Thiel said competition is for losers, seems to be validation
#### TL;DR
The work presented in this paper is considered highly...
**W. Chan Kim** is a professor of strategy at INSEAD, one of the wo...
> ***"Red oceans represent all the industries in existence today—th...
Companies adopting the Blue Ocean Strategy break away from the trad...
The Paradox of Strategy
In the traditional competitive strategie...
Innovation is born out of an entrepreneur's ability to link existin...
A **common misconception is that to create a blue ocean, disruptive...
For the opposing view (i.e., incumbents *are* less likely to create...
> ***"The key is making the right strategic moves. What’s more, com...
Barriers to Imitation:
- Learning Barriers: Competitors will fac...
Blue Ocean Strategy
by W. Chan Kim and Renée Mauborgne
harvard business review • october 2004 page 1
COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
Competing in overcrowded industries is no way to sustain high
performance. The real opportunity is to create blue oceans of
uncontested market space.
A onetime accordion player, stilt walker, and
fire-eater, Guy Laliberté is now CEO of one of
Canada’s largest cultural exports, Cirque du
Soleil. Founded in 1984 by a group of street
performers, Cirque has staged dozens of pro-
ductions 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 cir-
cus—took more than a century to attain.
Cirque’s rapid growth occurred in an un-
likely 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. Chil-
dren, the mainstay of the circus audience, pre-
ferred PlayStations to circus acts. There was
also rising sentiment, fueled by animal rights
groups, against the use of animals, tradition-
ally an integral part of the circus. On the sup-
ply side, the star performers that Ringling and
the other circuses relied on to draw in the
crowds could often name their own terms. As a
result, the industry was hit by steadily decreas-
ing 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 in-
dustry standard.
How did Cirque profitably increase reve-
nues by a factor of 22 over the last ten years in
such an unattractive environment? The tagline
for one of the first Cirque productions is reveal-
ing: “We reinvent the circus.” Cirque did not
make its money by competing within the con-
fines of the existing industry or by stealing cus-
tomers 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 tradition-
ally noncustomers of the industry—adults and
corporate 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 unprece-
dented entertainment experience.
To understand the nature of Cirque’s
achievement, you have to realize that the busi-
Blue Ocean Strategy
harvard business review • october 2004 page 2
W. Chan Kim
(chan.kim@insead.edu) is
the Boston Consulting Group Bruce D.
Henderson Chair Professor of Strategy
and International Management at In-
sead in Fontainebleau, France.
Renée
Mauborgne
(renee.mauborgne@
insead.edu) is the Insead Distinguished
Fellow and a 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).
ness 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 increasing competition
turns the water bloody.
Blue oceans denote all the industries
not
in
existence today—the unknown market space,
untainted by competition. In blue oceans, de-
mand is created rather than fought over. There
is ample opportunity for growth that is both
profitable and rapid. There are two ways to cre-
ate 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 created from within
a red ocean when a company alters the bound-
aries of an existing industry. As will become ev-
ident later, this is what Cirque did. In breaking
through the boundary traditionally separating
circus and theater, it made a new and profit-
able blue ocean from within the red ocean of
the circus industry.
Cirque is just one of more than 150 blue
ocean creations that we have studied in over
30 industries, using data stretching back more
than 100 years. We analyzed companies that
created those blue oceans and their less suc-
cessful competitors, which were caught in red
oceans. In studying these data, we have ob-
served a consistent pattern of strategic think-
ing behind the creation of new markets and in-
dustries, what we call blue ocean strategy. The
logic behind blue ocean strategy parts with tra-
ditional models focused on competing in exist-
ing market space. Indeed, it can be argued that
managers’ failure to realize the differences be-
tween 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 assess the profit and growth
consequences of blue oceans and discuss why
their creation is a rising imperative for compa-
nies in the future. We believe that an under-
standing of blue ocean strategy will help to-
day’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. The answer: Indus-
tries as basic as automobiles, music recording,
aviation, petrochemicals, pharmaceuticals,
and management 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 multibillion-
dollar industries jump out: mutual funds, cel-
lular telephones, biotechnology, discount re-
tailing, express package delivery, snowboards,
coffee bars, and home videos, to name a few.
Just three decades ago, none of these indus-
tries existed in a meaningful way.
This time, put the clock forward 20 years.
Ask yourself: How many industries that are un-
known today will exist then? If history is any
predictor of the future, the answer is many.
