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III.1. Value innovation and Blue Ocean Strategy
The Blue Ocean Strategy was developed by Kim and Mauborgne (2005) and it's the result of long-term strategy study over 30 industries covering 120 years. The core idea of this theory is to create value for the firm and its buyers by taking the differentiation-cost trade-off to a different level. Successful firms may want to create "blue oceans," which represent the new/innovative solution in order to become more competitive, rather than compete in "red oceans', which stand for the existing market place (see table 1).
TABLE 1 - RED and BLUE OCEAN STRATEGIES
RED OCEAN STRATEGY
BLUE OCEAN STRATEGY
Compete in existing market space
Create uncontested market space
Beat the competition
Make the competition irrelevant
Exploit existing demand
Create and capture new demand
Make the value-cost trade-off
Break the value-cost trade-off
Align the whole system of a firm's activities with its strategic choice of differentiation or low cost
Align the whole system of a firm's activities in pursuit of differentiation and low cost
www.blueoceanstrategy.com, Accessed April 2008
The authors define the notion of 'value strategy', which is the key to achieve a blue ocean. Thus, companies need to innovate in order to create value for them and for their buyers. Furthermore, the same authors argue that Michael Porter's (1980) suggested keys to success - low cost or niche penetration - are not the only options. Firms should try to offer both increased value and low cost by creating new value that is stretching beyond conventional limits.
Whereas the theory of swift even flow focuses on minimizing variability and standardizing processes to increase productivity, the blue ocean strategy is taking a different approach of "stepping outside the box" and increase productivity by increasing value through innovation. The second theory implies that variability is not undesirable as long as it's translated into value innovation. In terms of performance frontiers, the blue ocean strategy corresponds to a direct shift from one curve to another without increasing costs.
III.2. Morrison's value innovation
The takeover bid made by Morrison's to Safeway made business sense as the former, unlike the latter, didn't have a strong national presence before making this step. The result was a worthier competitor for the supermarket giants in the UK industry (see fig.2).
FIG. 2 - UK INDUSTRY CONCENTRATION BEFORE and AFTER SAFEWAY'S ACQUISITIONS by MORRISON'S
Note: as of January 2004; Source: internet data
Fig. 2 shows how Morrison's market share increased from 6% to 15.8% after acquiring the Safeway supermarket chain. The figure also depicts a rather concentrated oligopoly market structure in which the four largest retailers dominate 75.4% of the business.
Prior to the acquisition, the retailer's market growth strategy was an organic one focused on the grocery segment. The organic growth refers to the situation in which a company expands through internal means and by using the profit generated by its current activities. The company also used to resort to vertical integration to internalize more and more activities along the value chain, thus saving third-party related costs, reducing production to consumer time and also reducing the dependence to external suppliers.
Safeway's acquisition was translated into a horizontal acquisition. Horizontal acquisitions refer to the situation in which a company expands in the same industry and same products and its purpose is to increase market share. Additionally, Morrison's increased its geographical diversification and achieved considerable economies of scale, which enabled it to compete better in its industry.
In terms of blue ocean strategy and value innovation, there are a number of opportunities for Morrison's to improve its service, growth and profitability, such as:
Create uncontested market space. The retailer expanded its market space when it bought Safeway supermarket chain. The corporate decision was to transform the large Safeway stores into Morrison's ones and leave the rest to function under the Safeway brand. Nevertheless, the company increased its market share substantially. Given that the UK Competition Commission had to approve the acquisition, similar mergers/acquisitions in exactly the same industry are not likely to take place. Thus, to create further uncontested market space, Morrison's would have to take under consideration other options, such as diversifying the product/service portfolio by acquiring business in a different industry. One good example for this situation is Dell's application of call-center and it meant to sell mass customized computers. Shortly, the computer manufacturer engaged in a build-to-order strategy that led to more efficiency (by eliminating the obsolete) and a better customer experience (products were customized). Morrison's could move in the same direction and get closer to its customers to sell products and provide services that fit better the buyers' needs and wants.
Make the competition irrelevant. This task is very challenging as technology development made it almost impossible for firms to find unique assets or capabilities that enable them to make the competition irrelevant. Nevertheless, Morrison's can rely on a number of buyers that don't typically shop from the large supermarkets, but from smaller shops. The retailer inherited some of these customers from Safeway and could try to grow in that direction.
Create and capture new demand. Morrison's already has some experience in this area through its Market Street concept, which determined customers that otherwise bought from the market to buy from the supermarket. Similar products can be introduced to attract buyer that otherwise buy from specific shops, such as pharmacies for cosmetic products.
Break the value-cost trade-off. Morrison's is already providing a very good value-cost ratio to its customers. The cost can be reduced by taking further advantage of its scale and scope economies and the value can be increased by maintaining close relationships with its customers and flexibility to adapt to its needs.
Align the whole system of a firm's activities in pursuit of differentiation and low cost. Morrison's can make major it related improvements that could enable the company to be more efficient in terms of speed, costs and quality. Thus, an integrated logistics system would improve both production and distribution in a direct manner, in terms of costs and speed and customer service indirectly in terms of costs, speed and quality. Moreover, concentrated marketing campaigns focused on one concept at the time, such as the Market Street should differentiate the retailer from its competitors in the customer's mind and increased its mind share.
Blue Ocean Strategy official website, Accessed April 2008, www.blueoceanstrategy.com
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Fig. 1 shows that an improvement in quality leads to higher costs as the firm moves from a to B. An effort to reduce costs, will lead to a better performance frontier, from B. To C. Moving from…[continue]
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