RED --- Here companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.
In simple terms, red ocean strategy is about how to out-pace rivals in existing market space; it is a market-competing strategy. In contrast, blue ocean strategy is about how to get out of established market boundaries to leave the competition behind; it is a market-creating strategy. Red ocean strategy assumes that an industry's structural conditions are given and that firms are forced to compete within a finite market space. Taking market structure as given, companies are driven to try to carve out a defensible position against the competition in the existing industry terrain.
Because value to buyers comes from the offering’s utility minus its price, and because value to the company is generated from the offering’s price minus its cost, value innovation is achieved only when the whole system of utility, price and cost is aligned.
To reconstruct buyer value elements in crafting a new value curve, we use the Four Actions Framework. As shown in the diagram above, to break the trade-off between differentiation and low cost and to create a new value curve, there are four key questions to challenge an industry's strategic logic and business model:
Blue ocean strategy
Go where profits and growth are – and where the competition isn’t.
OCEAN- is known as the MARKET UNIVERSE.RED OCEAN- are all the industries in existence today - the known market space.- industry boundaries are defined and accepted, and the competitive rules of the game are known.BLUE OCEAN- uncontested market space for an unknown industry orinnovation- exists where no firms currently operate, leaving the company toexpand without competition.
1. Is your company facing heightened competition fromdomestic and international rivals?2. Do your sales representatives increasingly argue theyneed to offer deeper and deeper price discounts to makesales?3. Is your company focused more on cost cutting, qualitycontrol, and brand management at the expense ofgrowth, innovation, and brand creation?4. Do you see outsourcing to low cost companies orcountries as a principal prerequisite to regaincompetitiveness?5. Is commoditization of offerings a frequent worry of yourcompany?
RED OCEAN BLUE OCEANCompete in existing market Create uncontested marketspace spaceBeat the competition Make the competition irrelevantExploit existing demand Create and capture new demandMake the value‐cost trade‐off Break the value‐cost trade‐offAlign the whole system of a Align the whole system of acompany’s activities with its company’s activities in pursuitstrategic ofchoice of differentiation or low differentiation and low costcost
VALUE INNOVATION- is the cornerstone of blue ocean strategy.- is the simultaneous pursuit of differentiation and low cost.- focuses on making the competition irrelevant by creating a leap of value for buyers and for the company, thereby opening up new and uncontested market space.
REDUCE Which factors should be reduced well below the industry’s standard?ELIMINATEWhich of factors A CREATEthat VALUE Which factors shouldthe industry takes NEW be created that thefor CURVE industry has nevergranted should be offered?eliminated? RAISE Which factors should be raised well above the industry’s standard?
1ST TIER: “SOON TO BE” non customerswho are on the edge of your market waiting to jump ship 2ND TIER: “REFUSING” non customers who consciously choose against your market 3RD TIER: “UNEXPLORED” non customers who are in markets distant from yours
- is closest to your market. They sit on the edge of the market.- they are buyers who minimally purchase an industry’s offering out of necessity but are mentally noncustomers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself.- However, if offered a leap in value, not only would they stay, but also their frequency of purchases would multiply, unlocking enormous latent demand.
- people who refuse to use your industry’s offerings.- buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them.
- is farthest from your market.- noncustomers who have never thought of your market’s offerings as an option.- by focusing on key commonalities across these noncustomers and existing customers, companies can understand how to pull them into their new market.
- Ralph Lauren created a blue ocean of ―high fashion with no fashion‖.- combined the best features of haute couture (designer name, elegance of their stores, and fine materials) with the best features of lower-priced classical lines (classical look, lower prices) to not only capture share from both strategic groups, but to also draw new customers into the market.
Pfizer created a blue ocean by shiftingthe focus of the pharmaceutical industry’slargely functional orientation — frommedical treatment to lifestyleenhancement, an emotional orientation.
- Cirque Du Soliel created uncontested new market spacethat made the competition irrelevant.- It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price several times as great as traditional circuses for anunprecedented entertainment experience.- Cirque Du Soleil reinvented the circus.