The Three Tiers Of Noncustomers Business Essay
Several developments have led to tough conditions for the companies which apply red ocean strategy. Because of technological improvements the industrial productivity of suppliers has increased over the last years. In many industries this led to a situation in which supply exceeds the demands of the customers. Besides this, globalization let to transparent information for customers about products and prices all over the world, which led to smaller chances for monopolies and niche markets. Finally, because of the declining populations of developed countries, products and services have become sooner commodities. These developments lead to the occurrence of more price wars between competitors and shrinking profit margins for these organizations in red oceans.
Blue oceans are uncontested market spaces, where new customer demand is created and there is an opportunity for high growth and profitability. Instead of focusing on beating the competition, the organization focusses on making the competition irrelevant by creating new value for its customers and the organization itself. This is based on the reconstructionist view that asserts that market boundaries and industry structure can be reshaped by the activities and beliefs of industry players. There are two ways for creating a blue ocean: an organization can invent a whole new industry or a blue ocean is created within a red ocean by altering the boundaries of the existing industry.
Value innovation is the cornerstone of BOS; it is about innovating value to unlock new demand by the simultaneous pursuit of differentiation and low cost (Kim & Mauborgne, 1997). This strategy embraces the entire system of an organization which makes every effort to create a leap in value (Chang, 2010). This is a win-win situation for the organization and its customers; Customer value arises from the utility and price offered by the organization and value for the organization is achieved
because the profit margin is reached (Chang, 2010). Costs are saved by eliminating or reducing the factors that an organization has been competing on. The organization differentiates itself by offering elements that the industry has never offered before. Over time, this value innovation will again result in lower costs because of high sales volumes that superior value generates.
An example of a company that has created a blue ocean is the supermarket Albert Heijn (AH), one of the biggest Dutch retailers. Supermarkets are trapped in a red ocean of bloody competition and every supermarket tries to outperform other supermarkets to gain market share. Because of the diminishing customer demand and the fierce competition the last few years, a lot of supermarkets participated in price wars, which have shrinked their profit margins. AH decided to break away from their competition and created a blue ocean when they introduced AH to go. This concept contains a smaller supermarket at which customers can do quick groceries on their way to work or in a hurry. AH to go raised customer value because customers win time by doing their groceries there and the AH to go’s are at accessible locations. At the same time, AH to go reduced costs by eliminating the usual paths and by reducing the number of treadmills and cashiers. Therefore by introducing the Ah to go, the supermarket differentiated itself and minimized costs at the same time; they have applied value innovation. They have made the competition irrelevant, have created new demand and are now the leading company in this new market space.3.1.2 The Frameworks and principles of blue ocean strategy
Figure 8. Blue ocean strategy framework (Düsseldorf & Wubben, 2012)
The strategy canvas
The first analytic framework that is used to create a blue ocean is the strategy canvas. One of the key principles in blue ocean strategy is for an organization to "focus on the big picture, not the numbers". In BOS a strategy canvas is used to unlock creativity throughout the organization, which is an alternative approach to the existing strategic planning process. The horizontal axis of the strategy canvas depicts the factors that the industry competes on and the vertical axis shows the level of offerings to its customers for each of these factors (See figure 9). This canvas shows the current state of the organization, the factors that the industry is competing on and the offerings of competitors to its customers. The value curve is the line that represents the organization’s relative performance across the industry’s factors of competition. This line shows what the competition is offering to its customers and maybe most important, what they are not offering yet what could create a leap in value.
For a fundamental shift in the strategic value curve, the focus of the strategy must shift from competitors to alternatives and from customers to noncustomers of the industry. In this way the organization redefines the focus of the industry and reconstructs buyer elements that reach outside the industry boundaries. For pursuing low cost and differentiation simultaneously, organizations should resist to benchmark their performance to their competitors and resist the logic of choosing between those two strategies. The value curve of an effective blue ocean strategy will have three characteristics: it will have focus, divergence and a compelling tagline. Without these criteria the strategy will likely to be unclear, undifferentiated, hard to communicate and have a high cost structure. These three characteristics will serve as a guideline in the process of creating new value for the customers and the organization itself.
