Have you ever heard the expression "Blue Ocean"? Renée Mauborgne and W. Chan Kim used this expression to demonstrate a type of strategy used by some companies, where the power of competition simply does not interfere with your business, and you have a blue ocean of possibilities ahead. The example is used by thousands of business schools and is perhaps the most excellent example of a disruptive innovation strategy, or at least it was, until the Coronavirus.
In this analogy of the blue ocean, the coronovirus came as a phytoplankton, which starts to grow without apparent concern, and when you least expect it, has already transformed the waters of your ocean into dark magenta tones. The phenomenon is an indicator of eutrophication, or in good Portuguese: destruction of the natural habitat, or the destruction of the value generated in itself.
Make no mistake, other companies drink from the same source and have suffered from the same problems, e.g. Azul Airlines, Ifood, and Uber.
The Blue Ocean Strategy is based on 4 major activities:
- Raise: which attributes can be raised above the current standard (product, price, service, quality)?
- Reduce: which factors were developed only to face the competition and are no longer totally necessary, so they can be reduced?
- Eliminate: which attributes were used as competitive points a long time ago and can already be eliminated (including by reducing costs)?
- Create: which factors the industry has never offered and it is time to create them, producing differentiation and a new market?
For the Circu du soleil the analysis looks something like this, according to Renée and Kim:
Notice that while there are many explanations of what was done, little is said about how to reach these conclusions, or also why to choose one over another. The book offers insights, but not a methodology for analysis. Nevertheless, the Blue Ocean idea is based on creating a product whose value is so high, that no matter what the conditions, the customer will always pay the cost of the product, once the value-cost trade-off is broken.
The analysis is fantastic, which justifies its adherence by several business schools, but adoption is difficult, and now it seems it needs to be revisited. As happened with Kaplan and Norton's work on the Balanced Scorecard tool, critics of the model pointed out that little is said about the impact of external agents in the production chain, partly because of the complexity, partly because we still don't have established tools to discover the "unknowns," that is: risks that we are not even aware of or able to understand - the same was lacking in the Blue Ocean Strategy.
Here perhaps a reflection on the business model itself is in order, while most companies that adopt the Blue Ocean have a value chain pulled by the delivery of a single product/service with high added value, and therefore saw their value fall apart, we have traditional companies that were able to keep their operations running and still generate profit (e.g. Amazon). The financial market, already quite used to these situations, gives us a simple and unique lesson: diversification is necessary.
One of the biggest lessons that I preach when I offer financial consulting is for my clients to have a diversified portfolio. The weights vary depending on the profile, but usually using Barbell's strategy is the way to go: balancing risky assets with low-risk assets.
For a company this analysis can be taken further: Low-risk assets represent those activities that you master and do well, and have little or no probability of stopping doing. Risky assets are those activities with which you have little familiarity, and the risk of not bringing any return is high. It is then up to you to analyze scenarios, from the most optimistic to the most pessimistic, and understand what the chances are in each of these scenarios.
Some companies simply choose to take the risk, and perhaps this was the case with Cirque du Soleil, after all the odds of a worldwide pandemic stopping their operations don't seem all that likely. Anyway, here we are seeing giants and examples of innovation suffering to stand on their own feet, and now we have to analyze this, and as good portfolio managers learn from the problems of what this virus created, and add them as probable risks for the future.