Blue Ocean Strategy: Recessions help blue ocean companies?

Here's an article in the NY Times about Steve & Barry’s, a chain that sells clothing and accessories all for under $10. They're mobbed.

The overwhelming focus of this blog is on Blue Ocean Strategy for technology companies but I can't help being the first to shout out an obvious BOS star when I see it. There is no way to sell clothing, in Manhattan, at prices for less than Wal-Mart and not be a BOS company.

I don't understand the garment business enough to try to analyze the offering. I'm a stereotypical geek when it comes to clothing: I have one suit that fits me poorly and that finds its way to the cleaners more often because of dust than use. But rock-bottom prices and fanatically loyal customers virtually always means that somebody's found a Blue Ocean diamond.

This makes me wonder whether recessions actually help spur Blue Ocean Strategy innovation? When the economy if flush with money people seem content to engage in red ocean practices: spending countless dollars on non-valuable technology innovation, throwing money away on worthless focus groups, or rushing to commoditize their business by breaking their own cost structures.

But the lack of easy capital in recessionary times forces entrepreneurs to focus on cost, and that focus -- when applied wisely -- tends to force business to investigate what's really valuable. This fanatic focus on value seems to guide business owners, either on purpose of by accident, through Blue Ocean thinking.

Recessions are like forest fires. They're brutal and dangerous and lousy to be in the middle of. But they also clear out the underbrush and allow new trees to take root and spawn. Many great businesses gained traction during prior recessionary times, and the recessions helped them. Google's a good example. Google is a great company, but if they had to compete during dot-com madness with the dozens of other search engines I'm not sure the ride to the top would have been as easy.

It'll be interesting to see the market changes that the coming year or two shakes out.

Follow up: a couple years later Steve & Barry's is gone. Exactly what happened isn't entirely clear but it looks like they were using incentives and rent deferments from struggling mall owners to build out their stores, which attracted customers to smaller stores, to subsidize the business. Needless to say, this wasn't a long-term strategy since they eventually had to pay rent and ran out of malls willing to subsidize them. My initial reaction was to delete this post; one of the earliest value innovation case studies was Enron and that obviously didn't turn out well. But there really were parts of Enron that were radically different, and the mobs of people at Steve & Barry's were very real. Both companies blew it on factors that had more to do with the greed of harvesting the fish out of their blue oceans too fast, not unlike overfishing in real life. So I'm leaving the post despite that the company did fail not long after.

Blue Ocean Strategy: US Healthcare Management

I live in the US and have my whole life. I've traveled around the world, visiting and living in many other countries and found the spirit of people in the US to be different than anywhere else. This is especially true for entrepreneurship: Americans -- both native-born and immigrants -- love to build businesses and invent things.

But the US also has some problem areas. One, in particular, is our health care system: it's a mess. A large number of people have no type of medical insurance. Explaining for my foreign readers: the uninsured don't have emergency coverage -- they have nothing; they're expected to pay their own bills entirely. Even those who have coverage oftentimes have lousy coverage that can be canceled for virtually any reason if a person ever becomes sick. Some people (including many millions of children) can't afford coverage, others are sick and can't buy it no matter how much they're willing to pay, and a third group just refuse to pay for it.

Part of this problem is purely political. From a conservative vantage point it's easy to criticize our legal system and the mayhem large lawsuits against doctors and medical providers and technology (drug and device) companies unleash. From a liberal vantage point everybody understands the classic economic Commons problem: the incentive for medical insurance companies to cherry-pick only the healthy for coverage.

But I strongly believe the application of Blue Ocean Strategy to technology -- especially information management -- can play a large part in solving the well documented problems of the US health system. The same technology can probably also improve health-care in those countries that have fewer problems.

Specifically, I'd say let's use information sharing to eliminate administrative overhead, pandering to hypochondriacs, and questionable remedies from the system. Let's reduce unnecessary tests: medical procedures designed for legal defenses, as well as sky-high compensation for many in the health-care business. Let's raise the availability of access to non-doctor professionals and self-help material to encourage people to seek alternative, lower-cost methods to treat themselves. Finally, let's create information sharing systems that quickly and efficiently diagnose and treat genuine ailments.

Businesses are thinking along these lines: Microsoft and Google both have medical records systems they're in the process of launching. Both have merit though I'm not sure either is different enough to make much of a dent: I admittedly haven't done an in-depth study but both initiatives look like red ocean thinking. I have my own ideas about what would work, but I'm working with a startup in stealth mode so no public sharing ... yet.

In any event, bringing the Value Innovation component of Blue Ocean Strategy to health care -- enabling lower cost and higher value -- is long overdue.

We study non-customers, not try to create them...

I've published quotes I thought were brilliant so here's one that's the opposite, from TechCrunch:

"I had a chance to play around with the SearchMonkey application creation tool, which is actually quite straightforward (if you’re comfortable with PHP, XSLT, and DataRSS)." (emphasis mine)

A small part of me says the author must be expressing sarcasm, but the realist in me says he wrote that with a straight face. When quotes like this start pouring out of Silicon Valley it's a strong indicator of an impending correction.

Blue Ocean Strategy: Microsoft & Yahoo -- Build a better search

Writing again about MS and Yahoo. Yahoo came in with essentially flat earnings. Depending upon how one parses the numbers Google's profitability grew 30-40 percent during the same quarter. Google is clearly a Blue Ocean Strategy company (click here for a BOS analysis of Google: "Bloogle: Making Portals Irrelevant"). Based on earnings MS CEO Steve Ballmer says he's ready to walk away from the deal. He's probably just bluffing but walking away would be the best move.

It isn't that MS doesn't need the reach of a world-class search engine: it's just that Yahoo doesn't fit that model. There are some great Yahoo properties -- Flickr, Groups, Messenger -- but the centerpiece of Yahoo is search and Yahoo's search stinks. The problem with Yahoo search is that it's adulterated. Yahoo liberally co-mingles paid search results with organic results: doing so violates the integrity and credibility of the results. Many consumers outright understand this; others just sense that something is "wrong" or "weird" with the results (I've heard both words used).

Yahoo searchers feel like they've walked onto a used-car lot: they put their guard up and many don't return. Yahoo used to have a strategic advantage by human-indexed search results but that fell apart when they switched to paid inclusion; pay Yahoo a few hundred dollars and you'll become relevant, even if you're a third-rate hack in your field.

For those not in the know paid inclusion is like paying for a job interview: the job you stand to receive is junk. Similarly, Yahoo's search results are worthless. Since virtually everybody knows this at some level only the most clueless are left searching on Yahoo, which dilutes the value of the search results to advertisers. These diluted results -- stemming from a lack of credibility -- push Yahoo to do more to monetize results, which typically means more dumb tricks like co-mingled results, which even further dilutes credibility. The resulting death spiral they're in is well documented and will be studied in business and journalism text books for many years.

Microsoft: if you want to build a better search then build a better search. Look at the tiers of non-customers and apply each through the six path framework to find the key factors of a great search engine. Google's clobbered you and Yahoo but you two set them up perfectly: you, Microsoft, focused too much on technology innovation and Yahoo self-destructed. The only way to fight a BOS offering is with another BOS offering. Google redefined the rules once; you can and should do the same back to them.

Without going into a full-scale analysis I'd think the key factors of a Google beating search engine would include Price, Ease of use, Scope of items returned (not just websites), Credibility of results, Comprehensiveness, Relevance of search results, Honesty and integrity of search provider, Objective and subjective descriptions of results, and Reward to business owners for playing fairly. There's probably a few more, and some of these probably need refinement. But buried in there, I'll bet, is the recipe for a genuine Google killer. It won't be cheap to build, but it'll cost a lot less than buying Yahoo and trying to reform its culture, brand, and technology.

