BusinessThe Blue Ocean Strategy (Pt. 1)

Based on the book “Blue Ocean Strategy,” written by Renée Mauborgne and W. Chan Kim This article is the first part to a series that will be developed over the coming weeks. Check back to this article periodically to access the later parts as they are released. Entrepreneur, philanthropist, and mayor of New York City until 2014, Michael Bloomberg is the founder of Bloomberg LP, one of the largest and most powerful providers of business...
Arjun GangakhedkarNovember 25, 2018

Based on the book “Blue Ocean Strategy,” written by Renée Mauborgne and W. Chan Kim

This article is the first part to a series that will be developed over the coming weeks. Check back to this article periodically to access the later parts as they are released.

Entrepreneur, philanthropist, and mayor of New York City until 2014, Michael Bloomberg is the founder of Bloomberg LP, one of the largest and most powerful providers of business and financial information worldwide. Bloomberg started the company in a one-room office back in 1981, and today it has over 19,000 employees and 192 locations around the world.

It wasn’t until about fifteen years ago, however, that Bloomberg truly began to make its mark in the financial industry. At the time, data providers like Reuters and Telerate held control over the online financial information space, targeting the IT managers of brokerages and investment companies to sell their platforms.

But to Bloomberg, this didn’t make sense. After all, it wasn’t the IT managers of these firms who moved size in the markets and generated returns for their companies – it was the traders! This quickly became an opportunity for Bloomberg to capitalize, creating a product that tailored directly to the needs of the traders.

You’ll see on the Bloomberg Terminal that the keyboard is labeled with common financial commands that traders use in their day-to-day operations, and each Terminal comes with two screens for traders’ convenience.

In designing the platform, Bloomberg didn’t stop at the features traders use in their work. Understanding that traders live busy lives, tirelessly spending hours in front of their computer screens at work, Bloomberg equipped the Terminal with portals to search for real estate, bet on sports, book reservations at restaurants, and much more. By pivoting its specific target market from the purchasers in the investment companies to the traders, Bloomberg managed to create a tidal wave that shifted the industry sales dynamic, provoking traders to push their employers to purchase Terminals for their companies. By dissecting their comprehensive buyer market, the company was able to identify a formerly ignored target group (the traders) with immense buying potential.

This is one of the fundamental mechanisms of the Blue Ocean Strategy, a system designed by W. Chan Kim and Renée Mauborgne to identify what drives profitable growth in a competitive marketplace. According to Kim and Mauborgne, the best way to grow in a competitive marketplace is to stop competing in oversaturated industries, or “red oceans.” In a red ocean, rivals continuously compete to outperform each other for a share in an existing market, often leading to messy competition in which products become more and more objectified. Instead, Kim and Mauborgne recommend forming “blue oceans,” empty market spaces where you pull the demand out of thin air; that is, capturing new market demand that was previously nonexistent. This is what Bloomberg did, and companies like Thomson Reuters, FactSet, Morningstar, and S&P are still struggling to catch up.

What the Blue Ocean Strategy is not:

As we’ve seen with Bloomberg, the Blue Ocean Strategy isn’t necessarily about using technological innovation to create a new market. Sure, Facebook created a new market in the social media space by inventing a completely new type of social network, but it doesn’t always have to be this way. Especially in today’s time, there’s often a good chance that the technology already exists; it simply needs to be linked to a new buyer market.

Additionally, you don’t always have to travel to Facebook lengths to identify and tap into an undiscovered market. Kim and Mauborgne point to AMC: a dominant player in the movie theater business, AMC introduced the concept of the ‘megaplex’ which sometimes consisted of over thirty movie screens in a single building. Blue ocean thinking like this is what led to higher profitability and increased sales, allowing visitors to gain access to a wider selection of movie showings at once.

