Blue Ocean Strategy: Transforming Your Market

April 1, 2024 - Mark MacLeod

Beyond Competition: Transforming your Market with Blue Ocean Strategy

blue ocean strategy examples

An Introduction to Blue Ocean Strategy 

Venture-backed startups face immense challenges. Most startups fail.

The ones that succeed, usually succeed BIG!

Often, they do this by either creating a new market that didn’t exist before or reinventing an existing market.

My wife has an AI-personal training app on her phone. This wasn’t possible until very recently. There was no market for AI personal trainers. Now there is. This is an example of creating a new market.

The smartphone that hosts that app is an example of both disrupting an old market and simultaneously creating a new one.

Before smartphones, we used phones to make phone calls. They were not smart 🙂

Now, we use phones for everything but phone calls. I don’t remember the last time I saw someone using a 2G (not smart) phone. That market has been disrupted.

Blue Ocean Strategy Example: Nokia’s Market Disruption

Founded in 1865, Nokia was the darling of Finland and the market leader in 2G phones.

At its peak in the year 2000, it was worth $ 250B. This was peak dot com frothiness.

From these great heights, it ended up being bought in 2014 for $ 7.2B. 2.9% of its peak market cap!

This is what we call disruption. The end of a once great company. Its value is reduced to talent, patents, and other intellectual property.

Venture-Backed Blue Ocean Strategy

Enough with the history of phones. Let’s get back to how this applies to VC-backed startups.

Generally speaking, startups achieve huge outcomes when they create or expand an open market.

They can start from scratch creating a market. Or they can enter an existing market, but then open it up by disrupting it.

Either way, the goal is to create a blue ocean to compete on. i.e. a wide-open space.

The opposite of this is a red ocean. A crowded, competitive landscape.

Needless to say, as a CEO you want to create a blue ocean strategy. But sometimes, you have to start in the red.

In this article, I will explain both and then offer practical tips for how to create a blue ocean strategy for your company.

Understanding Red Ocean Strategy

So what are the characteristics of the Red Ocean Strategy? 

In a nutshell, they involve:

– Competing in an existing market space.

– Having to beat the competition. Often entrenched competitors.

– Capturing existing demand. The market is not expanding. In fact, it is often shrinking.

– You compete based on price.

This is typically a zero-sum game. The pie is fixed. You win a customer, someone loses a customer. You can’t expand the market.

The lowest-cost player wins. That means usually the biggest player with the most economies of scale. So, it is hard for a new company to break in.

Examples of this could include generic hardware components that manufacturers source from China. There is little differentiation. No brand value.

Another example would be going to Amazon to buy a white T-shirt. You’re not looking for a particular brand. You might be looking for fabric, a certain cut. And, of course, you want it delivered tomorrow.

But, you don’t really care which marketplace vendor you buy from. As long as it fits your needs. You are not developing a relationship with any brand. It’s just an undifferentiated transaction for you.

These companies compete in red oceans.

Companies in these markets operate on thin gross margins. They grow slowly, if at all. They don’t attract ambitious talent. They all look like one another.

Blue Ocean Strategy Summary 

In stark contrast, Blue Ocean Strategy involves the exact opposite:

An uncontested market space. You often have to create this yourself, which can be long and expensive

– Or, you disrupt an existing category, making the competition irrelevant. This is the 2G vs smartphone example.

– You create and capture new demand. Just like my wife’s AI personal trainer app.

– You have a choice of strategies. You can pursue differentiation and/ or low cost.

Apple is an example of a company pursuing differentiation. Their products are expensive. Unique. They have a high emphasis on design. They never put their products on sale.

Uber is an example of low cost. Excluding innovations like surge fares, for the most part, an Uber ride is cheaper than a cab. In the early days, Uber burnt millions of $ subsidizing rides in order to win markets.

They competed on price and won.

Side note: For more on Uber, check out this recent post on startup growth strategy lessons from Uber.

Red Ocean vs Blue Ocean Strategies: Key Differences

Blue OceanRed Ocean
Market DynamicNew/ ExpandingExisting/ Fixed or Contracting
Basis for CompetitionDifferentiation, DisruptionPrice, Cost Structure
Potential OutcomesMassiveSmall for a New Player 

Looking at this table, it seems obvious that blue ocean is better. But it is not that simple. 

To be clear, there are very large companies that compete in red ocean markets. 

Your favorite grocery chain is a good example. They typically operate on 5% gross margins (that is not a typo). They sell the exact same products as their competition. And they are worth billions.

