In their book, “Blue Ocean Strategy”, W. Chan Kim and Renee Mauborgne outline the concept of Blue Ocean Strategy which creates uncontested market space and makes the competition irrelevant.
In Red Ocean Strategy companies compete on the same level for the same customers. An example of Red Ocean Strategy would be McDonalds. They compete for the same customers, in nearly the same way that their competitors do.
However, in Blue Ocean Strategy companies compete for customers on such a radically different level compared to other companies that they move out of the Red Ocean of their competitors to a Blue Ocean where they swim alone among their customers.
Blue Ocean and Red Oceans are not simple On/Off or Black/White situations. Blue Ocean Strategy slides along a spectrum with pure Blue Oceans at one end and pure Red Oceans at the other end. A company’s location along this spectrum is determined by several factors.
Rival verses Non-rival:
A rival good or service is one that can only be used by one company at a time. As they point out in the book, a Nobel prize winning scientist employed by IBM cannot be employed by another company.
On the other hand a non-rival good is one that can be imitated. Again as they point out Virgin Atlantic Airways launched its Upper Class brand that had the leg room of first class for a business class price. However, other airlines could use this idea and Virgin Atlantic could not restrict it. Hence this business strategy was non-rival.
Connected to the idea of Rival and Non-Rival is that of Excludability.
“A good is excludable if the company can prevent others from using it because of, for example, limited access of patent protection.” (page 126)
The best example of excludability is a pharmaceutical company that invents a new drug and then protects it with a patent. Any patient who needs this medication, must purchase it from the manufacturer who patented it.
Lack of Excludability:
The best example of the lack of excludability, that runs the risk of free riding, would be the concepts of Curves or Starbucks. Without a patent they are not excludable and are then vulnerable to imitation by other companies. And the moment a company’s goods or services are imitated is the moment they move from a Blue Ocean to a Red Ocean.
Blue Ocean Strategic Price:
Companies have to start with price point that a buyer cannot refuse and must keep it that way to discourage free-riding imitations.
“When exceptional utility is combined with strategic pricing imitation is discouraged.” (page 127)
What this means is the lower the “utility” of a good or service the lower the strategic price point must be in order to discourage imitation and free riding by competing companies. Lower “utility” naturally slides the goods and services closer to the Red Ocean end of the spectrum. But when the “utility” is high — when the goods or services are Rival and excludable ( i.e. patented), then the strategic price point can be set higher without the risk of imitation by other companies. This naturally slides the goods and services towards the Blue Ocean end of the spectrum.
“To maximize the profit potential of a blue ocean idea, a company should start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost. Here, price-minus costing, and not cost-plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match.” (page 131)
The examples that are given in the book are Cirque de Soleil who by eliminating animals and stars reduced cost considerably. The other example is Ford and the Model-T which was introduced in one color, one model, having few options. In addition Ford created the assembly line. As a result, rather than skilled craftsman, who were more expensive, and who took twenty one days to make one auto, Ford used unskilled workers, who did one task faster. This not only reduced the cost of labor, but reduced the time it took to make a car from twenty one days with skilled craftsman to four days with unskilled workers. This allowed Ford to price their Model-T close to the cost of a horse carriage. Something the other car companies could not do. Hence Ford moved into a Blue Ocean.
I would highly recommend Blue Ocean Strategy to anyone in a position of leadership in any organization that is struggling or going through change. I have used Blue Ocean Strategy to:
- Help guide a church that was dying and $24,000 in debt, into a unique Worship Experience and Ministry that placed us in a Blue Ocean with few if any competitors.
- Restructure my speaking business, including branding, that allowed me to move into a Blue Ocean of expertise with few if any competitors.
- Start a new business partnership from scratch, based on existing successful business model, which was then tweaked and allowed us to add two additional groups to our customer base. This moved us into a Blue Ocean with few if any competitors.
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