Blue-Oceans? Reactions from a Red-Ocean Guy

I received an email this morning from Fast Company magazine, which was entitled “Blue Ocean,” and which addressed the recent Microsoft acquisition of Tellme Networks. It was the “Blue Ocean” leader that got my attention: I don’t understand “Blue Oceans.” What I do understand, after reading the book of the same name, is that deep-down, at heart, I’m a “Red Ocean” type of guy.

Despite the rather amazing success of the “Blue Ocean” book, most of us spend our lives swimming in the redder version, and rightly so. The acquisition of Tellme and its automated speech-recognition software is apparently seen by some as a plunge into new [blue?] waters by Microsoft, but isn’t it really all about establishing “a beachhead in mobile search” for “mak[ing] a great new interface for consumer devices”? To me, this is not so much about starting an entirely new business, as it is opening a new front in an ongoing war; a strategic foray into [red?] market waters that Microsoft is already swimming in? Frankly, I understand this best by relying on good-old "red ocean" Porter's five forces, and seeing this as an appropriate strategic response to the pressures of the existing competitive terrain.

As for Blue Oceans: I hear the words; I read the book; but I am not convinced. In most cases that I see, really “blue oceans” are very rare, and often irrelevant. New efforts in familiar “red oceans” tend to occupy most of our careers. I would include Tellme in such biographies.

The Persistence of Old Frameworks

Sometimes, “old” works better than “new”. I say this not in defense of my age, but as a simple observation of what works and what doesn’t. For example, what did I learn from reading about “blue oceans”? Simply, that I’m a “red ocean” type of guy, at heart. And, that I really couldn't figure out what a "blue ocean" really was, or why anyone would want to jump into it? Somewhat similarly, I regularly find myself defending my continued reliance upon Michael Porter's simple, but 30 year old, five-forces model, in the face of "newer, better, more complex" models, churned out daily by academics in the pursuit of tenure. Why do I stick with Porter? Largely, because it works. Almost always, in a complex world, simpler is better than complex. The moral is: never discard "old but useful/reliable" in return for "new but complex/glitzy" without thinking it through very carefully, and certainly never merely to be au courant[I hope that my wife Marie is reading this].

The Porter model is not, however, the only "old" framework that is still around. Recently, there seems to be a renaissance of enthusiasm for the BCG Portolio Matrix [cash cows, dogs and stars, etc.] and for the Treacy triangle [which argues, much as Porter did, at one time, that you can really only be great in one "value discipline": operational excellence, product leadership, or customer intimacy]. Both of these frameworks are more than a decade old and both have experienced periods where they had nearly faded from managerial consciousness, only to return again into fashion. They are also, for me, vivid testimony to my second conclusion which is that "sometimes, old doesn't work very well anymore, and should be discarded. "

Porter's five-forces and McKinsey's 7 S, work well, despite their age, because they are not epoch-bound and because they raise questions of durable strategic import, rather than proposing answers which can be correct in one vintage and inappropriate in another. The BCG matrix, and Treacy's pyramid, on the other hand, provide answers, and answers that reflect the limitations of the time that they were developed in, at that. Here's the point: it would appear reasonable that, for eternity perhaps, it will be a sound and sober idea, when considering strategic choices, to consider what the customer wants and how powerful suppliers are [Porter five forces]. Or, for that matter, that it will always be reasonable to ask "how does our style and structure agree with our strategy [McKinsey 7 S or Galbraith's star]?" Is it still reasonable, however, in the 21st century, to embrace "the tyranny of the ands" [Jim Collins' words in Built to Last] and suggest that you can only excel in one value discipline? I don't think so! Here's a case where an old framework is no longer useful. Less true, but also reflecting an earlier way of life, when conglomerates ruled the world, is that the BCG matrix still has the answers for complex, multi-business companies. It, actually, never did, as it often misrepresented the ways in which such organizations worked, but more importantly, for me at least, is that it is so typically misinterpreted as to what it means, and how it is measured, that it leads to more, not fewer, debates about strategy, and not value-adding ones, at that.

So, Old is not necessarily bad, and New is certainly not necessarily better. How's that for a lesson?

You Can't Save Your Way to Greatness

It seems like every time I turn around, another firm that I work with has launched a new campaign to cut costs. It’s not that it’s not a good idea. It is, of course. Who could ever be against cost-management? The big problem is that cost-control requires discipline and most firms lack that. They also lack the vision and the leadership that are central to this. Mindlessly cutting back on the distinctive competencies of the corporation, in an effort to be “cheaper”, will almost always erode the possibility of a sustainable future.

What comes to mind, in particular, is a recent memo (http//stabucksgossip. com) that Starbucks’ chairman, Howard Shultz, sent to his top team decrying the diminishing of the “Starbucks experience” as an unintended consequence of operational efficiency measures. The memo itself is an amazing statement of strategy and leadership. Shultz deplores the loss of “romance and theatre” that accompanied the adoption of automatic espresso machines, as well as the loss of aroma and the sound of bean-scooping that disappeared with the introduction of flavour- locked packaging. He even worries about the loss of the “soul of a neighbourhood store”. These are details, but it is the details that matter. If “strategy is choice”, then the efficiency choices that were made in the pursuit of an ambitious growth strategy may well have resulted in a threat to the promises that lie at the heart of the Starbucks brand.

Also worth noting is that the chairman is raising the issue, not middle-management, nor the customer—yet. It is the guy at the very top, who is taking responsibility for being part of the management team that made these choices, and is now calling for correcting them. This is sober and responsible leadership. What makes it even more amazing is that it is being worried about in an organisation that Business Week ranked 10th among it’s annual listing of “Customer Service Champions”, and which Fortune ranked 16th among its 100 Best Places to Work, for 2007.

The lessons for all of us, from Starbuck’s experience, are profound:
Cost-control needs to be controlled. Left on its own, the mindlessness which often accompanies such crusades can attack the very essence of the brand-promise
Senior management is ultimately responsible for the outcome of such initiatives, and they should act quickly if they suspect a wrong turn—being wrong is correctable; being gone is not
Enhancing offerings and charging more, rather than paring offerings and getting trapped in a downward margin spiral, is a better way to go.

This column originally ran in The Times of India, Mumbai edition, April 3, 2007.

Substitution in the Music Industry

In case anyone is still pondering what "substitutes" mean in a Porter model, consider the recorded music industry. In the first three months of this year, CD sales have declined by 20% relative to a year earlier. Why? Downloading, both legal and illegal! Music is still all around us, maybe more so as the ubiquitous ear-buds that are everywhere in any urban landscape attest, but that is scarce solace for those firms who populate the CD value-chain. This is a classic case of where new formats, in this case digital transfer of individual music tracks, has the potential to severely threaten the industry's existence. The situation has become so grim that a recent Wall Street Journal article quoted one entertaiment agent saying that CDs had become little more than "advertisements" for all of the other things -- T-shirts, concerts, etc -- that today really bring in the revenues to an artist. The article also observes that "the music industry has found itself almost powerless in the face of this [technological substitution] shift." Is this true? Are they really powerless, or are they, instead, stuck in a past mindset, unable to make the necessary diffcult choices? Where are the strategic responses [remember, strategy is all about choice] that the industry should be making to counter this threat to industry attractiveness? Why haven't they haven't they been more aggressive? iTunes has been the one bright spot in the recent past, yet that did not come out of the traditonal industry players, but from Apple, and even there the industry has had difficulty making timely and aggressive choices. In addition to the substitution effects, tradtional customer channels are also under tremendous pressure from low-price retaliers, such as Wal~Mart, and Best Buy; all of which recently led Tower Records, one of the venerable players in the music retailing business, to cease its operations. All in all, this is a tough time for the industry, but a fascinating time for those of us who rely on the Porter framework to appreciate how the competitive terrain really works.

Book Industry Value Chain

One of my on-going interests is in the dynamics and strategic implications of the value-chain; and, in particular, the book publishing industry's value chain. A recent Wall Street Journal article about the Borders Group, one of the two big book retailers in the North American market, indicates some big strategic choices on their part in an effort to respond to changes in their Competitive Terrain and Value Chain. Discount retailers, who sell books as part of their broad portfolio of product offerings (including toys, clothing, foods, etc.) have emerged as a big source of pressure, as barriers to their entry were insufficient to keep them out of the industry. In addition, while bookstore sales have continued to decline [down 2.9% last year], online sales have continued to increase [13% of total booksales in North America, last year]; while Borders, as a player in this industry, had made strategic choices to emphasize store sales rather than online.... not a successful strategy, it turns out. One interesting piece of this story is a graphical comparison of the relative importance of various channels of North American book distribution, comparing 1998 with 2006. What is amazing, is the magnitude of changes in channel importance over a very short [8 years] time: Online sales jumped from 2% to 13%, Bookclubs shrank from 16% to 5%, and traditional retail shrank from 42% to 38%. This is a vivid warning of the instability than can be found in competitive terrains, even in tradtionally slow clockspeed industries, and should be a good time to recall the wisdom to be found in Andy Grove's message that Only the Paranoid Survive. Strategy is all about choice [& execution], and among the choices that Borders will now be making are: re-launching an online sales site, refreshing its fidelity program, closing smaller [Waldenbooks] outlets, reducing its music business [as CD sales in that sector continue to slump globally], launching its own private-brand publishing business, and reducing its international retailing presence.