STRATEG by W. Chan Kim and Renee Mauborgne A

ONETIME ACCORDION PLAYER, Stilt Walker, a n d fire-eater, Guy Lalibertd is now CEO of one of

i Canada's largest cultural exports. Cirque du Soleil. Founded in 1984 by a group of street performers, Cirque has staged dozens of productions seen by some 40 million people in 90 cities around the world. In 20 years, Cirque has achieved revenues that Ringling Bros, and Barnum & Bailey-the world's leading circus-took more than a century to attain.

Cirque's rapid growth occurred in an unlikely setting. The circus business was (and still is) in long-term decline. Alternative forms of entertainment – sporting events, TV, and video games – were casting a growing shadow. Children, the mainstay of the circus audience, preferred PlayStations to circus acts. There was also rising sentiment.

76 HARVARD BUSINESS REVIEW

fueled by animal rights groups, against the use of animals, traditionally an integral part of the circus. On the supply side, the star performers that Ringling and the other cir- cuses relied on to draw in the crowds could often name their own terms. As a result, the industry was hit by steadily decreasing audiences and increasing costs. What's more, any new entrant to this business would be competing against a formidable incumbent that for most of the last century had set the industry standard.

How did Cirque profitably increase revenues by a fac- tor of 22 over the last ten years in such an unattractive environment? The tagline for one of the first Cirque pro- ductions is revealing: "We reinvent the circus."Cirque did not make its money by competing within the confines of the existing industry or by stealing customers from Ringling and the others. Instead it created uncontested market space that made the competition irrelevant. It pulled in a whole new group of customers who were tra- ditionally noncustomers of the industry-adults and cor-

porate clients who had turned to theater, opera, or ballet and were, therefore, prepared to pay several times more than the price of a conventional circus ticket for an un- precedented entertainment experience.

To understand the nature of Cirque's achievement, you have to realize that the business universe consists of two distinct kinds of space, which we think of as red and blue oceans. Red oceans represent all the industries in existence today-the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and in- creasing competition turns the water bloody.

Blue oceans denote all the industries not in existence t o d a y – t h e unknown market space, untainted by com- petition. In blue oceans, demand is created rather than

OCTOBER 2004 77

Blue Ocean Strategy

fought over. There is ample opportunity for growth tbat is both profitable and rapid. There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is cre- ated from within a red ocean when a company alters the boundaries of an existing industry. As will become evi- dent later, this is what Cirque did. In breaking through the boundary traditionally separating circus and theater, it made a new and profitable blue ocean from within the red ocean of the circus industry.

Cirque is just one of more than 150 blue ocean cre- ations that we have studied in over 30 industries, using data stretching back more than too years. We analyzed companies that created those blue oceans and their less successful competitors, which were caught in red oceans. In studying these data, we have observed a consistent pattern of strategic thinking behind the creation of new markets and industries, what we call blue ocean strategy. The logic behind blue ocean strategy parts with tradi- tional models focused on competing in existing market space. Indeed, it can be argued that managers' failure to realize the differences between red and blue ocean strategy lies behind the difficulties many companies encounter as they try to break from the competition.

In this article, we present the concept of blue ocean strategy and describe its defining characteristics. We as- sess the profit and growth consequences of blue oceans and discuss why their creation is a rising imperative for companies in the future. We believe that an understand- ing of blue ocean strategy will help today's companies as they struggle to thrive in an accelerating and expanding business universe.

Blue and Red Oceans Although the term may be new, blue oceans have always been with us. Look back 100 years and ask yourself which industries known today were then unknown. Tbe answer: Industries as basic as automobiles, music record- ing, aviation, petrochemicals, Pharmaceuticals, and man- agement consulting were unheard-of or had just begun to emerge. Now turn the clock back only 30 years and ask yourself the same question. Again, a plethora of

W. Chan Kim ([email protected]) is the Boston Con- sulting Group Bruce D. Henderson Chair Professor of Strat- egy and International Management at Insead in Eontaine- bleau, Erance. Renee Mauborgne ([email protected] insead.edu) is the Insead Distinguished Eellow and a pro- fessor of strategy and management at Insead. This article is adapted from their forthcoming book Blue Ocean Strat- egy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Harvard Business School Press, 2005).