Companies have a huge capacity to create 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 classi-
fied. The half-century-old Standard Industrial
Classification (SIC) system was replaced in 1997
by the North American Industry Classification
System (NAICS). The new system expanded
the ten SIC industry sectors into 20 to reflect
the emerging realities of new industry territo-
ries—blue oceans. The services sector under
the old system, for example, is now seven sec-
tors ranging from information to health care
and social assistance. Given that these classifi-
cation systems are designed for standardization
and continuity, such a replacement 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. Technologi-
cal advances have substantially improved in-
dustrial productivity, permitting suppliers to
produce an unprecedented array of products
and services. And as trade barriers between na-
tions and regions fall and information on prod-
ucts and prices becomes instantly and globally
available, niche markets and monopoly havens
are continuing to disappear. At the same time,
Blue Ocean Strategy
harvard business review • october 2004 page 3
there is little evidence of any increase in de-
mand, at least in the developed markets,
where recent United Nations statistics even
point to declining populations. The result is
that in more and more industries, supply is
overtaking demand.
This situation has inevitably hastened the
commoditization 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
categories have become more and more
alike. And as brands become more similar,
people increasingly base purchase choices on
price. People no longer insist, as in the past,
that their laundry detergent be Tide. Nor do
they necessarily stick to Colgate when there
is a special promotion for Crest, and vice
versa. In overcrowded industries, differenti-
ating brands becomes harder both in eco-
nomic upturns and in downturns.
The Paradox of Strategy
Unfortunately, most companies seem be-
calmed in their red oceans. In a study of busi-
ness launches in 108 companies, we found that
86% of those new ventures were line exten-
sions—incremental improvements to existing
industry 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 deliv-
ered 38% of total revenues and a startling 61%
of total profits.
So why the dramatic imbalance in favor of
red oceans? Part of the explanation is that cor-
porate strategy is heavily influenced by its
roots in military strategy. The very language of
strategy is deeply imbued with military refer-
ences—chief executive “officers” in “headquar-
ters,” “troops” on the “front lines.” Described
this way, strategy is all about red ocean compe-
tition. It is about confronting an opponent and
driving him off a battlefield of limited terri-
tory. Blue ocean strategy, by contrast, is about
doing business where there is no competitor. It
is about creating new land, not dividing up ex-
isting land. Focusing on the red ocean there-
fore means accepting the key constraining fac-
tors of war—limited terrain and the need to
beat an enemy to succeed. And it means deny-
ing the distinctive strength of the business
world—the capacity to create new market
space that is uncontested.
The tendency of corporate strategy to focus
on winning 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 competi-
tion was at the core of corporate success and
failure. Today, one hardly talks about strategy
without using the language of competition.
The term that best symbolizes this is “competi-
tive advantage.” In the competitive-advantage
worldview, companies are often driven to out-
perform rivals and capture greater shares of ex-
isting market space.
Of course competition matters. But by fo-
cusing on competition, scholars, companies,
and consultants have ignored two very impor-
tant—and, we would argue, far more lucra-
tive—aspects of strategy: One is to find and
develop markets where there is little or no
competition—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 creation of blue oceans? To answer that
question, we looked back over 100 years of
data on blue ocean creation to see what pat-
terns 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 creations in three industries that
closely touch people’s lives: autos—how peo-
ple get to work; computers—what people use
at work; and movie theaters—where people
go after work for enjoyment. We found that:
Blue oceans are not about technology in-
novation.
Leading-edge technology is some-
times 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 technol-
ogy intensive. As the exhibit reveals, across all
three representative industries, blue oceans
were seldom the result of technological innova-
tion per se; the underlying technology was
often already in existence. Even Ford’s revolu-
tionary assembly line can be traced to the meat-
A Snapshot of Blue
Ocean Creation
The table on the next page identifies
the strategic elements that were
common to blue ocean creations in
three different industries in different
eras. It is not intended to be compre-
hensive in coverage or exhaustive in
content. We chose to show American
industries because they represented
the largest and least-regulated mar-
ket during our study period. The pat-
tern of blue ocean creations exempli-
fied by these three industries is
consistent with what we observed in
the other industries in our study.
Blue Ocean Strategy
harvard business review • october 2004 page 4
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?
New entrant Value pioneering*
(mostly existing technologies)
Unattractive
Ford Model T
Unveiled in 1908, the Model T was the first mass-produced
car, priced so that many Americans could afford it.
