Strategy, a term used in almost everything and in different fields. Strategy was the main focus in management literature & the business world for the past years. It is defined as a serial of high management decisions that shows stability and order over time (Mintzberg ,1978). One of the newest literature of strategy developed by Kim & Mauborgne (2005) is the “Blue & Red Ocean Strategies” that inspired a lot of debates & researches in this field and resulted some serious empirical & theoretical studies in academic conferences and papers.
We live in a fast moving time, especially for businesses. Growing demand, market expansion, attractive industry, etc. these are the wishes of most companies nowadays, but the reality is that many of them are ending their businesses. More than 8,000 retail store closures were announced in 2017 in the US including big names like: RadioShack (1,430 stores), Payless (808 stores) and Crocs (160 stores), (Coresight Research, weekly stores opening and closures). On the other hand, not only retail stores are shutting down, many other companies from other industries may not survive the couple coming years. The reason behind all these closures are many, such as bankruptcy, economy status, focusing on international market, bad management, underperformance & mainly competition.
While many companies are closing, others were finding or creating ways to survive. Some companies decided to fight competitors in the current market by either lowering prices, investing in technology or even starting a dual strategy while others decided to try something with much more innovation: “The Blue Ocean Strategy” & Cirque du Soleil is the best example.
The blue ocean strategy is a strategy that give guidance to companies on how to go to a new market, which increase demand and prevent competition from the existing market. In order to expand the efficiency of the strategy and to ensure profits and success, it is best for companies to implement this strategy when initially starting the business. But also, it’s never too late to make improvements.
Blue Ocean strategy is a way to guide companies to find new market in which they can increase demand while reconstructing cost structure, (Gorrell, 2005).
Kim and Mauborgne’s strategy, introduced a new perspective of how markets look like today. The Red Oceans are almost all the industries existing today and the Blue Oceans is creating the unexplored market space and reaching non-customers.
The research made in the Blue Ocean strategy confirms that there are no permanently great companies, just as there are no permanently great industries. To increase the quality of companies’ performances, they really need to study what are the factors that affected them positively, and identify how to implement them consistently. Doing so, companies will be on the right path of choosing smart strategic moves, and the great strategic move to accomplish the goal of success, would be creating blue oceans.
Cirque du Soleil was able to create a new market space in the circus shrinking sector. They created a new demand that resulted generating high profitable growth. The circus reinvention that Cirque du Soleil made was the example that lots of studies used ; the most of them was the book of W. Chan Kim ; Renée Mauborgne (2005) that studied step by step the growth of Cirque du Soleil along with the tools and frameworks used.
Seeing the success of the strategy Cirque du Soleil used made this subject an interesting material for this paper knowing the difficulties companies are facing nowadays due to the many reasons we mentioned earlier. Innovation nowadays is a key to survive, competition is rising ; almost every company is having the dream to explore new markets by going international. A lot of big and small companies are doing so, but what if they can create their own market? How can they make competition irrelevant ; what will be the strategic changes that companies need to implement to shift from their current red ocean strategy to the blue ocean strategy?
This paper will include in the first part a literature review of some strategies (mainly the Blue Ocean strategy) by explaining the difference of the current market spaces (Red Oceans) and the future market spaces that a Blue Ocean strategy can create. It will also identify the cornerstone of the strategy, which is the value innovation, along with the most important tools to be used. The second part of this paper will demonstrate the success of Cirque du Soleil’s company and how they were able to shift their business from Red to Blue Oceans. Cirque du Soleil’s growth was the main example used in Kim ; Maurborgne’s book, and also an example of a business success in different articles & case studies.
Part 1: Literature review
Kim & Mauborgne’s strategy divided the market in two parts: Red and Blue Oceans. Red Oceans are currently existing markets, known market spaces. Whereas, Blue Oceans are none existing markets with unknown market spaces. This part will present the literature review of possible strategies that could be used in any business and it is divide into two chapters. Chapter one includes the Red Ocean strategy and the traps that sometimes hold companies from not shifting to better opportunities, on the other hand, chapter two includes the major idea of this paper which is the Blue Ocean strategy, the value innovation and the tools and frameworks to implement this strategy.
CHAPTER 1: RED OCEAN STRATEGY
1.1 What is red?
We are currently living in time of market globalization, multinational companies and high levels of demand. Companies are operating in very competitive markets and doing whatever it takes to exceed or reach their competitors.
