Features

From crisis to sustenance : Treasure is out there in the blue ocean

10 Mar 2013 - {{hitsCtrl.values.hits}}

Starting today and during the next few instalments, we will be making a brief study of what is known as the ‘blue ocean strategy’.
To understand what is meant by Blue Ocean Strategy, let us see how the two Professors who wrote the book - W. Chan Kim - Renee Mauborgne - introduce their theme: “Imagine a market universe composed of two sorts of oceans: Red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown 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 the existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities and cut-throat competition turns the red ocean bloody.”

“Blue oceans, in contrast, are defined by untapped market space, demand creation and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue oceans, competition is irreverent because rules of the game are waiting to be set.”
This is what blue ocean strategy in a nutshell.

In the blue ocean strategy, Chan and Renée study how innovative companies break free from the pack by staking out fundamentally new market spacethat is, by creating products or services for which there are no direct competitors. This path to ‘value innovation’ requires a different competitive mindset and a systematic way of looking for opportunities.
Instead of searching within the conventional boundaries of industry competition, managers look methodically across those boundaries to find unoccupied territory that represents real value innovation. For example, the French hotel chain ‘Accor’, discarded conventional notions of what a budget hotel should be and offered what most value-conscious customers really wanted: ‘A good night’s sleep at a low price’.

Guiding principles
As we create our blue ocean strategies, we must be aware of four guiding principles.

Focus on the big picture, not the numbers. Remember - when the strategy is right and implemented, the numbers will happen. The right strategic planning process is critical to developing a good strategy. Unfortunately, old habits die hard and planning processes become mired in the numbers.
Break from the competition and reconstruct market boundaries. For example: Novo Nordisk looked past the red ocean of doctors as the market for insulin to the blue ocean of diabetes and became a diabetes care company rather than just a producer of insulin.
Reach beyond existing demand. Historic strategic planning processes encourage focusing on current markets and further defining niches, thus continuing a red ocean existence.

To have a profitable and robust strategy, we must follow the fourth guiding principle: Get the strategic sequence right. The right strategic sequence of buyer utility, price, cost and adoptions will ensure commercial viability.
Normal business models, which we know, usually start with the cost and build the price based on how much profit they want to make. Blue ocean strategies suggest starting with the utility to the customer and then setting the consumer price and designing the model so that the cost allows the profit desired.
What happens is that companies juggle cost and price, trying to decide the highest price the market will bear and adding or subtracting features until they get a nominal product they think they can sell at the highest profit. Many times they never even get around to the subject of value to the customer.

Creating blue oceans
‘Value innovation’ is the cornerstone of the blue ocean strategy. It is not new. Many management professionals in the past have adopted innovation for decades. What is new is how Kim and Mauborgne suggest that innovation align with utility, price and cost positions while overcoming the execution hurdles.
They condemn the value cost trade-off which is so common today and provide useful tools that encourage us to think alternatives instead of competitors and non-customers instead of customers. One tool is the ‘strategy canvas’ used to create value. We are going to study about this tool in future.
‘Strategy canvas’ is a diagnostic and action-oriented chart that plots the current state of play (low vs. high activity) in the known market against the range of factors used to compete. The resulting value curve shows where the competition is currently investing and what they offer buyers. This creates the current value curve.
Once we have created that, we look at each factor and decide which of the four primary actions (eliminating, reducing, increasing or creating) could be taken to create value to non-customers. These actions will dramatically change our value curve.

Let us go for an example:
Australian Casella Wines created a blue ocean strategy that in just two years caused its [yellow tail] wine to become the fastest growing brand in the histories of both the Australian and the U.S. wine industries and the number one imported wine into the United States, surpassing the wines of France and Italy.
Below are the steps they took to create a blue ocean strategy—steps that any company can take to get out of the red ocean of competition:
01. Eliminate factors that the industry takes for granted but adds no perceived value to customers. Casella Wines recognized that most wineries touted aging and tannin qualities, two factors that intimidated customers. Casella decided to focus their efforts on different qualities.
02. Reduce factors well below the industry’s standard to avoid the mistake of over delivering in order to beat the competition. To avoid customer confusion, Casella Wines limited their offerings to just one white wine and one red wine.
03. Raise factors well above the industry’s standard so your customer won’t have to make compromises. Casella Wines raised the involvement of retailers with [yellow tail]’s success by giving retail employees Australian outback clothing that made [yellow tail] seem friendly instead of intimidating like other wines.
04. Create new sources of value that the industry has never offered. Casella Wines created new customer experiences for wine drinking: Easy drinking, ease of selection and a sense of fun and adventure.

Value innovation
Value is one of the most powerful words in the dictionary of management arts and science. Shareholder value, customer value, value chain and value proposition are just a few examples. It is almost universally accepted that innovation is the economy’s value creation engine.
The focus of ‘blue ocean strategy’ has been on ‘value innovation’, which can be simply defined as: “Creating exceptional value for the customer, most effectively when that customer is treated as the most important customer in the value chain.”
With continuing success in delighting the customer, in turn, will drive sustained increase in enterprise value. With the proper process, value innovation can occur with or without technology innovation in any organisation and at any time in a sustainable manner.

Value innovators:

Sometimes create value through the use of another company’s technological breakthrough; e.g. Ampex invented videotape recording technology but it was the Japanese electronics companies that capitalized on this technology by developing the products for the consumer.
Do not always follow conventional practices for maximizing profits.
Are not necessarily first entrants to their markets.
Create new aggregate demand through a leap in value at an accessible price.
Sometimes tightly link with technology innovators. Technology innovation is the creation of a new product or service that increases the benefits or reduces the costs of that product or service.
Sometimes create what is known as ‘radical innovation’ which is defined as a disruptive technology (e.g., steam ships displacing sail, email reducing the cost and delivery time of regular mail, cellular communications displacing conventional land line phone service, etc.) that changes the business landscape significantly.

Of course, the most successful value innovations will lead to values that are multiples of the firm’s costs of goods and/or services. This allows a price that is both far below the customer’s perceived value (thus catalyzing sales) and far above costs (thus catalyzing profits).

(To be continued next week)
(The writer, a corporate director with over 25 years’ senior managerial experience, can be contacted at
[email protected])

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From crisis to sustenance : Treasure is out there in the blue ocean

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