Why We Need to Teach Entrepreneurs Blue Ocean Strategy

Staying relevant in industries that are constantly on the brink of disruption

In January 2012, Kodak filed for Chapter 11 bankruptcy protection.

Despite being one of the most successful and innovative companies of the 20th century, this decision came as no surprise to the business world. Kodak’s corporate strategy was outdated, and everyone knew it. Today, the business world cites the downfall of Kodak as a “what not to do” manual. What’s more is that Kodak’s downfall is associated with the rise of Instagram, a company that transformed the way we share memories.

A Kodak Moment

Kodak’s failure is an important case study for a few reasons. Scott Anthony summarizes it well:

“A generation ago, a Kodak moment meant something that was worth saving and savoring. Today, the term increasingly serves as a corporate bogeyman that warns executives of the need to stand up and respond when disruptive developments encroach on their market.”

Today, practically every business is facing what Kodak faced in the 20 years leading to its demise. Technology has completely disrupted corporate strategy. Because of industry changes, even the most experienced of strategists are often left bewildered.

We live in a VUCA world (Volatile, Uncertain, Complex and Ambiguous). As a result, industry trends are constantly being redefined. The successful corporate equation no longer involves perfect competition and passive price-setting. Established companies are changing their policies and their corporate strategy to keep up with these changes. Those that fail quickly find themselves at the bottom rung of the ladder. Meanwhile, several new-age, innovative companies like Instagram are swooping in to take the crown.

The Kodak vs. Instagram case demonstrates why traditional corporate strategy simply isn’t fit for purpose. To ensure sustainable business success, we need to change how we teach and practice corporate strategy.

What’s Wrong With Mainstream Corporate Strategy?

For too long, the dominant focus of corporate strategy has been on “the competition”.

New businesses are advised to evaluate competitors, benchmark, and then follow suit, with minor changes that give them a competitive edge — like cost differentiation. Corporate strategy is typically formed based one a simple notion: do what the competition does, but do it slightly better.

This approach is too easy and unsustainable for a world that is constantly on the brink of disruption.

The truth is, outdated economic and business models are ingrained in the minds of students, would-be entrepreneurs, and next generation leaders sitting in the traditional Econ 101 classroom.

These models are causing new businesses to focus more on the competition and less on innovation. The problem with this approach is that it rarely prepares firms for the needs of tomorrow. Consumer preferences are consistently changing for two reasons: first, new products keep popping up to distract the consumer, and second, consumers now have access to an avalanche of information on each of these products that allows them to be picky. Hence, businesses need to be taught less to evaluate competitors that only exist today, and more to be both adaptive and innovative for tomorrow. We need a new focus for corporate strategy. To survive, businesses need to be agile and adaptive, have an enterprise mindset and think holistically.

The bottom line is that corporate strategy needs to stress innovation, not replication.

So, in comes Blue Ocean Strategy, an approach that challenges everything that you thought you knew about the requirements for entrepreneurial success.

Defining the Market Universe

Blue Ocean Strategy can be summarized in a nutshell:

“the best way to beat the competition is to make the competition irrelevant

The concept was first introduced by management thought leaders W. Chan Kim and Renee Mauborgne in their perennial bestseller.

Imagine that the market universe is comprised of two sorts of oceans: red oceans and blue oceans.

Typically, as I described above, when businesses are setting corporate strategy, they evaluate their competitors and then do what the competitor is doing — with a few tweaks. They enter crowded, shark-ridden red oceans. Red oceans are characterized by existing market space. In traditional economics, this is sometimes described as perfect competition: multiple firms offer the same product(s), because of which the price is set by consumers or by the market, not by each individual firm.

Meanwhile, blue oceans are characterized by untapped market space, demand creation, and the opportunity for highly profitable growth.

To make it simpler, red oceans represent all the industries in existence today, while blue oceans denote all the industries not in existence today — i.e., the unknown market space.

Why We Need Fewer Red Oceans, and More Blue Oceans

In red oceans, companies compete by grabbing a greater share of limited demand. Think about establishments that involve mass production — like food items (Walmart v. Walgreen). This type of strategy stifles growth and innovation.

Why?

Well, in red oceans, industry boundaries are defined and accepted. The competitive rules of the game are known. As more firms enter these industries, the market space gets increasingly crowded, meaning that price competitiveness becomes the sole focus of emerging businesses. This seems counter-intuitive, because one would assume that new entrepreneurs would not want to enter already saturated markets. But the reason that it’s appealing is because it’s familiar, it’s known and it’s taught to us.

That’s exactly where the problem lies. Traditionally, aspiring entrepreneurs are taught that the safest approach is the best approach. This is because in competitive red oceans, most firms are happy, and most consumers are happy, since the market sets the price. Red oceans are, after all, tested, safe, known market spaces. Your chance of stability appears to be relatively high.

But when companies get passive and fail to tap into untapped market space, they risk becoming what Kodak became: irrelevant.

What Kodak Missed

What happened to Kodak is now constantly happening around us because of technological disruption. The fear of becoming irrelevant is something almost every firm and every industry faces. Companies can use this 2x2 matrix to see how likely it is that their industry will be disrupted.

As this happens, existing companies have two options:

1. Shift existing corporate strategy to incorporate new technologies (think Volvo and Ford embracing self-driving technology).

2. Identify untapped market space and provide something entirely unheard of.

Kodak’s downfall is something that has been analyzed time and time again. It’s clear to us now that what Kodak failed to do is identify a vast blue ocean — digital photography.

For too long, Kodak’s core business was selling film. But then, cameras went digital. People went from printing photos to sharing them online.

It’s not that Kodak completely missed the rise of digital technologies. In fact, the first prototype of a digital camera was created in 1975 by a Kodak engineer. Later, Kodak even purchased a photo sharing site called Ofoto. But despite identifying the technology, Kodak refused to change its corporate strategy.

Instead of using Ofoto to share pictures and memories online, Kodak used it to try to get more people to print digital images. Kodak failed to see that online photo sharing was an entirely new business, not just an expansion of the printing business. And while Kodak was stuck in its red ocean of printing images, Instagram swooped in and made Kodak irrelevant by creating and dominating a whole new blue ocean.

The Rising Imperative of Blue Oceans

Many people might think that blue ocean strategy is unheard of. But blue oceans have existed for a very long time. Chan and Mauborgne urge their readers to ask themselves a simple question:

How many of today’s industries were unknown 100 years ago?

The answer: many as basic as automobiles, music recording, and aviation.

Blue oceans existed even prior to the advent of exponential technology. Think of something as simple as Cirque du Soleil, that somehow achieved in a declining industry.

The reason that Cirque du Soleil succeeded is because it realized that to win in the future, it needs to stop competing with the present. Cirque du Soleil identified a new target market (adults), figured out how it could create value for this new market, and created something legendary.

Today, more than ever, we’re ushering in a world of accelerating change. This means that for new ventures to succeed, blue oceans will constantly need to be created. We need to encourage entrepreneurs to create value through innovation, rather than through minor things like cost differentiation. Additionally, we need to prepare future leaders and entrepreneurs to be adaptive to disruptive technology. To do this, the focus in education needs to shift from simply teaching economic models and the basics to also encouraging business students to innovate.

Blue ocean strategy needs to be implemented at a basic, educational level. In fact, it should be a prerequisite and the holy grail for aspiring consultants, entrepreneurs and strategists, no matter the industry. Blue ocean strategy teaches a clear but important lesson for the future:

Identify an untapped market, engage in value innovation, and create something that that world hasn’t seen before.

I work @VMware. Philosophy, Psychology, Technology, Ethics, Policy