Wednesday, July 14, 2010
Blue Ocean Strategy
“BLUE OCEAN STRATEGY” or BOS is a revolutionary management philosophy that questions all the conventional wisdoms that have been predominant in the management circles till date. It consists of a very radical view that if one wants to beat competition the only way that is possible is to not focus on your competition. The idea came first into picture in the form of a bestseller namely “BLUE OCEAN STRATEGY” written by two INSEAD professors “W. Chan Kim” & “Renée Mauborgne” in the year 2005. The book talks about creating blue oceans that is uncontested market space. So far the traditional wisdom had been to fight against competition, most of the successful management theories in field of strategy such as “porters five force” “resource based model” and “delta model” basically talks about gaining competitive advantage with the help of product differentiation and price cutting. Such kinds of strategic moves are known as “RED OCEAN” strategy where companies fight bloody warfare against each other. It had been seen that though such moves might give a firm competitive advantage over another and can also result in top lines but since a large amount of resources are wasted in fighting against the competition ,cutting price and providing high end solutions to the customers at lower price it often ends up affecting the bottom line. Contrary to this belief “BOS” talks about creating blue oceans or in other words uncontested market space. It says that rather than focusing on existing customers and devising strategies to beat competition in order to get a larger share of the existing market space, companies should try to focus on the large share of population that has so far been the non customers of the company. Rather than trying to woo the same existing customers by giving them higher service at lower price the prime focus of the firms should to achieve value innovation. According to the book “VALUE INNOVATION” means:-
“ Value innovation is created in the region where a company’s actions favorably affect both
its cost structure and its value proposition to buyers. Cost savings are made by eliminating
and reducing the factors an industry competes on. Buyer value is lifted by raising and
creating elements the industry has never offered. Over time, costs are reduced further as
scale economies kick in due to the high sales volumes that superior value generates.”
THERE ARE FEW THINGS THAT IS VERY FUNDAMENTAL TO BLUE OCEAN STRATEGY:-
1> “BOS” fundamentally tries to capture the non customers of a company.
2> “BOS” proposes to shift the focus away from competition.
3> “BOS” proposes “avoid segmentation and to look at the commonalities between customers and non customers spread across various profiles”.
4> “BOS” talks about diverting from existing industry norms and coming up with value innovation.
Along with proposing a strategy Blue ocean strategy also consists of various strategic tools that can be applied to implement “BOS” in real life business situations. These are:-
ERRC FRAME WORK:-
A strategic frame work which plans to :-
1. ELIMINATE:- eliminate few of the product features that are not required by the non customers.
2. REDUCE:- Reduce few of the product features in comparison to the industry standard that are not very essential for non customers.
3. RAISE:- Raise the standard of few of the product features higher than the industry standard.
4. CREATE:- Create few new product features that can fulfill the requirements of non customer .
In order to implement “BOS” it is very essential that the way companies think needs to be changed .Until unless there is no paradigm shift in this, it will be very difficult to implement “BOS”. There are fundamentally two kinds of paradigm shift that is very important over here.
1> Focusing on non customers:-
Companies need to start focusing on their non customers rather than customers. Focusing on non customers can give them various kinds of new insights which otherwise is very difficult to obtain. Non customers are generally classified into three types .These can be:-
a) Customers who are mentally your non customers but occasionally do use your product out of some compulsion.
b) Customers who have the needs for the kind of service your industry offers but who still prefers to choose an alternate industry to fulfill their needs.
c) Customers who are far away from your industry and they are not at all willing to use your product/service.
2> Try to see the commonalities rather than specific requirements: - Often it had been seen that large amount of resources get wasted in segmenting the existing customers and providing them high value services. An alternative approach could be rather than trying to concentrate in differentiation, companies can try generalization. Between customers and non customers there is always some kind of commonalities. There are some basic requirements which are shared by people across both the customer as well as non customer bases. Companies should try to leverage this and try to come up with such cost efficient solutions that can fulfill the main requirements of both kinds of people that is those who are customers as well those who are non customers. That may help in increasing the market share by leaps and bounds.
UTILITY, PRICING, COSTING, ADOPTIBLITY MODEL:-
1> UTILITY: - In order to make a new product a big hit in the market it is very essential that the product must have exceptional utility for its end users. The very same principle holds true for blue ocean strategy,”BOS” calls for coming up with value innovation, but this value innovation will not serve any good until unless it does not have exceptional utility in the non customer base.
2> TARGET PRICING: - Along with utility it is very essential that the price should be fixed in such a way that it can be afforded by a wide range of customers.
3> COST: - Along with price it is also essential that the cost of innovation and producing the product should be very much within the limits of the budget of the company. Proper pricing cannot be done until unless costing is not with in budgets.
4> ADOPTIBLITY: - the new innovative measures should find easy adoption both amongst the customer base as well as among the employees of the company.