Monday, April 11, 2011

Make Them Irrelevant!

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Last Saturday, I went to the Hunter Valley, went to the little driving range there, went to a few wineries and had a very good lunch as well, just for fun and it was a nice break from all the studying. After a whole week of terrible weather, by terrible I mean hardly any sun and raining most of the time, Saturday’s weather was perfect. So I was driving towards a winery and my friend asked, “So how do you think wineries like Tempest Two or Peppertree establish their brand and make themselves knows when there are so many other good wineries here?”

The first thing that came to my mind was the Blue Ocean analogy. So there is a book called “The Blue Ocean Strategy” written by W. Chan Kim and Renee Mauborgne. I highly recommend buying this book and reading it if you are thinking of starting a business. Basically it is a book about differentiating yourself from the competition and creating a blue ocean for yourself.

So a blue ocean is when you have uncontested market space and pretty much no competition. Blue oceans are vast and wide and almost never ending. The more traditional market space is described as red oceans, where they are a lot of sharks. It is small, bloody and very competitive. Companies try to beat their competitors by cutting margins and offering more. If you had a blue ocean where there were hardly any competition, you can charge more for less.

Some examples that they gave were like Curves gym. The more traditional gyms were like Fitness First, big, buff man pumping iron, slender women running on the treadmills, expensive to join, 12 month contracts, etc. Now this type of gyms are popping up everywhere and they can be rather intimidating for people with self esteem issues to join. So Curves came up with an ingenious idea. Offer memberships to females only and only focus on circuit training. Take away the hassle of learning how to use different machines and exercise regimes and make it simple. On top of that because it was an all female circuit gym, their members do not feel judges or self conscious. Curves gyms exploded not only because of their differentiation from conventional gyms but also their simple franchising model.

Some other examples were like budget airlines, Air Asia for instance. They differentiated themselves and created a blue ocean by offering dirt cheap tickets and different options for their passengers. The more traditional airlines only had a few different price options and had everything included in them. Air Asia gave you the freedom to purchase more baggage allowance, purchase food if you wanted to, rent a car, book a hotel, etc. In fact, most of their revenue came from these optional extras.

So as a business owner, it is important to educate yourself and think about creating a blue ocean for your business by differentiating yourself from competitors.

As an investor, it is important to identify companies that have created a blue ocean for themselves. Less competition means higher margins which mean more revenue and net profit. That is why in the post “To buy or Not to Buy”; does the company has a sustainable competitive advantage is included in the checklist.

So if you are a business owner, does your business have a strategy for differentiation? What is it if you do? If not, why not? If you’re a value investor, do the companies that you invested in have a good strategy in place to make competition irrelevant?

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  1. theres a very straight forward bottom line here.... if you differentiate too much, more often than not, no one will actually buy your product....

    if ur product was say for wealthy business men earning a million a yr.... rite... how many people actually fit in that category?? whereas if ur product was say for any tom dick and harry well the ocean is wider but the scope is also wider rite??
    lol... i think more like a trader and business man rather than an investor.... this is probably cause one day i really plan to start a businees as a book publisher.... its a long shot but still..... yeah so as far as differentiate is concerned, i mean u dun want to differentiate it too much but at the same time u probably wan to do it enuf... true u cant hit out at a price too high if theres no differences... show u 2 very unique propositions 2 shops here in adelaide... i frequently go to... comic book shops... the first one is well cheaper thats the main one i go to coz well its cheaper and i get my comics there... the other is a supplimentary place coz its more exp.... ok?? now they probably target the same people... but sum people go to one or the other maybe its not the price difference but sum other things... maybe coz the other shops sells a much wider range of items ie collectables and the first shop kinda specializes in comics... but yeah u get the gist lol...

  2. Hey cmWei, thanks for the comment, I guess it was my bad for not talking at all about niches in the post.

    You're right in saying if you differentiate too much people probably will go what the heck is this and not buy the product no matter how hard you push it.

    I guess the idea is to differentiate just enough to establish a niche market for your company. With populations being so big now, if you can be the best in your niche, well u'll make tones of money.