Porter's Five Forces & Blue Ocean Strategy (CIE A Level Business)

• Porter’s Five Forces identify the key pressures on an industry that impact the ability of a business to compete with rivals
  
• It helps managers think strategically about the environment in which the business operates

Diagram: Porter's Five Forces

Porter’s Five Forces model identifies the main competitive pressures on a business within an industry
 

• Porter argued that once a business fully understands these pressures in their context, they can take strategic decisions to achieve and sustain a  competitive advantage

  

An Explanation of Porter's Five Forces Model

Force	Explanation	Example
1. Industry Rivalry	When there are many competitors selling similar products, the business will have little power Many rivals are trying to get a more significant share of the market Customers have a lot of choices and can shop around When a business offers products in an industry with little or no competition, it has more power, can use premium pricing and dominate the market	The UK energy market has experienced a significant reduction in the number of rival firms in recent years as a result of numerous takeovers Remaining energy suppliers have been able to charge high prices and make incredible levels of profit
2. Threat of New Entry	If new competitors can enter an industry quickly and without investing a lot of money, then the barriers to entry is low and the threat of new entrants is high The market is likely to contain a large number of rival businesses Individual businesses are likely to have little power Where the barriers to entry are too high for new businesses to gain a foothold and compete in the market, the threat of new entrants is low	As a result of deregulation in the 1980s, UK consumers can access an increasingly wide selection of television channels, many of which can operate at a very low cost online   Whilst a small number of powerful firms such as the BBC, Netflix and Sky dominate, it is relatively easy for new niche channels to enter the market
3. Buyer Power	When a business sells to a small number of customers, those customers have significant power to negotiate lower prices  The business has few options when it comes to customers It will have to price and sell products according to customer demands Where a business has a high number of customers, those customers have less power It is likely to be able to charge a high price for a product that is relatively inexpensive to produce	Boeing is an aerospace company that sells aeroplanes to airlines and governments Airlines that purchase large numbers of planes from Boeing have significant buyer power due to their ability to negotiate lower prices and favourable contract terms
4. Supplier Power	Where a business has a lot of choices over the suppliers from which it buys components It is likely to be able to shop around for lower price   Where a supplier has significant power over a business as a result of offering a specialised component or where there are a small number of suppliers in the market The business has little choice over the source of its suppliers It is likely to have to pay high prices for its components and accept suppliers’ terms and conditions	Large UK supermarkets wield significant power over small, local suppliers   On the other hand, in 2022, the giant food manufacturer Heinz refused to supply Tesco with any product unless they increased their payments by 51%, which they were forced to do
5. Threat of Substitution	Where customers can easily swap a businesses products for those of a rival, the business has little power The business is likely to have to compete on price or invest heavily in developing a USP Where substitution is unlikely, a business has significant market power It is likely to be able to charge a high price for its products and may be less inclined to innovate	Smartphones have become a substitute for a wide range of standalone goods, including calculators, cameras and even portable computers In the case of cameras, many manufacturers have moved away from selling low-priced devices and now focus on high-end, specialised products for serious photography enthusiasts

• Once a business has applied the Five Forces model to its own circumstances, Porter recommended a range of generic strategies to increase its chances of competing
  • On the basis of cost or through differentiation
  • In the mass market or within a smaller niche market
    
    
• It emphasises the importance of developing distinctive capabilities and avoid being 'stuck in the middle'
  

Diagram: Porter's Generic Matrix

Porter's generic matrix identifies suitable strategies for mass and niche markets

Mass Market Strategies

• Cost Leadership

  • Most suitable for businesses that have a significant cost advantage over rivals 
    
    • Cost leadership with parity is where a business has lower costs than rivals but charges the same price
      • Examples include hotel chains such as Premier Inn and Ibis Styles
        
    • Cost leadership with proximity is where a business has lower costs and charges a lower price than rivals
      • Examples include budget airlines such as Southwestern and Ryanair
        
        

