Article researched and written by Charles M. Vaughn
Competition is an integral part of the free market economy. It is mainly because of competition that we have seen development at a breakneck pace in the last century. Competition is the implementation of the “survival of the fittest” theory in the business space and if businesses get their marketing strategies wrong, it can spell doom for the business. Which is why it is absolutely vital for businesses to know what type of strategy they need to adopt and this is where understanding the difference between a blue ocean and a red ocean can help.
Ocean here refers to the market as a whole. The colors red or blue refer to the type of market that the business is in. Blue ocean refers to a market that either has little or no competition, just like an empty ocean with pristine and clear water. A blue ocean market is an unsaturated market with untapped potential for growth and development for the business.
Businesses in a blue ocean are usually price givers because there are not enough substitutes in the market to transfer the bargaining power to the customers. This allows businesses operating in blue oceans the opportunity to maximize the cost to value trade off, which means that instead of focusing on recovering the costs, businesses in blue oceans can maximise revenue generation by charging customers for the value they are creating through the product or service.
A very commonly used example of a blue ocean is the iphone. The mobile phone industry existed before the first iPhone but the iPhone broke through the industry with an innovative new product that started the smartphone age. Apple therefore created a blue ocean for itself with the first iPhone.
Red ocean on the other hand refers to a very saturated market with cut throat competition between the competitors, just like an ocean where a lot of fish compete with each other for survival, making the strongest contender the winner.
Businesses in a red ocean market, need to create a robust and aggressive marketing strategy to come out on top. Red ocean markets force the businesses to be price takers because the bargaining power and leverage rests with the customers. The availability of substitutes allow customers the ability to maximise their utility through a number of available options.
In a red ocean, businesses cannot maximise cost – value trade off because they simply do not have enough leverage to set the price. If we look at the example of the iphone quoted above, we can see that as time passed, the blue ocean created by Apple turned red as many competitors entered into the market.
Finding a blue ocean?
Ideally businesses should try to find blue oceans because existing data suggests that businesses operating in blue oceans exhibit the greatest tendency to grow and maximize their revenue.
One easy way to find a blue ocean is by focusing on a niche. If we look at the smartphone industry, we can see that although it has become a red ocean, companies still manage to create blue oceans within it. One such niche is the niche for gaming smartphones. Similarly through innovation, manufacturers in this market can create their own blue oceans. Apple has used this innovation based strategy to constantly take advantage of the cost to value trade off by introducing features usually not present in other phones.
According to a report by Deloitte, red ocean strategies are quickly becoming obsolete because of growing competition, homogeneity of products/services and increasing customer awareness. According to this report, businesses need to either find blue oceans or create them to keep their profit margins intact and achieve a steady growth rate.
Staying for too long within a red ocean can dent both profitability and growth because red oceans focus on competition based on cost, not on value. When you compete on cost, you have to end up compromising on quality. Therefore, as a long term strategy businesses should focus on finding or creating blue oceans.