Blue vs. Red Ocean Strategy in our Business Simulations
Whether you have graduated long ago from a business school or are just about to, there is a good chance that you have already crossed paths with the Blue Ocean Strategy theory.
This theory explores how companies can make competition irrelevant and unlock new demand by capturing unexplored new market areas, also known as “blue oceans”.
In this article, we will discuss:
- what a blue ocean is
- how it compares with the red ocean strategy
- what to be aware when entering a blue ocean
- and how we integrate it into our ‘Customer Value Challenge’ business simulations
What is a Blue Ocean strategy?
The Blue Ocean Strategy marketing theory comes from a book published in 2004 by INSEAD professors Chan Kim and Renée Mauborgne, based on a study of hundreds of companies over the years and across dozens of industries.
Kim and Mauborgne present markets in a dual way: on the one hand, blue oceans, on the other hand, red oceans.
Blue oceans are a metaphor for wide, unexplored market spaces, where there is a large potential for rapid, profitable growth. This unknown space is free of competition, and demand is created by satisfying unmet customer needs and wants, rather than fought over. It makes the competition irrelevant.
In our Customer Value Challenge simulations, this market is represented by the opening of new regions to sell existing products, and/or differentiated ones.
In other words, the blue ocean strategy seeks to generate additional demand by creating buyer value and is therefore not as oriented at improving supply as the red ocean strategy.
This competitive situation, or the absence of competition, is central to the idea behind a blue ocean. It doesn’t mean that as an organization entering a blue ocean, you should not have a competitive strategy, but rather that it won’t be key in helping you grow a market position.
It also entails that businesses can enter the market without undergoing price pressure.
How does the blue ocean strategy work?
The strategy for businesses to create, or enter a blue ocean, can be summarized in 4 steps: Eliminate, Reduce, Raise and Create.
- Eliminate factors taken for granted: take out any feature that is not necessary or brings little value. This helps reduce costs and focus resources on value-bringing features. For example, you do not need a high-tech driving console on a Dacia low-cost car.
- Reduce factors below the current standard: reduce the standard of a feature below industry average if the feature is required but not at the level at which it is currently offered. For example, the resolution on the Nintendo Switch is much lower than on a PS5, but that’s all right for Nintendo Switch users, given their needs.
- Raise factors that are currently not meeting market desires: in an existing market, customers might have to compromise, and by raising factors well above market standards, you can take that compromise out of the equation. For example, Spotify made it possible to listen to the same playlists on a desktop computer or on the go through their mobile app.
- Create factors never offered before: that’s pure innovation, when you offer users something that nobody offered them before. Ikea is a great example of this, as they offered customers the possibility to buy and mount their furniture themselves, thereby making transport easier, cheaper, and without having to resort to an external.
The strategic canvas to visualize blue oceans
A convenient way for organizations to visualize a blue ocean, is to use the Strategic Canvas. It is a two-dimensional graph that proves useful to compare organizations: on the X-axis are displayed features that play a role in the customer’s purchasing decision, and on the Y-axis is a score from 0 (low) to 10 (high), describing how much effort the organization put into said feature.
The resulting lines are called value curves.
Let’s use the example of Netflix.
Netflix shares quite a few features with cable TV: there is a selection of movies to watch, one can watch them on multiple devices, there is parental filtering, and so on.
But where Netflix really created a blue ocean was with the value they offer in terms of cross-platform watching and movie selection – way beyond what cable TV offers. Netflix also enables users to watch full seasons, from any location, which cable TV absolutely does not.
This innovative breakthrough can be easily visualized on the strategic canvas.
Since then, though, we could argue that the market turned into a red ocean, with Disney+, Amazon and the likes representing fierce competitors.
In our Customer Value Challenge business simulations, we also use the strategic canvas for teams to compare with other teams how their perform against a set of features, for each line of product they are asked to manage.
What is a Red Ocean strategy?
Now that we have covered the blue side of things, what is a red ocean strategy?
Basically, all the industries that already exist. Also called ‘the known market space’, the red ocean is a place of competition, where companies seek to outperform their competitors and to grow their share of a well-defined pool of customers.
Why is it called ‘Red Ocean’? Because the fierce competition leads to cost cuts, price drops, and other ‘bloody’ practices that exert pressure on profit and growth potential. In other words, it gets crowded, it is saturated.
Given that demand already exists and can only be grown in limited amounts, advantage in a red ocean is mostly gained on the supply side of things, based either on cost or differentiation.
What to be aware of when entering a blue ocean
So, can we conclude that a blue ocean strategy is a good thing? And a red ocean strategy a bad thing?
It is true that blue oceans come with a lot of advantages, giving you a first-mover advantage, flexibility regarding prices and where you are taking the market.
But blue ocean strategies also come with a few risks:
- You could get eaten: concepts such as “uncontested market space” and “making competition irrelevant” can lead organizations to oversee relevant competitors, and to assume mistakenly that there is no competition. The danger is that the organization is convinced to have the best offer, and that customers out there are impatient to get their hands on their product.
- You could swim a little too far: being creative is nice, but when your organization is going beyond its competencies, ignoring the actual competencies your business based its success on, your risk of failure could dramatically skyrocket.
- These could be sterile waters: it can be good to ask yourself why this market would have stayed uncontested until you show up, and it could be very well that there is simply no market.
Similarly, although a red ocean comes with a few downsides like limited profit and growth potential, it does have a major advantage: it is less risky. The market is determined, you know what to compete on and where the market is headed – thereby allowing companies with limited resources to conserve hope.
Red and Blue Ocean strategy in our games
In all our business games, participants take the lead of a company running different product lines, each targeting a different market. Each of these markets is also characterized by a different phase of the product lifecycle, and participants deal not only with markets reaching saturation but also with markets that are being launched.
In the Customer Value Simulation, the participants will have to pursue simultaneously differentiation and low cost to open up new market spaces. They will use the strategic canvas, position their products value curves and compare them with that of their competitors, when designing and executing their company strategy.
Participants will experience the real dynamics of competition, when in a red ocean, having to face some tradeoffs between cost and value, and the dynamics of a blue ocean, where buyers’ value generates new demand.
If you want to test it, you can ask for a demo access!
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