Business strategy has been proceeding backward for three decades or more, according to the authors of Blue Ocean Strategy.¹ In the September 2009 issue of Harvard Business Review,² W. Chan Kim and Renée Mauborgne (of INSEAD, a prominent international business school based in France and Singapore) extend the principles of Blue Ocean strategy to how organizations should determine and maintain their structures. They conclude that, in many cases, the tradition of assuming that a predetermined industry or company structure dictates business strategy is not only wrong, but harmful to an organization’s ability to thrive.
In “How Strategy Shapes Structure,” Kim and Mauborgne write that the better choice is to determine the organization’s strategies first and then design its structural components to ensure that those strategies are properly executed. Since at least the 1970s, function has followed form, they add, but it is usually more effective to invert that order.
Every business, the authors note, has not one strategy at its core, but three: a people proposition, a value proposition, and a profit proposition. In the imaging field, for example, the people proposition would cover all areas related to employees, from human-resources matters such as recruitment, retention, benefits, and salaries to broader topics such as staffing levels, workloads, promotions, cross-training, professional development, and job satisfaction.
The value proposition covers everything that the imaging provider offers its customers (including referring physicians and organizations, payors, and patients). Initiatives to improve quality and service fall into this category, but so does the overarching choice of how the imaging provider will maintain and expand market share.
The profit proposition includes not only how the imaging provider intends to make money (including both increasing revenue and reducing expenses), but whether it will compete in its market by positioning itself as a low-cost provider. The traditional model of competition holds that a business can compete based either on differentiation from other businesses (through quality and/or service) or price, but not on both. The Blue Ocean strategy maintains that competing on both price and differentiation is not only possible, but superior.
The Blue Ocean Model
The existing market for any product or service has a defined size and accepted rules of competition. As that market becomes more crowded, competition intensifies, with each piece of the pie that is taken by one company simultaneously being lost by another. Growth and profit potential both decline as more rivals compete, and the fierce battles that result leave the economic equivalent of blood in the water, creating a red ocean.
The Blue Ocean, however, is the market space for which there is no competition (because it does not yet exist). This space consists of new demand, not just new methods for capturing more of today’s demand. It is created through innovation in both service and product offerings, and it has high potential for growth and for profit. Often called value innovation, a Blue Ocean strategy must create value for both the company and its customers, and it must jettison the organization’s products or services that are no longer of high value to it or to its customers. Kim and Mauborgne contend that this strategy also reduces costs, partly by focusing the company on its most-wanted offerings, thus allowing the organization to compete on both price and differentiation.
As a development that grew, according to the authors, from the endogenous-growth school of economics, Blue Ocean strategy is based on what they describe as a reconstructionist premise: Individuals and their companies, through their acts and their ideas, change the world’s commercial environment.
In the standard (or structuralist) approach, structure leads to strategy because the organization accepts the constraints of its environment. An evaluation of the industry is followed by assessment of competitors; then, the company looks for a competitive advantage that it can exploit. Once a differentiation or price strategy has been chosen, then the structures involved in operations, human resources, and marketing are aligned to support that strategy (and financial/budget decisions are made accordingly). Structural elements such as the number of buyers and providers, Kim and Mauborgne say, are believed to cause companies