In the research of the Blue Ocean Strategy founders, they found six prominent assumptions that are built into managers’ minds about how the business world works. They termed them as Red ocean traps because they effectively anchor managers in red oceans — crowded market spaces where companies engage in bloody competition for market share.
These red oceans lead to organisations competing on quality and cost, which ultimately leads to a fall in the margin and a race to the bottom in the industry.
All managers must understand these traps to enter the blue oceans of previously unknown and uncontested market spaces with ample growth potential.
The founders of Blue Ocean Strategy outlined the traps as
Trap One: Looking to Existing Customers for Insight into Creating New Demand
Generating new demand lies at the heart of any market-creating strategy. But marketing managers — trained to believe that the customer is king — or queen — often assume that to generate new demand they must focus on making their existing customers happier.
While having happy customers is a good thing, it is unlikely to create new markets. To do that, an organization needs to turn its focus to noncustomers, for they hold the greatest insight into the points of pain and intimidation that limit the size and boundaries of an offering’s industry.
A focus on existing customers, by contrast, tends to drive organizations to offer better solutions for them than what competitors currently offer — but keeps companies moored in red oceans.
Trap Two: Treating Market-Creating Strategies as Niche Strategies
The field of marketing has placed great emphasis on using ever-finer market segmentation to identify and capture niche markets. Though niche strategies can be very effective, uncovering a niche in an existing space is not the same thing as identifying a new market space.
Successful market-creating strategies “desegment” markets by identifying key commonalities across buyer groups that could help generate broader demand and target non-customers.
Trap Three: Confusing Technology Innovation with market-creating strategies
R&D and technology innovation are widely recognized as key drivers of market development and industry growth, so managers would be forgiven for assuming that both are key drivers in the discovery of new markets. But market creation is not inevitably about technological innovation.
Value innovation, not tech innovation, is what launches commercially compelling new markets. Successful new products or services open market spaces by offering a leap in productivity, simplicity, ease of use, convenience, fun and fashion, or environmental friendliness.
Trap Four: Equating Creative Destruction with Market Creation
Creative destruction occurs when an invention disrupts a market by displacing an earlier technology or existing product or service, the old is incessantly destroyed and replaced by the new.
But market creation does not always involve destruction. It also involves nondestructive creation where new demand is created without displacing existing products or services.
Nondestructive market-creating moves offer solutions where none previously existed. And even when a certain amount of destruction is involved, nondestructive creation often plays a larger role than you might think.
Conflating market creation with creative destruction not only limits an organization’s set of opportunities; it can also build resistance to market-creating strategies within established companies and lead start-ups to unnecessarily take on larger companies with multiple times the resources and market reach. Commercially compelling new markets are at least as much — if not more — about nondestructive creation as they are about disruption.
Trap Five: Equating Market-Creating Strategies with Differentiation
In a competitive industry, companies tend to choose their position on what economists call the “productivity frontier,” the range of value-cost trade-offs that are available given the structure and norms of their industry. A commonly chosen strategic position is differentiation, meaning that companies stand out from competitors by providing premium value; the trade-off is usually higher costs to the company and higher prices for customers. Many managers assume that market creation is the same thing. In reality, a market-creating move breaks the value-cost trade-off. It pursues differentiation and low cost simultaneously. A market-creating move is a “both-and,” not an “either-or,” strategy.
Trap Six: Equating Market-Creating Strategies with Low-Cost Strategies
When an organization sees market-creating strategies as synonymous with low-cost strategies, they focus on what to eliminate and reduce current offerings and largely ignore what they should improve or create to increase the value of offerings.
A market-creating strategy takes a “both-and” approach: It pursues both differentiation and low cost. In this framework, new market space is created not by pricing against the competition within an industry but by pricing against substitutes and alternatives that noncustomers are currently using.
The findings of this blog were taken from the article written by the founders of the Blue Ocean Strategy and simply outline the traps that many managers face.