Blue Ocean Strategy: From Theory to Practice - Kim, W. Chan; Mauborgne, Renee

                      All businesses operate on the principle of risk and return.

                     That said, one can maximize opportunity and minimize risk by adopting what W. Chan Kim and Renee Mauborgne described in 2005 as Blue Ocean Strategy -  the creation of demand in a market space uncontested by one’s rivals, using the ‘Four Actions Framework’ (eliminating points of competition, reducing that excess design which does nothing to improve value, raising factors of product differentiation that are value-adding, and creating/addressing a consumer need that has never existed/been addressed before). 

                     This strategy’s products leapfrog the price factor (e.g. – [yellowtail] wines are priced more than budget wines, yet are gaining popularity as ‘friendly’ and enjoyable in a market clouded with terminology and complex wines for the sophisticated palate, intimidating to the lay person). Typically, this strategy steers the early years of a product’s market performance, using ‘value innovation’ as the guiding principle.

                     A Blue Ocean may be sustained more easily in some industries due to the innate pressing need of that industry to innovate for survival/growth/high payback (e.g. – technology industry as against consumer goods such as jams/jellies).

                     A Red Ocean strategy, in contrast, signifies the contest for a limited and set market share as per accepted best-practice rules. Companies using this strategy aim to increase their ‘slice of the pie’ in a saturated market by compromising on profit. As products lose their differential value and are reduced to being commodities, the price-driven cut-throat competition turns the ocean blood red (e.g. – performances by acrobatic/circus companies as against the premium Cirque du Soleil that combines showmanship, theatre, music, and acrobatics).

                     While the strategic and market profiles of Red Ocean products follow the same value curve in terms of price, quality, and product features, a Blue Ocean product’s value curve will differ on every point of the competition and thus neutralize the force of competitors (e.g. – the ipod, when introduced, differed from CDmans/walkmans in terms of user-friendliness, attractive designs/colors, higher price, cutting-edge components and revolutionary means of storing/organizing/playing music, energy efficiency).

                      However, when a product patent expires, new competing products will fight for market space and there is every possibility that Blue Oceans will turn bloody (the ipod now has its fair share of rivals such as Sandisk’s Sansa, and other MP3 players by Creative Technologies, Samsung, iRiver, Toshiba, Sony, that serve the Asian market at competitive prices. The ipod currently owns 49% Asian market share, while Sansa owns 29%).

                      With the rise of globalization and inter-connectedness (loss of untouched markets), businesses must insure against the disappearance of their niche markets or Blue Oceans via ‘reconstructionism’ – viz., the seasonal re-alignment of a firm’s utility, price, and cost activities with the conscious stimulation of demand (through constant innovation), and thus rewriting ‘game’ rules (e.g. – tech companies are constantly launching new versions of their products to capture a market that demands cutting-edge quality to feed technological and emotional needs) .

                      Kim and Mauborgne’s theory itself has innovative value as it could help businesses evolve and keep growing. Although the cases the theorists chose conveniently illustrated only the successful application of this strategy, it is noteworthy that their work is self-illuminating.

                      Firstly, it answers a need in the continually evolving academic canon for a Blue Ocean of new theories/redefinitions/solutions, with its own game rules. It is thought-provoking and stimulates creativity both in academia and in real life with the use of a powerful image – the blue/red ocean. It is life-affirming and recognizes the role human passion plays in any enterprise – be it business or social.

                     Secondly, this strategy is a viable tool in a globalized world, precluding the movement of the world market towards hyper-competition in different industries and locations, within economic cycles, and macro-/micro- economic forces. It is interesting that the root of this business theory lies in art and psychology (human nature – after all, strategic survival has existed even before man’s evolution). Fittingly, Blue Ocean strategies are strongest in the entertainment industry and art world, where value is driven by difference and originality.

                       Oprah Winfrey exemplifies this strategy. She attained popularity in the early 90’s despite the existence of other talk shows (Donahue/Jerry Springer/Ricki Lake/Suzanne Somers) by answering the need for women to have someone identifiable, who shared similar problems with weight/marriage/relationships, and who took the therapeutic power of ‘heart-to-heart girlfriend talk’ to a new level. The biggest differentiator for Oprah was her compassion and her generosity where charities and causes were concerned, on a scale that has not been matched in the industry.

                        Although the Blue Ocean strategy had not been theorized in the early 90’s, Oprah instinctively differentiated herself with her company Harpo and its divergent interests in publications (Oprah magazine/Oprah’s Book Club), charities (Oprah’s Angel Network), production (films/TV shows), radio, and a blog. Oprah’s creativity has led to the existence of a platform to foster other artists/professionals from other industries to prove themselves (Dr. Oz/Dr. McGraw/Rachel Ray).

                       The Blue Ocean in Oprah’s case, has moved beyond sustainability to itself becoming a controlled and protected world (minimally, as ultimate acceptance of Oprah’s stars lies with the global audience), where growth is bolstered by mere association with the parent Oprah brand.

© The Sacred Dome (Jan 2013 – current).

What is Strategy? - Michael E. Porter

                     According to Porter, strategy is an assertion of individuality/creativity in an unforgiving environment via the deliberate choice of interlinked activities.

                     A business maintains optimal competitive advantage by continuously moving towards the ‘productivity frontier’, wherein lies the possibility of its ability to deliver maximum optimal productivity, using the best resources and management tools, and exercising cost effectiveness.