Figure 9. Strategy canvas (Blueoceanstrategy.com, 2013)
The six paths framework
The third tool, to reconstruct the market boundaries of the industry, is the six paths framework. This framework is used to fulfil one of the key principles of blue ocean strategy: "Reconstruct market boundaries to break from the competition".
"The first path is for organizations to look across alternative industries" (Butler, 2008). Alternative industries include all industries that offer products or services that have different functions and forms but have the same purpose. An organization could investigate the factors that lead key customers to trade across alternative industries. By focusing on these key factors and eliminating or reducing everything else, a new blue ocean could be created.
"The second path is looking across strategic groups within the industry" (Butler, 2008). A strategic group refers to a group within an industry that pursues a similar strategy. Generally, there is an order of strategic groups build on the dimensions price and performance. Organizations within a strategic group will try to outperform the other organizations within this group and will view organizations within other strategic groups as no competition. By investigating the motives for customers to trade up or down from a particular group, organizations could create a blue ocean by fulfilling these needs.
"The third path is looking across the chain of customers" (Butler, 2008). Often organizations are having one target customer group for a certain product or service, forgetting that there could be a whole chain of customers. For example the person who buys the product or service could differ from the person that influences him to buy it or differs from the person using the product or service. These people often have different definitions of value, but most of the time organizations only focus on fulfilling the needs of one of these people. Therefore, by shifting the focus on a particular customer group an organization could unlock new value.
"The fourth path of the six paths framework is for an organization to look across complementary product and service offerings" (Butler, 2008). An organization could create new value for customers by thinking about the context and the process before, during and after the product or service is used. By doing this, an organization could offer a total solution by eliminating or reducing pain points through a complementary product or service.
"The fifth path is to look across functional or emotional appeal to customers" (Butler, 2008). Organizations often focus on a rational appeal, here price and function matters, or an emotional appeal to customers. Emotionally oriented industries often offer many extras that adds price without enhancing functionality. By reducing these extras, a lower-priced product would be introduced which customers could value. Besides this, functionally oriented industries often could add some emotional elements to create new demand.
"The sixth path is to look across time" (Butler, 2008). Most organizations adapt incrementally and pace their own actions to keep up with the development of the trends they are tracking. A blue ocean could arise if the organization looks at the impact a trend could have on the business model of the organization and on the value offered to its customers. The organization could ask himself what the market will look like if the trend were taken to its logical conclusion and look what must be changed today to create a blue ocean. This could only be done if the trend is decisive to the business, irreversible and has a clear trajectory. By following these six paths framework a new blue ocean for an organization can be realised.
The four actions framework
The second tool for creating a blue ocean is the four actions framework. This framework is used to create a new value curve by first eliminating taken-for-granted factors, where the industry has long competed on. To reduce costs, these factors that no longer have value for the customers should thus be eliminated (Ching-Chow & King-Jang, 2011). Second, the organization must reduce some factors below the industry’s standard, in which organizations have over served their customers. Third, some factors must be raised above the industry’s standard, which can result in significant value for customers (Ching-Chow & King-Jang, 2011). This question pushes the organization to eliminate the compromises the customers had to make. Here, the organization has to increase their investments for the purpose of higher future profits (Kim & Mauborgne, 2005). And fourth, an organization must create factors that the industry has never offered before by creating new sources of value for its customers (Ching-Chow & King-Jang, 2011). The first two questions provide an organization with insights in how to develop a lower cost structure than its competitors. This elimination and reduction of investments in factors that an industry is competing on is seldom done in red oceans. Therefore, high cost structures and complex business models are formed. The second two questions provide an organization with insight into how to lift customer value and create new demand. Together, they allow an organization to explore how it can reconstruct buyer value elements across alternative industries to offer customers a leap in value, while keeping its costs low.
Supplementary to this tool is the eliminate-reduce-raise-create grid, in which organizations not only ask themselves the four questions but also act on them to create a new value curve. By acting on this grid, the organization generates four benefits. First, it pushes them to break the value-cost trade-off. Second, it flags out organizations that are only creating, raising and over serving their customers; which lead to a high cost structure. Third, the ERRC-grid is easily understood throughout the organization, what results in a higher level of engagement. And finally, because completing the grid is a challenging task, every factor that the organization is competing on is carefully examined and implicit assumptions about competing are discovered.
