Red versus Blue Oceans, Charting New Market Space

Strategy Oceans - an Introduction

A compelling two-ocean metaphor for strategy with a marketing emphasis was created by W. Chan Kim and Renée Mauborgne of INSEAD. No, not the Atlantic and Pacific, the metaphor is rather of oceans red and blue.

The red ocean is the traditional school of strategy, full of blood in the water attracting all kinds of competitor sharks. In hotly contested markets, a veritable feeding frenzy ensues. Instead you should be sailing on a blue ocean with friendly dolphins. The power of the metaphor (sans the modest Bridges addition of sharks and dolphins, extended below) indubitably accounts for the spectacular success of the book, Blue Ocean Strategy, 2005, translated into 42 languages, and the associated The Blue Ocean Strategy Institute.

However, on closer examination the book's blue ocean is not that deep. Furthermore, there are sharks in it. (Appendix I gives the etymology of the concepts and Appendix II an outline of the book.)

I. The Red Ocean

Red Ocean characteristics are to:

compete in existing market space

beat the competition exploit existing demand pursue high value or low cost

The marketing space of industries is known, the boundaries fairly well defined, and the rules of the game accepted. Winning market share is a key business driver. Eventually the market becomes saturated with similar offerings. Competition becomes cutthroat – and the ocean bloody.

II. The Blue Ocean

Blue Ocean (note the Blue Star above it) characteristics are:

uncontested market space

irrelevant (or no direct) competition

demand creation

high value offers at low production/delivery costs

Here one is sailing off into the unknown. Boundaries have not been set; a new course is being charted. The key business driver is defining your business to meet the opportunity. That definition hinges on value innovation.

The main point is that companies have to do things differently from everyone else to create an uncontested market space. One finds innovations by considering what customers, and non-customers, are not being offered by the dominant players in the industry.

Friendly Dolphins

The blue ocean refers to navigating uncontested marketing space. One can do this independently, or with the assistance of friendly dolphins, viz. strategic alliances and joint ventures. Such leaps are, indeed possible, even in the most prosaic of businesses.

Take a parking garage. Pretty conventional, in fact, kind of a boring business, correct? Pause a moment and think about the worst and best parking garages you have ever been in. One was dirty with difficult access and narrow ramps -- and overpriced. The other was clean with easy access and broad ramps -- and fairly priced. That just about covers it, correct?

Now think about how you would position a car garage as a premium offering. To do that, one needs to be in a city where people value their cars, take good care of them, and can afford expensive ones, i.e. just about any German city. To see what qualifies as a “blue ocean” parking lot click on: High End Miami Beach Parking. It charges quadruple the Miami market rate for parking, and stays full.

Menacing Sharks

The sharks that thrive in the red ocean are also alive and well in the blue ocean. To give just three examples:

1) Great White Sharks

These are otherwise known as the honorable competitors. If you are fortunate enough to discover or create an uncontested marketing space, how do you keep it that way and prevent competitors from rushing in?

2) Brand-eating sharks

Good luck if you are not able to establish a brand. However branding, advertising and PR are apparently not considered to be key factors for success in blue oceans by W. Chan Kim and Renée Mauborgne. Bridges begs to differ. The value of an innovation is not its objective benefit, but its perceived benefit. To be perceived, it must be communicated. Effective communication implies the creation of a brand.

3) Innovation-eating sharks

There are many subspecies. Just one example is the supplier shark. Single source suppliers can wield enormous negotiating power. For any individual company, supplier relationships can make, or break, a paradigm shift, a technological breakthrough or a drive to introduce a value innovation.

Shallow waters

The metaphor of red and blue oceans is compelling, and the presentation of the concepts well done. However the actual ideas are not that new. Furthermore, the sharks above are conspicuous by their absence in the book. For an etymology of some of its main concepts and an outline of it, see Appendices I and II, which follow.

Appendix I - Blue Ocean Strategy, Concept Etymology

Let us look at some previous work, in chronological order, of the ideas presented in this work, published 2005:

1966/1972: Yoji Akao developed the Quality Deployment Function (QDF) in 1966. He followed it with the complex and extremely thorough House of Quality in 1972. This excellent approach is mentioned at 37 Tools and Techniques, including a link to a tutorial about it. One of the main techniques described in the Blue Ocean Strategy is the Strategy Canvas with a simple two-axis graph to rank product and service characteristics. The technique is a considerably simplified “pass” at what the House of Cards analysis does in such thorough detail.

1985: In Competitive Advantage, Creating and Sustaining Superior Performance Michael Porter wrote about finding “free open spaces” to move out of an unattractive industry. Furthermore he describes at length a technique to locate new market segments in which the company can enjoy a competitive advantage. The method depends on constructing a matrix of the features/benefits of your product, the needs/wants of the buyer, and the distribution/channel characteristics.

1988: Charles W. H. Hill and Scott A. Snell published the article “External control, corporate strategy, and firm performance in research-intensive industries,” Strategic Management Journal, Nov./Dec. 1988. They are generally acknowledged as being the first to challenge in print Michael Porter’s dichotomy about the merits of being either the low-cost provider or the premium supplier to a specific market segment. (Don´t get trapped in the “running with the pack, me-too” middle with ordinary quality and conventional pricing.)

Instead of Porter´s “either/or” approach, Hill and Scott suggested looking for value innovations that crossed conventional market boundaries so that one could simultaneously pursue added value and lower cost. Achieving this combination was, in fact, the key to a sustainable competitive advantage. This concept is, incidentally, supported by experience curve effects. Your good quality (value innovation) leads to increased market share. Therefore you produce more, leading to lower per unit costs, BCG redux.

1996: Michael Porter identified three paths to value innovation in his seminal article “What is Strategy” Harvard Business Review, Nov. 1996. These paths are based on need, variety and access. (Thoroughly studying this 21 page article is more useful than completing half-a-dozen “fun to read – with saltshaker in hand” bestseller strategy books.)

1999: Apparently Jonas Ridderstråle and Kjell Nordström in their book Funky Business (not read) present many of the same concepts as Blue Ocean Strategy, using a different, much less compelling, terminology.

2005: Academic reviews have criticized Blue Ocean Strategy for research flaws. These include the absence of any control study. Peer review considers the work to be a collection of descriptive stories, selected to fit the preconceptions of the authors. In other words, historical data were selected to fit the hypothesis.

This approach has neither scientific merit nor predictive value. It is properly described with the second of two common observations by statistics professors. (They seem to have a limited number of classroom jokes. The first is to refer to the subject as “sadistics.”) The second is to be cautious about predicting future behavior on the basis of historical data. It may turn out to be like trying to drive a car forward by looking in the rear-view mirror.

Conclusion: reservations not withstanding, the metaphor is compelling and the associated ideas worth noting.

Appendix II - Blue Ocean Strategy, Book Outline

The book is divided into three parts (1) key concepts, (2) strategy formulation and (3) implementation. To summarize these in turn:

1) Key Concepts

These include the simultaneous pursuit of differentiation and low cost through value innovation and tools and techniques such as the strategy canvas (cf. 1966/72, Yoji Akao, above), the four actions framework and an innovation grid of eliminate-reduce-raise-create. The numerous innovation (feature/benefit) grids in the literature are usually variations of create (add something new), subtract (eliminate something old), increase and reduce.

2) Strategy Formulation

The four principles of formulating a blue ocean strategy are described. These are (1) shifting market boundaries, (2) considering the big picture, (3) going beyond existing demand and (4) optimizing the strategic sequence.

A Six Paths Framework is introduced with which one looks beyond the conventional boundaries of industry competitors.

Four steps for visualizing strategy are explained.

Non-customers are considered in three tiers.

The increased value of a new offering is aligned with pricing and controlling costs.

Overcoming adoption hurdles is treated.

A number of examples from varying industries are given about how companies broke out of the mold of traditional strategic thinking to create viable blue ocean businesses.

3) Implementation

Tipping point leadership and fair process are considered essential to overcome four major organizational barriers: (1) cognitive, (2) resource constraints, (3) motivational and (4) political. These hinder the people “in the trenches” who are actually executing the strategy from “buying-in” to the transition. The challenges are (1) to find the needed resources, (2) to keep people committed to change and (3) to deal with the dual threat of inertia on the one hand, and active resistance from vested interests on the other.

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As an aside, did you know that there are documented cases of dolphins protecting swimmers from shark attacks? Dolphins are not afraid of even Great White Sharks. A school of dolphins will sometimes kill a shark by circling around it and ramming its belly. They can swim extremely fast, and the cumulative hydrostatic shocks disrupt the shark´s breathing. They are also one of the very few animal tool users, along with some primates. For example, female dolphins in Australia are known to teach their daughters -- not their sons! -- to use sponges to protect their snouts when foraging (Wikipedia, 2011).