“Blue ocean” is a popular business term representing an untapped market with no competition but strong, new demand. This concept originated from a 2004 book by W. Chan Kim and Renée Mauborgne of INSEAD. The blue ocean strategy states that companies must create new market spaces through product differentiation and cost leadership. Let us understand this concept in detail and see how you can use it to make smart investments.
What is the blue ocean strategy?
Blue ocean strategy is a strategic business idea aiming to create uncontested market space, making competition irrelevant. In other words, it is about making a market where no one else is, so you do not have to fight with competitors.
When we consider traditional strategies, the primary objective is either of the following:
- Differentiate by offering unique products or services at a premium price
- Attain cost leadership by producing goods or services at the lowest possible cost
However, the blue ocean strategy goes beyond this dichotomy and creates a new market space by focusing on both differentiation and low cost simultaneously. It promotes the idea that companies can attract a lot of new customers without worrying about competition if they can:
- Create something special that has a unique value proposition, and
- Simultaneously, find a way to make it cheaper
Let us now understand the four actions framework (or steps followed by companies to implement the blue ocean strategy):
| Parameters | Step I: Eliminate | Step II: Reduce | Step III: Raise | Step IV: Create |
| Meaning | Business organisations begin with identifying factors that the industry has long competed on but are no longer considered necessary by customers. | Next, companies need to identify which factors can be reduced below the industry standards. This usually involves reducing certain features, services, or aspects of the business that do not significantly contribute to customer value. | The third step is to determine which factors should be raised above industry standards. This could involve enhancing certain features, services, or aspects of the business that are highly valued by customers but are currently underdelivered by existing players in the market. | Finally, companies must identify entirely new factors that have never been offered in the industry. |
| Benefit | By eliminating these factors, companies can streamline their operations and focus resources on more valuable areas. | By reducing these factors, companies can lower costs while still meeting the needs of their target market. | By raising these factors, companies can differentiate themselves and create new value for customers. | By doing so, companies can create entirely new sources of value for and attract new market demand. |
What are red ocean markets
Red ocean markets are a concept that pertains to traditional finance and represents the crowded and highly competitive markets. These red ocean markets have the following characteristics:
- Intense rivalry among existing players
- Constant price competition, and
- Diminishing profit margins
In such environments, it becomes challenging for investors to achieve above-average returns.
How blue ocean strategy comes to the rescue of investors
Blue ocean strategy guides investors to identify and tap into blue ocean opportunities, where:
- Competition is irrelevant, and
- New demand is generated
Now, the question arises: how can investors do so?
This can be achieved through various means, such as:
- Investing in innovative companies that disrupt traditional industries
- Targeting underserved market segments with unique products or services
- Adopting alternative investment strategies that offer differentiated value propositions
By following the blue ocean strategy, investors can break free from traditional red ocean markets and explore new avenues for growth and profitability. You can also look to make investments in the commodity market.
How to implement blue ocean strategy in decision-making
Let us understand through simple steps how you can follow the blue ocean strategy while trading or making investments:
Step I: Analyse market segments
- Identify underserved or overlooked market segments where there is a demand for new or improved products or services.
Step II: Identify innovative companies
- Research and identify companies disrupting traditional industries with innovative products, services, or business models.
- Look for companies with:
- Unique value propositions
- Strong growth potential, and
- Decent market capitalisation
Step III: Make investments
- Select companies based on your market research and assessments.
- Choose an asset class, like shares or bonds, and invest.
Step VI: Practice diversification
- Spread your investment risk by investing in different industries, sectors, and asset classes.
Conclusion
A blue ocean strategy is a modern approach prompting business organisations to simultaneously reap the benefits of product differentiation and cost leadership by creating uncontested new market spaces where business competition is irrelevant.
It is distinct from the red ocean strategy, which represents crowded markets facing intense competition. Investors who invest in these markets often achieve sub-optimal returns. Whereas by investing in companies operating in new market spaces, they can maximise their returns and achieve substantial long-term growth.
