In 2005 two professors at INSEAD business school studied 150 strategic moves over more than 130 industries and a 100 years of business. What they founded was the concept of red and blue oceans.
What is a Red Ocean?
Consider the analogy that markets are oceans. Competitors are the sharks and customers are prey within the ocean. The level of competition is high and so the ocean is red from the blood of the prey. The boundaries of the ocean are fixed, there is only so much space and so the competitors are concentrated heavily. Entering markets like this (as we described in the previous article) can be difficult and is subject to market constraints that limit the level of profit that can be made.
What is a Blue Ocean?
In the previous article we talked about competition but we didn’t talk about the ‘market’ which is the total number of customers in the pool for a defined product or service. We talked about this as being fixed, there is only so much market share to be distributed among the various competitors.
What if there were fresh waters? What if the existing boundaries were increased to make space for a new competitor? This is the theory of Blue Oceans. While Red Oceans are full of existing competition, Blue oceans are untapped market space. When an innovator creates a blue ocean, they are faced with a market of customers with no competitive forces. The result of creating a Blue Ocean is often snapping up most of the market share in an uncontested environment.
How to Create a Blue Ocean?
In order to create a Blue Ocean, it’s necessary to create a new demand among customers. This can be done by developing a new product or service that customers want (if customers don’t want it, there is no market) for which there is no current market alternative. The most effective way to create a new product that people will want is to solve a problem for which there is no effective product or service currently solving it.
When Larry Page and Sergey Brin began indexing the internet in 1996, there internet was a much more difficult place to navigate. There wasn’t a lot of ways to search the internet but more critically, there wasn’t an effective way of evaluating and ranking the results. Google created an innovative way of ranking pages based on the number of other links pointing to it. The theory was that a page could be ranked in terms of its quality and relevance to the searcher by the number of links referencing it. If lots of other pages were pointing to a particular page, that page must be valuable or of high relevance. Of course, the Google search engine algorithms have advanced greatly since 1996, however at the time, the service was revolutionary and nothing comparable existed to compete with it.
The results are history. Google experienced incredible growth and is now a global giant. They have snapped up virtually all of the market share and are in a position where it would be incredibly difficult for a new competitor to enter the market. Because Google created a Blue Ocean (a solution to a problem that had no effective pre-existing solutions) it was able to experience phenomenal growth. Such is the benefit of competing in an uncontested market.
Putting it Into Practice
The benefit of entering a Red Ocean (going head to head in an existing market) is that you have evidence that there is indeed a market for the product or service. Blue Oceans are more difficult to enter as the market is not ‘proved’. Blue Oceans can be extremely lucrative however through the fact that they are an uncontested market space.
The problem-solving approach is a great way to identify blue ocean opportunities. Consider what problems consumers are currently facing and if there is an existing product or service available to address this problem, if not, or the market isn’t very crowed and competitive, then there may be a Blue Ocean opportunity available.
Aren’t all of the Big Problems Already Solved?
The best thing about this approach is that customer’s problems are in a state of continuous evolution. New technologies and advancements create a shifting profile of customer problems. This creates a dynamic environment for consumer needs and wants.
There are so many examples of incredible companies that have formed out of a changing world. The technology to make smartphones as we know them didn’t exist 15 years ago. The market opportunity gave birth to one of the world’s biggest industries. Industry leaders Apple and Samsung are among the world’s largest companies and to think that the technology used to develop their flagship phones didn’t exist that long ago.
Technological shifts create a surge of new market opportunities. Smartphones gave way to mobile apps which saw another explosion in a Blue Ocean that had previously not existed. This is not to mention the great shift in how industries interact with consumers through mobile devices and social media. I have a friend who makes a very good living from managing companies social media accounts. This is a business that once again, would not have been fathomable in previous decades. The point I’m trying to illustrate is that for each change and evolution in customer problems, needs and wants an avalanche of further, untapped market opportunities.
The key take home points on Blue Oceans are:
- Look for Blue Ocean opportunities by using the “problem-solving” approach
- Don’t assume that market opportunities are static, they are highly mobile and opportunities arise constantly
- Think about recent changes in the world. Think about opportunities that could have arisen out of this change.