Sunday, October 5, 2008

How to create uncontested market space - the blue ocean way

Renée Mauborgne may not BE as well known as Bill Gates or Jack Welch, or even Michael Porter, but there is one area where she leaves all three far behind. Consider this: her book, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, co-authored with W. Chan Kim, has been translated into 41 languages globally. Compare this with 25 languages for books by Gates, 27 and 29 for Welch and Porter respectively , and you realise just how popular the book has grown to be in the last few years.

It may seem like stating the obvious, but as supply outstrips demand in various markets and product categories, it has become essential for companies to find newer ways to compete and create strategies for new markets. “Blue Ocean Strategy is not only about how to tap new markets or uncontested spaces but about how to compete and create strategies in existing markets which offer a leap in value to the consumer,” says Mauborgne.

She uses Nintendo’s now revolutionary video game, Wii, as an example of how a company can use the blue ocean strategy to succeed in a crowded marketplace .

Till the Wii was launched in November 2006, video games were aimed at what she calls — for lack of a more succinct description — ‘anti-social young boys and girls’ . Most were violent games which had the gamer spending hours plonked in front of a screen (ideally, a high definition one so that the graphics were optimised), with minimal interaction with other people.

“The Blue Ocean Strategy comes through when you turn long held ideas and beliefs on their head, and that’s what Nintendo did,” she says. The new game requires people to be on their feet as they play games like tennis or golf on their Wii’s , and it’s marketed as a game that brings families together.

The best part — Nintendo makes a profit of $40 on every console sold, compared to Sony which actually loses $240 on each Playstation 3 (PS3) it sells. Sony makes the money on the software, but the PS3 console is basically is a loss making product.

This example, says Mauborgne, adheres to all the essential principles of a Blue Ocean Strategy. “It grew the demand for the product from the existing set of gamers to tap into a second tier of people who would perhaps be more inclined to playing a sport over a video game, and even a third tier like parents or grandparents,” she says. A product or service has to compete, not only for existing consumers, but also new ones.

The Wii has moved the competition to a new level, no longer fighting for the same lot of gamers as a Sony Playstation or Microsoft Xbox. In the process, it reduced cost through ‘value innovation’ which is the cornerstone of Blue Ocean Strategy — doing something which makes competition irrelevant.

Wii has also managed to differentiate itself by eliminating the need for a high definition TV and reducing the processing power and thereby the cost. This has further widened its potential user base. “What’s important,” says Mauborgne, “is to find a way of achieving differentiation along with low cost simultaneously to grow profitably, and that is what Nintendo has done with the Wii.”

At times, you don’t even need to create a new product to follow the Blue Ocean Strategy — simply re-look at how you are selling it. Cemex, the world’s third largest cement maker, is a case in point. About 85% of the cement sold in Mexico is to the do-it-yourself (DIY) home-builders , most of who take about seven years to add an extra room to their house.

This is because most of their money is spent on milestone events like village festivals, quinceañeras (girls’ 15th birthday parties) and anniversary celebrations, which everyone contributes to. So while having a cement house is top priority for everyone in Mexico , very few people can actually afford it.

“Cemex realised that the market had to potential to grow substantially and in 1998, it started positioning cement not as a functional product, but as a dream gift, romanticising ‘rooms of love’ that allow people to share their joys and bring them closer together,” says Mauborgne.

Now Mexicans gift each other bags of cement and Cemex helps teach people how to construct their extra rooms better. Not only has Cemex tripled the volume of cement consumption by the DIY homeowners, but it also sells at a higher price and has better control over inventory and production — just by repositioning cement from a functional to an emotional product.

A word of caution however. Just because a company is innovative today is no guarantee that it will continue to innovate in the future. An example being Sony. “It revolutionised the way people listened to music when it launched the Walkman, but since then, Sony hasn’t managed to do anything as path-breaking . But its earlier breakthroughs created tremendous brand equity for the company, so even today, a consumer is far more likely to buy a Sony music system over others,” says Mauborgne.

Another trap companies often fall into is classifying all innovation as Blue Ocean. “Often, when companies claim that they have come up with a new innovation , it is an improvement on an existing product or service,” says Mauborgne. The reason for this is simple — most CEOs are more comfortable signing cheques for these seemingly Blue, but actually Red Ocean Strategies, as it is something they can see and relate to.

Of course, Mauborgne isn’t recommending that companies blindly invest in vague and seemingly esoteric businesses only. “A company needs a strong balance between its red and blue ocean businesses, as it is the profits from the red that will fund the blue,” she says.

Also, as Nintendo did with the Wii, its often possible for an incumbent to create a blue ocean within the area of its core competency. An additional benefit, she mentions, tongue firmly in cheek, is that if the product is differentiated from others in the market, it means far lower advertising and marketing spends otherwise needed to make your brand stand out in the clutter.

(The Economic Times)

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