Blue Ocean Strategy Basics - Breaking the Value/Cost Trade-Off
Oftentimes spending more doesn't get more and, sometimes, gets less
Michael Porter is the father of modern business strategy theory and defined a few basic ideas. Core among them is that business centers around competition.
Competitors, new market entrants, suppliers, customers, and substitute products are five forces that influence profitability, he argued in his famous Porter’s Five Forces Theory.
To analyze a market approach, potential competitors — everything is competition-centric — analyze strengths, weaknesses, opportunities, and threats, or SWOT for short. To this day, MBAs everywhere spent countless hours drawing SWOT charts.
Baked into this is the notion that cost and value correlate. Spend more; get more. Spend less; get less.
Sometimes, spending more does buy a better product or service. A $1,000,000 house is likely to be nicer than a $250,000 dollar house in the same area purchased at the same time. However, oftentimes the opposite is not true. Not infrequently, the price of a good or service doesn’t correlate much at all to the value received.
Letting go of this idea that cost and value are hopelessly intertwined is a key component of value innovation, the heart of blue ocean strategy.
Rather than raw academic-speak, let’s check out some examples.
Gasoline. Fuel is heavily regulated. The same grade fuel drives your car the same no matter where you buy it from assuming your filling station isn’t cheating. Filling stations can advertise brand to their heart’s content but, ultimately, fuel is fuel. In fact, many filling stations branded to an oil company are actually franchisees who have licensed the name. Despite this, people pay more and less for the same fuel from different stations. In the US, it’s not uncommon to find multiple fuel stations close to one another selling the same grades of fuel at different prices. What stops buyers from always going to the cheapest since the value of the fuel is the same? Something else. We’ve spoken to convenience store Wawa who used blue ocean strategy to redefine the experience and created enormous incremental value with that that “something else,” which is often what we’re looking for when we create a blue ocean strategy.
Clothing. It’s Autumn as I write this and my teenage daughter has decided she likes sweaters. My sweaters, to be exact. I can’t blame her: they’re big and cozy and warm on her. She also likes clean clothes so tends to send them to the laundry after not much use leaving both of us with fewer choices. In business, there are certain decisions simply not worth the energy of fighting over and in life the same. This is one of these decisions. To make up the sweater deficit, I’ve turned to buying more (with her advice, of course). I’ve found sweaters range in price from €15 to twenty times that price. The difference? The higher-priced ones do seem nicer but I can’t figure out the difference between the €50 sweaters and the €250 ones. I suspect the difference is about €200 and not much else. Clothing, along with countless other brand-marketed items, often breaks the value/cost trade-off adding enormous cost for a brand without much if any corresponding value.
Automobiles. I once drove a Lexus hybrid that happened to look exactly like a Toyota Camry. Everything about it was identical down to the paint offered. But for the name, you could never tell the difference. Because there wasn’t one. In fact, I purchased the Lexus instead of the Camry because Lexus buyers figured that out and rejected the rebranded Toyota so they were being sold at a deep discount, below the price of Camry’s. These are very well made cars but the Lexus brand didn’t justify a higher price tag. Similarly, countless lower-priced cars offer far more value than their higher-priced cousins. Is there really much difference between a Toyota and Lexus? Between a Tesla Model 3 and a Tesla Model S? No. Car manufacturers are exploiting the value/cost trade-off.
Entertainment. Let’s look at a more common use of how the value/cost trade-off helps to develop a blue ocean strategy offering, Marvel. When the company created their movie studio, they found countless industry practices added cost but didn’t add buyer value. Movie studios used to, and many still do, offer lavish perks. Stars who like playing basketball might find a full-size indoor basketball court on the studio lot. One studio built an Italian villa in lieu of an office to make an Italian director feel at home at work. Marvel, which had pivoted from bankruptcy not long before creating their studio, realized these perks were unhelpful at best and an expensive distraction worst. They eliminated them, along with countless other common accouterments, and built the most profitable movie franchise in history.
Many people think of the four action framework when we reconstruct a new offering by figuring out what to eliminate, reduce, raise, and create. Focusing on what to eliminate and reduce is key to the exercise. Thinking about the value/cost trade-off with a hyper-focus questioning whether every component of an offering offers value that corresponds to its cost, to customers and noncustomers, is key to creating a successful blue ocean offering.