The Blue Ocean Strategy

In today’s business environment, it is challenging for firms to co-exist because of the intense competition that they face. Each one of them is vying for the largest piece of the market share and due to the presence of large number of organisations and immense rivalry, the profit margin of companies is fairly slim.

In 2004, INSEAD professors W. Chan Kim and Renee Mauborgne came up with the theory of ‘The Blue Ocean Strategy’ which suggests that firms should develop strategies that differentiate them from their competitors, thus creating a demand for their product and ultimately developing a market where a few firms exist and there is no intense pricing pressure.

The name is derived from the belief that the market that companies generally compete in, have barely any space to grow because of overcrowding industries that cause cut-throat competition; symbolising a Red ocean. These markets have defined boundaries and rules of competition. On the contrary, Blue oceans are referred to as the uncontested market areas where the opportunities are endless and uncaptured. It is an analogy to describe the deeper potential found in untapped market areas. The tactic aims to capture new demand by introducing a product with enhanced features. It helps the company make huge profits as the product can be priced at a premium because of its uniqueness.

The main pillar of creating a blue ocean is ‘value innovation’. Value innovation is all about creating a unique selling proposition for your product which is very difficult for your rivals to replicate and provides you with an edge over the others. The agenda of this strategy is the ‘simultaneous pursuit of value and cost’. This means that the firms should look for avenues that help them in minimising their costs without affecting the value of their services.

A classic example of this strategy is the circus company Cirque Du Soleil which strived in the hitherto ailing business and earned profits in leaps and bounds by shifting its customer base from children to adults. They used a combination of theatre, Broadway and opera to create an experience for their buyers for which they were ready to splurge a premium over and above the traditional circus shows. This, along with the cry of animal support groups that revolted against the use of animals in circuses, is what led to the success story of the theatrical company in less than 20 years.

In the blue oceans, the rules of the game are waiting to be set and can be remodelled by the actions and beliefs of industry players. The crux of the problem is ‘How to create it?’ This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation. As market structures are changing by breaking the value/cost trade-off, so are the rules of the game. By expanding the demand side of the economy, new wealth is created. Such a strategy therefore allows firms to largely play a non–zero-sum game, with high payoff possibilities.

Harshika Agarwal