Three Steps Towards Market Domination
The market dynamics of value innovation
No company wants perfect competition. It’s
tough. There’s no money in it. Perfect competition drives profits down to close
to zero. Instead, what companies strive for is market dominance. They want to
stand apart, be the best and, ideally, the most profitable. But how to achieve
this? In a world of non-exclusive goods and services, hasn’t head-on
competition become the norm? Or is there another way? In other words: is there
a formula for market dominance after all?
Historically companies have created market
dominance by following traditional monopoly practices that are based on
limiting access, setting a high price and engaging in price skimming. This
works well when you possess exclusive assets or critical patents. Just think of
the pharmaceutical industry. It can boast hefty profits and benefit from
long-term patents that protect them from being challenged by other players. But
is that the case for most companies today? The answer is no.
In today’s knowledge economy, based on ideas
rather than resources, traditional monopoly practices are hardly effective.
Almost everything can be replicated or imitated, often better and cheaper. Is
market dominance still possible then? Yes. Just think about how Starbucks
redefined the traditional coffee place or how Curves went about and challenged
the highly competitive fitness industry. These companies were not built on
traditional monopolist terms. Yet everyone will agree that they dominate their
markets. So how did they do it?
The characteristics of dominant firms
What these companies – and others who created
blue oceans – have in common, is that they benefited from the market dynamics
of value innovation. Their strategies deviate from the norm in three important
ways, as seen in the figure below:
1. They shift
the demand curve out by offering a leap in value;
2. They set a
strategic price so that people not only want to buy the product or
service but can also afford it.
3. They lower the long-run
average cost curve so the company can expand its ability to profit and
discourage free riding imitation while offering buyers a leap in value at a
strategic price.
What follows is win-win market dynamics, where
companies earn dominant positions while buyers also come out big winners. The
society benefits from improved efficiency as well, due to a focus on reducing
costs, not only at the start but also over time.
Conventional monopolistic practices, on the
other hand, set high prices and exercise price skimming to maximise profits,
limiting peoples’ ability to buy. At the same time, due to the lack of viable
competition in the market, they often fail to focus on efficiency and reducing
costs and hence consume more resources. Because of the artificially high
price imposed on consumers, the consumer surplus decreases and by inefficiently
consuming more of society’s resources, they also incur a deadweight loss in the
economy. As traditional monopolist practices in most instances work against
consumers and the efficient use of resources, there are regulations against
them with some exceptions in cases such as pharmaceuticals and other technology
intensive industries where patents encourage large long-term investments in
R&D and resulting monopolies.
The bottom line is: Market dominance through
monopolistic practices tends to come at the expense of society and consumers.
Value innovation, in contrast, creates a win all around. That’s why consumers
tend to fall in love with companies that achieve it.
Take a look at Zappos, a company which achieved
value innovation and market dominance in a saturated industry, selling
something which is almost considered a commodity: shoes.
They shifted out the demand curve
When Zappos started out in 1999, it could have
easily become one of many online stores benefiting off the dotcom bubble. But
that was never the goal. Instead, the company focused on offering a leap in
value by combining the best of a traditional shoe store with the best of an
online retailer. In traditional brick-and-mortar shoe stores, one out of three
sales was lost due to the unavailability of the right size for customers.
Zappos instead offered a large selection of shoes, in a wide variety of sizes
and colors. But Zappos didn’t stop there. It also offered top-notch
customer service, fast delivery and an easy and free of charge return policy.
By doing so, it brought choice, convenience and a personally tailored shopping
experience to the buyer, a combination which neither physical nor online stores
managed to offer.
They set a strategic price
Despite this leap in value, Zappos did not set a
higher price. They set a strategic price in order to capture the mass of target
buyers and create brand recognition along the way. The combination of a leap in
value offered at a strategic price allowed it to quickly acquire a solid customer
base, with buyers becoming fans rather than mere customers.
They lowered long-run average costs
Instead of paying for a prime location in a
shopping mall, Zappos invested in a state-of-the-art inventory
warehouse. This way they could keep stocks themselves and deliver shoes
faster to the customer, without relying on the manufacturer. A big cost saving
was achieved by shifting from traditional marketing to online marketing. SEO
and affiliate marketing turned out to be much cheaper and more effective. On top
of this Zappos benefited from word-of-mouth through their
customers-turned-fans. Lastly, Zappos developed an extraordinary company
culture, with highly effective employees and a turnover significantly below the
industry average. All these measures enabled Zappos to lower their long-run
average costs and improve their margins.
What Zappos achieved is Value innovation. It is
what enables companies to make the competition irrelevant and create and
dominate blue oceans of new market space.
In the case of Zappos it delivers such extraordinary value that it
doesn’t have customers, it has fans as all blue ocean companies do. That’s the
reason why over 75 percent of their customers are repeat buyers and the company
generated over $2 billion in sales in 2015. At the same time, they set a
strategic price and deploy a unique business model which not only ensures them
a good margin but also makes them almost impossible to beat. At the end of the
day, that’s what blue ocean strategy is all about: don’t fight the competition;
make it irrelevant.
W. Chan Kim and Renée Mauborgne, INSEAD Professors of Strategy and Co-Directors of the INSEAD Blue Ocean Strategy Institute | March 29, 2016
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more at
http://knowledge.insead.edu/strategy/three-steps-towards-market-domination-4605#cuZRUoHZgxQhcRYb.99
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