What should I do as my ocean is turning red?” This sentiment is echoed so frequently by managers around the world. More and more people, whether managers of companies, heads of non-profits, or leaders of government, find themselves up against an ocean of bloody competition and want to get out. Maybe your business is seeing its margins shrink. Maybe competition is getting more intense, driving commoditization of your offering and rising costs. Or maybe you know you are going to announce that salary increases won’t be coming. That’s not a situation any one of us wants to face. And yet that’s a situation that so many do face.
Now to address the above issue, we need to understand these two business strategies, one is the red ocean strategy and another one is the blue ocean strategy. Both these strategies are poles apart.
Blue Ocean Strategy Around Us
To have a glimpse of the idea of the blue strategy, just consider the following examples-
In today’s world, can you imagine any business without competition? Probably not. If I say that this is very well feasible. Even this is happening not only at a small scale but at a mega-scale. On small scale, we can understand like any local restaurant or food outlet with its own special dishes, which people love to eat. Such outlets can be found in each small or metro city. People love to visit there. These outlets have almost nil competition as people keep on visiting for what they offer.
Now let us take one global example, who is the competitor of Google’s search engine? Do you remember the name? Google has dominated the search engine market, maintaining a 92.47 percent market share as of June 2021. In today’s high-tech world, no other search engine is far near to Google. There are so many specific strategies adopted by Google to make it number one, one of them is the free Android operating system (OS).
Android is developed by a consortium of developers known as the Open Handset Alliance and commercially sponsored by Google. Once the mobile is having Android OS, then most of the things in your mobile seem to belong to Google. These people do so much R&D to make these operating systems very user-friendly. (Image credit Statista) The second example, we can take is Apple. The majority of Apple products are costly. But those who started using these products become fans of Apple. I am personally using MacBook. I love using it. It does not feel like a normal laptop. It’s beyond that. The value of the product, security aspects are at par in Apple products. This is one of the reasons that the market cap of this company has crossed $2 Trillion (The only company in the business world). Some companies are giving good competition in the smartphone segment but overall all these competitors are far distant.
The third example we can take is Amazon Kindle. One of the prime products from Amazon. I could not find any competitor of it for reading books for the past several years. It is not only a device but a complete encyclopedia of books. The flexibility which Amazon provides with these devices is dam good. You can download book purchase books directly from Amazon on Kindle and even you can have the same login on multiple devices. I personally have login into three devices i.e. Mac, Mobile, and Kindle.
“The ability to learn faster than your competitors may be only sustainable competitive advantage.”– Arie de Geus
Red Ocean versus Blue Ocean Strategy
|Red Ocean Strategy||Blue Ocean Strategy|
|Compete in existing market space||Create uncontested market space|
|Beat the competition||Make the competition irrelevant|
|Exploit Existing demand||Create and capture new demand|
|Make the value-cost trade-off||Break the value-cost trade-off|
|Align the whole system of the firm’s activities with its strategic choice of differentiation or low cost||Align the whole system of the firm’s activities in pursuit of differentiation and low cost|
In contrast, value innovation is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view. Competition-based red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what the academics call the structuralist view, or environmental determinism.
In the red ocean, differentiation raises costs because firms compete with the same best-practice rule. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating a blue ocean.
How Cirque du Soleil Created Blue Ocean
Guy Laliberté is a Canadian billionaire businessman and poker player. In 1984, Laliberté founded Cirque du Soleil. The Canadian circus company’s shows have since been seen by more than 90 million people worldwide. Before founding the company, he had performed as an accordion player, stilt walker, and fire-eater. In 2006, he was named the Ernst & Young Canadian Entrepreneur of the Year.
Cirque du Soleil is one of Canada’s largest cultural exports. Cirque’s productions to date have been seen by some 150 million people in over three hundred cities around the world. In less than twenty years since its creation, Cirque du Soleil achieved a level of revenues that took Ringling Bros. and Barnum & Bailey—the once global champion of the circus industry—more than one hundred years to attain.
What makes this growth all the more remarkable is that it was not achieved in an attractive industry but rather in a declining industry in which traditional strategic analysis pointed to limited potential for growth. Supplier power on the part of star performers was strong. So was buyer power. Alternative forms of entertainment—ranging from various kinds of urban live entertainment to sporting events to home entertainment—cast an increasingly long shadow.
Children cried out for video games rather than a visit to the traveling circus. Partially as a result, the industry was suffering from steadily decreasing audiences and, in turn, declining revenue and profits. There was also increasing sentiment against the use of animals in circuses by animal rights groups. Ringling Bros. and Barnum & Bailey had long set the standard, and competing smaller circuses essentially followed with scaled-down versions. From the perspective of competition-based strategy, then, the circus industry appeared unattractive.
Another compelling aspect of Cirque du Soleil’s success is that it did not win by taking customers from the already shrinking circus industry, which historically catered to children. Cirque du Soleil did not compete with Ringling Bros. and Barnum & Bailey. Instead, it created uncontested new market space that made the competition irrelevant. It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price several times as great as traditional circuses for an unprecedented entertainment experience. Significantly, one of the first Cirque productions was titled “We Reinvent the Circus.”
New Market Space (Cirque du Soleil)
Cirque du Soleil succeeded because it realized that to win in the future, companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition.
To understand what Cirque du Soleil achieved, imagine a market universe composed of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown 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 existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.
Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries, as Cirque du Soleil did. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.
It will always be important to swim successfully in the red ocean by outcompeting rivals. Red oceans will always matter and will always be a fact of business life. But with supply exceeding demand in more industries, competing for a share of contracting markets, while necessary, will not be sufficient to sustain high performance. Companies need to go beyond competing. To seize new profit and growth opportunities, they also need to create a blue ocean strategy.
Business From Past to Future
Although the term blue ocean is new, its existence is not. They are a feature of business life, past and present. Look back 120 years and ask yourself, How many of today’s industries were then unknown? The answer: many industries as basic as automobiles, music recording, aviation, petrochemicals, health care, and management consulting were unheard of or had just begun to emerge at that time.
Now turn the clock back only forty years. Again, a plethora of multibillion and trillion dollar industries jumps out—e-commerce; cell phones; laptops, routers, switches, and networking devices; gas-fired electricity plants; biotechnology; discount retail; express package delivery; minivans; snowboards; and coffee bars to name a few. Just four decades ago, none of these industries existed in a meaningful way.
Now put the clock forward twenty years—or perhaps fifty years—and ask yourself how many now unknown industries will likely exist then. If history is any predictor of the future, again the answer is many of them.
The reality is that industries never standstill. They continuously evolve. Operations improve, markets expand, and players come and go. History teaches us that we have a hugely underestimated capacity to create new industries and re-create existing ones.
The Impact of Blue Ocean on Business
To quantify the impact of creating blue oceans on a company’s growth in both revenues and profits in a study of the business launches of 108 companies has been carried out. It was found that 86 percent of the launches were line extensions, that is, incremental improvements within the red ocean of existing market space. Yet they accounted for only 62 percent of total revenues and a mere 39 percent of total profits.
The remaining 14 percent of the launches were aimed at creating blue oceans. They generated 38 percent of total revenues and 61 percent of total profits. Given that business launches included the total investments made for creating red and blue oceans (regardless of their subsequent revenue and profit consequences, including failures), the performance benefits of creating blue waters are evident.
The blog is inspired from ‘Blue ocean strategy’ by W. Chan. Kim & Renée A. Mauborgne.