The three tiers of noncustomers
Figure 10. The three tiers of noncustomers (Kim & Mauborgne, 2005)The third principle of BOS is to "reach beyond existing demand". Most of the time an organization focusses on retaining their existing customers and the differences among them. Because of these differences the organization creates new segments in its market. However, to create a blue ocean an organization should focus on noncustomers, the commonalities between what customers value and on de-segmentation of its market. By doing this the organization will reach untapped demand. The tool for reaching the noncustomers of an organization is the three tiers of noncustomers. These three tiers differ from their relative distance from the market of the organization (See figure 10). The first tier of noncustomers is the closest to the own market and exist of customers who purchase the products minimally out of necessity. However, these customers view themselves as noncustomers of the organization. If the organization would create a leap in value for this tier of noncustomers, customers would more frequently purchase their products and untapped demand is reached. For creating this leap in value an organization could ask himself what the key reasons are for the noncustomers to not purchase the products and then focus on the communalities among these answers. The second tier of noncustomers consists of people who refuse the use of the organization’s product because they have a negative attitude towards it or cannot afford the product. To unleash untapped demand the organization should focus on the communalities across the reasons for the noncustomers to refuse the product offering. The third tier of noncustomers is the farthest away from the existing customers and consists of people that never been thought of as potential customers by any industry player. When an organization focusses on the communalities between their existing customers and these third tier noncustomers, they could create value for this group and pull them into the market.
The strategic sequence
The fourth principle of blue ocean strategy is about "getting the strategic sequence right".This principle is about developing a business model to ensure profit out of the blue ocean idea. Organizations must follow a certain sequence to make their blue ocean idea commercial viable.
Figure 11. Buyer experience cycle (Kim & Mauborgne, 2005)This sequence starts with a look at the buyer utility, here the organization must ask himself the question if the blue ocean idea offers the buyers exceptional utility. The product or service offers utility if it eliminates the greatest blocks of the customers and noncustomers during the whole buyer experience cycle (See figure 11).
The second step in the strategic sequence is to set the price at which the mass of the target customers has a certain ability to pay for the product or service. Organizations can set this price with the help of the tool "the corridor of the mass". First the organization must plot the prices and volumes of alternative products and services and the size of the group of customers currently using these products or services. The price bandwidth that grabs the largest customer group is the corridor of the mass. The second part is too determine the position within this corridor of the mass; lower-level, upper-level or mid-level pricing. The organization must determine how high they can set the price without competitors starting to imitate the product or service. This choice is determined by two factors. The first is the level the product or service is protected legally, by patents for example. The second factor is the degree to which a organization owns some exclusive asset or capability. When an organization has a high degree in one or two of these factors, they must set the price at its upper-level and vice versa.
The next step in the strategic sequence is to set the target costs. For a blue ocean idea to be profitable a desired profit margin must be deducted from the price to arrive at the target costs. To meet this target costs it is important that the strategic profile has focus and divergence, in this way unnecessary costs can be stripped away.
The last step in the strategic sequence is to look at the possible adoption hurdles and fears from important stakeholders and overcoming them by good education
The fifth principle of blue ocean strategy is concerning the implementation of the strategy: "overcome key organisational hurdles". Four organisational hurdles could arise during the execution of BOS: a cognitive, resource, motivational and political hurdle. To overcome these hurdles a tipping point leader must be present. "A tipping point leader is an agent which provides unforgettable and unarguable reasons for change, who concentrates the resources on what really matters, who creates commitment of the organization’s key players and who succeeds in silencing the most opposing persons" (Kim & Mauborgne, 2003).
There is a cognitive hurdle when the employees don’t see the need for a strategic shift and are dedicated to remain the status quo. A tipping point leader must make employees see the tough reality and agree on the need and causes for a strategic shift to overcome this hurdle.
To overcome the resource hurdle, tipping point leaders must concentrate on multiplying the value of the resources currently available instead of focussing on getting more of them. They must redistribute more resources to their hot spots, activities that have low resource inputs but high potential performance gains, and redistribute more resources away from their cold spots. In this way lower costs and higher value are simultaneously achieved.
