“Top Management”
Blue Ocean Strategy in Hospitality
When Chan Kim and Renée Mauborgne, INSEAD professors, released the best-selling management book “Blue Ocean Strategy”, it would have been challenging to imagine that, 12 years and 3.6 million copies later, the principles behind their theory would remain so relevant. Relevant enough for them to feel the need to launch a second book – Blue Ocean Shift – focused on successful strategies for making the “shift” to a new paradigm.
The theory argues that a successful strategy involves finding a unique competitive space, based on a unique value proposition – the so-called “blue ocean” – as opposed to focusing on variables established by the existing market. Otherwise, the competitive dynamics of the existing market inevitably lead to strong pressure for price reduction and increased costs, creating a “bloody red ocean.”
To find this space, companies begin by designing the “value curve” of their industry. This is essentially a graph listing various factors in which the industry competes, assigning each a degree of importance to the customer. For a luxury hotel, for example, factors would certainly include brand prestige, service quality, lobby ambiance, room comfort, among others. Obviously, with competitors employing different strategies – “strategic groups” – a curve needs to be drawn for each. For example, in Lisbon, Four Seasons and Sheraton may focus more on international brand recognition, while Tivoli and Pestana may emphasize the tradition and history of their hotels and resorts.
From this foundation, we need to draw our own “value curve”, ensuring that it meets three requirements:
- Focused – It does not invest equally in all factors, avoids the temptation to be everything and ending up being nothing;
- Divergent – It decisively differs from competitors’ curves, eliminating or reducing traditionally dominant variables, increasing others that are undervalued, and (especially) investing in factors that competitors do not even consider;
- An appealing tagline – The previous two requirements can only be considered fulfilled if the company can synthesize its value proposition into a simple and short sentence.
Exceptional value creation comes from what the authors call “value innovation,” which is nothing more than breaking Porter’s famous paradigm, imposing the choice between a differentiation strategy with high prices or an efficiency strategy with low cost. In a “blue ocean” strategy, you seek, on the one hand, value and the ability to sustain high prices from innovative factors that the industry lacks; on the other hand, efficiency is achieved by reducing or eliminating factors in which everyone else competes, and that customers, in the end, do not value.
Due to its conservative nature, the hotel industry is not rich in examples of “blue ocean” strategies. But let’s focus on two good examples: W Hotels and the phenomenon of Airbnb-type Apartments.
W Hotels, created in 1998 by Starwood (now Marriott) and now with 80 units worldwide, was a real game-changer in the international hotel brand landscape. With a simultaneously trendy and informal style, a living room in place of the lobby, and a vibrant atmosphere, W Hotels was the antithesis of the incumbent top-tier hospitality players. While saving on rooms with smaller areas and simple finishes, W Hotels offers a unique experience to emerging Millennials and skims the highest-value customers, charging prices equivalent to the best luxury hotels.
Airbnb-type Apartments emerge as a new subset of accommodation, navigating a vast “blue ocean.” By offering a product directly competing with traditional hospitality, with a service reduced to the essentials, ultra-simplified distribution through an almost exclusive distribution channel, and taking advantage of highly favorable legal frameworks, short-term rentals leveraged, first and foremost, a cost advantage. However, they invested in new competitive factors aligned with consumer trends, such as the experience of living in a historic neighborhood. Many units are now able to obtain average rates comparable to traditional hospitality, generating very attractive levels of profitability. Of course, the explosion of supply in recent years should, in the long run, lead to a new “red ocean” within this subset. Still, it will be up to the best to find their unique space, differentiating themselves, not only from hospitality, but especially from competitors of the same format.
It’s not easy. But the opportunity for those who approach the market disruptively, creating a unique competitive space, is enormous. I believe it’s worth the effort.
A CONTRIBUTION FROM…
Miguel Abecasis | Senior Partner and Managing Director, BCG Portugal
In your experience across various industries, do you see the application of these principles?
Yes, it is undeniable that, in various industries, the players that can better anticipate and promote change, even influence customer needs and preferences, are those who sustain much stronger, solid, and profitable competitive positions.
In which sectors have you seen a greater capacity to rethink business fundamentals?
Sectors that quickly found themselves obliged to rethink their business models were those most susceptible to technological innovation: telecommunications equipment and solutions/platforms; media and entertainment; music and record publishing; etc.
Do you know of any interesting cases in the tourism industry?
There have been interesting cases of avoiding head-to-head competition based on the binomial quality/”stars” vs. price. Airbnb or couch surfing are excellent examples, but hostels were also, in the sense that they created their own “market” regarding the conception of quality and price relationship. The way Dubai positioned itself distinctively in extreme luxury and exhaustively exploited MICE is also a good example. How some players combined tourism with other concepts such as health, well-being, or senior leisure. The marketplaces or search and satisfaction scoring engines like Booking.com. But innovation continues, and nowadays we see players exploring other paths, such as designing tailor-made packages based exclusively on an app-based customer profile and preference assessment platforms.
What do you think are the main obstacles to the adoption of disruptive strategies?
There are several, but the main one is complacency. Just look at companies like Nokia. In 2009, its CEO said, “Nokia is operating from a position of strength: we have unmatched scale.”
Written by Filipe Santiago
May, 2018
This article was published in Publituris Hotelaria as part of the “Top Management” series. You can access the printed version here.
