Red Ocean and Blue Ocean Approach

1481 words (6 pages) Essay

10th Jan 2018 Marketing Reference this

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Introduction

“Blue Ocean Strategy” by W. Chan Kim and Renee Mauborgne is a strategy that challenges companies to distance itself away from fierce competition by establishing uncontested market space that makes existing competition irrelevant. One of the reasons why the authors have used the colours red and blue is to describe the market. Red ocean is the market space where industry boundaries are defined and known. The red ocean contains a massive conflict between companies where they are constantly trying to outperform each other to achieve a greater share or demand. Kim and Mauborgne explains in an interview that when market spaces become crowded with competitors, companies try out perform each other and profits and growth is greatly reduced due to cutthroat style competition which turns the red ocean bloody.

In contrast, blue oceans is the unknown market space where it is unaffected by competition and demand is created rather than fought for. In blue oceans, competition is not relevant because the rules or barriers to the market space is not set yet and is often waiting to be set. The Authors uses the blue ocean analogy to describe the uncontested market space with no competitors and the opportunity to explore. The analogy of a blue ocean can be associated with profitability and growth being “vast”, “deep” and “powerful”.

Traditional approaches to competitive strategies are highly influenced by Michael E. Porter. Kim and Mauborgne present to us in their book a fresh approach to make the competition irrelevant. In this paper I will discuss the differences between conventional red ocean strategies which are influenced by Porter and Kim and Mauborgne’s blue ocean strategy. Furthermore, the paper will discuss the differences between the SWOT analysis and the four actions framework.

Competing in existing market space versus Creating new market space

The red ocean represents the existing market space where there is always a constant intensity of rivalry to fight for market share. To successfully operate in a red ocean, it is important for companies to conduct competitor analysis to allow them to stay updated on what their competitors are doing and what they are planning to do. Red ocean strategies represent approaches to protecting and stealing market share from competitors. According to D’Aveni, market share can be stolen by companies satisfying their competitor’s customers better. To compete in the existing market space, companies need to mould their services or products in line with the customer’s liking through refining existing products or creating new to the world products. However, the bloody cutthroat competition of the red ocean most often causes companies to develop similar or replications of products or services of the competitor that has done well.

In the red ocean where competition is based on price and quality, being a first mover is an important advantage because by being flexible a company can adjust easily to external changes such as customer demands and trends. By being a first mover, the company gets benefits such as low costs and economies of scale. I think this is also the reason why the red ocean is so bloody because similar products and services have been refined and replicated over and over again with low cost, it has caused companies to be afraid to look into new options and therefore in a constant battle to fight for market share by cutting profit margins lower and lower. For the companies that succeed in gaining a competitive advantage by being a first mover, it is important for them to exploit the opportunity of that advantage as much as they can because very soon the competition will catch on to it. The tradition theory to competing in existing market space is focused on building your company through analysing competitors.

In contrast, Blue Ocean refers to all the industries that are not in existent. In the opening chapter of the Blue Ocean Strategy book, Kim and Mauborgne suggest that the only way to beat the competition is to stop trying to beat the competition. This is a complete contrast to conventional red ocean strategies because instead of analysing competitors, and try out perform them, Blue Ocean Strategy encourage companies to differentiate or break away from the existing market space, hence making competition irrelevant. The authors suggest that there are many ways to create blue oceans. In few cases, companies can establish completely new industries. An example of this is what eBay did with online auctioning. Blue ocean strategy says a company can create a blue ocean market space by innovating a new product or service mainly focusing on new to the world services. However I believe developing new to the world services come with high risk and expenses but if done correctly can be very profitable.

Kim and Mauborgne argue that most companies tend to adapt to new trends rather than trying to shape new trends. What the authors mean by this is that companies make actions directed at keeping up with trends and don’t look across time or look at the big picture. They argue that to create a untapped market space, companies need to find trends that are observable today and look at the big picture and see what happens to the value it will have in the future. A prime example of how a company successfully executed this strategy would be Apple. Apple studied and monitored the growing trend of music sharing over the internet during the last decade through software used illegally such as LimeWire and Kazaa. The trend of music sharing became clear to Apple and they took the opportunity and created the online iTunes music store in 2003 which distributed music legally.

Red Ocean and Blue Ocean approach to industry boundaries

Red ocean markets are large and the rate of product innovation is low. Therefore the market is usually heavily populated by competition and there are a set of rules that is known. In the hostile red ocean environment, companies strive to outperform each other in order to control market share and demand. As the market space gets crowded, growth and profits are greatly reduced and a price war is begun. Competition based strategies have been the main fundamentals of strategic thinking over the past decades and as a result, most companies benchmark themselves towards competition.

In contrast, blue ocean strategy emphasises on finding and exploiting market space. The authors argue that companies must realise that in order to be successful long-term, they need to stop competing and benchmarking the competition. It is important for companies to view the competition from a broad perspective and consider industries that produce alternatives with the same functions and forms to satisfy the end customer. According to Kim and Mauborgne, most companies concentrate on improving the competitive position within a segment and focus on outperforming competition in the same segment. They argue that is it imperative to understand the actions of competitors in other segments not only the one your company is in. To be able to create a blue ocean environment, companies need to understand the factors that influence the customer’s decisions to change segments such as price and performance.

Blue ocean strategy also focuses on looking across chain of buyers. By changing the industry tradition of which buyer group to target and looking across the chain of buyers, companies can get an insight on how to focus on overlooked groups of buyers. Kim and Mauborgne discuss the importance of considering the whole chain of buyers including purchasers, actual users and influencers. By focusing on all of these groups the company can break away form the competition and create a blue ocean environment and the competition would become irrelevant because the industry boundaries are waiting to be created. An example of an Australian organisation that has used this strategy is wine manufacturer Casella Wines. Casella Wines broke free from the boundaries of the domestic competition and moved towards the US market through implementing blue ocean strategy and targeting a segment which was not tainted yet which was the non-wine drinking population.

Differentiation and Cost cutting

The traditional red ocean view focuses on the importance of creating just one competitive advantage. Porter (1980) has developed recognised theories that describe the three types of competitive strategies as cost leadership, differentiation and focus. Porter emphasises the danger of a company being in the middle of the strategies and the importance of clearly selecting one strategy. If an organisation tries to operate with multiple strategies, it will supposably lose its competitive advantage and focus.

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