In 2017, Peter Thomas, now executive director at the Leasing Foundation, wrote an overview of new technologies that will impact the leasing industry. This article focuses on “what is blue ocean strategy”.
I am going to explore an influential idea called blue ocean strategy, an approach – just like design thinking and disruptive innovation theory – that helps companies understand how to compete in increasingly volatile and unpredictable markets.
What is blue ocean strategy?
In the late 1990s ING Direct stopped offering current accounts to personal customers.
Current accounts are expensive to run: They often have low balances, and regardless of the volume of transactions need the same infrastructure to support them. Most banks offer them on the assumption that they need to compete by offering every product or service a customer might need – current accounts, savings accounts, insurance, foreign exchange, mortgages. And based on this assumption, the way to dominate this market – or just stay in it – is to compete head to head in every product category.
And so we see a proliferation of near-identical products offered to smaller and mid-sized segments of the market, especially premium customers who are offered expensive, supposedly valued-added services. The result for customers is confusion; the result for banks is a huge array of products to advertise, an expensive infrastructure to support and extensive training in the cross-selling necessary to maintain the product range.
If the competitive landscape of personal banking were an ocean, and the banks were sharks, the ocean would be churning red as competitors fought for what little food was swimming around.
ING Direct decided the red ocean was not the place to be, and instead pursued what is now known as a blue ocean strategy: Go where the water is untainted by blood, where there is no competition and so demand can be created rather than fought over, and where there is opportunity for rapid, profitable growth. By drastically reducing the number of products and services to focus on savings and mortgage accounts, ING Direct simplified its operations, lowered its cost structure and offered far better savings rates. It also made it easier for customers to understand ING Direct’s products, and so made it easier for customers to make decisions.
What is blue ocean strategy? A blue ocean strategy is one where competition is irrelevant because the market space is new and unexplored. Bloomberg, for example, created its own blue ocean in business information services by challenging conventional wisdom about who buyers were.
Before Bloomberg, providers like Reuters dominated real-time news and price information to the brokerage and investment community. The customers were IT managers who procured and installed the systems, but Bloomberg realised the most profitable customers would be traders and analysts – those who had the greatest need for immediate information because they generated the profits for brokerages.
Bloomberg terminals – easy to use because they had shortcut keys labelled with common financial terms – created an entirely new market of analysts and traders. And by focusing on providing not just market data but access to other services such as real estate listings or travel services – now, of course, accessible in any internet browser – Bloomberg created a blue ocean of powerful but previously overlooked buyers.
Thirty-six years later, Bloomberg still has the lion’s share of the market.
What is blue ocean strategy and how does it work?
So how do you develop a blue ocean strategy? The original book, Blue Ocean Strategy by
W Chan Kim and Renee Mauborgne, essentially says that companies should focus less on competitors and more on alternative products, less on existing customers and more on potential customers.
They encourage businesses to ask questions like: “What does our industry take for granted?”, “What can be reduced below, or raised above, our industry standard?” and “What can be created that our industry has never offered?”
By focusing on simple questions, along with some simple tools, blue ocean strategy allows companies to focus on what is important – not what has always been assumed to be important.
Behind blue ocean strategy is a very simple idea: ‘value innovation’ – the simultaneous pursuit of differentiation and low cost. If you can achieve both, you create value for the market and your company while simultaneously eliminating less-valued products, features or services.
Conventional wisdom says that creating value while lowering costs is not possible; value innovation says it is, but only if you think outside existing industry structures – product types, customer segmentations, delivery channels – and about a blue ocean where the competitive rules no longer apply.
What is blue ocean strategy and why is it important?
Blue Ocean strategy is one of many, many approaches to corporate strategy that can be found in hundreds of business books and countless issues of Harvard Business Review.
At one level, it is just yet another way of asking: “What do we do next?”, but blue ocean strategy’s simplicity is its difference. Rather than a complex framework, it asks simple questions – the answers to which can be translated into action. In markets that are constantly being disrupted because competition is fierce, seeing beyond the conventional is essential and simplicity is an advantage.
As students on the Foundation’s MA in Leasing and Asset Finance are learning, and as we heard at the recent Chief Executives’ Forum, companies need to be increasingly creative. Success cannot be achieved just through competitiveness: It will depend on the ability to generate new demand and create and capture new markets.
So how can we apply blue ocean strategy in the asset finance market? One observation is that while many companies have tried, often successfully, to craft new products based on understanding existing customers, new markets are not created based on understanding existing customers – that is the red ocean of competition.
Blue oceans are created by trying to understand non-customers – for asset finance, the huge numbers of SMEs which do not know about, understand, or see the value of anything other than traditional bank finance. Therefore, a priority for companies in asset finance – if they want to avoid head-to-head competition for a smaller number of customers – is to look at non-customers and craft new products around their needs. That will require thinking more broadly about products, delivery channels and risk.
A mistake that blue ocean strategy identifies is that companies confuse niches with new markets. Identifying a niche and selling to it might be profitable in the short term, but long-term value will come from bringing new customers to play in a blue ocean.
An example from asset finance would be professional finance – loans to doctors, dentists and lawyers. Blue ocean strategy would say that professional finance is a niche market that will not remain profitable for long when competition takes hold. Far better to open up a blue ocean in an area that blurs asset financing, conventional professional lending and venture financing that can appeal to new customers – which may include the professional market and other customers with similar needs.
A final application of blue ocean strategy in asset finance is in technology. Many companies in the asset finance space have realised that they need to embrace digitalization. Some have understood the coming impact of fintech; fewer have started to try and innovate new fintech-oriented products.
But technology itself is not a means of market creation. It does not create new markets; well-designed, easy-to-use, convenient value-adding products that enhance productivity and customer business effectiveness or profitability do. The technology should simply disappear.
Current attempts to develop technology are possibly more about the technology than they are about well-designed products, and simply bring online what is a process that itself needs to be redeveloped.
What is blue ocean strategy for you?