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 ( [email_address] 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)

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 ( [email_address] 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

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

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)

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

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 OCEAN Red 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

Red 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

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 today The Unknown market space Untainted by competition In Blue Oceans, demand is created not fought over In Blue Oceans, growth is profitable and rapid

Blue oceans denote all industries NOT in existence today

The Unknown market space

Untainted by competition

In Blue Oceans, demand is created not fought over

In 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

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 creations Studies encompass over 30 industries Data used stretches more than 100 years Analyzes companies that create blue oceans vs. companies that are TRAPPED in red oceans

Cirque du Soleil is just one of more than 150 blue ocean creations

Studies encompass over 30 industries

Data used stretches more than 100 years

Analyzes 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 space Managers’ failure to differentiate between blue and red ocean strategy lies behind the difficulties many companies encounter to break from the competition

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 space

Managers’ 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 us What industries were unknown 100 years ago? Automobiles Music recording Aviation Petrochemicals Pharmaceuticals Management Consulting

The term blue oceans is NEW but it has always been with us

What industries were unknown 100 years ago?

Automobiles

Music recording

Aviation

Petrochemicals

Pharmaceuticals

Management Consulting

AUTOMOBILE Unattractive Value (mostly existing technologies) Incumbent Chrysler minivan Unattractive Value (some new technologies) Incumbent Japanese fuel-efficient cars Attractive Value (some new technologies) Incumbent GM’s “car for every purse and purpose” Unattractive Value (mostly existing technologies) New Entrant Ford Model T At time of creation, industry attractive or unattractive? Driven by technology or value pioneering? Blue Ocean created by a new entrant or incumbent? Key Blue Ocean Creations

COMPUTERS Unattractive Value (mostly existing technologies) New Entrant Dell built-to-order computers Nonexistent Value (mostly existing technologies) Incumbent Compaq PC Servers Unattractive Value (mostly existing technologies) New Entrant Apple personal Computer Unattractive Value (some new technologies) Incumbent CTR tabulating machine (CTR is now IBM) At time of creation, industry attractive or unattractive? Driven by technology or value pioneering? Blue Ocean created by a new entrant or incumbent? Key Blue Ocean Creations

MOVIE THEATERS Unattractive Value (mostly existing technologies) Incumbent AMC megaplex Unattractive Value (mostly existing technologies) Incumbent AMC multiplex Attractive Value (mostly existing technologies) Incumbent Palace Theaters Nonexistent Value (some new technologies) New Entrant Nickelodeon At time of creation, industry attractive or unattractive? Driven by technology or value pioneering? Blue Ocean created by a new entrant or incumbent? Key Blue Ocean Creations

The Paradox of Strategy In 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 PROFITS In contrast, on the 14% invested in creating new markets it delivered 38% of the total revenues BUT it delivered 61% of TOTAL PROFITS!!!

In 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 PROFITS

In 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 strategy The language of strategy is imbued with military references like “officers”, “headquarters”, “troops”, “front lines” The language is the that of a red ocean strategy The language is about confronting the enemy and driving him off a battlefield of limited territory

Corporate strategy is heavy influenced by its roots in military strategy

The language of strategy is imbued with military references like “officers”, “headquarters”, “troops”, “front lines”

The language is the that of a red ocean strategy

The 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 war Limited terrain The 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

It means accepting the key constraints of war

Limited terrain

The 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

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

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 feature This is true EVEN with technology-intensive industries Blue oceans are SELDOM the result of technology innovation – the underlying technology is often already in existence About linking technology to what buyers want and/or simplifying the technology

Leading-edge technology is INVOLVED but not the defining feature

This is true EVEN with technology-intensive industries

Blue oceans are SELDOM the result of technology innovation – the underlying technology is often already in existence

About linking technology to what buyers want and/or simplifying the technology

Incumbents often create Blue Oceans and usually within their core businesses GM, Chrysler, IBM and Compaq were the incumbents when they created Blue Oceans Only Ford, Apple, Dell and Nickelodean were new entrants in their industries This suggests that incumbents are not at a disadvantage in creating new market spaces These blue oceans are within their core businesses. New markets are NOT necessarily distant waters

GM, Chrysler, IBM and Compaq were the incumbents when they created Blue Oceans

Only Ford, Apple, Dell and Nickelodean were new entrants in their industries

This suggests that incumbents are not at a disadvantage in creating new market spaces

These 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 created There is NO consistently excellent company Every company rises and falls over time There is no NO perpetually excellent industry Relative attractiveness of an industry is driven largely by the creation of blue oceans WITHIN them

Traditional units of analysis, company and industry have little explanatory power on how and why blue oceans are created

There is NO consistently excellent company

Every company rises and falls over time

There is no NO perpetually excellent industry

Relative 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.

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 space Beat the competition Exploit existing demand Make the value/cost trade-off Align the whole system of company’s activities with its strategic choice of differentiation OR low cost Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value/cost trade-off Align the whole system of a company’s activities in pursuit of differentiation AND low cost

Compete in existing market space

Beat the competition

Exploit existing demand

Make the value/cost trade-off

Align the whole system of company’s activities with its strategic choice of differentiation OR low cost

Create uncontested market space

Make the competition irrelevant

Create and capture new demand

Break the value/cost trade-off

Align 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

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 Cost Blue Oceans are created in the region where a company’s action affects BOTH its cost structure and its value proposition to buyers Cost savings are made from eliminating and reducing the factors an industry competes on Buyer value is lifted by creating elements the industry NEVER OFFERED Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates

Blue Oceans are created in the region where a company’s action affects BOTH its cost structure and its value proposition to buyers

Cost savings are made from eliminating and reducing the factors an industry competes on

Buyer value is lifted by creating elements the industry NEVER OFFERED

Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates