The Blue Ocean Strategy: Did Michael Porter Get It Wrong?

Key Takeaways

• Strategy formulation and execution are the keys to market success

• The current strategy, which is thinking of two dimensions in large or niche markets, may need a reboot

• The blue ocean strategy demonstrates how entrepreneurial thinking can create a new strategy

The business world got a major rethink in 2005 when two INSEAD professors challenged the current way businesses conceive and implement strategy. For over thirty years, managers and students in the field were taught that achieving an advantage over the competition could be done in only two ways. This view was the accepted one, and every MBA student learnt that this was the way to deliver increased shareholder value. But this theory could not fully explain the emergence of major disrupters. The existing explanation had a blind spot or created one, especially for incumbent managers and business owners.

W. Chan Kim and Renée Mauborgne, authors of the best-selling Blue Ocean Strategy: How to create uncontested market space and make the competition irrelevant, developed a new perspective on strategy. This book sold over 3.6 million copies and is considered one of the best business books.

They argued that the either-or strategic options of low cost or differentiation need not be mutually exclusive; you can have both. Their view could explain why some disrupters can beat incumbents, a view that current strategy thinking says you cannot. Most of what we learnt about strategy was developed by Harvard professor Michael E. Porter, but, as with most thinking, new ways of seeing the world can 'disrupt' established ways of thinking.

Porter's view

Porter is considered one of the great contributors to the management discipline, especially in business strategy. In his groundbreaking 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance, he outlines how firms can gain an edge over competitors.

He is world-famous for the Five Forces Model. This model describes the industry structure and assesses its attractiveness—both key insights for crafting a successful strategy. Porter also developed the value chain concept, which helped business strategists identify ways to improve value creation.

Porter says you can either have a low-cost or differentiation approach. You can either be a low-cost operator, like BiC pens, and sell for less than everyone else because you have a cost advantage. You can differentiate like Cross pens and stand out in a prestigious, image-enhancing way. But Porter warns you cannot have both.

Red Oceans

Kim and Mauborgne coined the term 'red oceans' to describe the current industry landscape in which players in a mature market compete for an edge, to their detriment. This action results in competitors seeking lower costs or to further differentiate. The resultant effect is price cutting and lower profits. Hence the name red ocean.

The red ocean is about market competition, where players compete against each other. But if you are an entrepreneur looking to enter the home furnishing business, there is a lesson from an innovator. 

IKEA introduced the idea of selling stylish furniture at low cost by asking customers to assemble it at home, saving considerable sums in inventory costs (one of a retailer's most significant costs). This thinking sounds like I am asking you to arrange this article if it were all mixed up, but the retailer makes it easy and creates huge savings for the buyer. IKEA, in effect, opened a new market space when it started; Kim and Mauborgne call that the blue ocean.

Blue oceans

While the red ocean is market competition, the blue ocean strategy is about market creation. The blue ocean strategy achieves growth in two ways: disruptive and non-disruptive creation.

Economist Joseph Schumpeter first coined the term "creative destruction"; he argued that new technologies would displace older ones when they are innovative. Diminishing returns will occur for buyers and producers as they continue using existing methods. He suggests that destruction will destroy an industry. An example is digital photography: people now rarely use film, which could explain why Kodak failed to make the transition. 

The Kim and Mauborgne argue that, while this can be true, disruptive innovation occurs when an inferior technology slowly replaces an existing way of doing things as it improves. This is the Trojan horse strategy, in which industry leaders ignore the entrant until it is too late.

But sometimes new markets are created without disrupting existing ones. Sesame Street created preschool edutainment, which essentially did not exist before. It enabled what the authors call 'disruptive creation' by opening new market space without disrupting existing markets. There are still plenty of preschools around, but not like Sesame Street.

The blue ocean strategy offers three market-creating options: offer a breakthrough solution to an industry's existing problem, refine an existing problem, or solve brand-new problems. 

Value-cost opportunity

One of Porter's key messages is that it is impossible to have a low cost and yet be differentiated. It's like having a Mercedes for the price of a Toyota. Kim and Mauborgne outline four ways to achieve both increased value and lower cost simultaneously.

First, ask what factors should be reduced to lower the cost. As an industry develops, there are far too many 'bells and whistles' to the point where no one questions its value. This results in overserving the customer and so a higher cost structure. They use the example of citizenM Hotels, the business reduced the number of room types to just one. This strategy led to lower design and maintenance costs, as Southwest Airlines did.

Another way to reduce costs is to eliminate them. citizenM Hotels removed the front desk and lobby and replaced them with self-service check-in, reducing staff costs.

At the same time, citizenM increased value by creating larger rooms and a better sleep environment. They added free movies and phone calls, which other hotels charge premium prices for.

These four moves, reduce and eliminate costs, create and raise value, made citizenM a major affordable luxury chain that offers so much that its customer satisfaction is one of the highest in the industry, while having the lowest costs.

Entrepreneur's opportunity 

If you are wondering, how can this strategy shift change my business? Think about where you are right now in the industry and how you can deliver more value with lower costs. Or, if you are at the startup stage, look at the assumptions industry players make. They are likely looking at one another and trying to do each other out. This perspective creates a blind spot for strategising, and it could also be Michael Porter's, too.

Sajjad Hamid is an Entrepreneurship Educator who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he attempts to cultivate organic tropical fruits and vegetables, practising sustainable farming in his home garden.

He is the author of Build Your Legacy Business: Solopreneur To Family Business Hero. Sajjad is a Fellow of the Family Firm Institute. You can contact him at [email protected] or visit www.entrepreneurtnt.com.