Blue and Red Ocean Strategy

Introduction
The metaphor of red and blue oceans describes the market universe. Red oceans
represent all the industries in existence today – the known market space. In the red
oceans, industry boundaries are defined and accepted, and the competitive rules of
the game are known. Here companies try to outperform their rivals to grab a greater
share of product or service demand. As the market space gets crowded, prospects
for profits and growth are reduced. Products become commodities or niche, and
cutthroat competition turns the ocean bloody; hence, the term "red oceans".
Blue oceans, in contrast, denote all the industries not in existence today – the
unknown market space, untainted by competition. In blue oceans, demand is created
rather than fought over. There is ample opportunity for growth that is both profitable
and rapid. In blue oceans, competition is irrelevant because the rules of the game
are waiting to be set. Blue ocean is an analogy to describe the wider, deeper
potential of market space that is not yet explored.

Blue Ocean Strategy

Blue Ocean Strategy has been a corporate and business “buzzword” for over a
decade. Blue ocean is a term referring to the uncontested market space of an
unknown industry or innovation. The term blue ocean was coined by professors W.
Chan Kim and Renee Mauborgne in their book Blue Ocean Strategy: How to Create
Uncontested Market Space and Make the Competition Irrelevant (2005). Kim and
Mauborgne define blue oceans as markets associated with high potential profits.

Blue Ocean Strategy is a marketing strategy in which a business enters a market

that has little or no competition. The strategy focuses on moving away from an
existing market and searching for new markets. Specifically, these new markets give
a company a very high competitive advantage as well as low price/cost pressure.
This strategy involves getting out of a fiercely competitive, saturated market and
into untapped territory. Blue Ocean Strategy is a powerful tool for businesses who
want to create new markets instead of competing within the established ones.
The goal of Blue Ocean Strategy is not to generate business concepts that compete
for market share, but to instead create entirely new markets, making competition
irrelevant. Thus BOS is all about minimizing risks due to competition threat and
maximizing opportunities by exploring new boundaries.
Ford and Apple are two examples of leading companies that created their blue
oceans by pursuing high product differentiation at a relatively low cost.
Ford Motor Co.
In 1908, Ford Motor Co. introduced the Model T as the car for the masses. It only
came in one color and one model, but it was reliable, durable, and affordable. At the
time, the automobile industry was still in its infancy with approximately 500
automakers producing custom-made cars that were more expensive and less
reliable. Ford created a new manufacturing process for mass-
producing standardized cars at a fraction of the price of its competitors. The Model
T's market share jumped from 9% in 1908 to 61% in 1921, also officially replacing
the horse-drawn carriage as the principal mode of transportation.

Apple Inc.
Apple Inc. found a blue ocean with its iTunes music download service. While billions
of music files were being downloaded illegally, Apple created the first legal format for
downloading music in 2003. It was easy to use, providing users with the ability to buy
individual songs at a reasonable price. Apple won over millions of music listeners
who had been pirating music by offering higher-quality sound along with search and
navigation functions. Apple made iTunes a win-win-win for the music producers,
music listeners, and Apple by creating a new stream of revenue from a new market
while providing more convenient access to music.

Features of Blue Ocean Strategy

1. Non-existent industries: In a Blue Ocean Strategy, there is a creation of a whole
new industry as companies innovate and create products and services that are
highly unique and unseen. Blue Ocean Strategy denotes all the industries not in
existence till today.
2) Undefined Market Space: The market space in blue ocean strategy is unknown
as it has been uncontested and is to be created and developed.
3) Undefined Industry Boundaries: Even the Industries' boundaries are undefined.
The scope of new industries can be as large as one's imagination, creativity, and
potential.
4) Unknown competitive rules: The rules of the market are not defined. The policies
governing the industries are not developed. The scope of the market and industry is
just stipulated and the competition is almost negligible.
5) High Profit & Growth Opportunity: Since there is no risk of an immediate
competitor, the industry thus formed offers high profit and growth opportunities.
6) Value Innovation: Blue Ocean Strategy works on the principle of value innovation
which means that it looks only towards an innovative idea to create new or an
improved product which is far better than its counterparts.
7) Innovation & Creativity: Innovation and Creativity are the essentials in this strategy
as the company's only aim is to develop an innovative and an efficient product that
out performs the existing products.
8) Create a Market: The ultimate objective of the Blue Ocean Strategy is to create a
market for the new product. The strategy also focuses on building a pool of high loyal
customer who would idealize the company's every new product. Apple's iphone has
successfully implemented this strategy.

Principles of Blue Ocean Strategy

The six main principles that guide companies through the formulation and execution
of their Blue Ocean Strategy are explained as under:

