BLUE OCEAN STRATEGY

By W. Chan Kim &

Renée Mauborgne

From Harvard Business Review

October 2004

Author and Article Information

W. Chan Kim (chan.kim@insead.edu) is the Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management at Insead in Fontaine-Bleau, France.

Renée Mauborgne (renee.mauborgne@insead.edu) is the Insead Distinguished Fellow and professor of strategy and management at Insead.

This article is adapted from their forthcoming book, BLUE OCEAN STRATEGY : HOW TO CREATE UNCONTESTED MARKET SPACE AND MAKE THE COMPETITION IRRELEVANT (Harvard Business School Press, 2005)

BLUE OCEAN STRATEGY

Competing in overcrowded industries is no way to sustain high performance. The real opportunity is to create BLUE OCEANS of uncontested market space

Cirque du Soleil

Founded in 1984 by street performers

Stages productions seen by 40 million people in 90 cities around the world

Cirque du Soleil has achieved in 20 years time what Ringling Bros. And Barnum & Bailey – the world’s leading circus – more than 100 years to attain

Circus Industry Negatives

When CDS was founded the circus industry was in decline (and is still declining)

Other forms of entertainment was available (sports, TV, videos)

Animal rights issues

High priced Circus star performers

Ringling and Barnum’s name a barrier to entry (more than 200 years combined)

CdS’ Blue Ocean Strategy

Revealing Tagline : “We Reinvent the Circus”

CdS did not make money by competing within the confines of an existing industry

CDS did not steal from Ringling or Barnum

CdS created uncontested market space that made the competition irrelevant

RESULT : CdS increased revenues by a factor of 22 over the last 10 years

BLUE OCEAN vs.

RED OCEANRed Oceans represent all the industries in existence today – the known market space

Red Oceans’ industries boundaries are defined and accepted

Red Ocean’s competitive rules are well understood

What’s it like in a Red Ocean?

Companies try to outperform rivals in order to grab greater share of existing demand

Space gets more crowded

Prospects for profits and growth reduced

Products turn into commodities

Increasing competition turns water bloody

What is the BLUE OCEAN?

Blue oceans denote all industries NOT in existence todayThe Unknown market spaceUntainted by competitionIn Blue Oceans, demand is created not fought overIn Blue Oceans, growth is profitable and rapid

2 ways to create Blue Oceans

Companies can give rise to complete new industries, example : Ebay with the online auction industry

Created WITHIN a Red Ocean when a company alters the boundaries of an existing company, example : Cirque du Soleil

Authors’ studies on Blue Oceans

Cirque du Soleil is just one of more than 150 blue ocean creationsStudies encompass over 30 industriesData used stretches more than 100 yearsAnalyzes companies that create blue oceans vs. companies that are TRAPPED in red oceans

Insights on Blue Ocean Strategy

There is a consistent pattern of strategic thinking behind the creation of new markets and strategies (called Blue Ocean Strategy)Blue Ocean strategies part with traditional models focused on competing in existing market spaceManagers’ failure to differentiate between blue and red ocean strategy lies behind the difficulties many companies encounter to break from the competition

Once upon a time …

The term blue oceans is NEW but it has always been with usWhat industries were unknown 100 years ago? Automobiles Music recording Aviation Petrochemicals Pharmaceuticals Management Consulting

AUTOMOBILEKey Blue Ocean Creations

Blue Ocean created by a new entrant or incumbent?

Driven by technology or value pioneering?

At time of creation, industry attractive or unattractive?

Ford Model T New Entrant Value (mostly existing technologies)

Unattractive

GM’s “car for every purse and purpose”

Incumbent Value (some new technologies)

Attractive

Japanese fuel-efficient cars

Incumbent Value (some new technologies)

Unattractive

Chrysler minivan Incumbent Value (mostly existing technologies)

Unattractive

COMPUTERSKey Blue Ocean Creations

Blue Ocean created by a new entrant or incumbent?

Driven by technology or value pioneering?

At time of creation, industry attractive or unattractive?

CTR tabulating machine (CTR is now IBM)

Incumbent Value (some new technologies)

Unattractive

Apple personal Computer

New Entrant Value (mostly existing technologies)

Unattractive

Compaq PC Servers

Incumbent Value (mostly existing technologies)

Nonexistent

Dell built-to-order computers

New Entrant Value (mostly existing technologies)

Unattractive

MOVIE THEATERSKey Blue Ocean Creations

Blue Ocean created by a new entrant or incumbent?

