Porter’s Five Forces VS. Blue Ocean: Which one is Relevant in the age of AI?

Business schools teach future industry captains how to analyze an industry’s determinants of profitability with Porter’s five forces (Porter,1980). Namely, the threat of new entrants, rivalry among existing firms, the threat of substitutes, the bargaining power of buyers, and the bargaining power of suppliers. In other words, an industry structure does matter.

Then, choose a positioning for a competitive advantage through cost leadership, differentiation, or a focused strategy. However, in her article in Strategy&, Rita McGrath of Columbia Business School suggested the contrary when she said companies should give up the quest for competitive advantage. According to McGrath, “Neither theory nor practice of strategy has kept pace with the realities of today’s boundaryless and barrier-free markets.”

Similarly, Wilde and Hax (1999) designed the Delta Model, given that they observed from their four-year survey that Porter’s framework did not explain many successful strategies. Thus, they built their model based on three strategic options: best product strategy, customer solution strategy, and system lock-in strategy. The latter was inspired by earlier work (Brandenburger & Nalebuff, 1996), particularly the notion of complementor, which has increasingly become one of the most important aspects of digital platform ecosystems.

In the same year, other prominent scholars weighed in with their article “ A New Manifesto for Management,” arguing that Porter’s theory is grounded in static efficiency, given that it centers strategic thinking on accumulating the lion’s share of an economic profit. In Porter’s world, there is a zero-sum race between firms’ profits and societal well-being, where profits necessitate loss (harm) to society (Ghoshal et al., 1999).

In addition to Porter’s framework the resource-based view (RBV) emerged in the 1980s. Proponents that a firm’s competitive advantage lies primarily in the application of a bundle of valuable, tangible, or intangible resources at the firm’s disposal (Rumelt, 1984).” In other words, resources do matter in gaining a competitive advantage.

This was followed by the core competence of the late C. K. Prahalad and Gary Hamel in 1990. Similarly, the dynamic capability view emerged, which Teece et al. (1997) defined as “the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.” In other words, innovation does matter.

Again, more than two decades later, in their 2005 book “Blue Ocean Strategy,” W. Chan Kim and Renee Mauborgne argue that the competitive approach to strategy is flawed. They also state that the field of strategy provides an array of tools to compete in the Red Ocean, including the five forces and the three generic strategies for analyzing the existing industry.

As a result, they provided compelling arguments with a handful of case studies in value innovation where the competitive strategy framework could suggest the contrary. Also, they designed a strategy canvas, a diagnostic framework to guide in executing a blue ocean strategy by making the competition irrelevant.

For this reason, firms can create a blue ocean of uncontested markets with an opportunity-maximizing and risk-minimizing strategy. Hence, to compete successfully, value innovation is a necessity to escape the red ocean trap. As a result, you will drive costs down while simultaneously driving value up for buyers by reconstructing industry boundaries. In other words, the framework will allow you to differentiate while simultaneously lowering your cost. Above all, they argued that value innovation defies the most commonly accepted dogmas of the competition-based strategy, which is the value-cost trade-off.

Indeed, W. Kim Chan and Renee Mauborgne stated that many successful companies mentioned in Tom Peters’ book, “ In Search of Excellence,” went awry after two years of publication.

However, Nintendo, one of the success stories in their book “Blue Ocean Strategy,” did not stay in the blue ocean for an extended period. Its value began to decrease two years after the book Blue Ocean Strategy. As a result, I wonder why it didn’t create another blue ocean, given that its stock price decreased almost 70% between November 2, 2007, and January 28, 2015.

Also, its net profit decreased dramatically and was in the red territory twice during that time. As I was writing this article (January 28, 2015), Nintendo issued another profit warning. As a result, its shares lost another 7% of their value. This begs the question. How long can a blue ocean last? In other words, for how long can the blue ocean make the competition irrelevant?

Nintendo is not alone. Pitney Bowes began its spectacular decline in value almost two years after creating its so-called uncontested market through a blue ocean strategy, which was trumpeted by its former CEO, Michael Critelli (Knowledge@Wharton, 2006). Worse still, it lost nearly 50% of its value between its 2007 heyday and January 2015 (MarketWatch, 2019). Again, Tata Motors’ Blue Ocean experiments with its Nano (the people’s car) have been a disaster. Since its debut in 2009, the Nano has struggled to sell more than 10,000 cars as of February 2019. This begs the question: How Blue is the Blue Ocean Strategy, and how long can a blue ocean last? And for how long can a firm make the competition irrelevant.

In addition, the authors did not clarify whether, in our imitation-crazy world, where arguably most of the value of innovations goes to imitators as explained elsewhere—is just value innovation enough to capture value? Above all, it seems that the excellent metaphor—blue ocean versus red ocean—has been a dangerous distraction over the years across boardrooms around the world.

Furthermore, the research methodology raised some concerns, given that no control group allowed further investigation of their theory application. Also, they did not clarify their definition of innovation in their book, including the time horizon.

The two frameworks are very insightful to their credit, and I am intellectually indebted and grateful for their excellent work. However, in our fast-moving business landscape littered with innovation, where a strategy becomes obsolete after its formulation, many strategists are more confused than educated. For this reason, I am looking for an answer to this million-dollar question:

Porter’s Five Forces Vs. Blue Ocean Strategy: Which one is more relevant today? In other words, Competitive Strategy vs. Blue Ocean Strategy: Which one is more relevant today?
You be the judge! Check the infographics below.