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. The profitability of a company depends on three primary factors which include the price of a company’s products, the perceived value and attributes of a firm’s products or services such as performance, design, quality and after sales, and the costs of creating this value.
Blue Ocean Strategy Summary
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.
In global market today, it can be supposed that there are two typical kinds of oceans: read oceans and blue oceans. Of two sorts of market, red oceans are defined as a known space for all existent industries nowadays. On the contrary, blue oceans are regarded as an unknown area for industries which do not exist.
As a result, red oceans present all existing rules related to business competition and industrial regulations. This market defines and determines the boundaries for all games and rules. In this market, companies strive to compete with their competitors and rivals in order to gain better benefit and dominate more market share of current demand. Therefore, red oceans provide for space for enterprises to focus on their competition for decades. However, the space is limited while competitive battles are becoming increasingly fierce. There are more and more participants wanting to invest in the same products. This turns products into casual commodities. Although customer demand increases from time to time, the increasing speed cannot keep up with industry growth. As a result, red oceans turn out to be bloody place due to strong competition to gain profit and market share. Or in other words, the more severe competition is, the bloodier the market becomes.
Iphone is a typical example of red ocean case. In 2008, it was regarded that Iphone would defeat Nintendo DS. However, it turned out that Apple did not concentrate on this aspect of business. One of the reasons for this neglect was for blue oceans. Nintendo DS did take advantage of blue ocean strategy. It focused on innovative values that were unseen by its rivals. Particularly, DS provided an interface that enabled players to enjoy “mega-hits” including Brain Age. This helped Nintendo DS dominate Sony PSP. In fact, Iphone still did have greater interface and modern screen touched. But these technologies did not create new value in blue oceans. At this time, due to lack of innovative values for gaming, Iphone was still stuck in red oceans which curbed the Apples’ growth opportunity. At that time, while DS attacked forcefully gaming technologies, Iphone focused on existing 3G without deeply researching DS’s first approach. As a result, DS surpassed Iphone for its first approach in gaming technology while Iphone was struggling in red oceans of smartphones.
On the contrary to red oceans, blue oceans provide a more open and comfortable space for competition. This sort of market presents new opportunities for enterprises to try in new industries and create new demand for profit. Blue oceans are considered virtually wider area that has not been explored deeply and vastly. Unlike red oceans, this market does not contain existing rules of competition. They are still waiting for a creation of the whole rule system. Based on this characteristic, companies in blue oceans have not yet in a close relationship. There are two cases of blue oceans creation. The first one involves creating blue oceans beyond the boundaries of current industry. But this case accounts for little possibility. The second one refers to creating blue oceans inside the space of active industry.
These types of universe market generate two types of strategies respectively. They are red ocean strategy and blue ocean strategy. This strategy contains a set of rules for competition and there are a number of opportunities for business growth applying red ocean strategy. Red ocean strategy supports the interchanging and replacement of products and services. However, this strategy often leads to a situation in which the excess of supply occurs, making the market become too crowded for competitors. In contrast, blue ocean strategy creates new demand within red ocean market. This strategy aims at predicting excess supplying over demanding and crowded industry within red oceans. From such assumption, this strategy creates new innovation value for products and services or for new industry in order to benefit both customers and businessmen.
Read More: Introduction to Blue Ocean Strategy
Laundry soaps and detergents were two main divisions in the wash market in India in the mid Seventies. The laundry soap was strongly fragmented. It was the price of oil that decided the quality and price of this product. The second category, the detergent, produced mainly bars and powder and this market was developing very strongly at this time. Also, Unilever’s branch in India was playing the dominant role in these markets. After that, there was a small businessman who started his own detergent business in 1969. He priced his washing powder just one third of the price provided by Unilever. Moreover, his detergent, called Nirma, had the quality 25% lower than that of existing detergent product. Furthermore, that Indian businessman also built a strong distribution system in the Western area where he located his business. At that time, due to demand on mass production, Unilever’s Indian base had to use “blowing tower”, which cost it a lot of capital. In contrast, producing smaller scale of detergent powder enabled Nirma’s to save a remarkable capital. Apart from low starting capital, he also benefited lower material cost due to substantial dependence on “soda ash”, one of the main ingredients formulating washing powder. Nirma brand truly became popular because its price and quality satisfied low-income Indian residents. By the mid of 1980s the Indian entrepreneur reached a market share of 30%. Base on such success of washing powder, he continued to develop detergent bars. However, Unilever’s Indian based branch did not accept Nirma’s surpass. The subsidiary revealed a product called Wheel which had the same price and other costs as Nirma. Evidently, it removed blowing tower technology in the production of Wheel in order to be cost-effective. Because Wheel was the follower of Nirma, it had to do a lot of marketing strategies and conducted numerous communicative methods with potential customers. Consequently, Indian customers started to be aware of Wheel brand in particular and detergent powder in general. Before the competition between Wheel and Nirma took place, a huge number of Indian customers used laundry soaps instead of detergent products. In short, it was the battle between Unilever’s subsidiary and Nirma’s owner that led to the reveal of a new detergent product that did not use blowing tower technology and high awareness among Indian customers who initially used laundry soap. The historical case of Nirma-Wheel which presented an innovative value and dramatic change in customers’ usage was considered the most typical example of blue ocean strategy in India.
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 BOs 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 BO 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.
- Four Actions Framework was introduced in order to split the trade-off between low-cost and differentiation to make way for a creation of a new value curve. The four actions taken here are: 1) Create — Here, the idea is to create new industry factors that can generate value and anew market and were not offered before. 2) Reduce — Here, the idea is to reduce any of those factors which were nothing more than a consequence of the competition between industry players to differentiate themselves. 3) Eliminate — In this step, the idea is to identify those factors which have been the basis of industry competition for a long time and 4) Raise — Finally, the idea is to identify those factors that need to be raised above where they are in the industry at present.
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 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 BO 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.
Read More: Significance of Blue Ocean Strategies
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 carmakers to achieve both differentiation and cost.