The point to remember is that it is very difficult to create a “venture-scale” outcome by trying to enter an existing red ocean market with entrenched players.

Going back to groceries as an example: Whole Foods did sell to Amazon for $13B. But they didn’t try to be just another grocer. They differentiated their products and charged higher prices. They found a loyal customer looking for healthy, often organic, foods.

Blue Ocean Strategy Pros and Cons

While blue ocean strategy is the right approach if you are looking to create a big outcome, there are challenges: time and competition.

Time: If your market doesn’t exist today, you have to create it. That means evangelizing and educating before you can sell. 

This pushes out the time to revenue. You need to ensure you have enough capital to get through this painful, initial phase. It’s like crossing the desert: You won’t make it if you don’t have enough water.

It is important that your investors realize that the first phase of the goto market will be slow. Many startups die from trying to grow before the market is really there.

Competition: If a market opportunity is big enough to attract VCs, then it will be competitive. Other founders will have the same or a similar vision. They will be chasing the same customer. 

Competition is inevitable. I would say you don’t even have a market until you have competition. 

Fortune 500 Market

Before moving into tips for adopting a blue ocean strategy and creating a blue ocean strategy in your company, it is worth spending a minute on the Fortune 500 market.

Many of the CEOs I work with run enterprise software companies. The largest customers they serve are part of the Fortune 500. This is a list of the largest companies in the world.

If you serve this market, guess what: Your TAM is 500 companies.

Those companies are well served already. Deeply entrenched incumbents like Oracle and SAP cater to their every need.

There is still a massive opportunity here. This is why enterprise SaaS is a big category for VCs.

But, the key here is not to compete head-on with Oracle. They will crush you like an annoying ant!

You need to disrupt them. This is why Oracle and its peers buy so many startups.

Even though your TAM is small, you will only win if you find a blue ocean opportunity inside this small group of customers.

Practical Tips for Blue Ocean Strategy Adoption

Here are some tips for creating a blue ocean strategy in your company.

Reconstruct Market Boundaries: Mobile phones were an established category. Blackberry expanded the boundaries to include messaging and email. Apple then disrupted them by opening up phones to run games and applications.

Consider the chain of buyers and redefine who the real customer is: Traditionally, enterprise software was sold top-down. Long sales cycles. Big deals.

With SaaS, it became easy for individuals or departments to adopt new technology. Thus, technology started getting adopted bottom up.

Create new demand: Again let’s go back to mobile phones. There was no demand for apps on phones until Steve Jobs, former co-founder and CEO of Apple, created that demand.

Focus on non-customers and use cases: Many applications have a viral impact. For instance, when I was at FreshBooks, our customers were the ones sending invoices.

But, we created a network and exposed the end client (the customer of our customer to the product). We created value for that next layer.

Harness cost advantages: Moore’s law is the observation that the number of transistors in an integrated circuit doubles about every two years.

This has enabled massive increases in computing power while reducing computing prices. Computers were once large and expensive. Only a few customers could afford them.

Now, thanks to Moore’s law, they are ubiquitous.

Remove friction: Have you addressed the hurdles to having customers adopt your product? Friction slows you down.

But startups are all about speed. If you have used Shopify’s Pay app, then you have witnessed a frictionless checkout experience. It is almost too easy (as my credit card bill shows). This is disruptive.

Move fast! Speed is everything to a VC-backed startup. The speed at which your revenue grows is the biggest driver of your valuation.

It is the magnet that attracts ambitious talent, curious customers, greedy investors, and, ultimately, strategic buyers.

Dream big: Another key advantage of startups. No sunk costs or innovator’s dilemma (where an innovation might kill your current business so you hesitate).

When Open AI started working on ChatGPT, it was a dream. It was technically impossible. They assembled the best minds and figured it out.

Implementing the Blue Ocean Strategy in Your Startup

Why do people join a startup? For the best people, it is not just a job. It is a cause. They believe in the mission.

Also, they are here for personal growth. If you have a compelling vision/mission and you can offer people growth, you will attract the best people.

This is the starting point: Crafting a bold vision of the future. A vision that you are uniquely capable of seeing.

From there, systematically and continuously remove obstacles to growth. Get 1% faster every day. That’s 37x faster in a year.

Don’t be constrained by what is possible today. Focus on that dream vision and keep moving closer to it.

Conclusion

The companies and founder you admire the most, all found a way to create a blue ocean strategy for their companies. Doing this will transform your business. I spend a lot of time on strategy with my CEOs. If you’re stuck, let’s chat.

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