Companies nowadays are mostly competing in mature market segments which means operating in a market where there’s absence of significant growth, for that reason they are only focusing on gaining their competitors market share. In order to do that, companies are being forced to reduce prices and entering promotion wars. The most tool used in this war is currently advertisement, by the use of this tool, companies are hardly trying to persuade customers that the product they are offering is the best between the available products in the same industry. This tool and all other tools used by companies are demanding a big amount of company’s resources that could be used in a much creative way.
This exact situation described is called Red Ocean, which describes the bloody competition that companies are living today. In red oceans, market boundaries are limited and companies’ actions are highly predicted. With the saturated market and the low profits and demands companies are facing, the goal would be to get larger market share. Due to this market status, companies aren’t having options rather than reducing their costs and increase marketing expenses.
The central focus the strategic thinking for the past years has been based on competitive strategies and competition issues faced by most companies, for that reason it took most of the attention on how to develop strategy patterns to solve it. As a result, organizations learned how to compete with each other by using different strategies, such as: differentiation, cost reduction or focus. Under the same topic some tools were also developed such as Porter’s competitive model that aims to analyze competition.
The term red is associated with the blood color that expresses the market competitiveness that can sometimes result a red bloodbath ocean and ocean is the comparison for the large & potential market space.
Red oceans are always important and will always be a reality of business life. But when supply exceed demand, competing to gain the market will not be sufficient to maintain a high performance. That’s why companies need to go outside of the box to gain new profits and growth opportunities knowing that they will be monopolistic for a while.
The competition that red oceans faces are mostly based on low price ; quality, every player knows his position and shares in the market and the possibility of new rivals to enter these markets is very low due this strong competition. But, when using the blue ocean strategy, the main feature is that competition is no available due to the creation of the new market with no boundaries or rules (Kim and Mauborgne, 2005).
Many factors are forcing companies to choose another strategy to survive. Some of these factors are:
– Supply exceeding demand;
– Price wars;
– Low profits;
– Laws ; regulations;
– Similar products;
Innovation in companies is related with the price and cost. In red ocean markets, companies have to choose between differentiation and cost domination. In blue ocean markets, the target is using both differentiation and cost domination (Kim and Mauborgne, 2005).
The strategies that companies choose are in relation with the environment where they run their business. However, a variety of options is available to help companies in order to face the competition. Conventional logic and the traditional methods such Porter’s five forces are considered red ocean strategies.
The red ocean strategy is where companies compete roughly against the competition. Companies study their market and analyze their positioning in order to identify the strategies and actions of their competitors, while some companies adapt their actions on the competitors moves. Feedback to their actions comes usually from the end users and this feedback is used to adjust and apply a to their strategies or to their products/services. Success is usually attained by either providing customers more value or lowering prices. Products are also expanded by imitating competitors’ characteristics and by this customer from other companies can be stolen (Porter M.E, 1996).
1.2 Red Ocean traps
With the shift of market power from companies to customers, and the increased global competition, companies in almost all industries are now facing serious performance challenges. To overcome these challenges, companies need to be more creative in developing their strategies and present more value to customers. Competitiveness alone will not grant them success but they will need to find a way to create new demand to capture new markets. What’s happening is not that companies aren’t identifying the value of new market spaces but, somehow their past learnings are trapping them and not leaving an opportunity for them to develop models they use. They were trapped with mental models, gained knowledge from classrooms and years of business experience. These models, surely helped these companies and managers through years to respond better to competitive challenges, but also narrowed their ability to create new markets.
Six main assumptions were encountered into company’s mental models, and were supposed as red ocean traps, because they effectively were leaving companies in red oceans and prevent them from shifting to blue oceans. The first two traps came from assumptions about marketing, specifically in relation with customer orientation and niches; the next two traps are results from economic lessons on technology, creativity & innovations; and the final two are in relation with competitive strategy and main two strategies, differentiation & low cost.
Trap one: Associating market- creating strategies as customer-oriented approaches
Creating new demand is the core of market-creating strategies. It focuses on transforming non-customers into customers. Companies have been working under the assumption that the customer is king. That’s why the whole focus is being on the current customers and not on converting noncustomers into customers. This approach, is unlikely to create new markets. Focusing on customers, will definitely drive companies to come up with better solutions for them and overcoming what the competition is offering, but it keeps companies anchored in red oceans. Whereas, trying to gain the non-customers will create new markets for the company and expand the industry boundaries.
