What can I eliminate?I love using Blue Ocean Strategy in the classroom. I loved using it in my professional life. It’s so simple to understand and it forces the students to answer really simple questions regarding a current product or service:
What can I eliminate?
What can I reduce?
What can I raise the bar on?
What can I create that is new?
You can set sail for a blue ocean all in the hopes of creating a new product or service in a growing marketplace with little initial competition.
Blue Ocean Strategy by Chan Kim and Renee Mauborgne was published in 2005 by Harvard Business School Press. It became a bestseller and still remains popular today. The authors’ thesis is that most companies focus on competing against rivals for share in existing markets. Competition intensifies, features blossom, prices decline, and companies lose gross margin and profitability, as competitors rush in to sell cheaper products in order to maintain market share. In this competitively intense ocean, segments are niched and products are commoditized, turning the water red (either the red ink of losses or the blood of flailing competitors—choose your metaphor). So, if you find yourself competing on just price in either a growing or shrinking marketplace, the future is not bright.
Eliminate |
Raise |
Which factors can you eliminate that your industry has long competed on? |
Which factors should be raised well above the industry’s standard? |
List those here . . . |
List those here . . . |
Reduce |
Create |
Which factors should be reduced well above the industry’s standard? |
Which factors should be created that the industry has never offered? |
List those here . . . |
List those here . . . |
The red ocean is simply where every mature industry is today. There are defined competitors, a defined market, and a typical business model in any specific industry. You initially compete on some differentiation and then slowly (or quickly in a rapidly growing marketplace) you start competing on some version of price or cost (e.g., AT&T versus Verizon, Samsung versus LG, etc.). But you can choose to have a mindset that says you have to innovate in order to escape a red ocean and head to a blue ocean. How? Companies can choose to avoid this margin-eroding competitive intensity by putting less energy into red oceans and choosing instead to pioneer blue oceans—markets largely untapped by competition. By focusing beyond existing market demands, you can identify unmet needs (i.e., needs beyond lower price or incremental product improvements) and then innovate new solutions that create far more profitable uncontested markets—blue oceans. Here are key elements of a growth mindset regarding a Blue Ocean Strategy perspective:
Focus on current customers versus focus on noncustomers. In most industries there is little effort to attract new buyers to the industry; the focus is on the customers currently purchasing in that industry. With a blue ocean mindset, there is a focus on trying to increase the size of the industry by attracting people who have never purchased in that industry. Think Apple with iTunes allowing everyone to buy digital music legally, online.
Compete in existing markets versus create uncontested markets to serve. Sounds good, right? But how do you do that? Existing markets are all the customers doing business in the industry right now, whether they are doing business with you or your competitors. If someone wins a customer, then it is assumed someone will lose a customer. For someone to win, someone must lose. In uncontested markets, there is only a winner—you. No one else is fighting for the business because either they don’t know about it or they don’t know how. Think Cirque du Soleil in the early days attracting a more adult customer and a higher ticket price.
Beat the competition versus make the competition irrelevant. Competitors become irrelevant because they cannot duplicate the ideas in a way that is a commercial success. Remember, the whole idea of Blue Ocean Strategy is to have high value at reasonable cost. If you are doing that, how can anyone compete with you? All the would-be competitors fall by the wayside. An example again is a company like Netflix, which rendered Blockbuster irrelevant due to Netflix’s distribution model, first through the mail and then online.
Exploit existing demand versus create and capture new demand. You will be creating value so high that you will be attracting customers who never before would have considered entering the market. Nintendo’s Wii appealed to families and seniors by raising the bar and creating a more interactive gaming experience. Yellow Tail wine attracted beer drinkers by eliminating the pretentiousness of wine and making it friendly. Southwest Airlines appealed to business travelers who spent days on the road by creating reduced flight costs for short trips. And the Apple iPad, a keyboard-free wireless tablet computer, gained appeal as a computing device for use by sales and service professionals and even as a next-generation, flat-screen cash register.
Blue oceans matter because these markets are potentially large and have less competition, so there is more opportunity for you to grow as the dominant company as long as you continue to innovate. Let’s look at a few real examples of companies that created blue oceans for themselves.
Cirque du Soleil, a Canadian company, redefined the dynamics of a declining circus industry in the 1980s. Under conventional strategy analysis, the circus industry was a loser. Star performers had “supplier power” over the company. Alternative forms of entertainment, from sporting events to home entertainment systems, were relatively inexpensive and on the rise. Moreover, animal rights groups were putting increased pressure on circuses for their treatment of animals. Cirque du Soleil eliminated the animals and reduced the importance of individual stars. It created a new form of entertainment that combined dance, music, and athletic skill to appeal to an upscale adult audience that had abandoned the traditional circus.
Let’s review exactly what Cirque du Soleil did against the four elements of a Blue Ocean Strategy:
Which of the factors that the industry takes for granted should be eliminated? In the case of Cirque du Soleil that included animals, star performers, and the three separate rings.
Which factors should be reduced well below the industry’s standard? Cirque du Soleil reduced much of the danger associated with conventional circuses.
Which factors should be raised well above the industry’s standard? Cirque du Soleil increased the uniqueness of the venue by developing its own tents, rather than performing within the confines of existing venues.
Which factors should be created that the industry has never offered? Cirque du Soleil introduced dramatic themes, artistic music and dance, and a more upscale, refined environment.
