Wednesday, 12 November 2014 00:00
In a world with cutthroat competition prevailing in almost every industry, from telecommunications and FMCG to insurance, outdoing rivals takes a front seat at any cost. Companies’ insatiable appetite to increase market share by initiating price wars, massive discounts and buy-one-get-one-free promotions, etc. will really affect the bottom line by drastically eroding profit margins.
This will be exacerbated by globalisation trends where the whole world is connected and information readily available, eliminating trade barriers among nations and thereby increasing throughput (rate of production) through imports and technological enhancements. All these mentioned factors lead to a mammoth influx of supply over demand.
In order to leverage one’s product over hundreds of other similar brands of the same product, the said product will have to be distinguished by some distinct features. No sooner the feature attracts consumers, all other brands will also incorporate that feature into their products thereby eroding the specialty.
Furthermore, incorporation of more and more features comes at a cost and due to head-to-head competition the company may not be able to increase the price as well.
In a survey conducted in the US regarding consumers’ brand loyalty, researchers came upon the fact that for major product and service categories consumer brand loyalty will be challenged as they do not particularly restrict themselves to a certain brand and in its absence they simply move to another brand without any hesitation.
Since all these main categories carry almost all important features i.e. if a rational consumer wants to buy Glaxo-Sensodyne toothpaste for sensitive teeth, in its absence, the same consumer will select Signal Pro Sensitive-Unilever as all these main brands are inbuilt with the same feature. In order to overcome cutthroat competition for the same shrinking pie at any cost, W. Chan Kim and Renee Mouborgne introduced a mechanism called Blue Ocean Strategy after years of research.
Red Ocean and Blue Ocean
In the book, the authors divide the whole market universe in two: Red Ocean and Blue Ocean. Red Ocean comprises the known marketplace where cutthroat competition prevails. Blue Ocean refers to the unknown market place where the rules of the game are waiting to be set. A brief snapshot of Blue Ocean and Red Ocean is seen in table 1.
If you turn the clock maybe 20 years back, the dominant industry available today may not exist and those who predicted and pioneered by now may be enjoying the lion’s share of the market. For example social networks such as Facebook, Twitter, LinkedIn, etc.
The founders of the above mentioned social networks may not be the first to start, however, they are the early birds and now established themselves so firmly in the market. Of course there is head-to-head competition among social networks as once this segment became attractive then everyone in the tech industry wanted a slice of the pie.
One such company is Google, which follows a do-a-little-bit-of-everything strategy with their work in everything from self-driving cars and wearable computer devices to balloons which transmit the internet.
In the same vein, our managers must think maybe 10 to 20 years ahead in order to carve a blue ocean where the competition is irrelevant rather than devising strategies to stoke and immerse an organisation in bloody red waters.
When considering the implementation of the Blue Ocean strategy, initiators must be particular about two things: Low cost and the differentiation simultaneously. This may be contrary to Michael Porter’s Generic Strategies in which he argues that if a company tries to pursue either low cost and differentiation, the organisation may end up in with a stuck-in-the-middle approach. However, organisations nowadays have successfully proven this fact by practicing both strategies simultaneously. This is called Value Innovation, which provides both the organisation and the consumer with a low cost advantage and enhanced value. According to the framework shown in table 2, the organisation will be able to focus on both cost-reduction and differentiation simultaneously.
Now let me consider the authors’ illustration of the aforesaid ERRC grid for the wine industry in the US.
The wine industry is a very sophisticated industry which involves a lot of prestige and technological jargon which will put an average person in an extremely uncomfortable position when selecting a suitable wine and sophisticated aging processes etc.
The US market is flooded with over 1,600 wineries competing head-on and over 75% of the market share is enjoyed by eight major players.
Casella Wines (Yellow Tail), which is an Australian-based winery, managed to create a Blue Ocean in the over-flooded wine market in the US by mainly focusing on reducing sophistication(see eliminate and reduce in the grid) and attracting non-wine users like beers and ready-for-drink cocktail lovers (Create in the grid) also to their product. This enables the wine producer to pursue low costs while adding differentiation to the product simultaneously. See table 3 for an application of the ERRC grid to this company.
Casella Wines (Yellow Tail) became the best imported US wine in 2003. However, some critics had some concerns regarding the quality of the wine due to the elimination of aging qualities and the prestige point of view.
However, it manages to increase the pie by not only limiting itself to wine lovers but attracting other alcoholic beverage consumers.
Practical issues in adopting Blue Ocean Strategy
Being in the brand activation industry for almost two years, I have had the opportunity to work closely with multinational and SME organisations. I hardly notice any Blue Ocean initiatives taken by any organisation. The most probable reason would be the organisation culture where there is no room for any mistakes. There is an Old Russian saying that “success has many fathers, while failure is an orphan”. Therefore, no one takes any initiative to think out of the box and follow blue waters. Most of the time the managers have been trained to follow rather than lead, which kills innovative paradigms and as a result they do slight extensions and modifications to the predecessor’s plan to be on the safe side without trying out any new initiatives thereby getting immersed in the bloody red ocean. I believe the red tape is also playing a key role in discouraging Blue Ocean initiatives as the same plate may be going through so many hands with a cumbersome approval process.
To follow Blue Ocean initiatives, the organisation will have to invest in resources as this follows a different path than what they used to be. Finally, the encouragement of initiatives to follow Blue Ocean should come from the top management. The success of the strategy hinges on the commitment of top management. To unleash the maximum potential of out-of-box thinking the companies like Google giving their employees 20% of their working time to experiment with their own ideas.
In the same way I believe there should be an allocated time for independent thinking and to try out a different way of doing things. This will come at a cost, however, it may be worth investing in. And furthermore, companies can set up and allocate separate resources for the implementation of Blue Ocean strategy thereby bringing all managers immersed in Red Ocean down to earth by showing the other side of the coin since immersion in the Red Ocean does not give any sustainable or healthy bottom lines.
(The writer can be reached via email@example.com.)