Red to Blue to Red
If I ask 10 businesspeople to define the term "business model," I get 10 different answers—ranging from vague descriptions about the product's proprietary process to generalized descriptions, including how the product is marketed, sold, distributed, and supported.
I marvel at how many senior business executives still describe their business model using the classic marketing metaphor, "We do it, faster, better, cheaper," as if today's market is dumb enough to believe product differentiators can be faster, better, cheaper. So my follow-up is, "Tell me how it is faster, better, cheaper."
Business modeling and business models seem to remain a mystery. When things are good, businesses have a superior business model (whatever that means); when things are bad, their business model is OK, but the market is bad. Although both positions are true to some extent, the concept of "business model" is unclear.
To shed some light on the business-model mystery and hopefully prove its importance to success and sustained growth, I have chosen to introduce the use of the business-model concept as the foundation for a relatively new business strategy called Blue Ocean.
Beat-the-Competition Thinking Is Dead
When the book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renee Mauborgne was released in 2005, the market, rightfully so, was abuzz with the simple revelations the book put forth.
The "Red Ocean" metaphor, used to describe a cutthroat, backstabbing, cluttered bloody marketplace, struck a chord with most businesspeople. The book challenged businesses to "Stop trying to beat the competition and [instead] make the competition irrelevant by breaking the value cost trade-off paradigm."
According to the authors, if a business does that, it will enjoy an uncontested market space called "Blue Ocean." Using very simple examples, the book presents strategies for businesses to separate themselves from Red Ocean competitors and create a Blue Ocean where they can enjoy prosperity.
The problem is, even if a business can carve out a Blue Ocean spot, how does it stay there for long-term prosperity? Enter the need for the business model!
Let's Start With the Blue Ocean Language
Blue Ocean Strategy tells us that our business is just another pretty face in the market (Red Ocean) unless we differentiate to stand out. And to really differentiate, we need to apply Blue Ocean value-innovation thinking. Red Oceans, Blue Oceans, and value innovation, oh my!
So that the new language doesn't get in the way of understanding the principles of Blue Ocean thinking, here's my interpretation of a few key terms:
- Red Ocean: where most of us compete; it's red because it's bloody
- Blue Ocean: where we want to be; no competition
- Differentiation: based on buyer value; not price and promotion
- Value innovation or value creation: the process of adding buyer value by adding, changing, or eliminating something the buyer defines as value; however, buyer value cannot be added, changed, or eliminated at the sacrifice of cutting company value or margin. It must work both ways
- Functions or activities: the operational activities that must be changed to support the value-innovation process
- Market factors or market rules: the criteria we perceive as the targets that we must compete against
If you read the book carefully, you'll find that value innovation has been a one-sided concept until now. After all, increasing company margin by cutting product or service cost—isn't that our goal, our entrepreneurial duty, our measurement of success?
Not to Blue Ocean's authors; they think it works both ways. They tell us true value innovation is increasing customer value while also increasing company value. What?!
Blue Ocean thinking tells us that to pursue differentiation (increase the value of our product or service to the customer), we need to align all the firm's business operational activities to support differentiation while increasing value (margin) to the company.
That thinking opposes the classic approach we've been taught, which is to align the firm's operational activities with the strategic choice: "differentiation or low cost." The book calls that challenge "breaking the value cost trade-off."
In other words, true differentiation requires the company to focus all its operational activities (I call them functions) toward differentiation while increasing company margin.
OK, that sounds good, but where do we start? A good starting point is to understand the Red Ocean, the market factors everyone competes against, and what got us there in the first place.
Market Factors Who?
Blue Ocean's authors do a great job of pointing out that market factors, such as price, promotion, service, support, and convenience, are what businesspeople are taught to compete against and win (hopefully).
What we didn't know, at least I didn't know, is that the market factors are established by the competition to keep us out of the market—maybe not initially, but certainly over time. The bigger market players invest a lot of time and financial resources to enforce those factors, and we spend a lot of our limited financial resources trying to work around them.
So what do we do? Spend more money? Change the marketing pitch? Be more aggressive? No, change the factors and break the rules!
To change the market factors and break the rules, we need to know what the factors are and understand their importance in the customer's mind. Remember, the customer is the important part of the factor-changing game.
The concept of value innovation presented in Blue Ocean Strategy does a good job of showing us how to change the factors to get the customer's attention. It walks us through several examples of how value innovation can differentiate us, likely opening the mind of even the most status-quo-minded manager.
