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Blue Ocean Strategy
The term blue ocean strategy was first formed in the year 2005 by the two professors, namely W. Chain Kim and Renee Mauborgne in their book, Blue Ocean Strategy: How to Create Uncontested Market Space and make Competition Irrelevant. The book focused on the research of thirty industries with a hundred and fifty strategic moves dated to have been spanning for more than a hundred years. The term generally refers to the creation of an untapped market space by a company that does not take into consideration the competition posed by its competitors; instead it strives to create a new costumer value, while decreasing its total production cost (Kim,W.C.,Mauborgne, R. 2005).
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In this regard, there have been success stories of companies that have implemented the blue ocean strategy and have really performed well. Their profits have substantially increased, and they have reduced their competition by a large scale. A good example of such companies are: Palace theater, Nickelodeon, Apple personal computers, Compaq server, Dell built- to order computer, Ford model T and Japanese fuel-efficient models. This paper will focus on analyzing the following issues: reasons for the creation of the blue ocean strategy, a PEST analysis of the blue ocean strategy, a SWOT analysis of the blue ocean strategy, retailing policy explaining strategic goals and lastly a brief assessment of the PEST and SWOT analyses showing different approaches to the problem.
Reason for the Creation of Blue Ocean Strategy
W. Chan Kim and Renee Mauborge observed that companies were in a constant competition with each other with an aim of outdoing the rival and, hence, acquire profits and customers. This competitive strategy of running business did not give a chance to the innovation and creativity, because all the companies were aiming at defeating their competitors in terms of the profit and number of customers purchasing their product. Due to the competitive spirit of the companies, they would experience reduced profits as they tried to win more customers by lowering their prices (cost trade-off). A major contributor to this problem is that the market has already been overcrowded. The professors termed such market as the red ocean (Siegemund, 2008). Due to the shortcomings in the red ocean market, the professors invented the blue ocean strategy. This strategy enables the organization to have a significant change in its value and attitude towards its buyers as well as its employees. It also operates under a low-cost budget.
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Additionally, the organization is able to create a new market which makes its competition irrelevant by the mentioned creation. The blue ocean strategy offers analytical frameworks and tools for organizations to enable them create and capture the blue ocean. Furthermore, it helps the organization in achieving a strategic alignment in terms of its goals, sustainability and renewal at all levels of the business in order to avoid the red market traps (Kim, Mauborge, & ling, 2011). By creating an explored new market (Lucier, 2005), the strategy encourages the innovation and creativity (Menzel, March 31, 2014). For the innovation to work, it must be aligned to the utility, price and cost.
PEST Analysis of the Blue Ocean Strategy
PEST is an abbreviation for political, economic, sociocultural and technology. The PEST analysis is a method that enables a better strategic planning of a business. Its framework describes the factors that affect the strategic management of businesses from outside (Brian David Smith, September 13,2005). These factors can either affect the business positively or negatively. In this paper, the ways in which these factors affect the blue ocean strategy will be shown.
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A political factor affecting a business is the level, in which the government intervenes in the economy. This intervention can be either positive or negative, depending on the aim of the government concerning the economy. Political factors include trade restrictions, tariffs, political stability, labor law and tax policy. Companies operating in the blue ocean are affected by the policies that the government implements in regard to the businesses. A government can restrict the involvement of business practices in a particular venture. This is a limitation to a business that identifies it as its blue ocean. Additionally, a company in the blue ocean that operates in a country faced with the political instability is under the threat of a failure, because it will be faced with a lot of challenges. Such challenges include rooting, insecurity, and reduction of the market, because people will be fleeing from the affected areas. When the government reduces its taxes that it charges the companies, the latter increase the amount of profit that they make. This will also happen with those companies that operate in the blue ocean. Additionally, the abovementioned companies will, in their turn, reduce the cost of production, therefore making the goods appropriate to the value of the customers.
Economic factors affecting a business are those that influence the business externally and the broad economy at large. These factors can have a positive or negative effect on the business. The economic factors that result in the positive influence are those that lead to an increase in the organization’s output. While the economic factors that affect the business negatively are those that will lead to a low performance of the organization. These factors include the inflation, unemployment rate, taxes, and interest rates. At times, a business that is operating in the blue ocean will not be able to control the performance of the economy. Thus, the inflation will have both the negative and positive effects influencing the business (Kim, Mauborgne, Bong, & Ji, 2013). A blue ocean business will have high profits during the inflation, because it will have a high demand of the goods and services that it will produce. When the rate of unemployment is high, the business will increase its output, because it will have a reduced cost of production. When the rate of unemployment is high, it means that the business will achieve a cheap labor.
