Sunday, January 11, 2009

Blue Ocean Strategy- Part 2

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Sunday, January 4, 2009

Blue Ocean Strategy - Part 1

I just finished reading a book on strategy: "Blue Ocean Strategy" written by W.Chan Kim and Renee Mauborgne. It is one of the best books written on strategy out there and that is why I wanted to share this with you in this post.

It redefines strategy as we know it today: competition-based and customer-driven strategies are referred to as "red ocean strategies" in this book. Authors provide examples of how companies continue to compete head-on in overcrowded industries - that results in nothing but bloody "red ocean" rivals fighting over a shrinking profit pool.

Definition: Strategy
The word "Strategy" derives from the Greek word stratēgos, which derives from two words: stratos (army) and ago (ancient Greek for leading). Stratēgos referred to a 'military commander' during the age of Athenian Democracy. This definition leads us to believe that strategy is about making such choices that beat the competition; that's a classic red-ocean strategy.

Blue Ocean Strategy
Blue Ocean Strategy is just the opposite. Instead of beating the competition, this new strategy focuses on making the competition irrelevant by changing the market-space. It starts with re-orienting the company's strategic focus from "competitors" to "alternatives" and from "customers" to "non-customers". Conventional Red Ocean Strategy is based on value-cost trade-off which explains why companies pursue either "differentiation" or "low cost" strategy. As it is conventionally believed that companies can either create greater value to customer at a higher cost or create reasonable value at a lower cost.

Blue Ocean Strategy leads us to break the value-cost trade off .Basic tenet of this strategy is that "differentiation" AND "low cost" should be pursued simultaneously by companies in order to create "blue oceans".

Key Principles of Blue Ocean Strategy
Blue Ocean Strategy is different than red ocean strategy in several ways. As I just mentioned, the focus of blue ocean is to
1) create "uncontested market space" unlike competing in existing market space (red ocean).
2) focus on non-customers to create and capture new customer demand
3) make the competition irrelevant
4) break the value-cost trade off
5) align firm's activities in pursuit of both differentiation and low cost

To read more about Blue Strategy analytical tools and frameworks, stay tuned for my next post-
Blue Ocean Strategy-Part 2. Also don't forget to check out previous posts from December last year: Purpose Brands, Learning to Love Recession, What's your profit? and Pocket-Price Waterfall.

RECOMMENDED READING: Blue Ocean Strategy (Kim & Mauborgne)

"Value Innovation"

[Excerpts from Blue Ocean Strategy, Chapter 1]

"Value Innovation" is the cornerstone of Blue Ocean Strategy (read more on Blue Ocean Strategy). Value innovation places equal emphasis on "value" and "innovation". Innovation without value tends to be technology-driven, market pioneering or even futuristic - shooting beyond what buyers are willing to accept and pay for. At the same time, value without innovation tends to focus on value creation on an incremental scale - something that creates value but it fails to make you stand out in the marketplace.

Value innovation is created in the region where a company's actions favorably affect both its cost structure and its value proposition to buyers.

Cost savings are made by eliminating and reducing the factors that industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. (read more on this in The Four Actions Framework). Value Innovation breaks the value-cost trade-off and enable companies to pursue differentiation and low cost, simultaneously.

Value innovation enable companies in the simultaneous pursuit of differentiation and low cost. By focusing on alternatives instead of just competition and by targeting non-customers (beyond existing customers), companies will create new marketplace and make the competition irrelevant.

RECOMMENDED READING: Blue Ocean Strategy by Kim and Mauborgne. To get the best deals on shipping, Canadian readers purchase this book from; International and US residents should use

Death of "Need-Based Marketing"

Peter Drucker got it right: "The customer rarely buy what the business thinks it sells him".

Most companies segment along lines defined by the characteristics of their product (category or price) or customers (age, gender, income level). But customer and product characteristics are poor indicators of customer's buying behavior, proven by the research work of Clayton Christensen,et al and published in the Harvard Business Review (Harvard Business Review on Innovation). And the current need-based segmentation and marketing is self-limiting at the best; in some cases, it could even mislead marketers in their quest to understand what customers "really" want.

Challenge is that "buyer needs" change far more often than marketers would acknowledge. These needs change and evolve continually - as a function of situations and surroundings (environment).

