Blue Ocean or Blue Sky? It's still the blues...

Recently I read "Blue Ocean Strategy," a purported solution to the age-old question of "how do I make a buck in this world?" The subtitle, "How to Create Uncontested Market Space and Make the Competition Irrelevant," promises the holy grail of psuedo-monopoly, giddy profits, and a captive customer base, so I was hooked. Tell me more...

Written by W. Chan Kim and Renee Mauborgne, the book was published by Harvard Business School press - a surefire ticket to management-consultant riches, and they do not disappoint from that perspective. Blue ocean strategy divides capitalism into two bodies of water, red oceans and blue oceans. The red oceans are where competition swims like a great white just offshore during the Fourth of July festival at Amity Island. On the other hand, blue oceans are devoid of life except your own private party; they are like a giant spa filled with dancers whose names are Bambi, Jade, and Sapphire, and ringed by bottles of Cristal. You just settle in to the warm, bubbling water and listen to the giggles while smearing some Ossetra on a piece of gold leaf. Apparently, many well-known innovations are the result of blue ocean strategy, even though the book was written decades after those goods and services came to market.

One of the strokes of genius discussed thoroughly in BOS is Cirque du Soleil, the entertainment brainchild of Guy Laliberte and Daniel Gauthier. These men came from the rough-and-tumble world of street performance art, and the "Circus of the Sun" was originally intended to run for 13 weeks in Quebec and then shut down. But according to BOS, it was Guy's plan to devise a circus that was different from Barnum and Baily or Ringling Bros.; in fact, Blue Ocean Strategy only shows the traditional American circus acts as the sole competitive landscape for Cirque du Soleil. It's almost as if Guy and Daniel were planning to deal with the prospect of setting up their tent in the same town at the same time as a conventional three-ringed event, an eventuality that never occurred.

Apparently, Lalibert and Gauthier used a "strategy canvas" in 1984 to determine the precise differentiation factors from elephants and lion tamers and to create a blue ocean experience. Never mind that they were street performers who wanted to bring street performance to a theater. Never mind that the strategy canvas wasn't invented until 2005, or that the Canadian government bailed them out when they went bankrupt, or that they hired Guy Caron in 1985 to incorporate elements from circuses around the world into their show. Those pesky facts would interfere with the premise that BOS is not a POS.

Another blue-ocean innovator is Herb Kelleher, the founder of Southwest Airlines. It seems that he and Rollin King used a strategy canvas in 1970 to define the role of Southwest in a soon-to-be deregulated air travel market. Apparently, he carefully plotted the points in the Eliminate-Reduce-Raise-Create grid and after careful implementation of the BOS, he started the most successful airline in U.S. history. Yet, if the authors had actually asked Kelleher about his reasoning, he would have told them that if you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline. He would have told them that he never used a blue ocean strategy; he just wanted to deliver a reliable, fun service to an under-served market - a traditional marketing strategy that wouldn't make a dime for a management consultant.

Blue Ocean Strategy tells us to avoid red oceans at all costs; the red ocean is hard work followed by a slow death. Yet, red oceans are the source of all incremental innovation. Red oceans are the reason we have iPhones & iPods, air conditioning, disc brakes, power steering, touch-tone telephones, ball point pens, sliced bread, frozen vegetables - this list could go on for miles and encompass millions of products and services that make the modern world more comfortable, safe, and enjoyable. This is not to discount the disruptive innovations that crawl out of blue oceans onto muddy shores, but at the same time, to recognize that blue oceans also spawn far more failures than red oceans. Remember the old adage, you can tell a pioneer because he's face down in the dirt and has arrows in his back.

Hindsight is 20/20, and I could find allegory in a phone book. What this means is that after examining successful products, anyone could devise a "strategy" that creates a common thread out of thin air, complete with charts and graphs that can be sold to desperate businesspeople seeking salvation in the global economy. But the reality of the matter is that innovation begins with someone wanting to deliver an outstanding customer experience, and each innovator is as different as a snowflake. There are no magic juju beans or secret sauces, just a desire to delight, amaze, or enthrall.

The true test of BOS is, since it was published, can the authors point to a single disruptive innovation that was created solely as the result of someone reading their book? Take your time, I've got all day...

Blue Ocean Strategy delivers a value not found on the bookstore shelves in the "Business" section or in an MBA program. Its appraisal is more akin to Moby Dick, a big fish story. As a work of fiction, it is priceless.

The Beauty of Finance

Sarah Palin, once mocked in the press and on television for her vacuum of foreign policy skills, her implosive domestic agenda, and her slippery-fingertip grasp of economics, has finally shown her true colors. She is a financial genius, on the same level as Jim Cramer, Richard Nixon, and Herbert Hoover.

Speaking in Hong Kong at an annual conference of investors, Palin has finally cracked the code that led to our current global economic malaise, an issue that has already been explored by dozens of books, magazine articles, and television documentaries, all helmed by leading pundits, regulators, economists, traders, banking experts, and financiers. Contrary to this treasure trove of insight, in her opinion the fault line lay in too much government regulation.

Alan Greenspan, the legendary head of the Federal Reserve, has said, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." He went on to admit, "“I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” Under questioning by Rep. Henry Waxman at a congressional hearing, Greenspan even went to far as to agree that his world view, his entire ideology of deregulation was wrong. According to man who headed the most powerful financial institution in the world for 19 years, it was a lack of regulation that fomented the collapse. But from Palin's perspective, Greenspan is old and not very pretty, so he is not to be believed. Did Greenspan ever kill a wolf from a helicopter or put on hip waders for a news conference? I think I've made my point.

Numerous experts have pointed to the repeal of the Glass-Steagall Act with the Gramm-Leach-Bliley Act, a bill that removed the separation between commercial and investment banks, and the Commodities Futures Modernization Act, which eliminated penalties for outright gambling by investment houses, as key components of the meltdown. Further, a multitude of insiders point to a dysfunctional SEC as a contributing factor; this was an agency that for 16 years didn't notice the largest swindle in history, the Madoff scandal. Madoff's hedge fund was a Ponzi scheme, the oldest trick in the book and one that an MBA student could have uncovered, let alone the chief securities regulator.

Several investors walked out on her speech, but that only showed how their "reality-based" worldview will limit the possibilities for the future. Palin lives in a universe where Ayn Rand is the Supreme Creator, an alternate existence where the removal of all restraint will inspire trust and confidence in the markets. The French, the Russians, and the Iranians have already experienced this happy place of social Darwinism presided over by a discompassionate oligarchy, and as a result, the world received the benefits of the guillotine, Stalin's communism, and Islamic fundamentalism.

Perhaps this is Palin's strategy - we'll all have to buy lots of guns and move to Alaska while we await the apocalypse. Oh, joy!

"That Giant Sucking Sound"

Dell Computer is purchasing Perot Systems for a whopping $3.9 billion, a 68% premium over the pre-announcement share price. I'm glad that Michael Dell finally realized that hardware has been a commodity for some time now, unless you're Apple, which has created a unique experience with the combination of their hardware and software. If Dell had been paying attention, when Google started making their own servers (over 200,000 of them) of a proprietary design in order to reduce costs, the writing was on the wall. Years ago, IBM moved away from focusing on hardware and successfully transitioned itself to a global services company. Hewlett-Packard, with the exception of Carly Fiorina's ill-fated acquisition of Compaq, had been moving toward services. But then, Fiorina only made that acquisition to justify an increase in her compensation package - thankfully, her presence is no longer a blight on Silicon Valley. So Dell waited far too long, but did they pay too much for Perot Systems?



Consulting last year's 10-K report, it is apparent that $3.9 billion is quite a bit of money, considering the revenue and cash flow. Revenues top out at $2.7 billion, but at the bottom line, net profits are a mere $117 million. This is largely due to the fact that services incur heavy expenses and don't have software-like margins, such that operating costs for Perot Systems are a hefty $2.3 billion. On top of that, revenues are down in 2009, making this acquisition look even worse. But this is only a part of the picture, because Perot has very little long-term debt and it receives 47% of its revenue from the health care sector.

The American Recovery and Reinvestment Act of 2009 has set aside $59 billion toward health care and $19 billion just to create electronic medical records systems in hospitals and clinics across the country. Currently, less than 10% of doctors have access to electronic medical records, and that is about to change. Perot Systems is well positioned to capitalize on this tax-payer funded opportunity, so I think that 3 years from now, Dell will appear to be astute in paying such an egregious sum for a company founded by someone who, during his presidential campaign, talked about "crazy Aunt Hattie in the basement" as a reference to the economy, and "that giant sucking sound will be jobs going to Mexico" as his rebuttal to NAFTA.

Outsourcing Innovation

Disclosure: I am an ecstatic Netflix customer.

This morning, Netflix came through on their promise and awarded $1 million to the team that developed an algorithm for calculating viewing suggestions that substantially bested their in-house CineMatch system.

Three years ago, instead of expanding their staff of computer scientists and statisticians, Netflix offered a seven-figure prize to any person or team that could improve by a measurable margin, their CineMatch movie recommendation software. Initially, over 40,000 teams began work, ranging from groups of top-level scientists to individuals working from home. In fact, one person working alone, a statistician in England, was able to improve the algorithm by 5%. But the prize was only paid if the recommendations were 10% more accurate along with a speed increase. There were teams that topped the 8% mark, but as they approached 10%, it seemed an impossible task, in large part because the teams had to address a 100-million element dataset.

After two years of work, it was apparent that no single team had the requisite skills to win the award, so teams started merging spontaneously. The winning team, BellKor's Pragmatic Chaos, was a merger of tw separate groups and consisted of scientists, statisticians, and researchers from Australia, Canada, Israel, and the United States. The resulting algorithm, which Netflix now owns, offers a much better customer experience with regard to movie recommendations. A second team, Ensemble, was able to best the 10% mark within 30 days, which triggered an in-depth review of the algorithms. In the end, BellKor was declared the winner.

What does all this mean? First, Netflix was able to advance the science of recommendations research, which has tremendous potential to change the personalization experience of many companies doing business on the Internet. Second, it was able to do this without adding any corporate resources and for the paltry sum of $1 million - a bargain. The potential license revenues would pay for this many times over. Third, they have demonstrated just how important customer satisfaction is to it - and at a time when competition is heating up from numerous venues ranging from RedBox to Hulu. And finally, Netflix has shown that innovation can be outsourced successfully, thus changing the playing field for everyone.

Apple Stock Is Undervalued

The Financial Accounting Standards Board is about the change the way that some companies recognize revenue for the sale of hybrid products (story here). A hybrid product is one that is typically bundled with a service offering, and the old rules tied revenue recognition to the service instead of the product. A perfect example of this is the Apple iPhone, which is sold by AT&T as part of a two-year contract.

Under the current rules, Apple has to spread out the iPhone product revenue over eight quarters, the length of the AT&T subscriber contract. But the new rules, which are expected to affect Apple's financial statements in December, will permit immediate and total recognition of the product revenue at the time the subscriber contract is signed.

Had these new rules been in effect, Apple's recently disclosed third-quarter revenue would have increased by $1.4 billion and the commensurate net profit by over $700 million. The crowd in Cupertino will be sipping some well-deserved Cristal; it's not every day that you can grow revenues by almost 21% and earnings by 57%, all without hiring a single salesperson, placing a single ad, or increasing production by a single unit. Now that's paper money!

Nobel Season is Heating Up!

Stockholm is a-buzz with the latest dirt on the big brains who will be walking the red carpet in hopes of taking home a "dynamite" prize along with some cold cash from Scandinavia - 10 million kronor, to be exact. Or $1,438,712.53 if you haven't gotten hip to globalization yet. The odds makers in Las Vegas are going positively batty because of some real wild cards in the running this year, but that's what makes this the silly season north of "did my nose just fall off?"

Yes, I already have my fantasy Nobel team picked, and as you can imagine, Peter Higgs is tapped as my Don Quixote of Physics, jousting at bosons that could end my roller-coaster life of binge eating and purge dieting just by making my mass disappear. Yeah, Peter! You go guy!


Dr. Higgs has postulated the existence of the Higgs boson, conveniently named after him, a particle that not only explains how the Universe came into being, but also extends an olive branch between string theory and Standard Model particle physicists, long locked in a vicious struggle for dominance of high energy physics. Hey, maybe Higgs will win the Peace Prize too! (Here's Peter in his Edinburgh office, explaining how it's impossible to stay upright after drinking too much single malt).

The problem with Petey winning the Karolinska saucer is the fact that no one has found his boson yet. The Large Hadron Collider was supposed to do just that, but with liquid helium spills and vacuum leaks, it sounds more like my apartment after the Oscars. There is some evidence of the Higgs B, but it's not conclusive and the Nobel committee has a notorious reputation for having something called "a verified, proven result." Well, if they can't see fit to hang the dish around Dr. Pete's neck, then I swear I won't touch a little meatball for a year and I'll protest in front of the nearest IKEA, at least until I see a table that would just make the breakfast nook.

Stay tuned, Nobel nerds. This Prize fight has all the marks of a heavyweight bout, beginning October 5th with Medicine and finishing October 12th with Economics. And if you're still on speaking terms with your bookie, lay a couple of bucks on Higgs - he may be a long shot, but so was Milton Friedman.

Energy is the Answer

Dean Kamen, inventor of the Segway personal transporter as well as other, more important creations, has been trying to tackle one of the world's most pressing problems - a shortage of fresh, potable water. After 10 years of work, he has created the Slingshot, a vacuum compression distillation engine that uses only 2% of the usual electrical energy. The prototype costs $100,000 and Kamen hopes to get the price down to less than $2,000, which in his opinion would spark rural usage worldwide.

The process of vacuum compression distillation is not new; however, a decade of work was required to get the power consumption down to 500 watts, and that brings me to my point - the most pressing issue facing the planet isn't about clean water, arable land, pollution, or global warming; the most pressing issue is energy. With enough clean, renewable energy, every other problem becomes moot.

The energy consumption of the planet Earth is now increasing at a remarkable rate, largely due to the rapidly increasing standards of living in developing countries. For example, in 1985 the average person in China consumed 44 pounds of meat per year; by 2000 that figure had topped 110 pounds. High quality protein, such as meat, requires massive amounts of energy to produce, and with China showing such a dramatic change, you can only imagine the global impact to our energy picture.

A fews years ago, I had the good fortune to speak with Dr. Richard Smalley, winner of the 1996 Nobel prize in chemistry for his work on a new type of carbon, and it was he who convinced me that the solution for practically all human problems lay in energy. The entire economic notion of scarcity, which is responsible for both good and evil in the world (from entrepreneurship & innovation to wars, crime, and poverty), has its roots in a lack of energy.

The total worldwide demand for energy reached 14.5 terawatts per day in 2004, which is the equivalent of 220 million barrels of oil, and in fact, oil provides the largest share of our energy needs. But we all know that oil is finite, the very definition of scarcity. Not only is it becoming more difficult to find, extract, and provide, the process of making new oil is far too slow to compensate for our thirst (plankton + seabed + perfect rock formation + 150 million years). Coal has been proposed as a viable alternative, but there is no such thing as "clean coal," and even if carbon dioxide emissions could be stored in large underground reservoirs, coal mining still poses a serious health threat (graphs courtesy of Dr. Richard Smalley).

By 2050, we will consume 60 terawatts per day, or the equivalent of 900 million barrels of oil - oil that won't exist by mid-century. Nuclear power does play an important role, both today and into the future, but the problem of storing spent fuel rods is persistent and nagging. What happens when Yucca Mountain is filled to the brim? Fission and fusion are stopgaps, for the simple reason that they are not sustainable over the long-term. When it comes to energy, the picture isn't pretty, but are we truly condemned to a dystopian landscape? Not necessarily - the answer is hovering above us.

Amaterasu, Apollo, Freyr, Helios, Huitzilopochtli, Inti, Liza, Lugh, Ra, Sol Invictus, Surya, Tonatiuh, Utu - whatever you call it, the sun beams down to Earth 165,000 terawatts of energy each day. That is more than enough energy to provide health, wealth, and happiness for every person on the planet, and we don't even have to efficiently extract power from sunlight. All we have to do is efficiently transport the electricity from massive solar farms, which would be located in the ever-expanding desert regions of the world. Here's some food for thought - the future of our species is hinged upon developing a better copper wire.