Incumbent Value pioneering
(some new technologies)
Attractive
GM’s “car for every purse and purpose”
GM created a blue ocean in 1924 by injecting fun and
fashion into the car
.
Incumbent Value pioneering
(some new technologies)
Unattractive
Japanese fuel-efficient autos
Japanese automakers created a blue ocean in the mid-1970s
with small, reliable lines of cars
.
Incumbent Value pioneering
(mostly existing technologies)
Unattractive
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.
Incumbent Value pioneering
(some new technologies)
Unattractive
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.
Incumbent Value pioneering
(650: mostly existing technologies)
Value and technology pioneering
(System/360: new and existing
technologies)
Nonexistent
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.
New entrant Value pioneering
(mostly existing technologies)
Unattractive
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
appear
ed in 1978.
Incumbent Value pioneering
(mostly existing technologies)
Nonexistent
Compaq PC servers
Compaq 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.
New entrant Value pioneering
(mostly existing technologies)
Unattractive
Dell built-to-order computers
In the mid-1990s, Dell created a blue ocean in a highly
competitive industry by creating a new purchase and delivery
experience for buyers
.
New entrant Value pioneering
(mostly existing technologies)
Nonexistent
Nickelodeon
The first Nickelodeon opened its doors in 1905, showing short
films around-the-clock to working-class audiences for five cents.
Incumbent V
alue pioneering
(mostly existing technologies)
Attrac
tive
Palace theaters
Created by Roxy Rothapfel in 1914, these theaters provided
an operalike environment for cinema viewing at an affordable
price.
Incumbent Value pioneering
(mostly existing technologies)
Unattractive
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
.
Incumbent Value pioneering
(mostly existing technologies)
Unattractive
AMC megaplex
Megaplexes, introduced in 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
.
Automobiles
ComputersMovie Theaters
*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 in that industry or elsewhere.
Copyright © 2004 Harvard Business School Publishing Corporation. All rights reserved.
Blue Ocean Strategy
harvard business review • october 2004 page 5
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 buyers val-
ued. As with the IBM 650 and the Compaq PC
server, this often involved simplifying the
technology.
Incumbents often create blue oceans—and
usually within their core businesses.
GM, the
Japanese automakers, and Chrysler were es-
tablished 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 indus-
try, the same can be said of palace theaters
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 chal-
lenges the view that new markets are in dis-
tant waters. Blue oceans are right next to you
in every industry.
Company and industry are the wrong units
of analysis.
The traditional units of strategic
analysis—company and industry—have little
explanatory power when it comes to analyz-
ing 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. Likewise, there is no
perpetually excellent industry; relative attrac-
tiveness is driven largely by the creation of
blue oceans from within them.
The most appropriate unit of analysis for ex-
plaining the creation of blue oceans is the stra-
tegic move—the set of managerial actions and
decisions involved in making a major market-
creating business offering. Compaq, for exam-
ple, is considered by many people to be “un-
successful” 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 compa-
nies 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 move. IBM, too, is often regarded as an
“American institution” largely for the blue
oceans it created in computing; 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 de-
liver 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 charac-
teristics across strategic moves that create blue
oceans. We found that the creators of blue
oceans, in sharp contrast to companies playing
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 c
ost.
Copyright © 2004 Harvard Business School
Publishing Corporation. All rights reserved.
Blue Ocean Strategy
harvard business review • october 2004 page 6
by traditional rules, never use the competition
as a benchmark. Instead they make it irrele-
vant by creating a leap in value for both buy-
ers and the company 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 strategy is that it rejects the fundamen-
tal tenet of conventional strategy: that a trade-
off exists between value and cost. According to
this thesis, companies can either create 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 evidence
shows that successful companies pursue differ-
entiation and low cost simultaneously.
To see how this is done, let us go back to Cir-
que du Soleil. At the time of Cirque’s debut,
circuses focused on benchmarking one an-
other 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 substan-
tially altering the circus experience. The result
was rising costs without rising revenues and a
downward spiral in overall circus demand.
Enter Cirque. Instead of following the conven-
tional logic of outpacing the competition by of-
fering a better solution to the given problem—
creating a circus with even greater fun and
thrills—it redefined the problem itself by offer-
ing people the fun and thrill of the circus
and
the intellectual sophistication and artistic rich-
ness 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 cir-
cuses offer animal acts. These are a heavy eco-
nomic burden, because circuses have to shell
out not only for the animals but also for their
training, medical care, housing, insurance, and
transportation. Yet Cirque found that the appe-
tite 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 pro-
moted their performers as stars, Cirque real-
ized 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 con-
fusion 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 being taken for a ride.
