“Blue Ocean Strategy” by W. Chan Kim and Renee Mauborgne is a strategy that challenges companies to distance itself away from fierce competition by establishing uncontested market space that makes existing competition irrelevant. One of the reasons why the authors have used the colors red and blue is to describe the market. Red ocean is the market space where industry boundaries are defined and known. The red ocean contains a massive conflict between companies where they are constantly trying to outperform each other to achieve a greater share or demand. When market spaces become crowded with competitors, companies try out perform each other and profits and growth is greatly reduced due to cutthroat style competition which turns the red ocean bloody. In contrast, blue oceans is the unknown market space where it is unaffected by competition and demand is created rather than fought for. In blue oceans, competition is not relevant because the rules or barriers to the market space is not set yet and is often waiting to be set. The Authors uses the blue ocean analogy to describe the uncontested market space with no competitors and the opportunity to explore. The analogy of a blue ocean can be associated with profitability and growth being “vast”, “deep” and “powerful”.
Read More: Introduction to Blue Ocean Strategy
Competing in Existing Market Space versus Creating New Market Space
The red ocean represents the existing market space where there is always a constant intensity of rivalry to fight for market share. To successfully operate in a red ocean, it is important for companies to conduct competitor analysis to allow them to stay updated on what their competitors are doing and what they are planning to do. Red ocean strategies represent approaches to protecting and stealing market share from competitors. Market share can be stolen by companies satisfying their competitor’s customers better. To compete in the existing market space, companies need to mold their services or products in line with the customer’s liking through refining existing products or creating new to the world products. However, the bloody cutthroat competition of the red ocean most often causes companies to develop similar or replications of products or services of the competitor that has done well.
In the red ocean where competition is based on price and quality, being a first mover is an important advantage because by being flexible a company can adjust easily to external changes such as customer demands and trends. By being a first mover, the company gets benefits such as low costs and economies of scale. This is also the reason why the red ocean is so bloody because similar products and services have been refined and replicated over and over again with low cost, it has caused companies to be afraid to look into new options and therefore in a constant battle to fight for market share by cutting profit margins lower and lower. For the companies that succeed in gaining a competitive advantage by being a first mover, it is important for them to exploit the opportunity of that advantage as much as they can because very soon the competition will catch on to it. The tradition theory to competing in existing market space is focused on building your company through analyzing competitors.
Red ocean markets are large and the rate of product innovation is low. Therefore the market is usually heavily populated by competition and there are a set of rules that is known. In the hostile red ocean environment, companies strive to outperform each other in order to control market share and demand. As the market space gets crowded, growth and profits are greatly reduced and a price war is begun. Competition based strategies have been the main fundamentals of strategic thinking over the past decades and as a result, most companies benchmark themselves towards competition.
In contrast, Blue Ocean refers to all the industries that are not in existent. The only way to beat the competition is to stop trying to beat the competition. This is a complete contrast to conventional red ocean strategies because instead of analyzing competitors, and try out perform them, Blue Ocean Strategy encourage companies to differentiate or break away from the existing market space, hence making competition irrelevant. There are many ways to create blue oceans. In few cases, companies can establish completely new industries. An example of this is what eBay did with online auctioning. Blue ocean strategy says a company can create a blue ocean market space by innovating a new product or service mainly focusing on new to the business environment. However developing something new come with high risk and expenses but if done correctly can be very profitable.
Blue ocean strategy emphasizes on finding and exploiting market space. The companies must realize that in order to be successful long-term, they need to stop competing and benchmarking the competition. It is important for companies to view the competition from a broad perspective and consider industries that produce alternatives with the same functions and forms to satisfy the end customer. Most companies concentrate on improving the competitive position within a segment and focus on outperforming competition in the same segment. To be able to create a blue ocean environment, companies need to understand the factors that influence the customer’s decisions to change segments such as price and performance.
Blue ocean strategy also focuses on looking across chain of buyers. By changing the industry tradition of which buyer group to target and looking across the chain of buyers, companies can get an insight on how to focus on overlooked groups of buyers. The importance of considering the whole chain of buyers including purchasers, actual users and influencers. By focusing on all of these groups the company can break away form the competition and create a blue ocean environment and the competition would become irrelevant because the industry boundaries are waiting to be created. An example of an Australian organisation that has used this strategy is wine manufacturer Casella Wines. Casella Wines broke free from the boundaries of the domestic competition and moved towards the US market through implementing blue ocean strategy and targeting a segment which was not tainted yet which was the non-wine drinking population.
Most companies tend to adapt to new trends rather than trying to shape new trends. What the authors mean by this is that companies make actions directed at keeping up with trends and don’t look across time or look at the big picture. To create a untapped market space, companies need to find trends that are observable today and look at the big picture and see what happens to the value it will have in the future. A prime example of how a company successfully executed this strategy would be Apple. Apple studied and monitored the growing trend of music sharing over the internet during the last decade through software used illegally. The trend of music sharing became clear to Apple and they took the opportunity and created the online iTunes music store in 2003 which distributed music legally.
