An Example of a Red Ocean Strategy Going Well and Badly- Marks and Spencer's
Kim and Mauborgne (2004) write the ‘business universe consists of two distinct kinds of space, red and blue oceans'; interestingly they state that although there is a greater than ever business need for blue ocean strategies, most the theory is on red ocean. Here is a diagram from Kim and Mauborgne (2004) outlining the differences between the two strategies:
Blue ocean companies come from innovation, research and development, they create their own markets so grow quickly. Competitors will join the market seeing the high profitability but Kim and Mauborgne (2004) tells us that the blue ocean firms tend to stay ahead of competing firms. However, eventually they do say ‘products become commodities and cut throat competition turns the ocean bloody red.' Red ocean companies compete in saturated markets trying to gain competitive advantage over their competitors, the opportunity of profits and growth are decreasing the redder the ocean becomes.
Lainos (2011) compares blue and red ocean strategies, finding most firms compete in red oceans focusing on ‘gaining competitive advantage', they do this either by lower prices of product differentiation. In this case study, I will use Marks and Spencer's to demonstrate their food as pursuing product differentiation strategy and their clothes as being ‘stuck in the middle', Porter (1980). As previously discussed, Porter's Generic Strategy believes for a firm to be profitable in the long run, they need competitive advantage. Porter suggests to be successful, a firm must be: a cost leader; produce a superior product at a premium price or focus on a niche market. I aim to show in this essay Marks and Spencer's food pursuing product differentiation successfully, whereas their clothes falling into the trap of the bottom right of porter's strategy clock, ‘destined for ultimate failure'.
Marks and Spencer's Group PLC Strategic Report (2016), states ‘M&S is one of the UK's leading retailers, with 1,382 stores worldwide,' with over '32 million customers', and a '10.8 billion group revenue'. Steve Rowe, the CEO states ‘quality, innovation and choice are the hallmarks of our Food business, which accounts for 58% of our turnover', showing their product differentiation strategy. Their clothing and home products makes up the other 42% of turnover, Marks and Spencer's are the ‘the UK's largest clothing retailer by value and we have market-leading positions in Womenswear, Lingerie and Menswear'. However, their clothing business continually struggles and delivers disappointing results, as I will discuss later.
Marks and Spencer's food business has a clear upmarket position, (‘M&S Must Sell Clothes Just Like It Sells Food' n.d.), thereby Marks and Spencer's has competitive advantage through product differentiation, Porter (1980). They achieve competitive advantage by using high quality ingredients and innovation with their ready meals. Marks and Spencer Group PLC Annual Report (2016) shows their food business generated £5.4 billion revenue in 2016, an increase of 3.6%, and that it has long been performing growing in profitability. This is a good example of a red ocean firm working effectively as they are achieving competitive advantage and thereby long term profit. Porter (1980) says ‘aim of the game is to get larger market share', Marks and Spencer Group PLC Annual Report (2016) states they have a market share of 4.3% and it is increasing year on year.
On the contrary to their growing food sector, their clothing and home business revenue has decreased by 2.2% in 2016 to £3.9 billion, Marks and Spencer Group PLC Annual Report (2016). This is due to Porter's (1980) issue of being ‘stuck in the middle', they neither aim for cost leadership or product differentiation. Wood and Farrell (2016) write: ‘The choice rests on picking the strategy best suited to the firm's strengths and one least replicable by competitors'. Porter (1980) points out, ‘firms failing to deliver strategy in at least one of the three directions', ‘almost guaranteed low profitability', concurring with Wood and Farrell about the lack of clear and concise Strategy.
Steve Rowe says in the annual report that making clothing profitable is his number one objective, Marks and Spencer Group PLC Annual Report (2016). This report also expresses the views of the customers saying they want more stylist, less fashionable clothes, less sales promotions and greater availability, all this led to Steve Rowe pursuing a policy of cost leadership- “A key part of our recovery plan for clothing and home is lowering prices and reducing promotions”. Ellison (2016) writes they are starting to turn their clothing business around due to a policy of ‘see now buy now', they are cutting costs through no catwalks, no mass marketing and no celebrity patrons allowing them to substantially decrease prices for consumers. Armstrong (2017) explains how Marks and Spencer's has stopped the decrease in sales in their clothing division with their best Christmas sales in 2017 since 2011. The article quotes Steve Rowe in saying ‘better prices helped to improve our performance in a difficult marketplace'.
I have shown how Marks and Spencer's is an example of a firm pursuing a red ocean strategy, it is competing in saturated and aggressive markets. The aim in the supermarket industry is increase market share and they are consistently done this through achieving competitive advantage. Marks and Spencer's clothing business has continually disappointed through being ‘stuck in the middle', Porter (1980), however, there is now evidence to suggest through pursuing a focus on cost leadership, their clothing's performance has improved. However, Porter does states whole divisions need to be focused on price, meaning further cuts to costs and prices would be needed to ensure long term profitability. Furthermore, he also discusses the complications of companies with sectors pursuing differentiation and cost leadership like Marks and Spencer's are doing currently.
Most the literature on red ocean strategies has suggested cost leadership and product differentiation are mutually exclusive and Porter (1980) agrees, although he states there are exceptions. The idea a mature firm can reduce costs and improve differentiation through innovation is discussed by Hendry (1990) and Gilbert and Strebel (1988). Cronshaw, Davis and Kay (1994) also further emphasised the point saying it would be better to ‘successfully combine differentiation and cost leadership'. This is something Marks and Spencer's could investigate, they could keep costs low through economies of scale and innovation while selling at a premium price. Lainos (2011) Talks about firms going from red to blue ocean strategies, and how it would increase profitability and remove limitation on success of a company.
Finally, Dastaler and Flouris (2006) mention, Porter's (1980) ‘stuck in the middle' concept shouldn't always be taken literally as they say there is a danger of a cost leader not delivering acceptable quality and a differentiated product having high costs than its premium.
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