Changing oceans in strategy

#27. Real differentiation comes from creating new demand by addressing evolving customer needs.

The future customer is the blue and red ocean convergence point.

In strategy, considering the competition and unchartered territories is critical to avoiding potential pitfalls and identifying lucrative new markets. Metaphors like the blue ocean (uncontested market) are part of the strategy vocabulary, but working with the existing definition is not always easy. It requires a reset to remain useful during the current times. 

Different frameworks (Blue ocean strategy, M. Porter’s Five strategic forces) may differ in approach and supporting tools, but they follow the same principle. If you can do it, go for the uncontested market space. The less competition, the better. The challenge with this thinking is that a brand-new market (blue ocean) may prevail in the short term. Eventually, every company in that space will find itself sooner or later in an unforgiving competitive environment (red ocean). 

The idea of pursuing new and risky markets to avoid competition is outdated. Real differentiation comes from creating new demand by addressing evolving customer needs. Also, having competition in the market is healthy and useful. It forces companies to distill their value and define their positioning better relative to others. Without that, they might be forced to play by different rules that reset the game completely. 

Blue oceans can be dangerous spaces for the inexperienced.

Blue oceans promise to create new demand and go after different segments previously underserved with a new and compelling offering. But it takes much more than a demand to succeed in this new but hostile environment.

• The loose ends you leave in the beginning come to undo your plans later. 

Smaller companies may stray too far from their core competencies, get absorbed in transformation, or disregard competition and regulation. If they weaken their grip, they might fail as they focus all their efforts on creating a new market. There are many examples and lessons learned from such attempts. 

E-scooters are highly accessible, environmentally friendly, and affordable short-term transport, promising that they could solve urban micro-mobility. But many product launches failed due to safety concerns (deaths, accidents, injuries) and pollution implications (overcrowded pavements and public spaces) that didn't lead to widespread city endorsements. 

• Treating the customer as a means to an end inevitably erodes trust. 

For larger companies, blue oceans are the ultimate battleground to win the innovation war. They test the attractiveness of new products, pushing the risk toward users and getting away with suboptimal experiences. But, over time, this erodes trust and competitiveness in certain segments.

With Google Glass, Google attempted to create a smart wearable (smart glasses) and bring the world closer to unlocking the full potential of the information age. The product allowed users to check messages, view photos or search the Internet, all at a glance away, promising them a completely different experience on the move and in real-time. But was that a critical need for them? Not really, and not at the high price tag and major concerns regarding safety and privacy. What was expected to be a moonshot technology had a short lifespan. Google discontinued the product four years after the prototype was produced in Google's X lab.  

This example of failed innovation reveals an essential insight: people prioritize fulfilling certain needs over others, and so should companies. Treating that superficially places a dent in the brand trust that will be hard to build again if it continues to treat customers as a replaceable test pool.

Blue oceans are volatile. 

The generative AI was once a blue ocean. It was an uncontested space waiting for critical breakthroughs in neural network design, the growing availability of data, and the lower cost of computing power. Before Stability AI released its text-to-image tool, Stable Diffusion, to the masses, AI models from OpenAI, Meta, and Google were primarily gated. When OpenAI launched ChatGPT to the public in Nov 2022, it was the beginning of the end for the blue ocean. 

New markets where profits can be made don't remain a domain to a single player for too long. They attract big bets, innovation, and of course, much competition. Once ChatGPT’s monthly users reached 100 million, growing faster than Instagram and TikTok, the game was seriously on. On 7 Feb 2023, Microsoft announced a new Bing search engine with ChatGPT integration. Google declared a "code red" corporate emergency and a day later, on 8 Feb, rushed to the market its search bot, Bart.

"A race starts today." Satya Nadella, CEO of Microsoft

The consequence? Resets. When you threaten the winning position of competitors, they are forced to reset their strategy and become followers rather than front-runners.

The blue ocean can only sustain its existence with automation and scale, so you need a strategy to protect your position once competitors follow suit. Creating new demand doesn't translate immediately to profit and is neither a guarantee for lasting success.

To redefine the market, many companies introduce new metrics to define success, which often distorts reality (prioritizing subscriber growth vs. profit). It's a dangerous game, sometimes leading to toxic expectations and experiences that can't be sustained in the long run. Example: the same-day delivery introduced by Amazon. Sure, it is a highly convenient service, but can we disregard the dire consequences of over-consumption and its environmental impact? And if we do, for how long?

In the end, the volatility of the blue ocean creates a dynamic environment for players to attempt to overtake one another. Soon, it becomes a red ocean with pending challenges and promises to fulfill the awoken and exposed needs.

It's time to redefine what the blue ocean is about. 

At Owtcome, we see the blue ocean as a temporary, uncontested market, not a place for companies to settle down in the long term. It is a market of no identity and no loyalty from the customers' side but of great responsibility from the provider's side. Its most valuable attribute is unregulated customer segmentation.

This definition departs from the original idea of no competition, high value, and low cost. But for us, it provides a more practical approach to entering and navigating it in the short window of opportunity.

In the blue ocean, companies can change how needs are addressed by offering better products and experiences in the short term. But at the same time, it poses a significant challenge to front-runners. Companies must face the greatest competitor - themselves. 

The blue ocean doesn't give you the luxury to measure against competitors to position your product most advantageously for success. You are on your own to create high standards and deliver on the promise that caters to the customer's unmet needs. But, once it becomes an attractive place for competitors, maintaining unregulated customer segmentation for a long time will be hard. 

Moving away from a mature business model to creating a new one is expensive, but once you invest enough, it becomes a replicable model that competitors will use. 

In the early 2000s, the streaming service introduced by Netflix disrupted the media industry with a new offering and enhanced user experience. The exponential growth of users was impressive, and many companies tried to replicate its blitz scaling and exponential growth of users. But such growth required deep pockets to sustain operations and absorb costs. It took Netflix a long time to start generating operating income and recover some of the investments made in the platform, content rights, and content production.

The blue ocean doesn't guarantee a sustainable business model. The mentality of high-value/low-cost differentiation makes it difficult to be a profitable and self-sustaining business in the short term. Your advantage is the unregulated customer segment no one risked tackling, but once it becomes defined and emerges as a new trend, your blue ocean tactics no longer work.

The uncontested market poses one challenge innovators must keep in the back of their minds when designing new products. Under what conditions do unmet needs take priority over critical needs?

At some point, providers in the red ocean can’t reject the value of fulfilling that unmet need. They must rethink how critical needs are addressed and make space for the unmet needs to become a priority, therefore, fulfilled. The uncontested market requires a creative approach to find meaningful connections in the yet undefined and open the market to competitors.

The future customer is at the convergence point of the blue and red oceans. 

The red ocean is often treated as a space of high competition where innovation is incremental and hardly disruptive. But many innovators sit in the red ocean and generate meaningful value. That value is geared towards maintaining relevance and improving existing relationships. To a large extent, brand trust originates in the red ocean and has to be continuously nurtured to increase loyalty and attract new customers. 

These future customers are customers with unmet needs. They are vital for any company to guarantee revenue visibility but aren't easily recognized using existing market analysis approaches. They sit in the uncontested market, which requires the expansion of awareness that the blue ocean offers. 

Identifying the convergence point between the red and blue oceans is one way to predict how needs evolve. But this is the hardest challenge. What unmet needs take priority over critical needs that you can fulfill? The answer to that question opens a wide space of creation and discovery, that of the future customer. You need creativity, empathy, and innovation to draw the lines and make up the shape. It's hard work but worth the effort.