Companies are always looking at their competitors in search of inspiration to improve their strategy. Practices such as benchmarking and reengineering are very effective to help businesses rethink their processes in light of what industry leaders are doing; however, if a company focuses exclusively on copying its competitor, it will always lag behind them. That is why companies nowadays are constantly looking to innovate to differentiate themselves from their competitors.
“Your business will never get to be the leader if you focus exclusively on following your competitors.”
The key to creating a competitive advantage is, therefore, to develop innovative strategies to build new markets or reinvent existing ones. Professors at INSEAD, and authors of the bestselling book Blue Ocean Strategy [1], W. Chan Kim and Renée Mauborgne, recommend that companies focus on what they call blue ocean strategies. Instead of competing directly with their competition to grab a bigger slice of the existing demand (red ocean), they should focus on uncontested market spaces where the competition is irrelevant. Red ocean happens in markets that are increasingly crowded, which leads to lower profits for all players. On the other hand, blue ocean strategy allows companies to differentiate themselves, creating new demand and increasing profit. The following video explains how this strategy works:
The Explainer: Blue Ocean Strategy
In an article published in 1999 [2], Kim and Mauborgne presented six basic approaches to implement blue ocean strategies. They are:
Look at substitute products or services: Customers buy goods or services to solve their needs and wants. For example, people can choose to drive their car to work or go by public transportation. Although each of those solutions offers different values and benefits, they are essentially two options for performing the same function, in this case, to get to work.
Companies are always observing their industry but often miss actions from substitute industries. One of our former clients in the furniture retail industry has been very successful in innovating based on substitute products. Instead of fighting head to head with other on-demand furniture stores, their staff first seek to understand their customer, so they can then sell products that are unique to their clients’ needs. In fact, for most of their products, they only keep a single unit in stock. This strategy allows them to differentiate their service by bringing part of the value delivered by carpenters and personal decorators to an in-store experience.
Look across strategic groups within industries: Strategic groups are companies within an industry that operate with similar strategies. For example, some companies might choose to offer excellent customer service while others might be willing to sacrifice their service level to compete on price. By looking at other strategic groups, companies can learn what customers value and then change their strategy to attract these clients.
Look across the chain of buyers: Making purchase decisions often requires multiple agents. For example, the person that pays for a particular product may be different from the person that will use that product. For instance, in corporations, before buying new software or pieces of equipment, employees usually have to ask permission from purchasing agents. Also, in some cases, there are external agents that can influence the decision, such as doctors recommending medicines. By targeting a previously overlooked customer – users, purchasers, or influencers – companies can redesign their value proposition to reach a new market.
Look at complementary products and service offerings: Some goods and services are often consumed together. For example, some restaurants offer a playground for kids so their parents can enjoy a meal together. Similarly, companies can tap into these additional values by understanding what customers do before, during, and after interacting with their business. Thus, offering complementary products and services can directly impact the sales of your core offering.
Look across functional or emotional appeal to buyers: Companies, and sometimes entire industries, focus on one of two possible bases of appeal: functional or emotional. The functional appeal relies on the concept of utility, which means solving the customer’s fundamental needs, while the emotional appeal draws on customers’ feelings. Companies usually focus on reinforcing their appeal and, as a consequence, customers are trained to expect more of the same for less. By changing from a functional to an emotional appeal or vice versa, companies can surprise their customers and stimulate new demand.
Look across time: The world is in constant change. New technologies and changes in customer behavior can disrupt established industries and open up space for innovation. Most companies deal with industry shifts in a reactive way, but some of them are constantly looking at new trends and trying to understand how those changes affect their businesses. Understanding how the world is changing and applying this knowledge to reinvent their operations is one key for companies to create new demands and compete across time.
In summary, to innovate and create new market opportunities, companies should pay less attention to what their direct competitors are doing. Instead, they should look at substitute industries, other strategic groups, different buyer groups, the scope of their product and service offerings, the function-emotional orientation of their sector and other external changes that happen over time to differentiate themselves and gain a competitive edge.
At the end of the day, companies that are different and unique to their target customer are able to enjoy the benefits of fishing alone in a big blue ocean full of opportunities.
Do you have a differentiation strategy?
How is your company different from your direct competitors?
We’d love to hear from you: rafael@thebusinesstherapist.com
References/Recommended reading:
[2] Creating New Market Space. Kim, W. C.; Mauborgne R. (1999).