Trap two: Treating market-creating strategies as niche strategies
Marketing practices has placed an important mean on using market segmentation and capturing niche market. Niche markets can be very effective by revealing a niche in an existing market space but does not help in discovering a new market space. Successful market-creating strategies don’t focus on the right segmentation but instead the try to find the common factor between a group of buyers that could help them create larger demand.
Trap three: Confusing technology innovation with market-creating strategies
R&D and technology are well known as key factors that have big impact on the performance of a company, the market development and industry growth. For that reason, some companies suppose that they are also key factors in creating new markets. But, actually, these factors are not unavoidable in the market creation. What is unavoidable during market creation, is not technology innovation but, value innovation that will be discussed later.
Trap Four: Equating creative destruction with market creation
Creative destruction is when the economic structure is restructured, constantly destroying the old one, constantly creating a new one, (Joseph Schumpeter, 1942). This theory is the base of innovation economics. The perfect example for this theory is what happened with the photography business and how the digital photography replaced photographic film and kept on destroying them. But, market creation doesn’t always require destruction. It might also include nondestructive creation, at which point can create demand. Opposing market creation with creative destruction limits a company’s set of opportunities and capture them from market-creating strategies. In some cases, the idea of creative destruction can have the effect on people that they might lose their current status and jobs and they will be replaced by the new creations. For that reason, it is important for companies to explain for its members that their creation is nondestructive, but yet a growth to both them and the company.
Trap five: Equating market-creating strategies with differentiation
In red competitive oceans, companies are more likely to choose their position on the “productivity frontier”, which is the extent of value-cost trade-offs that are available in a specific structure and norms of the industry. Differentiation at this point is what separates the company from its competitors by offering premium value; the trade-off is usually elevated costs to the company and higher prices for customers. Many companies assume market creation is the same thing.
In fact, the market creation is about combining simultaneously low cost with differentiation, offering customers high value products/services with fair low prices.
Trap six: Equating market-creating strategies with low-cost strategies
This trap comes from the company’s assumption that lowering prices is what will create them new markets. This trap is somehow related to trap five, where companies think that while creating new markets they can’t combine differentiation with low costs, it’s either low-cost strategy alone, or offering customers higher or improved value.
The assumptions mentioned in the red ocean traps are not wrong or bad. They all came through years of experiences and business knowledge and they all serve important purposes. But, they will not lead companies into creating new markets. And when they drive companies into spending a lot to create new markets, they may result in new businesses that don’t secure back those investments. That’s why, while creating new markets, the current used strategies should be all revised in order not to fall into the red ocean traps.
CHAPTER 2: BLUE OCEAN STRATEGY
With all the work and the intense competition that is still available attacking almost all companies the main question arises, what other practices a company can do to prevent failure? The appropriate answer could be the Blue Ocean Strategy.
As an alternative to red oceans, blue oceans is considered all industries that do not exist today, as mentioned before it is the unknown and unexplored market space, with big potential of high profit and growth. The main focus would be creating this new market and making competition unavailable. Companies have two options, either creating new products or services that will result creating new demand and a completely new market or they can higher the borderline of the current industry.
2.2 What is Blue?
Companies that only focus on competition will eventually close but the ones that will focus on value creation will shine (Edward de Bono). With the current crowded market space, the possibility of profits and growth is being minimized. Competition is overcoming this possibility and turning the market space into red oceans. Blue ocean represents businesses/products/services/ideas that do not exist today; the unexplored markets. In blue ocean, demand is created rather than fought over where there is a much higher chance for growth and profitability ; the most important feature of this strategy is that competition is irrelevant. Creating a new industry creates a new set of rules depending on its type.
Today, when using the word strategy, it is always followed by the language of competition or the term competitive advantage. Most companies work on a strategy that helps them to take over more shares in their existing market space. For sure, competition mater (Rosenberg,2006) but, by only focusing on the competition, strategy thinkers missed two important cases: one is developing and creating market where there’s no competition & two to protect these new markets. When the term blue ocean is used with the term innovation, it’s not only about technology innovation, it’s true that nowadays the use of technology can be a competitive advantage to a lot of industries but the concept created has the main focus.