Driven by technology or value pioneering?

At time of creation, industry attractive or unattractive?

Nickelodeon New Entrant Value (some new technologies)

Nonexistent

Palace Theaters Incumbent Value (mostly existing technologies)

Attractive

AMC multiplex Incumbent Value (mostly existing technologies)

Unattractive

AMC megaplex Incumbent Value (mostly existing technologies)

Unattractive

The Paradox of StrategyIn a study of 108 companies 86% of new ventures were line extensions or

incremental improvements to existing industries ONLY 14% were aimed at creating new markets or

strategies

Line extensions provided 62% of total revenues but ONLY 39% of TOTAL PROFITSIn contrast, on the 14% invested in creating new markets it delivered 38% of the total revenues BUT it delivered 61% of TOTAL PROFITS!!!

Why the imbalance?

Corporate strategy is heavy influenced by its roots in military strategyThe language of strategy is imbued with military references like “officers”, “headquarters”, “troops”, “front lines”The language is the that of a red ocean strategyThe language is about confronting the enemy and driving him off a battlefield of limited territory

What focusing on the red ocean means

It means accepting the key constraints of warLimited terrainThe need to beat an enemy to succeed

Denying the distinctive strength of the business world – the capacity to create new market space that is uncontested

Competition Matters but …

It ignores two very IMPORTANT and FAR MORE LUCRATIVE aspects of strategy :To find and develop markets where there is

little or no competition (blue oceans)To exploit and protect blue oceans

BLUE OCEAN FINDINGS

Blue Oceans are not about technology innovation

Incumbents often create blue oceans – and usually within their core businesses

Company and industry are wrong units of analysis

Creating Blue Oceans builds brands

Blue Oceans are not about Technology Innovation

Leading-edge technology is INVOLVED but not the defining featureThis is true EVEN with technology-intensive industriesBlue oceans are SELDOM the result of technology innovation – the underlying technology is often already in existenceAbout linking technology to what buyers want and/or simplifying the technology

Incumbents often create Blue Oceans and usually within

their core businessesGM, Chrysler, IBM and Compaq were the incumbents when they created Blue OceansOnly Ford, Apple, Dell and Nickelodean were new entrants in their industriesThis suggests that incumbents are not at a disadvantage in creating new market spacesThese blue oceans are within their core businesses.New markets are NOT necessarily distant waters

Company and Industry are wrong units of analysis

Traditional units of analysis, company and industry have little explanatory power on how and why blue oceans are createdThere is NO consistently excellent companyEvery company rises and falls over timeThere is no NO perpetually excellent industryRelative attractiveness of an industry is driven largely by the creation of blue oceans WITHIN them

What then is the most appropriate unit of analysis?To explain blue oceans it must be the :STRATEGIC MOVE – the set of managerial actions

and decisions involved in making a major market-creating business offering

Example : Compaq is considered “unsuccessful” because of its acquisition by HP in 2001 and ceased to be a company. But this “move” led to the creation of a multibillion-dollar market in PC servers. This was key to it’s comeback in the 1990s.

Red Ocean vs. Blue Ocean(a comparison of imperatives)

Compete in existing market spaceBeat the competitionExploit existing demandMake the value/cost trade-offAlign the whole system of company’s activities with its strategic choice of differentiation OR low cost

Create uncontested market spaceMake the competition irrelevantCreate and capture new demandBreak the value/cost trade-offAlign the whole system of a company’s activities in pursuit of differentiation AND low cost

Red Ocean vs. Blue Ocean(a comparison of woldviews)

Structuralist or Environmental Determinism worldview

Companies and managers are at the mercy of economic forces greater than themselves

Reconstructionist worldview

Market boundaries and industries can be reconstructed by the actions and beliefs of industry players

The Simultaneous Pursuit of Differentiation and Low CostBlue Oceans are created in the region where a company’s action affects BOTH its cost structure and its value proposition to buyersCost savings are made from eliminating and reducing the factors an industry competes onBuyer value is lifted by creating elements the industry NEVER OFFEREDOver time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates