The last time I did a book review was probably back in primary school. Roughly a good 15-20 years back.
I recently completed the book, Blue Ocean Strategy, written by W. Chan Kim and Renee Mauborgne. It talks about business strategy which is critical for investors as it provides a framework to analyse a company’s approach to expand into new market opportunities. A big part of investing is about making an informed judgement between what the current market valuation is telling us about a company’s growth potential versus our expectations of the company’s growth potential. When our expectations vastly surpass the market implied growth potential, it offers an attractive investment opportunity that we can astutely act upon.
Before I begin, let me first define what the blue ocean strategy is.
“Blue ocean strategy is the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand. It is about creating and capturing uncontested market space, thereby making the competition irrelevant. It is based on the view that market boundaries and industry structure are not a given and can be reconstructed by the actions and beliefs of industry players.”
Takeaway 1: Focus on the customer, not the competition
The tenet of blue ocean strategy revolves around the concept of Value Innovation. Value Innovation reframes the focus from beating the competition to making the competition irrelevant by creating a leap in value for the customers, thereby opening up new and uncontested market space.
The more a company focuses on staying ahead of the competition, the more they ironically tend to look like the competition. To which blue ocean strategy would respond, stop looking to the competition.
Instead, value-innovate and let the competition worry about you.
When we look around us today, there are numerous companies that has reaped the rewards of their blue ocean strategy.
Amazon, unlike major book retailers such as Barnes and Noble, did not build a physical bookstore to sell books. Instead, Amazon created an online infrastructure that empowered individuals to browse and purchase books that were shipped directly to them. Grab/Uber radically transformed the business models of the taxi industry by developing a mobile application that connected drivers with riders. QB house, changed things up in the Asian barbershop industry by lowering the emotional appeal of a haircut and turning it into a highly functional one.
The below is a table that sums up the differences between a blue ocean vs a red ocean strategy.:
Analogous to shooting a basketball, the focus should be squarely on the hoop, not the competition. Focus on making your shot, let the competition worry about you.
Takeaway 2: The Eliminate – Reduce – Raise – Create framework
The Eliminate-Reduce-Raise-Create framework helps us to determine if, and how a company aims to create a blue ocean strategy.
This framework is highly aligned with the approach of pursuing a low cost and differentiation approach. Companies that are solely focused on just raising and creating to deliver value to customers incur significant costs. The elements of eliminating and reducing provide valuable insights as to how companies can reduce their cost structure, pushing companies to break the stubborn concept of a value-cost trade-off.
Over the weekend, I was visiting a Decathlon outlet to grab some sporting gear when it struck me that the speed at which Decathlon was displacing sporting goods retailers in Singapore was astounding. I used to get my gears from the likes of Sportslink, World of Sports, Royal Sporting House etc… but I barely see them around today. I started taking mental notes to see if the Eliminate – Reduce – Raise – Create framework could be used to explain Decathlon’s rise to prominence in Singapore. Here is what I noticed:
- Eliminate: Premium Brands
- Reduce: Prices, Prime locations
- Raise: Variety, Test zones for sporting gear, Friendly service
- Create: Shopping experience, Online presence, Delivery
Decathlon created a blue ocean strategy by breaking the price quality trade-offs that customers had to make when it came to sporting goods. The first thing that anyone notices when stepping into a Decathlon store is the void of premium brands such as Nike, Adidas, Under Armour etc.. Instead, we are introduced to in-house brands such as Domyos or Quecha, which are termed by Decathlon as “passion brands”. Aside from a mega outlet in Singapore’s prime shopping district, majority of Decathlon outlets are located in the city fringes. By eliminating premium brands, reducing stores in prime locations, it has empowered Decathlon to offer quality goods at affordable prices. Unlike traditional sporting good retailers in Singapore, Decathlon has redefined the shopping experience for sporting gears by offering a massive variety and providing “test zones” for consumers to try out sporting equipment such as bicycles, skates, treadmills etc… Decathlon’s strong online presence bolsters the fun and easy shopping experience through delivery services, facilitating exchanges and refunds etc…
The Eliminate – Reduce – Raise – Create framework gave me some clarity as to how Decathlon was able to create a new value curve, displacing the incumbents sporting goods retailers in the industry.
Takeaway 3: Reconstruct market boundaries
The first principle of a blue ocean strategy is to reconstruct market boundaries. However, successfully identifying a way to reconstruct market boundaries represents a significant challenge. The author offers six approaches in which a company can adopt to remake market boundaries. Using a mix of examples from the book and my own musings, the below are examples of companies that have successfully deviated away from existing competition by reconstruing the market boundaries for their products or services.
- Look across alternatives industries – Southwest airlines focused on the key factors that lead passengers to trade the speed of airplanes against the economy, and flexibility of car transport. By eliminating seat selections, reducing meals, and lounges, Southwest was able to offer high speed transport with frequent departures at affordable prices.
- Look across strategic group within Industries – The founders of F45 carved out a blue ocean strategy by creating a community for individuals looking to get a fun and effective workout. F45 identified a gapping segment between gym go-ers that engaged an expensive person trainer versus those that did not. F45 was therefore, built at a price point somewhere in between that normal gym goer and the person paying for personal training. Working out as a community, with the guidance of trainers made exercising more motivating and inspiring.
- Look across chain of Buyers – Nintendo, with the arrival of gaming consoles, targeted individual end users instead of arcade shops where games were traditionally sold to
- Look across complementary product and service offerings – Atlassian started with the intention to help software teams work better. Subsequently, they expanded their features and product offerings to augment use cases laterally across user types and vertically within organizations. To read more about my post on Atlassian, click here.
- Look across functional or emotional appeal to buyers – QB House lowered the emotional appeal of a haircut and turned it into a highly functional. By doing so, it was able to reduce the price of a haircut to 1,000 yen versus the industry average of 3,000 to 5,000 yen while raising the hourly revenue earned per barber nearly 50 percent, with lower staff costs and less required retail space per barber.
- Look across Time – Spotify created ongoing access to all music ever created, obliterating iTunes that was once considered a blue ocean by unbundling the physical album in individually downloadable (and bought) tracks.
Takeaway 4: Noncustomers, not customers, hold the greatest insight into an industry’s pain point
Focusing on noncustomers to help identify commonalities amongst buyers is important for a company looking to fundamentally recreate a value curve of an industry. Conventional logic often drives companies to look at how they can better their rivals to serve their existing customers. Blue ocean strategy guides companies to focus on noncustomers before customers.
Subway, a household fast-food chain expanded its blue ocean strategy by tapping into the huge latent demand of noncustomers of fast food. Scientists have long associated rising obesity rates in developed nations with the popularity of fast food that were high in saturated fats and sodium. A stigma grew, prompting health conscious individuals to refrain from consuming fast food. Subway noticed a trend that consumers were becoming increasingly health conscious but found it expensive to consume healthy food due to their pricy nature.
Subway’s solution: It offers affordable and healthy sandwiches made fresh, and at a speed that is similar to a fast-food restaurant. It embarked on a series of marketing campaign (See Jared Fogle Campaign) to educate consumers that Subway’s sandwiches were healthy and low costs.
By looking at the reason why certain people did not consume fast food, Subway was able to unlock an entire segment of health-conscious individuals that wanted an affordable and healthy meal.
Takeaway 5: Price first, then costs
Creating a blue ocean strategy entails unlocking some form of utility for the target market. Consumers of the target market usually have a range of prices in which they are willing to pay for the utility a company’s solutions offer. Hence, setting the right strategic price ensures that a company’s product/service is aligned with how much the target market is willing to pay. Allowing costs to drive prices not only results in a misalignment with what consumers are willing to pay, it provides little incentives to companies to cost innovate.
Cost innovation – Ford’s Model T
Back in the days where horse carriages were the pervasive mode of Transport, cars were priced roughly three times more expensive than a horse carriage. Instead of aligning their pricing with other cars, Ford strategically priced its Model T competitively with horse carriages. To meet its aggressive cost target, Ford revolutionized conventional car making practices via cost innovation. First, they made the Model T in one colour and one model, allowing them to scrap the standard manufacturing system, in which cars were handmade by skilled craftsmen from start to finish. Instead, Ford introduced the assembly line, which replaced skilled craftsmen with ordinary unskilled laborers, who worked one small task faster and more efficiently. The result was that the first Model T cost $850, half the price of existing automobiles in 1908.
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