I’ve always had an interest in business strategy and business models, I like thinking about why some strategies work and why others don’t. When I see a company starting to do something that is innovative, I take notice and investigate, and try to leverage insights into my own client work.
What sparked my interest is a concept developed several years ago by W. Chan Kim and Renée Mauborgne called Blue Ocean Strategy, a metaphor for companies creating uncontested market space. Here’s a link to their web site http://www.blueoceanstrategy.com
Imagine a company as a fishing trawler at sea. Setting out from port, there are many trawlers that are in competition with each other. They are sailing in a ‘Red Ocean’, contending against each other for a greater share of the ocean space and fishing catch. They’re all fighting after the same fish.
As more trawlers enter the Red Ocean, the harder it gets for them to be commercially viable, since the ocean does not get any bigger and the potential catch is shared out more. Customer demand remains the same but the number of suppliers continues to increase, thus encouraging fierce competitive practices to ensure that they get as much of the market out at sea, and also when they get back to port. Inevitably this means a price war – and blood everywhere, hence ‘Red’ Ocean.
Now let’s think of two scenarios: a new trawler that has never sailed in any ocean decides to venture out on its own into unchartered territory instead of entering the Red Ocean, or a trawler decides to sail out of the Red Ocean that it is currently in, and into unchartered territory, which we’ll call the ‘Blue Ocean’, as there is lots of space and clear, blue ocean around.
For each of the above scenarios, the end result is the same. The trawler has entered a Blue Ocean and in so doing made the other trawlers irrelevant as they’ve removed competition, and created itself a new market to thrive in. If you get it right, the pay off for developing your own market is much more rewarding than trying to beat down others to get to the top in established markets.
Competing in existing market space, with existing customers, only makes the water bloody, resulting in a horrible Red Ocean where there are more fisherman – but less fish each. By creating a Blue Ocean, there aren’t only more fish, but you’re the only trawler around. You’ve reconstructed the market boundaries.
A good example of a Blue Ocean Strategy is Apple’s iTunes. In 2003 Apple moved into the digital music space as a provider and distributor of content – and signalled the end of the previous innovation, the CD. Apple created iTunes as an online service where people could download legal, high quality songs for a very reasonable price.
Apple observed the flood of illegal music file programs such as Napster and LimeWire had created a network of Internet savvy music lovers freely, yet illegally, sharing music. By 2003 more than two billion illegal music files were traded every month and the recording industry fought to stop the cannibalisation of physical CDs.
With the technology available to digitally download music free instead of paying for a CD, the trend toward digital music was clear. This trend was underscored by the fast growing demand for MP3 players that played mobile digital music, such as Apple’s iPod.
Apple decisively capitalised on this trend with a clear trajectory, by launching the iTunes online music store. Until that point, no one had been able to establish such a user-friendly system for online music content curation and distribution.
Apple’s strategy was also unique in that the success of iTunes fed into Apple’s other hot product, the iPod. People would go to iTunes and download music onto their iPods. Apple provided the content, the means of acquisition and distribution, and the device. A great Blue Ocean!
Another reason for Apple’s success is that it is more a design-driven company rather than a technology-driven company, putting customers at the centre of its product innovation. In doing so, Apple created the need for its products and then exploited its newly created market share quickly, making it very difficult for competitors to grab a piece of the pie.
iTunes offered legal, easy-to-use and flexible à la carte song downloads. iTunes allowed buyers to freely browse and listen to thirty-second samples, and download an individual song or an entire album. By allowing people to buy individual songs and pricing them far more reasonably, iTunes broke a key customer annoyance: the need to purchase an entire CD when they wanted only one or two songs on it.
iTunes also leapt past free downloading services, providing sound quality as well as intuitive navigating, searching, and browsing functions. Apple’s iTunes unlocked a Blue Ocean in digital music. It was personalised, it was accessible, it was affordable – it was value innovation. iTunes was, and is not, a product either. It sprang to live as an eco-system, a collection of carefully orchestrated hardware, software services and content channels with unbeatable pricing.
