Tuesday, February 22, 2011

Blue Ocean Strategy


Companies have long engaged in head-to-head competition in search of sustainable, profitable growth. They have long fought for competitive advantage, battled over market share, and struggled for differentiation. These often lead to intense price wars, slow growth and low profitability.
So, can we break this rather pessimistic ending? In the academic world, the answer is yes.  Many business theorists offer mental frameworks to reinvent businesses. However, most of them are still at an experimental stage and they offer very little practical use.
Fortunately, a book titled “Blue Ocean Strategy” provides practical tools and methods for business practitioners to reinvent their businesses. These tools and methods are based on more than 15 years of research on more than 20 companies across different industries in Europe, Asia and America. The focus of these tools and methods are:  searching, formulating, evaluating and executing blue ocean strategies. Details are given in a mind map at the end of this post.

You may ask. What is the blue ocean strategy exactly? Imagine a market universe compose of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. They boundaries are defined and accepted, and the competitive rules of the game are known. Company’s strategies aim to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects of profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.
Whereas, blue oceans consist of three characteristic: untapped market space, demand creation, and the opportunity for higher profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. Company’s strategies in blue oceans focus on making existing competition irrelevant by resetting the rules of game in the industries.
Here, I would like to spend some time talking about a key concept of the blue ocean strategy. The concept is called value innovation. Value innovation is strategic logic which allows businesses to swim in the blue oceans. It focuses on making the competition irrelevant by creating a leap in value for buyers and businesses, thereby opening up new 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 businesses stand out in the marketplace. As the founder of Palace Theaters, Samuel Rothapfel said “Giving the people what they want is fundamentally and disastrously wrong. The people don’t know what they want … Given them something better.” 
In contrast, innovation without value tends to be technology-driven, market pioneering, or futuristic, often going beyond what buyers are ready to accept and pay for. In this sense, it is important o distinguish between value innovation as opposed to technology innovation and market pioneering. In fact, most of the successful companies in the blue oceans rely on simple technology, even in technology industries.  Furthermore, value innovation occurs only when companies align innovation with utility (buyer value), price and cost positions. 
In conclusion, the core concept of the blue ocean strategy is “customer focus”.  That is the cornerstone of the strategy. I guess it is a common sense to most of the people, however how many companies are actually achieving this? Well, in fact not many. Most of the businesses are still trapped in the red oceans and killing each other.  They focus too much on the competing with each other and forget about their customers. Reading “Blue Ocean Strategy” is a very good wakeup call for business practitioners to redefine their business positions.
Click Here To Download The Book Summary

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