This article is a continuation of our previous Blue Ocean Strategy article.
Well, the previous article delved into the first two steps of formulating a Blue Ocean Strategy, which is a business concept devised by professors W. Chan Kim and Renée Mauborgne in 2005. It involves the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand.
But now we’re looking into the final stretch — reaching beyond existing demand and getting the strategic sequence right.
Reach Beyond Existing Demand
In a red ocean, businesses compete over the same market of customers, leaving them only the opportunities to tailor specific offerings to particular target markets that get smaller and smaller the more you segment them. What the Blue Ocean Strategy suggests is a complete reverse of that idea. Instead of concentrating on customers, they should concentrate on noncustomers. Also, instead of concentrating on customer differences, they need to build on powerful commonalities in what buyers value.
Three tiers of noncustomers:
- First Tier: “Soon-to-be” noncustomers who are on the edge of your market waiting to jump ship.
- Second Tier: “Refusing” noncustomers who consciously choose against your market.
- Third Tier: “Unexplored” noncustomers who are in markets distant from yours.
Go for the biggest catchment
There is no correct tier to go for at a particular time, because the opportunities to unlock a blue ocean with a certain tier of noncustomer(s) varies across time and industries. What you should focus on is going for the tier(s) that contain the biggest catchment, and continue to explore the commonalities that overlap the three tiers of noncustomers.
Get The Strategic Sequence Right
This principle helps to ensure that your blue ocean ideas are commercially viable by implementing the right sequence of actions.
The Sequence of Blue Ocean Strategy
Buyer Utility is essentially what a customer can get from your product. There are six stages of the buyer experience cycle and also six levers of utility. These can be seen in the Buyer Utility Map below.
The Buyer Utility map is an indicator that you can use to check whether a blue ocean offering has removed the barriers to utility across the buyer experience cycle for customers and noncustomers. What you should focus on here is asking an important question for all of the six levers: in which stage are the biggest blocks? Look at where along the buyer experience cycle that your offering does well or poorly in terms of buyer utility.
Understanding how to set the right strategic price firstly allows you to not only attract buyers in large numbers, but also help you to retain them. It is a rising trend that volume is generating higher returns, and as the nature of goods becomes more focused on knowledge, companies hold much more of their costs in product development rather than in manufacturing.
Also, the value of an offering to a buyer may be closely linked to the total number of people using it. For example, online ecommerce and auction sites such as eBay and Amazon rely on social proof in order to sell — because if a lot of people use or recommend a product, it looks more attractive and authentic.
Step 1: Identify the Price Corridor of the Mass
The above tool can be used to understand the price sensitivities of people who will be comparing the new offering with a group of different offerings offered outside the group of traditional competitors. To look outside the industry boundaries is to list offerings that fall into two categories: those with a different form but the same function, and those a different form and function, but the same objective. Refer to the previous Blue Ocean Strategy article for an understanding of these terms.
You can then plot the price and volume of these alternatives on the above tool to determine the price bandwidth that captures the largest of target buyers, which is the price corridor of the mass.
Step 2: Specify a Level Within the Price Corridor
You’ll need to determine how high a price you can afford to set within the price corridor without inviting competition to imitate your offering. You can estimate this through understanding two principles: 1. The level of legal protection through patents or copyrights, and 2. The level of which the company owns some exclusive asset or core capability, that can block imitation — for example, an expensive production plant.
- Upper-level pricing appeals to companies with strong patents and hard-to-imitate capabilities.
- Mid-level pricing appeals to companies with uncertain patent and asset protection.
- Low-level pricing appeals to companies with no such protection.
Price-minus costing, and not cost-plus pricing is a focus here. There are also three principle levers that help to hit the cost target:
- Streamlining operations and introducing cost innovations from manufacturing and distribution
- Partnering to secure needed capabilities while dropping cost structure
- Changing the price model of the industry; e.g. from selling to renting
Before investing in a new idea, the company must educate the fearful — the stakeholders. This includes:
- Employees — make them aware of the threats posed and work with them to find ways of defusing the threats
- Business Partners — openly discuss issues with them and convince them that they will gain more business by cooperating
- The Public — engage in an open discussion about why the adoption of the new idea is necessary, and don’t let others take charge of the debate
The Blue Ocean Idea (BOI) Index
This tool allows you to understand your blue ocean offering in relation to the sequence of utility, price, cost, and adoption.