The book we are going to discuss today is Blue Ocean Strategy, Expanded Edition and we highly recommend it as the ideas and examples are mandatory knowledge for everyone doing business in nowadays oversaturated markets.
An overall belief is: if a business owner wants to be successful the business needs to beat the competition. But Renee Mauborgne and W Chan Kim believe that striving to beat the competition in an established market is a very unwise business strategy, especially if your business tries to compete over an established market (e.g. fast food, health & beauty, fitness markets).
If your business is trying to outperform the competition you are adopting what the authors call “Red ocean business strategy”. Nowadays, thanks to globalization, the widespread access to information, and the major improvements in technology it is very easy for business owners to try their luck into an established market. The consequences are vastly oversaturated markets, and the only business strategy for success in such markets is to compete with the other businesses for market share. Those battles (metaphorically) turn the waters bloody and this is where the term “Red ocean” comes from.
The alternative for the business owners is to sail past the “red oceans” and focus on searching and creating a “Blue ocean business strategy” for untapped market potential. According to the authors, this will greatly increase the new business’ chances of survival and profitability. The authors studied about 110 new businesses, across more than 30 different industries. About 100 out of those businesses adopted “Red ocean business strategy” and only a small number of businesses dared to adopt “Blue ocean strategy” to avoid competition. They searched for (and created) new markets to dominate. After some time, the authors measured the collective profits of all the companies and found out, that the “Red ocean” businesses only accounted for about 40% of the total profits, while the “Blue ocean” businesses managed to generate 60% of the total profits.
Renee Mauborgne and W Chan Kim studied the companies extensively for years and discovered that the “Blue ocean” businesses dominated their respective markets for 10 to 15 years after their initial launch, while many of the “Red ocean” businesses run out of business after a couple of years (or sooner).
As a business owner, you are probably asking “Ok, how could my business use blue ocean strategy and make competitors irrelevant?”. We will provide some examples of companies and how they did it.
They used a “Blue ocean strategy” to find an uncontested ocean of opportunity and dominate the market for over a decade, by creating a new category of wine, and become the best-selling wine in Australian and United States history.
Casella wines set out to create a successful new wine product. They knew the market is oversaturated and competing with existing wine brands in the traditional manner would be extremely difficult. If they have chosen a “Red ocean strategy” they would need to establish the brand over the span of several years and hope to win several awards along the way, hoping to gain the favor of existing wine drinkers. Those should have been a lot of investments leading to some very uncertain results.
Casella wines decided to take a different approach instead, and not only focusing on wine drinkers like most wine businesses. They mainly focused on beer and cocktail drinkers’ consumers in adjacent markets of other alcoholic beverages, who either infrequently drank wine or avoided wine altogether. They approached these non-wine-customers and ask them a few questions. E.g.: why did they avoid drinking wine and what was specifically discouraging them from drinking wine. These non-wine-customers shared many of the same reasons for avoiding wine. One of the most important reasons was that purchasing wine is intimidating, and having to choose from such a large variety of wines makes the process of purchasing wine overwhelming and time-consuming. Another important business discovery was that most non-wine-drinkers find wine unpleasant to drink – as it is either too bitter, harsh, or too sweet. Another reason was that those non-consumers believed wine is simply not so much fun to drink, compared to beer, cocktails, and other beverages. The wine seemed too fancy, traditional, and elitist.
Casella wines business accepted the challenge and set out to make a wine that would appeal to
these frustrated consumers of non-wine-drinkers. At the same time, they kept producing a wine that would be considered high quality to most wine drinkers.
The newborn wine product was called ‘Yellowtail’. The non-wine-drinkers found it very easy to purchase, drink, and enjoy. It was sweet enough to keep their palates fresh and keep them wanting more but not too sweet as to be associated with cheap and low-quality wine.
Casella wines had created a new category of wine that was fun, easy to drink, and relatively high
quality and ultimately caused a large portion of the non-wine-consumers to embrace the new category of wine. The new product provided incredible value; ‘Yellowtail’ was a high-quality innovative product at an incredibly good price. A price that was comparable with most beers and much cheaper than most of the cocktails.
The business strategy to create an innovative new product, while the same keeping costs low is what Renee Mauborgne and W Chan Kim call “value innovation” and it’s at the heart of every “Blue ocean business”. To achieve value innovation and discover blue oceans of opportunity Casella wines adjusted four levers during the development of the ‘Yellowtail’ (eliminate, reduce raise, and create).
1. Eliminated the aging process of the ‘Yellowtail’ wine and saved money on oak barrels and storage costs.
2. Reduced the inventory to just two wines. They offered just a white Chardonnay and a red Shiraz. Operating at minimum inventory reduced the cost of their product, while simultaneously increasing the appeal to infrequent or non-wine-drinkers who valued something much simpler.
3. Casella wines raised the freshness and drinkability of their ‘Yellowtail’ wine, so it was easy on the palate like beer and cocktails.
4. Incorporating practices from adjacent markets like the beer industry Casella wines created a new wine label that was simple and somewhat adventurous like many beer labels. The label just had a picture of a kangaroo and stated that the product was from Australia. Casella wines removed information about the age of the wine and there was not any fancy terminology that stressed the art and science of winemaking and confusing the consumers. Casella wines also came up with a bottle that could be used by both white and red wine. The first of its kind, but it was something that the beer industry had been doing for years.
Playing with these four levers allowed Casella wines to create its own wine category of fun, unintimidating, easy-drinking wine and it attracted a whole new group of customers to the wine market in an area of the market that Casella wines could dominate for years to come and due to their “Blue ocean business strategy” they created the category of fun, easy-drinking wine they had a huge head start on the competition, making it extremely hard for competitors to steal any market share from Casella wines.
This is the power of “Blue ocean strategy” and there are several businesses which have used the strategy to dominate their market.
Another blue ocean business example is ‘5-hour energy’ (or the alternative Moose Juice Energy Shots)
It is a mini energy drink that you see on the counters of almost every convenience store in the US. ‘5-hour energy’ created the new energy drink market of two bottles, and it maintained a 93% market share of that market category despite competition from major competitors like Coke and Red Bull. Because the business owner created the category and got out to a huge lead on future competitors ‘5-hour energy’ continued to dominate that category nowadays.
if you, as a business owner are interested in finding blue waters for your next business idea and try dominating a market niche for years start by focusing on 1. the frustrations of customers outside of your current market space and 2. look at existing products or services within the market and ask yourself:
1. What can my business eliminate?
2. What can my business reduce?
3. What can my business raise?
4. What can my business incorporate?
… to create something new and attract infrequent or non-current customers.
By pulling these four levers any business owner can gradually develop a product that defies the status quo and creates a new product category that the business will dominate for years. As a business owner, you should stop focusing on how you could beat the competition and start focusing on how you can make the competition irrelevant. That’s what every business owner should learn from the “Blue ocean business strategies”, described in the book Blue Ocean Strategy, Expanded Edition
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