Two ice cream sellers arrive at Red Ocean Beach. Looking along red ocean strategy v2the beach the strategic question is ‘where to sell?’ If one of the sellers, Phule Phat Phlavor, hat asked you for advice, where would suggest they set-up? Would you recommend them set-up at the opposite side of the beach to maximize the distance between themselves and their competitor and exploit a niche? If this was your advice, hopefully they ignored it! The best position is right near each other in the middle of the beach, where their competitor is also likely to go.

Assuming ice cream buyers are equally spread across the beach, the middle of the beach provides the least average distance buyers have to travel to your cart and also allows gives the seller access to the competitor’s catchment area. This is a snippet of a classic story in economics that is used to illustrate the importance of neutralising competitive advantage in a fight between branded generics. It is also a red ocean strategy. Whatever your competitor offers, you offer. Where they sell, you sell. If they promote, you promote. Sound familiar? This toe-to-toe battle is about not giving your customers a reason to choose a competitor. Coles and Woolworths are masters at this game, as are politicians that know the power of the middle ground. Unless your competitors makes a major blunder or circumstance shine favourably on you, it is not the path to strong growth, but it is safe.

A blue ocean strategy, like I discussed in a previous post, takes a different more risky approach. The ice cream seller looks at their offer to see what they can remove, reduce, increase and create. A potential blue ocean strategy for Phule Phat Phlavor is to set-up near the beach exit, offering sit down service and delivery to your towel. Dumping their branded range and selling a scooped ice cream. Blue Ocean strategies are, in essence, about creating a new category serving the same general need. But how to do it?

One of the four actions in the blue ocean framework is to ‘create’ what the industry does not currently offer. In their book W. Chan and Renee propose six ways to create new elements to your offer that transform your offer. The first five elements are the same as Porter’s Five Forces.

  • Alternative Industries. Instead of focusing on your direct competitors, go broad and look at how other industries satisfy the same need, and adopt elements of their offering. For example, by looking at how cafes also satisfy the need for coffee, Nestle created Nespresso. Strategic Question “Why do people use one category over another when trying to satisfy the same general need?”
  • Strategic Groups. Within a category there can be distinct subcategories often linked to quality or levels of self delivery. This is not as broad as looking at alternative industries but still offers potential insights into how to meld subcategories together to create a new category. For example, Cleardocs combined legal services with government forms to create a DIY online documentation service. Strategic Question “Why do people trade up or down in your category?”
  • Buyer Groups. Industries often focus on a limited set of stakeholders and their needs. By addressing other stakeholders’ needs new benefits can be delivered that create an advantage. The targeting of consumers rather than stockbrokers with online trading created an entire new category of amateur day traders and getting stock tips from taxi drivers. Strategic Question “How can you build value through working with other stakeholders in the decision to consumption process?”
  • Complementary Products and Services. (offer value chain). Many goods and services require a cluster of products and services to exist. Incorporating these into your offer is classical vertical and horizontal integration of your value chain. When Apple created a retailer, iTunes, they propelled MP3 players from obscure to mainstream. Strategic Question “How can you address different needs in the purchase-consumption-disposal cycle of your products?”
  • Trends. Categories change over time from forces outside their industry. When ING DIRECT entered Australia in late 90’s with online banking that took advantage of growing household internet penetration and pioneered branchless banking. Strategic Question “What trends are likely to become category defining?”
  • Functional and Emotional Orientations. In categories dominated by one way of framing benefits there are potential advantages in reframing. Home and personal insurance is dominated by warm and supportive emotional advertising; iSelect chose to be distinctive with dorky humour along with other offer elements that has helped it carve out a role in the insurance market. This approach is the most loved by advertising agencies, and is the easiest to neutralise by competitors when done in isolation from other substantive changes. Strategic Question “Can we change the way people relate to the category?”

 

Developing Your Blue Ocean Strategy

Developing a blue ocean strategy is risky as it moves you from what is known to unknown and demands changes to your business model. To ensure you have the best chances of success requires both industry level research (buyers and suppliers) and working with your team to fully map out your opportunities and capabilities. While the above approaches will help you find new benefits in your pursuit of growth they also need to used as part of the four action framework – reduce, eliminate, increase and the one covered above, create – to ensure you have a well defined strategy that does not stretch resources beyond your capacity.

 

To find out more

  • Chan Kim, W. Mauborgne (2005). “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant”. Harvard Business Review Press
  • Chan Byron Sharp (2010) “How brands grow: what marketers don’t know”.Oxford University Press
  • Chan Porter’s Five Forces. See: http://en.wikipedia.org/wiki/Porter_five_forces_analysis