Cirque found that the lasting allure of the
traditional circus came down to just three fac-
tors: the clowns, the tent, and the classic acro-
batic acts. So Cirque kept the clowns, while
shifting their humor away from slapstick to a
more enchanting, sophisticated style. It glam-
orized the tent, which many circuses had aban-
doned 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 flair.
Even as Cirque stripped away some of the
traditional circus offerings, it injected new el-
ements drawn from the world of theater. For
instance, unlike traditional circuses featuring
a series of unrelated acts, each Cirque cre-
ation 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 Broad-
way. For example, rather than putting on the
traditional “once and for all” show, Cirque
mounts multiple productions based on differ-
ent themes and story lines. As with Broadway
productions, too, each Cirque show has an
original musical score, which drives the per-
formance, lighting, and timing of the acts,
rather than the other way around. The pro-
ductions feature abstract and spiritual dance,
an idea derived from theater and ballet. By in-
troducing these factors, Cirque has created
highly sophisticated entertainments. And by
staging multiple productions, Cirque gives
people reason to come to the circus more of-
Blue Ocean Strategy
harvard business review • october 2004 page 7
ten, thereby increasing revenues.
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 underpin-
ning blue ocean strategy, see the exhibit “The
Simultaneous Pursuit 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 activities is
properly aligned. It is this whole-system ap-
proach that makes the creation of blue oceans
a sustainable strategy. Blue ocean strategy inte-
grates the range of a firm’s functional and op-
erational activities.
A rejection of the trade-off between low
cost and differentiation implies a fundamental
change in strategic mind-set—we cannot em-
phasize enough how fundamental a shift it is.
The red ocean assumption that industry struc-
tural conditions are a given and firms are
forced to compete within them is based on an
intellectual worldview that academics call the
structuralist
view, or
environmental determin-
ism
. According to this view, companies and
managers are largely at the mercy of economic
forces greater than themselves. Blue ocean
strategies, by contrast, are based on a world-
view in which market boundaries and indus-
tries can be reconstructed by the actions and
beliefs of industry players. We call this the
re-
constructionist
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 cir-
cus with all that it has eliminated, reduced,
raised, and created? Or is it theater? If it is the-
ater, then what genre—Broadway show, opera,
ballet? The magic of Cirque was created
through a reconstruction of elements drawn
from all of these alternatives. In the end, Cir-
que is none of them and a little of all of them.
From within the red oceans of theater and cir-
cus, Cirque has created a blue ocean of uncon-
tested market space that has, as yet, no name.
Barriers to Imitation
Companies that create blue oceans usually
reap the benefits without credible challenges
for ten to 15 years, as was the case with Cirque
du Soleil, Home Depot, Federal Express,
Southwest Airlines, and CNN, to name just a
few. The reason is that blue ocean strategy cre-
ates considerable economic and cognitive bar-
riers 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 continuing cost disadvantage. The huge
economies of scale in purchasing that Wal-
Mart enjoys, for example, have significantly
discouraged other companies from imitating
The Simultaneous Pursuit of Differentiation
and Low Cost
A blue ocean is created in the region
where a company’s actions favorably
affect both its cost structure and its
value proposition to buyers. Cost savings
are made from eliminating and reduc-
ing the factors an industry competes on.
Buyer value is lifted by raising and
creating elements the industry has
never offered. Over time, costs are re-
duced further as scale economies kick
in, due to the high sales volumes that
superior value generates.
Blue
Ocean
Buyer Value
Costs
Copyright © 2004 Harvard Business School
Publishing Corporation. All rights reserved.
Blue Ocean Strategy
harvard business review • october 2004 page 8
its business model. The immediate attraction
of large numbers of customers can also create
network externalities. The more customers
eBay has online, the more attractive the auc-
tion 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 activi-
ties, organizational politics may impede a
would-be competitor’s ability to switch to the
divergent business model of a blue ocean
strategy. For instance, airlines trying to follow
Southwest’s example of offering the speed of
air travel with the flexibility and cost of driv-
ing would have faced major revisions in rout-
ing, training, marketing, and pricing, not to
mention culture. Few established airlines had
the flexibility to make such extensive organi-
zational and operating changes overnight. Im-
itating a whole-system approach is not an
easy feat.
The cognitive barriers can be just as effec-
tive. When a company offers a leap in value, it
rapidly earns brand buzz and a loyal following
in the marketplace. Experience shows that
even the most expensive marketing campaigns
struggle to unseat a blue ocean creator. Mi-
crosoft, for example, has been trying for more
than ten years to occupy the center of the blue
ocean that Intuit created with its financial soft-
ware product Quicken. Despite all of its efforts
and all of its investment, Microsoft has not
been able to unseat Intuit as the industry
leader.
In other situations, attempts to imitate a
blue ocean creator conflict with the imitator’s
existing brand image. The Body Shop, for ex-
ample, shuns top models and makes no prom-
ises of eternal youth and beauty. For the estab-
lished cosmetic brands like Estée Lauder and
L’Oréal, imitation was very difficult, because it
would have signaled a complete invalidation of
their current images, which are based on
promises of eternal youth and beauty.
A Consistent Pattern
While our conceptual articulation of the pat-
tern may be new, blue ocean strategy has al-
ways existed, whether or not companies have
been conscious of the fact. Just consider the
striking parallels between the Cirque du Soleil
theater-circus experience and Ford’s creation
of the Model T.
At the end of the nineteenth century, the
automobile industry was small and unattrac-
tive. More than 500 automakers in America
competed in turning out handmade luxury
cars that cost around $1,500 and were enor-
mously
un
popular with all but the very rich.
Anticar activists tore up roads, ringed parked
cars with barbed wire, and organized boycotts
of car-driving businessmen and politicians.
Woodrow Wilson caught the spirit of the times
when he said in 1906 that “nothing has spread
socialistic feeling more than the automobile.”
He called it “a picture of the arrogance of
wealth.”
Instead of trying to beat the competition
and steal a share of existing demand from
other automakers, Ford reconstructed the in-
dustry boundaries of cars and horse-drawn car-
riages to create a blue ocean. At the time,
horse-drawn carriages were the primary means
of local transportation across America. The car-
riage had two distinct advantages over cars.
Horses could easily negotiate the bumps and
mud that stymied cars—especially in rain and
snow—on the nation’s ubiquitous dirt roads.
And horses and carriages were much easier to
maintain than the luxurious autos of the time,
which frequently broke down, requiring expert
repairmen who were expensive and in short
supply. It was Henry Ford’s understanding of
these advantages that showed him how he
could break away from the competition and
unlock enormous untapped demand.
Ford called the Model T the car “for the
great multitude, constructed of the best mate-
rials.” Like Cirque, the Ford Motor Company
made the competition irrelevant. Instead of
creating fashionable, customized cars for week-
ends in the countryside, a luxury few could jus-
tify, Ford built a car that, like the horse-drawn
carriage, was for everyday use. The Model T
came in just one color, black, and there were
few optional extras. It was reliable and durable,
designed to travel effortlessly over dirt roads in
rain, snow, or sunshine. It was easy to use and
fix. People could learn to drive it in a day. And
like Cirque, Ford went outside the industry for
a price point, looking at horse-drawn carriages
($400), not other autos. In 1908, the first
Model T cost $850; in 1909, the price dropped
to $609, and by 1924 it was down to $290. In
this way, Ford converted buyers of horse-
drawn carriages into car buyers—just as Cirque
turned theatergoers into circusgoers. Sales of
In blue oceans, demand
is created rather than
f
ought over. There is
ample opportunity for
g
rowth that is both
p
rofitable and rapid.
Blue Ocean Strategy
harvard business review • october 2004 page 9
the Model T boomed. Ford’s market share
surged from 9% in 1908 to 61% in 1921, and by
1923, a majority of American households had a
car.
Even as Ford offered the mass of buyers a
leap in value, the company also achieved the
lowest cost structure in the industry, much as
Cirque did later. By keeping the cars highly
standardized with limited options and inter-
changeable parts, Ford was able to scrap the
prevailing manufacturing system in which cars
were constructed by skilled craftsmen who
swarmed around one workstation and built a
car piece by piece from start to finish. Ford’s
revolutionary assembly line replaced crafts-
men with unskilled laborers, each of whom
worked quickly and efficiently on one small
task. This allowed Ford to make a car in just
four days—21 days was the industry norm—
creating huge cost savings.