Shift from Red Oceans to Blue Oceans
It is not by chance that companies transfer from Red Ocean to Blue Ocean strategy. There are some driving reasons that stimulate the creation of blue oceans. The first element involves the invention of advanced technologies that have substantially developed productivity and enabled manufacturers to release new products and services that are totally unprecedented. However, due to a variety of innovative products in the same industry, supply power exceeds customer demand. This trend must be taken into great consideration especially in the globalization. In fact, products and services have become globally exchanges, which nearly eliminate traditional economic barriers among countries. As a result, the impact of monopoly is on the verge of disappearing. Such situation indicates that Red Ocean has become overcrowded and so bloody that managers need to be more concerned with Blue Ocean as escape for current strategy and management. Once again, the pressure of Red Ocean is one of the driving forces that make companies to focus on Blue Ocean strategy if they want to survive in the future.
In the past, Blue Ocean Strategy was considered more risky than Red Ocean strategy. However, studies have proved that this strategy is more likely to reduce risks than the Red one. It does not mean that applying Blue Ocean strategy can eliminate all risks. There is no strategy that can have such ability whatever Blue or Ocean one. According to W. Chan Kim and Renee Mauborgne, there are exactly six risks related to this strategy including search, plan, scope, business paradigm, organization, and management risk. Of those risks, search, plan, scope, and business paradigm involve the process of constituting a strategy while organization and management risks occur around the process of implementing the strategy. Relevant to these risks, the author proposed six solutions to minimize the risks. For the search risk, it is advisable for companies to ‘reconstruct market boundaries’. This means companies need to carefully examine the possibilities and harvest blue ocean chance in advance. In order to curb plan risk, ‘focusing on the big picture’ is proposed to prevent enterprises from wasting money and time executing red ocean strategies. The third solution, ‘reach beyond existing demand’ expands customer demand for companies by offering them new values. Getting the exact strategic sequence helps the companies to reduce business risk by supporting them to build a reasonable model ensuring the Blue Ocean strategy will generate good profit. The fifth solution provides companies tips to overcome other organizations in the process of implementing Blue Ocean strategy while the last solution helps people deal with management risks by motivating their best abilities. On the way to creating Blue Ocean strategy, these solutions, or six principles, support enterprises to maximize their opportunities and mitigate potential risks.
Blue Ocean strategy is a ‘dynamic progress’. One typical example for this statement is the Body Shop in the 1980s. At that time, the shop was running its business very successfully. Instead of competing face-to-face with famous cosmetics brands, it focused on developing a beauty market with natural products. Evidently, this unique idea helped the Body Shop become a dominator in this type of market. The shop earned huge profits from beauty products made from natural ingredients. However, it does not last long that Body Shop had to compete with new participants in its field. Despite fierce competition, Body Shop is still keeping its idea of this product. The problem is that the shop has not recognized the reason for its strategic move. In details, the shop had generated a brilliant idea on its business. At that time, Body Shop was the only player in natural product. As a result, it can achieve a large market share and a lot of customers without struggling with any rival. By chance, Body Shop successfully created a Blue Ocean. However, when other shops realize the potential of this market, they jump into making natural beauty products and become Body Shop’s competitors. Consequently, the market that Body Shop has penetrated into becomes a Red Ocean. So, the lesson for any company is that once creating a Blue Ocean, the company must swim as far as possible in the ocean, leaving the imitators behind at a great distance. It is important to prolong the first mover advantage and protect the surrounding area. Moreover, once other imitators have succeeded in reaching the Blue Ocean, it obviously turns out to be a Red Ocean. Therefore, whenever realizing the signal of competition, a Blue Ocean company needs to create other blue ocean in order to be another first mover. In short, Blue Ocean strategy stimulates an on-going-process including creating, protecting, and reaching other Blue Ocean. This confirms the blue ocean is a dynamic strategy.
Apart from impacting on an organization’s future profit, Blue Oceans also supports that organization to create different strategies and achieve sustaining business plans. In order to provide such support, Blue Oceans have certain principles and assumptions. For key principles, Blue Oceans do not follow constructed boundaries for competition in Red Oceans. Instead, they expand the boundaries for new competitive elements. Moreover, Blue Oceans even create new visions for organizations’ strategies in order to go beyond existing products and services, to constitute and increase new demand.
Particularly, based on Blue Oceans’ principles, companies can generate strategies that help them avoid face-to-face competition as they usually suffer in Red Oceans. For this aspect, Blue Ocean strategy will look for new customer throughout different industries, or target diverse groups in a specific industry. In automobiles industry, there are certain established rules that prevent enterprises to change. For example, the segmentation of automobile market is hardly changeable. There are some fixed segments including luxury market and economy market. These segments are in close relationship with a system of price and production performance that nearly no automotive enterprise attempts to change. However, such situations create opportunity for a Blue Ocean Strategy. In fact, Blue Oceans go in an opposite direction with the Red Ocean. For traditional market, organizations can either choose to provide great innovation value at high prices or sell products at lower price for lower quality. Blue Oceans, in contrast, aims at implementing both cases. Moreover, Blue Ocean strategy intends to instruct a company to eliminate or reduce factors that industry in Red Oceans takes for granted. Also, Blue Ocean strategy assists an organization to raise innovation value or encourage factors to create new potential values. In short, Blue Ocean strategy supports a company to eliminate or reduce certain value offerings that have been taken for granted. For this aspect, consumer choice is partly prevented. On the other hand, Blue Ocean strategy helps a company to create or enhance other innovation value.