It happens to the best of us. One day we wake up with the realization that our product development efforts are no longer producing exciting new products resulting in slow sales growth. It’s dullsville around here and customers are beginning to yawn and wait for us to make deals to incent them to buy. Cost are going up and profits are going to hell.
This shouldn’t be happening. We bench mark the competition, we know who they are, what they are doing and what they are likely to do. We even beat them to the punch line by offering more and better. But we still can’t get their customers to defect to our side. We seem to be in a never-ending “one-upmanship” with the competition while having to lower our prices to keep our customers from defecting to the other side.
Welcome to a red ocean where we try to compete head-on with rivals in order to grab a greater share of existing demand. The industry boundaries are defined and accepted, and the competitive rules of the game are well understood. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody – hence the “red ocean.”
There is an alternative: compete in Blue Oceans. Blue oceans denote all the industries and markets not in existence today. In Blue Oceans, demand is created rather than fought over. Competition is irrelevant. The “rules-of-the-game” have yet to be defined. Focus is on non-existing customers versus market share. It seeks to escape from “accepted” market boundaries and create new boundaries to leave the competition behind.
Blue Ocean Strategy was created by W. Chan Kim and Renee Mauborgne through studying more than 150 strategic moves spanning over 100 years and 30 industries. In their book “Blue Ocean Strategy” the authors argue that businesses should focus less on their competitors and more on alternatives. Business should also focus less on their existing customers, and more on non-customers (non-consumers and underserved consumers).
The core tool in Blue Ocean Strategy is the “Strategy Canvas.” The strategy canvas captures the current state of playing field in the know market space depicting the key attributes (or factors) the current industry competes on and where each of the competitors (or segments of competitors) exist on the strategy canvas.
Blue Ocean looks outside the boundaries and realize there is a larger set of potential buyers – it ask how do I create new demand to broaden the industry. To answer that question Kim and Mauborgne introduce the “four actions” to discover and define new rules (important attributes) of a Blue Ocean:
Which of the factors that the industry takes for granted should be eliminated? In their book they use Yellow Tail Wine as an example. To attract non-customers/consumers – Yellow Tail reasoned it could eliminate Enological terminology and distinctions (meaningless and intimidating to non-wine consumers).
Which factors should be reduced well below the industry’s standard? Yellow Tail reduced wine complexity (made the wine structure uncomplicated and very “drinkable”). It also reduced the range of product offerings to keep selections simple – red wines and white wines.
Which factors should be raised well above the industry’s standard? Graphically depicted in the existing strategy canvas – there were two main types of competitors competing for consumers – the high end premium wines and the budget wines. While Yellow Tail was not positioning to compete for the premium segment, it also realized that it was not competing in the budget “jug” wine segment either. It could afford to raise the price of its offering vis-à-vis the jug wines while staying well below the premium wine price. In other words, offer a good value at a great price.
Which factors should be created that the industry has never offered? Here’s where Yellow Tail really broke tradition and defined a new market segment. They knew to attract non-wine consumers they needed a product that was “easy to drink” (i.e. taste good for first time wine consumers). Make the wine a lot easy for non-consumers to select (limited verities and easy to understand product descriptions). While creating a sense of fun and likable (snappy label and play off the Australian culture – bold, laid back fun and adventurous).
Blue Ocean provides a strategic framework to fundamentally shift the strategy canvas of an industry to create uncontested market space that make the competition irrelevant. There are several great examples in the book describing companies that used Blue Ocean to shape the structure their business environment resulting in innovation and new market spaces.
The other key concept the authors describe is “six paths framework,” a method to remaking market boundaries by looking across six basic paths underlying competitive strategy:
2) Strategic group
3) Buyer group
4) Scope of product or service offering
5) Functional-emotional orientation of an industry
We will explore what the six-path framework is in more detail in future articles. In the meantime:
Happy swimming in a blue ocean!