Blue ocean vs. red ocean strategy: what they are and examples

07/11/2024

Strategic planning is fundamental to any new business venture. Entrepreneurs face a critical decision early on: should they compete in a stable but crowded market, or aim for innovation in an underserved one? This is where the dilemma of blue ocean vs. red ocean strategy comes into play. 

In their 2015 book Blue Ocean Strategy, analysts Chan Kim and Renée Mauborgne address these questions. The book explores two strategic approaches, where the “red ocean” represents businesses in competitive and price-driven markets, and the “blue ocean” emphasises the creation of new, uncontested market spaces. 

Deciding between the two is one of the most complex and impactful decisions that entrepreneurs can make. Although many companies are transitioning from red to blue ocean strategies, this shift is not necessarily the right path for every business.

Let’s delve deeper into blue ocean and red ocean strategy, including the pros and cons of each, along with examples from real-world businesses.

What is the blue ocean and the red ocean strategy?

Traditionally, most businesses have operated with a red ocean strategy. The name is borrowed from a feeding frenzy that one might see in the ocean, which depicts a highly competitive market that is heavily saturated. In this environment, companies fight for market share, competing on price and trying to outdo each other.

The red ocean market operates within defined boundaries, driven by demand and competitive advantage. Businesses in these markets aim to capture as much of a limited pie as possible by employing aggressive tactics such as price wars, brand differentiation, and product feature enhancements.

By contrast, the blue ocean strategy is a more contemporary model that allows businesses to avoid overcrowded markets in search of uncontested market space. Companies using this approach offer innovative and never-before-seen products or services. Instead of competing, they create demand, carving out their own space in the market.

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Key differences of blue ocean and red ocean strategy: pros and cons

From a strategic perspective, both blue ocean and red ocean strategy have their pros and cons:    

Blue ocean strategy

Pros

  • Uncontested market space means there’s less competition and greater profit margins.

  • Greater control of the market and fewer demands for competition.

  • Low-value factors allow businesses to save on costs while enhancing buyer value.

  • Less emphasis on value-cost trade-off.

  • Potential for large-scale and rapid growth in a brand-new market.

Cons

  • Businesses must navigate dozens of unknowns when innovating in a new market space.

  • Less market knowledge creates a greater risk of loss.

  • Late-stage investors view uncertainty as unappealing, which can make it harder to capture funding.

Red ocean strategy

Pros

  • Businesses work in an established market with fewer unknowns.

  • Less spending on research and development.

  • Customer loyalty is often strong.

  • Businesses benefit hugely from brand recognition.

  • Businesses can study their competitors in a shared market.

Cons

  • High levels of competition make it harder to succeed and grow; profit margins are also very tight.

  • It’s easier for goods and services to become commodified.

  • Opportunities for growth are limited.

  • Customers are highly price-sensitive, generating fewer chances for innovation.

  • Business strategies are focused on short-term results rather than long-term health.

Real-world examples of blue ocean and red ocean strategies

Businesses from any market can adopt blue ocean or red ocean strategies as needed. However, some industries tend to lean toward one approach over the other.

Examples of businesses that use a blue ocean strategy 

  • Nvidia. Nvidia’s CEO, Jensen Huang, envisioned a concept called zero-billion-dollar markets, which describes future high-value markets with no current reach. This led him to identify AI chips as a future market. Now that AI chips are vital to emerging tech, NVIDIA’s blue ocean approach has set the company up for decades of leadership.   

  • Cirque du Soleil. As the traditional circus industry was experiencing slow and long-term decline, this strikingly innovative approach to live entertainment captured the world’s attention — and effectively redefined and replaced the former circus industry.

Examples of businesses that use a red ocean strategy

  • Ryanair. To cut through highly competitive airline competition, Ryanair opted for slashing prices while maximizing the number of seats in its planes. This budget approach allowed the low-cost airline to start competing against established businesses in the air travel space.

  • Amazon. After building on its book sales to become a giant in e-commerce, Amazon has fiercely fought off its competition by offering the lowest prices in the industry and adding new services like Prime Video.
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What is shifting from red ocean to blue ocean strategy?

Shifting from red ocean to blue ocean strategy requires strategic planning and long-term vision. There are three simple steps that you can take to shift your business strategy from a red ocean to a blue ocean approach:

  1. Identify whether or not you have the mindset of a blue ocean approach. If you’re more focused on reshaping the industry with innovative new products and services, then you’re ready to pursue differentiation and low-cost blue ocean strategies.

  2. Start using the analytic tools and frameworks available for blue ocean strategy sessions, from the Six Paths Framework to the Three Tiers of Noncustomers.

  3. Develop your confidence to start actively shaping the market rather than reacting to it, then organize concrete steps to move your business and employees forward.

Blue ocean and red ocean strategy: choosing the right strategy for your business

A blue ocean strategy focuses more on market innovation and a low-cost approach to profits. On the other hand, a red ocean strategy focuses on competing at a high level in an existing and busy marketplace. Both have their pros and cons that entrepreneurs must carefully consider.

Are you more willing to experiment in unknown and potentially highly profitable market spaces? That’s a blue ocean outlook. Do you favor tackling a more well-known, if competitive, market space with the hopes of building customer loyalty? That’s a red ocean outlook.

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