Blue Ocean Strategy

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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)
Overcrowded Market?

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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
Get out of Here

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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
Concept!

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

Chrysler minivan Incumbent Value (mostly Unattractive

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

Palace Theaters Incumbent Value (mostly Attractive

existing
technologies)
AMC multiplex Incumbent Value (mostly Unattractive
existing
technologies)
AMC megaplex Incumbent Value (mostly Unattractive
existing
technologies)
 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
 Limitedterrain
 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 Reconstructionist
Environmental worldview
Determinism Market boundaries
worldview and industries can
Companies and be reconstructed by
managers are at the the actions and
mercy of economic beliefs of industry
forces greater than players
themselves
 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