To break through the motivational hurdle tipping point leaders must motivate their employees with the use of kingpins, fishbowl management and atomization. The tipping point leader must first motivate a kingpin, this is a natural leader who is persuasive and well respected or has the ability to block or unlock access to key resources. When is kingpin is motivated, the rest of the employees will follow. Second, the actions of the kingpin must be made transparent for the others to see; fishbowl management. The third manner to break through the motivational hurdle is the practice of atomization by the tipping point leader: "framing the strategic challenge in a way that the strategy seems attainable and actionable in every level of the organization".
The last potential hurdle is the political hurdle, in which powerful vested interests resist the strategic change. To overcome this hurdle tipping point leaders must leverage angels, silence devils and get a consigliere in the top management team. Angels (devils) are the people who have the most to gain (loose) from the strategic shift and a consigliere is a highly-respected adviser and insider.
The sixth key principle of blue ocean strategy is "build execution in strategy from the start". By doing this trust is build up and the employees will voluntary cooperate. Fair process is the most important factor here. Fair process is engaging all affected people, explaining them the reasons for the decisions made and the consequences and expectations for the employees (Kim & Mauborgne, 2005). This fair process is built on engagement, explanation and clarity of expectations. Engagement involves people in the strategic decisions that affect them by asking for their input and allowing them to refute one’s other ideas or assumptions (Kim & Mauborgne, 2005). By doing this, everyone’s thinking is sharpened and better collective wisdom is built up. Explanation of the strategic decisions makes people confident that their ideas have been considered and that the decisions made are in the overall interest of the company. Expectations clarity means that after a strategy is set, managers state clearly the new rules of the game and the expectations for the employees their tasks. When these three E-principles are combined when executing the new strategy, employees will see this as a fair process.
3.1.3 Critique on BOS
In the collection of 30 articles on BOS, the authors of ten articles criticized BOS. The main criticism (6 out of ten articles) is that BOS is an untested concept with no ex ante study to confirm their findings (See table 2). Kim & Mauborgne have looked at successful organizations and then have predicted what they could have applied to reach such a blue ocean (Parvinen et al, 2008). In addition, 4 out of 10 articles criticize the analysis of Kim & Mauborgne of the 150 strategic moves. In this analysis no control group was used, no deductive method was used, no information of failures was given and also the influence of other influential variables is neglected. Next to this, 5 out of 10 articles mention that BOS neglects the importance of marketing to communicate a new blue ocean idea to the customers of an organization. Their criticism is that BOS takes marketing for granted and that marketing success will automatically come when a blue ocean idea is introduced (Pollard, 2005). Besides this, articles also criticize that the book of BOS does not present a full plan to reach a blue
ocean. BOS introduced frameworks; however the exact plan of how a blue ocean is crafted is missing.
Table 2. Critique on BOS mentioned in the collection of articles
3.2 The ensuing concepts of Blue ocean strategy
This paragraph describes the concepts that are developed on the basis of blue ocean strategy.
In the recent years, more concepts are developed around the question of ‘How to deal with competition and to stay or become profitable?’ With the use of BOS organizations make their competition irrelevant, thus with no focus on them but on new market spaces. However, other concepts refute this idea, by deliberately focusing on beating the competition, or broaden it with other concepts like sustainability or even religion. These latter concepts are named Green- and White ocean strategy.
"Green ocean strategy is formulated as a strategy of sustainable development under the guidance of harmonious belief" (Cibe, 2010); it refers to business operation theories, actions and procedures to achieve sustainable development by increasing core and sustainable competence. This is done by actively undertaking corporate social responsibility management and balanced management of stakeholders' interests, as well as maximizing economic and social values. This strategy is about organizations taking care of the environment as their core business and making profits along the way. A lot of authors summarize the need for more sustainable driven strategies; however the explanation of how to formulate and implement these strategies is missing. The concept of green ocean strategy originates from the Asian continent, there were no articles found on this concept in English academic journals. For this reason, this concept will not be evaluated on its effectiveness because there is too little information to properly describe it. This is also applicable for the concept of white ocean strategy, introduced by Danai Chanchaochai (Darongklod, 2012). This strategy is partly based on Buddhism and focusses on being a more social- and environmental oriented organization instead of focussing purely on profit (Darongklod, 2012). As said earlier, also on this concept little detailed information is found to properly describe it. Both of these concepts are not refuting the idea of BOS, but they are adding possible characteristics of the strategy by which BOS becomes more sustainable or social. Below, two other concepts are described: purple goldfish strategy and white space strategy.