• • •
Blue and red oceans have always coexisted and
always will. Practical reality, therefore, de-
mands that companies understand the strate-
gic logic of both types of oceans. At present,
competing in red oceans dominates the field
of strategy in theory and in practice, even as
businesses’ need to create blue oceans intensi-
fies. It is time to even the scales in the field of
strategy with a better balance of efforts across
both oceans. For although blue ocean strate-
gists have always existed, for the most part
their strategies have been largely unconscious.
But once corporations realize that the strate-
gies for creating and capturing blue oceans
have a different underlying logic from red
ocean strategies, they will be able to create
many more blue oceans in the future.
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Innovation is born out of an entrepreneur's ability to link existing technology to what buyers value.
**W. Chan Kim** is a professor of strategy at INSEAD, one of the world's leading business schools, who is highly regarded for his significant contributions to the field of strategy. Kim has been recognized for his groundbreaking work on "blue ocean strategy" and he has co-written the best-selling books "Blue Ocean Strategy" and "Blue Ocean Shift."
**Renée Mauborgne** is a professor of strategy at INSEAD and co-author of the globally recognized "Blue Ocean Strategy" and "Blue Ocean Shift" books. Renée has received numerous awards for her contribution to management thinking. Her ideas have made a significant impact on the way strategy is understood and practiced in the modern business world.
Thiel said competition is for losers, seems to be validation
For the opposing view (i.e., incumbents *are* less likely to create blue oceans), see Clayton Christensen's *The Innovator's Dilemma*. The book is about the idea that incumbents are scared to innovate, lest their latest product undercut their main business.
In *The Power Law*, Sebastian Mallaby provides an example of how the innovator's dilemma defined the winners and losers of the personal computing revolution: "Xerox worried that a computerized paperless office would harm its core photocopying business. Intel and National Semiconductor feared that making a computer would put them in conflict with existing computer makers, which were among their top customers. HP fretted that building a cheap home computer would undercut its premium machines, which sold for around $150,000." Apple had no hesitations in using Xerox PARC's research to create its personal computer and won big.
> ***"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 increasing competition turns the water bloody."***
> ***"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."***
Companies adopting the Blue Ocean Strategy break away from the traditional competitive mindset. Instead of focusing on existing competition, companies create new markets (so called blue oceans) making the competition irrelevant.
> ***"Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over."***
A **common misconception is that to create a blue ocean, disruptive technology or innovation is required. **
According to the authors, blue oceans are generally created from within red oceans by expanding industry boundaries. Existing companies have the capabilities to make the shift and create a blue ocean from a red ocean - they just need to refocus their approach.
**Creating a blue ocean is less about technological innovation and more about innovative business strategy.**
The Paradox of Strategy
In the traditional competitive strategies the focus is put on outperforming rivals to gain more share of an existing market. These strategies often end up leading to bloody competition, stagnant growth, and reduced profits.
The Blue Ocean Strategy **encourages companies to break away from the traditional competitive mindset.** Instead of focusing on existing competition, companies should create uncontested market space (blue oceans), making the competition irrelevant.
Barriers to Imitation:
- Learning Barriers: Competitors will face cognitive challenges in understanding and adopting the business model and practices that make the blue ocean strategy work. The more different the new strategy is from the existing industry norms, the higher these barriers tend to be.
- Operational Barriers: Implementing a blue ocean strategy often requires **significant changes in operations and processes.** For competitors, this might mean substantial investments and a long period of trial and error.
- Brand Perception Barriers: If a **company successfully creates a blue ocean, it is often associated with the new value curve.** Competitors might find it challenging to change market perceptions that they can deliver the new value proposition as well as the pioneer.
#### TL;DR
The work presented in this paper is considered highly significant because it revolutionized the conventional thinking about business competition and strategy.
Traditionally, businesses focused on outperforming their rivals in established markets, fighting for a larger share of existing demand. This often resulted in cut-throat competition, lowering growth potentials and diminishing profit margins.
In this paper W. Chan Kim and Renée Mauborgne, present a novel idea the **Blue Ocean Strategy** which breaks away from the traditional competition strategy and focuses on the creation of brand new markets - the so called "blue oceans".
The authors spent over a decade studying more than 150 strategic moves spanning more than 30 industries over 100 years (from 1880-2000). These strategic moves, which they refer to as "value innovations" were key instances where organizations departed from traditional competitive strategy (red oceans) to create new markets (blue oceans).
This work is important because it encouraged businesses to think differently, to innovate, and to explore new avenues for growth rather than merely trying to outdo competition. It has since had a significant influence on business strategy, prompting a shift towards more creative, value-driven approaches to market development.