Monday Aug 20, 2007

Purple Ocean Strategy

A few weeks ago I read through "Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant", By W. Chan Kim and Renée Mauborgne of the Insead business school. This book has sold millions of copies since its publication. It is very easy to read, and contains a lot of clear and entertaining business cases by way of illustration, from the growth of the Cirque du Soleil via the story of the turnaround of crime in New York under the leadership of Bill Braton, all the way to Apple's phenomenal success with the iPod.

The Blue Ocean the book refers to is opposed to the Red Ocean of competition in well established markets where optimization and distinction on well understood, standardized criteria matter. The Blue Ocean stands for the new markets created by businesses where there are no predefined standards, no predefined audience, where no industrial feet have yet been placed; in short the sought after space where there is no competition, where huge fortunes can be made. One of the very nice things about this book is how it shows just how much the blue ocean markets can be created in every walk of life, not just where one expects it the most, in technology driven industries.

The aim of the book is to show how these oceans of innovation are created. The tools it develops to make it possible to understand this are very easy to grasp, and make a lot of sense. One point it makes, and that every creator knows, is that you cannot find a Blue Ocean by asking your customers what they want, or by doing simple market studies. Of course these spaces are created by responding to something people really wanted, and feeling for your customers is an important aspect of seeing new possibilities emerge. But the business owner, the entrepreneur - as opposed to the manager ( the book does not make this distinction ) - is the creator of a new value space which cannot be comprehended by the market ahead of time. More so even since by creating something new, the entrepreneur is redefining the boundaries of the established market, and so redefining the audience. The Cirque du Soleil for example changed both the definition of what a circus was and what theater was. In doing that the Cirque du Soleil became a competitor of not just theater and circuses, but also other night time activities people might have enjoyed in their place. The Cirque du Soleil did that but seemed also to appear out of nowhere.

Blue is the symbol of Liberty. The French flag is blue, white and red: Liberty, Equality, Fraternity. Blue in Europe is also associated with conservatism. The history of color associations in the USA is more complex and currently has the reverse association in part due to the stigma attached to the color red in the battle against Communism. Just as with the colors the book presents what are probably very complex ideas in an amazingly simple way. It separates the strands of thought the way a crystal separates light. Like a beat of electronic music it drums these distinctions into the readers mind, so that there is probably no need to re-read the book twice: reading it once is to read it three times. So my following criticism or thoughts will probably be just very facile remerging of what was separated for clarity.

Following the internet and computer industries I have noticed an element of the relation between red and blue that this book fails to make. As our CEO Jonathan Schwartz often mentions on his blog, it is not because one is in a commodity market that one cannot make a huge profit. The electric plug in your house, voltage, wire sizes and many other parts of the electricity industry are standardized. Those are commodity markets. Yet companies like General Electric or Siemens that produce huge generators for large dams or other electrical installations are in some very profitable markets. Without the standardization of the plugs and voltages, the electricity industry could never have grown so big. Standardization I have noticed, can be a stepping stone to building a Blue Ocean, the blue can build on the red.

To illustrate let me take one example from the book: Apple's huge success in recent years. One of the conceptual tools put forward by Blue Ocean Strategy, is that one has to create a new value curve. Remove some aspects of cost and value from a product (no animals in the Cirque du Soleil), change other aspects of value (price), create something new (artistic dance show). One way Apple reduced cost was by adopting open standards. By building on the Unix Operating system developed and used in Universities world wide they removed the major research cost of developing an Operating System whilst gained a huge pool of ready and highly qualified experts worldwide, and all the software that had been built in an Open Source way over time. The default compiler of OSX is Gnu CC. Think of the huge cost reductions that flow from being able to build in such a way on the works of others. By adding the one thing that had been missing from that system, an artistically coherent and beautiful end user experience, Apple gained those people's hearts and support and gave them a unique value proposition, bringing a very important community to Apple that would never have touched it before. By building on these open standards Apple also brings value to the community, if only in the existential example that it can be done, but certainly also over time in feeding back the improvements to the community. Simon Phipps explains how this works in full detail in "The Zen of Free". The same forces at work also lead Sun Microsystems down a similar path to its logical conclusion: by Opening up all of the software stack. As a result Sun and Apple are able to cooperate in numerous ways that would otherwise have been impossible. By working on a standard base Apple can gain award winning technologies such as ZFS at very low cost, allowing it to focus on differentiating itself where its user base's value is: simple packaging, beauty and fluid end user experience. Apple's switch last year to Intel is a similar move, building this time on an industrial de facto standard.
In all these cases reducing costs is not removing something completely from the system as proposed by Blue Ocean (removing the lions), but building on the commoditization and standardization of one layer, thereby bringing the costs down to close to zero. Building on the Red Ocean of community ownership a Blue Ocean of innovation and creativity, in a way that respects the value of the Red Ocean, is what I would like to call here, on my little blog at the end of the universe, Purple Ocean Strategy.

Having gotten this far it may be necessary to enlarge the notion of what is Red all the way to Green. If Red is what is socially established, fraternal ownership, then further along there is what is common to all living things, the biosphere, the Green. A strategy that took this into account would be looking for how to use and build in a sustainable way on that space. It is clear that not taking this into account can be extremely damaging, as the unfolding drama of Beijing Olympics is revealing. How to take it into account effectlively, may get us to the Turquoise Ocean Strategy.

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