3.2.1 Purple goldfish strategy
The first concept that is discussed in this thesis is the purple goldfish strategy. This concept was introduced by Stan Phelps in 2012 in the book What’s your purple goldfish. He asserts that "organizations should stay in the sea of sameness and differentiate themselves by offering its customers unexpected little extras which they value" (Phelps, 2012). Phelps argues that the growth of demand of a product or service is determined by five factors: size of the environment (market), number of goldfish (competition), the quality of the water (economy), start-up phase and finally the genetic make-up (differentiation) (Phelps, 2012). An organization has no control over the first four factors; however an organization could affect growth of demand by differentiating itself from its competitors by offering unexpected extra value. This offering of extra value must have five characteristics: relevance, unexpected, limited, expression and sticky (Phelps, 2012). Phelps also stresses the importance of word of mouth by current customers of an organization. This extra offering in value could create positive word of mouth by which the customer base of an organization could increase.
This concept is not focussing on finding uncontested market spaces, like BOS, but on differentiation. Differentiation was already mentioned as one of the generic strategies, formulated by Porter. Porter defines differentiation strategy as a strategy by which a organization offers its customers a product or service with unique attributes that are valued by customers and are perceived to be better than or different from the products of competitors (Porter, 1980). Notable is the fact that purple goldfish strategy matches precisely with this definition of Porter.
In table 3 below, from Phelps (2012), provides a summary on the principles of red- purple and blue ocean strategy. Although Phelps argues that purple goldfish strategy is between red- and blue ocean strategy, it may be concluded that this concept is just the same as red ocean strategy. The differences between red ocean strategy and purple goldfish strategy are not very convincing. First, both of these strategies focus on competing in the existing market space. Second, they both try to beat the competition, red ocean strategy by differentiation/ cost or focus advantage and purple goldfish strategy with a differentiation advantage. Third, both of these strategies are targeting their existing customers. Fourth, both are making the trade-off between value and costs. Fifth, both align their system with cost- or differentiation, with red ocean strategy, or only differentiation, with purple goldfish strategy. In fact, the main difference between purple goldfish strategy and red ocean strategy is that purple goldfish strategy focusses on differentiation, by offering unexpected extras, and with the red ocean strategy an organization can choose between a focus on costs or differentiation. Thus, with the development of purple goldfish strategy Phelps tried to come up with an intermediating form between red- and blue ocean strategy, however its strategy clearly resembles with the already in existence red ocean strategy. Purple goldfish strategy could be seen as an opposing concept of BOS, because of the similarities with the concept of red ocean strategy. However, it is still interesting to evaluate the concept of purple goldfish strategy because it is a sort of ‘old opponent in a new jacket’ of BOS. For this reason, purple goldfish strategy is one of the ensuing concepts that will be evaluated on its effectiveness in the next chapter.
Table 3. Purple goldfish strategy in comparison with red- and blue ocean strategy (Phelps, 2012)
3.2.2 White space strategy
The second ensuing concept of BOS discussed in this thesis is the concept of white space strategy. This concept was introduced by Mark W. Johnson in 2010 in his book Seizing the white space: growth and renewal through business model innovation. His definition of white space is "the range of activities not defined or addressed by the organization’s current business model" (Johnson, 2010). These opportunities are outside the core activities of an organization and these can be exploited with the use of a different business model. This concept describes a process in which activities are seized that lay far outside the normal way of working and that present a series of unique challenges for the organization. "Here the assumptions are high and the knowledge is low, the opposite of the conditions in the organization’s core space" (Johnson, 2010). The term business model is defined by Johnson as "the way an organization delivers value to a set of customers at a profit" (Johnson, 2010).
