Why Lowering Costs and Increasing Value Doesn’t Need to Be A Trade-Off

Posted by the Blue Ocean Team

LOWERING COSTS AND INCREASING VALUE DOESN’T NEED TO BE A TRADE-OFF

Do you often find your organization making value-cost trade-offs – either creating greater value for customers at a higher cost or creating reasonable value at a lower cost?

In a competitive industry, companies tend to choose their position on a range of value-cost trade-offs that are available given the structure and norms of the industry. Some pursue differentiation to stand apart from competitors by providing premium value. Others pursue cost leadership, driving costs down by cutting back the industry’s existing competing factors. Here strategy is seen as a choice between differentiation or low cost. It’s the mindset of a red ocean strategist.

Red ocean strategists focus on either differentiation or cost leadership

When pursuing differentiation, red ocean strategists focus on what to offer more of. They think about what to factors to improve or create to stand apart from competitors. They pay less attention to what factors they can eliminate or reduce that would lower costs. The trade-off usually results in higher costs to the company and higher prices for customers.

When pursuing cost leadership, red ocean strategists focus on what to offer less of. They think about what factors to eliminate and reduce in their current offerings and largely ignore what they should improve or create to increase the value of their offer. The trade-off usually results in compromised value for customers.

How about you? Do you act on the assumption that to achieve differentiation, you need to spend more? Do you assume that to win through low costs you need to compromise on the distinctive value you can offer?

Differentiation and cost leadership are viable strategic options, which a great many organizations pursue. However, both strategic options require making trade-offs and keep organizations stuck in red oceans of bloody competition. To break out of red oceans and create blue oceans of uncontested market space, you need to shift your mindset from ‘making’ to ‘breaking’ the value-cost trade-off.

Blue ocean strategists pursue differentiation and low cost simultaneously

Blue ocean strategists do not view value and cost as a trade-off. They pursue differentiation and low cost simultaneously. Unlike red ocean strategists, they see strategy not as an either-or, but as a both-and approach that breaks the value-cost trade-off.

Blue ocean strategists realize that differentiation cannot be sacrificed to cost savings, and vice versa. They seek to break not make the value-cost tradeoff through value innovation, effectively creating a leap in value for both buyers and the company through the simultaneous pursuit of differentiation and low costs.

Blue ocean strategists focus as much on what to eliminate and reduce as they do on what to raise and create. This value innovation approach allows blue ocean strategists to leapfrog the competition, creating a positive buzz – especially online – that attracts not just new customers but fans.

Becoming a blue ocean strategist is about embracing a new perspective and asking a fundamentally different set of questions. Are you ready to see new opportunities where others see only red oceans of declining profits and growth?

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