Cirque du Soleil attracted a new customer, mostly adults as opposed to children, at a high price point, and redefined what a circus is supposed to be. Today, Cirque du Soleil has a valuation of over $2.5 billion.
For the second example, let’s look at two current companies competing in the same industry, one seemingly drowning in a red ocean and the other in a blue ocean . . . in the same industry! The Microsoft Surface looks to be a very good product, certainly one that is competitive. It has great specifications, a lot of adaptability, and meets many user needs—and it is available at what appears to be a favorable price when compared with iPads. But it is in a very, very red ocean. The market for inexpensive personal computing devices is filled with a lot of products. Don’t forget that before we had tablets we had netbooks: low-cost, scaled-back yet very useful Microsoft-based PCs that can be purchased at prices that are less than half the cost of a Surface. So, the Surface is more than a netbook, but also a lot more expensive.
This is classic red ocean behavior. The market is being fragmented into things that work as PCs, things that work as tablets (meaning they run apps instead of applications), things that deliver the functionality of one or the other but without traditional hardware, and things that are a hybrid of both. And prices are plummeting, with intense competition, multiple suppliers, and eroding margins.
Ouch. The “winners” in this market will undoubtedly generate sales. But will they make decent profits?
Amid this intense competition for sales of tablets and other low-end devices, and notwithstanding sales of its iPad, Apple appears to be completely focused on selling a product that not many people seem to want. At least not yet. Apple has developed and launched the Apple Watch. Apple is saying that it has looked into the future and thinks today’s technology is going to move onto our bodies and become more personal: more interactive, more knowledgeable about its owner, and more capable of being helpful without being an interruption. It won’t be another variation on the PC like a tablet, but an entirely new computer experience. Apple’s leaders are betting on a vision. Not a market. They could be right. Or they could be wrong. But today, smartwatches are a blue ocean.
I am not bashing Microsoft or lauding Apple. Microsoft thinks in relation to its historical core markets and is engaging in bloody battles to win share. Microsoft looks at existing markets—in this case tablets—and thinks about what it has to do to win sales/share at all costs. Microsoft is a red ocean competitor. Apple, on the other hand, pioneers new markets. Apple’s success has not been built on defending historical markets. Rather, it has pioneered new markets that made existing markets obsolete. Its success has never looked obvious. Contrarily, many of its products looked quite underwhelming when launched. Questionable, even. And it has cannibalized its own products as it brought out new ones. Apple avoids red oceans and prefers to develop blue ones.
Which company will be more successful in 2020? Time will tell. But since 2000, Apple has gone from nearly bankrupt to the most valuable publicly traded company in the United States. Since January 1, 2001, Microsoft has gone up 32 percent in value. Apple has risen 8,000 percent.
Consider this Blue Ocean Strategy exercise, again using the same brainstorming structure we have before. Imagine you are a student in my Creativity and Innovation class:
I say, “I just came from a meeting with a group of investors who want to enter the pet industry. Revenues in the industry are now over $70 billion per year and the investors want to introduce a product into the marketplace. But they do not want to be a ‘red ocean’ competitor. Using the Blue Ocean Strategy, you have about forty-five minutes to solve the problem.”
First, the students, in groups of three to four, spend ten minutes analyzing the Blue Ocean Strategy elements.
Next, they spend ten to fifteen minutes identifying possible solutions in each blue ocean quadrant.
Then they spend ten minutes narrowing it down to the best solution(s).
Then they spend ten minutes drawing the Blue Ocean Organic Pet Food grid, which is then presented in front of the class.
So, here is one of the group’s solutions for entering the pet industry marketplace: organic pet food delivered directly to your home.
Which of the factors that the industry takes for granted should be eliminated? Eliminate the distributors and the retail stores.
Which factors should be reduced well below the industry’s standard? Reduce time spent in the store, product filler, and preservative ingredients.
Which factors should be raised well above the industry’s standard? Organic pet food made with fresh and natural ingredients including healthy pet vitamins.
Which factors should be created that the industry has never offered? A home delivery pet food subscription-based membership.
U.S. pet food sales are over $25 billion, and one of the fastest-growing pet food categories today is organic pet food. The students examined a competitive industry that is growing and came up with a new type of pet food and delivery service. A blue ocean, for sure. Other companies like Uber, Dollar Shave Club, and Birchbox are all doing the same as they look to compete in their own blue oceans. Fewer competitors, more room to grow, new business models. The Blue Ocean Strategy is a great way to view existing markets/industries and determine where, how, and when you can be disruptive so that you compete on your terms and not the industry’s.
CREATIVE / INNOVATIVE INSIGHT
These founders were all professionals in a very large and conservative industry. Clients paid well for their services. Relationships meant everything. So why would these founders set sail for a “blue ocean” and potentially put themselves out of business? Because if they did not, someone else would. They saw the adoption of the Internet and looked to create a new business model for a service that has been around for thousands of years. They completely reimagined their industry’s services and, using the blue ocean grid of “eliminate, raise, create, and reduce,” they began to redefine their new company’s offerings, one where you did not actually need to interact with humans at all. They looked at what the majority of clients wanted in the marketplace, created new “easy to use” streamlined products for greatly reduced fees, and launched the new company in 2001. LegalZoom has never looked back, turning the legal industry on its ear.
Key Takeaway
As you read this, unless you are in an emerging company or industry, you and your company are in a red ocean ultimately competing on price all the way to the bottom. “Change the game and head for a blue ocean” should be a constant refrain in your company. That thought alone will potentially drive creative and innovative thinking.