• Differentiation

  • Businesses that cannot be the most competitive on cost should make its products distinct from those of rivals
  • This allows a business to charge a premium price and achieve a high profit margin
  • Examples of businesses that adopt a mass market differentiation strategy include
    • Coca Cola, whose trusted and well-known branding includes its logo, brand colours and characters such as the Coca Cola truck
    • Samsung's cutting-edge mobile phones have the most advanced package of technical features in the mass market
    • Volvo's focus on safety and build quality allows it to charge premium prices in the mass market
       

Niche Market Strategies

• Businesses that operate in a niche markets should adopt one of two focus strategies that closely meet the needs of its specific group of customers
  
  
• Cost focus strategy 
  
  • This involves being the lowest cost competitor within the market niche
    • Examples of businesses that adopt a cost focus strategy include Carnival Cruise Line and Glasses Direct
      
      • Carnival Cruises sells cruises to locations including the Caribbean and Europe and is well-known for it's eye-catching low fares that can be offered due to its fleet of smaller vessels that operate at full capacity
      • Glasses Direct is an online retailer of spectacles that sells popular styles of lesser-known brands at very low prices as a result of its low overhead costs
        
        

• Differentiation focus strategy

  • A differentiation focus involves offering specialised products within the niche market
    • Examples of businesses that adopt a differentiation focus strategy include Hotel Chocolat and Brompton Bicycle Retail Ltd
      • Hotel Chocolat sells a range of premium, fair-trade celebration confectionary in its chain of beautifully-designed retail outlets
      • Brompton Bicycle Retail sells innovative products, such as the folding bicycle, that closely meet the needs of its wealthy commuter target market
        
        

Stuck in the Middle

• Porter argued that failing to adopt one of the strategies risks a business being ‘stuck in the middle'
  • This means it is unable to compete successfully with rivals in the market because each strategy is different
  • A business should select its strategy and concentrate its resources on pursuing it rather than simply responding to its competitors actions
    
    
• Pursuing a mixture of strategies is also not feasible in the long term
  • For example, cost leadership and differentiation are unlikely to be financially compatible
    • Low prices combined with high quality can negatively affect consumer perceptions of the product
      
      

Evaluation of Porter's Generic Strategies

Benefits	Drawbacks
The model encourages businesses to make strategic choices that are difficult for competitors to copy Pursuing one strategy forces the business to make explicit choices about its direction and concentrate on it	The model does not offer guidance to businesses on specific tactics or implementation The model often overlooks external factors such as technological change, economic conditions and changes in laws which could impact competitive position

• Blue Ocean Strategy is the simultaneous pursuit of differentiation and low-cost strategies
  • This opens up a new market space and creates new demands, so there is less fighting over existing demand
  • Uncontested market space is captured by products that other businesses have not yet adopted, making competition irrelevant

  • There is ample opportunity for profitable and rapid growth
     

• Businesses pursuing this strategy follow the Four Actions Framework to identify a new value curve which combines cost and differentiation in a new, innovative way
  

Diagram: The Four Actions Framework

The Four Actions Framework asks four key questions of businesses that adopt a Blue Ocean Strategy

• The four actions in the framework are:
  • Raise: question which features/products should be better than the industry standard
  • Create: question which features/products have never existed and should be created
  • Reduce: question which features/products should be downplayed to levels below industry standards
  • Eliminate: question which features/products have been overcompeted and eliminate them
    
    

Nintendo's Blue Ocean Strategy

Context

Strategy

In the early 2000s, Nintendo was struggling as industry giants Sony and Microsoft dominated the market

In 2006, the company took a blue ocean approach It researched the needs of non-gamers rather than customers who already owned games consoles It eliminated or reduced factors that were thought to be vital in the market, such as high-definition graphics, fast chips, controllers with many buttons, and violent lifelike games It raised and created factors that appealed to non-gamers, such as more approachable games, a focus on fun and intuitive controls   The result was the Nintendo Wii, a console based on simplicity, functionality, and interactivity, which opened up a new market that went on to outsell all Sony and Microsoft gaming products combined