Blue Ocean Strategy: The value of value innovation

One common misperception about Blue Ocean Strategy is that it increases one's Cost Of Goods Sold (COGS). This couldn't be further from the truth: value innovation always reduces COGS. Nintendo sells the Wii for $250 retail: they make money on every console sold and have since the console first went on sale. Sony and Microsoft, in contrast, sell their own consoles for a higher price point and lose money on every unit sold. It cost Microsoft less to produce early versions of DOS then Windows than it did to crank out VMS or the Macintosh OS, both because of volume and also because the lack of hardware lock-in made it possible to focus on high-margin software rather than lower-margin hardware. Despite the lower cost -- and the lack of an integrated locked-in ecosphere -- Microsoft's OS's went on to be much more valuable than the coupled operating systems they replaced.

Value Innovation -- the realization that less is oftentimes more -- is the centerpiece of Blue Ocean Strategy. At the core exists the understanding that a few really valuable key factors -- where value is defined in terms of utility to the buyer -- is better than a smörgåsbord of stuff. Put simply, a a two course meal created with the best ingredients, prepared by a talented chef, and served in a plain atmosphere by a friendly and prompt server has more appeal than a lousy eight-course meal served by a crank in a palace. The former has a lower price point, but since the Cost of Goods Sold is dramatically lower the gross margin and the volume of sales will be higher.

This isn't to say that value innovation involves deceiving the consumer into believing they're receiving something more valuable than they actually are. Steve Jobs put it best: "...it's not about pop culture, and it's not about fooling people, and it's not about convincing people that they want something they don't. We figure out what we want. And I think we're pretty good at having the right discipline to think through whether a lot of other people are going to want it, too."

Buyers realize when purchasing a Wii that the graphics won't be as sharp as a PS3, the physics as accurate as an XBox 360, and they understand the console won't play movies. These buyers probably like movies, sharp graphics, and accurate simulations. They just don't value these features as much as they like Mii's and the Wii remote. Nintendo doesn't try to convince buyers that they're receiving the best graphics, the best chip, or the best home entertainment system. Instead they're marketing the game system that's the most fun, with the realization that fun is the primary utility that buyers receive from any game console.

Blue Ocean Strategy & Technology Innovation

I can't count the number of times I've heard marketers rant on to say that technology has nothing to do with innovation and that Blue Ocean Strategy somehow supports this notion.

Summarizing: Blue Ocean Strategy puts customer value at the center of any new offering. Customer value is never defined in terms of raw technology, but the technology is catalytic to the value: the value will never get realized without the technology.

Let's examine some examples:

• The Wii wouldn't be without its small, inexpensive accelerometer driving the Wii remote. The accelerometer allows the creation of the magic wand: no accelerometer = no magic wand. However, Nintendo is not marketing accelerometers.


• Google reads a users mind to return relevant search results. However, these results are driven by a brilliant search algorithm and massive data centers. No brilliant algorithm and no enormous infrastructure = no mind reading web search. However, the end users never see the technology.


• The Toyota Prius is an engineering masterpiece. A user drives around with more computing power than the entire world had not long ago powered by computer-designed technology no human with a slide-rule could ever have mastered. No computers to design and run the Prius = no magic high mileage car. However, end users never see the technology.


• Even the Blue Ocean Strategy case studies in the book all have technology driving them. Starbuck's uses extremely sophisticated GIS systems and water filtration technology, Cirque du Soleil low noise, portable power generation and stage technology, the NYPD well documented crime tracking software; the list is endles...

All of these ... virtually every Blue Ocean business has one element in common: catalytic technology that is invisible to the end user. Blue Ocean Strategy demands the technology in itself rarely, if ever, has value but the value the technology brings to the consumer does. And, in almost all case studies, no technology means much less value. There are exceptions, but they're extremely rare.

