by Merlin Hernandez
Companies today battle for a share of the market in a theater that is fiercely competitive. It has been described as a bloody red ocean of sharks and victims primarily because industries continue to strategize within a defined economic structure that is dictated by existing demand. But with supply outstripping demand in some industries, the marketing edge of differentiating strategies is quickly diffused in an information-driven culture, with the cost of competing eroding margins, and companies needing to look at new opportunities for profitability and growth.
A divergent strategy will serve to insulate a business from competition by establishing itself in an untapped market with high opportunity for growth without threatening the immediate interests of competitors. It is a strategy meant to extend the time frame between market entry and competitor alert while concentrating on consolidating brand loyalty through value creation. This undermines the traditional approach to business by denying competitiveness as the key to success to pursue unlimited market opportunity through a leap in value creation for a different kind of demand orientation – a Blue Ocean Strategy (BOS).
The fashion industry is intensely red ocean. But many high-end designers like Ralph Lauren, Versace, Stella McCartney, and Michael Kors have taken the best features of haute couture to offer a classic look at lower prices. It is a tactic that spans strategic groups – haute couture and mass market – to create Designer Retail as a whole new market segment to draw new customers to their brands and be less vulnerable to the competitive red ocean. Customers buy luxury and brand name (added values) at affordable prices. In other words, lowering costs and maximizing value.
There is considerable evidence in the fashion industry where BOS has proven to be successful but with a twist. Instead of decreasing costs and lowering prices to differentiate the basic product, many designers have used a line extension RTM. Some of the literature claims that line extension is not aligned with BOS because it remains a strategy to compete for market share and only reinforces red ocean values. I tend to disagree because the line extension strategies used by these designers are specifically directed at unlocking the blue ocean by bringing previously untapped customers into the revenue stream. It does not differentiate the basic product to target the same red ocean market, there is a whole new product mix aimed at a target that is outside of the basic client profile.
The approach splits the market into two separate targets – expensive high-end/low volume and low-cost mass market/high volume – with two separate and distinct product mixes. Companies maintain their brand identity as a high-end label and use that equity for value creation with a BOS strategy of low-cost luxury to reach into the mass market for volume output and higher profit margins.
Apple has also embraced superior value creation through service delivery. In the face of intense competition, and similar products on the market before the company can achieve its full market projections, Apple has shifted its short to medium term emphasis from value innovation as its differentiation strategy to heightened value-creation as a way of getting one leg out of the competitive bloodbath (red ocean). This can be seen as a strategic re-alignment in an attempt to balance the components of value by measuring its economic and financial impact with both qualitative (value) and quantitative (financial metrics) tools for strategic and economic control. It is a methodology based on the integration of the investment curve for innovation, the value of the market generated by these investments, and the value-price ratio that impacts the company’s market position.
“Given the expectation that competitors will quickly develop similar products and threaten the investment curve, companies like Apple need to push the life cycle boundaries as far as possible by ratcheting up the value-creation – not based on product improvement at additional R&D outlay but on the level and quality of service. It is a strategy of great market value that brings a new opportunity to take the product into the blue ocean. It will serve the function of buying time to cover capital investment, keep the share price steady, and have the surplus for the next wave of innovation” (The New Apple, Hernandez, 2012). Note the imminent arrival of I-Phone 5.
Apple is currently operating in the blue ocean with the iPhone by creating new buyer value. “This is the mature phase of the smart phone life cycle where declining revenues and decreasing customer loyalty are to be expected along with and sharpened competitive tactics” (Apple and Samsung, Hernandez, 2012). Apple has actually opted out of the intense competitive red ocean strategies of increased marketing and branding spend, drastic cost cuts to increase margins, and price wars. Instead, Apple has re-defined its value map to offer a superior service product to sail the blue ocean. The brand loyalty generated might just carry the company through several cycles of competitor innovation.
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Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. For more information on this and other topics, please send enquiries to email@example.com