Blue ocean strategy focuses on how to link innovation to commercial value. While traditional strategy, or red ocean strategy, exploits existing demand, blue ocean strategy creates and captures new demand. In a red ocean, competing companies usually have to choose between differentiating themselves at the expense of pushing up costs, or stay low-cost and undifferentiated from rivals. Rather than beating the competition, a blue ocean strategy works by making the competition irrelevant. There is a four-action framework for applying blue ocean strategy: eliminate, reduce, create and raise. That is, evaluate which factors the industry takes for granted but which can be eliminated, which factors can be reduced to below industry standards, which new factors should be created, and which should be raised above industry standards. In a blue ocean, companies realize both differentiation and low cost. In other words, returns from investments in blue oceans are substantially higher. Yet 86% of business launches by companies fall in the red ocean category. According to a study the revenue impact of these red ocean launches was 62% and profit impact 39%. The remaining 14% of business launches that fell in the blue ocean category accounted for 38% of revenues and had a profit impact of 61%. Research into blue ocean strategies in the 120-year-period from 1880-2000 demonstrates blue oceans are not about technology innovation. For instance, although the hugely successful iPod uses sophisticated technology, people buy it because it is so stylish and simple.
A good example of applying blue ocean strategy was seen when Ninentendo employed it for its Wii games. Wii's launch helped Nintendo grow sales 90% and profits, 77%. Its better established rival, Sony, was losing $ 240 on each Playstation 3 model sold, while Nintendo was making $ 40 on each Wii sold, With the Wii, what Ninentdo did was ask itself how many customers used high-definition TV compatibility, a feature that was pushing up the cost of the console. The answer was hardly any. So it decided to do away with this feature, keep the price of the Wii low and also target non-core gamers with the product. Thus using a blue ocean strategy, it created a new market for itself instead of fighting for share in the market space dominated by Sony's Playstation and Microsoft Xbox. It focuses on opening up new and uncontested market space and thereby reconstructing buyer value elements that resides across the industry boundaries.
Contributed By: Ritesh Baranwal
1 comment:
I was pleasantly surprised to see the article on Blue Ocean Strategy here. Good choice !
As far as my knowledge about the topic goes, I know that this strategy plays a very important role in deciding a firm's bottom line.
Blue ocean strategy was adopted by American banks and it proved to be a great success. Since then, the strategy has gained importance.
These banks invested money to find the market which was untouched. This untouched, unobserved market acted as a blue ocean.
In a blue ocean, the first player to enter the market is the architect of all the rules and regulations. Naturally, it will favour the first player and possibly suit its requirements.
However, this blue ocean slowly gets converted into red ocean as more banks land up at that location. The red ocean indicates war and bloodshed between the competitors. Whereas, a new business opportunity where hardly any player exists is termed as a blue ocean.
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