Sociocultural factors consists of the societys beliefs, customs, practices and behaviors. The sociocultural factor has a high impact on the product and activity that a business will venture into. It affects the strategy and its respective implementation by a business to a considerable degree. For the blue ocean to work effectively, its strategic framework should be in line with people’s beliefs, culture, custom, practices and behaviors (Doughlas & Cameron, 2010). A company will enjoy massive profits from venturing in the business that is generally acceptable by all the people in the community. For a business that wants to enjoy the massive blue ocean, it should tap the market in the community that has not yet been discovered by other companies. Moreover, it should be in line with the practices, beliefs and behaviors of the people. If the venture is totally not in accordance with the sociocultural beliefs and practices of the people, then the business will suffer and will be closed in the end.
In regard to technological factors, the blue ocean is hardly affected by the technological innovation. Although the technological aspect is sometimes used in the creation of the blue ocean, it is not a leading determinant of its success. From the statistics of success stories of organizations that operate in the blue ocean, it has been proved that their successes were not because of their technology, although the latter was present. In general, the blue ocean is achieved when the organization links the technology with what the buyers value. A good example is the Compaq PC server. Its success was not reached because of the technology that existed. Instead, the Compaq PC server linked the technology to what the buyers would value.
SWOT analysis on Blue Ocean Strategy
SWOT is an acronym for strengths, weaknesses, opportunities and threats. SWOT is an analysis that is used to determine the performance of an organization by highlighting and analyzing its strengths, weaknesses, opportunities and threats (Agency, 2008). By establishing all these in terms of the organization, the head of the company will know the course of actions to take in order to enhance the performance of the organization. The course of actions to take will be to remove the weaknesses in order to avoid the threats they pose and maintain as well as improve the weaknesses in order to increase the opportunities available for the organization. In this part of the paper, the strengths, weaknesses, opportunities and threats of companies will be discussed in regard to the blue ocean strategy.
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A major strength of the blue ocean strategy is its four action framework. This framework poses four questions. By answering the four concepts questions, one is able to come up with a profitable new market that aims at having the value of consumers. The four concepts from the framework are raising, eliminating, reducing and creating. When an organization applies this framework, it will be able to create a new market and expand its profits. Furthermore, it will be able to meet the consumer needs. The firm should identify and raise the factors that are its strength above the industrys standard. Additionally, firms should identify factors that slow down their performance. By the elimination of these factors, the industry will initiate the step towards the creation of the blue ocean (Dubrin, 2011). The firm should also identify the factors that it needs to reduce, so that it can meet its consumer values. This is because the blue ocean strives at meeting the consumers value by reducing the costs of production of the commodities. Another strength of the blue ocean strategy is that it creates a brand loyalty and equity towards the organization for decades. The data shows that organizations that have succeeded in the creation of the blue ocean are still recognized for decades, and their consumers are loyal to the brand. Thus, it shows that there is an ample space and time for an organization to grow within the strategy. All it requires is a good managerial action taken by the leaders governing those organizations. The blue ocean strategy enables a company venture into the new market by looking for an uncontested market space. This market space does not offer a competition in that company seeks to provide commodities that are different from the other ones offered in the red ocean. Additionally, in regard to the blue ocean, there is no need to look for the market outside the red ocean. One of the minor strengths of the blue ocean is that it is not affected by technological factors. Thus, blue ocean organizations have thrived because of the value they offered to their customers. This is evident from the collected data regarding companies that have implemented the blue ocean strategy in their businesses successfully.
Though the blue ocean strategy offers valuable frameworks and tools that provide valuable strategic processes, there are some risks associated with taking the strategy too far. These risks are called weaknesses; they are the elements that make the company have or experience losses. One of the characteristic peculiarities of the blue ocean strategy is to ignore the competition by creating an uncontested market space (Stan, October 1, 2008). This is risky for managers, because they ignore the competition.
Managers adopting the blue ocean strategy believe that they offer a unique product that has a high quality and differs from other commodities. However, by ignoring the competition they pose greater risks, because the market can be having substitutes or alternative goods meeting the same needs. In the process of implementing the blue ocean strategic framework, an organization can drift too far from its original goals and objectives by trying to think out of the box, while trying to identify a new market. This can lead to the failure of such organization. Additionally, the company can forget its strengths, beliefs and mission, leading to the inevitable failure. Another advice in regard to the blue ocean strategy is to benchmark itself against the dominant players in the industry. This is a weakness of the blue ocean strategy, because the company will ignore other competitors, including the young promising ones. The later market that will be formed from such an analysis will already be populated by other industries (Porter, 1980). Another weakness of the blue ocean strategy is that the newly found uncontested market can be vacant for a reason (Mauborgne, 2005). Thus, the reason can be that the market is not viable to sustain the company for long. Additionally, there may be governmental restrictions preventing the business from operating.
