Porter’s Five Forces VS. Blue Ocean Strategy

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The Porter’s Five Forces is focusing more on what makes an organization competitive in existing red markets and it is concerned with the micro-environmental factors affecting businesses within the same industry. Factors such as competitive rivalry, new entrants, buyer power, supplier power, and threat of substitution are factors which when conquered would not necessarily make you as a market leader since one of the criticism of this model is that businesses are not always in a web while Blue Ocean Strategy is a strategy that is undertaken by an organization in a new dimension in which its competitors haven’t ventured into. Hence in essence, the organization creates its own new market and if successful, it would make you a business leader by being aggressively innovative.

Why do business people always compare Porter’s Five Forces and Blue Ocean Strategy? Fortunately, I found out that they think it’s a battle of which of the two strategies is the most effective way in the industry. But we are talking here about business. So, there are some businesses today that facing of different problems in their company that was address to the manager, that’s why there are some strategies that exist in the firm. The results indicate that there may be a lot more opportunities in existing markets than previously thought. Most of the business press cover new and fast growing markets, but what this study clearly shows is that innovating in existing markets is an effective strategy; that competition is a much weaker force in terms of eroding the benefits from that form of innovation. And especially the type of innovation that you need to look at doesn’t have to be a radical revolutionary type of innovation; it is more incremental, adaptive, reforming and edging forward in the market.

Now, I would like to emphasize the difference between Porter’s Five Forces and Blue Ocean Strategy for a deeper understanding of what it is all about.

Porter’s model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change.

Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.

Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:

  1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices.
  2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down.
  3. Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don’t get a good deal from you.
  4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do.
  5. New Entrants: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position.

The Blue Ocean Strategy take the view that innovation should create new market space, tap into unsatisfied consumer demand, and find uncontested market space. In this way, competition can become quite irrelevant because the rules of the game are waiting to be set. Blue Ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored.

W. Chan Kim and Renee Mauborgne outline a strategy process to create a long-term sustainable competitive advantage. Especially today, companies need to be more than just another competitor in a mature and over-saturated market. The cornerstone of Blue Ocean Strategy is ‘Value Innovation’. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.

Following the ideas of Blue Ocean Strategy will help you to find and exploit those customer and market niches where you can deliver a unique value without all the competition. Here are some of the following:

  • The concept of Blue Ocean is defined by untapped market space, demand creation and the opportunity for highly profitable growth without all the competitors.
  • Some examples of Blue Ocean strategy:
    • Cirque De Soleil
    • Chrysler Minivan
    • CNN
    • Body Shop
    • Southwest / Ryanair
    • Apple with the I-Pod, I-Phone, and I-Pad platform
  • Blue Ocean is based on value innovation
    • Focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.
  • Blue Ocean Strategy pursues both differentiation and low cost simultaneously
    • Align the whole system of a firm’s activities in pursuit of differentiation and low cost.
    • Decide what you are going to do. And decide what you are not going to do and not going to offer to the customer. As an example, Southwest does not offer first class or assigned seating.
  • Six Principles of Blue Ocean Strategy
    • Formulation Principles
      • Reconstruct the market boundaries – re-define the market space
      • Focus on the big picture, not the numbers
      • Reach beyond existing demand
      • Get the strategic sequence right
    • Execution Principles
      • Overcome key organizational hurdles
      • Build execution into strategy
  • Analytical Tools and Frameworks
    • Strategy Canvas
      • Analysis of the points of competition and thus differentiation
    • Four Actions Framework
      • Based on the Strategy Canvas to create a new value curve for competing
        • Which factors that the industry takes for granted should be eliminated?
        • Which factors should be reduced?
        • Which factors should be raised well above industry standard?
        • Which factors should be created that the industry has never offered?
    • Three characteristics of a good strategy
      • Focus
      • Divergence
      • Compelling Tagline
  • Formulating Blue Ocean Strategy
    • Reconstruct the market boundaries
      • Look across alternative industries
      • Look across strategic groups within industries
      • Look across the chain of buyers
        • Purchaser
        • User
        • Influencer
        • What group do you typically focus on?
      • Look across complementary product and service offerings
        • What happens before, during and after your product is used?
        • What is the context in which your product is used?
        • What are the pain points? How can they be eliminated through a complementary product and service offering?
      • Look across functional or emotional appeal to buyers
        • Trade-off between emotional appeal v. functionality
      • Look across time
        • Trends that are decisive, irreversible, and with a clear trajectory
    • Focus on the big pictures, not on the numbers
      • Compare your business with your competitors by drawing a strategic canvas (Visual Awakening)
      • Go into the field to explore the paths to creating a Blue Ocean (Visual Exploration)
      • Draw your “to be” strategic canvas and get feedback to improve (Visual Strategy Fair)
      • Communicate and support these projects (Visual Communication)
    • Pioneer – Migrator – Settler Map
      • Classify the different business in your company
    • Reach Beyond Existing Demand – Three Tiers of Non-Customers
      • Your Market
      • First Tier – “Soon to be” non customers who are on the edge of your market, waiting to jump ship
      • Second Tier – “Refusing” non customers who consciously choose against your market
      • Third Tier – “Unexplored” non customers who are in markets distant from yours
    • Get the Strategic Sequence Right
      • Buyer Utility
        • Buyer Utility Map
          • The Six Stage of the Buyer Experience Cycle
            • Purchase
            • Delivery
            • Use
            • Supplements
            • Maintenance
            • Disposal
          • The Six Utility Levers
            • Customer Productivity (help customer do things better and faster)
            • Simplicity
            • Convenience
            • Risk
            • Fun and Image
            • Environmental Friendliness
      • Price
        • Look at network externalities (all or nothing propositions), non rival goods, excludability
      • Cost
        • Look at ‘price minus’ costing, not ‘cost plus’ pricing; focus on the value that you are offering the customer.
      • Adoption – What are the adoption hurdles in actualizing your business ideas?
  • Executing Blue Ocean Strategy
    • Overcome Key Organizational Hurdles
      • Tipping point leadership
      • Use disproportionate influence factors
      • Cognitive Hurdles – People wedded to the status quo
      • Resource Hurdles
        • Redistribute resources to your hot spots
        • Redirect resources from your cold spots
        • Horse trade resources
      • Motivational Hurdle
        • Zoom in on kingpins
        • Put kingpins in a fishbowl
      • Political Hurdles
        • Angels, devils, consigliore
    • Build Execution into Strategy
      • Power of Fair Process to change attitudes and behaviors to improve strategic execution
        • Engagement
        • Explanation
        • Clarity of Expectation – State the new rules of the game
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