The first step in the Blue Ocean Strategy is to reconstruct the market boundaries to break from the competition and create blue oceans. The challenge is to identify commercially compelling Blue Ocean opportunities out of all the possibilities that exist.
There are six basic approaches to re-making market boundaries. Authors Chan and Mauborgne call these approaches the six paths framework. None of these paths require exceptional vision or foresight about the future. They are all based on current but from a different viewpoint.
These six paths challenge the six fundamental assumptions underlying many companies’ strategies. These six assumptions keep companies trapped in very competitive markets. Companies often:
- Define their industry similar to competitors and focus on being the best
- See their industry through the lens of generally accepted groups (luxury automobiles, economy cars, and family vehicles) and strive to stand out in their strategic group.
- Focus on the same buyer groups, the purchase, the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry).
- Defined the scope of the products and services offered by their industry similarly
- Accept the industry functional or emotional orientation.
- Focus on current competitive threats in formulating strategy.
The more a company shares this conventional wisdom about competing, the more similar they are.
To break out of the excepted boundaries that define how they compete, you need to look systematically across them to create Blue Oceans.
Do you need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional, emotional orientation of an industry, and even across time?
This analysis gives companies keen insight into how to reconstruct market realities to open up Blue Oceans.
Path one: look across alternative industries
In a broader sense, a company competes with the other firms in their industry and that produce alternative products or services. Alternative products are wider than substitutes. Products may have different forms but offer the same functionality or utility can substitute for one another. Also, alternatives include products or services with different functions and forms with the same purpose.
For example, people can buy and install a financial software package, hire a CPA, use pencil and paper, or a financial app to sort out their finances. All of these are substitutes for each other. They have different forms, but the same function.
Also, products or services can take different forms and perform other functions, serving the same objective—for example, movie theatres vs. restaurants. While they have few physical features in common with movie theatres and fill a distinct role: they provide conversational and gastronomical pleasure. This role is a very different experience from the visual entertainment offered by cinemas.
Despite differences in form and function, however, people go to a restaurant for the same objective they go to a movie: to enjoy a night out. These are not substitutes, but alternatives they can choose.
Alternative decisions
In making purchase decisions, buyers implicitly way their alternatives, often unconsciously. Should we go to the movie or should we get a massage or read a book. This thought process is intuitive for individual consumers and industrial buyers alike.
For some reason, we forget about this intuitive process when we are sellers. Seldom do sellers think consciously about how their customers make trade-offs across alternative industries?
Yet, the space between alternative industries provides opportunities for value innovation.
Consider NetJets, owned by Berkshire Hathaway. Business people didn’t want to use commercial flights because they were uncomfortable and time-consuming. Yet, they didn’t want to buy a jet because it’s costly upfront.
Net Jets created the concept of selling fractions of jets which can be as small as 1/16 ownership of an aircraft in the United States. This ownership entitles them to 50 flight hours per year starting at just over $400,000 (plus pilot, maintenance, and other monthly costs) for an aircraft that cost 7 million dollars.
Owners get the convenience of a private jet at the price of first-class air travel. When you consider all the other expenses, NetJets is less expensive than first class. Also, because it is a smaller airplane, you can use smaller regional airports, and limited staff help to keep costs low.
By offering the best commercial travel and private jets and illuminating and reducing everything else, NetJets opened up a multibillion-dollar Blue Ocean where customers get the convenience and speed of a private plane with low fixed costs and lower variable costs.
Home Depot is another example and offers expertise to professional home contractors at markedly lower prices than hardware stores. They also made ordinary homeowners into doing it your self customers. Today is the world’s largest home retail improvement store.
What are the alternative industries in your industry?
Why do customers trade across alternatives?
If you focus on the key factors that lead buyers to sell across alternative industries and reduce everything else, is one way to create a Blue Ocean market.
