Wednesday, June 15, 2011

Blue ocean strategies - not for every organization

Of all the readings assigned this week, I found the article on Blue Ocean Strategy very engrossing. I was especially surprised to know that 14% of investments (out of the total investments) in blue ocean strategies accounted for 61% of total profits while the 86% investments (out of the total investments) in red ocean strategies accounted for just 39% of total profits. After reading the numbers, every CEO might be inclined to look for new innovations or markets.

Though I agree with the authors, on the need to find tomorrows successful industries I feel the article depicts only one side of the coin. What if the people did not like the performances staged by Cirque du Soleil? The odds of the idea failing was very high as they were trying something radically new. But Cirque de Soleil took the risk and it paid off handsomely. The fact that Cirque de Soleil was able to pull this off doesn’t mean that there is no risk associated with blue ocean strategies. On the contrary, I believe there are high risks (though the rewards are equally high) in pursuing blue ocean strategies.

The authors also emphasize that it is difficult to imitate a blue ocean strategy. However, I don’t believe this is the case always. H&M pursued a blue ocean strategy by offering chic clothes at a cheap rate. However, Inditex followed suit with its Zara line of stores to compete with them. The low cost trendy segment servicing the hip population is now overcrowded and has turned red.

Most of the examples picked up by the authors are industries that require huge investments (auto, computers etc.), which makes it difficult for the competitors to imitate quickly. However, I feel the blue ocean strategies in certain industries can be easily imitated. Consider the case of the Indian micro finance industry. SKS Microfinance set up shop in India by creating a new market – to lend people who earn a meager daily wage. These poor people had no access to credit, as the big banks would turn them away. SKS was able to charge a very high interest rate due to this and were able to command a high profit margin. But, soon many institutions imitated the strategy of SKS and there was intense competition. On top of this, in September 2010, the government increased the regulations in the still nascent industry making it difficult for the micro lenders to charge a premium interest rate. I feel that pursuing a blue ocean strategy backfired in SKS’s case.

I agree with authors that pursuing blue ocean strategies gives the organizations higher ROI and helps in creating an ever-lasting brand. However I think that blue ocean strategies have their own risks and every company must evaluate its various options carefully before deciding upon one.

References

http://in.reuters.com/article/2011/06/11/idINIndia-57536820110611

http://www.scribd.com/doc/19484802/On-Logistics-in-the-Strategy-of-the-Firm

1 comment:

  1. It has been a while since I read the article you refer to, but the difficulty in imitating a blue ocean strategy as I recall it was in learning from the strategy used by others to enter a blue ocean to enter a new (different) blue ocean.

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