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Kim, W. C. and R. Mauborgne. 2015. Red Ocean Traps: The mental models that undermine market-creating strategies. Harvard Business Review (March): 68-73.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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Note: This article extends the authors' previous work on Blue Ocean strategy (For example, see Kim and Mauborgne 2004 and Kim and Mauborgne 2009).

Kim and Mauborgne begin by reporting that Deloitte's 2013 Shift Index1 showed the aggregate return of assets (ROA) of U.S. companies had fallen below one percent. To turn things around, companies need to generate new demand and create new market space. Although company leaders recognize this need, few companies seem to be able to successfully implement a blue ocean strategy. The problem, according the authors is the mental models that lie below people's cognitive awareness, i.e., ingrained assumptions and theories about the way things work. These mental models help managers respond to various challenges, but also undermine their ability to create new markets, i.e., blue oceans. Kim and Mauborgne refer to these inhibiting mental models as red ocean traps that anchor managers in crowded markets where bloody competition is the norm. The purpose of this article is to describe six mental models or traps that prevent managers from entering blue oceans, i.e., new uncontested market space that makes the competition irrelevant.

Trap One: Seeing Market-Creating Strategies as Customer-Oriented Approaches

Blue ocean strategy is about converting noncustomers into customers. It's not about existing customers, but managers (particularly in marketing) tend to assume that creating new markets is about focusing on making existing customers happier. Sony's 2006 Portable Reader System is provided as an example. Sony focused on the e-reader market and designed a lightweight device with a more reader-friendly screen than those in current products. Sony lost its market to Amazon's Kindle because it failed to focus on the noncustomers who were people who rejected e-readers because of the shortage of interesting e-books. Amazon offered four times as many book titles that grew to over 2.5 million by 2014.

Trap Two: Treating Market-Creating Strategies as Niche Strategies

Niche strategies are often effective, but segmenting a market by finding a niche in existing market space is not a blue ocean. Delta's Song airline venture illustrates the point. Delta launched the Song airline for stylish professional women in 2003 that offered organic food, custom cocktails, entertainment choices, free flight workouts, other perks and competitive pricing. They idea was to develop new market space, but their customers came from the existing market and the niche segment was too small to be sustainable.

Trap Three: Confusing Technology Innovation with Market-Creating Strategies

Creating new market space is not about technology innovation. Blue oceans come from linking technology to what buyers value. The Segway Personal self-balancing Transporter conveys the point. The Segway is an engineering marvel based on innovative technology, but it failed to pass the value test because of difficulties in use and convenience, e.g., where to use it, where to park it, how to take it with you in the car. Starbucks, Cirque de Soleil, Salesforce.com, Intuit's Quicken (See Kim & Mauborgne 1999), and Uber are mentioned as successful examples of market creation. Although technology is frequently involved, it is not the reason these new market strategies were successful. Value innovation, not technology innovation is the key to creating new market space.

Trap Four: Equating Creative Destruction with Market Creation

Creative destruction2 occurs when a new invention displaces a previous technology, product, or service, e.g., when digital photography displaced photographic film. However, markets are frequently created from nondestructive moves that offer solutions that did not previously exist, e.g., Viagra's new market for lifestyle drugs, and Grameen Bank's creation of the microfinance industry. Therefore, to equate market creation with creative destruction limits an organization's opportunities and may also cause managers to view market creating initiatives as a threat to their current status.

Trap Five: Equating Market-Creating Strategies with Differentiation

Companies tend to choose a strategic position along the "productivity frontier" (See Porter 1996). The productivity frontier represents the range of value-cost trade-offs available based on the structure and norms of the industry. Differentiation typically involves offering premium value at higher cost to the company and higher prices to customers. However, a blue ocean strategy breaks the value-cost trade-off and includes the pursuit of differentiation and low cost  simultaneously. Yellow Tail wine and Salesforce.com are provided as examples of companies that offer high value at low cost.

Trap Six: Equating Market-Creating Strategies with Low-Cost Strategies

Equating blue ocean strategy with low cost is similar to trap five since new market space does not involve the low cost end of an industry. As indicated above it includes both differentiation and low cost. Examples include Cirque du Soleil (See Kim and Mauborgne 2004), Starbucks coffee, and Dyson vacuum cleaners. Although low cost and differentiation are valid competitive strategies (See Porter 1980 Chapter 2), they are not market-creating strategies.

The people that are involved in executing market-creating strategies must recognize the six red ocean traps described above. Otherwise these mental models may prevent them and their organization from successfully executing a blue ocean strategy.

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Footnotes:

1 Success or struggle: ROA as a true measure of business performance. Report 3 of the 2013 Shift Index series. Deloitte University Press. (Link to Deloitt's Shift Index report).

2 Creative destruction is an economic theory attributed to Joseph Schumpeter.

Related summaries:

Johnson, M. W., C. M. Christensen and H. Kagermann. 2008. Reinventing your business model. Harvard Business Review (December): 50-59. (Summary).

Kim, W. C. and R. Mauborgne. 1997. Value innovation: The strategic logic of high growth. Harvard Business Review (January-February: 103-112. (Summary).

Kim, W. C. and R. Mauborgne. 1999. Creating new market space: A systematic approach to value innovation can help companies break free from the competitive pack. Harvard Business Review (January-February): 83-93. (Summary).

Kim, W. C. and R. Mauborgne. 2002. Charting your company's future. Harvard Business Review (June): 77-83. (Summary).

Kim, W. C. and R. Mauborgne. 2004. Blue ocean strategy. Harvard Business Review (October): 76-84. (Summary).

Kim, W. C. and R. Mauborgne. 2009. How strategy shapes structure. Harvard Business Review (September): 72-80. (Summary).

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).

Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review (May-June): 43-59. (Summary).

Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).

Porter, M. E. 2001. Strategy and the internet. Harvard Business Review (March): 63-78. (Summary).