Value Innovation: Sailing Into Blue Ocean
by Mateusz Graboń
11 November 2018
Competition in Red Ocean
In business, the term ‘competition’ often functions as a metanarrative on which business strategies are built. This perspective, however reductionistic, has been effective in enabling many companies to outperform rivals and grow.
The market spaces characterised by established competition, well defined and accepted industry boundaries and agreed competitive rules are referred to as Red Oceans (1), (2). What makes the ocean red is the metaphorical blood, shed from cut-throat competition fighting for growth and profits in a crowded and oversupplied market space (2), (3).
There are many problems with strategies in the Red Ocean as they usually focus on a choice between value and cost (4). Managers concentrate on building defence against competitors or taking advantage of competitors’ weaknesses. This focus on beating the competition seems, however, to have limits in that it is not always profitable to improve value or reduce costs particularly in markets that are declining and where differentiation strategy is harder due to a high number of competitors even in niche markets. The saturation of players fighting for market share leads to commoditisation of offerings and a decrease of customer loyalty (5) led by selecting market offerings based on price (6).
In highly competitive markets, building a competitive advantage may be a futile enterprise in a long-term perspective because using competition as a benchmark results in looking like the competitors (4), resulting in a zero sum game (5). Since competition alone cannot ensure long-term success, generating new demands and capturing new markets is necessary (17).
In spite of the grim picture of the Red Ocean, competition will always be a part of business (2) and hence the competition strategies will always stand. There is, however, a way to make competition irrelevant, at least in the short-term: a prospect especially attractive for small businesses whose disadvantaged competitive position in the Red Ocean may be restrictive.
Sailing into Blue Ocean
The waters of the Blue Ocean are free from competitors and full of opportunities but require changing mindset and focusing on customers and the value the company is to provide. This shift in thinking is a characteristic of value innovation strategies, namely Disruptive Innovation, Value Co-creation, and Blue Ocean.
The concept of innovation is commonly associated mainly with the strategy of Disruptive Innovation characterised by its displacing and destructive forces . The essence of innovation within the Blue Ocean strategy lies in its complementary force by redefining the problem and create a new demand or an offering (13).
The main difference between the Value Innovation strategies and competitive ones lies in the former’s orientation towards customers, creating and capturing new demand, recognising new demand potential in ‘non-consumption’ and aiming for a ‘value breakthrough’ (1).
In essence, the Blue Ocean strategy is based on creative thinking on positioning and finding uncontested market spaces (where competition is minimised) (7). There are several tools (8), proposed by the authors who developed the Blue Ocean strategy (9), which may help managers in developing the strategy with Strategy Canvas being the most significant and useful in explaining the idea of the approach:
Source: Svend Hollensen, (2013) (10)
The tool highlights three features (7):
- Critical Success Factors (CSF’s) or factors of competition (fig. 1) are sources of competitive advantage or disadvantage;
- Value curves depict the relative performance of CSF perceived by customers;
- Value Innovation is a new market space built on poor performance of competitors or creation of new CSF.
In the case of Nintendo Wii, the Blue Ocean was discovered in the last three CSF and two of four actions within four actions framework (11). This being reducing the CSF that are overdesigned without affecting perceived value (12) and raising the CSF above the current industry standards (12). The other two actions are: eliminating the CSF that are not a source of competitive advantage and creating the CSF that introduce new sources of value for customers (12), for example Virtual Reality.
The reducing and eliminating actions are of particular interest to small businesses as they enable them to free up limited resources this way and reduce costs or invest in raising and/or creating CSF. Nonetheless, it should be borne in mind that the Blue Ocean strategy is most importantly about raising buyer value, allowing the pursuit of differentiation (13).
The utility of the strategy canvas can be extended to the analysis of the overall business strategy. As an example, if a company’s value curve is high across all factors yet is not reflected in the company’s market share and profitability, this may signal oversupplying customers (9). Analogously, a low position of the curve may show the extent of undelivered value to customers. The curve may also indicate an incoherent strategy when zigzagged (9).
Such analysis should be undertaken with caution because it changes our orientation towards comparison against competition and leads to falling into the Red Ocean trap. This re-orientation in the Blue Ocean strategy is two-fold: from competitive markets towards ‘uncontested market space’ (1) and from customers to non-customers as the latter ‘hold the greatest insight into an industry’s pain points” (13).
It is also important to note that the Blue Ocean strategy is not about being first to market, the advantage of which by the way is questionable (14), but “about being first to get the customer offering right by linking innovation to value” (13).
The above features of the Blue Ocean strategy can be summarised as below:
- creating an uncontested market space,
- rendering the competition irrelevant,
- creating and capturing new demand
- abrogating the value-cost trade-off,
- aligning a firm’s activities with its strategic choice of differentiation or reduced cost (15).
The comparison of the dychotomic strategies is succinctly presented as:
Source: Jeffrey Boon Hui Yap, Khai Ling Chua, (2018)
Unfortunately, creating a new market space does not guarantee success for the company as it faces the danger of imitators entering the space with the product or service being imitated or even improved. In fact, the relevance of the First Mover (the pioneer) who creates or discovers a new market is minimised as a bigger and smarter competitor (the colonisator) can surpass the first-mover advantage (20). Hence, it is wise for the pioneer who is sailing into the Blue Ocean to prepare a strategy that will enable domination of the new market space for as long as possible before it turns into a red ocean (2).
On the other hand, the Blue Ocean strategy itself creates barriers to imitation (4). The new value usually conflicts with the current competitors’ brand image and does not fit their strategy. It also requires substantial changes in the competitors’ business practices, organisational values and culture. Finally, potential imitators face a cost disadvantage (4) – an entry barrier that can be reinforced if the first-mover is capable of creating economies of scale advantage.
Drifting at Blue Sea
When implementing the Blue Ocean strategy it is easy to stray to mental models with which managers are more familiar, and which the authors of the strategy, Kim and Mauborgne, call Red Ocean traps.
The essence of the Blue Ocean strategy lies in market creation. When creating a market, customer orientation must be abandoned as the focus is on non-customers. Care must also be taken to avoid confusing the strategy with market segmentation, which can only uncover a niche market within an existing market as opposed to creating a new market.1 Also differentiation attempts do not support the necessary creative aspect of the Blue Ocean strategy as the focus is directed towards creating, improving, eliminating and reducing the Critical Success Factors in order to stand apart and/or achieve low cost, within the existing industry space rather than creating a new market space.
The above traps should particularly concern marketing managers; of whom one of the most strategic imperatives revolves around differentiation and segmentation, therefore making them more prone to divert their thinking from the Blue Ocean strategy towards The Red Ocean trap of competition1. Marketing, remembering that Sales is a part of the Marketing Mix, plays a crucial role in developing business strategy owing to its in-depth knowledge and understanding of customer, industry market, and the company’s internal capability of value creation – the characteristics that place the marketing function in the central position of developing successful Blue Ocean strategy, which is not possible without an effective marketing strategy and its execution.
Another misunderstanding relating to the strategy is to perceive technology innovation as the only path to opening a new market space. The fallacy of such thinking, often accompanied by the aforementioned creative destruction concept, overlooks that the Blue Ocean is about value – not technology – innovation, although new technology may lead to creation of new value.
Anchoring at the Red Ocean
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