Rethinking Blue Ocean Strategy in a Down Economy
In 2005, a new book on business strategy called Blue Ocean Strategy took the
corporate world by storm. Blue oceans were discussed and enthused about in
boardrooms across America. The book became a best seller with over 1,000,000
copies sold.
In the book, authors W. Chan Kim and Renée Mauborgne outlined their theory of
value innovation, whereby companies caught up in a competitive “red ocean” (i.e., an
ocean where the competition is fierce and the water gets bloody) could reconstruct
their market boundaries, thereby creating a “blue ocean” (i.e., a calm, serene new
market space in uncharted and uncluttered waters). Value innovation at its core
was described as creating a leap in value for consumers while both lowering costs
and increasing revenue for the company.
One of the authors’ prime examples was Cirque de Soliel, which took traditional
circus acts and infused them with Broadway-style creative productions to increase
customer value and ticket prices, while simultaneously cutting the largest cost item
of the circus: the animals. Cirque de Soliel reinvented the circus and still today
maintains dominance in largely uncontested market space.
Blue Ocean Strategy was instantly appealing. In a vibrant economy, the potential of
finding profitable—sometimes obscenely profitable—blue oceans became
irresistible to corporate CEO’s. The book even instructively outlined six specific
paths for reconstructing market boundaries and conceiving new market space.
Despite this, even in growing markets, finding blue oceans was very difficult for
most companies, in part because there were so few to find. After all, not every
industry was as ripe for transformation as the circus, and blue oceans were often
much easier to recognize and map out after they had been discovered, or at times
stumbled into though the serendipity of the new product development process.
Another problem with finding blue oceans was that many of today’s most dynamic
industries were themselves, only just recently, blue oceans: blue oceans which have
started to get bloody with competition. Let’s call them “pink oceans.” A good
example is the digital media industry. New media companies, like Yahoo, who have
until recently enjoyed rapidly growing markets without cutthroat competition
(think of a blue ocean getting bluer faster than it can get redder) now have to avoid
getting eaten alive. Finding an entirely new blue ocean for digital media companies
may prove exceedingly difficult since digital revolutions happen only every so often.
Does this mean that Blue Ocean Strategy is outdated or obsolete? Actually, it is quite
the contrary. Instead, the lessons of the book need to be reinterpreted and
refocused in relation to new economic realities. Blue Ocean Strategy offers many
useful tools and insights, whether a category is ripe for transformation or not. Its
most important aspect is the theory of value innovation itself. Aside from being a
way to find uncontested market space, value innovation can also be a fundamental
way for companies to carve out stronger competitive positions within their existing
markets. Its core tenets of shedding cost and adding value can help transform both
moribund companies, which have been outflanked, as well as fast moving
companies, which are being challenged for the first time.
In other words, Blue Ocean Strategy has embedded within it the makings of a great
Red Ocean Strategy.
Kim and Mauborgne also provided a particularly powerful tool for coming to grips
with value innovation in a down market. It is called the Eliminate-Reduce-RaiseCreate Grid. The grid is a matrix that guides companies to list the things they need
to stop doing (eliminate), do less of (reduce), do more of (raise) and start doing
(create).
Eliminate
Raise
Reduce
Create
One company that has used this process extensively is the advertising agency
Saatchi & Saatchi. According to Saatchi & Saatchi’s Worldwide CEO Kevin Roberts:
Internally, we call this the “Transformation Grid.” All of our operating units use
it on an on-going basis. It allows us to drive continual transformation with two
major benefits. First, it helps focus our people on the strategies that will help us
stay ahead in an intensely competitive industry. Second, it allows us to put our
finite resources in exactly the right places to keep moving forward faster than
our competition. We call this resource allocation “Right Side Up.” Without
constant review and transformation, resources tend to settle in places where
they may not be effective for future growth.
The difference between using the grid to find blue oceans and using it to succeed in
red oceans is one of emphasis. For Kim and Mauborgne, it would be impossible to
discover a blue ocean without a strong, concrete idea of what you want to create
(Blue Ocean’s authors prefer to call this the “strategic move”). Therefore, the
“create” box in the matrix is paramount in the blue ocean world. However, in an
effort to compete better in an existing red ocean market space, I would suggest that
the “eliminate” and “reduce” boxes are now paramount. They become critical
because the key challenge for companies trying to compete in red—or even pink—
oceans is resource reallocation. The speed with which resources can be freed up by
eliminating or reducing non-productive tasks is directly and proportionally related
to a company’s ability to put their resources to work at productive tasks. The
fundamental nature of competition is that it is constantly redefining what generates
consumer interest and incremental revenue. This is especially true in declining
industries and down economies, which lay bare unproductive work that has been
covered up by previous growth or good economic times.
