A book chapter review on Chapters 1, 2, 3, and 6 of Blue Ocean Strategy A review needs to cover the following three components:A brief summary of the chapters – covering main themes and stores in chapters. (About 1 and half single-spaced page) With a font type of Times New Roman, a font size of 12, and 1 inch page margins
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Blue Ocean
Strategy
How to Create Uncontested Market Space and
Make the Competition Irrelevant
W. Chan Kim
Renée Mauborgne
H A R VA R D B U S I N E S S S C H O O L P R E S S
BOSTON, MASSACHUSETTS
Copyright 2005 Harvard Business School Publishing Corporation
All rights reserved
Printed in the United States of America
09 08 07 06 05
5 4 3 2 1
No part of this publication may be reproduced, stored in or introduced into a
retrieval system, or transmitted, in any form, or by any means (electronic, mechanical,
photocopying, recording, or otherwise), without the prior permission of the publisher.
Requests for permission should be directed to [email protected], or
mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston,
Massachusetts 02163.
Library of Congress Cataloging-in-Publication Data
Kim, W. Chan.
Blue ocean strategy: how to create uncontested market space and make the
competition irrelevant / W. Chan Kim, Renée Mauborgne.
p. cm.
Includes bibliographical references and index.
ISBN 1-59139-619-0 (hardcover: alk. paper)
1. New products. 2. Market segmentation. I. Mauborgne, Renée. II. Title.
HF5415.153.K53 2005
658.8 02—dc22
2004020857
The paper used in this publication meets the requirements of the American National
Standard for Permanence of Paper for Publications and Documents in Libraries and
Archives Z39.48–1992
Part One: Blue Ocean Strategy
1
Creating Blue Oceans
2
Analytical Tools and Frameworks
3
23
Part Two: Formulating Blue Ocean Strategy
3
Reconstruct Market Boundaries
47
4
Focus on the Big Picture, Not the Numbers
81
5
Reach Beyond Existing Demand
101
6
Get the Strategic Sequence Right
117
Part Three: Executing Blue Ocean Strategy
7
Overcome Key Organizational Hurdles
147
8
Build Execution into Strategy
171
9
Conclusion: The Sustainability and Renewal
of Blue Ocean Strategy
185
Appendix A
191
Appendix B
209
Appendix C
213
Notes
217
Bibliography
223
Index
231
About the Authors
239
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PA RT O N E
Blue Ocean
Strategy
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CHAPTER 1
Creating Blue Oceans
A
ONE TIME ACCORDION PLAYER,
stilt-walker, and fireeater, Guy Laliberté is now CEO of Cirque du Soleil,
one of Canada’s largest cultural exports. Created in 1984 by a group
of street performers, Cirque’s productions have been seen by almost
forty million people in ninety cities around the world. In less than
twenty years Cirque du Soleil has achieved a level of revenues that
took Ringling Bros. and Barnum & Bailey—the global champion of
the circus industry—more than one hundred years to attain.
What makes this rapid growth all the more remarkable is that it
was not achieved in an attractive industry but rather in a declining
industry in which traditional strategic analysis pointed to limited
potential for growth. Supplier power on the part of star performers
was strong. So was buyer power. Alternative forms of entertainment—ranging from various kinds of urban live entertainment to
sporting events to home entertainment—cast an increasingly long
shadow. Children cried out for PlayStations rather than a visit to
the traveling circus. Partially as a result, the industry was suffering from steadily decreasing audiences and, in turn, declining revenue and profits. There was also increasing sentiment against the
4
B LU E O C E A N S T R AT E G Y
use of animals in circuses by animal rights groups. Ringling Bros.
and Barnum & Bailey set the standard, and competing smaller circuses essentially followed with scaled-down versions. From the perspective of competition-based strategy, then, the circus industry
appeared unattractive.
Another compelling aspect of Cirque du Soleil’s success is that
it did not win by taking customers from the already shrinking circus
industry, which historically catered to children. Cirque du Soleil
did not compete with Ringling Bros. and Barnum & Bailey. Instead
it created uncontested new market space that made the competition irrelevant. It appealed to a whole new group of customers:
adults and corporate clients prepared to pay a price several times
as great as traditional circuses for an unprecedented entertainment experience. Significantly, one of the first Cirque productions
was titled “We Reinvent the Circus.”
New Market Space
Cirque du Soleil succeeded because it realized that to win in the future, companies must stop competing with each other. The only way
to beat the competition is to stop trying to beat the competition.
To understand what Cirque du Soleil has achieved, imagine a
market universe composed of two sorts of oceans: red oceans and
blue oceans. Red oceans represent all the industries in existence
today. This is the known market space. Blue oceans denote all the
industries not in existence today. This is the unknown market space.
In the red oceans, industry boundaries are defined and accepted,
and the competitive rules of the game are known.1 Here, companies
try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and
growth are reduced. Products become commodities, and cutthroat
competition turns the red ocean bloody.
Blue oceans, in contrast, are defined by untapped market space,
demand creation, and the opportunity for highly profitable growth.