The blue ocean strategy has some amazing opportunities to offer to those companies that experience it. Opportunities are the factors that a business can exploit in order to achieve the advantage from that venture. To begin with, a firm that experiences the blue ocean has the opportunity to expand into a larger firm. The customers loyalty to the brand of the company enables it to have a high output, which results in the high income to the firm. The accessibility of money can enable the firm to expand and have branches. The firm is confident that the output will sell, because it provides a unique product and has a brand loyalty from its consumers. Additionally, companies experiencing the blue ocean have the opportunity of discovering more uncontested markets either in the red ocean or the blue one. A business operating in the blue ocean has the opportunity of having of a good manager who links the strategies to be in line with the framework and tools of the blue ocean strategy (Dubrin, 2011). Due to the business operating under no consideration of the competition, it is able to thrive in a healthy manner. By so doing, it will attract many consumers.
Although companies operating in the blue ocean enjoy the uncontested market, they are faced with certain threats. The abovementioned threats are the factors that can cause troubles to the business. They can either be internal or external factors. Internal threats are the ones that affect the business alone, while external factors are the ones that affect the whole market. A company is under the threat of a failure if it has been lured by the desire to think out of the box so much that it has forgotten its strengths. This will leave it vulnerable, because it is not exploiting its strength. Additionally, it has compromised most of its beliefs, practices and mission. Such a company is misdirected. Furthermore, a company in the blue ocean is under the threat of being output in the competition by its rivals if it follows one of the strategies of the blue ocean, which advises the company to benchmark itself from the dominant competitor in the market. This leaves it vulnerable to the young promising companies. With time, these young companies do better than the dominant company, hence outdoing the company that ignored their potential. Some companies face the closure due to the wrong assumption in their determination of the blue market. The company manages to find a vacant blue ocean which does not have the capabilities of sustaining it for a long time.
Retailing Policy Explaining Strategic Goals
The retailing policy basically refers to the rules and regulations that have been established to help in the daily running, operating and managing of the retail business that an entrepreneur has established. This set of retailing policies determines the success or failure of the organization. In terms of the blue ocean strategy, it has a framework with tools that outline the processes that an industry will follow in order to achieve the blue ocean success. The framework has four principles that organizations follow, which are: how to create an uncontested market, focusing on the idea, researching beyond the existing demand in the red ocean market and following the strategic sequence correctly to ensure that the blue ocean is reached.
Brief analysis on the PEST and SWOT Showing Different Approach to the Problem
Before, the PEST analysis was used in terms of the strategic management of the business. In general, it gives an overview of different factors that affect the business in regard to its performance. On the other hand, the SWOT analysis is a method that evaluates the strengths, weaknesses, opportunities and threats of a business venture. This method involves specifying the objective of the business, while also identifying the factors that are favorable and those that are not to the firm. These factors can influence the business internally or externally. Political factors are both the strengths and weaknesses of an organization. When there is a political instability, the political economy is viewed as a weakness. However, when there is a reduction in taxes, it can be the strength of the economy. Apparently, economic factors can be the strength, weakness, opportunity as well as the threat to the business. In this regard, the unemployment can be viewed as an opportunity for the business, for it will be able to have a cheap labor. A cheap labor is then becomes the strength of the business.
Companies in the blue ocean that enjoy a cheap labor create more profit. Sociocultural factors affect the performance of the business depending on how it is manipulated. When the business operates in terms of the beliefs and practices of the community, this becomes its opportunity, because the amount of customers will increase. However, when the business is not operating in line with the beliefs, culture and practices of the community, to which it is planning to sell the produced goods, it will become a weakness, because the people will not purchase from the company. This, in its turn, becomes a threat to the company, because if it does not change, the business will be shut down. Technology does not have any effect on the blue ocean; however, it is seen as the strength if the company has the advanced technology that enables it to cut the total cost of production.
The blue ocean strategy enables companies to look for the uncontested market, thus enabling them to achieve the market profit. Companies that have tried this blue ocean strategy have experienced the success in terms of their operations. This paper has managed to show the reason for the creation of the blue ocean strategy, the PEST and SWOT analyses of the blue ocean strategy, as well as the retailing policy explaining strategic goals. Lastly, there was a brief assessment of the PEST and SWOT analyses showing different approaches to the problem.
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