“An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage”. ~Jack Welch
Companies have long engaged in head-to-head competition in search of sustained, profitable growth. They fight for competitive advantage battle over market share, struggle for differentiation. Yet, in today’s overcrowded markets, competing head-on results in nothing but a bloody ‘red ocean’ of rivals fighting over a shrinking profit pool characterized by increasing levels of commoditization.
Blue Ocean Strategy is a business strategy first written by W. Chan Kim and Renée Mauborgne of ‘The Blue Ocean Strategy Institute’ at INSEAD. The Blue Ocean Strategy is about capturing uncontested market space, thereby making competition irrelevant. The “ocean” refers to the market or industry. “Blue Oceans” are untapped and uncontested market, which provides little or no competition for anyone who would ‘dive in’, since the market is not crowded or may not even exist.
“Red Ocean” on the other hand, refers to a saturated market where there is fierce competition, already crowded with companies providing the same type of products/services. The idea is to do something different from everyone else, produce something that no one has yet seen, thereby creating a “blue ocean”.
In the Wall Street Journal article “What is Blue Ocean Strategy?” by Alan Murray writes: The rapid pace of innovation and change in recent years has led scholars and executives to search for an approach to strategy that is more dynamic than Michael Porter’s classic “five forces.” One of the most successful efforts to do so is the book “Blue Ocean Strategy” by W. Chan Kim and Renee Mauborgne. While avoiding use of Mr. Porter’s name, Mr. Kim and Ms. Mauborgne nevertheless attack him head on, arguing that the “five forces” analysis is a formula for remaining in “red oceans,” where the sharks compete mercilessly for the action.
The key to exceptional business success, they say, is to redefine the terms of competition and move into the “blue ocean,” where you have the water (market) to yourself. The goal of these strategies is not to beat the competition, but to make the competition irrelevant.
Among the examples they cite is Cirque-du-Soleil, the Canadian company that redefined the dynamics of a declining circus industry in the 1980s. Under conventional strategy analysis, the circus industry was a loser. Star performers had “supplier power” over the company. Alternative forms of entertainment, from sporting events to home entertainment systems, were relatively inexpensive and on the rise.
Moreover, animal rights groups were putting increased pressure on circuses for their treatment of animals. Cirque-du-Soleil eliminated the animals and reduced the importance of individual stars. It created a new form of entertainment that combined dance, music and athletic skill to appeal to an upscale adult audience that had abandoned the traditional circus. Here, Cirque-du-Soleil defined a ‘blue ocean’ and created an uncontested market space and made competition irrelevant…
However, a critical question is whether the Blue Ocean Strategy and its related ideas are just descriptive rather than prescriptive. This strategy has been criticized on several grounds and it’s argued that rather than a theory, Blue Ocean Strategy is an extremely successful attempt to brand a set of already existing concepts and frameworks with a highly “sticky” idea.
The blue ocean/red ocean analogy is a powerful and memorable metaphor, which is responsible for its popularity. This metaphor can be powerful enough to stimulate people to action. However, the concepts behind the Blue Ocean Strategy (such as the competing factors, the consumer cycle, non-customers, etc.) are not new. Many of these tools are also used by ‘six sigma’ practitioners and proposed by other management theorists…
Many others have proposed similar strategies. For example, Swedish educators Jonas Ridderstråle and Kjell Nordström in their 1999 book ‘Funky Business’ follow a similar line of reasoning. For example, ‘competing factors’ in Blue Ocean Strategy are similar to definition of ‘finite and infinite dimensions’ in ‘Funky Business’. Just as Blue Ocean Strategy claims that a Red Ocean Strategy does not guarantee success,
‘Funky Business’ explained that ‘competitive strategy’ is the ‘route to nowhere’. ‘Funky Business’argues that firms need to create ‘sensational strategies’. Just like Blue Ocean Strategy, a ‘sensational strategy’ is about ‘playing a different game’ according to Ridderstrale and Nordstrom. Kim and Mauborgne argue that traditional competition-based strategies (red ocean strategies) while necessary, are not sufficient to sustain high performance.
To sustain themselves in the marketplace, practitioners of Red Ocean Strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss.
Blue ocean strategy, on the other hand, assumes that structure and market boundaries exist only in managers’ minds, and practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there and largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from a ‘focus on competing’ to a ‘focus on value innovation’—that is, the creation of innovative value to unlock new demand. This is achieved via the simultaneous pursuit of differentiation and low-cost…
Instead of focusing on beating the competition, they focus on making the competition irrelevant by creating a ‘leap in value’ for buyers, thereby opening up new and uncontested market space. … To fundamentally shift the strategy of a market, you must begin by reorienting your strategic focus from ‘competitors-to-alternatives’ and from ‘customers-to-non-customers’ of a market…
In the article “Blue Ocean Strategy and Value Innovation” by Tracy Sigler writes: ‘Value Innovation’ is the cornerstone of Blue Ocean Strategy and, according to the authors, it occurs only when companies ‘align innovation with utility, price, and cost positions’. If they fail to anchor innovation with value, then technology-innovators and market-pioneers often ‘lay the eggs that other companies hatch’. As the business cliché goes ‘pioneers are the ones with arrows in their backs’. Hence, most companies choose one of two paths:
- The high end: Differentiation by creating greater value at higher cost.
- The low end: Broader appeal through reasonable value and lower cost.
Whereas Blue Ocean Strategy means value innovation, or simultaneous differentiation and low cost. So there’s the rub: How do you deliver more for less? If you want to make your competition irrelevant you’ll have to create a new way to meet a market need and create a new market in the process. Kim and Mauborgne studied scores of companies and their competitors across over 30 industries as far back as 1880.
The bottom line is that businesses with a Blue Ocean Strategy are much more likely to be profitable and successful long term. Example: Consider ‘Yellow Tail Wine’, the company’s initial success was achieved with a wine of ordinary quality (according to the standard criteria used to evaluate wine), targeted to ‘beer drinkers’. The steps for this innovation:
- Wines traditionally compete, among others, on aging quality, vineyard prestige and complexity.
- ‘Yellow Tail’ identified a significant group of target customers who were intrigued by wine, but who were intimidated by the difficulty of selecting and enjoying this product. These customers were typically reverting to beer as a lower end alternative.
- ‘Yellow Tail’ developed a line of wines that were not as good as even the lower end of the market on the traditional dimensions of competition, but valued by the target customers.
- ‘Yellow Tail’ introduced new features or dimensions that were not traditionally used to evaluate wine, but that were valued by their target customers, such as “ease of drinking,” “ease of selection,” and “’fun.” These new dimensions enabled the company to steal customers from the ‘beer market’.
Value innovation is created when a company’s actions favorably affect both its cost structure and its value proposition to buyers. In the red ocean or ‘head-to-head competition’, the strategic choices for firms are to pursue either differentiation or low cost. The focus is on rivals and competitive positioning within the bounds of a market, and adapting to external trends as they occur. In case of blue ocean or ‘revolutionary value innovation’ (radical innovation), the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean.
To define a Blue Ocean Strategy, you look across alternative markets, look across strategic group within an market and redefine the buyer group, look across complementary product and service offerings and participate in shaping external trends over time. You need to stand apart in the marketplace. So, your strategy must deviate from me-too-ism, and your value curve must diverge from industry standards…
We don’t have a traditional strategy process, planning process like you’d find in traditional technical companies. It allows Google to innovate very, very quickly, which I think is a real strength of the company.” ~ Eric Schmidt,