Interesting Business Approaches

In the previous posts, we have discussed things from the perspective of an investor alone. In this post, we will view things from the perspectives of an investor and a business owner.

So first of all, what do I mean from the perspective of a consumer and the perspective of an investor, and the perspective of a business owner?

The perspective of a consumer includes how he/she sees a product, and they may evaluate a product based on the cost-to-value it provides. Whereas an investor will also evaluate a product based on the value it provides relative to its cost. The only difference between a consumer and an investor here is that the investor will not consume the product.

Now, if we shift our focus to a business owner, we may evaluate an investment based on the return it generates through the market in which it performs. The difference between an investor and a business owner is that the business owner has to collect and make choices all throughout their journey to keep the business afloat, while an investor has to evaluate those decisions to check whether they suit their risk appetite or not.

Till now, we have seen what an investor can use to evaluate an investment, and as for a consumer, we all know it. So now we are going to understand the perspective of a Business owner. But before that, we need to get familiar with certain terms. Are you still there with me? Read along to understand the terms.

1. Business Competition

So, what is business competition?

Competition in business occurs when multiple companies vie for market share by offering similar products or services. Competition can be of various types as described below:

• Direct Competition – Companies selling identical products (e.g., Coca-Cola vs. Pepsi).
• Indirect Competition – Businesses offering different products that fulfill the same need (e.g., McDonald’s vs. Subway).
• Potential Competition – Emerging businesses that could disrupt existing markets (e.g., smartphones replacing digital cameras).

2. Market Creation

Market creation involves developing new demand rather than competing in existing markets.

• Blue Ocean Strategy – Creating uncontested market space (e.g., Tesla revolutionizing electric vehicles).
• Disruptive Innovation – Introducing groundbreaking technology (e.g., Netflix replacing traditional cable TV).
• Niche Markets – Targeting specialized customer needs (e.g., organic food brands).

Business competition and market creation are essential for economic growth and innovation. Market creation is more important than business competition, as it adds much more value to the economy by creating a whole new market as compared to competition, where competitors compete for the same pie.

If you want to start a business, you have two popular approaches: the Blue Ocean and the Red Ocean Strategy. We will start with the Red Ocean Strategy.

The Blue Ocean Strategy and Red Ocean Strategy are two contrasting approaches to business competition and market creation.

Red Ocean Strategy

The Red Ocean strategy involves competing in existing market space, that is, the market is already proven to generate revenue. In this strategy, since the market is proven to generate revenue, the business focuses on establishing itself in the market and gaining the upper hand over its competitors either through disruption, that is, making a better product, or providing better value for the same cost.

This strategy is about competing in known industries, where the fight is for higher market share, often leading to intense rivalry.

Blue Ocean Strategy

• Creates uncontested market space.
• Makes competition irrelevant.
• Captures new demand.
• Breaks the value-cost trade-off (achieving both differentiation and low cost).
• Aligns a firm’s activities in pursuit of differentiation and low cost.

The Blue Ocean strategy involves creating a new market from scratch by focusing on creating new demand. This provides a first-mover advantage to the business. This strategy focuses on innovation and creating new markets, making competition irrelevant. This strategy breaks the value-cost-trade-off, achieving both differentiation and low cost.

The Table below summarises the differences between Blue Ocean and Red Ocean Strategy:

Advantages and Disadvantages

Now that we have seen the difference between the two strategies. Let’s look at the advantages and disadvantages of both strategies. Here’s a breakdown of the advantages and disadvantages of both the Blue Ocean Strategy and the Red Ocean Strategy.

First, we will start with the Blue Ocean Strategy.

Blue Ocean Strategy

The Blue Ocean Strategy has the following advantages:

1. It creates a new market space that eliminates the risk of direct competition. If someone wants to compete, they themselves need to prove the market first and generate revenue, which carries a higher risk as compared to established markets.
2. Since the person creating the market is the first and mostly the only one in the market, there is a chance of high-profit margins.
3. This approach encourages people to think out of the box and discover new markets, thus increasing the GDP of the economy by a large margin as compared to the Red Ocean strategy.
4. This approach focuses on value innovation, combining low cost with differentiation.

Despite the above disadvantages, the Blue Ocean Strategy has some disadvantages as listed below:

1. The most obvious is high risks, as this involves the creation of a completely new market, which can result in failure with a huge loss of time and money.
2. Since this market is to be developed from scratch, it requires significant investment in Research and Development.
3. It becomes hard to sustain when competition starts flowing in.

Red Ocean Strategy

The advantages of the Red Ocean Strategy are as follows:

1. The first advantage is that you don’t need to put in effort to discover a whole new market. So you can predict the demand by studying your competitor.
2. We can reduce uncertainty by using the existing business models used by competitors.
3. This strategy yields results with incremental improvement as opposed to requiring radical changes as in the Blue Ocean Strategy.

The disadvantages of the Red Ocean Strategy are as follows:

1. The first and most obvious disadvantage is the intense competition because it is an established market, which leads to price wars and low profits.
2. Since these markets are already discovered, and depending on the age, these markets may become saturated.
3. This strategy focuses on beating competitors rather than creating new value.

Industries of Use

Now let’s look at some of the examples of Industries Using Red Ocean and Blue Ocean Strategy. Both of these strategies are suited for certain types of industries, depending on the market conditions and competition. Let’s look at some industries where these strategies are most suited.

Industries that use the Red Ocean Strategy:

1. Automobile Industry: This is the most obvious industry. In this, if you have observed, businesses focus on price, features, and brand loyalty.
2. Fast Food Industry: McDonald’s and Burger King battle for market share through pricing, promotions, and menu innovations.
3. Airlines: Traditional airlines compete on ticket prices, routes, and service quality in a saturated market.

Industries using Blue Ocean Strategy:

1. Technology and Innovation industry: Apple created a new market with the iPhone, combining phones, music, and the internet into one device.
2. Entertainment and Streaming: Netflix disrupted traditional cable TV by introducing on-demand streaming.
3. Electric Vehicles: Tesla pioneered the EV market, making electric cars desirable and mainstream.

Companies in Red Oceans focus on outperforming rivals, while Blue Ocean companies create new demand and redefine industries.

This is all for this post, I hope you got to learn something new from this post. Don’t forget to follow my Facebook and Instagram pages for regular updates. See you all in the next post. Till then, keep learning.