Red Ocean Traps
• W. Chan Kim
• Renée Mauborgne
FROM THE MARCH 2015 ISSUE
HBR Reprint R1503D
For disclosure, I have never been a true fan of the Blue Ocean strategy but I wanted to share with our community their thoughts on creating new markets.
Trap One: Seeing Market-Creating Strategies as Customer-Oriented Approaches
Generating new demand is at the heart of market-creating strategies. It hinges on converting noncustomers into customers, as Salesforce.com did with its on-demand CRM software, which opened up a new market space by winning over small and midsize firms that had previously rejected CRM enterprise software…..Growth comes from converting nonusers. EXAMPLE:Sony focused on improving e-readers’ legibility to please current customers. But Amazon’s Kindle addressed the number one concern of non-buyers: too few available titles. Amazon won.
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 often be very effective, uncovering a niche in an existing space is not the same thing as identifying a new market space….EXAMPLENiche marketing can be treacherous. Delta’s Song targeted too narrow a segment of fliers—stylish professional women—and didn’t last. But Pret A Manger thrived by “desegmenting” different customer groups—figuring out what they had in common—to create a new market space.
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. It’s understandable, therefore, that managers might assume that they are also key drivers in the discovery of new markets. But the reality is that market creation is not inevitably about technological innovation.. Technological breakthroughs don’t necessarily create new markets. EXAMPLE: Segway was a marvel but never found a wide customer base. New markets arise from value innovation, not tech innovation.
Trap Four: Equating Creative Destruction with Market Creation
But does market creation always involve destruction? The answer is no. It also involves nondestructive creation, wherein new demand is created without displacing existing products or services.
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 the industry. Differentiation is the strategic position on this frontier in which a company stands out from competitors by providing premium value; the trade-off is usually higher costs to the company and higher prices for customers. We’ve found that many managers assume that market creation is the same thing….In reality, a market-creating move breaks the value-cost trade-off. It is about pursuing differentiation and low cost simultaneously.