12.04.2018 Formation, Lifehacks
Why Competition Should Be Irrelevant – the Blue Ocean Strategy
Many entrepreneurs believe that the way to long-term success is to outperform or outpace their competitors and are therefore constantly observing the other market players: Have the rivals lowered their prices? Which product improvements will distinguish their new flag ship from competitors’ offers? Companies following that scheme find themselves in a so-called red ocean - the opposite of blue oceans where new demand and market space are created.
In a red ocean, industry boundaries are defined clearly and accepted. Consequently, the competitive rules of the game are known by all relevant players and companies try to outperform or outpace their rivals to obtain a greater share of the existing demand. As the market gets saturated, prospects for profits and growth are reduced not just for one but for all players. A better way to lasting success is to create new markets where no competition exists – blue oceans that are defined by demand creation, new market spaces and opportunities for sustainable growth.
A good example for the blue ocean strategy developed by the professors W. Chan Kim and Renée Mauborgne is the Canadian entertainment company Cirque du Soleil starting as a performing troupe in a small town near Québec in 1980 and experiencing the same financial hardships as most circuses. In the early 1980s, recession and the invention of video technology led to a declining number of circus visitors and, in turn, decreasing revenue.
While other circus companies focused on outperforming their rivals and trying to maximize their share of shrinking demand which resulted in higher costs and just a slightly altered experience for the visitors, Cirque du Soleil invented a whole new concept: It did not aim to take customers from the already shrinking circus industry, which historically catered to families. Instead it targeted adults and corporate clients prepared to pay a significantly higher price than for traditional circuses for an unprecedented entertainment experience.
Creating a new market space and targeting different group of customers
Cirque du Soleil had realized that to achieve long-term success, they had to stop competing in red oceans, e.g. existing markets with big competitors such as the Ringling Brothers who had been in the circus industry for almost a century. The company created a blue ocean of new market space, appealed to a different group of customers and therefore made competition irrelevant. Its strategic move challenged the conventions of the circus industry. Cirque du Soleil’s shows have been seen by more than 160 million spectators in over 400 cities and 60 countries around the world.
To achieve lasting success, entrepreneurs need to look across trends and ask themselves the following questions to determine which aspects of the industry’s traditional business model can be reduced or eliminated to manage costs and what elements should be reinforced or newly created to differentiate themselves from their competitors:
- Is there exceptional buyer utility in your business area?
- Is your price easily accessible to the majority of your buyers?
- Can you attain your costs target to profit at your strategic price?
- What are adoption hurdles in realizing your business idea? Are you addressing them upfront?
Only if every single one of the questions mentioned above is answered with “yes”, the company is following a commercially viable blue ocean strategy. If the answer to one or more questions is “no”, entrepreneurs should rethink their strategy and value curve.
Value innovation is one of the key concepts of the blue ocean strategy and consists of the following four actions
- Raise: Question which factors must be raised within an industry in terms of product, pricing or service standards.
- Eliminate: Figure out which areas of a company or industry could be eliminated to reduce costs and to create an entirely new market.
- Reduce: Determine which areas of a company’s product or service are not entirely necessary but play a significant role in your industry?
- Create: By creating an entirely new product or service, your company can create a new market through differentiation from the competition.
These insights on the blue ocean strategy have been provided by Thomas Landis, head of F10 and start-up coach, during an F10 Masterclass in Zurich.