Startups must embrace Blue Ocean strategy
With fierce competition by established SMEs and global MNCs, startups strive hard to stay afloat. Following this strategy might come handyBy Shiwen Yap 03 Jun, 2014
Fishing and entrepreneurship make for an apt comparison: Fishermen undertake the uncertain task of catching fish much like entrepreneurs establishing a risky venture. For most businesses, risk is manageable, since their ‘ocean’ – the market universe – is large enough and with enough segments and niches to survive. But what about when markets are saturated with multiple competitors and intense competition, with insufficient customers for everyone?
Competition among the sharks (businesses) of the business world for the fish (opportunities) turns any ocean red, making it harder for startups and SMEs to survive. A red ocean is an intense, saturated market pervaded with competition. There are only so many fish to be distributed among the sharks. And when blood is in the water, sharks often enter a feeding frenzy.
When recession strikes or competition surges and innovation disrupts markets, balance sheets often turn red. This is when business strategy becomes crucial. Throughout their early business life cycle, startup ventures work to gain traction, functioning as micro-businesses surviving amid intense economic pressures and high risk, while competing against established competitors. For them, strategy is crucial, perhaps even more so than other businesses.
The whats and whys of business strategy
People have heard of ‘strategy’ in business, often as a nebulous word implying a multitude of things: strategic management, strategic marketing, strategic brands, etc.
Max McKeown, a management consultant specialising in innovation strategy, leadership and culture, has spoken of strategy as a relevant tool for influencing future prospects and achieving desired outcomes with available resources.
Strategy is both crucial to the success of startups and indicative of the leadership quality of founders. It also grants startups the opportunity to differentiate themselves from more established brands and market leaders competing for traction and market share. The difference between success and failure lies in developing and implementing a coherent strategy. Strategy optimises the chances of success, especially in the high-risk business world of startups.
Blue Ocean strategy vs. Porter’s Five Forces
Traditionally, when business strategy is discussed, Porter’s Five Forces Model, developed by Professor Michael Porter of Harvard Business School, is used. It is a framework traditionally used to determine the competitive intensity and appeal of markets. Conversely, Blue Ocean Strategy (BOS) is a rival framework developed by W.C. Kim and Renee Mauborgne of INSEAD. Challenging the reactionary Five Forces model, it instead demands that businesses seize the initiative and innovate. It asks them to disrupt the market and question the assumptions underlying the conventions of the business operating systems and their market-universe.
Blue oceans denote an unknown market space with negligible competition. In blue oceans, demand has to be created, with growth opportunities, both profitable and rapid. In blue oceans, competition is considered irrelevant because market rules are mutable, with a broad potential market that is unexplored.
Red oceans represent known market spaces, with industry boundaries defined and competitive rules specified. Companies traditionally outperform their rivals by grabbing a greater share of the market.
Metaphors of red and blue oceans denote the ‘market universe’ in Blue Ocean strategy. The strategy argues that the Five Forces analysis works well in ‘red oceans’, where businesses compete intensively. However, this renders it unsuitable to the needs of startups, which require disruptive, value-added strategies enabling competition with market leaders. BOS argues that the key to exceptional business performance lies in redefining the market context, transitioning into a ‘blue ocean’ in the process. The objective is to render established competition irrelevant and transform the way a business operates.
As market spaces become saturated, prospects for profit and growth diminish and market structures evolve towards oligopolism as market leaders entrench themselves, much as Google, Apple and Samsung have done. Products and services become commoditised, with intense competition turning the ocean ‘red’, more specifically the balance sheets of a business, and forcing greater pressures on the cost structures of firms.
The cornerstone of BOS is value innovation — innovation where a company’s actions favour both its cost structures and value proposition.
The case of Cirque du Soleil
The classic case study used to exemplify BOS is Cirque du Soleil, a Canadian circus company that redefined the declining circus industry of the 1980s. Conventional strategy analysis indicated its decline, but Cirque du Soleil survived and thrived.
In the 1908s circus industry, star performers had ‘supplier power’ over companies, with competing entertainment formats ranging from sporting events to home video systems (eg.VHS) disrupting the industry. Animal rights groups pressured the circus industry to improve its treatment of animals, creating negative publicity for circuses and reducing audience sizes.
Cirque du Soleil responded by eliminating animals and reducing the importance of individual performers, eliminating competitive disadvantages. It crafted art forms melding dance, music and athleticism to appeal to more upscale adult audiences, who had abandoned traditional circuses before.
This was done using the Four Actions Framework, questioning prevailing assumptions in order to reconstruct the value of the firm. To break the cost-benefit trade-off that exists between differentiation and low cost, in order to create a new value curve, the Four Actions Framework poses four questions meant to challenge industry’s strategic logic.
1) Which factors that an industry takes for granted can be eliminated?
Cirque du Soleil eliminated animals, star performers and the three separate rings. This differentiated its brand and streamlined its cost structure.
2) Which factors can be reduced below the industry standard?
Cirque du Soleil counter-intuitively reduced the thrill and danger associated with conventional circuses. Rather than using trained wild animals, it shifted to using human performers. This reduced the risks and changed the performance context.
3) Which factors can be raised above the industry standard?
Cirque du Soleil developed its unique branding through developing its own tents, rather than performing within the confines of existing venues. This allowed it to redefine and control its performance standards, event space and venue, rather than rely upon contractors to meet its requirements. This also benefited it in terms of expanding its range of business options.
4) Which factors could be created that the industry never offered?
Cirque du Soleil introduced sophisticated narratives, dramatic themes, artistic music, acrobatics and dance — all consolidated in upscales setting.
BOS calls for businesses to focus less on competitors and more on what matters; shifting focus from existing customers to prospective ones. In short, Cirque du Soleil rewrote the rules and influenced how the market reacted to it. This laid the foundation for its contemporary industry leadership, built on a coherent, cohesive strategy.
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