Red Ocean Traps
12 March, 2015 / Articles
America, corporate performance has been deteriorating for decades. According to Deloitte’s landmark study “The Shift Index,” the aggregate return on assets of U.S. public companies has fallen below 1%, to about a quarter of its 1965 level. As market power has moved from companies to consumers, and global competition has intensified, managers in almost all industries have come to face steep performance challenges. To turn things around, they need to be more creative in developing and executing their competitive strategies. But long-term success will not be achieved through competitiveness alone. Increasingly, it will depend on the ability to generate new demand and create and capture new markets.
The payoffs of market creation are huge. Just compare the experiences of Apple and Microsoft. Over the past 15 years, Apple has made a series of successful market-creating moves, introducing the iPod, iTunes, the iPhone, the App Store, and the iPad. From the launch of the iPod in 2001 to the end of its 2014 fiscal year, Apple’s market cap surged more than 75-fold as its sales and profits exploded. Over the same period, Microsoft’s market cap crept up by a mere 3% while its revenue went from nearly five times larger than Apple’s to nearly half of Apple’s. With close to 80% of profits coming from two old businesses—Windows and Office—and no compelling market-creating move, Microsoft has paid a steep price.
Of course, it’s not that companies don’t recognize the value of new market spaces. To the contrary, their leaders increasingly are committed to creating them and dedicate significant amounts of money to efforts to do so. But despite this, few companies seem to crack the code. What, exactly, is getting in their way?
In the decade since the publication of the first edition of our book, Blue Ocean Strategy, we’ve had conversations with many managers involved in executing market-creating strategies. As they shared their successes and failures with us, we identified a common factor that seemed to consistently undermine their efforts: their mental models—ingrained assumptions and theories about the way the world works. Though mental models lie below people’s cognitive awareness, they’re so powerful a determinant of choices and behaviors that many neuroscientists think of them almost as automated algorithms that dictate how people respond to changes and events.
Does market creation always involve creative destruction? The answer is no.
Mental models have their merits. In dangerous times, a robust mental model can help you quickly make decisions that are critical to survival. And we have no issue with the soundness of the mental models that we saw managers apply. They were grounded in knowledge acquired in classrooms and from years of business experience. They help managers respond better to competitive challenges. But our conversations suggest that the mental models managers rely on to negotiate existing market spaces also undermine their ability to create new markets.
In our research and discussions, we’ve encountered six especially salient assumptions built into managers’ mental models. We have come to think of 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—and prevent them from entering blue oceans, previously unknown and uncontested market spaces with ample potential. The first two traps stem from assumptions about marketing, in particular an emphasis on customer orientation and niches; the next two from economic lessons on technology innovation and creative destruction; and the final two from principles of competitive strategy that regard differentiation and low cost as mutually exclusive choices. In the following pages, we’ll look at each trap in detail and see how it thwarts companies’ attempts to create markets.
Growth comes from converting nonusers. Sony focused on improving e-readers’ legibility to please current customers. But Amazon’s Kindle addressed the number one concern of nonbuyers: too few available titles. Amazon won.
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.
The trouble is that managers, especially those in marketing, have been quite reasonably brought up to believe that the customer is king. It’s all too easy for them to assume, therefore, that market-creating strategies are customer led, which causes them to reflexively stick to their focus on existing customers and how to make them happier.
This approach, however, is unlikely to create new markets. To do that, an organization needs to turn its focus to noncustomers and why they refuse to patronize an industry’s offering. Noncustomers, not customers, hold the greatest insight into the points of pain and intimidation that limit the boundary of an industry. A focus on existing customers, by contrast, tends to drive organizations to come up with better solutions for them than what competitors currently offer—but keeps companies moored in red oceans.
Consider Sony’s launch of the Portable Reader System (PRS) in 2006. The company’s aim was to unlock a new market space in books by opening the e-reader market to a wide customer base. To figure out how to realize that goal, it looked to the experience of existing e-reader customers, who were dissatisfied with the size and poor display quality of current products. Sony’s response was a thin, lightweight device with an easy-to-read screen. Despite the media’s praise and happier customers, the PRS lost out to Amazon’s Kindle because it failed to attract the mass of noncustomers whose main reason for rejecting e-readers was the shortage of worthwhile books, not the size and the display of the devices. Without a rich choice of titles and an easy way to download them, the noncustomers stuck to print books.
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