Breaking the Value vs Cost Trade-Off with Blue Ocean Strategy

Key takeaways

  • Traditionally the game of business has been a trade-off between cost and value, with a focus on beating the competition.
  • By focussing on internal capabilities, instead of what competitors are doing, a company can move beyond the red ocean, it can create sustainable competitive advantage and their own blue ocean.
  • By breaking the cost vs value trade-off, companies can create uncontested market space and access customers that previously weren’t even in the market.

The Value vs Cost Trade-Off

  1. Cost Leadership — The edge a company has over its competitors is its cost. It reduces its costs and either (a) maintains going-rate pricing (the price to the customer is the same as the competition) and increases its profit margin, or (b) it takes a price leadership position, competes on price (charges less to the customer than its competitors) and takes more market share while still maintaining a reasonable profit.
  2. Differentiation — The company competes by having a better or more attractive offering than its competitors. It can then charge a higher price that reflects the increased value they are providing to the customer. The issue is that when they have a better offering, it usually costs more; whether that be R&D, manufacturing, marketing, etc. Even though the price is higher, the costs are also higher.
  3. Focus — Focusing is where the company targets specific segments, or niches, of the market. This requires a deep understanding of the dynamics of the market and the unique needs of the customers. But, it is inherent that you are only targeting a small segment of the larger market.

In this game, each brand is focussing on what the other brands are offering, positioning themself accordingly and then trying to beat them; hence the blood in the red ocean.

Blue Ocean Strategy

By breaking the value vs cost trade-off Ford was able to create and capture uncontested market space.

Six Places to Use Blue Ocean Strategy

  1. Industry — in a red ocean competitors focus on each other, rarely does a player look at an alternative industry and analyse how they can provide value there. Companies don’t just compete with players in their own industry, but industries that offer substitute or alternate offerings. For example, Netflix doesn’t just compete with other streaming services, TV shows and movies, what Netflix’s customers want is to relax and be entertained. In reality, Netflix is competing with libraries, shopping mall, recreation centres because all of these provide customers with the same utility that Netflix does. If a company can capture market share in multiple industries by looking at what factors lead customers to alternate industries they have created a new market space.
  2. Strategic Group — within each industry there are groups of companies that have a similar business model, they capture value using a similar strategy. Instead of trying to make the current business model better, instead, look across different strategic groups and ask why customers choose to trade up or down. A quick method to visualise how this works is to construct a Strategy Canvas.
  3. Buyer Group — instead of trying to capture more market share, start looking at how to target new customer groups. Only a small subset of the population is currently being targeted by any one industry. Look at non-customers, what are the wants and needs of the people that are currently unaware or uninterested in your industry and your offerings. Don’t just target your offerings at current customers and aiming to serve them better, serve people that are in one of the three tiers of non-customers.
  4. Scope of Offering — stop focussing on maximising the value of the current offering, instead look to provide new utility to your customers. If your current offering focusses on customer productivity, instead of innovating to make the offering do that better, look to incorporate a new utility. Make it simpler, more convenient, quicker, better for the environment or more fun than your competitors. Using a Buyer Utility Map can help to identify how to add new utility at different stages of the buyer’s experience cycle.
  5. Functional-Emotional Orientation — following on from redefining the scope of the offering, rethinking the functional-emotional orientation of the industry can unlock new demand. If the industry currently is function focussed, shifting to incorporate an emotional utility can have a huge impact. The fast-food industry typically competes on the functions of price and convenience, by using the emotional appeal of eating healthier, Subway was able to create new demand.
  6. Time — shift from being reactive to proactive, be the one that rocks the boat. Action should be taken to gain an insight into how trends will change the value to the customer and the business model in the future. By understanding what and how certain trends will affect the future, and acting decisively to capitalise on these a company can open up unprecedented customer utility.

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