Blue Ocean Strategy 1 Running Head: BLUE OCEAN STRATEGY

Blue Ocean Strategy: Pacific or Puddle?

Jeffrey J. Bowe Anderson University BSNS7050 Conceptual Foundations of Management July 2, 2009

Blue Ocean Strategy 2 What Caused the Blue Ocean Craze and How Deep is The Water Blue Ocean Strategy (Kim & Mauborgne, 2005) quickly became lauded as a revolutionary new theory of business strategy. Kim and Mauborgnes1 concept is there are two types of oceans, red oceans and blue oceans. Red oceans are full of bloody competition where profits are minimal to nonexistent and the market is comprised of many players all using marketing to attempt to increase market share. Blue oceans, in contrast, are undeveloped and uncontested markets, created by innovative companies which identify an underserved market, and then enter that market and earn handsome profits with little threat of competition. While it is not uncommon for authors to claim a new and revolutionary approach to solving an existing problem, a legitimate area of concern is whether the new has any accepted theoretical structure or conceptual foundation to support the claim. Mintzberg, Ahlstrand, and Lampel say, There is a terrible bias in today's management literature toward the current, the latest, the hottest. This does a disservice, not only to all those wonderful old writers, but especially to the readers who are all too infrequently offered the trivial new instead of the significant old. (1998, p. 8) The first question for this paper is whether Blue Ocean Strategy is new, followed by whether it has deep roots in accepted foundations of managementdeep roots like an oceanor is it built on shallow commentary without strong theoretical basesshallow like a puddle. Whether Blue Ocean Strategy is new is answered easilyno, it is not new. Whether the Blue Ocean Strategy has puddle or Pacific depth to its foundation is also answered easily-it has Pacific depth when redefined to fit the purposes of the author. The last question of whether Blue
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Due to the large number of references to Kim and Mauborgne and Blue Ocean Strategy, the year will be left off all subsequent references as all citations are to the same reference, and the citation will be Kim and Mauborgne, Blue Ocean, or Blue Ocean Strategy, depending on the context.

Blue Ocean Strategy 3 Ocean will survive the test of time is also answered yes providing the parameters of use are followed. The balance of this paper will outline the bases for these conclusions. What is Strategy? To dig into a review, analysis, and critique of Blue Ocean Strategy, we need to define strategy. Strategic decisions are decisions on what kind of business the firm should seek to be in (Ansoff, 1988, p. vii), which reminds us of the famous Drucker question, What is our business and what should it be? (Drucker, 1977) Porter says, Strategy is developing a broad formula for how business is going to compete, what its goals should be, and what policies will be needed to carry out those goals (1980, p. xvi) Later, Porter writes, Strategy can be viewed as building defenses against the competitive forces or finding a position in the industry where the forces are weakest (2008, p. 89). According to Chandler, strategy is The determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Rumelt, 1986, p. 10). Strategy is about seeking a competitive edge over rivals while slowing the erosion of present advantages (Day, 1997b, p. 48). Strategy is the direction of an organization" according to McCarthy (2000, p. 35). The common theme of all of these definitions is that strategy is a look at and description of a desired future. Having defined strategy, we next must look at the history of the study of business strategy. Business strategy has been researched for nearly 100 years. Since the 1960s, Most research on sources of sustained competitive advantage has focused on either isolating a firms opportunities and threats (Porter, 1980, 1985), describing its strengths and weaknesses (Hofer & Schendel, 1978; Penrose, 1958; Stinchcombe, 1965), or analyzing how these are matched to choose strategies. (Barney, 1991, p. 99).

Blue Ocean Strategy 4 The older models assume homogeneity in strategically relevant resources and that any heterogeneity that is developed is quickly absorbed to all firms via mobile resources in a perfectly competitive market. Newer models suggest heterogeneity lingers which provides new opportunities and threats in competitive environments. (Barney, 1991) Mintzberg et al. (1998) note that even though the concept of strategy is about stability, the vast majority of research is about using strategy to create change. In the fifty years of business strategy research, We [have created] five-forces analysis, core competencies, hypercompetition, the resource-based view of the firm, value chains, and a host of other helpful, often powerful, analytical tools (Hambrick & Fredrickson, 2005, p. 51). Mintzberg et al. suggests that the best use of strategy today is to combine elements from the various models to synthesize what is best for each firm. Sun Tzu wrote over 2400 years ago that The best policy is to attack your enemys strategy (Hanzhang, 2000). This advice is as sound today as it was then. But, many managers feel that the pace of competition today requires new approaches and this prompts strategic theorists such as Kim and Mauborgne to propose new models. The concern for a firms future is of vital importance to managers who are agents of shareholders and are personally interested in developing effective strategy to maintain their employment. So, when a new theory of strategy is proposed, Mintzbergs quote above is correctit is often adopted as the greatest and most important breakthrough. Historical Background and Literature Review General concepts There are two major schools of strategy, recombination and reconstruction, both of which have impact on and components within Blue Ocean Strategy. Recombination strategists look for a better way to compete to gain a larger share of a zero-sum perfectly competitive market, to

