Blue Ocean Strategy – Nazli Mohammad

Porter’s 5 Forces Strategy vs Blue Ocean Strategy: Which One Is Better?

Are you a fan of Porter’s five forces or blue ocean? Do you want to dominate existing markets or explore for new ones to create?

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Blue Ocean Strategy

Porter’s 5 Forces Strategy

A graphical representation of Porter’s five forces From Wikipedia

Researchers Andrew Burke, André van Stel, and Roy Thurik studied whole industries to determine whether an innovation strategy or a competitive strategy is better.

They examined profitability and numbers of vendors for 41 shop types during a 19-year period (1982–2000). They employed a model that dates back to the 1921 economics study by Harold Hotelling for their research approach.

It argues that as long as there are profits to be made in a certain market, more and more vendors will emerge to serve that market until it reaches a saturation point, at which everyone more or less breaks even. If an industry is successful, additional competitors will enter the market, increasing competition and lowering profits down below the marginal cost.

Looking at entire industries, they discovered that blue-ocean approach would need the creation of a new market. If it attracted consumers in the long term, industry profits and the number of vendors would both continuously increase. As a result, companies win by staking out new markets.

As I said, the study looked at profits and numbers of vendors for 41 shop types over a 19-year period (1982–2000) and they found evidence that the blue-ocean strategy is sustainable. Average company profitability and the number of businesses were positively associated in more than half of the shop categories.

They found evidence that the blue-ocean strategy is sustainable. Average company profitability and the number of businesses were positively associated in more than half of the shop categories.
Andrew Burke, André van Stel, and Roy Thurik

According to their findings, competition gradually erodes the profits from innovation. However, this is a slow process that takes around 15 years, meaning that blue-ocean approach takes the greater part of a generation to yield to a competitive strategy.

According to their research, businesses may want to consider a hybrid of the two strategies. For example, by slowing profit erosion in an existing market with an efficient competitive strategy, they can improve the funds available for blue-ocean investments and hence their chances of finding an untapped market with plenty of consumers.

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What Is the Concept of Blue Ocean Strategy and its Defining Characteristics?

In today’s environment, most businesses compete hard for market share and will do anything to get it. The competition is usually so intense that some businesses cannot survive.

Blue ocean strategy is a strategy that encourages enterprises to think beyond the competition by developing new uncontested market space that makes the existing competition irrelevant.

Blue Ocean is about growing demand and breaking away from the competition.
W. Chan Kim

The terms Red Ocean and Blue Oceans were invented by Chan Kim and Renée Mauborgne to describe the market universe in their book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (2005).

What Is Blue Ocean?

Blue oceans represent all of the industries that do not exist today. the untapped market area that is free of competition. Demand is created rather than fought for in blue oceans. There is plenty of room for both profitable and quick growth.

The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action.
W. Chan Kim

What Is Red Ocean?

Red oceans represent all of the industries that exist today. the recognized market space.

According to W. Chan Kim, in red oceans, industry boundaries are specified and accepted, and the competitive rules of the game are well understood. Companies compete to outperform their competitors in order to capture a larger share of the current demand. Profitability and growth opportunities are decreasing as the market becomes increasingly saturated. Products become commodities, and increased rivalry turns the water bloody.

Red Ocean vs Blue Ocean Strategy

The Defining Characteristics

Chan Kim & Renée’s research shows several common characteristics across strategic moves that create blue oceans.

They found that, in contrast to traditional business, blue ocean creators never consider the competition as a benchmark. Instead, they make it irrelevant by producing a value increase for both buyers.

The authors argue that the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost. when it comes to creating blue oceans, the evidence shows that successful companies pursue differentiation and low cost simultaneously.

It is important to remember that creating value and innovating are important success factors. Understand the industry in which you compete, as well as new market entries that may threaten your market share.

ABOUT THE AUTHORS
W. Chan Kim and Renée Mauborgne (@blueoceanstrtgy) are professors of strategy at INSEAD and codirectors of the INSEAD Blue Ocean Strategy Institute. They are the authors of The New York Times and Wall Street Journal best-seller Blue Ocean Shift: Beyond Competing (Hachette Books, 2017) and the global best-seller Blue Ocean Strategy (Harvard Business Review Press, 2005; expanded edition, 2015).

Learn more about red and blue ocean strategies from the authors of the book on their website.

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