As a creator of a Blue Ocean, Apple didn’t use the competition as their benchmark. Instead of focusing on beating the competition, they focussed on making the competition irrelevant by creating a leap in the value proposition for customers across several dimensions as highlighted above, thereby opening up new and uncontested market space.
Apple then applied Blue Ocean thinking to the iPad – instead of further segmenting the PC industry, they asked can we create a third category that is neither PC nor smartphone? Instead of offering high-valued laptops or lower-valued netbooks, can we make a new product that provides breakthroughs in value for PC users? Today the iPad defines the market, it is not so much a competitor in an established market, it sails in its own clear and pristine Blue Ocean.
The iPad and iPad 2 show that Apple is trying to displace the way we use our computing devices, and extend the usage of tablets to a larger, wider audience. They have sold 204 million units to the end of February 2013.
Rather than competing head on with a laptop or tablet pc market leader, the iPad defined a new market and even the boundaries of the space, showing its applications and usability. Instead of seeking to mitigate its weaknesses (specifications and price), it isn’t afraid to harp on its strengths (design and user satisfaction).
Just like Windows made OS the PC mainstream, now Apple wants to move people away from that mainstream. It wants more people on iOS devices, more people to use iTunes, more people to purchase apps from App Store, more people to use iPads to read books, more people to use iPods to listen to music and iPhones to make calls.
By moving the consumers into the Blue Ocean market defined by Apple, it doesn’t need to fight with Microsoft head on. Maybe it hopes that one day enterprises will use iOS instead of Windows, and use Apps instead of software?
Apple has shown that a Blue Ocean Strategy makes sense:
Focus on the market and user How does the user interact with your product or service? Find out what hasn’t been met and how things can be improved. There is definitely a way to improve on things, since nothing is perfect. Dyson made vacuum cleaners a tech-gadget with its futuristic design and disposing with flimsy one-use filters.
Don’t fight the market, move the market boundaries. Create the necessary foundations to define the boundaries of the new marketplace. Apple did this by creating iTunes and the Apps Store, making it affordable to people to buy songs and easy to access from all iDevices. It created a new ecosystem where new customers can thrive, and retention rates are high.
Build on your strengths and hide your flaws Apple focused on user-experience where it could make a difference rather than showing off its technical specification. In the iPad 2, it didn’t tell people how much RAM it had but told them it was lighter and thinner – things that were more important for portability in tablets.
This is where the Blue Ocean begins to turn a little murky – blood in the water from skirmishes between laptop companies, Android and Windows-based tablet makers. However, iPad has so far demonstrated that it can navigate around these battles because it is not a product, it is part of a broad collection of products and services that no single competitor seems to be able to match. Even in these seemingly competitive scuffles, the iPad is slowly but surely replacing the traditional modes of computing and moving users into Apple’s clear Blue Ocean space.
The competitive sea is getting more crowded for iPhone. Apple still has an edge, in that it built that sea. However, the sheer convenience of using all its products together also creates very real switching costs – the 250 million users of Apple’s iCloud are going to think twice (or three or four times) before buying a smartphone, tablet, or computer from anybody else.
Apple made the iPod with a great circular touch-sensitive dial to make the user interface more satisfying to use rather than to press on buttons and dials. The iPhone was the first great touch screen phone and cracked open a market. The screen rotation on the iPad and the tap, scroll, pinch and swipe – the multi-touch function, continue to set it part as genuine value innovations.
Apple’s strategy is really about finding Blue Oceans, markets that come into existence as Apple defines them. The company has repeatedly given customers something that felt entirely new, that solved their problems in a way no existing product did.
Of course, Apple’s market position is currently under threat with commentators saying it has lost its creative mojo. I wouldn’t be so sure that Apple has lost its way, but what I am pretty sure about is that Apple’s future success will be built on continuing its Blue Ocean strategic thinking.
The language of strategy is more informative about Apple’s predicament than most of the chatter one hears about whether the company is still cool or Tim Cook really has what it takes. And as it fights back, take a look at this: