Are You Swimming in a Red or Blue Ocean?

6. September 2012 08:51 by Jay Grossman in   //  Tags: , , , ,   //   Comments (0)

I am quite fascinated how people/companies are able to innovate, make the most of their opportunities, and disrupt the established norms. It amazes me how some companies can tackle a small nuance differently than their competitors and win market share. I remember reading an interesting quote that stuck with me:

play a different game on the same field as the competition.

Last year a colleague introduced me to the concept of a Blue Ocean after hearing about it in as part of his MBA program (made popular by the book Blue Ocean Strategy). Since then I have spent quite a few hours in dicussions about them with various friends.

In the book, there is the metaphor of red and blue oceans describes the market universe. Here's how the authors define them:

Red Oceans are all the 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 commodities or niche, and cutthroat competition turns the ocean bloody. Hence, the term red oceans.

Blue Oceans, in contrast, denote all the industries not in existence today – the unknown market space, untainted by competition. 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 is an analogy to describe the wider, deeper potential of market space that is not yet explored.

The cornerstone of Blue Ocean Strategy is 'Value Innovation'. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. The authors criticize Michael Porter's idea that successful businesses are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost. 


The strategy for creating a Blue Ocean

It's really hard to come up with a financially viable idea that is new ground and execute on implementing it well. Let's face it, most business fail miserably. The red ocean seems to be the more logical starting point for most scenarios, as there is less risk and the market is better understood. It's a lot easier to download some canned ecommerce software and start selling commodity products than to become a manufacturer of a brand new product line.

The book's author writes:

"The only way to beat the competition is to stop trying to beat the competition. In red oceans, the industry boundaries are defined and accepted, and the competitive rules of the game are known. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. ...The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order. The creators of blue oceans, surprisingly, didn't use the competition as their benchmark. ...Instead of focusing on beating the competition, they focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space. …Value innovation 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. …To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to non-customers of an industry. As you shift your strategic focus from current competition to alternatives and non-consumers, you gain insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value elements that reside across industry boundaries" 

One of the key tools presented in the book is the Strategy Canvas (shown below). The basic idea is to choose business factors (Key Performance Indicators) that you can heavily focus on to create a new type of offering. 

 

In 2003, Friendster was the hottest thing imaginable in social networking and looked they would be pretty much insurmontable (because it was pretty much the first social network and were growing exponentially). There was a huge explosion of competing social networks in the next year or so, including one I built and ran (Hipstir.com). Facebook seemed to market properly at the right time to the right demographic and blew everyone away.  

What was so brilliant about Facebook's story is the way they concentrated key factors (such as clean design and limiting membership to only students at certain colleges) that set their offering apart from others. If you look at competitive landscape today, they have such incredible reach that there really is no competition for them.

Blue Ocean - Go Big or Go Home

I look at Blue Oceans as classic high risk, high reward scenarios. Sure you may fail (as most businesses do), but you have the chance to hit a big time home run by defining a brand new market with no real competition. 

The image below shows how a blue ocean product/service has the potential to reach far greater audience than the tiny red ocean it almost completely covers up.

 

eBay is another great Blue Ocean success story, as they disrupted the selling landscape in the late 90's by making it easy for anyone to buy and sell in auction format. Traditional auction houses make their revenues from charging the buyers premiums (fees) on top of the purchase price. eBay changed it up by making buying free and charging smaller fees only to the seller using their service as a distribution channel. 

eBay has become the defacto marketplace for a great many product types. Their reach exceeds pretty much all other auction, stores, and marketplaces (the only possible exceptions may be the huge marketing budgets of amazon and walmart).

Making your Ocean go from Red to Blue

It's pretty common that your first idea is not necessarily your best. As you iteratively learn about your audience and gather feedback, you have ability to make adjustments. This has been popularized by Eric Reis's Lean Startup movement and by agile development methodologies. 

When I decided to create SportsCardDatabase.com, the inital goal was to create the best engine for measuring market value for sports cards. While I firmly believed my methodology for determining values was superior to what I had seen from the established competitors, I wasn't really offering something radically different.

As I began looking at all of the data I had collected for my sports card valuation algorithim, I realized that I wanted more (as a user of the service). Not only did I want to know the value for a sku, but I wanted to know where that sku was being sold and where I could buy it below that market value. In fact, I never wanted miss out on a deal again. I went on to add comparison shopping and deal finder functionality (features that no one else in this niche have). These new features have become more popular than the original idea.

I have been so inspired by the site's success and learned so much from it, that I have some new  unique functionality developed that I am planning to introduce. These items will further move SportsCardDatabase into a market of its own for helping sport card collectors:

  • ways to quantitatively measure demand for a sku vs. others in our catalog
  • volatility measures and arbitrage functionality 

 

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About the author

Jay Grossman

techie / entrepreneur that enjoys:
 1) my kids + awesome wife
 2) building software projects/products
 3) digging for gold in data sets
 4) rooting for my Boston sports teams:New England PatriotsBoston PatriotsBoston Red SoxBoston CelticsBoston Bruins

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