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Introduction
Business strategy is highly competitive and relentlessly unforgiving. There is a reason
why formulating business strategy is often analogized with formulating war strategies. Beating
out the competition is not enough in and of itself; complete victory comes by gaining and
sustaining a competitive advantage for the long-term. History has seen many companies gain
their competitive advantage but not sustain it for the long-term, leading many to go completely
bankrupt or become a market afterthought. We need look no further than companies like Circuit
City, Compaq, Montgomery Ward, American Motors, recently Radioshack, and even GM as
examples of those whose strategy did not sustain itself for the long-term. Arguably the greatest
flaws in their strategies is who they were setting themselves up to compete against. Had they
chosen to pursue a blue ocean strategy, their competition would have been irrelevant.
Red Oceans/Blue Oceans Defined
Most companies are competing in very tightly contested market spaces. Companies go to
great lengths to win out over their competitors. Beer Wars is an excellent example of a market
which has become an oligopoly, yet the big players in the market still attack one another to eat
away at the other’s market share. AB and MillerCoors even resort to using litigation against the
smaller craft breweries as a strategy to wear out their financial resources. These types of
characteristics in a market are the classic signs of a red ocean - that is, companies are fighting
neck and neck with one another to try to grab a bigger piece of market share within a very
defined set of boundaries. Products turn into commodities, and the fighting makes the ocean turn
into bloody red. A much better strategy is to go towards a blue ocean. In this report I will set out
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to apply the concepts and analysis presented in Blue Ocean Strategy to explain how the audio
recording industry dramatically changed from digital technology (Kim & Mauborgne 4).
Blue Oceans are exactly the opposite of a red ocean. They are market spaces which are
uncontested and unexplored. There is very little definition as to what the “rules” are and what the
boundaries are. Companies, if they pursue the right strategies, can actually create these brand
new market spaces and change the conventional rules of their respective industry. In order to
create blue oceans, there are some questions to ask, analysis to do, and frameworks to use in
order to gain a more complete understanding of how the company stands in comparison to its
rivals. Understanding how you as a company compare to your rivals is an essential first step to
creating a blue ocean that will break you away from them entirely.
In reality, blue oceans are continually being created. We have industries existing today
that were not around even 20 years ago. For example, was anyone selling cloud storage space to
store data 20 years ago? Clearly not. Blue ocean strategy is centered around a concept known as
value innovation, which can be defined as, “making the competition irrelevant by creating a leap
in value for your buyers and your company, thereby opening up new and uncontested market
space” (Kim & Mauborgne 12). By this term we are not speaking of cost cutting, benchmarking
competitors, or making tweaks to further differentiate your product, but rather radically altering
your value proposition. The dichotomy between price and differentiation is false; through value
innovation both occur simultaneously in new and explosive ways. Value innovation is really
more than simply innovating, as it deals with overhauling a company’s overall business strategy
and changing the orientation of their entire system. There are four fundamental questions to ask
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which will force a company to change their orientation towards their industry, and thereby put
them on the path to creating blue oceans. Let us examine them (Kim & Mauborgne 17).
Creating Blue Oceans
The following four questions will push a company to re-orient its entire strategy:
1. Which of the factors that the industry takes for granted should be eliminated?
2. Which factors should be reduced well below the industry’s standard?
3. Which factors should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered?
The answer to those questions in conjunction will create a brand new value curve for the
company. The value curve is the sum of the total experience a customer gets by doing business
with your company. The first question forces considerations on factors which companies within
your industry have been trying to compete on, with many of them likely not directly adding
value to the customer’s experience. The second question forces you to consider whether or not
certain products or services have been over-inflated in their attempt to serve customers well.
Many times this is done unnecessarily, and adds a significant burden to the cost structure of a
company. The third question forces you to think about the sacrifices that are normally made in
the value proposition to customers. Finally, the fourth question helps you think about value-
adding components for your customers that have not yet been done in your industry, altering the
pricing strategy of your industry. The first two questions will address the reduction in cost
structure, and the latter two questions will address creating radically new value for customers.
Together they produce a synergistic effect of offering customers a new, much more valuable,
experience while keeping cost structures lower. (Kim & Mauborgne 29-30).
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The first thing about the recording industry is in what is taken for granted. Traditionally
big studios have concentrated on building fancy facilities with state of the art amenities and
soundproofing. Often this includes having multiple rooms, large and small, for recording certain
instruments. In addition, the focus on doing things with large analog soundboard consoles was
never questioned, as it is believed to deliver the purest audio quality possible. Digital recording
has eliminated the need for large rooms, elaborate facilities, and analog consoles by only
necessitating a laptop loaded with recording software and any room. The second component is
what parts have been overbuilt to serve the customer’s needs. Microphones are the biggest tools
used in recording, and thanks to advances in technology and manufacturing, quality has greatly
improved. Nevertheless, many recording studios still choose to outfit themselves with
microphones which are in the $3,000 range and up. It’s not unusual for some vintage
microphones to be worth tens of thousands of dollars. These days, a microphone of comparable
quality can be had for small fraction of that cost. In this way, cost structures are significantly
reduced.
