Blue Oceans in Israel

Examples of Israeli companies that have developed true 'value innovations'

Published in Hebrew in Status - Management Thinking Magazine, Issue 184, October 2006
By Ari Manor, CEO, ZOOZ

A competitive market is like an ocean full of predator fish, furiously biting at each other. Big fish feed on small ones, giant fish devour the big fish, and the ocean water become red with blood. An intelligent fish will try to leave the ocean in search of blue waters without other fish, where there are no competitors, where he can grow and prosper. This image of a blue ocean without competitors is the focus of the book - "Blue Ocean Strategy", written by Kim and Mauborgne. The authors demonstrate how it is possible to systematically paddle toward blue oceans - that is, to develop an innovative strategy that changes the rules of the game in the sector and make the competitors irrelevant.

The authors say by focusing on the customers in the sector and on the non-customers - those who are not currently buying the products or services. The idea is to offer customers and non-customers an extraordinary and innovative benefit that suits most of them. The authors call this type of benefit a "value innovation". In order to offer this, one needs to provide additional elements that go beyond the accepted norms in the sector, while reducing or canceling other things that are customarily provided. In this way, it is possible to offer what is truly important without raising prices, and perhaps even lowering them.

Are there Israeli companies that have succeeded in doing this, who have changed the rules of the sector and made the competitors irrelevant, who have offered an extraordinary benefit without raising prices? In this article, we will review a number of examples of such companies.

1. FOX - From T-shirts to a Fashion Chain

In 1992, Harel Weisel opened a small clothing store that sold T-shirts. Later, he decided to develop an innovative and extraordinary chain of fashion stores. The brand-name fashion chains offered a wide range of fashion items: pants, shirts, dresses, socks, jackets, and so on - in a range of designs and prints. The new chain, called FOX (the name of the manufacturer who supplied the shirts to Weisel), offered a much more limited range of products: only T-shirts and tank tops, plain and without prints - the most basic product possible. The stores in the FOX chain, which were located in malls around the country, could therefore be smaller than usual - 80 square meters instead of 150-400 square meters, and thus save expensive rental costs.

A typical FOX store, like the one that opened in the Tel Aviv Azrieli Mall, was a very small corner store. There were two walls with display shelves that contained the store's entire inventory. There was a wall for black and white T-shirts and a wall for colored T-shirts. Opposite them were two other glass walls that faced the open space of the mall. In this way, customers could not miss the store and the display. Simplicity was the name of the game. Want a T-shirt? Here it is, in any color you want! Go over to the appropriate wall and pull out your size.

The climate in Israel is hot and simple T-shirts are very popular among men and women alike. Orders were soon to follow and the volume of sales enabled the FOX chain to offer good quality shirts (and pleasant to the touch) at affordable prices. The relative simplicity of the items in the chain coupled with the limited variety also enabled low manufacturing and operational costs. As a result, gross profit was relatively higher than the norm in the fashion sector.

This was perhaps the first time that prime locations in Israeli malls offered inexpensive items of clothing. It was the first time that such basic items of clothing were branded in Israel and marketed under a quality brand. To a certain extent, the new chain offered a combination of an open-air market stall (limited variety, simplicity and accessibility, small store space, low price) and a brand-name fashion chain (arrangement on shelves, branding, stores in malls). The new concept offered a suitable solution for almost all customers (in terms of gender, age and fashion preference), who preferred to purchase the simple product in the respectable and comfortable atmosphere of the mall, and to experience the value involved with purchasing a brand name.

After about two years, as additional branches were opened in malls throughout Israel, the FOX chain evolved in new directions. T-shirts in Israel are simply not a big enough market. The variety expanded to all types of clothing, and additional branches opened with larger stores. In subsequent years, additional FOX chains were opened (for men, children and infants), an accessories division opened, and the company floated shares and signed franchise agreements with other countries. Today, FOX is a company with over 1,500 employees, an annual turnover of about $100 million (in 2005) and a market value of about $95 million.