1. Reconstruct market boundaries- A Company needs to look what the market is

doing and competing on and create a strategy that is different than that of the rest of
the market. This principle suggests the need to develop a strategy that will create
uncontested market space. It identifies the paths by which managers
can systematically create uncontested market space. The six paths focus on looking
across

 alternative industries- Companies must try to find alternative industries where

customers commonly seek substitutes or alternative to the company offerings.
By focusing on the key factors that lead buyers to trade across alternative
industries and by eliminating or reducing everything else, a company can
create a blue ocean of new market space.
 Strategic groups- These are the groups within an industry that pursue a
similar strategy. Strategic groups are usually built on two dimensions, price
and performance. Thus by looking across strategic groups, an organization
has to find why do buyers trade up for the higher group, and why do they
trade down for the lower one? For example, Toyota implemented a new blue
ocean by creating the Lexus, with the quality of the high-end Mercedes, BMW
and Audi at a price closer to the lower-end mid-class.
 buyer groups- There are a chain of buyers who are directly or indirectly
involved in the buying decision i.e. purchasers, actual users and influencers.
By identifying a new market group within the chain of buyers, a product can
be repositioned to attract a new group of buyers.
 complementary product and service offerings- A Company must identify and
offer other products and services that are required to use its products. For e.g.
a petrol pump can offer petrol as well as mechanical services.
 functional and emotional appeal for buyers- Companies must make use of
functional and/or emotional appeal to convince the target audience to buy
their products.
 time/trends- Companies must create reactive strategies in order to adapt to
the ever changing business environment. Apple has used this strategy
 successfully. Google has changed the ICT industry by adding cloud-based
services.

2. Focus on the big picture, not the numbers- This principle illustrates how to
design a company’s strategic planning process to go beyond incremental
improvements to create value innovations. It presents an alternative to the existing
strategic planning process, which focuses on numbers and not on making
incremental improvements. This principle tackles planning risk. Using a visualizing
approach that drives managers to focus on the big picture rather than on numbers
and jargon, this principle proposes a four-step planning process whereby a company
can build a strategy that creates and captures blue ocean opportunities.

3. Reach beyond existing demand- This principle suggests that a company should
focus on reaching beyond existing customers. In other words, it must focus on how
to get potential future customers who are not currently purchasing the product. In
other words, it emphasizes on what is keeping the potential customers out of the
market and make efforts in reaching them.

4. Get the strategic sequence right- This principle describes a sequence which
companies should follow to ensure proper implementation of the blue ocean
strategy. The sequence includes

 Buyers utility- The product must provide exceptional utility to the customers
 Price- The product must be priced in a manner that it meets customer
expectations and demonstrate demand.
 Cost- The cost structure for delivering the product must allow for adequate
profit margin
 Adoption- The hurdles in executing the blue ocean strategy must be
identified. For instance, limited available resources, internal opposition etc.

5. Overcome key organizational hurdles- Tipping Point Leadership is the set of

leadership principles that allow managers to overcome execution hurdles fast and at
low cost while winning employees’ backing in executing a breakthrough strategy.
Tipping point leadership is based on the belief that in every organization, there are
people, acts, and activities that exercise a disproportionate influence on
performance. It focuses on on conserving resources and cutting time by focusing on
identifying and then leveraging the factors of disproportionate influence in an
organization.

6. Build execution into strategy- For effective formulation and implementation of

the blue ocean strategy, fair process must be followed. Fair process is defined by
three elements- engagement, explanation and clarity of expectations.
Engagement means involving individuals in the strategic decisions that affect them.
It involves effective communication of management's goals and objectives.
Explanation means that everyone involved and affected should understand why final
strategic decisions are made. Expectation clarity requires that after a strategy is set,
managers clearly state their expectations from the employees.

Red Ocean Strategy

Red Ocean Strategy is a head-to-head battle where the players of a particular
segment compete with each other remaining in the same market space i.e. within the
boundaries of the same industry on the principle of ‘competitive advantage'. Red
oceans represent all the industries in existence today in the known market space. In
the red oceans, industry boundaries are defined and accepted, and the competitive
rules of the game are known. The Red Ocean companies try to outperform their
rivals to grab a greater share of existing demand. Some of the features of red ocean
strategy includes:
1) Existing Industries: Red Ocean strategy involves existing and current industries
and product or service segment.
2) Defined Market Space: Market space is the space within which any company
conducts business and is able to sell its produce to the possible buyers. In this form
of strategy the market space is known.
3) Defined Industry Boundaries: The industry boundaries are limited, defined and
well accepted by the company and its competitors.
4) Known Competitive Rules: Competitive rules are known and defined, the policies
on which the industry is governed is updated and modernized to its capacity of
ensuring better and healthy environment within the industry.
5) Low Profit Growth Opportunity: Since the markets are divided, profit margins are
low. Further, it also gives rise to limited growth opportunities.
6) Competitive Advantage: The market on a Red Ocean Strategy works on the
principle of competitive advantage. For instance, higher technology, supply of
cheaper raw material, higher product quality, better logistics etc.
7) Low cost or Differentiation: The best way to survive or sustain in such a market
condition is either through a strategy of low cost or by product differentiation.
8) Beat the Competition: The company's only goal and outlook is to fight and beat
the competitors.
9) Focus on existing customers and Exploit Existing Demand: The strategy focuses
on the existing customers and tries to exploit the existing demand. Hence, the
demand for the offering is limited.
Difference between Red Ocean Strategy and Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy

1. Basis Business is done in the The idea is to create a

existing market place new, uncontested market
place

2. Competition Approach of the strategy is Approach of the

to beat the competition. competition is make the
competition irrelevant

3. Demand It uses to exploit the Creating new demand

existing demand

4. Focus Company activities focus Company activities aim at

on the strategic choice the pursuit of products'
between products' differentiation and low cost
differentiation or low cost

5. System Approach System approach is System approach is

towards low cost and towards creativity and
differentiation innovation

6. Profit opportunity Profit Opportunity Profit Profit opportunity of using

opportunity of using Red Blue Ocean Strategy is
Ocean Strategy is low. High.

7. Customer focus Focus is on existing Focus is on creation of

stream of customers. new customers

8. Importance of value- Important Not to relevant

cost trade-off