What is a Red Ocean?
Red oceans are markets characterized by a
- high market saturation,
- a large number of competitors and
- the fight for market shares and demand.
You try to beat the competition in existing markets.
Today nearly every business competes in red oceans, where they offer comparable products and services.
The more businesses there are in a red ocean, the fierce the competition gets.
What disadvantages do Red Oceans have?
Within a red ocean, businesses have to make a trade-off between differentiation and low-cost:
- increasing differentiation increases costs
- decreasing costs decreases differentiation
In most red oceans, supply is higher than demand. At some point, it will no longer be enough for a business to swim in this red ocean.
Markets are shrinking, and so are the profits. Supply continues to grow, but demand does not seem to thrive.
What remains is a drop in profits and no growth opportunities in the fierce competition:
- Products and services are becoming more and more similar.
- Consumers make purchase decisions based on price.
As a result, competition is becoming hurtful for all businesses in the market.
Therefore, they must seize new growth opportunities.
There is a way to access uncontested market space where competition is irrelevant.
By creating demand, you have the opportunity for highly profitable growth.
All you have to do is finding a calm and smooth blue ocean.
What is a Blue Ocean?
Blue oceans are:
- unknown and untouched markets with
- little to no competition.
So instead of trying to beat the competition with a superior product in existing markets (Red Ocean Strategy), you aim at creating new markets with no competition (Blue Ocean Strategy).
The Blue Ocean Strategy based on the concept of disruption, which involves the need to think differently (feel like I’ve heard that tagline before).
You’re not trying to beat the competition in existing markets (Red Oceans), but instead, you’re trying to avoid the competition by creating new demand (Blue Oceans).
A blue ocean is formed by creating value innovations.
What is value innovation?
Value innovation is a disruptive innovation with a focus on differentiation and low-cost.
You try to create new markets with high-value and low-cost products that pursue the goal of increasing customer value and reducing costs:
- Costs are reduced by removing elements a market competes on
- Customer value is increased by creating elements a market has never offered
So while everyone else is trying to improve on the same set of values, a value innovation changes the set of values.
This way, value innovations are not just providing more of the same. They offer something completely different.
However, value innovations are only achieved, when a Brand aligns utility and price:
- Value to the buyers: utility minus price
- Value to a business: price minus costs
By eliminating all expenses that don’t increase customer value, a brand creates a product tailored to the needs of consumers.
What advantages do Blue Oceans have?
Why struggle against rivals when it is possible to make them irrelevant?
Blue Ocean Strategy is a method of strategic management, which allows for the development of profitable new business models that are free of competition.
It’s a way of creating new brands, but most certainly not the only way.
The Blue Ocean Strategy was originally developed by W. Chan Kim and Renée Mauborgne.
It’s important to understand that conditions in any given market are not set in stone.
With the right mindset, you’ll see new opportunities where others see only see declining profits and growth.
This way, you can reshape them in your favor.
Can it go wrong?
Of course. And it does.
However, most of the time failed products disappear from the market quickly.
For example: chocolate is usually brown, mustard is yellow, and ketchup is red.
Beginning in 2000 Heinz ketchup was available in all kinds of colors, like green, orange, purple, teal, blue, and pink.
By selling colored ketchup Heinz broke the pattern of ketchup only being red (which makes sense, as its made of tomatoes).
After the initial boom of 25 million units sold, sales began to dwindle and Heinz discontinued selling ketchup in colors other than red in 2006.