The small store with only two display walls no longer exists. It was only the engine for initial growth and helped finance the beginning, en route to establishing a global company that continuously renews itself but now more closely resembles other fashion chains. The minnow of 1992 grew in a blue lake, developed, became stronger, and returned in 1994 to the red sea (Israel does not border an ocean) in order to grow into the shark it is today.

2. Bagir - Value Innovation in Conservative Dress

A suit is a traditional and conservative piece of clothing - or at least that is the conventional view. But Ofer Gilboa, Bagir's CEO, saw this as an opportunity to create a competitive advantage.

Two years earlier, Ofer received bad news. His principal customer, the Marks & Spencer chain from England, which purchased most of the suits Bagir produced, informed him that it had no other choice but to ask Bagir to cut its suit prices in half within a few months due to the difficulties Marks & Spencer was experiencing. Bagir underwent a serious crisis, during which it laid off hundreds of employees in Israel and began to manufacture in countries where the labor force was less expensive. But the goal was achieved and after several months Bagir succeeded in meeting the target price and became a leaner and more efficient company.

At this stage, it was clear that competition over price was not enough and that what had succeeded until then would not necessarily suffice in the future as less expensive products continued to come from China and other places. The time had come to think about creating a significant and unique niche in order to reinforce the loyalty of existing customers and succeed in penetrating new markets. Not an easy task, especially in such a conservative market with buyers who refuse to work with quality and pricey suppliers and furthermore from Israel. Maybe T-shirts, but what does Israel have to do with suits? A German buyer would prefer to purchase a German or Italian suit, or one made in Hong Kong. In fact, Bagir repeatedly failed to penetrate the German market in previous years. Therefore, it was clear that an extraordinary solution was required.

The solution that was chosen was to carry out real value innovation. In 2000, Bagir developed a unique suit that can be laundered at home in a washing machine(instead of dry cleaning). The suit is sold with its own laundry sack and is made from a special combination of cloth and thread that allows it to withstand a regular wash. The suit is a very complex product made of dozens of types of cloth and thread. Polgat Technologies, a subsidiary of the Bagir conglomerate, developed the unique suit.

The price (for the end customer) of a washable suit from Bagir is about $200 - quite a normal price But, the suit saves dry cleaning costs as well as the time and bother of repeatedly going to the dry cleaners. That is, it is a solution that combines the product itself (the suit) and the service accompanying it (dry cleaning).

The innovative suit became a commercial success and over 600,000 suits were sold in England through Marks & Spencer, which even won the Queen's Award for Enterprise (Innovation 2003) thanks to this suit. Bagir itself won IDB's Entrepreneurship & Innovation Contest in 2003 because of this project.

More importantly, thanks to the innovative suit, Bagir succeeded in widening its circle of clients, reducing the risk in working vis-a-vis such a dominant client, and increasing it revenues and profitability. Bagir's suits are now sold in new countries and chains, including the U.S., Germany (!) and Japan (!!).

In light of the washable suit's success, and in order to leverage this success, Ofer decided to implement systematic innovation processes at Bagir and in 2003 he asked ZOOZ to help him with this. This included breathable and ventilated suits, solutions to prevent wrinkles during travel, and more. In this way, the costs of maintaining the suits were even further reduced. The Bagir conglomerate, which previously offered "me too" products at a too-high a price, is now a global leader in innovation in a conservative sector in which almost nothing has changed for centuries.

3. Tiv Taam - From "Russian" Delis to Secular Supermarkets

The immigration from the former Soviet Union during the 1980's and 1990's changed the demography of Israel as well as its consumption habits. Approximately 800,000 Russian-speaking Jews who were accustomed to their food products immigrated to Israel during these years. Delis tailored to their needs were quickly opened, with products imported from Russia, including many non-kosher products. This was contrary to the inventory of the regular food chains in Israel, which include only kosher products, most of which are produced in Israel under the supervision of the Chief Rabbinate.

