Chapter 2
Overfished Ocean Strategy:
Five Principles That Make It Work

AT A GLANCE

IN THE ERA OF the collapsing linear economy, the Over-fished Ocean Strategy transforms today’s depletion of resources into tomorrow’s differentiated long-lasting profits. Five principles allow companies to power up innovation for a demanding world.

 

It is green, dense, and surprisingly light. Fitting perfectly in the palm of my hand, it leaves a light, oily residue on my skin. It is fragrant (just a touch of soft, alluring smell) and textured (it looks like thousands of little worms squished together). It goes against everything we are taught by conventional strategy theory. And it is an amazingly powerful symbol of the new era dawning.

Intrigued? While you are trying to guess what exactly I am holding in my hand, let me set the context to spice up the big reveal.

Popular strategic thought tells us that to compete well, we need to find the most advantageous position in the crowded market space and stick to it. Michael E. Porter is the guru at the helm of this thinking, and his famous menu of “generic” strategies suggests that in the tough search for ideal positioning, we are to make two primary choices.

The first choice is between price and differentiation. Do you compete on cost, striving for the most competitive (read cheap) production on the market, or do you have something unique to offer that differentiates you from other, cheaper competitors? The second choice is about focusing your efforts: do you want to target a specific segment (narrow focus) or the entire universe of consumers (broad, global market scope)? The two choices set into a two-by-two grid will present you with four possible options making up the entire landscape of the market to consider.

Play with brands of your favorite product—say, a smartphone—and you will immediately see which strategy is pursued. Today, Apple’s iPhone is conquering the market with a unique differentiation strategy—it can hardly be called the most cost-attractive smartphone on the market, but the company is pursuing a broad market scope. The Vertu cell phone, in contrast, is a differentiation-cladproduct made attractive to a very narrow segment on the market—a luxury brand for a small slice of the consumer pie. The LG Optimus smartphone is a choice that pursues cost leadership—at a price one-tenth that of the iPhone—with a broad, global appeal. Huawei (ever heard of this one?)—the third-largest cell-phone producer on the market—offers the even cheaper Y-300 model targeted at Asia’s “ant tribe community,” which refers to young people who go to the city for a better life but get stuck with low-paid jobs and high costs to live there.

Once you explore the marketplace and find your own unique position, the question becomes, how do you maintain it? What can you do to preserve your stake? The logical answer would be to keep doing what you are doing—and continue to get better at it. If you are selling a product that is uniquely different, keep pushing it forward and upward; add features; build new bells and whistles, and more of them. If you are going for cost leadership, keep driving down the cost with more efficiencies and better processes. And that is exactly where the problem lies.

“For those of you who haven’t made a lot of steel, historically there are two ways to make it. Most of the world’s steel has been made by massive integrated steel companies. The other way to do it is to build a mini mill. In a mini mill, you melt scrap in electric furnaces, and youcould easily fit four of them in this room.” The author of an impressive collection of books and one of the most celebrated strategic thinkers of our time, Clayton Christensen is telling a story of disruptive innovation he has shared with thousands before.

“The most important thing about a mini mill is that you can make steel for 20 percent lower cost than you can make it in an integrated mill. Now, imagine you’re the CEO of a steel company somewhere.

In a really good year, your net profit will be 2 to 4 percent. Here is a technology that would reduce the cost of making steel by 20 percent. Don’t you think you’d adopt it?” The answer to Christensen’s question is so obvious, it almost turns the inquiry into rhetoric. Yet why is it that no integrated steel companies anywhere in the world have built a mini mill—even though it would save them from bankruptcy, which caught up with all but one integrated mill by 2012? The answer, as Christensen suggests, is the core dilemma for any innovator in any industry, anywhere in the world.

In the steel industry, as in your own industry, many tiers make up the market. The lowest-cost products are at the bottom of the market: for steel, that would be concrete reinforcing bar, or rebar. Any company can make rebar, while steel for cars, appliances, and many other pricier products is much harder to produce. Rebar happened to be the only market that mini mills were capable of serving at the beginning. Then, mini mills used scrap to produce steel, and the quality was low. Reinforcement bars get buried in cement, have almost no specifications, and thus can be made of low-quality steel. And thus, mini mills set off to conquer the rebar market with all their might.

What about the integrated mills? Well, they were happy to give up the rebar market. As a commodity, reinforcement bar is a low-margin product, so dropping it would allow for shifting the focus on angle iron and thicker iron and rods and bring home a higher margin.While the mini mills built-up their rebar capacity, the integrated mills shut down rebar lines—and enjoyed a higher gross-margin profitability. Everyone was happy. The mini mills were enjoying a piece of the pie, while the integrated mills got better performances. And then came 1979.

It was the year when mini mills celebrated their final victory, driving the last of the integrated mills out of the reinforcement bar market. But the happiness was short-lived: the price of rebar fell by a whopping 20 percent. It turned out that a low-cost strategy makes you competitive only when there is a high-priced competitor. With all the high-cost integrated mills out of the game, mini mills had to look for a new way to make money. Making better quality steel was the only way forward—and for the integrated mills, it was a new chance to get rid of another low-margin product. So the story repeated itself again and again.

This climb up the hill to the top of the market—continuous improvement of bells and whistles in products, services, and processes—is what most big companies do as they try to survive. They do exactly as demanded by the customer, trying for a better version of the product, hiking up the market tiers, until there is nowhere else to climb. And at just about that time, a newcomer comes along, offering a completely different—cheaper or more appealing—alternative, sending the big companies down the drain. Remember the story of Kodak, a company that misjudged the charm of digital photography and went bankrupt in 2012? Or how about the struggle of Nokia, once the top-of-the-world producer of cell phones, which failed to notice the growing appeal of smartphones? As with the slow collapse of the integrated steel industry, they, too, were not too big to fall. Christensen calls this all-too-familiar story of old-versus-new “disruptive innovation.”

And it is precisely this kind of innovation that I am holding in my hand in Figure 2. So what is it?

Take a close look. A soap bar? A spinach hamburger? A sponge? Some sort of energy tablet? An eco-macaroon? A new-age vitamin pill? A breakthrough detergent? Before you is the equivalent of not one, not two, but three bottles of shampoo—all squished into one solid bar. That is the way to disrupt!

What do we sell when we sell shampoo? What end benefit do the customers get? What is the value? Clean hair, indeed. What ingredient need not be supplied to ensure this desired outcome, as it is always available? Water, indeed. So why do we pump water, process water, bottle water, package water, store water, transport water, sell water, and waste plastic post-water to wash our hair, when water is the only ingredient that is not necessary to provide?

That was exactly the starting point for Lush Fresh Handmade Cosmetics, a 20-year-old UK brand, when it started working onits solid-shampoo line. According to the company, “The inventors worked with Stan Krysztal”—one of the leading cosmetic chemists of Great Britain—”to create these very clever little bars; an effective, hardworking shampoo base, quality ingredients, beautiful fragrances and, best of all, require no packaging. Handy for travelling, compact and easy to use, each bar is roughly the equivalent of three plastic bottles of shampoo. These humble bars are (probably) one of the greatest inventions we’ve ever come up with.” The Lush team loves to talk about it. But what about the customers? Naturally, a number of customers would refuse such a strange-looking shampoo option. My baby brother is one of them. Whenever he visits us in Europe, I have to make a conscious effort to restock his bathroom. “I am a normal person,” he claims. “I like my soap solid and my shampoo liquid, and not the other way around!”

Yet by any measure other than my brother’s comfort zone, Lush’s solid invention has been a great success since its launch in 2007, capturing rave reviews and a solid (pun intended!) customer following. Here is one such review from a rather conventional consumer—a Boston.com writer’s take:

Trust me, I was skeptical too. A rock of shampoo, eh? Sounds about as effective as a steel wool pad as conditioner. But after trying it multiple times at an adult sleepover—don’t judge—I slowly became convinced. The stone of shampoo seems to last forever (if you keep it in a dry place after use), and it comes in a variety of scents. I recently picked up cinnamon and clove. But most importantly, it’s pretty damn effective. The shampoo itself lathers nicely (sorry to sound like a Prell commercial… wait, do they still make that?) and at about $10 a rock, it’s a better deal than it appears.”

But the glowing reviews and growing revenues are not the only business victories for Lush solid shampoo; on the other side of the business continuum, the company is also doing well with costs. As of 2013, Lush has avoided producing, bottling, and distributing sixmillion plastic bottles globally by selling shampoo bars—count in 2.6 ounces (or 75 grams) of plastic saved per shampoo bar, and multiply that by all the savings in energy and labor costs that would have been incurred designing, producing, bottling, and storing the bottles.

Annual water savings from producing the solid shampoos are nearly 120,000 gallons (or 450,000 liters) globally, while transportation savings are beyond surprising: when calculated per wash, transportation costs are 15 times less than those of liquid shampoo. Additional resource intelligence comes in a form of raw-material savings: the bar has no preservatives, as there is no liquid content requiring preservation. And with a scale of 830 stores in 51 countries carrying the product (which nearly doubled from 2007’s 438-strong chain), strengthened revenues and intelligent cost structure for the unusual product are a welcome performance outcome for the once-tiny underdog of the cosmetics industry.

The story of Lush solid shampoo is a story of radical innovation. While the traditional majority of cosmetics companies are fighting for a share of the difficult consumer market with more appealing packaging and stronger advertising campaigns, and while the eco-conscious minority is struggling with recycled plastic and third-party “green” certification, Lush goes well below the surface and delivers an entirely new way of looking at a product. Once a barely known company that started with a sausage machine in the messy workshop of a nearly bankrupt husband-and-wife team, Lush has put into question the essential value delivered by traditional shampoos and paved the way for an entirely new way of thinking. Lush’s solid-shampoo bar exemplifies the company’s production standards. About 70 percent of the products sold require no packaging, much of the product range has no synthetic raw materials, and over 70 percent of the range is totally unpreserved. For Lush, this approach to resources is simply business as usual. For most of us, it is anything but.

In its unexpected take on resource intelligence, Lush is not alone. OMV, an integrated oil and gas company that supplies 200 million people in Central and Eastern Europe with energy, calls it resourcefulness. This term, which smells of ingenuity in the age of the Great Recession, captures the new essence of survival. “As one of the leading European oil and gas companies, OMV faces major challenges to which only innovative thinking can be the answer,” OMV explains. “Global energy requirements are increasing significantly. At the same time, environmental protection and social justice are of growing importance. The demands placed on us grow as we expand our operations. This is why we made being careful with our resources one of our basic business principles.” OMV Resourcefulness Strategy demands that every one of the company’s 29,000 employees face the fundamental question of the collapse of the linear throwaway economy—and take it as a productive challenge. As such, it is a strategy that deliberately tackles both natural and human resources. On one hand, the company runs extensive eco-efficiency and eco-innovation programs to reinvent the way it provides for the energy needs of its customers. Hydrogen (fuel cell) mobility, biofuels, and water and carbon management all are under this umbrella. On the other hand, OMV looks at the diversity, skills, and community engagement of its employees as key resources of the future, and runs comprehensive programs to protect and grow this capital. When I visited the company’s biggest refinery in the summer of 2013, I was surprised to learn that even the apprentices—high schoolers striving to get trained and employed by OMV—look at the issues of resources in a broader sense. “We sellsomething that is disappearing. So the question for us is what to sell next, so that all of us don’t disappear, too,” said a shy 16-year-old.

Trendwatching.com, the leading consumer trend reporting company, gave the new wave of strategic resource intelligence a catchy name—Eco-Superior. It flagged this trend in 2011 as among its 11 most important consumer demands for the year, and again in 2013 as one that is here to stay. Here is why: “When it comes to ‘green consumption,’ expect a rise in ECO-SUPERIOR products: products that are not only eco-friendly, but superior to polluting incumbents in every possible way. Think a combination of eco-friendly yet superior functionality, superior design, and/or superior savings.” Among the products and innovation highlighted by Trendwatching is the Throw & Grow confetti sold by the Netherlands-based gift store niko niko. The confetti is made of biodegradable material embedded with wildflower seeds; when the confetti is used, it can be left on the ground or discarded onto soil to disintegrate naturally and grow into flowers. Another innovation on the list is a billboard that generates drinkable water—9,000 liters of it in three months—thanks to Peru’s University of Technology and Engineering (UTEC). The Torre de Especialidades building of the Mexico City hospital also makes the cut—it now absorbs and breaks down chemicals in the surrounding air. Using Prosolve370e tiles, developed by Berlin-based design firm Elegant Embellishments, the building features tiles painted with titanium dioxide, which interacts with UV light to break down pollution into less toxic chemicals.

Together with Lush, OMV, and Trendwatching.com, Design Hotels elevated the search for innovation for a resource-deprived world to the level of core strategy. A 20-year-old company that represents and markets a carefully selected collection of 250 independent hotels in over 40 countries across the globe, Design Hotels refers to this new strategic effort as Finding Infinity. “We live in the age of sound bites, of short attention spans, of celebrity worship. First-term politicians seem to want only one thing: a second term.” Is there a vaccine against ourcollective short-sightedness? For Design Hotels, there is. With a goal of replacing today’s fuels with clean and endlessly renewable alternatives, the company has initiated a “full-speed-ahead-no-time-to-lose movement… setting a path for a future based on infinite resources.” The company has joined intellectual forces with a number of inventors and change makers, such as a young Australian engineer named Ross Harding, who created Finding Infinity. The resulting program, named “Design Hotels is Finding Infinity,” attacks the essential problem of the disappearing linear economy. “The world is powered by fuels that will run out in two lifetimes. This is not our problem—it’s our opportunity!” declares the powerful partnership.

Pursuing this opportunity is what I call the Overfished Ocean Strategy.