Blue Ocean Strategy

I recently participated in reviewing the book - “Blue Ocean Strategy” and found it to be a pretty interesting exercise. The book is about business strategy and is written by W. Chan Kim and RenĂ©e Maubborgne of INSEAD business school. Here's a brief summary.

The book classifies the business universe as consisting of two distinct kinds of spaces - red and blue oceans. Red oceans represent all the industries in existence today-the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody.

Blue oceans 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. There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry.

Blue oceans differ from traditional models which are focused on competing in the existing market space. While the term “Blue Oceans” may be new, the concept has always been around. Take a look back over the past century and try to find out how many of today's industries were then unknown. You would notice that many of today's fundamental industries such as automobiles, aviation, petrochemicals, pharmaceuticals and many others were not just unheard of but people then would not have even thought these industries were possibilities. If a hundred years seems long, try looking back at a shorter period of a few decades ago and try to find the answer to the same question. You are sure to find several new industries – such as mobile phones, biotechnology, satellite television, internet start-ups and many more that were not around then. Now, look ahead at the next few decades and ask yourself the question – how many industries that are unknown today will exist in the future – a decade or two from today ? If the past is any indicator of the future, the answer would be obvious – we are sure to have many new industries that we are not aware of now.

Organizations have a tremendous capacity to create new industries and recreate existing ones. Various factors such as rapid technological advances, enhanced industrial productivity, falling trade barriers between nations and regions, ready global availability of information on products and prices – and such others are contributing towards the contraction of niche markets and monopolies.  Prospects in many established market spaces a.k.a. Red oceans are steadily declining. This situation has speeded up the commoditization of products and services, led to price wars and reduced profit margins. With commoditization, most brands across categories tend to become more and more alike. This leads to consumers increasingly basing purchase decisions on price. In overcrowded market spaces, differentiation between brands becomes harder.

So, why do organizations still focus their strategies greatly on the red oceans ? A possible answer would be to trace the roots of corporate strategy - which seems to be heavily influenced by military strategy. References to officers, headquarters, troops, front line, etc. are borrowed from the military. Strategy in the military context is all about red ocean competition – fighting an opponent and taking over the battlefield or limited territory. Blue ocean strategy is however, about doing business where there is no competition. It is about creating new land and not dividing existing land. Red ocean focus implies an acceptance of the limitations of war – limited land and the requirement to beat an enemy to be successful.

Blue ocean strategy rejects a fundamental principle of traditional strategy – of a trade-off between cost and value. According to conventional strategy, organizations can either create greater value for customers at a higher cost or create moderate value at a lower cost. The relationship between value and cost seems to be proportionally driven, higher value driven by higher cost and vice versa. However, organizations that have successfully followed blue ocean strategy pursue both value differentiation and lower costs together and not as a trade-off. Blue ocean strategy works when organizations adopt a total-system approach wherein all systems of the organization such as the value offering, price and costs are well aligned. Observance of companies that have created blue oceans show that they are able to benefit without facing strong challenges for over a decade. This is due to the nature of blue ocean strategy which creates significant economic and cognitive barriers to competition.

Both blue and red oceans have always existed and will continue to do so. When organizations understand the rationale behind both types of strategies, they will be better able to balance their efforts across both strategy types and create more blue oceans.