From Red to blue to Red
If I asked ten businesspeople how they would define “business model,” I got ten different answers. They ranged from vague descriptions of the proprietary process used to make the product to more generalized descriptions that included how it was marketed, sold, and distributed.
It amazes me how many senior executives describe their business models using the old marketing metaphor “We do it faster, better and cheaper,” as if consumers today are stupid enough to think that product differentiation can be made faster, cheaper, or better. My follow-up question is “Tell Me How It Is Faster, Better, Cheaper.”
The difference between business models and business modeling is still a mystery. When business is reasonable, they have an excellent business model. Both positions are correct to a certain extent, but the “business model” concept remains unclear.
To shed some light on this mystery of business models and to hopefully demonstrate its importance for success and sustained growth, I have chosen to use the business model concept as the basis for a relatively recent business strategy known as Blue Ocean.
The Beat-the Competition Thinking is Dead
The book Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne, How to Create Uncontested Space in the Market and Make Competition Irrelevant, was published in 2005. It was a bestseller, and for good reason.
Most businesspeople were moved by the “Red Ocean” analogy, which describes an unforgiving, bloody, and savage marketplace. The book challenged businesspeople to “Stop trying [to] beat the competition, and instead] make the competitors irrelevant by breaking down the value-cost trade-off paradigm.”
The authors claim that if businesses follow this advice, they will be able to enjoy a market uncontested by competitors called the “Blue Ocean.” The book uses simple examples to present strategies that businesses can use to differentiate themselves from Red Ocean rivals and create a Blue Ocean in which they can prosper.
How can a company stay in a Blue Ocean for long-term success, even if it has carved out a spot? The business model is a must!
Let’s Start with the Blue Ocean Language
Blue Ocean Strategy says that unless our business differentiates itself, it will be another pretty face on the market. To differentiate ourselves, we must apply Blue Ocean value innovation thinking. Red oceans, Blue Oceans, and Value Innovation, Oh My!
Here’s how I interpret a few keywords so that they don’t interfere with understanding the Blue Ocean principles:
Red Ocean: where most of us compete. It’s red because it’s bloody.
Blue Ocean: Where we want to go; no competition
Differentiation – is based on the buyer’s value, not price or promotion
Value creation or innovation: Creating value for the buyer by changing or adding something the buyer defines as valuable. However, the value of the buyer cannot be increased, altered, or removed at the expense of company value or margin. It has to work both ways
Functions and activities: The operational activities that must be modified to support the value innovation process
Market rules or factors: The criteria that we perceive to be the targets against which we must compete
You’ll discover that until recently, value innovation was a one-sided idea. After all, isn’t increasing company profit margins by cutting service or product costs our goal, entrepreneurial duty, and measure of success?
The authors of Blue Ocean do not believe this. They say that true value innovation involves increasing both customer and company value. What?!
Blue Ocean Thinking tells us to pursue differentiation (increase the value of a product or service for the customer) and align all business operations activities in the firm to support differentiation. This will increase value (margin).
This thinking contradicts the traditional approach we have been taught: aligning the firm’s operations with the strategic decision of “differentiation or cost-effectiveness.” This challenge is called “breaking the value-cost trade-off” in the book.
To truly differentiate, the company must focus its entire operational activities (I refer to them as functions) on differentiation and increase company margin.
What next? Understanding the Red Ocean and the factors that everyone is competing against will help you get started.
Market factors Who
Blue Ocean authors make a good point in pointing out how businesspeople are taught that they can compete and win by focusing on market factors such as price and promotion. They also emphasize the importance of service, support, and convenience.
We didn’t realize, or I certainly didn’t, that the market factors are set up by the competition to keep us off the market – maybe not initially, but definitely over time. Market players spend a great deal of money and time to enforce these factors. We use our limited resources to try to get around them.
What are we going to do? What should we do? Change your marketing message? Be more aggressive? Change the factors, and then break the rules.
To change market factors and break rules, we must understand the importance of these factors in the minds of customers. The customer is the most essential player in the game of changing elements.
Blue Ocean Strategy’s concept of value innovation shows us how to alter the factors that will attract the customer’s attention. The book gives us several examples of how value innovation can help us differentiate ourselves, which will likely open the minds of even the most traditional managers.
When we examine the value innovation concept and how it operates, we discover that Blue Ocean strategies are only temporary successes unless a business model supports them.
The strategies may work for a while, but soon, the company finds itself back in the Red Ocean it has worked so hard to escape.
Enter the Business Model
For a company to maintain a Blue Ocean Position, the business model must support these strategies. Otherwise, the strategy will become marketing tactics with no focus or support from operations, and they won’t last. We’re now back to business models not just how a company makes money.
I use the Dell “Sell Direct” business model to help bridge the Blue Ocean and business-model gaps. It shows how a business supports differentiation and sustains its success.