December 16, 2019

Thinking Blue

What Blue Ocean Strategy and Carlotta Perez’ theory of techonological revolutions have in common.

Writing has been tiring lately.

Too often recent readings just fill up my head, leaving no space for thoughts of my own. This can make the writing experience overwhelming. It is easy to jot things down, but hard to weave the disparate threads together. But sometimes, you get lucky. And several ideas bubbling inside your head crystallise all at once.

Today I read the original Blue Ocean Strategy” article, and it catalysed this process. First I’ll summarise the thrust of the article, before plunging into some half-baked ideas about blue oceans, organisational innovation, the deployment age, and jobs-to-be-done. At the end, I’ll suggest a framework for building-your-own-blue-ocean.

1. Blue Oceans, Red Oceans

Most strategic thinking takes the boundaries of markets as a given. For example, there is an automobile market, with associated customer segments, competitive landscape, and complements & substitutes.

The rules of the game are static — the company with the highest market share wins. Strategic decisions in this frame are all about positioning — how can I differentiate my brand or product to attract a favourable customer segment? The authors call markets like this red oceans, because commodification drives margins down, forcing companies into a bloody fight for survival.

On the edges of these red oceans, lie uncharted waters; markets tantalisingly accessible, but yet to be explored.

The authors call these markets blue oceans. Blue oceans are unpopulated with predatory competitors, but abundant with customers — there is latent demand for a product that doesn’t yet exist. Blue oceans can be discovered by start-ups, like Ford with the model-T and Apple with the Mac, but are more often exploited by incumbents redrawing market boundaries, like Toyota with affordable, reliable cars, and IBM with the system 360 computer.

In red oceans, strategy is all about positioning and competitive response; in blue oceans, strategy is about providing customer value and largely ignoring the competition. Companies in red oceans view business as war; companies in blue oceans view business as exploration. Red ocean strategy is playing to win a finite game; blue ocean strategy is playing to continue a potentially infinite game.

Blue ocean strategy is similar to Peter Thiel’s ideas on start-ups. A blue ocean is an untapped market, so an entrant can monopolise it. However, blue ocean strategy is about serving existing demand in a new way, so it involves persuading customers to switch to a new product. As a result, a blue ocean strategy only works if the product is ~10x better than existing alternatives. Such a strategy is usually powered by a new technology, allowing you to provide more value at lower cost.

2. Blue Ocean Strategy requires Organisational Innovation

Blue ocean strategy doesn’t require proprietary technological innovation. Instead it piggybacks on existing innovations, working out how to deploy them in new ways.

Blue ocean strategy is about finding pockets of underserved demand — customer segments which are almost like dark matter, because they are ignored by the standard industry paradigm.

For example, before the model-T, cars were unreliable luxury goods, handmade for the rich much like yachts are today. Henry Ford’s genius was to realise cars could compete with horse-drawn wagons, provided they were made reliable and cheap enough. Ford dived in, and produced the mass-market model-T, which tapped into a market where no car had gone before.

Today, SpaceX have done something similar. Instead of replicating the ballooning cost-base of incumbents like Lockheed, they chose to stay lean, often keeping production of parts in-house. This has allowed them to sell satellite launches for a fraction of the price of their competitors, giving rise to a future of mass-market internet satellites.

While neither company has relied upon high-tech innovation, their success would not be possible without organisational innovation. Ford was the first major manufacturing company to fully implement Taylor’s ideas of assembly-line mass production, which allowed them to produce cars much faster, and at much lower cost than existing car companies, which relied on expert skilled labour. SpaceX’s philosophy of hardware as software” and continually upgrading and making parts in house is the driving force behind their low cost structure, which allows them to price so cheaply.

Whenever new technologies burst onto the scene, they suggest different ways of providing value to customers served in existing markets. Blue ocean strategy is about organising firms differently, and harnessing existing technologies to provide value to customers in new ways.

3. A digression: The deployment age is the age of blue oceans

According to economist Carlota Perez, technological innovation occurs in cycles each about 50-60 years long.

The first phase is an irruption”, as new technology, powered by risky financing, bursts onto the scene. As society warms to the promise of new tech, it becomes over invested, and irrational exuberance” causes a bubble, which eventually pops — the dotcom bubble being the most recent example. After this, society is mostly accustomed to the new technology, and we enter a new period, where technology is deployed to redraw the boundaries of existing industries. Old industry best practices” and common sense become disrupted. There is a paradigm shift, as the new technology becomes part of the status quo. We enter the Deployment Age. And the deployment age is the age of blue oceans.

Blue oceans require almost no new technological innovation, only social and organisational innovation. And these organisational innovations complement the already installed new technologies. Technological innovation is like the creation of a new apex predator — upgrading from travel by canal to travel by steam rail is like upgrading from sharks to orcas. Blue ocean strategy is then the re-discovery of new environments (markets) where this apex predator (new tech) can flourish.

If Perez is right, we are in the deployment age of information-communications technology right now. Thus, there must be lots of opportunities to applying tech to existing industries, carving out new markets overnight. Once you’re looking for this it is easy to spot — Uber, Airbnb and the rise of tech consulting are some examples. In our current technological cycle, the general case is captured by a16z’s maxim: software is eating the world”.

4. Build Your Own Blue Ocean (BYOBO)

To BYOBO, you need to challenge the implicit boundaries of industries.

You need to identify dark matter” customer segments, who are currently underserved by existing companies. A great way to do this is by using the jobs-to-be-done” framework.

Instead of analysing customers by their purchasing behaviour, you analyse them by what kind of job their purchase is fulfilling. This allows you to identify customers who might not currently be in your industry, but could potentially be served by your product. For example, a customer who’s job is to get from point A to point B could be served by public transport, hire car, bicycle rental, train, or plane, depending on distance and time constraints.

Although he didn’t call it that, Henry Ford used the jobs-to-be-done framework to identify a huge gap in the market for the first car for the middle classes.

Airbnb have a blue ocean strategy and explicitly uses the jobs-to-be-done model. They identified two sets of users: cash-strapped travellers looking for affordable lodging, and cash-strapped homeowners looking to make money. By serving these customers’ jobs, Airbnb created a new market, and are a multibillion dollar company as a result.

A trusty recipe to Build Your Own Blue Ocean:

  1. Identify a customer job-to-be-done currently underserved by industry best practices”
  2. Use recently invented technology to fulfil this job in a way which is ~10x better than alternatives
  3. Take over this new market, redrawing industry boundaries
  4. Profit

Stating the strategy is tantalisingly simple, but executing is tough. Luckily this is just a blog. Happy strategising!

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