EXPLORING THE BLUE OCEAN STRATEGY

Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant. Instead of dividing up existing and often shrinking demand and benchmarking competitors, blue ocean strategy is about growing demand and breaking away from the competition. Blue ocean opportunities have been in the market for a long time. As they have been explored, the market universe has been expanding.

This expansion is the root of growth. What makes this rapid growth all the more remarkable is that it was not achieved in an attractive industry but rather in a declining one in which traditional strategic analysis pointed to limited potential for growth. Yet, poor understanding exists, both in theory and in practice, as to how to systematically create and capture blue oceans.

Competitive rules

Red oceans represent all the industries in existence today. This is the known market space. On the other hand, blue oceans denote all the industries not in existence today. This is the unknown market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand.

As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cut throat competition turns the red ocean bloody. Blue oceans, in contrast, are defined by untapped market space, demand creation and the opportunity for highly profitable growth.

Although some blue oceans are created well beyond existing industry boundaries, this is mainly done within red oceans by expanding existing industry boundaries. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. It will always be important to swim successfully in the red ocean by outcompeting rivals. Red oceans will always matter and it is part and parcel of business life.

But with supply exceeding demand in more industries, competing for a share of contracting markets while necessary, will not be sufficient to sustain high performance.Companies need to go beyond competing. To seize new profit and growth opportunities, they also need to create blue oceans.Unfortunately, blue oceans are largely uncharted.

The dominant focus of strategy work over the past twenty-five years has been on competition-based red ocean strategies. The result has been a fairly good understanding of how to compete skilfully in red waters, from analysing the underlying economic structure of an existing industry, to choosing a strategic position of low cost or differentiation or focus, to benchmarking the competition.

There are several driving forces behind a rising imperative to create blue oceans. Accelerated technological advances have substantially improved industrial productivity and have allowed suppliers to produce an unprecedented array of products and services. The result is that in increasing numbers of industries, supply exceeds demand.

The trend toward globalization compounds the situation.As trade barriers between nations and regions are dismantled and information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to disappear.

While supply is on the rise as global competition intensifies,there is no clear evidence of an increase in demand worldwide,and statistics even point to declining populations in many developed markets. What consistently separated winners from losers in creating blue oceans was their approach to strategy. The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order.

The creators of blue oceans, surprisingly, do not use the competition as their benchmark. Instead, they follow a different strategic logic called value innovation. Value innovationis the cornerstone of blue ocean strategy.

It is called value innovation because instead of focusing on beating the competition, companies focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.

Value innovation places equal emphasis on value and innovation.Value without innovation tends to focus on value creation on an incremental scale, something that improves value but is not sufficient to make you stand out in the marketplace. Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for.In this sense, it is important to distinguish between value innovation as opposed to technology innovation and market pioneering.

What separates winners from losers in creating blue oceans is neither bleeding-edge technology nor timing for market entry. Sometimes, they might be in existence. More often, however, they do not. Value innovation occurs only when companies align innovation with utility, price, and cost positions.

If they fail to anchor innovation with value in this way, technology innovators and market pioneers often lay the eggs that other companies hatch.

Value innovation is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy – the value-cost trade-off. It is conventionally believed that companies can either create greater value to customers at a higher cost or reasonable value at a lower cost. Here strategy is seen as making a choice between differentiation and low cost. In contrast, those that seek to create blue oceans pursue differentiation and low cost simultaneously.

Although economic conditions indicate the rising imperative of blue oceans, there is a general belief that the odds of success are lower when companies venture beyond existing industry space.The issue is how to succeed in blue oceans. How can companies systematically maximize the opportunities while simultaneously minimizing the risks of formulating and executing blue ocean strategy? If you lack an understanding of the opportunity-maximizing and risk minimizing principles driving the creation and capture of blue oceans, the odds will be lengthened against your blue ocean initiative.

Of course, there is no such thing as a riskless strategy. Strategy will always involve both opportunity and risk, be it a red ocean or a blue ocean initiative. But at present, the playing field is dramatically unbalanced in favour of tools and analytical frameworks to succeed in red oceans. As long as this remains true, red oceans will continue to dominate companies’ strategic agenda even as the business imperative for creating blue oceans takes on new urgency.

Perhaps this explains why, despite prior calls for companies to go beyond existing industry space, they have yet to act seriously on the prescribed recommendations.

Growth trajectory

Practioners utilize strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It serves two purposes. First, it captures the current state of play in the known market space. This allows companies to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market.

To set a company on a strong, profitable growth trajectory in the face of these industry conditions, it will not work to benchmark competitors and try to out compete them by offering a little more for a little less. Such a strategy may nudge sales up, but will hardly drive a company to open up uncontested market space. Nor is conducting extensive customer research the path to blue oceans.

Strategy canvas

To fundamentally shift the strategy canvas of an industry, they must begin by reorienting their strategic focus from competitors to alternatives, and from customers to noncustomers of the industry.To pursue both value and cost, they should resist the old logic of benchmarking competitors in the existing field and choosing between differentiation and cost leadership. Asthey shift their strategic focus from current competition to alternatives and noncustomers, they gain insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value elements that reside across industry boundaries.

Conventional strategic logic, by contrast,drives them to offer better solutions than their rivals to existing problems defined by your industry.

In conclusion, I would like to state that to reconstruct buyer value elements in crafting a new value curve, companies can utilize four actions framework to break the trade-off between differentiation and low cost and to create a new value curve. There are four key questions to challenge an industry’s strategic logic and business model as used by the four actions framework:

• Which of the factors that the industry takes for granted should be eliminated?
• Which factors should be reduced well below the industry’sstandard?
• Which factors should be raised well above the industry’s standard?
• Which factors should be created that the industry has never offered?

The first question forces companies to consider eliminating factors that they have long competed on in their respective industries. Often those factors are taken for granted even though they no longer have value or may even detract from value. Sometimes, there is a fundamental change in what buyers value, but companies that are focused on benchmarking one another do not act on, or even perceive,the change.

The second question forces companies to determine whether products or services have been overdesigned in the race to match and beat the competition. Here, companies over serve customers, increasingtheir cost structure for no gain.The third question pushes companies to uncover and eliminate the compromises industry forces customers to make. The fourth question helps companies to discover entirely new sources of value for buyers and to create new demand and shift the strategic pricing of the industry.

Dr. Kellen Kiambati holds a PhD in business administration with a focus on strategic management from JKUAT and an MBA from KEMU. She is a certified business associate (CBPA) and a member of the Institute of Human Resource Management of Kenya. She is also the author of business Research Methods and can be reached on kellenkiambati@gmail.com