Wednesday, April 13, 2011

A Critique of Red Oceans and Blue Oceans

Seeking Blue Oceans is an excellent goal. Blue Oceans are untapped opportunity. Blue Oceans are exciting and have potential to produce huge profits. Blue Oceans also have little competition. Blue Oceans seem amazing, but they are blue because they haven’t been discovered and while there is great reward in developing the unknown, the risks are also huge.

Blue Oceans depend on identifying needs that customers often don’t know they have. In this circumstance, educating the customer about the value falls solely on the innovator. The estimation of the range of the size of the potential market is very large. The amount of investment needed to establish this market is probably the biggest unknown. In total, these parameters make new markets less appealing than most established markets. Only the most innovative and confident visionaries exemplify Blue Oceans as a go to strategy.

My favorite positive example is NetFlix. NetFlix is a media distribution company. It began during the Internet Boom by relying on the postal system to ship DVDs. They used an old system to improve the availability of new technology. Unlike Kim and Mauborgne’s assertion that the Blue Ocean have no competitors, Netflix created a variation on an established system of distribution through local retailers like Blockbuster Video. Netflix charged a reasonable rate and offered an impressive selection.

NetFlix seemed to be at a disadvantage because customers needed to plan their usage of the service unlike the immediacy of a local retailer. This disadvantage was less than expected. Having customers plan their purchase also allowed customers to see all that they wanted and allowed them to plan more than the next purchase, something the retail model did not encourage. It also allowed to Netflix to estimate demand in ways that Blockbuster could not. NetFlix emerged as the better service and its competitors went out of business.

Netflix innovated. It made its competition irrelevant and broke the value/cost trade-off but I don’t think it’s ocean was blue. Its space was not uncontested. Its waters were just less murky than the mainstream. It had to think of itself as a media distribution company to enter the market and to thrive. It positioned itself in a way that Blockbuster could not, but it challenged and won.

The Blue Ocean Strategy idea has many great components, but it must be structurally diluted to be realized in most cases. This strategy must be refined whenever it is implemented, but it never allows a firm to disregard its competitors. It may ask that a firm’s product render competition irrelevant eventually, but this does not happen quickly enough to totally forget about them.

Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, Havard Business Review October 2004

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