Blue Ocean Strategy versus competitive-based strategy

ADESOYE ADENIJI
March 10, 2020.
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. In other
words, it is wading the mud of red ocean for survival of the firm in the industry.

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.
COMPETITIVE BASED STRATEGY BLUE OCEAN STRATEGY

 Compete in existing market space  Create uncontested market space

 Beat the competition
 Exploit the competition
 Make the value-cost trade-off
 Align the whole system of a firm’s
activities with its strategic choice of
differentiation or low cost
 Make the competition irrelevant
 Create and capture new demand
 Break the value-cost trade-off
 Align the whole system of a firm’s
activities 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.
While Porter’s forces and Blue Ocean strategy are simply alternating concepts for
a firm to stay afloat (positioning) in an existing or new industry, core
competencies are the wherewithal, resources that the firm requires to stay afloat.
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.
Let’s illustrate with an example
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.
We can further investigate the nature of the competition process in retailing
by contrasting blue ocean strategy and competitive strategy
Retailers operate in heavily contested markets. A way to avoid this heavy
competition is to look for uncontested market space. This strategy is known as
blue ocean strategy (Kim and Mauborgne, 2005). In contrast, competitive strategy
emphasizes the inevitability of long-term competition among relatively
homogeneous contenders pretending that market conditions are stable
(Porter,1980, 1985). While canonical strategy preaches to find a good niche, to try
to understand it, to control it and to harvest supernormal profits, market conditions
usually don’t remain stable so that your niche disappears. How fast it disappears
determines the relevance of the blue ocean strategy. In other words, it is
determined by how long new market space remains sustainable because it is
uncontested or unsuccessfully contested. In yet other words, it is determined by
how long it takes for a blue ocean to turn red. Kim and Mauborgne (2005a) contest
the dominant position that competition is assumed to play in strategic management.
At the heart of this debate is Kim and Mauborgne’s view that in the long-term firm
profits need not be negatively related to the number of firms in its industry. They
argue that firms can find markets where they can grow their profits without
competition. By contrast, competitive strategy (Porter 1980, 1985) is related to
economics’ concepts where long term competition and imitation are dominant
forces (e.g. Cool et al., 1999). In this framework, even if firms adopt highly
innovative strategies leading to enhanced performance (Hamel and Prahalad,
1994, and Hamel, 2002), the axiomatic underlying assumption of competitive
strategy is that these will be temporary/transient advantages that sooner or later
will be imitated and improved upon by other firms (Buisson and Silberzahn, 2010).
This focus on competition in the literature means that the ability of firms to
generate a ‘competitive advantage’ is the central objective permeating most areas
of strategic management (De Wit and Meyer, 2005). Both competitive strategy and
blue ocean strategy emphasize the importance of firms avoiding intense
competition. In the competitive strategy framework avoiding competition has
much to do with a resource based view of the firm (Penrose, 1959) where unique
resources limit imitation and create a sustainable competitive advantage and
enhance profits (Barney, 1991, Amit and Schoemaker, 1993, and Peteraf, 1993).
Of course, over time it becomes increasingly possible for other firms to replicate
what was once a unique resource. Since market opportunities continuously change,
unless a firm continues developing new unique resources and new sustainable
competitive advantages, a greater number of firms should simultaneously increase
competition while reducing profits. Consistent with these observations, Black and
Boal (1994), Teece et al. (1997) and Winter (2003) highlight the importance for
firms to develop the dynamic capabilities necessary to continually create new
unique resources facilitating new sustainable advantages over competitors thus
aligning the firm to future profit opportunities. Cohen and Levinthal (1990),
Zollo and Winter (2002) and Kim and Mauborgne (2005c) emphasize the critical
role played by learning and managing information. In turn, McEvily and
Chakravarthy (2002) and Lee et al. (2000) deal with the next level of the imitation
challenge which is the propensity for dynamic capabilities themselves to be
replicated by others. Obviously, the faster this imitative process happens, the faster
and more intensely firms find themselves in a situation leading to reduced profits.
Porter (1980, 1985) argues that this process happens quickly. In fact, it is
sufficiently fast that the main concern of strategic management ought to be
survival and winning inter-firm competition. Put differently, innovation can
provide a short-term panacea but in the long-term imitation forces firms to engage
in and win competitions with close rivals.
So, despite the lack of radically different theoretical dispositions, there are valuable
differences between blue ocean and competitive strategy centered on completely
different empirical conjectures regarding the speed at which profits generated by
innovation are eroded by imitative behavior. In essence, the proponents of the blue
ocean strategy take a more optimistic view of the impact of innovation on firm
profitability. If there are barriers to imitation and if firms can continually find
uncontested markets or create new consumer demand through innovation, then the
main strategic concern of firms is not managing competition, but rather managing
innovation. It requires different managerial objectives. Kim and Mauborgne (2005)
view the blue ocean strategy as a generic option for management because they
take an empirical view that through ‘value innovation’ firms will be able to find
sufficient untapped markets thus creating consumer demand and ultimately
growing while avoiding confrontation with competitors. By contrast, the view of
the competitive strategy school of thought is that there is no guarantee that a
plentiful supply of untapped markets exists and even if it is found, it only
temporarily distracts from the core business activity: competition among firms.
Above all, they argued that value innovation defies most commonly accepted
dogmas of the competition-based strategy, which is the value-cost trade-off.