So far, so good. It sounds relatively easy. Use the Eliminate-Reduce-Raise-Create
grid and focus on what needs to be eliminated or reduced. Unfortunately, it is not
that easy. The reason is human nature. While people are very good at identifying
productive new things they should be doing, they are notoriously bad at identifying
things that can be eliminated. There are three key reasons for this. First, company
processes are rarely neat and clean. It is never easy to say, “let’s stop doing this, and
we can free up these resources that used to do that.” This is because processes over
time become intertwined with other processes. They become parts of many
people’s jobs and cut across many departments in varying ways. Second, what
seems like something that is non-productive to one group in the agency seems very
productive to others, especially if the elimination will affect their relationships with
customers, suppliers, or employees. It may be unproductive to management, but
someone, somewhere has come to rely on it. Third, employees who are tied to the
process don’t like change. They don’t like it because change creates uncertainty. In
fact, it creates the biggest uncertainty of all: “Will I still have a job?”
Again, Kevin Roberts notes his experience:
When we do the Transformation Grids, it usually follows the same path. The
first time we do it, we get tons of great ideas in the “create” and “raise” boxes and
very few in the “eliminate” and “reduce” boxes. This is usually followed by a
discussion about what new resources are needed and a request for additional
budget to accomplish the new tasks. Unfortunately, this is exactly what we don’t
want to do. Rather than get frustrated, we spend a lot of time explaining to our
people that the only way to free up resources for great new ideas is to really
focus on eliminating and reducing. We need to find the core, resource it heavily,
and free up other existing resources to support the ideas that will keep us at the
cutting edge. It takes time and patience to make this process work, but it is
always worth it. Eliminate and reduce are the keys. In the current economy they
are vital.
Roberts’s experiences are instructive. The companies that will succeed in red
oceans will be the ones who tenaciously identify unproductive work and who follow
up relentlessly against the strong headwind of complaints from those who value the
work in some way. There is a hegemony of complaisance that must be overcome.
Identification of where these fights must take place, via the Transformation Grids, is
step one.
Interestingly enough, a good analogy for this process comes from military strategy.
Now, just to be clear, the authors of Blue Ocean Strategy thoroughly frown on
military strategy as applied to business. They feel that the use of military strategy,
language, or allusions is a trap, which focuses managers on engaging their
competition in battle (i.e., red oceans) rather than focusing on finding blue oceans.
But what about military strategy which is not about general engagement? What
about military strategy where the objective is strategic retreat with a goal to protect
the core of your forces, re-gather and reorganize, emerging stronger?
An instructive example here comes from Mao Zedong and the Communist army
during the Long March. In 1934, the Communists were on the verge of collapse and
susceptible to being crushed in short order by Chiang Kai-shek’s Nationalists. Mao
and the other Chinese military and political leaders decided that strategic retreat
was the only option to protect the core of their army. The retreat was incredibly
arduous: in one year, the army walked close to 5,000 miles through tortuous, and
torturous, terrain. Of the 100,000 troops Mao started with, fewer than 9,000
finished the march and arrived to the remote city of Yan’an. But then a funny thing
happened. This stripped down force, given breathing space, was able to recuperate,
re-focus and rebuild. In fact, its transformation was so complete that a decade later
the Communists were big, strong and unstoppable.
The military lesson and the business lesson are the same: strategic retreat,
protection of the core, shedding of extraneous strategies, and refocusing of available
resources can make you a more formidable competitor in the long run, especially
when you are under extreme duress. In each case, what an organization decides to
stop doing or do less of (in Mao’s case to do less fighting) is just as important, and
sometimes more important, than what it needs to start doing.
Today the world is awash in red oceans. Our rapidly declining world economy
means, in general, that our economic ocean is getting redder faster than it can get
bluer. Funnily enough, Blue Ocean Strategy has never been more relevant, just in a
different way.
About the Author
Brian Sheehan is Associate Professor at Syracuse University’s S.I. Newhouse School
of Public Communications. Brian spent 25 years in the advertising industry as the
CEO of agencies in Los Angeles, Australia, and Japan, and working with clients such
as Toyota, DuPont, Hewlett-Packard, Ritz-Carlton, General Mills and Procter &
Gamble. His most recent article, Could Google Get MySpaced Like Friendster?, ran last
week in Advertising Age.