                     This may be achieved by balancing Operational Effectiveness with Strategic Positioning. One’s ‘difference’, from a unique combination of OE and SP, ensures that rivals will find it harder to steal (not copy, but replicate and improve upon) its product/service and the processes involved in realizing the same.

                      One can outperform rivals via the 3 principles of Strategic Positioning:

Creating a unique and valuable position, involving a different set of activities: The move towards the productivity frontier engenders greater similarity in the best practices of all competitors (‘hypercompetition’ - as seen with Japanese companies in the 1980’s). OE alone thus endangers one’s survival and achieving an entrepreneurial edge demands the differentiation of all activities, at all levels.

Trading one activity off of another, and retaining those that fit best: This choice addresses 3 strategic positions – variety (Vanguard, Jiffy Lube), needs (Bessemer Trust, Citibank), and access (Carmike Cinemas) based – that are a “function of the differences” of the activities on their supply side. Business therefore must collect knowledge from their markets in order to “preempt discovery” and to stay ahead of the competition curve.

Maintaining and reinforcing this fit as per the situation: To fend off repositioners and straddlers (JC Penney/Sears, Southwest/Continental Lite), one may apply such optimal advantage formulas as will undercut an imitator’s position when partially/wholly replicated (as showcased by Neutrogena). Trade-offs (due to inconsistencies in image/activities/limits on internal coordination+control) help us retain our valuable position by “choosing what not to do” and engendering “interconnectedness” (IKEA) or the best fit of activities (based on consistency, reinforcing, and the optimization of effort).

                     As per the classical theory of strategy, Porter’s position school emphasizes positioning through choice. In 1999, Ghoshal and Barlett criticized the classical school as simplistic and “obsessing only with value appropriation and not the more useful value creation” (Haugstad, 1999). This recalls the original definition of strategy as “the art or science of shaping means so as to promote ends in any field of conflict” (Bull, 1968).

                     By 1996, Hax and Majluf had included both the content of strategy and the processes leading to the same under this umbrella. Again, the proliferation of theory (an appropriation of semantic power, as it were) only reaffirmed Ghoshal and Barlett’s statement. The question remains – how can one capture value creating strategies in a globalized economy reveling in its increasing ‘interconnectedness’?

                      The answer probably lies in knowledge-seeking, using this knowledge as power within organizations, and re-learning strategy. Kunne mentions Honda’s entry into America as an example, first suffering multiple failures but eventually succeeding due to continuous re-assessment and problem-solving. It is interesting to note that Honda had adopted the American approach and yet they had to re-invent their strategy.

                      Strategy therefore, may not be limited to its peculiarity to one company but also the time, location, and business cycle that a company is posited in. In any case, it is best not to blindly apply strategy but to use information to tailor customized temporary strategic solutions.

© The Sacred Dome (Jan 2013 – current).

The Five Competitive Forces That Shape Strategy - Michael E. Porter

                           It was once unanimously believed that the only force influencing any business was direct competition. Porter’s post-1979 seminal essays point out 5 forces – viz., competition from one’s rivals, the bargaining power of suppliers and buyers, and the threats of new entrants in the industry and of substitutes (products/services).

                          These forces have the power to determine ROI, as seen in – the airline industry where the forces are strong (and that is least profitable with 6% ROI), and the beverages industry where the forces are benign (and that is more profitable with 38% ROI).

                          The 5 forces are not deterministic or inescapable. Businesses can increase profitability/efficiency by repositioning themselves at the point where the forces are at their weakest (as per Paccar in the heavy-truck industry that has sustained its business by targeting individual truckers). The brilliance of Porter’s tool lies in its recognition that businesses constantly evolve and restructure themselves (as per Apple’s success as the major music download platform in the music industry).

                           Strategic repositioning demands our comprehension of the “factors” that influence the forces. The threat of new entrants is determined by the barriers that deter entry (price wars/economies of scale, government regulations, capital investment/sophistication of technology required). The power of buyers depends upon their concentration in the market, their switching costs, their capacity for forward/backward integration, and the significance of their need (indispensable/easily substituted). The power of suppliers depends on their/their buyers’ industry concentration, their capacity for forward/backward integration, their buyers’ switching costs, and the extent of product standardization. The threat of substitutes is influenced by the number of substitutes available within/outside the industry. If available within, then it is innovation that will determine the supply chain for that product/service. Lastly, direct competition from rivals increases with the existence of numerous equal players in an industry with low switching costs, high capital investment and storage costs, slow growth rate, greater product standardization, and high exit barriers.

                           In the mid-1990’s, Bradenburg and Nalebuff identified a 6^th force – the role of complementors (the government/ the archetypal Intel-Microsoft pair that offer complementary products). This was rejected by Porter as both complementors had already been accounted for in his theory (in the threats of new entrants/substitutes).

                            Porter’s theory situates strategic analysis within the world of market forces. An amateur strategist/economist might ask – what of non-governable non-market forces (political/economic/social/cultural) and the x-factor that can be speculated by using logic? The former could be controlled by conglomerates (as history has proven) yet the sum of this control would eventually be cancelled by the latter’s principle that every action has an equal and opposite reaction.

                           How a business could benefit by using these additional tools to speculate while repositioning would be by considering time frames and business cycles, both advised by Porter. The advantage gained by repositioning could be protected for as long as possible till the business is willing to trade from its bank of advantages for a ‘disadvantage/growth freeze’ as per its need at that future point in time, thus providing it enough time to reassess itself, regain efficiency, and achieve a successful 'metamorphosis'. 

© The Sacred Dome (Jan 2013 – current).