Strategy involves standing out from the competition and making choices that give the company a unique and valuable position by offering distinctive products and services. Competitive advantage and profitability can be achieved simultaneously by approaches that create consistent internal synergies and combine a company’s operational activities efficiently. Strategies are formed at various levels of the organization. However, a typical organizational structure incorporates strategies at 3 specific levels: corporate, business and functional. Corporate strategy defines a company’s holistic growth and management direction pertaining to its various businesses, products and services. Business strategies, on the other hand, are established at the divisional levels and typically focus on enhancing the strategic business unit’s competitive position in its industry. Functional strategies aim to maximize resource productivity and are typically set by functional departments within each SBU to improve competencies and performance.
Blue Ocean strategies are a form of business level strategies that enable firms to achieve sustainable competitive advantage by tapping uncontested market space. Developed by INSEAD professors, W. Chan Kim and Renee Mauborgne, Blue Ocean strategies were derived from analyzing winners and losers of more than 150 strategic moves across 30 industries, including hotel, cinema, automobile, retail, airlines etc., over the course of several years. Read More About: Blue Ocean Strategy
Conventional competitive or red ocean strategies encourage firms to choose between value and differentiation to compete in prevailing markets with clearly defined boundaries and conditions. In red oceans, firms aim to gain market share by exploiting existing demand and overtaking competitors. Ruthless competition in red oceans confines companies to benchmark against competitors, and make incremental improvements that increase costs without increasing revenues or having much impact on demand. This results in a crowded market space, difficulty to differentiate products and services, greater supply than demand, price wars, which turn the ocean bloody and red ensuing a reduction in profit and growth.
Contrastingly in Blue Oceans, firms go beyond industry borders and make the competition extraneous by redefining the industry, creating new demand and profitable growth. This is achieved by filling strategic gaps and targeting markets and opportunities that are not being served. Instead of encouraging firms to build a defensible position in an existing industry, this approach follows a re-constructionist view whereby firms recognize key factors valued by customers within conventional industry borders and reconstruct these factors across market boundaries while concurrently pursuing differentiation and cost leadership.
To provide a quantitative impact of Blue Ocean strategies, evidence of business launches of 108 companies over the years shows that:
- 86% launches that were incremental improvements within existing industries accounted for only 62% total revenues and 39% profits.
- The remaining 14% launches that created Blue Oceans resulted in 38% total revenues and comprised 61% of total profits.
A strategy canvas and four action plans are some primary tools that assist customers with formulating and executing Blue Ocean strategies to target unexploited opportunities. Strategy Canvas allows firms to identify key success factors in its market that are important to customers and hence provide competitive advantage or disadvantage. By allowing the firm to assess the current situation in its market space and comprehend the factors that competitors invest in, the firm is able to analyse itself in relation to its existing competitors based on key competing factors explore routs to new market space and determine how to convert non-customers into customers by looking at the big picture. Depicted in a graphic form, the horizontal axis represents the range of factors while the vertical axis show the level at which these key factors are offered. The value curve, a key component of the canvas graphically plots the relative performance of companies in the known market space across the range of factors. This tool therefore enables firms to minimize competition and risk and maximize opportunity. By having a drastically different value curve, a firm can create value innovation which involves tapping into new market by creating new factors where the customer’s requirements were previously not served. In addition, the firm can also surpass performance on industry factors where competitors are not doing very well.
Value innovation is a key foundation of Blue Ocean thinking which involves eliminating or minimizing factors that the industry competes on and creating factors that were never previously offered by the industry. This enables firms to save costs and drives up their product or service value for customers allowing companies to break the value-cost trade-off. Value Innovation also involves aligning utility, price and cost. The superior product or service value offered by the firms results in high sales volume over time, and further reduced costs due to economies of scale.
It is important to note that most key industries such as automobile, biotechnology, telecommunication, cell phones are a result of blue ocean thinking. Historically, several companies across numerous industries have offered major products and services that opened new market space and generated significant demand. The case of the evolving US automobile industry provides key evidence of Blue Ocean strategies success.
In 1893 when horse buggies were the primary means of transportation in the US, the Duryea brothers invented the first one-cylinder auto. Following this launch several auto manufacturers entered the market to make conventional automobiles at a time when they were considered an unreliable, and unaffordable luxury. Furthermore, they weren’t expected to become popular in the future, making the industry look small and unattractive by conventional wisdom.
In 1908, Henry Ford went beyond boundaries by introducing the Model T, which was made using preeminent components, and only came in one color and model. Marketed as reliable and durable, and sold at half price of existing automobiles, it soon captured the mass market with its reputation as a high quality, low priced car. Its price dropped even further over the years and it went on to sell cheaper than the carriage. As the car was easy to manufacture and highly standardized, Ford used unskilled workers on its assembly line who could build them quickly and efficiently, thereby reducing costs. This allowed the company to charge a reasonable price for its cars, increase its sales, and the size of the automobile industry in the process. While most automakers made expensive automobiles, Ford created a huge Blue Ocean with its Model T eventually becoming the main mode of transportation.
Following this in 1924 when the car became an essential household item, GM created a Blue Ocean by launching a line of automobiles that were different to Ford’s basic functional, one color, single model concept. By appealing to the emotion of the US mass market, its strategy included building fun, exciting, and comfortable cars fit for ‘every purpose’. The range of models offered by GM included different colors and styles that were updated each year thus creating new demand for fashionable cars. The ease of replaceability of these cars also led to the formation of the used car market and GM eventually surpassed Ford as the leading car-maker.
In the 1970s, the Japanese created a new Blue Ocean by producing small fuel efficient cars by challenging US car-makers and their notion of bigger and better cars. While the big three car manufacturers focused on benchmarking and competing one another, Japanese car-makers changed conventional logic by introducing and offering a new value concept of good quality, compact, and gas efficient cars. Demand for these cars soared further because of the US oil crisis in the 1970s as consumers turned to fuel efficient cars like Honda, Toyota, and Nissan. Apart from reducing the competitiveness of US car makers, this Blue Ocean also challenged their survival.
In 1948, troubled and on the edge of bankruptcy, Chrysler launched the minivan creating another Blue Ocean in the auto industry. By developing an entirely new type of vehicle, the company provided a middle ground between the car and van. The minivan had the functionality of both, was smaller and easier to handle than a van, and more spacious than a car. This heavily appealed to nuclear families that needed sufficient space to hold important necessities in addition to passengers. By exploiting this untapped market space, the minivan became Chrysler’s bestselling vehicle within the first year, enabling the company to regain its position in the market and earn significant revenues over the next couple of years. This success also led to the SUV boom in the 90s by extending the Blue Ocean that Chrysler had tapped into.
These examples show how companies that created Blue Oceans were able to earn more revenues than industry leaders in a short time span and managed to achieve growth in industries with limited potential that were unattractive according to competition based strategies. The evolution of the auto industry because of Blue Ocean thinking also indicates that auto companies became successful by appealing to new customers and breaking way from the competition instead of poaching customers from competitors. Instead of offering better solutions to given problems, they redefined the problem by offering comfortable and functional cars for reasonable prices thus reinventing user experience. The implementation of these strategies not only challenged the status quo of the automobile industry but also allowed it to positively evolve over the years generating profitable growth in the process.
By creating a whole new concept that broke the value-cost trade-off and by looking across the market boundaries, the automobile companies offered new critical success factors into their offerings, eliminated or reduced irrelevant factors thereby increasing demand. Invented new forms of transportation by eliminating costly production methods enabled these car-makers to achieve both differentiation and cost.