The lure of the Blue Ocean Strategy

We talk about strategies to enable and maintain sustainable competitive advantage - be it through low cost, differentiation or through focus. But what is the way ahead for organizations stuck in an industry with fierce competition, where companies try to outperform each other to grab market share with each of them working on the same strategy to create competitive advantage. The result is that, with a seemingly "perfectly competitive" setup, its very difficult for organizations to differentiate their offerings and hence growth and profit prospects reduce as the marketplace gets crowded. 
     The way out for organizations mired in such a competitive landscape is what is known as the Blue Ocean Strategy. The strategy, propounded as recently as 2005, in a book of the same name, proclaims the view that organizations can generate high growth and profits by creating new demand in an uncontested market place or "Blue Ocean" as compared to competing head-to-head with other suppliers for known customers in an existing industry.
      Let's look at the basic premise of the Blue Ocean strategy. Its something called Value Innovation - wherein the actions of a company affect favorably both its cost structure and its value proposition to customers. Cost savings are made by eliminating and reducing the factors an industry competes on.  Buyer value is lifted by raising and creating elements the industry has never offered.  Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. 
      A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. 

      The metaphor of red and blue oceans describes the market universe.

                     Red Oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the ocean bloody. Hence, the term red oceans.
                          Blue oceans, in contrast, 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. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored.

         Now let us look at the principles of the Blue Ocean strategy.

Before we adopt the Blue Ocean strategy, it is pertinent to understand the current condition of the marketplace to find out the areas the competitors are investing. This is done by the Strategy Canvas. It captures the current state of play in the known market space, allowing organizations to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. Now, to break the the trade-off between differentiation and low cost and create a new curve, we have a Four Actions Framework (Eliminate, Raise, Reduce, Create). It answers the four key questions of:
What industry takes for granted and needs to be eliminated; 
What factors need to be reduced below industry standards; 
What factors need to be raised above industry standards; and 

What should be created that the industry has never offered.

              The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve.  By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.

               This is followed by the 4 steps to visualize strategy through unlocking the creativity of the people. The four steps include visual awakening, visual exploration, visual strategy fair, and visual communication.

 Additionally, for a sustainable blue ocean strategy, we need to create new demand by unlocking the three tiers of non-customers and launch a commercially-viable blue ocean idea by aligning unprecedented utility of an offering with strategic pricing and target costing and by overcoming adoption hurdles. 

          An important part of blue ocean strategy is to “get the strategic sequence right.”  This sequence fleshes out and validates blue ocean ideas to ensure their commercial viability.  This can then reduce business model risk.  In this model, potential blue ocean ideas must pass through a sequence of buyer utility, price, cost, and adoption.  At each step there are only two options: a “yes” answer, in which case the idea may pass to the next step, or “no”.  If an idea receives a no at any point, the company can either park the idea or rethink it until you get a yes. 

          The buyer utility map helps managers look at this issue from the right 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 utilizing the 6 stage buyer experience cycle - Purchase/Delivery/Use/Supplement/Maintain/Dispose. Uncovering the blocks to buyer utility at each stage of this cycle can help the organization get a clear idea of how and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting non-customers into customers.

        Next, the Price Corridor Tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price.  The tool involves two distinct buy interrelated steps.  The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors.  The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets. 

        Finally,the profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation.

Let us look at some successful examples of companies using Blue Ocean strategy to zoom ahead of their competitors. In the auto industry, we can think of Chrysler that created the blue ocean of minivans in the 80's. In 1984, for example, Chrysler unveiled the minivan, creating a blue ocean in the auto industry in which the company has been an established existing player. The minivan broke the boundary between car and van, creating an entirely new type of vehicle. Smaller than the traditional van and yet more spacious than the station wagon, the minivan was exactly what the nuclear family needed to hold the entire family plus its bikes, groceries, and other necessities. And the minivan was easier to drive than a truck or van. Built on the Chrysler K car chassis, the minivan drove like a car but provided more interior room and could still fit in the family garage.

thereby breaking the market boundary between car and van.
          Another example - NTT DoCoMo is the first company to make money out of the mobile internet. In a very competitive industry engaged in a technology race and strong price erosion, NTT DoCoMo was able to achieve superior performance when it launched its novel i-mode services in February 1999. It was an immediate and explosive success in Japan.   

                 The first example in "Blue Ocean Strategy" is Cirque de Soleil. The criteria/boundaries/rules for the circus industry that were "taken for granted" for decades included: animal shows, star/famous performers, multiple shows at the same time (i.e. 3 rings), and pushing concession sales. Rather than keeping a high emphasis on all the existing rules and then creating new ones, they either eliminated or reduced many of those rules and created a bunch of new ones. In the process, they increased value for their target market while lowering their own costs. A key thing they did at Cirque de Soleil was that they looked across market boundaries to alternatives to the circus. It ended up being part circus and part theatre. Rather than focus on the market boundaries, they focused on the job the customer was hiring for -- in this case, it was adults looking for sophisticated entertainment. Another key thing they did was not targeting the existing market (i.e. children), rather they targeted non-consuming adults.


            Thus as these examples suggest, companies have understood the need to seek out new target groups of customers and to expand their existing market domains in order to seek continued growth. It all depends on how well they are able to internalize the concept of value innovation so that the value proposition of their offerings continues to be sustainable.

Until Next time.


Cheers!!!
Signing off
Shauvik.