Creating Blue Oceans
5
Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries, as Cirque du Soleil did. In blue
oceans, competition is irrelevant because the rules of the game are
waiting to be set.
It will always be important to swim successfully in the red ocean
by outcompeting rivals. Red oceans will always matter and will always be a fact of business life. But with supply exceeding demand
in more industries, competing for a share of contracting markets,
while necessary, will not be sufficient to sustain high performance.2
Companies need to go beyond competing. To seize new profit and
growth opportunities, they also need to create blue oceans.
Unfortunately, blue oceans are largely uncharted. The dominant
focus of strategy work over the past twenty-five years has been on
competition-based red ocean strategies.3 The result has been a
fairly good understanding of how to compete skillfully in red waters,
from analyzing the underlying economic structure of an existing
industry, to choosing a strategic position of low cost or differentiation or focus, to benchmarking the competition. Some discussions
around blue oceans exist.4 However, there is little practical guidance on how to create them. Without analytic frameworks to create
blue oceans and principles to effectively manage risk, creating
blue oceans has remained wishful thinking that is seen as too risky
for managers to pursue as strategy. This book provides practical
frameworks and analytics for the systematic pursuit and capture of
blue oceans.
The Continuing Creation of Blue Oceans
Although the term blue oceans is new, their existence is not. They
are a feature of business life, past and present. Look back one hundred years and ask yourself, How many of today’s industries were
then unknown? The answer: Many industries as basic as automobiles, music recording, aviation, petrochemicals, health care, and
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B LU E O C E A N S T R AT E G Y
management consulting were unheard of or had just begun to
emerge at that time. Now turn the clock back only thirty years.
Again, a plethora of multibillion-dollar industries jumps out—mutual funds, cell phones, gas-fired electricity plants, biotechnology,
discount retail, express package delivery, minivans, snowboards,
coffee bars, and home videos, to name a few. Just three decades ago,
none of these industries existed in a meaningful way.
Now put the clock forward twenty years—or perhaps fifty years—
and ask yourself how many now unknown industries will likely
exist then. If history is any predictor of the future, again the answer
is many of them.
The reality is that industries never stand still. They continuously evolve. Operations improve, markets expand, and players
come and go. History teaches us that we have a hugely underestimated capacity to create new industries and re-create existing
ones. In fact, the half-century-old Standard Industrial Classification (SIC) system published by the U.S. Census was replaced in 1997
by the North America Industry Classification Standard (NAICS)
system. The new system expanded the ten SIC industry sectors into
twenty sectors to reflect the emerging realities of new industry territories.5 The services sector under the old system, for example, is
now expanded into seven business sectors ranging from information to health care and social assistance.6 Given that these systems
are designed for standardization and continuity, such a replacement shows how significant the expansion of blue oceans has been.
Yet the overriding focus of strategic thinking has been on competition-based red ocean strategies. Part of the explanation for this
is that corporate strategy is heavily influenced by its roots in military strategy. The very language of strategy is deeply imbued with
military references—chief executive “officers” in “headquarters,”
“troops” on the “front lines.” Described this way, strategy is about
confronting an opponent and fighting over a given piece of land
that is both limited and constant.7 Unlike war, however, the history of industry shows us that the market universe has never been
constant; rather, blue oceans have continuously been created over
Creating Blue Oceans
7
time. To focus on the red ocean is therefore to accept the key
constraining factors of war—limited terrain and the need to beat
an enemy to succeed—and to deny the distinctive strength of the
business world: the capacity to create new market space that is uncontested.
The Impact of Creating Blue Oceans
We set out to quantify the impact of creating blue oceans on a company’s growth in both revenues and profits in a study of the business launches of 108 companies (see figure 1-1). We found that 86
percent of the launches were line extensions, that is, incremental
improvements within the red ocean of existing market space. Yet
they accounted for only 62 percent of total revenues and a mere 39
percent of total profits. The remaining 14 percent of the launches
were aimed at creating blue oceans. They generated 38 percent of
total revenues and 61 percent of total profits. Given that business
launches included the total investments made for creating red and
blue oceans (regardless of their subsequent revenue and profit consequences, including failures), the performance benefits of creating
F I G U R E 1-1
The Profit and Growth Consequences of Creating Blue Oceans
86%
Business Launch
Revenue Impact
Profit Impact
Launches within red oceans
62%
39%
14%
38%
61%
Launches for creating blue oceans
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B LU E O C E A N S T R AT E G Y
blue waters are evident. Although we don’t have data on the hit rate
of success of red and blue ocean initiatives, the global performance
differences between them are marked.
The Rising Imperative of Creating Blue Oceans
There are several driving forces behind a rising imperative to create
blue oceans. Accelerated technological advances have substantially
improved industrial productivity and have allowed suppliers to produce an unprecedented array of products and services. The result
is that in increasing numbers of industries, supply exceeds demand.8 The trend toward globalization compounds the situation.
