An alternative way to do your diagnosis with an emphasis on creating value vs. competitors
This alternative diagnosis method comes from Renee Mauborgne and W. Chan Kim from their book, “Blue Ocean Strategy”. The idea is to create a blue ocean (new market you own) and make the competition irrelevant. Blue oceans are mostly created within red oceans.
A red ocean is a market where the parameters are known and the rules set so you are forced to compete for temporary gain, usually by giving up some margin. But, when supply exceeds demand, you have to create new ways to compete, hence create a blue ocean.
The basic idea is to create value innovation. Creating value without innovation will not make you stand out. Innovation without value tends to be technology-driven, market pioneering, futuristic and often going beyond what buyers are ready to accept and pay for.
To create new value, you first need to find cost savings by eliminating and reducing the factors an industry competes on. Buyer value is created by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to higher sales and greater value.
There are four key questions you need to ask to challenge an industry’s strategic, logic and business model.
- Which of the factors that the industry takes for granted should be eliminated?
- Which factors should be reduced well below the industry’s standard?
- Which factors should be raised well above the industry’s standard?
- Which factors should be created that the industry has never offered?
Most companies focus on improving their competitive position within a strategic group (BMW vs Mercedes, both competing in the luxury care business). Rarely do sellers think consciously about how their customers make tradeoffs across alternative industries?
Here are a couple of examples. What if movie theatres offered a babysitting service at the movie theater? Curves, the women’s fitness company, was seen as entering an oversaturated market. However, it tapped into an untapped market of women struggling and failing to keep in shape and because it was for women, took the advantage away from traditional health clubs and home exercise programs.
There are six systematic patterns one can use to reconstruct market boundaries and create blue oceans.
Pattern One. Look across alternative industries
One competes with other firms in its own industry but also with companies in other industries that produce alternative products or services. Alternatives are a broader category than substitutes (e.g., for personal finances, people can buy a software package, hire a CPA or simply use pencil and paper which are substitutes vs. restaurants that also show movies are alternatives. What are the alternative industries in your industry?
Pattern Two: Look across strategic groups within industries
A strategic group is a group of companies within an industry that pursue a similar strategy. They can be ranked usually by two dimensions; price and performance (VW competes with Toyota and BMW competes with Mercedes). The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another. For example, women did not care for the fancy health club or restaurants, they didn’t want men to see their imperfect bodies as it made them uncomfortable. A new opportunity.
Pattern Three: Look Across the chain of buyers
In most industries, competitors generally converge around a common definition of who the target buyer is. In reality, there is a chain of “buyers” who are directly or indirectly involved in the buying decision. Also, the purchasers who could differ from the users and influencers as well.
Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of a new blue ocean ( the trucking company that becomes the transportation company for example.)
Path Four: Look across complementary Product and service offerings
Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers see when they chose a product or service. A simple way to do this to think about what would happen before, during and after your product is used (babysitting and parking the car are needed before people can go to the movies or the cost of the car plus maintenance).
Path Five: Look across functional or emotional appeal to buyers
Some industries compete principally on price and function largely based on calculations of utility and their appeal is rational Other industries compete largely on feelings where their appeal is emotional. Yet most products or services are rarely intrinsically one or the other. When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space (for example, Swatch transformed the functionally driven budget watch industry into an emotionally driven fashion statement.)
Path Six: Look across time
All industries are subject to external trends that affect their businesses over time. Most companies who are aware of a trend, pace their own actions to keep up with the trend. But key strategies rarely come from projecting the trend itself and how it will impact customers and change the business model. Don’t keep up with the trend, look across time — from its market value today to the value it might deliver tomorrow. This can actively shape your future and create a blue ocean.
Here are some questions to ponder. What trends have a high probability of impacting your industry, be irreversible and have a clear trajectory? How will these trends impact your industry? What would the trend look like if taken to its logical conclusion?
We will have more articles in the future about creating blue ocean strategies but this article should give you plenty to think about for now.
