The global factoring industry is arguably one of the business success stories of the last 30 years.

The industry has seen remarkable growth across many markets; UK, Italy, China, US, Ireland, The Netherlands, Spain, France, Germany, Taiwan to name but a few. And there are many more in South America, eastern Europe and other regions around the world, following in their footsteps.

For the more mature markets such as the US, UK and Italy, life in the factoring world has become more competitive as the markets head towards maturity.  Increasing competition means lower margins, increased risk and a greater focus on marketing, new products and greater efficiency. As with any industry facing these conditions, companies are looking for ways of getting back to higher profits and distancing themselves from competitors.

One methodology that has recently caught the eye of some factoring executives is blue ocean strategy. Blue ocean strategy is the brainchild of W. Chan Kim and Renée Mauborgne, both professors of strategy and management at INSEAD, the international business school in France. In their best selling book, Blue Ocean Strategy*, Kim and Mauborne challenge the traditional management thinking of mature industry businesses of going head to head with competition in attempting to achieve sustained profitable growth.  They contend that fighting over competitive advantage, battling over market share and struggling to achieve differentiation only create what they call ‘bloody red oceans’ where rivals ‘fight over a shrinking profit pool’. Kim and Mauborne claim that this strategy is increasingly unlikely to create profitable growth in the future.

Instead, what Kim and Mauborne argue is that businesses would be far better off by creating ‘blue oceans’ in which uncontested market space is opened up, thereby making the competition irrelevant and creating a leap in value for customers. The way to do this they say is through ‘value innovation’, i.e. creating differentiation by increasing value and low cost simultaneously. The authors cite a large number of examples of companies that have successfully created blue oceans, from Cirque du Soleil to Ford motor company to Yellow Tail wine company. These companies have all looked hard at their existing highly competitive markets and sought to create something different that simultaneously creates a product or service of significantly higher value but at lower cost. In the case of Ford it was the Model T car, Yellow Tail created a completely new style of easy drinking, fruity flavoured wine and Cirque du Soleil sought to completely change the traditional circus experience by distancing themselves from the increasingly controversial use of animals and infusing theatre into the circus experience.

One senior factoring executive who has readily proclaimed the virtues of blue ocean strategy is Michiel Steeman, Head of International Factoring at ING Commercial Finance in The Netherlands. When asked how he came across blue ocean strategy, Steeman explained that ‘a number of management books come across my desk, but this one particularly caught my attention’. Using blue ocean strategy helps in redefining a market says Steeman. According to Steeman, ‘there are several trends affecting the factoring industry at the moment, two of which are supply chain finance solutions and the whole area of digitisation’. ‘There has also been a ‘huge trend for using the web and also track and trace facilities whereby knowing the location of products at any given time can help in managing risk’. Steeman added that the ‘starting point for all these is the invoice and more particularly the information that leads up to the creation of an invoice. The longer term trend says Steeman, is the use of open account in international trade – ‘companies are more comfortable with markets like China and India. Letters of credit, cash in advance etc are no longer needed. Companies are more interested in strategic partnerships’.

With all this going on, Steeman has found that using blue ocean strategy has really helped him in providing a structure for the organisation’s line of thinking and to get an understanding of what the position of a market is now, where it might be heading and what its potential could be if viewed very differently.

Of course, many would argue that blue ocean strategy is nothing new and is just another variant of long understood ‘thinking out of the box’ or ‘blue sky thinking’ methodologies. However, where blue ocean strategy really seems to score is in its structured and framework style of approach and excellent and plentiful case studies. Indeed, Steeman argues that this approach is where the key value in blue ocean strategy lies.

However Steeman warns that the book is not so strong in implementation strategies and for help on this he recommends one should look further afield.

Kim and Mauborne do not suggest that their publication will guarantee success and even if it does, that it will last. And perhaps this is another reason why the book compares well with other management best sellers. For example, in Peters and Waterman’s enormously successful In Search of Excellence (1982) the authors went to great lengths to identify eight points that they felt were central to business success. However, the subsequent demise of some of the ‘excellent companies’ that the book highlighted, identified a central weakness in suggesting that these points would apply indefinitely.

Many factoring industry visionaries, including Steeman are predicting that for large factors, factoring will become a commodity product and that ‘traditional’ style factoring will be pulled back to niche markets and smaller players. Steeman goes further and says that ING will focus on big players and any suppliers to large corporates anywhere in the world. And ‘where we have a strong, local network we will focus on smaller clients’ says Steeman.

It would seem that with Steeman for one, blue ocean strategy in factoring, is perhaps already in use.

*Blue Ocean Strategy, W. Chan Kim and Renée Mauborgne, Harvard Business School Press.

Article contributed by Michael Bickers, BRC Factorscan

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