Blue, Blue Oceans

The strategy battle rumbles on. Those in search of strategic inspiration are faced with two alternatives. Either, they start with their industry as the basic strategic building block (Michael Porter’s Five Forces), or with their company (Gary Hamel and CK Prahalad’s core competencies). Over the last three decades a great deal of intellectual energy has been expended on refining these two worldviews. But other ideas are also coming to the fore. W Chan Kim and Renée Mauborgne, based at INSEAD, the leading European business school, just south of Paris, challenge the strategy orthodoxy. 

 “There’s no such thing as a permanently great company or a permanently great industry. All industries rise and fall as do companies,” they explain. “However, there are permanently smart strategic moves.”

Kim and Mauborgne’s reputation is built around a series of acclaimed articles in the Harvard Business Review and the bestselling book, Blue Ocean Strategy.  Their work is supported by a substantial database – a database that now extends all the way back to 1850.

So what does all this data show? Kim and Mauborgne believe that the business world has been overlooking one of the key lessons of wealth creation in history. Their research indicates that the major source of wealth creation over time is not the industry that a company plays in per se.  Nor did they find permanently great companies that consistently captured wealth.  (This contradicts books like In Search of Excellence and Built to Last, which seek to distil the characteristics of great companies). Instead they found that an industry’s and a company’s ups and downs are substantially attributable to something they call strategic moves.  “By strategic move we mean the actions of players in conceiving, launching, and realizing their business ideas.  In each strategic move, there are winners, losers, and mere survivors,” says Mauborgne. 

A snapshot of the auto-industry from 1900 to 1940 is instructive.  As Kim and Mauborgne articulate, “Ford’s Model T, launched in 1908, triggered the industry’s growth and profitability, replacing the horse drawn carriage with the car for American households. It lifted Ford’s market share from 9 to 60 percent.”

The Model T, then, was the strategic move that ignited the automotive industry. But in 1924, it was overtaken by another move, this time by GM.  “Contrary to Ford’s functional one-colour one-car single model strategy, GM created the new market space of emotional stylised cars with ‘a car for every purpose and purse’,” explains Kim. “Not only was the auto industry’s growth and profitability again catapulted to new heights, but GM’s market share jumped from 20 to 50 percent while Ford’s fell from 60 to 20 percent.” 

Over the 150-year period, they found a similar pattern in other sectors. In short, the strategic move that matters most to both an industry’s long run profitable growth and that of individual companies is the repeated creation over time of new market space that embraces the mass market. Kim and Mauborgne call this “value innovation”.  Without it, whole industries fade into the sunset and are replaced by those which are more innovative. Without it, companies become irrelevant or are overtaken — as Ford was overtaken by GM in the 1920s.

“Value innovation occurs across industries, across countries, across companies,” says Kim. “It is a universal force. A company, therefore, substantially limits its strategic opportunities and profitable growth potential by narrowly confining its analysis to its own industry. Yet, in most strategy literature, industry boundaries are regarded as central — think of SWOT analysis or Michael Porter’s Five Forces.”

According to the blue ocean duo, value innovators differed across five main dimensions of strategy:

Industry assumptions: Value innovators assume that they are able to alter and shape industry conditions.

Strategic Focus: Instead of responding to rivals, letting their rivals set the parameters for competing, and offering something similar but better, value innovators reinvent markets making great leaps in the value offered.

Customers: Rather than focus on segmentation and customization to further refine differing customer needs, value innovators concentrate on customer commonalties among the mass of buyers.

Assets and capabilities: Value innovators are not contained by viewing business opportunities through existing assets and capabilities frequently taking a clean slate approach to create new value.

Product and service offerings:  Conventional companies operate within a space defined by the products and services that their industry traditionally offers. Value innovators, however, will look for customer solution that they can meet right across the value chain even if that means entering a new business.

Kim and Mauborgne cite the rise of Cemex to become one of the world’s largest cement producer as an example of what they are talking about. Cemex created new market space in Mexico by transforming cement into an emotional product.

Mexican houses are traditionally built in stages, a room at a time. This can take many years. Spare cash is often spent on weddings or on relatively expensive gifts for important religious festivities. Realizing this, Cemex has rewritten the rules by repositioning cement as an emotional product – “the stuff of dreams”.

If you really love somebody, the strategy suggests, cement is the best gift you can give them because you are giving them a home. With a strategic flourish, a flat industry has been transformed into a growth industry where the price of cement jumped from a historical low of some $40/ton to over $100/ton by the late 1990s. By 2002, the Financial Times had ranked CEMEX as the most admired company in Latin America. 

Along similar lines, Kim and Mauborgne note, the coffee industry was dead, until Starbucks came along and kick-started it.

Rather than viewing strategy as enacted in a landscape of dominant companies or industries, Kim and Mauborgne paint a persuasive picture of a commercial world in constant flux, where whole industries rise and then often disappear into oblivion. “Look back to the major industries of 1970 and very few, if any, are now significant,” says Kim. “The big growth industries in the past 30 years have been the computer industry, software, gas-fired electricity plants, cell phones, and the café bar concept. But in 1970 not one of those industries existed in a meaningful way, and that’s just 30 years back. The pattern continues as you dig into the past. The big industries of 1940 aren’t those of 1910 and so on.  We have a hugely under-estimated capacity to create new industries.”

This, then, is their big discovery. The number of industries is ever expanding – and the pace is accelerating. The implications for chief executives and their advisors are profound. “What we see is that over a 30 year cycle the focus of commerce, where the money is made, shifts 100 percent,” says Kim. “Some industries die, some persist. But new industries are constantly being created. It is like a galaxy of stars – infinite.”

In this view the challenge of strategy becomes one of exploration — to discover new markets and new industries. The trouble is that the basis of strategic thinking – and the consulting industry it has spawned — is based on coming up with strategies based on what you can see now. Business strategy is historically intertwined with military notions of strategy. General principles were extracted from the likes of Carl von Clausewitz, a Prussian general, and Sun-Tzu, an ancient Chinese theorist, and are still cited as inspirations by the world’s managers. This notion of strategy, say Kim and Mauborgne encourages managers to see strategy as a series of battles to be conducted on a neatly defined battlefield. The victor gains ownership of more of the battlefield. 

For strategists the choice is to continue to fight battles in what Kim and Mauborgne label the red ocean of competition or to seek their own industry-redefining strategic move into the competitor-free blue ocean.

Resources
W Chan Kim and Renee Mauborgne, Blue Ocean Strategy, Harvard Business School Press, 2005.

This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).