MANAGEMENT INSIGHT - Forging a Blue Ocean Strategy to Work in a Red Pharma Ocean

I used to hate the circus. Crowds, sticky cotton candy fingers, poodles utterly failing to take the place of lions and bears, candy-overdosed children, and blasé, predictable stunts.

And then came Cirque du Soleil. Montreal’s Cirque catapulted onto the scene in the 1980s, translating the circus to an adult audience, without losing the kids. It sidestepped the complications of dealing with animals, added edgy opera and ballet elements, and elevated the human acrobatic and artistic performances to jaw-dropping levels. It was something no one had ever seen before, and it created a new market.

Cirque du Soleil is the ideal business model; the golden ticket, the American dream, the thing we business types are all looking for. In modern management parlance, it’s the Blue Ocean Strategy, a book by W. Chan Kim and Renee Mauborgne, professors at INSEAD.

The thinking goes something like this: in a crowded market space, prospects for profit and growth are marginal, and competition turns cutthroat. The oceans become bloodied; hence the term “red oceans.” True growth is to be found by seeking out blue oceans — those unknown market spaces where demand is untapped and competition non-existent. They are hard to find. 

Percy Spencer, while working at Raytheon in 1945, noticed that his chocolate bar was melting when he worked on radar. This observation led to the discovery of the microwave – a completely new cooking method. While testing a potential insecticide, Shashikant Phadnis tastes it and finds that this test subject is surprisingly sweet. This leads to Sucralose. The anti-cancer drug cisplatin was discovered in the 60s, when researchers were looking at the effect of electricity on cell growth and found that a byproduct from one of the platinum electrodes was to blame. We like these stories, but how frequent are they? And can you work to find a blue ocean, or is it something that just happens to people by chance?

The Blue Ocean Revolution

Blue Ocean Strategy made waves. Published in 2005, it quickly became a Wall Street Journal, BusinessWeek, and Amazon.com bestseller. It was named best book of the decade by 800-CEO-READ. Translated into 43 languages, it was selected by the China Daily and the China Research Institute as one of the 40 most influential books in the history of the People’s Republic of China, along with Adam Smith’s Wealth of Nations, under the category Economics and Finance. It was named one of the 15 Best Business Books of the past decade in Russia by Kommersant.ru magazine. Forbes named it one of the 10 business trends for 2013 claiming that blue ocean strategies are “more influential than ever.”

If you work in a business, you should know about blue ocean strategy. At the very least, it will give you something to drop into conversation with your CEO at the company Christmas party. At best, it might help you come up with the next Big Idea.

The key concept behind the strategy is the value innovation. A value innovation is something novel that, once introduced, unlocks demand that wasn’t there before. It is achieved by pursuing both differentiation and low cost at the same time. The result is a new, uncontested market space, effectively making competition irrelevant. You no longer have to grow by reducing competitor market share. Payoff possibilities are higher in this scenario than in any other.

Much of the body of the Blue Ocean Strategy contains analyses and exercises to help your company find the blue ocean strategy that plays on your company’s strengths and is just waiting to be discovered.

Does it work?

You’re probably a scientist. You had to ask that question. The analyses in this book would not meet our industry’s standards for scientific rigor. The book used no control groups. There is no way to know how many companies attempting a blue ocean strategy failed; no insights at all into why some ideas belly-flop into the big blue ocean and others grow and expand. It is descriptive rather than prescriptive, identifying businesses that appeared to have created value innovations, and then working backward to fit those cases into the blue ocean blueprint.

In some examples, it isn’t even the proven cause of its own success. NYPD Commissioner Bratton’s success in reducing crime in New York is given as an example of public sector blue ocean strategy. But did the decline in criminal activity truly come as a result Bratton’s ideas, or was the drop a result of a nationwide decline in crime, as many social scientists contend?

It’s not even a new idea. It’s a really slick branding of some concepts that have been out there for a long time. Ideas like competing factors, the consumer cycle, non-customers, etc. Tools like this were used by Six Sigma practitioners and proposed by other management theorists for many years before this book.

Why you should try it anyway

And yet, I’m going to suggest that you take it seriously anyway. Don’t see this book as a formula for finding new blue ocean opportunities. See it as an exercise that will help you recognize one when it hits you in the face. Because quite honestly, that’s how most blue ocean opportunities come to light. The only company I could find that claims to have had a value innovation epiphany as a direct result of a blue ocean strategy process is Nintendo, which successfully used the book’s techniques to create the Wii. The Wii, however, was a one-hit wonder. When the initial success began to wane, Nintendo failed to repeat the win.

Pharma is a very red ocean business. We tweak medications to extend patents, we combine medications, we extend release, and we offer maximum strength. In drug development, we fine-tune our equipment lists trying to offer the latest and the best, adjusting capacity to maximize revenue and flexibility.

Which is not to say pharma hasn’t had its blue ocean moments. Fleming’s discovery of penicillin is an obvious example. The most famous recent example is the little blue pill – Viagra. Developed to treat pulmonary artery hypertension, for which it didn’t work particularly well, doctors noticed a most interesting side effect. They stumbled across this happy fact by complete accident – but they knew a blue ocean moment when they had one. By 2012, the little blue pill was earning $2 billion in annual sales.

Latisse, the popular cosmetic that causes extra growth and thickening of eyelashes, began life as Bimatoprost, a prostaglandin analog/prodrug used topically to control the progression of glaucoma and to manage ocular hypertension. That patients grew long luscious lashes was a serendipitous side effect, which now earns Allergen in excess of $90 million annually.

