How to Disrupt and Dominate a Red Ocean Market

How Toyota Took Down the Kings of Luxury Performance

Business leaders dream of what is now a nearly mythical space: a “blue ocean” market, the term Renee Mauborgne and W. Chan Kim coined to denote unexplored and uncontested markets in their 2004 bestselling book Blue Ocean Strategy.

The truth is, nearly all businesses operate in “red oceans” – markets that are crowded and competitive. The challenge today isn’t as much about searching for some rare niche that may offer a small window of opportunity and fleeting advantage as it is about competing in and conquering established customer and market segments with new value.

To do that requires revisiting what many executives find complicated, painful, and often marginally effective: strategy.

One of the things that makes strategy complicated is that there are so many definitions of it.

The word itself is most often used in adjective form with planning, i.e. “strategic planning,” connoting a process, one that is unfortunately perceived by many as a rather endless chore to produce a weighty document capturing everything you’re going to do, along with timing and costs.

But as Michael Porter told us 30 years ago in his definitive book Competitive Strategy, in order to prevail against others in your space, you must consciously choose to do some things and not do others.

Having a plan on paper is all well and good, but it isn’t the point of strategy. The true purpose of strategy is to make critical choices and clear statements about what you are and aren’t going to do, and why or why not. While one might argue that a plan does this, the reality is that most strategic plans simply are not explicit about those elements.

Strategy Defined

A better definition of strategy is the one given by Roger Martin, one of the world’s most foremost thinkers on strategy and coauthor (with former Proctor & Gamble CEO A.G. Lafley) of Playing to Win: How Strategy Really Works:

“Strategy is an integrated cascade of choices that uniquely positions a player in its market to create sustainable advantage and superior value relative to the competition.”

Thinking about strategy as critical choice-making rather than plan-making is important because making difficult choices is the only way to focus to resources, which of course are finite. Irrespective of size or scale, a company that doesn’t focus their resources on doing some things and not others simply won’t succeed.

So if strategy is about making integrated choices, what are they? In Playing to Win, Martin and Lafley argue that strategy can be boiled down to five key decisions:

1. What is our winning aspiration?
2. Where will we play?
3. How will we win?
4. What capabilities do we need?
5. What management systems are required?

What makes these seemingly simple choices at all difficult is that they must fit together and reinforce each other up and down the cascade.

Let’s unwrap each choice and see how this framework might actually enable a company with no market presence and an arguable right to win might enter, disrupt and dominate a “red ocean.” Further, let’s see if we can lay out a winning strategy in a few pages, rather than doctoral-length thesis.

What Is Our Winning Aspiration?

A winning aspiration is a future-oriented, externally-focused statement that clearly spells out what winning means—concretely, specifically, and ambitiously. It describes in measurable ways both who you’re winning for, and who you’re winning against. It’s not a modest statement, and it doesn’t describe playing to simply play, or playing to not lose.

The notion of winning is critical, because while no space is entirely safe in business, the safest spot is on the podium. If you’re not winning or constantly angling to do so, you will likely not focus the right resources needed to win. As a result, you will live in fear of those who are winning and will use the resources that accrue to winners to make sure you remain an also-ran.

Take the case of the secret luxury vehicle project launched by Toyota in the mid-1980s, codenamed F1, for “flagship one.” Toyota wasn’t too keen on the fact that as their customers grew in wealth and success, they chose to purchase more upmarket, luxury brands: Mercedes, BMW, Jaguar, Cadillac, and the like. Senior leaders wanted to keep those customers in the Toyota family. Unfortunately, the company did not have a product fit for the luxury market.

Toyota’s winning aspiration was three-fold:

• Give increasingly affluent Toyota customers a vehicle to match their status
• Become the number one U.S. luxury import brand, displacing Mercedes and BMW; and
• Become the number one luxury overall auto brand in the United States, by various measures, including share of market, share of garage, and third-party rankings of objective automotive attributes in magazines such as Car & Driver.

Nicknamed internally by Toyota rank and file as the “Beat Mercedes” strategy, the winning aspiration was felt to be a true moonshot, especially by the 1400 designers and 3700 engineers who cried, “Impossible!” when Toyota president Eiji Toyoda announced to the world in 1984 that Toyota would best both Mercedes and BMW across the board in comfort, styling, performance, handling, noise, aerodynamics, weight and fuel efficiency.

Eiji was confident that building essentially the best car in the world wasn’t as crazy as it sounded. Luxury and performance weren’t completely uncharted territory. Toyota built limousines for executives and dignitaries. Some of Toyota’s senior engineers early in their career had worked on Zeros, Japan’s WWII fighter jets. And by 1984 Toyota had competed in motorsports for over a quarter century.

The venture would take tremendous resource focus: six years, radical innovation, 900 engine prototypes, 450 test models, and nearly two million test miles.

Where Will We Play?

This question teases out the specific spaces where you will and will not compete: customer segments, channels, product/service, geography, process stages, etc. While the tendency is always to “play everywhere customers need us,” only the spaces in which you believe you can achieve a “podium” position – 1, 2, or 3 – should be chosen. Being explicit about spaces in which you will not play, or stop playing, is quite difficult.

Toyota chose to play only in the United States’ luxury performance sedan market, and only target affluent consumers aged 40 and up. The choice of geography not only reinforced the winning aspiration, but also made it clear that competing with a Mercedes or BMW in Europe would be a fool’s errand, as would be selling into the comparatively lower income Asian market. The choice of market and consumer segment also made it clear that high-end sports cars such as Porsche or Ferrari were not in the competitive set.

How Will We Win?

There is only one way to consistently win in business: offer a better value equation than competing alternatives. This requires making choices that deliver specific, unique, and defensible advantages that provide superior value in each chosen space. This is perhaps the most difficult choice in strategy, because the final arbiter of value is the customer.

Toyota had a clear three-point how-to-win that they believed would offer superior value:

• Offer the very best comfort, styling, performance, handling, noise, aerodynamics, curb weight, fuel efficiency in the luxury performance sedan segment as measured by Car & Driver, et al
• Offer a retail price $30,000 less than top-of-the-line BMW and Mercedes vehicles
• Provide an upscale image and retail experience commensurate with the vehicle (ala Nordstrom, Four Seasons, etc.). The Toyota brand image would not suffice; neither would the traditional car dealer experience, which the majority of Americans ranked below a visit to the dentist.

Producing and delivering this level of value to the market would require a game-changing operating model: critical capabilities and management systems the likes of which had not been heretofore seen in the U.S. automotive market.

What Capabilities Do We Need?

The choices you make in answering this question bring your where-to-play and how-to-win choices to life. Capabilities are not to be confused with competencies. Competencies can be simply ante to the game, while capabilities are the specific current and future skills and activities that must be performed at the highest level to help you win in the spaces and ways you’ve chosen.

There’s a dangerous tendency to simply list your strengths as the capabilities you need. There are two problems with that approach. First, your strengths may or may not give rise to a competitive advantage. Second, they may not be relevant to those to whom you deliver value.

Whether the needed capabilities are in place when making your choices is irrelevant; in fact, for many if not most new strategies, the capabilities needed to produce altogether new value must be gained either through acquisition or development.

Toyota needed to master four critical capabilities to produce their how-to-win, most of which were not in place, and all of which needed significant development:

• Deep understanding of the American luxury consumer. Being a very humble culture, wealth and luxury were anathema to the Japanese existence.
• Reinvention-level Innovation in design and engineering. Toyota engineers needed to redefine the luxury performance sedan, because All of the value elements were in conflict. For example, greater speed and acceleration conflicts directly with fuel efficiency, noise, and weight, because higher speed and acceleration requires a more powerful engine, which is turn bigger, heavier, makes more noise and consumes more fuel.
• Editorial/3rd party endorsement relationship building. Trying to outperform the luxury performance leaders against the headwinds of poor reviews would strike a death knell to the strategy.
• Brand building supported by riveting advertising. Typical automotive marketing would not distinguish the car. No brand extensions allowed. A new name, a new brand image, and head-turning messaging would be needed. After a global search for a new identity, the name Lexus was chosen, complete with a top-shelf logo design introduced to the world through stunning imagery and a distinguished spokesperson adorned in elegant formal attire touting a tagline promising something wholly unrelated to a piece of metal: “The Relentless Pursuit of Perfection.”

What Management Systems Are Required?

Management systems refer to processes, structures, standards, rules and metrics that reinforce, support, and sustain your critical capabilities.

For Toyota, that meant leveraging their vaunted Toyota Production System (TPS), a system of work designed to produce the highest quality at the lowest cost with the shortest lead time – all in an effort to outsell the competition. In other words, a Lexus would be assembled using the same production system as a Camry or Corolla.

While TPS was necessary, it was not sufficient. Toyota needed to separate the Lexus division, select the highest potential American managers to lead it, and to employ a stringent retail dealer selection process supported by a new and fully enforceable franchise agreement to ensure a consistent upscale experience. Only 81 of the very best dealers in the nation were selected out of 1600 possible candidates, each of whom were required to build an entirely new facility, adhere to strict brand identity standards, and go through exhaustive product, sales, and service, and customer relations training.

Strategy’s Magic Question

While Toyota’s strategic choice-making seems airtight in retrospect, at the time it was simply a set of guesses, an audacious but intelligent hypothesis about the future. And as with any hypothesis, its logic had to be tested before the first yen of product design was ever spent.

As the saying goes, no strategy survives first contact with the enemy. Generally, that’s because multiple assumptions are folded into any forward-looking strategy — unconscious and risky leaps of faith that if not teased out and tested in the real world often become blind spots that can render strategy formulation a fun but ultimately academic thought exercise.

The best and most mind-opening technique for surfacing critical risks in strategy is to ask a single but powerful question: What must be true? 

According to Roger Martin this is “the most important question in strategy.”

Asking “what must be true?” — about chosen playing spaces, customer value, critical capabilities, and competitive reaction — is a process of reverse engineering the strategy to identify the conditions, or preconditions, for success. It’s not about what is true, or what could be true, but rather what would have to be true for the strategy to work as envisioned. If it is unknown whether a specific condition for success is in fact true, it becomes a potential barrier to success, and tests must be conducted to determine validity.

For Toyota, the first listed critical capability became a clear What-Must-Be-True condition that put the Lexus strategy at great risk: the ability to understand what affluent Americans truly value.

Toyota designers needed to get inside the hearts and minds of American luxury buyers, to learn the ways of the wealthy, to understand their wants, needs and requirements.

Toyota sent the senior design team to Southern California with the instructions to not just observe but live the lifestyle of the rich and famous. They leased a multimillion-dollar beachfront house in Laguna Beach for several months, shopped at designer boutiques, ate in five-star restaurants, played golf at exclusive country clubs, nightclubbed at trendy hotspots, and leased Mercedes, BMWs, Porsches, and Jaguars. They interviewed valets, caddies, chauffeurs, housekeepers and caterers to find out the druthers of the wealthy.

Following the southern California stint, they took similar tours of San Francisco, Miami, New York City, Houston, Denver, and Chicago. The luxury scene was a whole new world for the Toyota team. Only criminals in Japan lived that way.

Armed with a deep and empathic understanding of their target customer, Toyota felt confident in the Lexus strategy.

Making Waves in a Red Ocean

When the Lexus LS400 made its debut on September 1, 1989, it stunned the automotive world and set a new luxury standard. It was by all objective measures the best car the world had ever seen. The facts made history: in every category rated by Car & Driver, the LS400 trumped the BMW 735i and Mercedes 420SEL. The Lexus LS400 was five decibels quieter, 120 pounds lighter, and 17 miles per hour faster. It got more than four more miles to the gallon, and indeed retailed for $30,000 less than the BMW 735i.

Upon tearing down two LS400s given to General Motors headquarters by a southern California auto dealer, Cadillac engineers in Detroit concluded that the Lexus car could not possibly be built.

It took just two years for Lexus to displace Mercedes-Benz and BMW, which had been entrenched for decades, as the top-selling luxury import nameplate in America.

It’s safe to say that the sine qua non of disrupting and dominating a red ocean market is making a strategic set of choices that will leave the competition in the rearview mirror.