What Is the Red Ocean Strategy?
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Origins of the Red Ocean Strategy
Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD Business School, coined the terms “red ocean” and “blue ocean.” Their book, Blue Ocean Strategy, details how the red ocean and the blue ocean are metaphors for any given market. First published in 2005, Blue Ocean Strategy has sold over four million copies worldwide and is a bestseller across five continents.
The “red ocean” describes how sustained cutthroat competition from sharks, or competitors, turns the ocean bloody red. Here, profitability is a zero-sum game in which a company’s gain is achieved at another’s loss. Every new company entering the market is treated as a threat. As such, companies must be able to slug it out and wade through the crowded waters to grab a share of the existing market.
A good example of a company that thrives using red ocean strategies is Amazon, the top shark in the e-commerce space based on market capitalization. Any company aiming to launch an online supermarket knows that they have to compete against Amazon to succeed.
How the Red Ocean Strategy Works
Unlike the Blue Ocean Strategy where the idea is to find uncontested markets, the Red Ocean Strategy advocates simply outmuscling the competition and staying profitable in an established industry.
Business decision-makers should note the following fundamentals when crafting a Red Ocean Strategy.
In any red ocean marketplace, competition already exists, and in most cases, is already stifling. There are already lots of sharks in the water ready to attack. And yet, new competitors continue to enter the market, making the waters even redder. Companies operating in such markets know full well that if they cannot beat the competition, the business will not last.
Limited Room for Growth
Red ocean markets are supersaturated, so there is little to no room for growth.
Companies must often decide between improving value offerings for customers at a higher cost versus maintaining reasonable value at a lower cost.
Exploit Existing Demand
No new markets are being created so eventually supply starts to exceed demand. Companies must then fight for what little demand remains.
How to Apply a Red Ocean Strategy
There are two primary approaches to implementing a Red Ocean Strategy: differentiation and lower pricing.
A company can set itself apart from its competitors by focusing on unique selling points (USP), strong brand identity, elevated customer experience, and better marketing.
However, there are many similarities between existing products in red ocean marketplaces, so these measures are not always effective. As a result, companies sometimes have no choice but to lower their prices to remain competitive.
Salt is an example of a highly commoditized product. It is sold under different brand names, but the commodity is more or less similar. The salt sold by Company A will taste exactly like the salt sold by Company Z.
Consumers want the best value for money, and it is easy for them to switch brands. So in this case, companies selling salt will often lower their prices to stay competitive in the market and make more sales.
A Red Ocean Strategy will only work if the company has faith in its product or services, and has created a clear execution plan.
Red Ocean vs. Blue Ocean
Given the numerous limitations in a red ocean, the Blue Ocean Strategy advocates for a shift toward freer blue oceans where companies can enjoy uncontested market space and thrive.
The Blue Ocean Strategy makes competition irrelevant through innovation and improved value offerings. This is in stark contrast to the Red Ocean Strategy, which is focused on slugging it out for market share.
Here are some fundamental differences between these approaches.
In the Red Ocean Strategy, the focus is on competing favorably in a highly contested space. Companies do not usually attempt to push beyond the existing market boundaries. The rules are set and accepted by the market participants.
On the other hand, the Blue Ocean Strategy aims to break out of the competitive space and create new market opportunities. Blue ocean companies typically come up with something unique. By shifting to newer markets, companies can set the rules of the game, enjoy greater profitability, and have more room to grow.
The Red Ocean Strategy focuses on beating the competition and capturing as much market share as possible. Companies do this through differentiation techniques and lower pricing.
By contrast, the Blue Ocean Strategy’s goal is to make competition useless by providing superior value offerings and targeting uncontested markets.
Companies operating in a red ocean compete for existing demand in the market. As more companies enter the space, the further demand drops, making the competition even bloodier.
On the flip side, companies in a blue ocean create new demand. They look at the market to identify areas where they can provide additional value to customers. In other words, they create new demand by addressing problems consumers never knew they had.
In a red ocean, a company has to choose between improving value offered to customers and lowering the price. This is known as making the value/cost trade-off; they are mutually exclusive.
However, a blue ocean strategy eliminates choosing between the two. With competition effectively rendered irrelevant, companies can pursue both differentiation and low cost at the same time.
That said, blue ocean markets may eventually become red ocean markets. Novel and successful markets will eventually attract competition. Therefore, blue ocean strategies are not a one-time solution; companies must target newer market spaces again once the competition starts to amp up.
What Are the Advantages of a Red Ocean Strategy?
The Red Ocean Strategy can be quite beneficial for all the flak it gets, especially when correctly executed. For one, zero competition is not realistically attainable or necessarily desirable. When a company operates in an industry without competition, there is no drive to innovate. Plus, they can set unfair prices, which can backfire on them in the long run.
Here are some benefits of the Red Ocean Strategy worth noting.
Because the market is already established, there is a lesser risk associated with adopting the strategy. Moreover, the objective is clear—to outshine the competition through differentiation or low cost.
The services and products in a red ocean already have good demand, which is why the market is competitive in the first place. This is more straightforward than the blue ocean strategy where the company has to find uncontested markets, where demand is uncertain.
Red ocean organizations have clarity about various market aspects, including boundaries and customer preferences. This makes planning and forecasting much easier because many variables are already well-defined.
Companies pursuing blue ocean strategies must have ample resources to test and uncover new markets. On the other hand, companies with limited resources can still enter a red ocean market and find unique ways to set themselves apart.
- The Red Ocean Strategy is a method for surviving in an intensely competitive market. Most red ocean strategies are done by differentiating a company’s products or services or lowering prices.
- The main goal of the Red Ocean Strategy is to outshine the competition and gain from the losses of other companies in the market.
- The strategy is a distinct opposite of the Blue Ocean strategy, which focuses on utilizing value-driven innovations and pricing to target new markets and render competition irrelevant.
- However, the Red Ocean Strategy offers distinct benefits from its blue ocean counterparts: reduced risk, greater market clarity, and lower resource requirements.
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