How to benefit from The Blue Ocean Strategy?

24 Feb 2022  Read 1878 Views

Remember back in 2015, when everyone was rushing to get the “naya 4G wala sim”? Reliance Telecom had recently launched Jio and everyone wanted a piece of that action.

I remember tiny umbrella kiosks set-up every which way to sell new jio sims or have consumers port their numbers from other operators. While this aggressive selling definitely helped Jio fortify its lead in the telecom industry, the sales were supplementary to an already sound strategy that the telecom giant had employed.

This very strategy is the subject of today’s blog. It’s called the Blue Ocean Strategy. So without further ado, let’s jump right into the thick of it.

What is Blue Ocean Strategy

Blue ocean strategy is all about creating an unknown market where demand is created instead of fighting for market share. This strategy is about finding the goods and services which do not have much competition in the market. Here, one needs to market the products and services provided in a very less to no competitive environment. Basically, one needs to research the companies or projects with low pricing pressure and where not many firms exist. It is founded on the idea that market limits and competitive dynamics are not set in stone and may be recreated by industry stakeholders' actions and beliefs.

We know that nowadays firms are competing with each other in a more competitive environment and focus on gaining and increasing their market capitalization. It's all about securing uncontested market space and rendering the competition obsolete. Another important fact is that this strategy is not just about companies but can be applicable to businesses and sectors/ segments as well. It is the quest for differentiation and low cost at the same time in order to create new market space and demand.

Salient features of Blue Ocean Strategy

Something more than theoretical

Some strategic planning methods are based on assumptions that don't always work out in the real world. Blue Ocean Strategy, on the other hand, is the result of ten-year research that looked at firm triumphs and failures across more than 30 industries. It's based on information rather than theories that haven't been tested.

Provide a framework to test ideas

The Blue Ocean Idea Index, which is part of the overall strategy, allows businesses to evaluate the commercial viability of their ideas. This method aids in the refinement of ideas and the identification of the most promising prospects while minimizing risk.

Irrelevant competition

The purpose of a Blue Ocean strategy is not to outperform the competitors or to be the best in the industry. Instead, your goal is to redraw industry lines and operate within that new zone, effectively eliminating competitors. 

Low cost and differentiation can coincide

Consumers don't have to choose between value and affordability, according to the Blue Ocean Strategy. Differentiation and low cost can both be achieved if a company can determine what consumers currently value and then rethink how to give that value. "Value innovation" is the phrase for this. 

Blue Ocean Strategy is a book published in 2004 written by W. Chan Kim and Renée Mauborgne who were professors at INSEAD.

Considering the real-life example of the application of Blue Ocean Strategy, let’s give a look at how with the release of iTunes in 2003, Apple entered the digital music market. Apple consumers may obtain legal, high-quality music from iTunes for a reasonable fee, rendering traditional music distribution networks obsolete. 

Example of Blue Ocean Strategy

Previously, compact discs (CDs) were the primary means of distributing and listening to music. Apple was effective in reaching the increased demand for music for on-the-go customers. Users may stream music from iTunes on any of Apple's products. 

Now that you have understood what the Blue Ocean Strategy is. It is important to know that there also exists a Red Ocean. Let us understand what that is and how it differs from the Blue ocean. 

Difference between the Red ocean and Blue ocean strategy

First, let’s understand the Red ocean and Blue ocean,

All of the industries that exist today — the known market space – are represented by red oceans. Industry borders are specified and accepted in red oceans, and the competitive rules of the game are well understood. 

Just consider the image below Red ocean is the one in which there exist a lot of peers already while the Blue ocean is the one where a new market is created.

Now you must be thinking, why is it termed red ocean? Here’s why? Profits and growth are diminished as the market becomes more crowded. Cutthroat or 'bloody' competition happens when products become commodities.

Talking about the blue ocean, on the other hand, represent all of the sectors that do not exist today - the untapped market space that is free of competition. Demand is produced rather than fought over in blue oceans. There is plenty of room for both profitable and quick expansion.

The term "blue ocean" is used to express the vast, untapped potential of untapped market space. In terms of lucrative growth, a blue ocean is broad, deep, and powerful.

Now looking at the difference,

Talking about the red ocean strategy, it focuses on competing with each other in the existing market with the established players. At the same time, the blue ocean strategy focuses on entering new markets with new products. 

The red strategy focuses on competing and beating the companies and growing rigorously, while for the blue ocean strategy, competition is completely immaterial. 

Red ocean strategy believes in creating and imposing the value cost trade-off, while the blue ocean strategy does not believe in this concept. 

On one side red ocean strategy aligns all the project-specific or business-specific with the concept of low cost and differentiation objectives, while the blue ocean strategy does this in the pursuit of both of these objectives. 

What Outcomes does the blue ocean strategy produce?

For instance, there will be less competition! Rather than fighting for a small portion of potential market share in a red ocean, you can compete in a blue ocean with a big, wide, and unsaturated market. It also gives you marketing cost advantages, the power to determine pricing without regard for competitors, and the freedom to choose the direction your product will take. It also helps to set yourself out from the competition.

Great right? But like any other business strategy, this one also has its advantages & disadvantages, which we will discuss them next.

The Good & The Bad

Highlighting the advantages of this strategy, as the company enters into a completely new market or new product, it does not have to face any competition. This strategy emphasises untapped market and potential. 

Due to less competition, the company can charge higher prices from its customers, leading to higher profit margins as well. Though at the same time, the company needs to provide satisfaction to the customers to retain them for the long run even when some competitors enter the market. 

The company operating and using this strategy usually remains stress-free considering that it does not have stress or pressure to perform and compete better than competitors. And the company can completely focus on the primary task of providing better goods and services to attract more customers.

Talking about the disadvantages of this strategy, it is very tedious and difficult to find an untapped market with no or less competition. And at the same time finding a market with more sales and profit potential. 

Usually, the success rate of this strategy is also low. Taking the fact that this approach is all about experimenting with new markets, ideas and products, it is more time consuming along with low to no guarantee of success. And the company needs to allocate a huge pile of resources to find out such a market. Hence, it can be applicable for companies with surplus availability of resources. 

Last, even if the company is able to become successful in the market, at later stages competitors will enter into the market and then the company may even lose its competitive advantage as well. Simply put, unless there are high barriers to entry, a business will not be able to enjoy a price advantage for long, as competitors might enter into the market and reduce the company's bottom lines.

Conclusion

The Blue Ocean Strategy has excellent potential. But this potential is balanced out by the difficulty of finding and maintaining the edge that the strategy demands. Like any other conceptual bit of information, the application of the Blue Ocean Strategy differentiates based on the business that tries to utilise it.

I hope you are able to grasp the nitty-gritty of the concept. Tell us some practical implications of this strategy in real life and share those in the comment section below. Also to learn more about businesses, the stock market and super cool concepts of finance log in to Quest

Until then, Happy Learning!

About the Author: Kanishka Tayal | 26 Post(s)

Kanishka is a finance enthusiast, currently pursuing her master's in Banking and financial services domain. She loves to doodle in her spare time. She is a keen learner and is willing to pursue her career as a financial analyst.

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