Posted: Thu 28th Jan 2021
Developing and maintaining a competitive advantage, especially in mature industries, can be enormously challenging. Could a 'blue ocean strategy' help?
Many companies have adopted new technology as a way of staying ahead of the innovation curve. For a lot of these, however, the decision was driven by competitive pressure, rather than a true assessment of how to leverage technology to produce better value for the company and its customers.
'Value innovation' is a strategic approach that can help companies create and deliver unique, differentiated value rather than engage in direct head-to-head competition.
Based on the work of Blue Ocean Strategy authors W Chan Kim and Renée Mauborgne, the approach aims to help innovators achieve two things.
…by eliminating compromises that the industry forces customers to make, and by introducing new elements that entice people who aren't yet customers to begin consuming a company's offering.
For instance, by increasing the artistic nature of its show, Cirque du Soleil was able to attract a new adult audience – people less interested in traditional, child-oriented circuses, and who were prepared to pay higher prices.
…by eliminating factors that the industry takes for granted but that no longer have value, and by optimising the offering to avoid over-serving customers for no gain.
Yellow Tail, for example, began offering a narrower range of wines to make wine selection easier, and ignored things like vineyard prestige in favour of creating a fun brand that stood out from industry convention.
The 'four actions framework' is value innovation's basic analytical tool. It consists of four questions that force companies to challenge the status quo as well as their assumptions.
The first question forces companies to eliminate elements that the industry takes for granted but no longer deliver value.
Banks, for instance, have assumed physical branches to be a vital part of their operating model. However, online banks such as Monzo have challenged this assumption by demonstrating that greater value can be delivered online. Moreover, a lack of physical branches means reduced operating costs for online banks.
The second question forces companies to consider whether they are over-delivering without sufficient payback.
In the race to keep up with the competition, companies have tended to pack their products and services with more and more features, many of which customers aren't asking for or using.
The latest smartphones are a good example of a product packed with features that a lot of customers are unaware of and don't need. Adding features to a product increases its complexity and cost.
The software industry developed its Agile movement in response to this costly approach. Agile focuses instead on what matters most to customers by designing products that deliver the minimum set of features while not compromising on the value that customers are looking for.
The third question forces companies to consider the compromises that consumers are having to make to access products and services in their industry.
Apple leveraged insights from this question when developing iTunes to push platforms like Napster out of the industry. Although Napster was free, users faced many compromises such as a horrible user interface, slow download speeds, substandard sound quality and, of course, the serious matter of breaking the law.
By contrast, iTunes was legal, had a simple interface, enabled customers to download songs in seconds rather than minutes, and provided high sound quality, all of which consumers were willing to pay for.
The fourth question pushes companies to discover entirely new sources of value and to create new demand.
By incorporating artistic elements such as dance, a storyline and themed music into its show, Cirque du Soleil was able to attract a new adult audience willing to pay theatre prices for its shows.
Value innovation is about creating value not just for consumers in the form of better products and services, but for companies as reduced costs and higher margins.
The first two questions of the value innovation framework contribute to cost reduction and value for the company; the final two contribute to value creation for consumers and increased market demand. Combined, the four questions enable companies to create a sustainable competitive advantage that is difficult for competitors to replicate.