A Snapshot of Blue Ocean Creation This table identifies the strategic elements that were

common to blue ocean creations in three different

industries In different eras. It is not intended to be

comprehensive in coverage or exhaustive in content

We chose to show American industries because

they represented the largest and least-regulated

market during our study period. The pattern of blue

ocean creations exemplified by these three industries

is consistent with what we observed in the other

industries in our study.

multibillion-dollar industries jump out: mutual funds, cellular telephones, biotechnology, discount retailing, express package delivery, snowboards, coffee bars, and home videos, to name a few. Just three decades ago, none of these industries existed in a meaningful way.

This time, put the clock forward 20 years. Ask your- self: How many industries that are unknown today will exist tben? If history is any predictor of the future, the answer is many. Companies have a huge capacity to cre- ate new industries and re-create existing ones, a fact that is reflected in the deep changes that have been necessary in the way industries are classified. The half-century-old Standard Industrial Classification (SIC) system was re- placed in 1997 by the North American Industry Classifi- cation System (NAICS). The new system expanded the ten SIC industry sectors into 20 to refiect the emerging realities of new industry territories-blue oceans. The ser- vices sector under the old system, for example, is now seven sectors ranging from information to health care and social assistance. Given that these classification systems are designed for standardization and continuity, such a re- placement shows how significant a source of economic growth the creation of blue oceans has been.

Looking forward, it seems clear to us that blue oceans will remain the engine of growth. Prospects in most established market spaces – red oceans – are shrinking steadily. Technological advances have substantially im- proved industrial productivity, permitting suppliers to produce an unprecedented array of products and services. And as trade barriers between nations and regions fall and information on products and prices becomes instantly and globally available, niche markets and monopoly havens are continuing to disappear. At the same time, there is lit- tle evidence of any increase in demand, at least in the de- veloped markets, where recent United Nations statistics even point to declining populations. The result is that in more and more industries, supply is overtaking demand.

78 HARVARD BUSINESS REVIEW

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Key blue ocean creations

Was the blue ocean created by a new entrant or an incumbent?

Was it driven by technology pioneering or value pioneering?

At the time of the blue ocean creation, was the industry attractive or unattractive?

Ford Model T Unveiled in 1908,theModetT was the first mass-produced car, priced so that many Americans could afford it.

GM's "car for every purse and purpose" GM created a blue ocean in 1924 by injecting fun and fashion into the car.

Japanese fuel-efficient autos Japanese automakers created a blue ocean in the mid-1970s with small, reliable lines of cars.

Chrysler minivan With its 1984 minivan, Chrysler created a new class of auto-

mobile that was as easy to use as a car but had the passenger space of a van.

CTR's tabulating machine In 1914, CTR created the business machine industry by

simplifying, modularizing,and leasing tabulating machines. CTR later changed its name to IBM.

IBM 650 electronic computer and System/360 In 1952, IBM created the business computer industry by simpli- fying and reducing the power and price of existing technology. And it exploded the blue ocean created by the 650 when in 1964 it unveiled the System/360, the first modularized com- puter system.

Apple personal computer Although it was not the first home computer, the all-in-one,

simple-to-use Apple II was a blue ocean creation when it appeared in 1978.

Compaq PC servers Compag created a blue ocean in 1992 with its ProSignia

server, which gave buyers twice the file and print capability of the minicomputer at one-third the price.

Dell built-to-order computers In the mid-1990s, Deli created a blue ocean in a highly competitive industry by creating a new purchase and delivery experience for buyers.

Nickelodeon The first Nickelodeon opened its doors in 1905, showing short

films around-the-clock to working-class audiences for five cents.

Palace theaters Created by Roxy Rothapfel in 1914, these theaters provided an operalike environment for cinema viewing at an affordable price.

