Blue Ocean Strategy to monetise the web

Blue Ocean Strategy is a business concept developed by W. Chan Kim and Renée Mauborgne of INSEAD that promotes the creation of new market spaces or “Blue Oceans” rather than competing in existing industries which they term “Red Oceans”.

Red Oceans are industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commoditised and cutthroat competition turns the ocean bloody, hence, the term red ocean. The competition is this on the supply side of the micro economy.

“Blue Ocean Strategy” aligns innovation with utility, price and cost positions to create competitive advantage by influencing demand. Value Innovation is the simultaneous pursuit of differentiation and low cost. It is the creation of an uncontested market space and makes competition irrelevant. The powerful interactive web has created the opportunities for forward thinking organisations to change their competitive landscape forever. No longer are industry boundaries fixed, but with a little imagination they are non-existent.

4 Principles of Blue Ocean Strategy

The four principles of blue ocean strategy formulation include how to create uncontested market space by

• Reconstructing market boundaries,

• Focusing on the big picture,

• Reaching beyond existing demand; and

• Getting the strategic sequence right.

These formulation principles address how an organisation can create blue oceans by looking across the conventional boundaries of competition, reduce their planning risk by visualising strategy, creating new demand by unlocking the non-customers and launching a commercially-viable blue ocean idea by aligning unprecedented utility of an offering with strategic pricing and target costing and by overcoming adoption hurdles.

New Economic Principles

The new economic principals of the web include:

• The law of abundance whereby things can be created once and sold many times

• The networked economy whereby the value of a (social) network is increased with every additional member; and

• Unfettered geographical constraints where we have access to audiences outside of our immediate environment.

We need to break out of traditional competitive (structuralist) strategic thinking and to grow demand and profits for the company and the industry by using blue ocean (re-constructionist) strategic thinking.

The winning organisations will be those whose leaders can overcome the key organisational hurdles that prevent even the best strategies from being executed – the cognitive, resource, motivational and political hurdles that prevent people involved in strategy execution from understanding the need to break from status quo, explore the opportunities provided by the modern internet, commit the resources to implement the new strategic shift, keep people focused on implementing the new strategy and from overcoming powerful vested interests that may block the change.

Creating Demand

In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue Ocean Strategy is about “playing a different game.

Traditional competition-based strategies (red ocean strategies) while necessary, are not sufficient to sustain high performance. Companies need to go beyond competing and seize new profit and growth opportunities by creating create blue oceans. Competition based strategies assume that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what academics call the structuralist view, or environmental determinism.

To sustain themselves in the marketplace, practitioners of red ocean strategy focus on building advantages over the competition by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company’s gain is achieved at another company’s loss. Competition, the supply side of the equation, becomes the defining variable of strategy, cost and value are seen as trade-offs and a firm chooses a distinctive cost or differentiation position. Because the total profit level of the industry is also determined exogenously by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.

Blue ocean strategy is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. This is what Kim and Mauborgne call “re-constructionist view”.

Assuming that structure and market boundaries exist only in managers’ minds, existing market structures do not limit their thinking. Extra demand is out there, largely untapped, the problem is how to create it. This requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation. This is achieved via the simultaneous pursuit of differentiation and low-cost a model which is ideal on the internet.

As market structure is changed by breaking the value/cost trade-off, so are the rules of the game. Competition in the old game is therefore rendered irrelevant. By expanding the demand side of the economy new wealth is created.