Blue Ocean Strategy, a chance to think more creatively on your business

On 13th November 2009 I will do a workshop on ‘Blue Ocean Strategy’ for Kansdenkdag. The Blue Ocean Strategy is the international bestseller written by W. Chan Kim and Renee Mauborgne. The core idea in the book is to extend your business while making your competition irrelevant since the focus has to move to non-customers. At the moment this strategy is extensively hyped by marketing advisors and consultancies. They bring it as the method to save your business from extinction. But to me, this is certainly not the idea behind the book. Red and Blue Oceans don’t stand apart, they exist next to each other. Red Oceans are the cash flows you need to keep your cash cow (see Boston Consulting Group-matrix) alive in your product/service portfolio and the Blue Ocean is the healthy cash flow you will need to invest in your stars to come.

What is this strategy about anyway?
Most companies are in the Red Ocean, trying to extend their business while focusing on the competition who aim at the same customers. This mostly leads to price wars and lowers the status of your brand. In order to get out of this conventional way of thinking the authors W. Chan Kim and Renee Mauborgne propose to draw a Strategy Canvas to see the big picture of your market space. This means you draw a X and Y-axis. On the X-axis you name the key success factors from your business and on the Y-axis you rate them. Then you draw a value curve to combine the rating with your success factors. In the same canvas you draw this value curve also for your competitor(s).
To start the creative thinking you need to utilize the Four Actions Framework to emerge the Blue Ocean Strategy from your canvas. This may sound difficult, but it simply means that you need to check which factors you can reduce or eliminate in order to gain insight how to drop your cost structure and which factors in your industry you can raise or create with the goal to lift buyer value and to create new demand. This should result into value innovation and the Blue Ocean of uncontested market space, making the competition irrelevant.

But what is so creative about lowering costs and higher customer value?
Therefore the authors suggested the six paths framework next to the framework mentioned above. This is quite a fun thing to do in a business environment during a brainstorm session. You will look at alternative (1+2+3) industries, across strategic groups within industries and across the chain of buyers you can approach for your business. Next to that you (4) look across complementary product and service offerings, and ask which products/services can I add to higher customer value? What are my customer doing before, during or after they utilize my product/service? Or you can think about strategic alliances, networks, co-creation opportunities which will enrich your business. The last two paths are (5) to look across functional or emotional appeal to buyers and (6) to look across time. With looking across time the authors mean to find insight in trends that are observable today. You need to ask yourself which trends have a high probability of impacting your industry, how will they do that and how can you open up for unprecedented customer utility? And that’s it!!

Red Ocean next to Blue Ocean
Of course in the book the authors explain far more about the above mentioned frameworks, but the essence is what I wrote just now. This will give you a start. The authors do realize there are quite some key organizational hurdles to overcome to execute Blue Ocean Strategy. But I think that you can at least start with a brainstorm and take the six paths framework step by step. To change everything at once is in my view too radical. And not taking the competition into account anymore is also an illusion. The competitive strategy theory of Porter is certainly not dead. I actually think that Blue Ocean is the combination of the differentiation and focus strategy of Porter with a pinch of cost leadership. They just gave another name to it. Smart indeed. The Red Ocean is the stuck in the middle position a business falls in when having no focus on the future cash flows.
Red and Blue Ocean do stand next to each other. The Red Ocean is your current position and the Blue Ocean is what you aim for in the future. For me this strategy is a combination of having passion for your business, to bring in some creative out-of-the-box thinking and to restrict the problems that keep your business from growing.

Sources:
Kim C. and Mauborgne R., Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, HBR Press 2005.
Interview with Chan Kim by Rick Nieman on RTLZ (introduction is in Dutch, interview is in English)

Marketing Metrics can save your day

As mentioned in my former blog post I would write this time on marketing metrics and co-creation. I guess that was a bit too ambitious to put everything here in one go. Let’s focus on marketing metrics for this blog post. Last time I came to the conclusion that marketers don’t follow a left-brain approach to their activities and are therefore not able to do a valuable contribution to the business performance. The background is probably that some issues they deal with (loyalty, brand/awareness, beliefs and likeability) are difficult to measure, at least according to them. I'm afraid that top management, not being aware that there are metrics for these issues, agrees with that.

Let’s put first things first, what is a metric? A metric is a measuring system that quantifies a trend, dynamic, or characteristic. From this definition one can already deduct that something like a brand can be measured. Being able to ‘crunch the numbers’ is vital in marketing. I will start with penetration from which we can also measure Brand Penetration. With penetration I mean: the proportion of people in the target group who bought (at least once in the period) a specific brand or category of goods. We all know that this can be calculated at Market Penetration (%) = Customers who have purchased a product in the category (#) : Total Population (#).
Brand Penetration calculation is then easy. Brand Penetration (%) = Customers who have purchased the brand (#) : Total Population (#). So if over a period of a month, in a market of 10.000 households, 500 households purchased Coca Cola Light we can calculate this as 500:10.000 = 5% Brand Penetration Coca Cola Light.

Share of wallet
But how do I measure the Brand Loyalty? Loyalty means we have to look for heavy users. We might do that by the share of requirements (share of wallet) which is calculated solely among buyers of a specific brand. Within this group, it represents the percentage of purchases within the relevant category, accounted for by the brand in question. Easier maybe to say that it is the average market share enjoyed by a product among the customers who buy it. To make this clear I give the example that in a given month, the unit purchases of Coca Cola Light is 1.000.000 bottles. But among the households of heavy users that bought Coca Cola Light, total purchases of soft drinks came to 2.000.000. This means 1.000.000:2.000.000 = 50% Share of Requirements/Wallet.

Awareness
Even after former examples issues like awareness, beliefs and likeability are still taken for granted and may not (yet) have been put into metrics or performance indicators by marketers. But awareness – the percentage of potential customers or consumers who recognize or name a given brand - can be (un)aided or (un)prompted. To reveal this awareness different kind of questions have to be asked:

To measure awareness: have you heard of Brand X? What brand comes to mind when you think luxury car?

To measure beliefs/likeability: Is Brand X for me? On a scale of 1-5, is Brand X for young people?

To measure loyalty: Did you use Brand X this week? What brand did you last buy?

Next to metrics there are also key performance indicators (KPI’s). Like metrics they indicate what to do to dramatically improve business performance and are connected with the business most important/critical processes. KPI’s therefore indicate the critical success factors. But how to control all these kind of metrics? To get an immediate overview of your business performance the Balanced Scorecard was invented by Kaplan and Norton (1996). A very interesting subject which I may address in one of my next blog posts.

Source: Farris et al (2006), Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing.