BLUE OCEAN STRATEGY By W Chan Kim Rene
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)
Cd. S’ Blue Ocean Strategy Revealing Tagline : “We Reinvent the Circus” Cd. S did not make money by competing within the confines of an existing industry CDS did not steal from Ringling or Barnum Cd. S created uncontested market space that made the competition irrelevant RESULT : Cd. S 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? l l l Automobiles Music recording Aviation Petrochemicals Pharmaceuticals Management Consulting
AUTOMOBILE Key Blue Ocean Creations Blue Ocean created by a new entrant or incumbent? Driven by At time of technology or creation, industry value pioneering? 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 fuelefficient cars Incumbent Value (some new technologies) Unattractive Value (mostly existing technologies) Unattractive Chrysler minivan Incumbent
COMPUTERS Key Blue Ocean Creations Blue Ocean created by a new entrant or incumbent? Driven by At time of technology or creation, industry value pioneering? 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-toorder computers New Entrant Value (mostly existing technologies) Unattractive
MOVIE THEATERS Key Blue Ocean Creations Blue Ocean created by a new entrant or incumbent? Driven by At time of technology or creation, industry value pioneering? 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 Strategy In a study of 108 companies l l 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 l The need to beat an enemy to succeed l 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) l To exploit and protect blue oceans l
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 marketcreating 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 1990 s.
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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