value curve has anything at this position
When it earns its keep
- Your industry has converged on the same factors of competition, offerings look alike, and rivalry has collapsed into price. The strategy canvas will show every value curve tracking the same shape.
- The pool of noncustomers is plainly larger than the market itself, and you want to reason systematically about what keeps them away.
- Your cost structure carries features and service levels that buyers tolerate rather than value, and you need a disciplined way to identify what can be cut to fund what matters.
- You are shaping a new offer and want it to diverge from the industry deliberately rather than benchmark its way back to sameness.
And when it doesn't
- You hold a defensible position in a structurally attractive industry. Exploiting that position with conventional competitive strategy may beat abandoning it for unproven space.
- You cannot invest in research with buyers and noncustomers. An ERRC grid filled from opinion in a meeting room produces a fantasy value curve, and the method's own authors insist on field observation.
- Regulation or safety fixes the factors of competition, as in parts of pharma, aviation or utilities, so there is little genuine freedom to eliminate or create.
- The task is incremental operational improvement. PDCA and process tools serve that; blue ocean thinking is about redefining the offer itself.
How to run it
Before starting, gather the inputs the analysis depends on:
- A strategy canvas of the industry as it stands: the factors on which competitors invest and compete, and the value curves of the main players including your own.
- Evidence from buyers and, critically, from noncustomers on what they value, what they merely tolerate and what keeps them out of the market entirely.
- A view of your cost structure mapped against those factors, so eliminate and reduce decisions can be priced.
- Enough knowledge of adjacent and substitute industries to look across Kim and Mauborgne's six paths for ideas worth importing.
- 1
Draw the strategy canvas as it is
Plot the factors the industry competes on along the horizontal axis and each main player's offering level on the vertical. If the curves broadly overlap, the industry is competing on sameness, and that overlap is the opportunity the rest of the exercise works.
- 2
Look where the industry over-serves and under-serves
Study buyers and the three tiers of noncustomers. Ask which factors buyers no longer notice, where they are forced to compromise, and what blocks refusing noncustomers from entering the market at all. This evidence, gathered in the field, feeds every quadrant of the grid.
- 3
Ask the four actions questions
Which factors the industry takes for granted should be eliminated? Which should be reduced well below the industry standard? Which should be raised well above it? Which should be created that the industry has never offered? Answer all four; the pairs discipline each other.
- 4
Commit factors to the ERRC grid
Move from questions to commitments by writing named factors into each quadrant with the evidence behind them. Kim and Mauborgne note that an empty eliminate row is the classic tell of a company planning to raise and create only, lifting cost without breaking the trade-off.
- 5
Draw the new value curve and test it
Redraw your value curve as the grid implies and apply the three tests of a good blue ocean strategy: focus, divergence from the industry curve, and a compelling tagline. A curve that fails any of the three sends you back to the grid.
- 6
Check the economics and the adoption path
Confirm that eliminate and reduce genuinely fund raise and create, then run the sequence Kim and Mauborgne prescribe: buyer utility, strategic price, target cost, and adoption hurdles among staff, partners and the public. Value innovation fails as often on sequence as on idea.
Reading the result
A completed ERRC grid of named factors with evidence in each quadrant, a redrawn value curve set against the industry's, and a first-pass check that the eliminated and reduced factors fund the raised and created ones.
- Read the grid as two pairs. The left column, eliminate above reduce, cuts cost out of the model; the right column, raise above create, lifts buyer value. Value innovation requires action in both columns, since the point of the tool is to break the trade-off between differentiation and cost.
- An empty or thin eliminate quadrant is the most informative failure. It signals a plan to add value by adding cost, which is ordinary differentiation dressed in new language.
- The grid is a hypothesis until the new value curve passes the three tests of focus, divergence and tagline, and until the utility, price, cost and adoption sequence has been run. Treat a grid that has not faced buyers as a draft.
A worked example
An independent bicycle shop in Bristol steps out of the price war
A single-site bicycle retailer in Bristol is being squeezed from both sides: online discounters undercut it on every new bike and accessory, while a national chain outspends it on range and showroom. Margins on mid-range bike sales have fallen for four consecutive years, yet the workshop is booked out a week ahead. The owner draws the industry's strategy canvas, interviews customers and lapsed customers, and builds an ERRC grid to redefine what the shop sells.
- Eliminate
- Price-matching against online retailers, which converts every sale into a loss-making negotiation. Deep floor stock of mid-range commodity bikes that the chain and the discounters will always carry cheaper. The accessory wall duplicating what customers already buy online. Each of these consumes cash and floorspace while winning nothing.
- Raise
- Workshop quality and speed, to a guaranteed 48-hour turnaround where the chain quotes ten days. Professional bike fitting and honest diagnosis, the factors interviewees said they could not buy online at any price. Mechanic accreditation, made visible, because trust is the factor the whole industry under-delivers.
- Reduce
- Showroom floorspace and range breadth, down to a curated set of models the shop genuinely recommends. Dependence on new-bike sales as the revenue engine. Opening hours skewed to browsing rather than collection and drop-off.
- Create
- A monthly subscription servicing plan for commuters, which no local competitor offers. Fleet-care contracts for Bristol employers running cycle-to-work schemes. E-bike loans with servicing bundled, aimed at the shop's largest group of noncustomers: people curious about e-bikes and unwilling to spend two thousand pounds untested.
The read. The grid moves the shop from retailer with a workshop to service business with a showroom, a curve no competitor occupies: discounters cannot service, and the chain will not chase fleet contracts. The economics hold on paper because eliminated stockholding releases the cash that funds a second mechanic. The honest caveat is that subscription uptake is unproven, so the owner sets a test of one hundred paying members within six months before reducing the showroom lease, exactly the small-scale utility and price test the blue ocean sequence demands.
Pitfalls
- Filling only raise and create. This lifts the cost structure and over-engineers the offer, the pattern the grid was designed to expose, and it turns value innovation into ordinary premium positioning.
- Working from opinion instead of observation. The quadrants demand evidence from buyers and noncustomers; a grid produced in an afternoon workshop usually restates the management team's existing beliefs.
- Treating elimination as cost-cutting. Factors are eliminated because buyers no longer value them; cutting factors buyers do value is simply degrading the offer.
- Ignoring imitation. A blue ocean without barriers, whether brand, cost position, network effects or lock-in, is an invitation; the strategy needs a view on how long the space stays uncontested.
- Stopping at the grid. Without redrawing the value curve and running the utility, price, cost and adoption sequence, the grid is a brainstorm rather than a strategy.
What the critics say
The evidence rests on retrospective case studies. Successes such as Cirque du Soleil and [yellow tail] were identified after the fact, which makes the theory persuasive as description and weak as prediction; it offers no way of knowing in advance which blue ocean bets will pay.
An empirical study of Dutch retailing found that blue ocean and competitive strategy operate together over time: new market spaces raised profits, and competitive forces then eroded them as entrants arrived. Blue ocean creation defers competition rather than making it irrelevant, so the two logics complement each other.
Burke, A., van Stel, A. and Thurik, R. (2010) 'Blue Ocean vs. Five Forces', Harvard Business Review, 88(5), May 2010.
The core claim that differentiation and low cost can be pursued simultaneously predates the book. Hill argued in 1988 that Porter's generic strategies were not mutually exclusive and that combined strategies could be sustainable, so critics read value innovation as a compelling repackaging of an established position rather than a new theory.
Hill, C. W. L. (1988) 'Differentiation versus low cost or differentiation and low cost: a contingency framework', Academy of Management Review, 13(3), pp. 401-412.
Work it through
Work through the four questions in order, committing named factors and the evidence behind them to each quadrant. Your entries persist for this browser session and can be copied out as Markdown or printed.
0 of 4 blocks filled
Sources and further reading
- Kim, W. C. and Mauborgne, R. (2004) 'Blue Ocean Strategy', Harvard Business Review, 82(10), October 2004. ↗
- Kim, W. C. and Mauborgne, R. (2005) Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston, MA: Harvard Business School Press. Expanded edition 2015.
- Kim, W. C. and Mauborgne, R. (1997) 'Value Innovation: The Strategic Logic of High Growth', Harvard Business Review, 75(1), January-February 1997. Reprinted July-August 2004. ↗
- Kim, W. C. and Mauborgne, R.: Eliminate-Reduce-Raise-Create Grid, Blue Ocean Strategy tools. ↗