Blue ocean strategy: The new-age mantra for success

The difference between being an also-ran, a failure and a winner in the corporate marketplace could be a blue ocean strategy. What is a blue ocean strategy? Rather than beating the competition, a blue ocean strategy works by making the competition irrelevant, according to Renee Mauborgne, co-author of the best-selling book, Blue Ocean Strategy.

Ms Mauborgne, who was in India recently for The Premier Business Leadership Series organised by business intellegence and analytics firm, SAS Institute, prescribed four-action framework: eliminate, reduce, create, raise. That is, evaluate which factors the industry takes for granted but which can eliminated, which factors can be reduced to below industry standards, which new factors should be created, and which should be raised above industry standards.

Consider how Ninentendo employed the blue ocean strategy with the Wii. Wii's launch helped Nintendo grow sales 90% and profits, 77%. Its better established rival, Sony, was losing $ 240 on each Playstation 3 model sold, while Nintendo was making $ 40 on each Wii sold, Ms Mauborgne said. With the Wii, what Ninentdo did was ask itself how many customers used high-definition TV compatibility, a feature that was pushing up the cost of the console. The answer was hardly any. So it decided to do away with this feature, keep the price of the Wii low and also target non-core gamers with the product. Thus using a blue ocean strategy, it created a new market for itself instead of fighting for share in the market space dominated by Sony's Playstation and Microsoft's Xbox.

Blue ocean focuses on how to link innovation to commercial value. While traditional strategy, or red ocean strategy, exploits existing demand, blue ocean strategy creates and captures new demand in the same manner that Nintendo did with the launch of the Wii, said Ms Mauborgne. What Nintendo did was create an uncontested market space and make the competition irrelevant. Also in a red ocean, competing companies usually have to choose between differentiating themselves at the expense of pushing up costs, or stay low-cost and undifferentiated from rivals.

In a blue ocean, companies realise both differentiation and low cost. In other words, returns from investments in blue oceans are substantially higher. Yet 86% of business launches by companies fall in the red ocean category. The revenue impact of these red ocean launches, according to studies by Mauborgne and her colleagues, was 62% and profit impact 39%. The remaining 14% of business launches that fell in the blue ocean category, accounted for 38% of revenues and had a profit impact of 61%. "As sensible leaders, we should be investing more in blue oceans. But they (companies) always sign cheques for red. We know innovation is important but we have not learnt how to control risk and do it in a systematic manner," Ms Mauborgne added. So is innovation a black box? Ms Mauborgne's analogy to explain this was simple.

In the 1960s, quality was also not measurable. But in the late 70s and 80s, Japan came up with the concept of total quality management and just-in-time manufacturing. Later the concept of six-sigma was born and today, quality is measurable. Blue oceans are not about technology innovation. Research into blue ocean strategies in the 120-year-period from 1880-2000 demonstrates blue oceans are not about technology innovation. For instance, although the hugely successful iPod uses sophisticated technology, people buy it because it is so stlyish and simple. In the earlier example, Ninentendo, in fact, cut down on technology to achieve a blue ocean. "Incumbents often create blue oceans within their core businesses," Ms Mauborgne explained, citing the example of how Chrysler came up with the mini-van.

But there is no permanently excellent company or industry. "You're only as good as your most recent strategic move," explained Ms Mauborgne. Take Sony, which launched the Walkman and created a market for a personal stereo, which was so far non-existent - again, a blue ocean. But since then Sony has done many right and wrong things. However, the power of the blue ocean it created back then, still endures. And even today, Sony is top of mind recall for anyone who thinks of buying a music system or video recorder.

There many examples of blue ocean strategies across industries. In late 1990s, the retail financial industry was highly competitive. Traditional banks were offering more and more services with personalised offerings, and online companies were trying to imitate. In this scenario, ING Direct, came up with a blue ocean, a value proposition, which was to offer fewer products and four times higher savings rate with no minimum or maximum deposit. It realised the vast number of of products in the market were creating more confusion than choice to the customer.

By offering only few products and of much lower complexity, ING Direct was also able to keep its costs low. To sell these products, it did not need highly qualified staff and each product had to bring in at least 5% of revenues. Products that required more time and face-to-face interaction were not sold. Rather the focus was only on saving.
"ING runs its various divisions as a fleet of companies, each has enormous independence. SAS has one of the lowest people turnover in an industry where attracting and retaining talent is the biggest challenge," Ms Mauborgne said, listing some of the firms that had blue ocean strategies. Blue oceans are tough to imitate. How fast can blue oceans be imitated? In Ms Mauborgne's view it would take at least 10-15 years because it requires an alignment of the value proposition for buyers, profit proposition for companies and people proposition for employees.

Another instance of a company that created a blue ocean is Cemex, the world's third-largest cement producer. Cement was a commodity in Mexico but Cemex was able to convert it to an emotional purchase, which could be given as gift for occasions such as birthdays and festivals. It was able to differentiate itself from other providers and also gain marketshare. However, Ms Mauborgne said red ocean initiatives were also important because of the stability they brought.

What a blue ocean brings to the table can be illustrated with Microsoft's example. Despite being a very profitable company, its stock price is languishing because it doesn't have the next killer application. "How happy will you be to get a Samsung or a Philips instead of an iPoD?," Ms Mauborgne asked. "Blue will become red but sometimes blue can stay blue longer than common sense dictates," she said, about the following iPod commands. She also had some encouraging words for India, "If India wants to create the next global brand, it has to create a blue ocean. With all the Indian engineering talent in this room, think of what you can do."

Source:Blue ocean strategy: The new-age mantra for success- Corporate Trends-News By Company-News-The Economic Times
 

gautamsaraswat

New member
Thanks for the info. I have heard a lot abt this in the corporate world but was unaware. thanks for sharing the knowledge. there's a book also on the blue ocean strategy. If you have got the e book of that plz upload the same.
 
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