AMC multiplex In the 1960s, the number of multiplexes in America's subur- ban shopping malls mushroomed.The multiplex gave viewers greater choice while reducing owners'costs.

AMC megaplex Megaplexesjntroducedin 1995,offered every current block- buster and provided spectacular viewing experiences in

theater complexes as big as stadiums, at a lower cost to theater owners.

New entrant

Incumbent

Incumbent

Incumbent

Incumbent

Incumbent

New entrant

Incumbent

New entrant

New entrant

Incumbent

Incumbent

Incumbent

Value pioneering* (mostly existing technologies)

Value pioneering (some new technologies)

Value pioneering

(some new technologies)

Value pioneering

(mostly existing technologies)

Value pioneering [some new technologies)

Value pioneering (650: mostly existing technologies)

Value and technology pioneering (System/360: new and existing technologies)

Value pioneering (mostly existing technologies)

Value pioneering (mostly existing technologies)

Value pioneering (mostly existing technologies)

Value pioneering (mostly existing technologies)

Value pioneering (mostly existing technologies)

Value pioneering (mostly existing technologies)

Value pioneering (mostly existing technologies)

Unattractive

Attractive

Unattractive

Unattractive

Unattractive

Nonexistent

Unattraaive

Nonexistent

Unattractive

Nonexistent

Attractive

Unattractive

Unattractive

*Driven by value pioneering does not mean that technologies were not involved. Rather, it means that the defining technologies used had largely been in existence, whether n that industry or elsewhere.

OCTOBER 2004 79

Blue Ocean Strategy

This situation has inevitably hastened the commoditi- zation of products and services, stoked price wars, and shrunk profit margins. According to recent studies, major American brands in a variety of product and service cate- gories have become more and more alike. And as brands become more similar, people increasingly base purchase choices on price. Peopie no ionger insist, as in the past, that their laundry detergent be Tide. Nor do they neces- sarily stick to Colgate when there is a special promotion for Crest, and vice versa. In overcrowded industries, dif- ferentiating brands becomes harder both in economic upturns and in downturns.

The Paradox of Strategy Unfortunately, most companies seem becalmed in their red oceans. In a study of business launches in 108 compa- nies, we found that 86% of those new ventures were line extensions-incremental improvements to existing indus- try offerings-and a mere 14% were aimed at creating new markets or industries. While line extensions did account for 62% of the total revenues, they delivered only 39% of the total profits. By contrast, the 14% invested in creating new markets and industries delivered 38% of total reve- nues and a startling 61% of total profits.

So why the dramatic imbalance in favor of red oceans? Part of the explanation is that corporate strategy is heav- ily influenced by its roots in military strategy. The very language of strategy is deeply imbued with military ref- erences – chief executive "officers" in "headquarters," "troops" on the "front lines." Described this way, strategy is all about red ocean competition. It is about confronting an opponent and driving him off a battlefield of limited territory. Blue ocean strategy, by contrast, is about doing business where there is no competitor. It is about creating new land, not dividing up existing land. Focusing on the red ocean therefore means accepting the key constrain- ing factors of war-limited terrain and the need to beat

an enemy to succeed. And it means denying the distinc- tive strength of the business world-the capacity to create new market space that is uncontested.

The tendency of corporate strategy to focus on win- ning against rivals was exacerbated by the meteoric rise of Japanese companies in the 1970s and 1980s. For the first time in corporate history, customers were deserting Western companies in droves. As competition mounted in the global marketplace, a slew of red ocean strategies emerged, all arguing that competition was at the core of corporate success and failure. Today, one hardly talks about strategy without using the language of competi- tion. The term that best symbolizes this is "competitive advantage." In the competitive-advantage worldview, companies are often driven to outperform rivals and capture greater shares of existing market space.

Of course competition matters. But by focusing on competition, scholars, companies, and consultants have ignored two very important – and, we would argue, far more lucrative – aspects of strategy: One is to find and develop markets where there is little or no competi- tion-blue oceans-and the other is to exploit and protect blue oceans. These challenges are very different from those to which strategists have devoted most of their attention.

