Blue Ocean v Five Forces Strategy
Should you go out into the deep blue ocean, or battle with the five forces? We are not talking about sailing here, we are talking about business strategy.
We have gathered together some relevant research findings on this popular debate in strategic management. Essentially both schools of thought feed off the same economic model. Their difference is what they think is happening out there in the real world. The proponents of competitive strategy, largely going back to Porter, take the view that competition is the main issue that senior business managers ought to be addressing. That is what they see as the main challenge facing organisations.
A close look at this in practice provided some valuable results.
This was a joint research with Erasmus University in Rotterdam and EIM We decided to take a look at a market where both schools of thought had a reasonable chance of prevailing. We examined the retail sector and we found there that to some extent neither school are correct on this issue – in fact, that polarising strategy into blue ocean and competitive strategy options is misleading.
Proponents of Blue Ocean
The proponents of 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. Now blue ocean strategy has had a lot of enthusiasts and people like Starbucks and Dell have been cited as examples where you can get into territory that is uncontested and profitable.
So let me deal first of all with competitive strategy. If competitive strategy is right, then in the long term there should be a negative relationship between the number of firms in an industry and the profit levels; essentially that is the essence of the Five Forces. The more firms that you have in there competing, then the lower the profitability of the market.
Long-lasting Gains from Innovation
What we find is that in the long run is that profitability does indeed decline with competition, but it is actually quite a pedestrian force. Put differently it takes about fifteen years for an industry to push an innovation’s profits back down to a very basic level. What that means is that the profit gains from innovation, in an existing market, are quite a lot more than previously supposed.
The implication of that is that companies should pay close attention to their existing markets when looking for opportunities for innovation. We found in relation to the retail sector that, as the number of firms has come into the market, the market has expanded. This tells you that these firms can’t just be fulfilling a competition role; they are fulfilling an entrepreneurial role in bringing innovation into the market, expanding the market in the process by drawing in more consumer expenditure.
Where that leaves Blue Ocean Strategy
The results provide some partial support for blue ocean strategy, particularly in relation to the role of competition which we found not to be the strongest as previously imagined and of course the role of innovation. But right at the core of blue ocean strategy is the view that you should find new markets space and pioneer new markets.
Now this study and other research conducted here at Cranfield suggests that for pioneers in new markets it is often the followers that cash in–think of Microsoft in relation to the computer interface and iTunes in relation to digital music. These companies were essentially followers and employed adaptive innovation in terms of these new markets.
A Question Mark for Blue Ocean
Combined these results put a major question mark over blue ocean strategy; you do want to find new untapped market space, but do you want to be the pioneer in that market? The answer is not so clear. In this particular study on the retail sector it is predominantly about an existing market rather than a new market but nevertheless innovation and renewal are key features. But if you look across the piece, despite exceptions like Starbucks, most of these firms are innovating in incremental stages, not in big radical changes. And it is the net effect of this process, aggregating it all up, that leads to a significant positive effect. So the message is quite different from blue ocean strategy.
Pay Attention to Existing Markets
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 thirdly, 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.
Professor Andrew Burke is the founding Director of the Bettany Centre for Entrepreneurial Performance and Economics at Cranfield School of Management.