This strategy came with fundamental principles to create values for both customers and the company. By using these principles and tools, companies will be able to transform innovation into a repeated, continued process that everyone will be a part of it. When innovation is introduced to the working lives of employees in a company, it develops a culture that creates capacity and responsibility for all employees (Golpayegani and Pirouz far, 2009).
The Blue Ocean strategy was developed by Chan Kim & Renée Mauborgne (2005) of INSEAD University in France. Their study covered more than 150 strategic actions from almost 30 different fields using data aged more than 100 years.
They created the Blue Ocean Strategy from analyzing all winning actions and combining them and the less successful actions were left in the red ocean of intense competition.
When companies are facing declining life cycle products inside a red ocean market, then a Blue Ocean strategy is their best solution. The products at this level would have the status of decreasing growth rate market, low profits, low demand & decreasing competitiveness due to low interest of the market. At this point, customers avoid this products thinking that it does not fully satisfy their needs. Contrary to Red Oceans, Blue Oceans can be described as an untouched market space offering a special product with an opportunity of high profit & growth. Blue oceans can be created by going outside the current market limits and by reconstructing market boundaries. The blue ocean strategy gives companies a theoretical and practical ways to stop competitions in their operation field and instead create their own market space of gainful growth (Mi, 2015).
Reconstructing the market boundaries is the main focus when shifting the company from a red to a blue ocean strategy. In order to create blue oceans, six basic approaches were found to help reconstruct the market boundaries (Kim & Mauborgne, 2005). These approaches don’t require special analysis for the company or deep researches but instead they can be identified through the familiar company’s data but seeing it from another perspective.
These 6 assumptions are somehow capturing companies in the red oceans to struggle while competing and tend to do the following:
– See themselves as being the best in their industry;
– Position themselves based on the accepted strategic groups available in their market and try to find the similarities between them and these groups;
– Target the same buyer group and chain of buyers;
– Determine similarly the scope of products and services offered by their industry;
– Acknowledge the fact of offering either functional or emotional appeals;
– Neglect the timing factor of the products when formulating strategy.
The more that companies share this traditional knowledge on how to compete, the greater the competition strive among them. To shift from red to blue oceans, companies should look outside their regular perspective and try to reconstruct their boundaries. To do that they will need to look across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time (Kim & Mauborgne,2005).
Companies operating in the red ocean have to search in its own market to identify the closest competition, then the company will try to beat this competition basing her actions on similar factors. The blue ocean strategy requires a different process that will result make the competition irrelevant and this process is applied by identifying the six conventional boundaries of competition to start operating in the blue oceans.
One of the ways to move the company to a blue ocean strategy is looking across alternative industries, in other meaning looking in the same market for products or services that have different structure, but the same general use, purpose or utility. For example, restaurants offer their customers food and a social environment, and cinemas offer their customers visual entertainment, however, these both businesses have the same objective: providing an enjoyable environment for customers outside their homes. When companies try to create a new market with irrelevant competition, they need to check alternative industries instead of competing in the same industry. By focusing on the things in common & the objectives between alternative industries, and at the same time excluding everything else, companies can create a blue ocean of uncharted market space (Kim & Mauborgne, 2005).
Companies should also look across strategic groups within industries, we mean by strategic group a group of companies already operating under the same strategy. These groups can be known using vertical integration, product platform, R&D investments, and other theoretical concepts (McGee, 1986). These strategic groups are usually rated by their price and work and these two factors being dependent to one another. Usually companies focus on developing their competitive position within these strategic groups. For example, Mercedes, BMW and Jaguar, three companies that compete with each other with almost the same strategy under the luxury car segment, in such a way that they allow other segments like economic car companies to compete within their own segment (Kim & Mauborgne, 2005). When creating a new market, companies should look across strategic groups in their same industry in order to identify what the different beneficence between these groups are.
Another field companies should look across to, is the chain of buyers that is defined by the different parties concerned during a buying decision. The chain of buyers is usually divided into three groups, which are: purchasers, users and influencers (John Pruitt, 2006). For example, if taking the buying decision of a video game, the end user would be a child, the gaming shop would be the influencer and the purchase is most probably the parents of the child. In this example of video gaming, the gaming industry focuses massively on children. If companies can sometimes shift their attention to another buyer group, they can then unlock a new value and by that shift their market boundaries to finally maximize their end users.