The third part is about which compromises the recording industry has forced customers to
make. Traditionally analog studios have required customers to go to the studio for the duration of
up to a few weeks, paying for every day they are there. With digital recording, an audio business
can be mobilized, coming to the location of where the customer is. Furthermore, rather than
inefficiently spending several weeks in creating an album of music, the process can be reduced to
a matter of days. The fourth and final part is about adding new value the industry has not done
before. Previously it was believed you could only get great sounding recordings through analog
consoles, leaving those who choose to record digitally on computers at a disadvantage in terms
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of sound quality. That was until the advent of plug-ins. Plug-ins are pieces of software that are
digital emulations of various elements an analog console offers. Many purists would argue this is
not a perfect substitute for the real thing, but many believe it comes so close it is very difficult to
tell the difference. This offers a tremendous source of brand new value that digital users did not
have before. Thus, an audio business can offer professional sound quality on a customer’s songs
all through using digital means.
Reach For New Demand
To ensure the size of the new blue ocean market is formidable, conventional logic of who
the industry’s customers are must be expanded. Forget about defining your industry and your
customers rigidly and focusing on being the best within those parameters. Re-orientation is
required for this, and the new orientation should be towards reaching beyond the current sources
of demand. Again this means challenging conventional approaches, which in this case are putting
the most focus on current customers and working for finer segmentation to accommodate buyer
preferences. Rather we will flip the two on their heads, and think about non-customers first, and
de-segmenting before finer segmenting. Customers can be thought of as three different tiers: the
first tier is soon-to-be customers, as they minimally use your offerings but are searching for
something better. Second-tier customers are those who refuse your offerings, because they find it
unacceptable or beyond their means. Third-tier customers are those who are distant from your
market, usually not thought of as targets of your industry. Again the recording industry will be
the example as digital recording has reached across these three tiers to create new sources of
demand in their blue ocean (Kim & Mauborgne 104-110).
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The best approach is not to try to make strategic decisions to reach of these tiers. If you
do that then you are returning back to a segmentation approach. Here we are trying to de-
segment these new sources of demand. Typically the range of customers looking for recording
ranges from bedroom recording enthusiasts, singer-songwriters, up and coming bands, to big
label pop stars. The needs of each group are not very similar. Bedroom recording enthusiasts are
hoping to record a song that sounds somewhat decent, singer-songwriters want recordings that
emanate a particular mood, and pop stars want flashy high production, similarly to how
Hollywood movies are. Digital recording offers solutions to all groups by enabling all three to
achieve what they are looking for.
In the days before digital recording, bedroom musicians were in the third-tier because no
studio would ever consider a small independent musician as a potential customer. Singer-
songwriters would be in the second-tier for analog studios, as coming in to record there would be
far too expensive. Perhaps a simple tape-recording device would be used to record their songs
before there was digital recording, which would produce a result of a very awful sounding audio
quality. Now the singer-songwriter is reached because he can create a song of superior audio
quality than what he had before. Pop stars, looking for the highest production value possible in
their recordings, would have a hard time working with analog recording studios because
everything was done using tape. Tape is costly, limited, and when recorded over creates great
difficulty for the person responsible for editing it. Enter digital recording, and now the luxury of
adding various plug-ins, fancy effects, and other experimental techniques is very easy to
accomplish. All three tiers of customers have been reached and tapped as new sources of
demand.
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The Ocean Starts Getting Red Again
Lastly, we will focus on what happens when new mindset begins to become the
conventional logic.Value innovation, when done properly, creates a fundamental shift in the
entire business strategy. It is not mere modifications to existing strategies. The conventional
wisdom of the recording industry would like to eschew what digital recording can offer, saying
that digital recording produces sterile, lifeless sounding recordings as compared with analog
systems. However, when we value innovate we disregard the conventional wisdom of the
industry. Analog recording studios do not like that a skilled audio engineer can work as his own
independent business making recordings for his clients. Their system is still set up to compete
within the red ocean, as they have refused to adopt the new mindset.
As it turns out, there are very few purely analog studios who are still in existence. Most
studios have converted to digital, changing their mindset to adopt the ease of the technology.
There are also very many independent audio engineers who are recording clients, and
independent artists who are recording themselves in home studios. The shift in the recording
industry has been happening over the last 10-15 years, as more and more people have flocked
into the blue ocean that digital recording created.
As time goes on, what was once a blue ocean begins to become red again as more and
more people begin to adopt the strategy of the blue ocean. What once defied conventional logic
becomes the new industry logic. The blue ocean starts becoming red again. For those who were
early adopters in the new strategy of using digital recording, the temptation is to begin fighting to
keep their market share in tact, just as everyone did before in the red ocean. In order to avoid
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that, those adopters should monitor their value curves to make sure they are still differentiated
enough from other competitors. If there is no strong difference, it is time to value innovate again.
As the recording industry has shifted to digital just about everywhere, it may be time to do so
again.
I have neither given or received, nor tolerated the use of unauthorized aid.
Daniel Mosco