I'll give marketers who say the technology doesn't matter the benefit of the doubt that they're not just trying to cover-up their own unwillingness or inability to learn about the technology driving their industry. However, when these people pipe-up and start shouting that "technology doesn't matter" tell them that they're absolutely wrong. It's just that technical innovation must be defined in terms that drive utility to the end user, but that doesn't mean the technology is unimportant.

Quoting the book "[acting] on the assumption that bleeding-edge technology is equivalent to bleeding-edge utility for buyers ... is rarely the case." Blue Ocean Strategy, pg. 120. That doesn't mean technology doesn't matter; it means the technology must always be described for it's utility and value to the buyer.

There would be no Nintendo Wii, Google, or Toyota Prius without extremely sophisticated new technology. The NYPD would be chasing down muggers aimlessly, Cirque du Soleil wouldn't be the same without the dramatic lighting, and Starbucks wouldn't magically be located in great locations. Just because the end-user never sees, understands, or appreciates the technology doesn't mean the business/product developer doesn't need to.

Blue Ocean Strategy: Non-Customers

One of the primary components of a successful six-path study is the focus on customers and non-customers. Non-customers, which are divided into three tiers, each of which has a specific definition, are especially important.

Paraphrasing from the book, the first tier of non-customers are current customers who are getting ready to leave. The second tier are people who consciously decide against your product. The third tier are people in distant markets.

Let's bring that back to earth using the the Nintendo Wii and -- more importantly -- it's predecessor, the Nintendo Game Cube. Young boys loved the Game Cube: it was small and cute and cheap; it even had a handle so they could pick it up and carry it to play with friends. The problem is that the core group of boys who played the Game Cube would "graduate" to a Sony PS2 or Microsoft XBox. These boys were the first tier of non-customers: current customers who were likely to leave. The second tier of non-customers were girls: they were the same age, had access to the same resources, but just didn't show interest in the Game Cube. Finally, geriatrics in nursing homes were the third tier: they thought a Game Cube was the box containing the checkers board.

Nintendo of course turned those tiers of non-customers entirely on their head. By studying the six-paths and applying what they learned to redefine the market boundaries they built the Wii and the Nintendo DS to appeal to both customers and non-customers alike. Boys love the Wii, but so do girls, young men, mom's, and just about everybody who tries it. Changing the key factors to attract girls to play the DS was especially inexpensive albeit brilliant: they came out with a version in pink. As for the Wii, it was renamed from it's code-name the Nintendo Revolution. Boys loved the name "Revolution" -- my son still does -- but they could live with the Wii. Girls went for the Wii, they had no interest in their brothers revolution.

One company that has a massive swarm of first tier non-customers is Microsoft. Vista is a disaster. One commentator, writing about the merits of Vista, described a key benefit as the inclusion of Snipping Tool, an application that takes screen-shots. That is, the strongest proponents of a multi-billion dollar project that took years to complete, greatly increased the hardware requirements needed to run, and cost almost double its predecessor were reduced to citing the inclusion of a trivial piece of freeware.

People are getting ready to flee Vista. I personally have a Vista "Ultimate" computer, a Macintosh, and I just ordered an Ubuntu (Linux) machine from Dell. Long term, putting up with the sluggish speed and instability of Windows just doesn't make sense, especially given that I'm sure Microsoft will soon enough want even more than the $400 I already paid for this awful operating system. In the case of Vista, it's not that the advantages outweigh the disadvantages: there are no advantages I can think of except that I need to use this computer to test software because Windows is what most of my clients use. If my clients change, so will I. I'll probably change anyway, and keep a Windows computer only for testing.

I'm a vocal and classic first-tier non-customer for Windows. Microsoft has literally millions more like me. I'm not being alarmist or anti-Microsoft: Gartner calls the current state of Windows "untenable" and has announced that Windows is "collapsing." Microsoft engaged in classic technical innovation: innovation for the sake of innovation, when releasing this awful beast. Now they're driving away their customers in droves.