Blue & Red

Introducing Idun... ..and Kim & Mauborgne

Friends,

Here we are, a fortnight later, and things are no longer what they were nor what they will ever be; I have become a father to a beautiful daughter. As I noted on Twitter, and you might have anyway realized, she was the reason there was no newsletter last week.

Under the circumstances, I suspect you understand.

Either way, fourteen days ago, we broke down where Michael Porter’s famous generic strategies break down. As it turned out, they suffered from a practical reality distinctively different from that in the underlying theory, which in itself was not entirely surprising given their creator’s occasional lack of interest in supporting evidence.

Today’s thesis stands, by own explicit design, in stark contrast to the claims of Porter. Kim and Mauborgne’s notion of blue ocean strategy (BOS) sets out to not merely provide a practical how-to, but to also disprove the entire idea of competitive strategy.

If sales are indicative of success, they have also ostensibly succeeded at it. Although their book is not as widely cited as Porter’s (none is), it has been a best-seller since its publication and thus, clearly, struck a chord with managers around the world.

Split into three parts, the first section of the text introduces the reader to the concept of value innovation (paradigm shifts in provided customer value), the BOS canvas and the four actions framework (illustrated below):

The second section deals with strategy formulation, in particular as it pertains to creating so-called blue oceans. In short, these are uncontested market spaces that allow the company to avoid competition altogether, at least until other actors recognize the opportunity as well. In turn, this would allow the organization to achieve at least transient profits far above industry averages by driving costs down and customer value up.

In other words, blue oceans are verticals that do not yet exist. This has a number of important implications, not least that demand is created rather than contested. As a result, the authors argue, fundamental principles of conventional (competitive) strategy become irrelevant.

By comparison, red oceans are industries already in existence, where boundaries and barriers to market entry are ‘defined and accepted’. What one might call the opposite conditions of competition apply; the rules are known to all players and performance is largely tied to market share, leading to a ‘bloody’ fight for supremacy (hence the word ‘red’ in the designated term).

The concluding section deals with implementation, both in terms of principles of fair process execution (engagement in strategic decisions, explanation as to why final decisions are made, and expectation clarity around what standards for judgement will be implemented and any penalties for failure) and potential hurdles. These obstacles might, according to the authors, be cognitive (e.g., opposition to new ideas), resource based (every shift in strategy will require investment, often in direct relation to size), motivational (creating momentum) or political (achieving senior leadership buy-in).

To Kim and Mauborgne’s credit, BOS has proven very popular with practitioners. A significant reason why, I would suspect, is that it provides a full and detailed way of doing strategy from diagnosis to formulation and execution; it is very much the equivalent of a recipe book. So why did it fail to whet my appetite?

The answer is not that I rate BOS poorly. To be blunt, I would not rate it at all.

Despite its creators’ many grand assertions, the only thing that I can find to be novel about blue ocean strategy is its name. Gaze but an inch below the surface and it is revealed to be nothing more than a mishmash of old ideas with new labels, similar to what the Book of Mormon is to the Bible or fandoms are to heavy buyer fallacies. To take but two examples:

• Creating new markets that provide lucrative returns until others move in is a key feature of Joseph Schumpeter’s theory of creative destruction, first introduced in Capitalism, Socialism, and Democracy (1942) and heavily inspired by works of Karl Marx. In short, he argued that the ‘perennial gale’ of competition was created by extraordinary profits earned by first movers.

• Focusing on ‘the demand-side’ as opposed to ‘the supply-side’ – what Kim and Mauborgne call value innovation – is nothing more than customer centricity. That was, at the very latest, formulated by Peter Drucker in The Practice of Management, published in 1954. As he put it, it is the customer who determines what a business is, what it produces, and whether it will prosper.

Linking innovation to what customers might value is hardly groundbreaking, particularly not if one has happened to have read any one of the most basic marketing textbooks. Unfortunately, the impression that the authors have not is only strengthened by the fact that there is not a single one referenced in the provided bibliography.

The omission or misrepresentation of what has come before is a frustratingly common theme in their work. Central to the premise is a critique of Michael Porter; Kim and Mauborgne claim that competitive strategy began with him (another easily disproven falsehood - although many roads lead to Porter, most continue past him) and that, contrary to his conclusions, companies can indeed pursue both differentiation and low-cost strategies at the same time.

But if they had actually read Porter, they would (should) know that he does not state that the strategies are mutually exclusive. In fact, he explicitly states that ‘the converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions’ – a firm that is ‘stuck in the middle’ – is in an extremely poor strategic situation’ (quoted from Competitive Strategy, page 41, my emphasis).

Put differently, Porter’s point is that the bare minimum required for a competitive advantage is either the ability to differentiate or to become the lowest cost producer in an industry or segment (cost leadership per definition only applies to the leader). Although this is a claim worth debating, as I did two weeks ago, misrepresenting his argument merely leads to a false antithesis.

Yet such questionable techniques are, as I wrote, on par for the course. Kim and Mauborgne are only too happy to criticize the efforts of others without bringing much else to the table themselves. Competitive strategy as defined by Porter is deemed irrelevant, yet the four actions framework referenced above, for example, is entirely about the competitive dynamics of the industry in which the organization acts – customers are not even mentioned. Similarly, previous best-sellers such as Jim Collins are called out for being flawed beyond saving, but Kim and Mauborgne make a myriad of the same mistakes themselves (poor research methodology, highly biased samples, cherry picked timeframes, vague post hoc inferences to suit a narrative etc.).

Even at the most basic, there is little to suggest that their approach is a good one. Although what is meant by blue ocean strategy appears to change from one page to the next, it is clear that it is supposed to work best wherever there is a heavy focus on innovation and the market is demarcated by constant change. But a closer look at market behavior tells a different story.

If the technology changes rapidly and the market is slow to accept the new product category, early entrants normally have to suffer years of flat sales and operating losses; a first mover advantage is highly unlikely. The pace of change also increases the risk of new competitors with improved products, fewer investment lag effects and less potential for internal cannibalization.

If the technology changes rapidly and the market is quick to accept the new product category, there is admittedly an opportunity to create a short-term advantage. However, the same risk applies here in even greater measure; more competitors are likely to be attracted, and they will have the benefit of a better understanding of emergent customer bases. Although first movers can create barriers to entry and limit imitation, it tends to be an exception rather than a rule given that low barriers to entry often are fundamental to the pace of change being high in the first place.

Kim and Mauborgne acknowledge these issues by stating that each blue ocean is destined to become a red ocean over time, but that one can still compete in them using ‘standard practices’ (a conclusion, shall we say, worthy of note given their previous dismissal of said practices). Yet the rapid-change nature of the market will inherently make long-term dominance unlikely. The best strategy, logically, would therefore be to make a timely exit – to move from one blue ocean to the next – but that is an entirely unrealistic way of doing business for most companies and an extremely complex and uncertain one for the few that remain.

To suggest, as the authors do, that blue ocean strategy is a ‘risk-minimation, opportunity-maximation’ approach is therefore bordering on the ridiculous. That is not to say that it is entirely without merit; exploration at the edges, creative thinking and challenges of the modus operandi are good ways to build resilience. But most of what they propose that has value has been argued for better elsewhere before.

At the end of the proverbial day – and current newsletter – it is undeniable that BOS has become a fad, much like business process reengineering, Six Sigma or the learning organization. Ultimately, one can only speculate as to why. Perhaps it is the fill-in-the-boxes approach that so many crave that makes it successful. Maybe it is the raison d’être it provides for managers either incapable or unwilling to compete.

Either way, the promise of metaphorical uncharted waters under a blue sky and warm sun, far from the realities of market demands, the financial climate or existing client needs, is patently alluring to many. Me, I remain entirely unimpressed, which is why blue ocean strategy failed to make my original list.

Until next time, have a lovely weekend.

Onwards and upwards,
JP