Tuesday, November 19, 2013

Search of Blue Oceans by Firms

The authors of the “Blue Ocean Strategy” cites examples from the past and present in arguing for the superiority of firms that seek outward in order to create new industries, or blue oceans. Through innovation and strategic planning, firms such as General Motors, Dell, Apple and Cirques du Soleil were able to kill two birds with one stone – the birds being a) increase in value created for the customers and b) lower production costs.
The authors argue that the majority of the firms currently in existence reside in the Red Ocean, where opportunities for value creation & revenue growth and general demand for products and services are in a constant decline. Red ocean firms fail to look outward and fail to innovate, but instead lock themselves in a meaningless competition to against one another for larger portions of a crumbling pie.

Interestingly, this idea seems to directly conflict with the ideas of an earlier article that we read, the “Five Competitive Forces of that Shape Strategy”, which highlight the 5 key components of market competition that firms must analysis and strategize against in order to remain profitable and sustainable.

So which method is best for firms to follow?

In an article written for the Harvard Business Review, an empirical study, “Blue Ocean vs. Five Forces”, conducted by Andrew Burke, Andre van Stel and Roy Thurik based on data from the Dutch retailing industry gathered over a period of 19 years agrees with the point made by the Blue Ocean Strategy that although the initial advantage generated through an innovative breakthrough and the defining of a new industry is substantial and impervious from competition and imitation, these effects tend to fall off after about 15 years.

The study recommends an intelligent mixture of the two methods where, even though a firm’s investments should be geared towards innovation and searching for blue oceans, the resources to fund such investments come from the effective and efficient management of its position in the existing market – thereby making analysis of industrial competition critical.

Without a doubt, discovery of a blue ocean brings a firm massive revenues and a loyal customer base to both its existing and future products and services. However, in order to look to the future, a firm has to demonstrate its ability to survive in its given environment first.

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