Compound Annual Growth Rate vs. Blue Ocean Strategy: Also-Ran Versus Whole New Class?

 

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One of the typical markers taught in business school to evaluate entering a new market is the compound annual growth rate or CAGR (pronounced kay-jer). A compound annual growth rate of 15% or greater is considered a favorable market and one you may want to consider entering.  There are lots of complex formulae to calculate the CAGR however there is a relatively straightforward one in a book entitled Harvard Business School Secrets by Emily Chan.  Don’t be taken in by the table she lists at the end of the book with the CAGR trick.  Unless I have misread it, Emily, or Emily’s editor, actually rearranges the fast formula for CAGR likely on accident.

 

The quick formula for CAGR is 0.75 divided by the amount of time the market takes to double in size.

 

So, if the market takes 3 years to double in size, the CAGR would be 25% and this would be a favorable market.  This is one pole of strategic thinking which is sort of an also-ran strategy.  Meaning this focus on entering a market that is already doing well is a nice way to try to move in the same direction as everyone else and obtain a return.

 

However, there is another extreme on the spectrum of strategic ideas called Blue Ocean Strategy.  If you haven’t heard about Blue Ocean Strategy I invite you to consider reading a book also entitled Blue Ocean Strategy which has really been fascinating in my opinion. It is one of the more interesting business-related books I have seen in the last 10 years.  Blue Ocean Strategy is the name given for what was originally an Eastern idea of blue and red oceans.  Red oceans are depicted as ones in which there are multiple competitive entities that bloody the ocean with the products of their competition.  A blue ocean, by contrast, is a here-to-fore unseen market created with a game changing product, service, or business model.

 

A nice example of Blue Ocean Strategy is the counter-intuitive idea of the gaming console that makes us get up and move.  Where originally gaming consoles were thought of as static things that favored sedentary lifestyle, the Nintendo Wii and now other consoles such as Microsoft XBox with Kinect have really completely changed the market to where now a substantial degree of motion is expected in certain gaming consoles. Nintendo’s game changing move to the Wii resulted in substantial sales, first mover advantage, and an incredible blue ocean for some time until the rest of the predators were able to enter that same field.  So, Blue Ocean Strategy sort of reflects a first mover advantage until copy-cats arrive. However it is more than that as it focuses on innovation as an important deciding factor in gains.

 

Blue Ocean Strategy draws a contrast to the older business school thinking that leads us to the idea of the CAGR and the also-ran strategies. I take these as two spectrums in product development and invite you to read more about both Blue Ocean Strategy and typical tools to evaluate a market such as the compound annual growth rate.  Each has its place and utility.