Looking across complementary product and service offerings can also help in shifting from a red to a blue ocean strategy. Complementary products and services are the ones sold separately but used together and by that creating value and demand for the end users. Complementary products or services do not have necessarily to complement each other based on requirements, but they have to complement each other based on the buyer experience. Books and coffee can be an example of two complementary products inside a shop. By making the benefit of having these two products at the same place for the buyer and the whole experience, companies can create a blue ocean of market space.
Adding to the tools companies can use, they can also look across the functional or emotional appeal to buyers. Functional appeal can be defined by the functional value a buyer can receive from a product or service based on the relation between the price and the functionalities of the product or service bought.
As for the emotional appeal it is defined by the emotional value that a customer gets by using this product or service. Companies tend to either offer the functional or the emotional appeal and not merging them. Products having high emotional appeal are usually more priced and less functional, while companies can be removing these utilities and presenting to customers a simpler and cheaper product. And as for the companies offering only functionalities they can add the emotional appeal and offer more value to customers and by that stimulates more demand.
Companies should also look across time & by being able to identify external trends affecting their industry. Being able to spot a trend at the right time can massively help companies to create blue ocean opportunities. One of the trends can be technology and the best example is smart phones. Mobile phones companies that were able to the smart phones trend and project the trend itself where able to shift themselves to another level among their competitors. What’s important is the value delivered today to the value that might be delivered tomorrow (Kim ; Mauborgne, 2005). They key of looking across time is always finding insights in trends that can be identified today.
2.3 Value innovation
Until today all the scientific efforts have been centralized on the Red Oceans especially on overcoming the competition. Blue Oceans are not today’s creation, they existed in the past and they will remain in the future. Some market sectors died and others are being created based on the demands. Market sectors cannot be immovable, on the contrary they evolve continuously with the production developments and the market expansion. History shows that people have the potential of recreating old market sectors or creating new ones. This particular ability is the base of Blue Ocean creation.
Many factors lead companies to focus on creating a Blue Ocean. One of those factors is the constantly improved technology, which empowered the producers to present the market with higher quantity and diversity of products and services. By constantly doing that, the market reaches its limits and in some point the supply will exceed the need in that market. Globalization & open markets intensified this situation by helping the increase in suppliers with no sign of increase in demand in this globalized economy. This lead to a price war between competitors and by that lower profits and growth for their products. Similar products were found in the same market and differentiation is hard to be found.
Strategies used in Red Oceans were no longer helping companies to win the competition, as a result some were forced to create Blue Oceans, they needed to make a change. Today, future is based on the creation of these Blue Oceans markets.
What differentiate “winners” from “losers” in the creation of Blue Oceans is mainly the choice of the right strategy. Red Ocean companies use traditional known strategies and their main issue reside with the competition, whereas Blue Oceans companies do not consider competition as an issue but instead they use another perspective strategy called “Value Innovation”.
The Blue ocean strategy is a motivation for companies to adapt a new way of thinking, different than its competitors. By adapting this way, companies can save themselves from a highly competitive market (a Red Ocean), and create a new unexplored are of demand (a Blue Ocean). By using the Blue Ocean strategy, companies will no longer have to overcome their competitors, but to making the competition irrelevant by creating a higher value to its customers in a new market. This particular way of thinking is defined by “value innovation” that means like it sounds, focusing on innovation and creation of value.
Conventional competitive theories, such as the one developed by Porter, highlights the importance of a company to choose one strategy to focus on instead of joining multiple strategies (Porter M.E., 1985).
In his theory, Porter mentioned three main competitive strategies. One is cost leadership, which is selling high quantity of products at the lowest price with maintaining profitability. This competitive strategy can be achieved when the company can operate at a lower cost than its competitors. The second competitive strategy is the differentiation strategy that has a goal to sell a high value exclusive product to a wide range of customers that are willing to pay higher price to this added value product in order to satisfy their needs. Focus strategy is also another type of differentiation strategy, it is usually employed when segments are known and the company is competitively able to satisfy its needs. This is usually not done by performing more efficiently, but instead by product innovation and/or brand marketing (Porter M. E., 1980). The blue ocean strategy contrast Porter’s theory by using both at the same time differentiation and low cost and this is defined by “The Value Innovation”, lowering price while at the same time setting up the buyer value (Figure 1).