Toward Blue Ocean Strategy what kind of strategic logic is needed to guide the cre- ation of blue oceans? To answer that question, we looked back over lOO years of data on blue ocean creation to see what patterns could be discerned. Some of our data are presented in the exhibit "A Snapshot of Blue Ocean Creation." It shows an overview of key blue ocean cre- ations in three industries that closely touch people's lives: autos – how people get to work; computers – what people use at work; and movie theaters – where people go after work for enjoyment. We found that:

80 HARVARD BUSINESS REVIEW

Blue Ocean Strategy

Blue oceans are not about technology innovation. Leading-edge technology is sometimes involved in the creation of blue oceans, but it is not a defining feature of them. This is often true even in industries that are tech- nology intensive. As the exhibit reveals, across all three representative industries, blue oceans were seldom the result of technological innovation per se; the underlying technology was often already in existence. Even Ford's revolutionary assembly line can be traced to the meat- packing industry in America. Like those within the auto industry, the blue oceans within the computer industry did not come about through technology innovations alone but by linking technology to what buy- ers valued. As with the IBM 650 and the Com- paq PC server, this often involved simplifying the technology.

Incumbents often create blue o c e a n s – and usually within their core businesses. GM, the Japanese automakers, and Chrysler were established players when they created blue oceans in the auto industry. So were CTR and its later incarnation, IBM, and Compaq in the computer industry. And in the cinema industry, the same can be said of palace the- aters and AMC. Of the companies listed here, only Ford, Apple, Dell, and Nickelodeon were new entrants in their industries; the first three were start-ups, and the fourth was an estab- lished player entering an industry that was new to it. This suggests that incumbents are not at a disadvantage in creating new market spaces. Moreover, the blue oceans made by in- cumbents were usually within their core busi- nesses. In fact, as the exhibit shows, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters. Blue oceans are right next to you in every industry.

Company and Industry are the wrong units of analy- sis. The traditional units of strategic analysis – company and industry – have little explanatory power when it comes to analyzing how and why blue oceans are created. There is no consistently excellent company; the same company can be brilliant at one time and wrongheaded at another. Every company rises and falls over time. Like- wise, there is no perpetually excellent industry; relative attractiveness is driven largely by the creation of blue oceans from within them.

The most appropriate unit of analysis for explaining the creation of blue oceans is the strategic move-the set of managerial actions and decisions involved in making a major market-creating business offering. Compaq, for example, is considered by many people to be "unsuccess- ful" because it was acquired by Hewlett-Packard in 2001 and ceased to be a company. But the firm's ultimate fate

does not invalidate the smart strategic move Compaq made that led to the creation of the multibillion-dollar market in PC servers, a move that was a key cause of the company's powerful comeback in the 1990s.

Creating blue oceans builds brands. So powerful is blue ocean strategy that a blue ocean strategic move can create brand equity that lasts for decades. Almost all of the companies listed in the exhibit are remembered in no small part for the blue oceans they created long ago. Very few people alive today were around when the first Model T rolled off Henry Ford's assembly line in 1908, but the company's brand still benefits from that blue ocean

Red Ocean Versus Blue Ocean Strategy The imperatives for red ocean and blue ocean strategies are starkly different.

Red ocean strategy

Compete in existing market space.

Beat the competition.

Exploit existing demand.

Make the value/cost trade-off.

Align the whole system of a com- pany's activities with its strategic

choice of differentiation or low cost.

Blue ocean strategy

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.

move. IBM, too, is often regarded as an "American insti- tution" largely for the blue oceans it created in comput- ing; the 360 series was its equivalent of the Model T.

Our findings are encouraging for executives at the large, established corporations that are traditionally seen as the victims of new market space creation. For what they reveal is that large R&D budgets are not the key to creating new market space. The key is making the right strategic moves. What's more, companies that understand what drives a good strategic move will be well placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period. The creation of blue oceans, in other words, is a product of strategy and as such is very much a product of managerial action.

