Why do some companies succeed in creating new markets while others fail?

This question has driven the work of W. Chan Kim and Renée Mauborgne over the past ten years and led them to conceptualize a framework for business innovation and success: Blue Ocean Strategy.

Blue oceans vs red oceans and the new laws of competition

The metaphor of red and blue oceans describes the market universe.

Red oceans

Red oceans represent the highly competitive market spaces we know today: The car industry, the fast food industry, supermarkets and retail chains etc.

To sustain themselves in the marketplace, practitioners of red ocean strategy focus on building advantages over the competition usually by looking at what competitors do and striving to do it better, enabling them to grab a greater share of product or service demand.

In this environment, securing a bigger share of the market is seen as a zero-sum game: one company's gain can only be achieved at another company’s loss. As a result, competition becomes the defining variable of strategy.

As the market space gets crowded, opportunity for profit and growth are reduced.

The value of products in these markets are reduced to simple commodities in a crowded niche. In this ocean, the water is bloody with cutthroat competition, hence the term "red oceans".

Blue Oceans

Blue oceans, in contrast, denote industries which do not exist today, representing a wellspring of untapped market space free from fierce competition.

It is based on the view that market boundaries and industry structure are not fixed and can be reconstructed by the actions and beliefs of industry players.

By expanding the demand side of the economy, new wealth is created rather than fought over. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored.

Value innovation

Sound unrealistic? It’s easy to list off “unicorn” companies which have achieved remarkable success, like Uber, Amazon or Airbnb but what about the lesser known instances?

W. Chan Kim and Renée Mauborgne studied 150 “strategic moves” that, once executed, led to “value innovation”. Value innovation, as articulated by W. Chan Kim and Renée Mauborgne, is not to compete but to make the competition irrelevant by changing the playing field of strategy.

Strategic move: Cirque du Soleil

How Cirque du Soleil expanded their market and unlocked new demand, is owed to a simple tweak in the traditional business of circus performance.

By blending opera, ballet and theater and combining them under the big top, while at the same time removing star performers and animals, Cirque du Soleil created a leap of value in the performance experience which was unique to their audience and employees. This unlocked new demand without fierce battle with competitors, whilst simultaneously allowing it to increase ticket prices for shows.

Strategic move: Peirce College

Peirce College is a private, non-profit college located in Philadelphia, U.S.A. Despite a good reputation, by the late 1980s post-secondary education, particularly around regional colleges, was a highly competitive environment. 

With the appointment of a new President, Peirce College looked to provide value innovations, first by identifying markets which were being ignored:

• Working adults who could not complete an on-campus degree while fulfilling their duties at work.
• Military personnel (retired as well as active service) and those who worked in employment sectors that were constantly relocating
• Learners residing in other regions or even in foreign countries that Peirce never considered as its potential customers

Exploring the commonalities across these groups provided Peirce with important insights to begin reconstructing their markets.

In response, the College offered four year collegiate status and bachelor degree programs delivered: on campus, on-site (in corporate and community locations) and online (which was only used by corporate entities at the time). 

Each platform offered the same material, taught by the same professors, and produced the same educational outcomes, giving students the flexibility to move seamlessly within the three systems.

The results were staggering:

• In the first year, 0nline enrollment forecasts were exceeded by 300 per cent
• Peirce achieved international reach in less than a decade
• Total enrollments nearly tripled

You can see more strategic moves from the research here.

Six key principles for your Board and executives to embrace

1. Don't buy what the sector has defined itself as. If you accept the definition, you also accept the boundaries and you will fail to see potential for innovation.
2. Be aware that opportunities are all around you, waiting to be recognized.
3. Focus on creating your vision, not the 'how-to' or operational details.
4. Develop strategies and build the execution into them.
5. Understand there are always hundreds of ways to solve a problem...keep looking!
6. Measure, change, measure, change

How can you move beyond the mold of what your sector or organization does, and embrace an outside-the-box approach? Leave your comments below.

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