Why do some companies succeed in creating new market spaces while others fail?
This question is answered by authors W. Chan Kim & Renée Mauborgne in their best-selling business book “Blue Ocean Strategy”. If you don’t have time to read the entire book, here’s a concise and straightforward summary containing key insights and useful application!
Book Summary: Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne
The “Blue Ocean Strategy” book debunks the popular notion that in order to win in business, we must beat the competition.
Because of widespread access to information and resources today, it becomes too easy for businesses to enter an already established market. With the presence of many businesses in an industry, that market becomes saturated and the only way to succeed is to capture more market share.
What are Red and Blue Oceans?
Adopting this strategy is called Red Ocean Strategy, wherein the water turns bloody as many businesses try to compete with and outdo each other.
But according to the authors W. Chan Kim and Renée Mauborgne, if businesses instead focus on sailing past the red oceans and into the untapped markets of Blue Waters, there is a bigger chance of survival and profitability.
W. Chan Kim and Renée Mauborgne made a study of 108 businesses in 30 various industries. In those 108 businesses: 92 of them adopted a red ocean strategy and focused on ousting the competition. The remaining 16 businesses, however, embraced a Blue Ocean Strategy, searched for their own markets, and avoided competition.
What they found out was that, in terms of the accumulated profits of all 108 companies:
- The 92 Red Ocean businesses produced 39% of the total profits
- The 16 Blue Ocean businesses produced 61% of the total profits
The results show that companies that competed in the Blue Ocean produced more profits. Not only that, the authors also found out that these blue ocean businesses became the market leaders in their respective industries for around 10-15 years!
Most companies consciously focus on beating the competition in Red Ocean markets. These markets are over-crowded and companies soon discover that margins are shrinking and growth opportunities become limited. The profit impact is actually significantly higher if businesses chose to develop new market spaces or Blue Oceans.
How to create Blue Oceans?
For authors W. Chan Kim and Renée Mauborgne, the secret to creating blue oceans is a strategy called Value Innovation.
The goal is to create and lift value for the customers while driving down costs for your company. But who exactly are your customers?
The authors suggest that you focus on infrequent customers or customers in adjacent markets instead of regular ones that everyone is competing for. These are the customers who either avoid your market or who have never heard of your market. There is an example below explaining how a company, Casella Wines, got to apply this in their business.
But, first, how exactly do you create value?
What you can do is look at the typical business model in your market and ask yourself these questions:
- What process can we Eliminate?
- What standards can we Reduce?
- What standards can we Raise?
- What standards/processes can we incorporate from adjacent industries to Create a new experience?
By using this Eliminate-Reduce-Raise-Create (ERRC) framework, you can reconstruct your business systems and get to provide value by creating an entirely new experience for your customers, while keeping your costs low.
Canella Wines – Example of creating the Blue Ocean
How did Casella Wines use the ERRC framework to create their Blue Ocean?
Instead of competing in the already established premium wine market, Australian wine maker Casella Wines set out to understand why non-wine drinkers (beer and cocktail drinkers) avoid wine.
Based on the company’s research, they discovered that beer and cocktail drinkers thought wine was intimidating, pretentious, and too unpleasant to drink.
Given these useful customer insights, Casella Wines addressed the frustrations of “non-customers” and created a new brand called Yellow Tail, marketed as a wine that is “fun, un-intimidating, and easy to drink”.
Casella Wines used the ERRC Value Innovation framework this way:
- They Eliminated the wine aging process that made the wine taste too complex for non-wine drinkers which also saved them money on oak barrels and storage costs.
- They Reduced their inventory to just two wines, a white Chardonnay and a red Shiraz. They offered fewer variants than most wine businesses, yet it actually made the wine selection process easier and less intimidating for non-wine drinkers.
- The company Raised their grape selection standards which improved the freshness and drinkability of the wine, making it fun to drink.
- Finally, they Created a new wine experience for non-wine drinkers by borrowing and incorporating a few standards from the beer industry. For instance, they simplified the wine label and removed fancy language that talked about grapevines and the winemaking process. They put an image of a kangaroo which symbolizes both the origin of their wine, Australia, and the name of their wine company. This simplified label made Casella Wines more inviting, less pretentious, and more fun and adventurous to customers.
Conclusion
Blue Ocean Strategy challenges businesses to make the competition irrelevant by capturing new demand. The authors remind us that every market space and every industry was once new and was once created by someone.
“The only way to beat the competition is to stop trying to beat the competition.”
With this knowledge from the Blue Ocean Strategy book, why not decide to create your own Blue Ocean?
*** Is it possible to be rich and successful just by working 4 hours a week? Author Tim Ferris says yes. Click to read a summary of his book The 4-Hour Workweek!