However, when we peel back the concept of value innovation and look closely at how it works, we find that the new Blue Ocean strategies will provide only temporary success unless they are supported by—you guessed it—a business model.
The strategies work for a while, but the company soon finds itself falling back into the same Red Ocean situation it worked hard to swim away from.
Enter the Business Model
To sustain a Blue Ocean position, strategies must be supported by the company's business model. If not, they simply become marketing strategies, without focus or operational support, and will not last. So, we're back to the concept of business models and not just "the way the company makes money."
To help bridge the Blue Ocean and business-model gap, I often use the Dell "Sell Direct" business model as an example of how a business model supports differentiation and sustains success.
Dell did not have the benefit of Blue Ocean thinking at the time the Sell Direct model was created, but a close look at the model shows all the characteristics of today's Blue Ocean thinking.
Let's walk through the Dell Sell Direct model, take some poetic license, and see how all the pieces transformed a small want-to-be player into a computer hardware powerhouse.
Start with the market factors. Dell observed that the market was dominated by two major players, HP and IBM. Both had a long, rich history of manufacturing and selling personal computers, and both had strong distribution networks.
However, what HP and IBM failed to see was that buying direct, either via the Internet or via inbound telemarketing, was emerging as a customer purchasing preference. Dell recognized the shift in customer buying behavior and set out to differentiate itself by changing how customers bought computers.
Dell added buying convenience (buyer value) to the customer's buying experience and, at the same time, created company value (margin) by building only what was sold.
Let me rephrase, Dell added buyer and company value at the same time!
Dell knew it needed to make major changes in the way it ran its business. It could not afford to build large quantities of personal computers, store them, and hope what it built was what the customer wanted.
Build to order was the right thing to do: Eliminate raw-material and finished-good inventory , and deliver exactly what the customer wants.
To support the Sell Direct business model, Dell aligned its operational activities in support of the new business model. And here's an interesting side note: By selling direct, Dell was talking directly to the customer. It not only took orders but also had the opportunity to build customer relationships and to cross-sell and up-sell enhanced features, such as added memory, extended maintenance contracts, and speedy delivery options.
Dell's strategy was to make customers feel that Dell had custom-designed their computing solution and so they could be excited about it. With its "Sell Direct" business model almost complete, and the company's operational activities aligned to support the business model, one more part needed to be added.
To make sure it would not deviate from the Sell Direct strategy, Dell established operational business rules to keep everyone accountable and on the same page. Simple and brilliant, and the rest is history.
Put It to Work
Blue Ocean thinking—knowing the market factors you're playing against, deciding what to change to add customer and company value, and focusing business activities toward differentiation—provides the steps you need to take. But how do you get started?
Listed below are suggested critical first steps to get you going in the right direction. Remember, there's no shortcut to Blue Ocean success. Just plot the path and stay the course, and Red will turn to Blue.
- Understand the concepts of Blue Ocean Strategy. The book is a must-read to truly understand the concept of differentiation and the value-innovation process.
- Once you have read the book and have analyzed the market factors you're competing against, determine what you can change to differentiate yourself by adding customer and company value.
Remember that customer value can be either tangible (enhanced features, simple to use) or perceived (enhanced customer experience, such as buying direct). This step is not a five-minute exercise; it will require customer research, competitive analysis, and financial testing to make sure it's a win-win strategy. - Once you determine what and how you will differentiate, you need to turn the company in the right direction to focus its operational resources in support of differentiation—not just a select few but all the operational activities required to transform the company and the product or service into a Blue Ocean-differentiated offering.
- To ensure that the plan stays on track, establish operational rules to support what you're doing. For example, if overnight shipping is one of your differentiators, then establishing a strategic partnership with companies such as Fed Ex or UPS is critical. The partners must understand that 24-hour delivery is vital to your differentiated market position.
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Developing a Blue Ocean strategy without a business model as the foundation to support the strategy will yield only temporary success. The business model is the foundation for the what, why, and how of business. All business stakeholders, from owners to line employees, must understand their role and the role the business model plays in the company's differentiated success.
So, if you're asked "What's a business model?" what's your answer? "Faster, better, cheaper business processes"? Or "The operational platform from which to launch a truly sustainable differentiated strategy"?
For more, see...
- Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, by W. Chan Kim and Renee Mauborgne
- Rethinking Marketing: The Entrepreneurial Imperative, by Minet Schindehutte, Michael Morris, and Leyland Pitt
