Strategy Assignment: Blue Ocean & Red Ocean Strategy
Question
Task: Prepare a strategy assignment discussing the concept of Blue Ocean and Red ocean strategies.
Answer
1. Blue Ocean Strategy illustrated herein strategy assignment is defined as the approach to achieve low-cost ad differentiation simultaneously. The strategy helps in creating a new market space and new demand. This creation of a market space without any competition is based on the belief that the structure of the industry and market boundaries are not hard bound but can be expanded or reconstructed.
The business world comprises of two different types of categories, which are known as red and blue oceans. Red oceans embody all the organizations that exist nowadays i.e. the market area that is known.
In red oceans, the limitations of the industries are well defined and being accepted as well as there is set rules for the competition. In this strategy, organizations try to perform way better than their rivals and overtake them to grab a larger share of current demand (Blue Ocean Strategic Moves, 2020). The drawback of the red ocean is, space gets more and more packed and the opportunity for growth and profit of the companies gets reduced. This leads to cut-throat competition. Blue oceans signify all the industries that do not exist today, the market area which is unknown and lacks any competition. In blue oceans, instead of fighting over demand, the demand is being created. There is plenty of chance for development that is both rapid and profitable. Two distinct ways are present to create blue oceans. In some cases, organizations can develop an entirely new industry, like eBay which is an online sales platform. But in majorly, a blue ocean is formed from the red ocean space itself, when the set boundaries of the present industry are being changed by the companies.
As per the analysis of the growth strategy of many companies, strategic thinking can be observed in a consistent pattern behind the formation of new organizations and markets, which is known as the blue ocean strategy. The basic ideology of this strategy discussed in the strategy assignment is not to focus upon competing in the existing markets as in the case of traditional models. Another key aspect on the basis of which blue oceans are differentiated is the fact that the traditional theory says that there is a tradeoff between value and cost (Blue Ocean Strategic Moves, 2020). But the blue oceans approach both low cost and differentiation together.
Nowadays, the public no longer insists on a particular type of detergent like they used to do in the past. For example, no one sticks to their detergent tide when a promotion for surf excel is going on and vice- versa. This is due to the fact that in industries that have too many competitors, people stop differentiating between brands over time (Dvorak &Razova, 2018). There are the following characteristics associated with a blue ocean strategy as discussed within this strategy assignment:
a. Blue ocean strategy does not depend on technological innovations. The use of the latest technology might be useful in the formation of a blue ocean, but it is not a necessary factor. This can be observed even in the famous case of Ford’s assembly line; its technology can be traced to the American meat-packing industry.
b. Blue oceans are often created via incumbents: From the cases of GM and Chrysler, it can be that the established players of an industry can end up creating blue oceans through their incumbents. The blue oceans thus created are generally in their own core areas.
c. Industry or company is not the right units of analysis: In order to understand the formation of a blue ocean, its industry or company does not necessarily explain its creation. Strategic moves thatinvolve the managerial decisions and actions should be analyzed to know the success of a blue ocean.
d. Brands are created through blue oceans: By the use of the blue ocean strategy, brand equity can be created that might last for a long time.
The creators of blue oceans generally enjoy an unchallenged market for at least 10-15 years. This was evident in the strategy assignment from the cases of Southwest Airlines, Cirque du Soleil, CNN, and Home Depot. The players who want to enter into a blue ocean’s market space faces many entry barriers ranging from economic to cognitive. Since the blue oceans almost instantly attract customers in huge numbers, they enjoy economies of scale. These huge economies of scale, as in the case of Walmart, discourage any other company to try and copy the model. The higher number of customers leads to the creation of network externalities.
Imitating a blue ocean creator’s strategy might require an organization to make changes in its entire structure and activities (Dvorak &Razova, 2018). Such a huge change might not be possible due to the presence of organizational politics.
The cognitive barrier mentioned in the strategy assignmentcan also play a deciding role in the adoption of the blue ocean’s strategy. When a blue ocean creates a new market, offering completely different value, it creates a buzz in the market and earns loyalty amongst its customers. Such strong loyalty cannot be easily broken through even very expensive campaigns of marketing. For example, Microsoft tried for more than 10 years, to capture the market created by Intuit but failed. Also, in cases such as L’Oréal, it might be difficult to adopt the blue ocean strategy of The Body Shop, which goes completely against the former’s image. Imitating Body Shop might result in L’Oréal losing its current customer base as well.
Breaking the barrier set by the numerous red oceans and becoming a blue ocean can prove to be a great competitive advantage for an organization. Through this strategy depicted in the strategy assignment, the organization might be able to tap into the unexplored market areas. Both blue and red oceans have always coexisted in the markets (Agnihotri, 2016). In the current market scenario as considered in the strategy assignment, competing in the red ocean space is the go-to strategy for most organizations. Blue ocean strategy has existed for a long time now, but its use has been mostly unconscious. If and when the organizations realize the ways to create a blue ocean, there will be many more created in the future.
2. The world-renowned consulting company, Boston Consulting Group, or popularly known as BCG, developed a tool in 1970 to help organizations in developing their long-term strategies. This tool is popularly known as the BCG Matrix, or growth or share matrix, as it is a 2X2 matrix. The tool helps an organization to plan the performance of its product at the industry and company level. The tool helps the organization in analyzing about investing in or selling off one or to shut down a strategic business unit (SBU). Through the use of this tool, organizations can efficiently make use of their available resources.