In Israel, 12% of the Jews are ultra-Orthodox, 10% are Orthodox and 35% define themselves as traditional. The ultra-Orthodox, Orthodox and some of the traditional Jews refrain from purchasing food items at non-kosher stores. The food chains in Israel provide only kosher products in order to avoid losing these customers.

Against this background, the owners of a meat processing factory and a chain of meat and "Russian" delis decided to take action and open the first non-kosher food chain in Israel: for the new immigrants, secular Israelis, and the more liberal individuals among the traditional Jews. The latter welcomed the possibility of enjoying products such as wine and cheeses that do not bear the stamp of kashrut and do not comprise a source of revenue for the rabbinate, but are still permissible according to Jewish tradition.

The new and splendid Tiv Taam branch opened in 2002 in Netanya, covering 5,500 square meters, and replacing a smaller (2,500 square meter) "Russian" deli. The branch was opened near the only IKEA store in Israel, which constitutes a pilgrimage site, and brought new tidings to the secular public in Israel: the taste (and variety) of overseas.

The store's design was European and unconventional: a giant and high-ceilinged space, "deli" stands alongside regular shelves, and a clean and uncluttered look. The stock in the store included an abundance of deli items and unique and imported products, many of which were non-kosher and completely new for the Israeli consumer: hundreds of types of meat (including pork), seafood (which are all non-kosher), salamis and sausages, cheese and non-kosher wines imported from overseas. In short - it was truly a taste of overseas and this created hundreds of thousands of enthusiastic customers among secular Israelis, who had not previously been customers of "Russian" delis.

The unique design, the expansive space and the high level of service did entail higher costs for Tiv Taam, but the chain enjoyed significant savings in other areas:

• Relatively low rental costs (most of the stores that opened were located in industrial zones)
• Low salary costs (many Russian-speaking immigrants were looking for work and preferred a Russian employer)
• Import of non-kosher products from Eastern Europe at relatively low prices
• No need to pay the rabbinate for kashrut permits and inspections
• A relatively very low advertising budget
• Opening the stores daily, including Saturdays and holidays (unlike the norm)
  

In addition, Tiv Taam mainly appeals to the four top strati of the population that are willing to pay for the deli items and shopping experience. (The percentage of secular Israelis in these strati is relatively high.) Therefore, the chain's prices are average, definitely not low.

Tiv Taam quickly became a fast-growing chain. Today it includes 19 branches of various sizes throughout Israel and it is the third largest food chain in the country. In addition, Tiv Taam is continually improving the efficiency of its purchasing, thanks to its importing division that specializes in the import of wines, cheese and other items from all over the world, and thanks to its industrial division, which is now the third largest producer of meat in Israel. Tiv Taam employs more than 2,000 workers, and its sales revenues in 2005 were about $300 million.

FFour years after Tiv Taam opened, it still enjoys a blue ocean as the only non-kosher food chain in Israel. Its strategy is evident to all and appears on its Web site, including the statement: "We have no direct competitors." Even during periods of recession, Tiv Taam maintains relatively high profitability and does not lower prices. Over the years, it has also succeeded in adding new shopping experiences to its branches, including a giant grill at the Netanya branch, and a variety of bars and restaurants inside an even larger megastore that recently opened in Rishon Letzion. The chain's slogan today is: "The others simply don't have it." The little deli has become a large and well-established chain, which still continues to surprise.

Summary

Blue oceans can be found everywhere, even for companies in a small country like Israel. Sometimes they serve as a springboard in order to return with greater momentum to the red ocean (as in the case of FOX). Sometimes they enable the penetration of new countries (as in the case of Bagir). And sometimes they provide a wonderful place for continuous growth (as in the case of Tiv Taam). In any case, it is very worthwhile to search for a path to the blue ocean, where it is possible to grow much more quickly.

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Source:
1. Blue Ocean Strategy, Kim & Mauborgne, HBS Press (2005)

Written by Ari Manor, CEO, ZOOZ. All rights reserved.
Any trademarks and symbol-marks mentioned in this article belong to their owners.