By means of the four-box business model, displayed in figure 12, an organization can realize a new business model ‘to seize the white space’. The first element of this framework is the customer value proposition, which describes how an organization creates value for its customers at a given price (Johnson et al., 2008). An organization should identify an unsolved consumer problem and then propose a product or service that solves this problem at a given price (Johnson, 2010). The second element of the four-box business model is the profit formula. This formula presents how an organization will create value for itself and its shareholders (Johnson et al, 2008). It specifies the assets and the fixed costs structure, next to the margins and velocity required to cover them (Johnson, 2010). This formula consists of a revenue model that presents the price times the quantity that could be sold; a cost structure that consists of direct and indirect costs and economies of scale; a target unit margin required to cover overhead costs and achieve the desired profit level at the target volume; the resource velocity that defines how quick resources should be used to support the target volume (Johnson, 2010). The third element of the four-box framework consists of key resources and processes. Key resources are unique people, technology, products, facilities, equipment, funding and brand required to deliver the customer value proposition within the constraint of the profit formula (Johnson et al., 2008). "Key processes are the means by which an organization delivers the customer value proposition in a sustainable, repeatable, scalable and manageable way" (Johnson et al., 2008). Here is the implementation of rules, norms and metrics important. When these four boxes are integrated together, they provide the development of a competitive advantage. Business model innovation will start with the identification of an unsolved consumer problem, and then create a solution with a product or service. The new customer value proposition is the start of the review of the profit formula. When this formula is established, the key processes and resources are influenced both by the new customer value proposition and the profit formula.
Figure 12. Four-box business model (Johnson, 2010)
There a three types of white spaces: white space within, beyond and between. "A white space within is an opportunity to solve a consumer problem, of existing and new customers, in a organization’s current market using a new business model" (Johnson, 2010). "A white space beyond reaches new customers in a new market" (Johnson, 2010). This is done by making products accessible to larger groups of consumers that first were not able to consume the product or service because it was too expensive, complicated or time-consuming. "White space between is an opportunity that arises from a sudden, unpredictable external event" (Johnson, 2010). Such events could be economic market shocks, the rise of powerful enabling technologies or shifts in governmental policy (Johnson, 2010).
The implementation of a new business model is divided into three stages: incumbation, acceleration and transition. Incubation is the process of identifying the assumptions most critical to the success of the business proposition and then testing them to prove or disprove their viability (Johnson, 2010). The second stage with the implementation is acceleration, which begins by refining and standardizing processes, then establishes business rules to govern them and last determines the metrics required to chart continuous success (Johnson, 2010). Transition is the final stage of implementation and applies only to incumbent organizations. It asks the question if the new business model can be integrated with the core of the organization or if it should remain a separate unit (Johnson, 2010). The new business model could be integrated when the profit formulas are substantially the same, when the new business model enhances the brand of the core business, or when the new business model improves the core business. It should remain a separate unit when the profit formulas do not match, the new model needs different rules or metrics or when the new business model needs a distinctive brand (Johnson, 2010).
When this concept of white space strategy, WSS, is compared to the BOS, it is clear that with both strategies the business model is changed. However, with BOS the change of the business model is simple an outcome of a blue ocean idea. WSS argues that a change of a business model is the main driver for profitability, while with BOS a blue ocean idea is the main driver and a change in business model makes this idea profitable. Next to this, there are differences between the strategic sequence of BOS and the four-box framework of WSS, both analytic tools to change the business model of an organization. The first step of these two models are the same, both are making sure that value is created for its customers. However, the first difference between the two lies in which components of profit are taken as given. With BOS, the price and profit margin are determined, and the costs are adjusted to this. With WSS, the costs and desired profit level are given, and then the price is determined to reach this profit level. So white space strategy takes costs for granted and BOS not. The second difference lies in the fact that with WSS the profit formula has an influence on the key processes and resources, which is not mentioned in the strategic sequence of BOS. Besides this, there is a difference in the scope of the two strategies. While BOS tries to find uncontested market spaces and focusses on non-customers, WSS has three different options (within, beyond and between). White spaces beyond corresponds most with uncontested market spaces of BOS; however it is not clear if Mark Johnson means that these areas are reached by means of pursuing differentiation and costs at the same time; BOS its value innovation.
Concluding, the concept of white space strategy could be seen as slightly different from blue ocean strategy. Because of these differences, this concept of WSS will be evaluated on its effectiveness in the next chapter.