The Defining Characteristics Our research shows several common characteristics across strategic moves that create blue oceans. We found that the creators of blue oceans, in sharp contrast to com- panies playing by traditional mles, never use the compe- tition as a benchmark. Instead they make it irrelevant by

OCTOBER 2004 81

Blue Ocean Straten

In blue oceans, demand is created rather than fought over.There is ample opportunity for growth that is both profitable and rapid. ^

creating a leap in value for both buyers and the com- pany itself. (The exhibit "Red Ocean Versus Blue Ocean Strategy" compares the chief characteristics of these two strategy models.)

Perhaps the most important feature of blue ocean strat- egy is that it rejects the fundamental tenet of conven- tional strategy: that a trade-off exists between value and cost. According to this thesis, companies can either cre- ate greater value for customers at a higher cost or create reasonable value at a lower cost. In other words, strategy is essentially a choice between differentiation and low cost. But when it comes to creating blue oceans, the evi- dence shows that successful companies pursue differen- tiation and low cost simultaneously.

To see how this is done, let us go back to Cirque du Soleil. At the time of Cirque's debut, circuses focused on benchmarking one another and maximizing their shares of shrinking demand by tweaking traditional circus acts. This included trying to secure more and better-known clowns and lion tamers, efforts that raised circuses' cost structure without substantially altering the circus expe- rience. The result was rising costs without rising revenues and a downward spiral in overall circus demand. Enter Cirque. Instead of following the conventional logic of outpacing the competition by offering a better solution to the given problem-creating a circus with even greater fun and thrills-it redefined the problem itself by offering people the fun and thrill of the circus and the intellectual sophistication and artistic richness of the theater.

In designing performances that landed both these punches. Cirque had to reevaluate the components of the traditional circus offering. What the company found was that many of the elements considered essential to the fun and thrill of the circus were unnecessary and in many cases costly. For instance, most circuses offer animal acts. These are a heavy economic burden, because circuses have to shell out not only for the animals but also for their training, medical care, housing, insurance, and transpor- tation. Yet Cirque found that the appetite for animal shows was rapidly diminishing because of rising public concern about the treatment of circus animals and the ethics of exhibiting them.

Similarly, although traditional circuses promoted their performers as stars, Cirque realized that the public no

longer thought of circus artists as stars, at least not in the movie star sense. Cirque did away with traditional three- ring shows, too. Not only did these create confusion among spectators forced to switch their attention from one ring to another, they also increased the number of performers needed, with obvious cost implications. And while aisle concession sales appeared to be a good way to generate revenue, the high prices discouraged parents from making purchases and made them feel they were heing taken for a ride.

Cirque found that the lasting allure of the traditional circus came down to just three factors: the clowns, the tent, and the classic acrobatic acts. So Cirque kept the clowns, while shifting their humor away from slapstick to a more enchanting, sophisticated style. It glamorized the tent, which many circuses had abandoned in favor of rented venues. Realizing that the tent, more than anything else, captured the magic of the circus. Cirque designed this classic symbol with a glorious external finish and a high level of audience comfort. Gone were the sawdust and hard benches. Acrobats and other thrilling performers were retained, but Cirque reduced their roles and made their acts more elegant by adding artistic fiair.

Even as Cirque stripped away some of the traditional circus offerings, it injected new elements drawn from the world of theater. For instance, unlike traditional circuses featuring a series of unrelated acts, each Cirque creation resembles a theater performance in that it has a theme and story line. Although the themes are intentionally vague, they bring harmony and an intellectual element to the acts. Cirque also borrows ideas from Broadway. For example, rather than putting on the traditional "once and for all" show, Cirque mounts multiple produc- tions based on different themes and story lines. As with Broadway productions, too, each Cirque show has an original musical score, which drives the performance, lighting, and timing of the acts, rather than the other way around. The productions feature abstract and spiri- tual dance, an idea derived from theater and ballet. By introducing these factors, Cirque has created highly so- phisticated entertainments. And by staging multiple pro- ductions. Cirque gives people reason to come to the circus more often, thereby increasing revenues.