Applying the strategy:

To apply these principles to your own ventures, we’ll take a look at six fundamental approaches to identifying and capitalizing on new market boundaries. But before that, bear in mind two key concepts to ensure that you aren’t deviating from the strategy:

  1. Ensure that you are not implementing red ocean thinking in your blue ocean strategy. Many people are often tempted to use the competition as a benchmark to their performance, but this isn’t particularly conducive when you’re entering a blue ocean (think about it; why should you look at the sharks in another ocean when you’re swimming in your own sea of fish?). When the Model T was released in 1908, Ford identified the middle class as his buyer market. He could have easily tried to follow the footsteps of manufacturers like Rolls Royce to develop higher-end cars, but what good would that have served his target market? Instead, the Model T was created as an affordable and durable car that could withstand everyday use, bringing Ford to be one of the largest carmakers in the world.
  2. Focus on how to reduce the expenses you incur while maximizing the value you offer to your customers. A lesson we can also take from Ford, the usage of the assembly line and interchangeable parts reduced the car manufacturer’s costs by making it easier to produce cars in high masses (cutting the production time per car to a mere four days, despite the industry norm being 21) while allowing consumers to repair the cars themselves (a much more convenient alternative to, say, having the entire car replaced). Not only does this allow a company to pursue product differentiation and efficiency, but it also breaks the link between value and cost – making it possible for companies to maximize value while cutting costs at the same time.

Keep these two ideas in mind when we examine the “Six Paths Framework.”

The Six Paths Framework

The Six Paths Framework is a set of six tactics of deviating from red ocean thinking and reinventing your market approach. According to the authors, the framework is generally applicable across most industries and operate under the notion that new ideas can be generated from familiar data.

  1. Industry – While red ocean players focus on competing within their industry, blue ocean players expand their focus across other markets that produce substitutes or alternatives to what is offered in their industry. Broadening your competitive focus to consider substitutes (defined as products and services that ultimately serve the same function) and alternatives (defined as products and services that might not have the same function, but nevertheless serve the same purpose) can help position yourself into a market of your own.
  2. Strategic Group – While red ocean players focus on their competitive position within a single strategic group in their industry, blue ocean players broaden their sights to multiple groups. In other words, rather than solely playing with companies pursuing a single strategy, why not expand to other strategies as well? A good example of this is Maserati. Known as a luxury car manufacturer, the company began to produce a more affordable model known as the Ghibli, entering strategic competition with BMW, Mercedes, and Audi. Of course, this principle can apply in the other direction as well; although unsuccessful, Apple began to compete with the luxury watch market by unveiling the Apple Watch Edition, a watch with a price point comparable to that of Rolex, Breitling, and Cartier, among others.
  3. Buyer Group – While red ocean players focus on better serving the buyer group, blue ocean players completely redefine the buyer group. This is the path that Bloomberg took when pivoting their strategy to appeal directly to traders rather than IT departments. Identifying the specific buyers in the industry and creating new markets by tapping into undiscovered buyer groups can be an incredibly robust growth strategy.
  4. Scope of Product or Service Offering – While red ocean players focus on maximizing the value of the product or service that they are selling, blue ocean players look across to offerings that complement their primary product or service. Consider GoDaddy, one of the world’s largest web hosting providers. In addition to their suite of web hosting products, GoDaddy heavily markets their 24/7 sales and support team to help you with whatever you need, and whenever you need it. Complimentary offerings like this might entice customers who have high user traffic to their websites and cannot afford to incur any downtime or other issues.
  5. Functional-Emotional Orientation – While red ocean players focus on improving the price performance within the functional-emotional orientation of their industry, blue ocean players rethink the functional-emotional orientation of their industry. Industries are typically driven by two types of appeals: emotional appeal and functional appeal. By understanding what drives your industry, you can choose to disrupt an emotional appeal by eliminating the extraneous features and processes of your product (simplifying your product), or a functional appeal by inserting emotional elements and cues into your product.
  6. Time – Lastly, while red ocean players focus on adapting to external trends as they occur, blue ocean players are more proactive and take part in shaping external trends over time. This is a fairly simple concept and serves to distinguish the reactive nature of red ocean companies and the proactive nature of their blue ocean counterparts.

The Blue Ocean Strategy is not rocket science and is simply intended to be a creative model that you can apply to familiar data to identify new opportunities for growth. However, there is much more that the framework has to offer: The Four Hurdles to Execution, Tipping Point Leadership, and the Three E Principles of Fair Process, Buyer Utility, and so on.

Over time, we will cover the rest of these principles, but that’s it for now.

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