The matrix is used to assess an organization’s offerings by segregating each SBU, division, or product on its 2X2 structure. The grid is shown below (Hanlon, 2019):
The decision to place which SBU where is taken on the basis of answers to two simple questions outlined in the following segment of strategy assignment:
a. Market Growth Rate: Represented on the vertical axis, it represents the relative attractiveness of a market for an SBU. To quantify this value, there is plenty of research data available online for each product in the market.
b. Relative Market Share: Represented on the horizontal axis, it represents the market strength of a company. In order to quantify this value, the market share of the company is divided by the market share of its largest competitor.
Thus through these two axes, the matrix is divided into four fields, which enables an organization to divide its SBUs into four categories.
These four fields of the matrix are given different labels in order to define their characteristics. These four fields are discussed below (Claessens, 2017) with example BSUs from Marks and Spencer’s (M&S) portfolio:
a. Question Marks: The strategy assignment examines that this field represents the SBUs in high-growth markets but have a low market share. In order to even hold their current position, these need cash inflows. Increasing the share of these SBUs is a distant dream. Organizations need to stress out on these SBUs, on whether to put effort into them and make them stars or to fazethem out eventually. The food category represents the question mark SBU for M&S. Few of the characteristics of question marks are:
i. Presence in the growing market but with a relatively small market share
ii. If invested with caution, they have the potential to turn into stars
iii. When the market matures, these can turn into dogs
b. Stars: These are the SBUs that are in a high growth market and have a higher share. To support the rapid growth in such a market, these SBUs might need heavy investments. With the maturity of the market, there is a slowdown in their growth, which transforms them into cash cows. Lingerie units are the stars for M&S, as they are the market leader in this section. They are characterized by the points mentioned in the next section of strategy assignment:
i. Presence in a growing market with a high market share
ii. With the heavy investment, they have the potential to be turned into cash cows.
c. Cash Cows: This field represents the SBUs in low-growth markets but have a high market share. There is very little investment needed in these SBUs for them to maintain their market share. Hence, these SBUs are used to generate cash inflows for the company for them to pay their bills and invest in other SBUs. The classic range of M&S is its cash cow as it has its strong support base. The characteristics of such SBUs are depicted below within this strategy assignment:
i. Presence in a slow-growing market but with a high market share
ii. Generates the highest cash inflows
iii. The organization can “milk” these cows as much as they can.
d. Dogs: These SBUs are present in the low growth market with relatively low market share. These might be generating cash so as to just support themselves. The premium-priced clothing range of M&S is their dog. Their characteristics are:
i. Presence in a low growth market with a relatively low market share
ii. These generate cash flows just to break even
iii. The organization should look to divest in such SBUs
Herein strategy assignment, in an ideal situation, when the strategy is properly followed by identifying the SBUs correctly, the flow chart of the BCG matrix (Mohajan, 2017) should look like:
The primary advantage of a BCG matrix discussed within this strategy assignment is that it is very easy to understand. Using this tool companies can have better strategic planning for its products and can make more informed decisions about its product portfolio.
There is an emphasis on the flow of cash through the matrix analysis. From this analysis, a company can make a better decision about its investment-related strategies (Hanlon, 2019). Also, differentiation in only four categories can make it simple to operate.
There are limitations too associated with the use of the matrix. Since it classifies the business into binary categories, it tries to present a simplistic analysis of the organization’s product portfolio. There are always exceptions to the generalized categorization. Also, it might not always be feasible for an organization to gather data for quantifying market share and market growth (Mohajan, 2017). Another issue with this model outlined in the strategy assignment is the fact that it assumes that the BSU’s are independent of each other which might not be true in every case. Though with its limitation of being over-simplistic in its analysis, the tool provides a basic idea for a company to differentiate its BSU based on their performance. Then based upon this differentiation, the company can decide on whether to invest in a particular BSU or make changes in its strategy in dealing with another BSU. All in all, it can be said that, as with the other strategy tools, the final strategy of an organization depends not only on the outcome of a tool but also on the managerial commitment and foresight. ?
References
Agnihotri, A. (2016). Extending boundaries of Blue Ocean Strategy.Journal of Strategic Marketing, 519-528.
Blue Ocean Strategic Moves. (2020). Retrieved from Blue Ocean Strategy: https://www.blueoceanstrategy.com/bos-moves/cirque-du-soleil/
Claessens, M. (2017, August 12). The BCG Matrix Explained – How Does The BCG Matrix Work? . Retrieved from Marketing Insider: https://marketing-insider.eu/how-does-the-bcg-matrix-work/
Dvorak, J., &Razova, I. (2018).Empirical Validation of Blue Ocean Strategy Sustainability in an International Environment.Strategy assignmentFoundations of Management, 143-162. Hanlon, A. (2019, July 16). How to use the BCG Matrix model. Retrieved from Smart Insights: https://www.smartinsights.com/marketing-planning/marketing-models/use-bcg-matrix/
Mohajan, H. (2017). An Analysis on BCG Growth Sharing Matrix.Noble International Journal of Business and Management Research, 1-6.
