I read an old Harvard Business Review article about "Blue Ocean Strategy" the other day (Blue Ocean Strategy. (2004). Kim, W. C. and Mauborgne, R. Harvard Business Review (October), 77-84.). The article was rather well written, and I have found it very useful in evaluating business opportunities.
Saturated markets with intense competition, according to the article, are "red" oceans. Companies in these markets tear at one another like sharks, filling the blood with water. Innovative companies recognize opportunities to create "blue" oceans in similar markets but where there is no competition. In my experience, I have seen at least two different kinds of blue oceans. I call them icebreaker and parallel blue oceans.
The first, or icebreaker, strategy is effective for new companies. An example is the New Zealand company Icebreaker (the name of the strategy is merely a coincidence). The founder of this company recognized a void between the wool clothing and technical apparel markets. He established "merino" as a product definition that spanned both categories. The new market was devoid of competition and has proven to fuel rapid groath for the small New Zealand company - which now has operations worldwide.
An established firm, however, would not be capable of such a strategy. Any innovative products released would be instantly related to existing ones, preventing the move into the blue ocean. The only avenue available to larger, established companies would be to found a subsidiary. The separate company would not have an existing brand identity and would be free to define its blue ocean and restrict entering competition.
The second strategy, which I call "parallel," is used by existing firms. Rather than moving entirely into uncharted waters with a new product, a parallel strategy involved stepping sideways into a complimentary market. The first example that comes to mind is NTT DoCoMo in Japan. DoCoMo was Japan's leading mobile phone company when mobile phones were just starting to take off as a market. As other suppliers began to enter the market, mobile phones began to become a commodity, forcing DoCoMo to reconsider the direction its future was taking.
Rather than continue to design and sell mobile phones, DoCoMo because developing content for the phones and released its innovative i-mode. DoCoMo leveraged its existing relationships with phone manufactures and designed i-mode activated phones for its customers, forcing the development of network effects in the system (i-mode requires both content providers and suppliers to function, neither of which will sign on unless the other is already there).
New companies would have issues implementing such strategy. They lack the networks and proved partnerships necessary to create such a parallel system. This strategy builds on the firm's existing positional advantage. It harvests certain intangible assets (network, brand reputation, and negotiating power) and reinvests them in the blue ocean's business model.
Blue ocean strategy seems like common sense, and essentially is just that. However, it provides valuable tools for evaluating the strategies used by different businesses. Should Nike, for example, have tried to create the merino category before Icebreaker it would likely have failed. Moving in a new direction to create a new category is an icebreaker strategy and requires a young firm if it is to be successful. Likewise, it would be ill-advised for a start-up company still operating off its initial financing that tries to use parallel strategy to move into a related industry. Their investors might want to reevaluate their decision. Without these analytical tools, however, there is no concise way to evaluate certain market entry strategies.