Blue Ocean Strategy

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)

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 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

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 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

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

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

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

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!!!

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

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

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 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

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

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 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

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

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