Idea 4 - Blue ocean strategy (50 Management ideas you really need to know)

Idea 4 - Blue ocean strategy

Innovate! Innovate! Hardly a new idea. Everyone knows that the dream

Business strategy is to create a new product that everyone wants and no

One else is offering, but that's easier said than done. How do you do it? W.

Chan Kim and Renee Mauborgne think they have an answer, a framework

To help companies swim free of the threshing, bloody red ocean of

Competition into calm and uninfested waters - the blue ocean

Ever since Michael Porter, most companies have built their strategies around the idea of competition. But Porter's theories of competitive advantage through differentiation or cost leadership have been so persuasive that they have become a given. Everybody does it. Strategic and operational benchmarking has given us not differentiation but a bland international conformity. Oversupply of comrnoditized products, static if not falling demand and declining brand loyalties have led to price wars and shrinking profit margins. This is the known market space, limited and fought over, the red ocean. The blue ocean is the unknown, uncontested market space. Others have created blue oceans for themselves, and Kim and Mauborgne insist that companies stuck in the red ocean can do the same. These two are professors of strategy and international management at the INSEAD business school. They sketched out their ideas in a paper entitled 'Blue ocean strategy' in 2004 and followed it up with a book the following year, describing how to implement them.

Circus performers The most striking example of a business that has colonized the blue ocean is the captivating Cirque du Soleil, the Canadian travelling circus for grown-ups. The circus was a dying trade when Cirque du Soleil was created in 1984. Children had better things to do on their games consoles and animal rights groups had circuses in their sights. So Cirque du Soleil stopped trying to beat the competition. Instead of trying to procure more famous (and more expensive) clowns, it created a new market for a new group of customers - who were happy to pay a lot more. Nearly 40 million people have since been to 'The Circus'.  Other denizens of their own blue oceans include Pret a Manger, which serves quality eats at fast-food speed; Curves, an affordable, women-only health club chain; and JC Decaux, which energized outdoor advertising in the 1960s by creating street furniture. Kim and Mauborgne claim strategic

logic singles out these and other blue ocean companies, calling it ‘value innovation’. Value creation on its own is usually incremental, and innovation alone tends to be technology-driven and too futuristic for consumers to accept readily. Value innovation makes competition irrelevant by creating a leap in value for buyers and the company. It anchors innovation with value, aligning it with utility, price and cost. It doesn't make the Porter-esque choice between differentiation and low cost, but pursues them simultaneously.

The sailing manual

Blue ocean strategy formulation follows four principles.

Reconstruct market boundaries Look for blue oceans where the competition isn't looking - in industries that provide alternatives to your products; among users as opposed to purchasers or influencers; in complementary services (like post-sales maintenance); in emotional or functional appeal; or across time, by anticipating trends.  Nerjets, the creator of fractional jet ownership, looked across alternative markets and broke the tradeoff between owning an executive jet and flying first class. Home Depot did the same by providing professional home decorator advice at prices that were lower than the hardware store's. In Japan, where men's haircuts were emotionally driven, time-consuming and expensive, QB House made them functional, quick and cheap. Swatch changed the functionally driven budget watch into an emotionally driven fashion statement.

Ø  Focus on the big picture, not the numbers Kim and Mauborgne describe how to draw up a 'strategy canvas' instead of drowning in spreadsheets and budgets.

Ø  Reach beyond existing demand Instead of concentrating on customers, look at non-customers. Callaway Golf discovered that many people didn't play golf because hitting the ball was too hard. So it designed a golf club with a bigger head.

Ø  Get the strategic sequence right Build the strategy in the following order. If the answer to any of these is no, you need to rethink:

Ø  Buyer utility - is there exceptional buyer utility in your business idea? Utility is not the same as amazing technology.

Ø  Price - is your price easily accessible to the mass of buyers? Traditional innovation launches start high and come down (it's called 'skimming'). But in the blue ocean it is important to know from the start what price will quickly attract the mass of target buyers. Volume generates higher returns than it used to and, for buyers, the value of a product may be closely tied to the number of people using it.

Ø  Cost - can you hit your cost target and make a profit at your strategic price?

Ø  Adoption - what are the hurdles to adoption and are you addressing  them up front? Blue ocean ideas threaten the status quo and may inspire fear and resistance among employees, business partners and the public. Educate the fearful.

Kim and Mauborgne round off their theory with advice on how to  implement it. Whether or not it stays the course as a methodology, it is an enlightening contribution to post-Porter literature.