In their 2005 book entitled, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, Professors W. Chan Kim, and Renée Mauborgne of INSEAD, a graduate business school with locations in Europe and the Middle East, put forth a simple, but effective argument as to why markets should be divided into two distinctly different categories.
What were these all-important categories, and what does it mean for today’s aspiring entrepreneur and established business trying to spearhead new business development efforts?
Kim and Mauborgne’s assessment wasn’t exactly revolutionary, but it was insightful. They defined today’s markets as either being a “Blue Ocean” or a “Red Ocean”, with the latter being the one most companies operate in and the one we all understand best. The Red Ocean was referred to as the “existing market space”, whereas the Blue Ocean was seen as the “uncontested market space”.
Understanding a Blue Ocean market comes first from understanding what constitutes a Read Ocean market.
THE RED OCEAN
A Red Ocean is what most of us would recognize as a market, one that includes multiple competitors and players, all vying for a smaller piece of the proverbial pie. Red Ocean markets are highly competitive. Winners and losers systematically increase and decrease market share in a never-ending pursuit of capturing or dominating existing customer demand.
These markets are largely driven by a trade-off between a product or service’s value and its cost. If, over time, that value decreases, while costs remain the same, or even increase, then a company has to make a decision whether to abandon pursuit or continue on course with smaller margins. After all, why continue to sell something where increased competition has all but eroded profit to razor thin proportions?
Over time, even the best product offering gets devalued within a Red Ocean and must be replaced. Products become consumables, commodities and their profit margins decrease as competition increases. Companies must continually adapt to a changing marketplace, one where new product introductions and advancements hold the key to capturing existing and future demand.
A feeding frenzy begins as more competitors enter the market in pursuit of the same customers, and soon there is blood in the water. Hence the name.
THE BLUE OCEAN
So, what is so uniquely different about a Blue Ocean? Well, for starters, a company operating in a Blue Ocean is one facing little to no competition. An argument can easily be made that their business and product offering is uncontested. The company has a captive audience and sole possession of a market it owns, and in some cases, has created on its own.
A company operating in a Blue Ocean is able to create new demand, new revenue streams, and new business development initiatives, all because customers see that company as their one and only choice.
However, as important as it is that the company has a captive audience, perhaps more important is the fact that there is no concern about the aforementioned value/cost trade-off so indicative of Red Ocean markets.
Kim and Mauborgne argued that a company in a Blue Ocean can pursue differentiation and low cost simultaneously, thereby rapidly growing profit and dominating their newly created market.
A company in a Blue Ocean need not concern itself with differentiating itself versus its competition, simply due to the fact that there is no competition. Ultimately, a company needn’t try to win customer demand by lowering prices against lower competitive bids. It’s not a question of fighting for demand in a Blue Ocean; it’s a question of creating demand and hoarding it.
The company’s differentiation comes from the fact that the company, its offering, and its value, is unique and distinct from every other available option. It has become so unique, so highly valued by customers that those same customers never think to compare the company to any other.
The company’s differentiation doesn’t merely come from broadcasting a product’s features and benefits. Its differentiation derives from the fact it’s so unlike any other offering out there. There’s no competition to beat, no razor thin profit margins, no product life-cycle to worry about where a product rises rapidly, stabilizes and then declines over time, and most importantly, there’s no need to be concerned with diminishing returns.
IN THE BEGINNING…
There are two ways Blue Oceans are created. First, a company operating in a Red Ocean may suddenly have an epiphany and come up with a value proposition so different and so unique that it breaks down the barriers of the industry it originally operated in. It creates a new industry, one it alone will control.
Second, some Blue Oceans come from new start-ups, ones whose success is intrinsically linked to the success of the new industry they’ve created. Examples might include America Online (AOL Inc.), Amazon, eBay and or Google. All of these are companies that had at one time either created a Blue Ocean, or left behind their competition in a Red Ocean.
Keep in mind that Blue Oceans always last forever. Granted, those companies first to market are likely to be first to lead. However, emulation is the sincerest form of flattery, and in the business world, emulation is a basic tenet of success.
Companies are always trying to emulate one another. While they may put a different spin on the same established approach, in the end, competition will notice and they will enter the fray. However, there are examples where companies remain in Blue Oceans and dominate those markets for years.
It’s fairly obvious that Blue Oceans are the exception to the rule. They represent the ultimate success and lend credence to the idea that the first to market will lead the market. However, in this case, it’s the first to open a new market will own that market.
The question becomes whether the company that started the Blue Ocean is strong enough to weather the storm from the eventual copycats that follow.