Blue Ocean Strategy 5 redistribute a set level of demand, typically looking at either cost or differentiation. Recombination looks at the supply side, taking existing components and most often using technological innovations to create a new offering to primarily the same group. Inside the recombination school is the structuralist view of strategy, often called the structure-conductperformance (SCP) view. The SCP perspective is that structure of the market as defined by economic theory impacts buyer and seller conduct through pricing and value, leading to financial and operational performance of the firm. In other words, there is an environmental impact which leads to competitive advantage thinking, driving companies to look for defensible positions using advantages in existing market space. In contrast, the reconstruction school redraws or reshapes the boundaries of the market, ignores the existing perfect competition market structure, redefines competition, and creates new demand by offering something with increased value to the newly bounded area. Brandenburger and Nalebuff (1996) state that the boundaries of business are artificial, that all markets are interdependent and cannot be considered individually. Bresser, Hitt, Nixon and Hueskel write, Deconstruction of the proprietary business arrangements has changed the boundaries that define markets and industries leading to a radically new competitive landscape....It is changing the concept of firm strategy along with the strategic options available to firms (2000, p. xii). This school feels there is latent demand to be found and the best approach is to stimulate the demand side, which is a non-zero sum perspective. One of the major subsets of the reconstruction school is the resourced-based view. A resource isanything which could be thought of as a strength or weakness of a given firm (Wernerfelt, 1984, p. 172). Implicit to the resource-based view is that internal resources are not universal and heterogeneous. (Peteraf, 1993) Porter (1985) introduced the value chain concept,

Blue Ocean Strategy 6 and resource-based theorists feel they build on Porter, saying their perspective is a further development of his value-chain concept. (Barney, 1991) The resource-based perspective argues that the strategic analysis should focus more on the key resources that allow the firms to attain a specific competitive advantage, rather than on product-market positioning (Kay, 1993) (Gurau, 2007, p.372). Specific theorists Ansoff (1957) is a cornerstone recombination theorist, declaring that strategy is intentional and involves heavy analysis. In developing strategy, Ansoff says it is essential to systematically anticipate future environmental challenges to an organization, and to draw up appropriate strategic plans for responding to these challenges. In Corporate Strategy, Ansoff (1988) built a systematic approach to strategy formulation and strategic decision-making through a framework of theories, techniques and models. Ansoff (1988) sees a firms capability planning as a complement to formulation of strategy. His reactive mode is similar to organic strategic planning which is similar to Mintzbergs emergent strategy, all of which state that proper strategy is evolutionary with incremental changes to prior strategy. Ansoffs research showed that a firm has four strategic options in a 2 x 2 matrix: a firm can either penetrate the market or develop the market, or a firm can expand its products use via modification (product development) or look for new products (diversification). He explained further that, Market penetration requires increasing existing product market share in existing markets; market expansion requires the identification of new customers for existing products; product expansion requires developing new products for existing customers; and diversification requires new products to be produced for new markets. (Ansoff cited in Chartered Management Institute, 1991)

Blue Ocean Strategy 7 Ansoffs research found that most well run companies do all of the first three simultaneously and may opt to also do the fourth, a precursor to Blue Ocean and counter to Porter who originally said the three generic strategies were mutually exclusive. Porter (1980, 1985), another member of the recombination school, is one of the most well known and highly analyzed strategic theorists. An economist by training and practice, Porter is highly analytical in studying industry and competition. Structural analysis is the type of competitive market, followed by looking at established players and new markets and figuring out where to draw the lines(s) for your company.but where they are drawn has little to do with strategy since the type of market dictates the strategy, and not who is or is not currently playing in your market (1980, p. 32) Porters two most well known concepts are the five forces and three generic strategies. The three generic strategies are low cost producer (G1), differentiation (G2), or niche market (G3). His strategic model and resulting strategic recommendations are based on the analysis of industry structure. The essence of formulating competitive strategy is relating a company to its environment (1980, p. 3), and "The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these [five] competitive forces or can influence them in its favor" (p.4) For Porter, a firm can take offensive or defensive moves to secure its position. Probably the most analytical of all strategic theorists, Porter is very intentional in the entire process, unlike Mintzberg who sees intentional strategy as impossible. Mintzberg places Porters work in the positioning school, which advocates an analytic approach to strategic

