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Innovating in Red and Blue Oceans 11 July 05
In their recent research and publications, professors Chan Kim and Renee Mauborgne distinguish two types of business innovation.
“Red ocean” innovations are those that aim to fill existing needs better than current offerings. They exist in the red ocean because the ensuing battles between similar products for similar customers can get very bloody.
The upcoming competition between next generation game systems, Microsoft’s new Xbox 360 and Sony’s Playstation 3, is shaping up as a red ocean battle. In a classic “more, better, faster” approach to new products, both companies plan to sell next generation features to current video gamers.
A Red Ocean Battle
“Blue ocean” innovations are those that approach customers and their needs obliquely, aiming to create new products and services where none existed before. Bose’s noise-cancelling headphones represent a recent blue ocean innovation. Blue oceans are uncrowded, and, according to the authors, the recommended waters in which companies should sail.
To provide support for this view, Kim and Mauborgne studied business launches at 108 companies. They found that blue ocean strategies were rare, representing only 14 percent of the cases. Yet those blue ocean launches accounted for 61 percent of the total profits -- almost 10 times as many profits on average per launch -- as those who launched in red oceans, where competitive space is already served.
One potential problem with the study: the comparison between red and blue ocean innovations may be susceptible to “survivor bias.” The reason the blue ocean innovations in the study were so successful is because all the unsuccessful ones were weeded out before launch, so the authors are only seeing the successful survivors. They’ve just held on to the winners.
If the study is correct, however, it raises an intriguing question -- why is it that companies expend so much more of their innovative efforts in the red ocean when it seems to be so unprofitable relative to creating new uncontested markets?
Kim and Mauborgne look to the history and development of corporate strategy to explain the persistence of red ocean innovations. Corporate strategy has its roots in military strategy, which assumes conflict and competition – pitched battles over limited terrain. Exploration, for example, has a much more limited role in most corporate strategies, yet it is vital to the creation of uncontested new market space.
Another explanation comes from the approaches taken by company management. Reactive management results in red ocean products. Consider this observation from an executive in a financial services company:
“We’re not well-versed in anticipating the market before it happens – we tend to be more reactive. We’ll respond after one of our competitors has launched a new service. But we won’t be the first.”
Business Development manager, Financial Services company
There’s nothing like a competitor’s product launch to provide an impetus for a response. And this response will, by definition, be targeted at terrain that is already claimed by another company.
Nintendo’s Revolution
"[Our new console] has the power of a Ferrari, and [Sony and Microsoft] are talking about Saturn rockets. But we are traveling on earth.”
Satoru Iwata, the president of Nintendo, in The New York Times, May 23, 05
The upcoming video game console wars have a third player, Nintendo, who is taking more of a “blue ocean” approach to its next generation console. Its new console, codenamed “Revolution,” is scheduled to launch sometime in 2006. Nintendo isn’t saying much about the new console, but has acknowledged that it won’t have the blazing speeds and technical power of either Sony’s or Microsoft’s offering. Instead, Nintendo will distinguish itself with more imaginative gameplay. It is hoping to stake out new territory and bring in new users with products like “Nintendogs,” a game in which players raise virtual pets.
Many analysts are skeptical about Nintendo’s future as a manufacturer of game consoles. Some predict that Nintendo will follow Sega and soon exit the game console market.
Nintendo points out that, in contrast to Microsoft, it makes money on its game consoles. It maintains that it will continue to make consoles at a profit, and wants to improve its declining market share.
Both Microsoft and Sony have the ability to support their console wars with profits from other operations. Nintendo is much smaller and much more focused on the gaming business. It’s the creative underdog trying to find a little blue while Sony and Microsoft wage their red ocean battle.
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