"Need-based marketing" does not explain why a guy takes out his girlfriend to a movie theater on one night but next evening, they order pizzas at home and watch movies on DVDs ordered from Netflix or picked from the nearby video store.

Another example: Say,you are rushing to get to work for that early morning meeting and you miss your breakfast. You then decide to grab a bite at a local coffee shop that's on your way to the office. However, a busy drive-thru at the coffee shop means that you could miss your meeting; so not taking a chance you decide to head straight to work. You are still hungry and a dairy shop near the office might be your best bet. This dairy shop has a quick drive-thru and they have recently started serving thick"fruity milkshakes" that are quite filling actually. And so you have just found your next best "alternative" to breakfast bun at the coffee shop. The new fruity flavored milkshake is healthier and filling at the same time. Add to this a faster drive-thru and customer service at the dairy shop, you have just "hired" milkshake over breakfast bun.

Customers don't buy products, they "hire" products to get a job done. Marketing guru, Ted Levitt, taught us 30 years ago that customers "don't want a quarter-inch drill. They want a quarter-hole!"
This concept was recently re-introduced by Clayton and others in Harvard Business Review. As illustrated in case of dairy shop example, you hire "milkshake" to feed your morning hunger in a healthier and filling manner. Not only that, choice of milkshake over breakfast bun at the coffee shop is reinforced by smaller line-up and faster drive-thru at the dairy shop. In fact, you don't need breakfast bun or milkshake, in fact what you need most is to feed yourself quickly to get you going till lunch. Milkshake and "Breakfast bun +coffee" are two alternatives to meet the same need. You choose the one that offers you the most value.

Products are just like "job candidates" hired by consumers to get a specific job done. The best candidate wins the job - product which can help consumer get a job done most efficiently and effectively will surely win.

We think of FedEx as the fastest parcel/courier service. When we think of BMW, we are reminded of high performance cars. Think of online auctions and eBay comes to mind. Best products position themselves as "purpose brands" (read this post). These products and brands are associated with a clear purpose and pop into customers' minds when they need to do the jobs that these products were optimized to do.

Marketers should think of this concept before rolling out new surveys, focus groups and forum discussions. It should be central to any customer-driven strategy. The key is to ask right questions. Ask the right questions and you'd unlock key information on the buying behavior of your customers.

Ask the "right" questions: The "right" question to ask in a survey is NOT what your customers want? Most of the times, they wouldn't know it either (historically, customersurveys are not very useful for ahead-of-the-curve technology products like walkman, iPODs and even PCs) and if customers know what they want, they would tell you and likely share a long list of feature enhancements for your product. But what they will never tell you is if they would also pay for the same. Unsuccessful product launches are testimony to this fact; after investing heavily in marketing research and surveys, companies launch products loaded with new features and technologies (that their customers asked for in those surveys) but dismal sales prove otherwise; customers do not value new functionality enough - at least not as much as to pay for it! These functionalities end up getting labelled as "bells and whistles".

Therefore, marketers should focus less on product-centric questions and more on customer-centric questions. By asking the right questions, marketers can unlock a wealth of information about customer buying behaviors.
  1. What your customers use your product for?
  2. What job are they trying to do?
  3. How do they use your product to get those jobs done?
  4. Is there a better way in which your product could help them perform customers perform their job better?
  5. What do they use as alternatives if they are not using your product?
These questions are key to unlocking buyer-value. Not only that responses to these questions would help in new product enhancements (#4) and finding new competition in alternatives (#5). It is valuable insight for any marketer and should help organization to develop best products and build successful brands.

I am not prophesying death of "Need-based marketing". It is a useful concept and has been put into good practice producing successful results over the decades. It tells us to focus on customer needs in order to win their business - that is and will remain an undeniable truth for years to come.

But as consumer choices increase and their needs change at any given moment, need based marketing in its current form proves static rather than dynamic to reflect that change.
Need-based marketing will cease to exist in its current form - as a snapshot in time of customer needs - assumption that buyer needs remain static over long periods of time. Need based marketing will face a certain death if it fails to capture varying customer needs and competing alternatives.

RECOMMENDED READING: For further reading, refer to following books.