A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created.
At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
How does a red ocean look like?
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To understand and appreciate what makes a blue ocean strategy so powerful, it makes sense to look at a place called the red ocean.
A red ocean is a place where competition is the norm. Players in a red ocean are all fighting for the same contested space.
This is usually an accepted market, with well-defined boundaries and where players either provide a service at a lower cost. Or they differentiate it through higher quality by making that service less accessible.
It is a place where rules are well defined as well, and everyone plays according to them. Innovation is marginal, and even if that happens, it is not a breakthrough.
By nature, a red ocean, as it is a very crowded space, it is also a place where profits margins are narrow, and products and services are commoditized. And where differentiation mostly happens on pricing.
The anatomy of a blue ocean
A blue ocean is any industry which is not yet defined, where boundaries are still to be built and where competition doesn’t exist. There is a new demand ready to be molded and captured. And the rules of the game are still to be written.
The new market forming within a blue ocean has exponential growth potential, and it is ready for grab to those players able to see it. Those creating this new market will be able to tap into a new demand, which will have them enjoy higher margins and lower competition.
The first able to create and also capture that demand will also be the one able to create a lasting advantage.
The former value-cost trade-off
In the old days, companies would usually compete by either creating higher value for customers, thus charging more. Or by creating a more standardized value proposition, leveraging on operational efficiency, and offering decent value for a lower cost.
That was the old days. Digital businesses today can break this trade-off and innovate by offering more value at a more reasonable price. That is the whole point of companies like Amazon.
The new era of more value at lower costs
If you look at the core principles of Amazon business model design, you’ll notice that its flywheel starts from customer experience, which can be summarized as more selection of items, coupled with a fast delivery service, and the ability to find almost anything.
In short, Amazon wasn’t just offering a much better customer experience. It was offering a better customer experience at a lower price. The same applies to platforms like Airbnb or Booking and the whole logic of their value proposition design.
More value at a lower cost is the key to understand how to build a successful digital business model.
Value innovation in a blue ocean strategy
Therefore, value innovation looks slightly different in a blue ocean model. More precisely, it looks at five core concepts:
- create uncontested market: the whole point of a blue ocean strategy is to look beyond the conventional boundaries of existing markets to create an uncontested market.
- Competition is made irrelevant: a blue ocean also makes competition irrelevant. Not because you compete and win. But as you’re creating a new market, you’re are creating the rules of the game. This also implies another key aspect.
- Create and capture new demand: a blue ocean strategy is not just about creating new demand. We know now that the so-called first-mover advantage is just an illusion. And the key to success here is actually to capture that same demand. In short, roll out a business model with a strong distribution strategy to take hold of that new market. Otherwise, the risk is that a first-mover is creating a market to see latecomers take it over.
- Break the cost-value trade-off: the central concept of the blue ocean strategy is to break the cost-value trade-off. Thus, you not only can offer more value. But as you leverage on a more efficient cost structure, you can pass lower prices to your end customers. You are thus making your value proposition as more value at a lower cost.
- Align the organization around the more value at lower cost principle: as blue ocean players are aware of the possibility of breaking the cost-value trade-off. They need to make this principle a built-in feature of the overall organization. So that all can be aligned around these principles.
A blue ocean strategy enables the creation of new markets, buy moving beyond the boundaries of existing red ocean markets to create uncontested markets. A key concept of this blue ocean strategy is value innovation.
In this context, value innovation is built around the break down of the cost-value trade-off. Thus a successful business model needs to be offering more value at a lower cost.
That’s the key for a blue ocean strategy.
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