Blue Ocean Strategy 8 planning and implementation (Gurau, 2007, p. 370). Porter would ruminate that there is no other effective process to form strategy. Two more recombination theorist are Hambrick and Fredrickson. They approach strategy most like Porter, that competitive and internal analysis are necessary parts of the strategic process. We present a framework for strategy design, arguing that a strategy has five elements, providing answers to five questionsarenas: where will we be active? vehicles: how will we get there? differentiators: how will we win in the marketplace? staging: what will be our speed and sequence of moves? economic logic: how will we obtain our returns? (Hambrick & Fredrickson, 2005, p. 51). Hambrick and Fredrickson say that you need to pay attention to all areas, including your competition and your own capabilities, and not just the market. Based on a careful and complete analysis of a companys environment, marketplace, competitors, and internal capabilities, senior managers need to craft a strategic intent for their firm (Hambrick & Fredrickson, 2005, p. 59). Hambrick and Fredrickson are clear that winning is not a chance event and that everything, including competitors, must be analyzed. As we discuss at length in the next section, Blue Ocean does not look at competition. Mintzberg is also a recombinationist but views the strategic process quite different from Porter and Ansoff and, in some ways, more like Kim and Mauborgne. Mintzberg sees the Porter and Ansoff approach to strategy as top down and does not like it. Porter favors the analytical process but Mintzberg says no one has ever created a strategy through analysis. Mintzberg feels that events cannot be predicted, that strategic planning cannot be separated from operational issues, and that novel ideas cannot come from analysis and hard data. He clearly states his

Blue Ocean Strategy 9 position that, I dont think you create a strategy through a formal process (McCarthy, 2000, p. 36). Mintzberg likes flexible strategy that is incremental, informal, and continuous. He feels strategy should be more of a synthesis and the best strategy will emerge during the course of running the business instead of from formal planning meetings. Wernerfelt is a reconstructionist with a Porter-like analytical approach, and one of the founders of the resource-based view. Some thirty years prior to Blue Ocean Strategy, Wernerfelt saw strategy moving from market to product noting, The resource perspective provides a basis for addressing some key issues in the formulation of strategy for diversified firms, such as a) on which of the firms current resources should diversification be based, b) which resources should be developed through diversification, c) in what sequence and into what markets should diversification take place, and d) what types of firms will it be desirable for this particular firm to acquire? (1984, p. 172) Wernerfelt (1984) saw the need for new strategic models to address both existing offerings and resources and new offerings that require new resources. He noted that traditional concepts of strategy looked at resource positions of the firm in terms of relative strengths and weaknesses, whereas the trend was to look at strategy from a product perspective. Blue Ocean is a productcentric model that all but ignores market structure, competition, and analysis of firm capabilities prior to launching a new strategy. Peteraf is also a resource-based reconstructionist whose strategic model for competitive advantage includes four conditions. Four conditions underlie sustained competitive advantage, all of which must be met. Those include superior resources (heterogeneity within an industry), ex post limits to competition, imperfect resource mobility, and ex ante limits to competition

Blue Ocean Strategy 10 (Peteraf, 1993, p. 179). Heterogeneity and imperfect resource mobility are imperfect information and imperfect communication, a key to Blue Ocean Strategy discussed in the next section. Kaplan and Nortons Balanced Scorecard is another popular and well researched strategic tool. Kaplan and Norton are intentional strategists in that they feel strategy should be planned in detail and not left to an incremental or emergent process per Mintzberg. However, The Balanced Scorecard is not really a strategy formulation tool (1996, p. 77). Balanced Scorecard becomes a strategy only if stated as such, otherwise it is a measurement tool for any strategy in place; more of a recording of result against objective and activity than a setting of objective and activity. However, Kaplan and Nortons model does have three generic strategies: growth, sustain, and harvest. The stage three harvest is, A mature phase of their life cycle, where the company wants to harvest the investments made in the earlier two stages (p. 57). We will discuss the choice of harvest or a blue ocean move in the next section. In Manage for Profit not Market Share, Simon, Bilstein, and Luby (2005)2 write about strategies for mature markets, a different focus from Blue Oceans focus on new markets. Although Blue Ocean Strategy and Manage for Profit target different markets, they share some conceptual elements. Simon et al. develop a competitor map which outlines where to pick and do battle for profit and where to cede market share that is not profitable. The competitor map of Manage for Profit is very similar to the strategy canvas of Blue Ocean. Both are designed to visually show opportunities for differentiation in the market or offering. Both Manage for Profit and Blue Ocean suggest looking at your market without preconceived ideas or limitations, and to challenge the assumptions that drive current behavior and offerings.

Due to the large number of citations to this reference, all future citations will be either Simon et al. or Manage for Profit depending on the context.

Blue Ocean Strategy 11 Game theory is a strategic analysis tool just like Porter's five forces or Boston Consulting Groups strengths/weaknesses/opportunities/threast (SWOT) model. Game theory provides a formal methodology for knowing oneself and one's competitors (Ho and Weigelt, 1997, p. 127), to anticipate or project strategic moves of your competitors. Game theory is similar to the heavy analysis models likes Porter and Ansoff which include competition as part of the strategic decision process, and could be called The science of strategy (Brandenburger & Nalebuff, 1996, p. 40). Game theory is also Mintzberg-ish in that strategy emerges from moves and countermoves by all players. Ho and Weigelt and Brandenburger and Nalebuff warn of the dangers of ignoring the interactive nature of competition. Managers who are myopic do not anticipate the future, because they fail to realize the process-like nature of strategy. Such managers may make good short-run decisions, but may not be successful in the long run, because they lack strategic foresight. (Ho & Weigelt, p. 137) Porter would agree with game theory while Blue Ocean unfortunately dismisses the need to anticipate competitors reactions. A core economic theorist is Schumpeter (1970). One of Schumpeters major concepts is creative destruction, the process of entrepreneurial innovation which continually creates new markets and new competitors as firms find better ways to solve existing problems (which is the Manage for Profit target) and offer new solutions to new problems (the Blue Ocean target). As an economist, Schumpeter strongly agrees that most markets are perfectly competitive and that all firms in competitive markets will trend to zero economic profit as competition decreases profit via decreased margins. (Economic profit is not accounting profit; economic profit is accounting profit plus a return on capital that compensates for the risk involved in investing the

Blue Ocean Strategy 12 capital in the type of venture contemplated.) Schumpeter provides conceptual theory for why only oligopoly will allow economic profit. We will discuss next that Blue Ocean Strategy suggests economic profit is available in competitive markets. Conceptual Critique and Holes in the Ocean Blue Ocean Strategy is tactical over theoretical and makes only passing attempts to discuss conceptual foundations. This author could find no indication of doctoral qualification of either Kim or Mauborgne, although their positions at INSEAD would imply such credentials. This does not in itself indicate that their model lacks conceptual basis, but being doctorally qualified leads to higher inherent credibility. When Kim and Mauborgne do discuss conceptual foundations, they draw inconsistent conclusions from other theorists and a conclusion from economics counter to core equilibrium theory, all discussed in this section. Within first 8 pages, you find that their main point is the need to go from red oceans to blue oceans, from commodity to non-commodity. In fact, Kim and Mauborgne admit that this is not a new concept. This is nothing more than moving from perfect competition to oligopoly or monopoly, and could be the result of using Ansoff and Porter-like analysis of markets to identify opportunities in the form of weaknesses in competitors that can be turned into firm strenghts. One of the biggest areas of concern for the Blue Ocean Strategy is their dismissal of economic theory. They claim that a firm can produce long term at P > ATC (price greater than average total cost where total cost includes return on investment), returning significant economic profit. They claim that you can sell at high price and high quantity over time, but keep costs low and keep out free riders. This is counter to all economic theory that says economic profits will draw other firms into the industry and cause economic profits to go to zero. High prices, however, do induce other less efficient firms to enter the industry. Such firms will enter and

Blue Ocean Strategy 13 produce so long as price exceeds their marginal cost (MC) (Peteraf, 1993, 180). Kim and Mauborgne also fail to show the long-run average total cost (LRATC) curve turning back up at higher quantity (Q), suggesting that there are increasing efficiencies of scale at all levels of higher output. (p. 214) Simon et al. note that the marginal revenue curve (the additional revenue gained from selling one more unit) is a key to profit. Customers who are willing to pay morea higher marginal revenuelead to increased profits. It is foolish not to explicitly consider the demand side in setting prices. The customer's willingness to pay is not determined by costs of a product but by its performance and resulting value to its customer (Simon et al., p. 61). Kim and Mauborgne agree that value is important, writing, "You should not let cost drive price (Kim & Mauborgne, p. 119). However, economic theory says the inevitable impact of competition on price is that in a perfectly competitive market price will go to cost. We must recall that with perfect information all competitors in an industry have the opportunity to have same cost curve. Blue Ocean attempts to prepare an argument that the marketing can overcome these economic theories, but such arguments are not accepted by economists and suggest a shallow puddle and not a deep ocean. With perfect information in the market, absent a natural monopoly (such as the only power company in a rural area supplying electricity) or a legal monopoly (such as a patent), all markets become perfectly competitive. Manage for Profit states that if you have a truly innovative product, then go for market share and follow a monopoly pricing model, otherwise the market will follow a perfect competition model. Blue Ocean Strategy admits that economics and pricing are in play, that too high a price will lead to competition (p. 130). They suggest "price-minus costing" where you start with price and subtract profit to get to your target price. They say shoot for a target cost that is low enough

Blue Ocean Strategy 14 that competition cannot match it, so they are now involving Porter G1, and by page 132 they say this low cost situation is an essential requirement for lucrative blue waters. Then, they contradict the rest of their model and book by agreeing with economic theory and suggesting low to mid pricing to keep the new market unattractive to competitionthe opposite of page 119 where they say cost should not drive price. The creation of blue oceans is about driving costs down [Porter G1] while simultaneously driving value up for buyers [Porter G2 and G3] (Kim and Mauborgne, p. 17). They refer to this as pricing innovation yet they are really discussing Porter G2 (differentiation) and G1 (low cost) because the innovation is to make the purchase attainable and reachable by the masses through low costassuming that low cost leads to low price. While Ford (1922) might have liked this, it has no theoretical basis. High-profit opportunities ultimately attract competitors who strive to match, leapfrog, or neutralize the advantages of the leader (Day, 1997b, p. 49). The last step of the Blue Ocean Strategy is assessing and addressing adoption hurdles which does include some analysis (pp. 125-126). Blue Ocean discusses strategic pricing, which they define as setting a price that will attract right away the mass of buyers. They follow economic theory and discuss price elasticity and then move to looking at competition or offerings that are near competition, including both alternatives and substitutes although they do not use these terms (p. 128). Porter discusses the strategy of substitutes variously, including Redefining competition away from the strengths of substitutes from your competitor and. Redirecting strategy toward segments least vulnerable to substitution (Porter, 1985, p. 311). If your strategy is Porter G3 niche which is a redefinition of relative strengths and weaknesses, and add G1 low cost so that the offering is not attractive to competitors, then you have what Kim and Mauborgne call value innovation, which is also the Manage for Profit concept. To bring some

Blue Ocean Strategy 15 foundation to their model, they discuss offerings which have a different form, same function which is between the normal definitions of a substitute and alternative, and other offerings with a different form and function, same objective (p. 129). Others would call this an alternative; Kim and Mauborgne call it a Blue Ocean Strategy. The authors both support and reject Ansoff and Porter, and seem to agree most with Mintzberg. Blue Ocean admits that looking at current customers for segmentation is not wrong, but that new customers are also important (p. 114). The analysis of existing and potential competitors of Porter (1980, p. 49) is the look beyond of Blue Ocean. Knowing where to compete is critical for both Blue Ocean and Porter. Defining the relevant industry [is] a crucial step in competitive strategy formulation (Porter, 1980, p. 32). Porter writes, Mistakes in industry definition made by competitors present opportunities for staking out superior strategic positions (2008, p. 92). A highly competitive market, especially a mature market, requires a complete understanding of the market and competitors to know where a strategic advantage is possible. A resource-based view holds that a firm can find and maintain an advantage and that imperfect information is possible. Blue Ocean must balance both of these for their model to work. According to Best, Entrepreneurial companies by definition create differentiation, they seek to create distinctive capabilities by fostering an interactive dynamic between their own technological capabilities and market opportunities (2001, p. xiii). Do Kim and Mauborgne look at existing internal skill sets or resources in the firm? Do they analyze position and capabilities or just plunge forward into a new market? Other strategy theorists warn of imprudent moves. [The firm] may have developed a strategy that is not feasible. The company may not have the resources or capabilities to pull off the preemption (Wind, 1997, p. 270). Best (2001) states that a firm must look both at company and at market--

Blue Ocean Strategy 16 the market sets the price and the company must be able to provide the offering at that price. Blue Ocean makes no mention of existing skills or capabilities as an area of concern in strategy, a significant lapse according to other strategic theorists and an indication of shallow puddle depth. What does Blue Ocean say about size of the market? Do they agree with Chandler that size is best? Or, do they agree with Manage for Profit that profit is better than size? Manage for Profit would not agree with Chandler that size via vertical and/or horizontal integration is the primary long term strategy and goal Manage for Profit by definition says go for profit over size. The only comment that Blue Ocean makes about size is to price the offering such that the firm draws the most customers in the shortest amount of time. There is the balance between Porter and Blue Ocean. Blue Ocean is a new growth theory which combines the logical incrementalism of Mintzberg, the knowledge side of innovation from Peteraf, and adds Porter and Ansoff analysis of markets to find opportunities, so that strategy is a cognitive process which is the result of unique processing of information. This unique processing though, can be replicated by other firms. All competitors can come to the same decision about new opportunities, pursue those opportunities, and no firm will be able to maintain a competitive advantage. To avoid this risk, according to Porter, firms should focus on oligopolistic or monopolistic segments or industries. (Barney, 2002, p. 58) Blue Ocean says that being first has advantages in that the first firm in the market can set the price and offering parameters. It is much easier to pioneer a position than to replace someone else who already has it (see Ries and Trout, 1981) (Wernerfelt, 1984, p. 174). Blue Ocean claims this is the core of the success process, to out think your competition. Barney (1991, p. 104) writes,

Blue Ocean Strategy 17 It seems clear that if competing firms are identical in the resources they control, it is not possible for any one firm to obtain a competitive advantage from first moving. To be a first mover by implementing a strategy before any competing firms, a particular firm must have insights about the opportunities associated with implementing a strategy that are not possessed by other firms in the industry, or by potentially entering firms. Schumpeters creative destruction says that continual entrepreneurial innovation will repeat the cycle ad infinitum with improved pricing and parameters generating ways for competitors to regain market share by finding new blue oceans. Therefore, Blue Ocean Strategy assumes that firms do not have identical resources, agreeing with Schumpeter in the short run when entrepreneurial innovation is at its creative best so in this element Blue Ocean is deeply rooted. In some situations, the firm cannot decipher why their combination of resources has resulted in a strategic advantage, yet the advantage exists and the result is positive economic profits. Management theorists call this unknown causal ambiguity, where the cause is unknown or ambiguous. Since the firm and therefore market does not know the source of the advantage, it cannot be replicated. (Barney, 1991; Peteraf, 1993) Blue Ocean does not subscribe to causal ambiguity, but rather ignores the capability discussion and focuses on future direction with minimal forethought to the ability to be successful in the new market. Blue Ocean says forget the patents and performance drivers and just focus on need, but we cannot forget about resources and competitors as easily as Blue Ocean would have us do. The strengths of our competitors can lead to higher costs for our firm if our firm does not currently possess the same strength. The economic performance of firms depends not only on the returns from their strategies but also on the cost of implementing those

Blue Ocean Strategy 18 strategies (Peteraf, p. 185) and Organizations have to build on whatever strengths they can make use of (Mintzberg et al., 1998, p. 40). Both Blue Ocean and Manage for Profit say that peaceful competition is best. Peaceful competition is finding a niche that you are best suited to fill, and then ceding other niches where you are weaker to your competition such that all firms are making satisfactory profits. Porter opens the door for the Blue Ocean Strategy in saying that, To look for positions in the market where a firm can meet its objectives without threatening its competitors..may be a place where everyone is relatively happy (1980, p.57). Relatively happy is an important term for Porter, who never forgets his base in economics. New entrants may be tempted into an industry where existing firms are doing wellso it needs to find a strategy it can defend against existing competitors and new entrants through some distinctive advantages (p. 57). While pure economic theory states that competition will eventually drive economic profits to zero, in a shorter timeframe economic profits are available. For Porters focus on analysis, looking at where to freeze out a competitor is or can be part of the strategy of a Blue Ocean, which is to find a place where your competitor cannot or will not go. In some cases, the economic key may be to obtain premium prices by offering customers a difficult to match productIn some instances, the economic logic might reside on the cost side of the profit equationan advantage that competitors cannot duplicate. (Hambrick & Fredrickson, 2005, p. 56-57) The latter combines Porter G1 and G3 in the Blue Ocean Strategy. However, the argument remains that profit attracts competition. Creating blue oceans is not a static achievement but a dynamic process. Once a company creates a blue ocean and its powerful performance

Blue Ocean Strategy 19 consequences are known, sooner or later imitators appear on the horizon (Kim & Mauborgne, p. 185). This appears very late in the book, and is very similar to Mintzbergs emergent strategy, and also concurs with economic theory. A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors. A firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy. (Barney, 1991, p. 102). Blue Ocean assumes imperfect information in the form of intellectual brain power, that you can think of something that your competition cannot think of, yet this is even less likely in today's high pace information world. A competitive advantage strategy approach starts with the question that opens Porters (1985) book Competitive Advantage, With whom am I really competing? where a Blue Ocean perspective starts and ends with What need is being unmet? The second question in a competitive advantage strategy is, What advantage does the firm have over its competition? or Where do we have an advantage over our rival? so that we can create a strategy that creates and/or sustains these advantages. The third question in competitive advantage strategy is, How will my competitors respond to an action now and how will they respond in the future? According to Day, The payoff from understanding the competitive forces is when managers begin to think how they can change strategy to alter the attractiveness of their market to their advantage. These are change the game strategies that dampen the competitive forces, perhaps by

Blue Ocean Strategy 20 dramatically increasing differentiation, raising switching costs, or using capital investment to raise the minimum scale of operations to deter potential entrants. (1997a, p. 46) This is where game theory, behavioral theory, and Porters intense competitor analysis take center stage and provide decision input missed in Blue Ocean Strategy. The value curve model or strategy canvas of Blue Ocean is not significantly different from the five forces graphic as a way to visually indicate what is happening. Porters visual model (1980, p. 47) may not visually demonstrate points of differentiation, but the process of working through the Porter visual is more comprehensive and descriptive. Further, Porter addresses both Blue Ocean new markets and Manage for Profit mature markets. Porters model combines the types of competition with buyer and supplier power and has strong ties to economics throughout presentation. Blue Ocean all but ignores economic theory during the first half of their book and then apply it inconsistently throughout the second half. Blue Ocean Strategy may be theoretically sound, but it is not an innovative process when one looks at Porter G2 differentiation or G3 niche market or the resource-based views which state that new markets and offerings are available from imperfect information. The Porter and Ansoff analysis is very different from the management debate Blue Ocean suggests as part of the innovation process because Porter especially is much deeper in the level analysis that is part of strategy. Drucker, Deming, Porter all say know the customer, so that position is not revolutionary, and even Ford (1922) and Taylor (1911) knew the customer wanted price so they focused on cost while others were focusing on features. The Blue Ocean commitment to focus is not unique, and the requirement for a catchy and unique tagline is marketing and not a management or strategy issue.

Blue Ocean Strategy 21 The Future of The Ocean As noted above, Blue Ocean is not a new theory. So why is Porter G3 niche market strategy not Blue Ocean Strategy? The simplest view is that positional advantage can be achieved either by differentiation through providing superior customer value or by achieving the lowest delivered cost. According to this view, these two generic strategies involve fundamentally different routes to competitive advantage, and firms must make a choice between them because they are usually incompatible. (Day, 1997b, p. 54) Usually is not always and Blue Ocean is about those non-incompatible times. Blue Ocean Strategy might be innovative in calling it out as a theory, but not as a practice that has been in place for some time. Companies sometimes pursue both strategies simultaneously. Firms like Kellogg prosper by simultaneously lowering costs and gaining price premiums with superior customer value (Day, 1997b, p. 55). At the end of the book (p. 188), Kim and Mauborgne reverse course and suggest a Manage for Profit process of milking or harvesting a mature business as a cash cow. Porter (1985) recognizes harvesting as a valid and profitable strategy, and Simon et al. state that innovation cannot grow a pipeline and profit fast enough, so a firm must be prepared and able to harvest profits from mature markets as well. Kaplan and Norton also suggests a Blue Ocean move is not always best, that a company should maximize current profits to earn the maximum profit before making new investments in a new offering. (Kaplan & Norton, 1996, p. 57) Gurau writes of the difficulty in knowing when to harvest and when to venture to blue waters. No strategy is better than the other in absolute terms, and only by carefully analyzing the company, the customers, and the competitive environment, a manager will be able to decide which specific

Blue Ocean Strategy 22 strategy is more appropriate for its firm (Gurau, 2007, p. 379). Firm success is contingent on both as Kim and Mauborgne admit late in the book saying, Practical reality demands that companies succeed in both oceans and master the strategies for both (p. 190).Kim and Mauborgne suggest a harvesting focus can keep a firm from being distracted by new opportunities that are not as good as the one currently being served. It also keeps you from pursuing another blue ocean when there is still a huge profit stream to be collected from your current offering.you should resist the temptation to valueinnovate again and instead should focus on lengthening, widening, and deepening your rent stream through operational improvements and geographical expansion to achieve maximum economies of scale and market coverage. (Kim and Mauborgne, p.188-189) This apparent change of heart matches economic theory and agrees with strategists like Porter and Ansoff who suggest that analysis of timing is a vital part of strategy and while not consistent with the majority of their theory, adds significant staying power to their model. There is no argument that it is easier to find profit in non-competitive (oligopoly or monopoly) markets and that when competition arrives, the market needs to be analyzed more closely for the proper strategy to maximize profit in the future. Kim and Mauborgne write that, To avoid the trap of competing, you need to monitor value curves on the strategy canvas (p. 188). This is Porter and Ansoff-like competitor analysis. Monitoring the canvas allows a firm to be aware of the need to redirect, while generating maximum cash from existing markets before, possibly, exiting them for a Blue Ocean market. Once a company creates a blue ocean and its powerful performance consequences are known, sooner or later imitators appear on the horizon (Kim and Mauborgne, p. 185). This is good advice which will keep Blue Ocean a popular strategy due to its success.

Blue Ocean Strategy 23 This leads to the last area of concern remains for Blue Ocean Strategyit is only a proactive model, which assumes that the firm is the first mover. Sun Tzu realized that it is easiest to Defeat your enemy by a surprise move (Hanzhang, 2000, p. 45). A reactive move tries to stop, slow, or limit the damage of a rival's action after it has been initiated. A simple offensive maneuver is designed to attack a competitor or move in a new direction. In contrast, preemption is focused on attacking the future moves of a competitor, before they have been made.Preemption is tantamount to knocking out your rival's missiles while they are still on the ground. (Wind, 1997, p. 256) In reality, it is quite possible that your competition completes a Blue Ocean move first, beating you to a new market, forcing you to a reactive mode to survive because your strategy canvas is no longer profitable. Managers also must identify potential moves of competitors (Wind, 1997, p. 265), which is why game theory is a useful analytical strategic tool. Without minimizing the value of being a first mover, there is no mention in the Blue Ocean book about reaction, which limits its usefulness to practitioners confronting smart competitors who have done their homework and simply acted faster. A Blue Ocean Strategy brings with it considerable barriers to imitation (p.185) but your competition has the same information from which to be the first to create a Blue Ocean. The new watchwords are anticipation and preparation (Day & Reibstein, 1997, p.2); this would make the oligopoly arguments of Blue Ocean problematic because others are doing the same analysis of the same data trying to create an equally effective Blue Ocean solution against you. You must assume your competition is as smart as you are and that they are having the same strategy sessions you are having, and that they might just get one key aspect implemented fasterso you need to be

Blue Ocean Strategy 24 prepared for that contingency. Changes may be easy to understand in retrospect, but the real challenge managers face is to anticipate these changes (Schoemaker & Amit, 1997, p. 376). This is not to say that being first does not have advantages; the problem is there is no contingency component in Blue Ocean which represents a serious flaw for its long term usefulness. The only Blue Ocean Strategy move is to create a new market instead of creating a more defensible position in your current market. If a firm fails to prepare for counters by competition, and fails to address weaknesses that by definition must be in place, then the firm will be required to find a long string of blue oceans. Therefore, the older intentional and highly analytical models of Porter and Ansoff are valuable in projecting second and third wave activities. Despite its (sic) limitations, Porters models are still valuable tools for managers in their attempt to analyze the competitive market environment and design effective strategies (Gurau, 2007, p.372). Porter, Day, and the game theorists would be more prepared from a more continuous and intentional analysis of their competitors and the market, knowing more about what the competition is doing and is likely to do, so that they would not find themselves in a former red ocean that became a Dead Sea. Sun Tzu would be equally supportive of catching your enemy off guard from your own analysis and projection of their next move. The key to preemption is to determine where competitors or the market are headed. To preempt a move, a manager must first be aware of the possibility for the move. Understanding the possible moves of competitors provides an opportunity to lock them out. (Wind, 1997, pp. 259-260) Porter suggests that a firm must continually look to other markets and industries for events and offerings that might impact their own market. (2008) The more turbulent the environment, the

Blue Ocean Strategy 25 more likely it is for new solutions to appear via Schumpeters creative destruction. As market boundaries become more blurred, bringing new outsiders into once stable industries, competition has become more complex and multidimensional. The options and threats facing companies are broader and more diverse, demanding a wider field of vision (Day & Reibstein, 1997, p.2). This is where Blue Ocean can function at its finestlook at the customer, be first, and be successful. Another place Blue OceanStrategy could find success is not clearly stated but rests in the trend today of co-opetition and joint ventures. (Brandenburger & Nalebuff, 1996) Blue Ocean Strategy could be stronger with an acknowledged tie to partnering and co-opetition as increasing levels of technology are likely to create narrower areas of expertise. Banding together multiple areas of expertise will probably be a more effective strategy than doing it all yourself in a mediocre fashion. The Blue Ocean goal is simply to create a new market and sharing the risk through co-opetition or partnering with customers can be a new market leading to short term economic profits. Unfortunately, Blue Ocean fails to emphasize the iterative and complex nature of strategy required when facing smart competitors with the reality of perfect information in the market. The impact of a strategy is determined not only by the initial action of the firm but by the interactions of the strategy with competitors, customers, and other players in the competitive environment (Day & Reibstein, p.2). Should strategists pick and choose from among all these ideas, like diners at a buffet table, or should they try to combine them into palatable dishes, as chefs do back in the kitchen?...The answer has to be yes both times. (Mintzberg et al, 1998, p. 367) Proactivity is preferred and as long as a firm can be a first mover then Blue Ocean has staying power. But Blue Ocean Strategy countermands or dismisses some very well received theory from

Blue Ocean Strategy 26 Porter, Day, Mintzberg, Ansoff, and a list of other foundational authors of strategy and economics, and the next version needs to include how to defend a previous blue ocean that has slowly or suddenly become red.

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