Wachovia Swot Analysis

Blue Ocean Strategy

By W. Chan Kim and Renйe Mauborgne

1. What are the key issues addressed in the article?

Many companies are confining themselves in the overcrowded industries. With that confinement there is no way to sustain high performance. The real opportunity is to create blue ocean market that are uncontested and without competitors.

The business universe consists of two distinct kinds of spaces including red oceans and blue oceans. While red oceans represent all the industries in existence today - the known markets, blue oceans denote all the industries not in existence. Red ocean markets are defined with clear boundaries and well understood competitive rules. Blue oceans provide another scenario. They are untainted by competition. In blue oceans, the demand usually is created rather than fought over.

There are two ways to create blue oceans. Companies can give rise to completely new industries with the example of eBay in the online auction. Or a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry.

Blue oceans seem to remain the engine of growth. As trade barriers between nations and regions are falling down and information on products becomes globally available, niche market and monopoly havens are hard to exist. Meanwhile, demand does not increase rapidly. The result is that supply overtakes demand. Maintaining the high margins and differentiated brands becomes harder ever in the overcrowded industries.

In military term, strategy is all about red ocean competition where "generals" will do all their best to drive the opponents from the battlefields. Focusing on red oceans therefore means accepting the key constraining factors of war: limited terrain and the need to beat an enemy to succeed. Blue ocean strategy, by contrast, is about doing business without competitors. The authors did research on blue ocean creators of three industries: autos, computers and movie theaters. Here what they found:

- Blue oceans are not about technology innovation.

- Incumbents often create blue oceans and usually within their core business.

- Company and industry are the wrong units of analysis.

- Creating blue oceans builds brands.

The key to creating new market space was found to be not the R&D. Instead, the creation of blue oceans is a product of strategy and managerial action.

The research also showed several common characteristics across strategic moves that created blue oceans. Firstly, the creators never use the competition as a benchmark. Secondly, the most important feature of blue ocean strategy is that it rejects the trade-off between value and cost which is the fundamental tenet of traditional strategy. The final characteristic common is that blue ocean strategy is achieved only when the whole system of a company's utility, price and cost activities is properly aligned. It is the whole-system approach that makes the creating of blue oceans a sustainable strategy.

Blue ocean strategies create barriers to imitation. Firstly, because blue ocean creators immediately attract customers in large volumes, they are able to generate economy of scale rapidly. Imitators are then at the immediate and continuing cost disadvantage. Secondly, imitation requires the change of the whole system, not just one or some parts. Imitators, then, takes time to change or do not dare to change as they will have to forgo many of their core businesses. Thirdly, the cognitive barriers can be also