Are you a five-forces disciple or a blue-ocean enthusiast? I.e. Do you try to dominate existing markets or try to create new ones?
Basic economics models state that if an industry is profitable then new companies will enter the market and increase competition, thus driving down profits to marginal cost (where everyone more or less breaks even).
Researchers Andrew Burke, André van Stel, and Roy Thurik looked at entire industries to find out if an innovation strategy or a competitive strategy is best. In the blue ocean approach creating a new market would attract consumers over the long term, industry profits and the number of vendors would both steadily increase. If however, firm profitability went down as the number of firms went up you’d know companies focused on competition would outperform those setting their sights on blue oceans.
The study looked at profits and numbers of vendors for 41 shop types over a 19-year period (1982–2000) and found that evidence that blue-ocean strategy is sustainable. In more than half the shop types, average firm profits and the number of firms were positively related.
Although it would be foolish to dismiss competitive strategy altogether the study shows that competition eventually erodes the profits from innovation, but it is a slow process requiring 15 years or so, which suggests that it takes the better part of a generation for the blue-ocean approach to yield to competitive strategy.
This study suggests that businesses should consider a blend of the two approaches. For instance, by slowing down profit erosion with an effective competitive strategy for an existing market, they can increase the funds available for blue ocean investments and thus their chances of finding an untapped market with plenty of consumers.
3 thoughts on “Blue ocean strategy vs. Porter’s five forces”
Arif, this looks suspiciously like the basis for a dissertation? :o)
It’s Interesting to see that Shell’s new mission statement is to be “The most Innovative and competitive energy company” – in agreement with you’re concluding paragraph. It’s a tough balancing act though.
Hi Neil. I am still struggling for a title for my thesis, I am pretty sure it is going to be in the area of strategy and innovation.
A huge company like Shell in a mature stable market is going to find it hard to innovate unless they embrace alternative forms of energy but that will cannibalise their existing business. My guess is that they will wait until another company develops a sustainable form of alternative energy and then acquire them, which is probably cheaper than the R&D costs. From what I see innovation is bottom up led, so you need to lead the way and innovate for Shell!!
That’s an option Shell might not have the opportunity to take advantage of. If Shell fails to innovate for fear of cannibalising its current business, they might end up like Kodak or Comet who saw what the future would be like but failed to act immediately or even adapt to changes.
Apple is a good example of an innovative company, with one part cannibalising on the other – the iPad division feeding fat off the Mac division, and also disrupting the PC business of competitors. Of course Apple is aware of this but if they don’t do it when it’s in their power, some other company would which may eventually lead to their demise. Same goes for She’ll; if they would wait for another company to start, what is the assurance that their current business would be sustainable in that ‘waiting period’ to allow them acquire the new company that is into alternative energy which may dominate the future energy business, or better still, why would the company even want to sell?
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