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Blue Ocean Strategy

Cirque offers the best of both circus and theater. And by eliminating many of the most expensive elements of the circus, it has been able to dramatically reduce its cost structure, achieving both differentiation and low cost. (For a depiction of the economics underpinning blue ocean strategy, see the exhibit "The Simultaneous Pur- suit of Differentiation and Low Cost")

By driving down costs while simultaneously driving up value for buyers, a company can achieve a leap in value for both itself and its customers. Since buyer value comes from the utility and price a company offers, and a com- pany generates value for itself through cost structure and price, blue ocean strategy is achieved only when the whole system of a company's utility, price, and cost activ- ities is properly aligned. It is this whole-system approach that makes the creation of blue oceans a sustainable strat- egy. Blue ocean strategy integrates the range of a tirm's functional and operational activities.

A rejection ofthe trade-off between low cost and dif- ferentiation implies a fundamental change in strategic m i n d – s e t – w e cannot emphasize enough how funda- mental a shift it is. The red ocean assumption that indus- try structural conditions are a given and firms are forced to compete within them is based on an intellectual world- view that academics call the structuralist view, or environ- mental determinism. According to this view, companies and managers are largely at the mercy of economic forces greater than themselves. Blue ocean strategies, by con- trast, are based on a worldview in which market bound- aries and industries can be reconstructed by the actions and beliefs of industry players. We call this the recon- structionist view.

The founders of Cirque du Soleil clearly did not feel constrained to act within the confines of their industry. Indeed, is Cirque really a circus with all that it has elimi- nated, reduced, raised, and created? Or is it theater? If it is theater, then what genre – Broadway show, opera, ballet? The magic of Cirque was created through a recon- struction of elements drawn from all of these alternatives. In the end. Cirque is none of them and a little of all of them. From within the red oceans of theater and circus, Cirque has created a blue ocean of uncontested market space that has, as yet, no name.

Barriers to Imitation Companies that create blue oceans usually reap the ben- efits without credible challenges for ten to 15 years, as was the case with Cirque du Soleil, Home Depot, Federal Express, Southwest Airlines, and CN N, to name just a few. The reason is that blue ocean strategy creates consider- able economic and cognitive barriers to imitation.

For a start, adopting a blue ocean creator's business model is easier to imagine than to do. Because blue ocean creators immediately attract customers in large volumes.

they are able to generate scale economies very rapidly, putting would-be imitators at an immediate and continu- ing cost disadvantage. The huge economies of scale in purchasing that Wal-Mart enjoys, for example, have sig- nificantly discouraged other companies from imitating its business model. The immediate attraction of large num- bers of customers can also create network externalities. The more customers eBay has online, the more attrac- tive the auction site becomes for both sellers and buyers of wares, giving users few incentives to go elsewhere.

When imitation requires companies to make changes to their whole system of activities, organizational politics may impede a would-be competitor's ability to switch to the divergent business mode! of a blue ocean strategy. For instance, airlines trying to follow Southwest's exam- ple of offering the speed of air travel with the fiexibility and cost of driving would have faced major revisions in

The Simultaneous Pursuit of Differentiation and Low Cost A blue ocean is created in the region where a company's

actionsfavorably affect both its cost structure and its value

proposition to buyers. Cost savings are made from eliminat-

ing and reducing the factors an industry competes on. Buyer

value is lifted by raising and creating elements the industry

has never offered. Over time, costs are reduced further as

scale economies kick in, due to the high sales volumes that

superior value generates.

OCTOBER 2004 83

Blue Ocean Strategy

routing, training, marketing, and pricing, not to men- tion culture. Few established airlines had the flexibility to make such extensive organizational and operating changes overnight. Imitating a whole-system approach is not an easy feat.

The cognitive barriers can be just as effective. When a company offers a leap in value, it

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