Creating a Two-Horned Dilemma

Blue Nile's disruptive potential probably comes from its engineering of the classic competitive dilemma, coined "The Innovators Dilemma" by Clayton Christensen in his book by the same name. You force your competitors onto the horn of a dilemma. They can either run to protect themselves against one end of the horn, while exposing themselves to the other, or vice versa, but they cannot do both.

Last week I conducted a Webinar with Blue Nile's CEO Diane Irvine and this strategy was discussed at length. For those of you who didn't attend, you can listen to the recording by visiting http://www.kaihan.net/vpw_login.php?img=blue-nile.

To understand how Blue Nile forces its competitors to choose between two losing approaches, try to imagine yourself as the traditional competitor trying to compete with Blue Nile. You know Blue Nile is growing and is more profitable, in percentage terms, than you are. You have resources and a brand so you figure you should simply copy Blue Nile's model. But as you think through your strategy you find the hard choices returning you to a strategy of inaction.

The first step, of course, is to sell diamonds online. You can easily figure out the technology, build the requisite customer service team, and sort out how you will plug into your inventory. But what type of diamonds should you sell--the high quality ones you offer in your stores or lower quality ones?

To complete with Blue Nile, you must choose to sell high quality diamonds because Blue Nile has cleverly chosen a premium positioning. As Blue Nile's CEO Diane Irvine explained, "We're not positioned as a discounter. We are selling a very high end product but selling it for much less. So I think of this as the smart way to shop and I think our business is made possible because of the Internet."

Your next strategic choice is to decide how to price your online inventory. You can afford to sell these diamonds at a lower "online" price because your online business does not have to pay retail rent so your costs are lower. You could drop your prices while still holding up margins. But if you sell high quality diamonds, the same quality you sell in stores, for a lower price online, then you are communicating to your customers that you are overpricing your offline offerings.

While in some categories retailers can get away with this (e.g., you may expect to pay more for a book sold in Barnes & Noble than you would for the same book purchased on Barnes & Noble's online store, www.bn.com) but diamonds are different. You become more price-sensitive when choosing a $7,000 diamond than when choosing a $14.95 book. And while you are willing to pay for the convenience of getting the book in your hands today rather than wait three days for online shipping, three days seems not long to wait for the diamond that will mark a major turning point in your life.

Indeed, as Blue Nile has found, many people find the in-store experience of diamond shopping to be less attractive than the low-pressure experience of shopping online. Sell your diamonds cheaper online and customers will stop buying in your stores.

Now that your options to sell high quality diamonds online have been exhausted, you explore the other option: selling lower quality diamonds online. Regardless of at what price you offer these low-quality diamonds, your strategy will be have little effect on Blue Nile's continued expansion into your market because you're aiming your online business at an entirely different market.

At the end of the exercise you must make a tough decision: do I sell cheap diamonds online or do I abandon any serious efforts to sell diamonds online? Blue Nile does not care which you choose because in either case you are choosing not to compete with them.

Because of Blue Nile's engineering of the "two horn" strategy, the strategy known in the 36 Stratagems as "Besiege Wei to Rescue Zhao," history shows it needs little else to deflect competition from traditional players. Entrenched incumbents face an impossible choice and so are moved to quietly observe Blue Nile's progress.

But innovators must contend not just with existing competitors; they must also prepare themselves for future ones. An analysis of Blue Nile's strategy shows they are building an additional competitive shield that, if skillfully assembled, could deflect would-be attackers for a considerable amount of time.

Ask yourself the questions below to see how you can create a strategy that your competitors can not compete with.

  1. What do we do differently than our competitors?
  2. How can we dive further into our niche and truly control that space?
  3. What strategic choices can you make that your competitors, even the smart and well-funded ones, will choose not to copy?

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