Blue Ocean Strategy versus competitive-based strategy
Business strategy has been dominated until recently by theories and tools such as Michael Porter’s five forces, SWOT analysis or BCG matrix, mainly focusing on how to beat the competition. These approaches assume that the market space is given; therefore what companies need to do is to create ways to get a bigger market share by choosing either to differentiate or to achieve lower cost.
This is called the structuralist view of strategy; in this case we can say that (industry) structure shapes strategy.
However, for the last 15 years professors Kim and Mauborgne from INSEAD have challenged this assumption. They went on to demonstrate that in several cases throughout history strategy shaped structure.
To understand the pattern of such successful strategic moves, the professors studied more than 150 business cases stretched over 120 years. As a result, they developed a scientific approach that seeks to create a new market space, thus making the competition irrelevant. This challenges the traditional approach, by claiming that strategy shapes structure, a view called reconstructionist.
The metaphor of blue oceans (the newly created markets) contrasts the red oceans where the competition is fearsome. Here below are the main differences between the two approaches to strategy.
- Complete in existing market space
- Beat the competition
- Explloit the competition
- Make the value-cost trade-off
- Align the whole system of a firm’s activites with its startegic choice of differentiotion or low cost
Blue Ocean Strategy
- Create uncontested market space
- Make the competition irrelevant
- Create and capture new demand
- Break the value-cost trade-off
- Align the whole system of a firm’s activites in pursuit of differentiation AND low cost
First, the competitive-based strategy focuses on competing in the existing market space.
Companies with large resources have an obvious advantage, therefore it is very likely that they would have a larger market share. The choice that companies have is to choose a position of either differentiation or low-cost, decisions often based on their core competencies.
However, there are cases in history when small players created very successful strategic moves or when players succeeded in apparently very unattractive industries. Most of these moves are examples of blue ocean strategy. In these cases, the companies did not seek to compete in the existing market space (where they probably would have not stand a chance), but instead decided to create a new market space or a blue ocean, reconstructing the market boundaries.
Second, companies pursuing red ocean strategy focus on beating the competition by offering either better features or lower prices (affordable thanks to low costs). In contrast, companies pursuing blue ocean strategies do not focus on competition, but on creating a totally different strategic offering, making the competition irrelevant.
Third, red ocean strategies focus on the existing demand, by trying to offer customers better, faster or cheaper products or services. Obviously, this has cost and profitability implications. In time, as more and more players enter into a market, prices would gradually lower, resulting in commoditization. On the other hand, blue ocean strategy does not focus on the existing demand, but tries to create new demand by addressing the non-customers: buyers at the edge of the market, refusing non-customers or unexplored noncustomers. Instead of segmentation, which results in niche or small markets, blue ocean aims for de-segmentation, capturing a mass of buyers.
Fourth, companies following red ocean strategies choose a strategic option, either to differentiate their products and services or to pursue low cost, increasing their profits through large scale. This approach splits the market in two strategic groups, each option with its own risks. On the other hand, companies formulating blue ocean strategy obtain both differentiation and low cost through value innovation.
Finally, once a company in the red ocean decides its strategic option, it will naturally align its whole system of activities with its strategic choice of differentiation or low cost. Therefore for companies choosing differentiation it is likely to see more emphasis on marketing, as a tool for increasing the value for buyer. For companies choosing low-cost positions, the main objective is to reduce the cost structure as much as possible, so probably more emphasis would be placed on operations. These companies focus on productivity and are mainly functional. On the other hand, companies pursuing blue ocean strategy align their activities with the strategic option of both differentiation and low cost. The focus is on creating value for both the buyer and the company, therefore their culture is characterized by creativity and the shift is towards emotional.
In the light of the above, let us look at the US wine industry, which was considered to be very unattractive for a company to enter. The reasons were high supply compared to small demand from the US consumers, a large number of players, both local and international (French, Italian, South American wines), locked distribution channels, low barriers to entry and great threat from substitutes (the US consumers are known to be much more inclined towards drinking beer). Would a company enter this market? Is it doomed to fail?
Casella Wines entered the US wine market, but did not focus on the traditional offering of the wine industry (such as denomination of the wine, sophistication, origin etc.). Instead they eliminated and reduced the value factors which did not appeal to non-wine drinkers and raised and created other factors, creating a unique offering and thus a new market space. Since the company did not choose to focus on competitors but rather made them irrelevant, it also did not focus on the existing demand, but it addressed the non-customers, by setting the right price to attract beer drinkers. Moreover, Casella did not choose between differentiation or low cost, as it pursued both at the same time, through value innovation.