Has Your Business Plateaued? Here's How Companies Like Square and Salesforce.com Have Broken Through. Instead of fighting for scraps in existing cutthroat markets, produce more creative strategies that open up new frontiers.
By W. Chan Kim and Renée Mauborgne Edited by Dan Bova
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Today tighter profit margins, rising costs, sinking sales and market share battles are hitting industries across the board from retail to media, construction to publishing. Even in public and nonprofit sector industries like post offices, museums and classical orchestras demand is down, costs and competition are up, and organizations are struggling financially.
If your business has plateaued, take heart. There is a way out of this. Consider how Square and Salesforce.com seized new growth in two intensely competitive industries: the credit card and the customer relationship software (CRP) industries. Both saw the opportunity to open new frontiers of demand and growth by asking different sets of questions which allowed them to see new opportunities and reshape industry boundaries. And as they did it, you can too.
Instead of fighting for scraps in existing cutthroat markets, you can learn to produce more creative strategies that open up new frontiers of opportunity, growth and jobs, where success is not about dividing up existing, often shrinking markets, but about creating a larger economic pie for all -- what we refer to as Blue Oceans. Blue oceans are less about disruption, and more about nondisruptive creation.
To find your organization's blue oceans, you need to reshape the boundaries of the market in which you operate. But how can you favorably shape market boundaries and change the conversations you have about where opportunities reside so as to conceive and open up a new value-cost frontier? Every organization, even the most innovative, must face this question sooner or later.
Most organizations tend to define their strategic playing field -- and limit their opportunity horizon -- on the basis of six conventional boundaries: industry, strategic group, buyer group, scope of the product or service offering, nature of the offering's appeal and time.
Yet these boundaries do not define what must be or should be. They merely define what is. None is a law of nature. All of them are the product of people's minds, and, as such, they are open to change. The six paths framework, shown below, provides six systematic ways to shift the lens you use in looking at the market universe and open up a new value-cost frontier. Path by path, the framework explains how to uncover plausible blue ocean opportunities by looking across an industry's self-imposed boundaries, instead of remaining stuck within them. It also incorporates seasoned advice on what to look and listen for as you pursue each path. Let's explore the six paths in turn.
Path 1: Look across alternative industries.
This path requires you to identify the problems or needs your offering currently solves, and then to generate a list of other solutions or industries noncustomers use to address the same problems or satisfy the same needs. Remember that the focus is not on alternatives within your industry—why people choose to fly on one airline over another, for example—but on alternative industries that serve the same function or solve the same problem, but that have a different form. What are the decisive sources of value and the detractors of value that make people gravitate to and choose one alternative over another?
Although there may be several alternative industries to the industry you're in or targeting, you should focus on the one(s) that has (have) the largest catchment(s) of demand.
Related: Square Makes Money Transfers as Easy as Sending an Email
Path 2: Look across strategic groups within your industry.
Most companies focus on outcompeting their rivals to improve their position within their strategic group or market segment. In the hotel industry, for example, five-star hotels tend to focus on outdoing other five-star hotels, three-star hotels focus on outcompeting other three-star hotels, and so on. But this only keeps them doggy-paddling in a red ocean. The key to a blue ocean shift is to understand what factors determine buyers' decision to trade up or down from one strategic group to another. This allows you to distinguish between the range of factors on which strategic groups compete, and the decisive few that drive buyers' decisions to choose one over the other. Again, the focus here is not on why buyers choose one particular organization over another, but on why they trade up or down across strategic groups.
Related: Salesforce Launches $100 Million Fund to Invest in Entrepreneurs Building Apps On Its Platform
Path 3: Look across the chain of buyers.
Most industries converge around a common definition of their target customer. In reality, however, the purchasing decision usually involves, directly or indirectly, a chain of buyers: the users of the product or service; the purchasers who pay for it; and, in some cases, the influencers whose opinions can make the difference in a decision to purchase—or not. So for preteen girls' clothing, the purchaser or payer is typically a parent, the users are the teens themselves, and the key influence group might be pop stars.
In thinking about who's in the chain of buyers, it's also worth considering potential influencers, people who could be brought into the decision-making process but currently aren't.
Related: 10 Ways to Learn About Your Target Audience
Path 4: Look across complementary product and service offerings.
Few products or services are used in a vacuum; in most cases, other products or services affect their value. But in most industries, rivals converge within the conventional boundaries of their industry's product or service offering and focus their efforts solely on maximizing its value. The key to value innovation is to define the total solution buyers seek when they choose a product or service, and then to eliminate the pain points and points of intimidation across the total solution. A simple way to do this is to think about what happens before, during, and after your product and service is used.
By broadening your understanding of the total solution buyers need or seek, you can often discover new sources of trapped value.
Related: Why Your Target Market Is Not, That's Right, Not Important
Path 5: Rethink the functional-emotional orientation of your industry.
Competition in a given industry or strategic group tends to converge, not only around an accepted view of the scope of an offering, but also around the bases of its appeal. Some industries and groups compete principally on price and functionality: Their appeal is functional. Others compete on generating positive feelings: Their appeal is emotional. A new value-cost frontier can often be opened up by shifting the appeal of a product or service from one basis to another, or by blending the sources of its appeal.
Related: Don't Wage a Price War. Win Sales by Eliminating Your Competition.
Path 6: Participate in shaping external trends over time.
External trends affect every industry over time. Nowadays there is hardly a business, nonprofit, or government agency whose world is not being reshaped by external forces. Think of the rise of social media, the growing obesity crisis, the global environmental movement, or aging populations in many developed countries.
Many companies try to project external trends themselves, and they pace their actions to keep up with the trends they're tracking, adapting to them as events unfold. Projecting trends seldom provides insight into opening up new value-cost frontiers, however. Looking at how a trend will change what customers value, and how it might impact a company's business model over time can. As Netflix saw Internet broadband explode, for example, it realized that fast, real-time streaming of full-length films would soon be able to take off. That meant the possibility of instant viewing gratification and complete viewing flexibility.
Applying the Six Paths Framework
Athletes often remind themselves that there is no gain without pain. The same is true when it comes to using the six paths framework. The results are eye-opening and often revelatory. But be prepared: Generating those results takes time and effort in the form of multiple one-on-one interviews and observational fieldwork. While this is the most time-consuming part of the blue ocean shift journey, this is work that team members cannot delegate to anyone else -- inside the organization or outside it. Seeing truly is believing. Never outsource your eyes when your goal is to shift.