Anyone can find a blue ocean. Many management textbooks will tell you it takes a visionary — someone in the company, usually at the top, with that rare ability to think outside the box. Honestly, these ideas may equally come from anywhere in the company, as with the 3M employee who famously thought of another application for an adhesive that failed to permanently bond paper, inventing the Post It note.

It is hard to figure out how much chance plays in this invention process. It is probably underreported as everyone wants to believe his or her discovery came from hard work. There was a study way back in the 80s by Jaun Miguel Campanario that looked at 200 papers and found that about 8% of them mentioned luck in their scientific discovery.

Is it really just luck, though? Maybe it’s just about looking at things from a different angle. Maybe instead of taking a problem and looking for an invention or solution, most innovation comes from the reverse: you have an invention or discovery and then look for a problem it could solve. It is far easier to work backward.

Blue oceans are pseudo-serendipitous. There does seem to be an element of serendipity, and yet, these ideas only seem to happen to people through hard work. That’s the pseudo part. If you sorted all of Thomas Edison’s 1,093 patents in chronological order, you would see that the more subjects he worked on the higher the output of patents. Cross-pollination fueled his discoveries. If you search for more ideas from different places you will get more ideas.

How to find a blue ocean

Blue oceans don’t have to have the size and impact of Cirque du Soleil. They may be small and even fleeting. Think about your company’s strengths. Then think about what those strengths could do that you and your competition aren’t already doing. In my business, I have seen four. They are small oceans, and none of them will last. But all were/are/will be springboards for truly substantive growth.

The Xcelodose

Ten years ago, my company’s best-known strength was formulation services. Around this time, I came across a little known company called Meridica. They had invented a capsule-filling machine that claimed to bypass steps of the formulation process, getting products to market faster. This was their blue ocean, not ours, but they were going about it wrong. They were marketing these machines to big pharma, thinking that, at $500K a pop, only these companies could afford them. In fact, even for big pharma, $500K is a big purchase, particularly for a machine that is destined to be mothballed for months or years at a time. The Xcelodose was perfect, however, for a service provider that could push dozens of projects through it every year.

I brought the first one to America and for a short time, the ocean belonged to us. Today, that ocean is red, though our history as the first gave us a solid reputation within that market.

Clinical Supply Solutions

This blue ocean play came from a different strength: flexibility and adaptability. Before 2012, companies with a viable drug candidate looked to large pharma for their blister packs, their bottles, and their distribution services. Even if they only needed a few tablets, they would have to book a room that was meant to produce 10,000 tablets a day, reconfiguring it to produce small batches at large batch prices. There was no flexibility for urgent or unpredictable demand.

What if there was a facility that could produce small runs in small rooms, using pre-establish protocols to enable quick turnarounds? What if you could book such a room on a few days or even a few hours notice? Here was an uncontested market space, and we developed a dedicated plant to meet a new demand.

Others are making moves to establish similar operations that will bloody the waters. In the meantime, we have begun swimming into deeper blue waters.  Orphan drug sponsors can rarely find enough patients on our own shores; they are forced to go global to get the necessary patient numbers. It took 2 years to establish our UK facility and get MHRA certification, and we figure that gives us a 2-year license to fish in this ocean alone.

Dedicated Shops

Quality and regulatory excellence are two of our company strengths. So when a colleague in an unrelated field – bioprocessing – ran into quality and regulatory issues, I came up with the idea of working with him to create a dedicated shop inside our facility. This bioprocessing shop will launch by the end of the year, and two more very different shops are in the pipeline.

Full Solubilization Services

Here’s a blue ocean we’re still scouting: full solubilization services. Imagine one company that can offer the full range of solubilization services. With our recent strategic acquisition of the Pennsylvania-based company Powdersize, we are almost there. Powdersize is one of two contract companies capable of micronization, the other having been bought by a competitor. We are missing one piece of the puzzle: spray drying.

The ocean viewed from 30,000 feet

Stringing all of these services together into Suite Services creates yet another blue ocean. No other company with revenue under $1 billion offers this combination of services. Of course, anyone can put together a unique combination of services. The key is to choose your pieces not at the 30,000-foot level, but at the 5,000-foot level.

If you were designing a city from the window of a jet plane at 30,000 feet, you might choose to put your city near the river, to dam the river for hydroelectric power, and to cultivate farms on the flatlands behind the city. But when you get closer you might see that the river is too small to dam, the soil to unstable to support skyscrapers, and the flatlands are too rocky to farm.

If you looked at the drug development pipeline from 30,000 feet, you’d start with API development, add formulation, and string it together with analytical. You’ve seen this combination before. It makes sense from a distance. But if you get in closer you’ll see what the customer really needs, even if he or she doesn’t yet know it. Adding micronization was like that. You would never see the need for this piece from 30,000 feet, and our clients never asked us to bring this service in house. But we realized that when packaged together with our analytical and formulation services, micronization creates a much stronger value proposition for our customers by allowing them to develop drugs under a single corporate roof.

None of these blue ocean strategies from our industry created a jaw-dropping Cirque moment for our customers. None will go down in history as game-changing plays. But every time we get out of the red ocean, creating untapped, uncomplicated markets, our books see a nice little crescendo that our investors truly appreciate. 

Derek Hennecke, CEO & President, Xcelience