As trade barriers between nations and regions are dismantled and
as information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to
disappear.9 While supply is on the rise as global competition intensifies, there is no clear evidence of an increase in demand worldwide, and statistics even point to declining populations in many
developed markets.10
The result has been accelerated commoditization of products
and services, increasing price wars, and shrinking profit margins.
Recent industrywide studies on major American brands confirm
this trend.11 They reveal that for major product and service categories, brands are generally becoming more similar, and as they are
becoming more similar people increasingly select based on price.12
People no longer insist, as in the past, that their laundry detergent
be Tide. Nor will they necessarily stick to Colgate when Crest is on
sale, and vice versa. In overcrowded industries, differentiating brands
becomes harder in both economic upturns and downturns.
All this suggests that the business environment in which most
strategy and management approaches of the twentieth century
evolved is increasingly disappearing. As red oceans become increasingly bloody, management will need to be more concerned with blue
oceans than the current cohort of managers is accustomed to.
Creating Blue Oceans
9
From Company and Industry to Strategic Move
How can a company break out of the red ocean of bloody competition? How can it create a blue ocean? Is there a systematic approach to achieve this and thereby sustain high performance?
In search of an answer, our initial step was to define the basic
unit of analysis for our research. To understand the roots of high
performance, the business literature typically uses the company as
the basic unit of analysis. People have marveled at how companies
attain strong, profitable growth with a distinguished set of strategic, operational, and organizational characteristics. Our question,
however, was this: Are there lasting “excellent” or “visionary”
companies that continuously outperform the market and repeatedly create blue oceans?
Consider, for example, In Search of Excellence and Built to Last.13
The bestselling book In Search of Excellence was published twenty
years ago. Yet within two years of its publication a number of the
companies surveyed began to slip into oblivion: Atari, ChesebroughPond’s, Data General, Fluor, National Semiconductor. As documented in Managing on the Edge, two-thirds of the identified model
firms in the book had fallen from their perches as industry leaders
within five years of its publication.14
The book Built to Last continued in the same footsteps. It sought
out the “successful habits of visionary companies” that had a longrunning track record of superior performance. To avoid the pitfalls
of In Search of Excellence, however, the survey period of Built to
Last was expanded to the entire life span of the companies while its
analysis was limited to firms more than forty years old. Built to
Last also became a bestseller.
But again, upon closer examination, deficiencies in some of the
visionary companies spotlighted in Built to Last have come to light.
As illustrated in the recent book Creative Destruction, much of the
success attributed to some of the model companies in Built to Last
was the result of industry sector performance rather than the
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B LU E O C E A N S T R AT E G Y
companies themselves.15 For example, Hewlett-Packard (HP) met
the criteria of Built to Last by outperforming the market over the
long term. In reality, while HP outperformed the market, so did the
entire computer-hardware industry. What’s more, HP did not even
outperform the competition within the industry. Through this and
other examples, Creative Destruction questioned whether “visionary”
companies that continuously outperform the market have ever existed. And we all have seen the stagnating or declining performance
of the Japanese companies that were celebrated as “revolutionary”
strategists in their heyday of the late 1970s and early 1980s.
If there is no perpetually high-performing company and if the
same company can be brilliant at one moment and wrongheaded at
another, it appears that the company is not the appropriate unit of
analysis in exploring the roots of high performance and blue oceans.
As discussed earlier, history also shows that industries are constantly being created and expanded over time and that industry
conditions and boundaries are not given; individual actors can
shape them. Companies need not compete head-on in a given industry space; Cirque du Soleil created a new market space in the entertainment sector, generating strong, profitable growth as a result. It
appears, then, that neither the company nor the industry is the best
unit of analysis in studying the roots of profitable growth.
Consistent with this observation, our study shows that the
strategic move, and not the company or the industry, is the right
unit of analysis for explaining the creation of blue oceans and sustained high performance. A strategic move is the set of managerial
actions and decisions involved in making a major market-creating
business offering. Compaq, for example, was acquired by HewlettPackard in 2001 and ceased to be an independent company. As a result, many people might judge the company as unsuccessful. This
does not, however, invalidate the blue ocean strategic moves that
Compaq made in creating the server industry. These strategic
moves not only were a part of the company’s powerful comeback in
the mid-1990s but also unlocked a new multibillion-dollar market
space in computing.
Creating Blue Oceans
11
Appendix A, “A Sketch of the Historical Pattern of Blue Ocean
Creation,” provides a snapshot overview of the history of three representative U.S. industries drawn from our database: the auto industry—how we get to work; the computer industry—what we use
at work; and the cinema industry—where we go after work for enjoyment. As shown in appendix A, no perpetually excellent company or industry is found. But a striking commonality appears to
exist across strategic moves that have created blue oceans and have
led to new trajectories of strong, profitable growth.
The strategic moves we discuss—moves that have delivered products and services that opened and captured new market space, with
a significant leap in demand—contain great stories of profitable
growth as well as thought-provoking tales of missed opportunities
by companies stuck in red oceans. We built our study around these
strategic moves to understand the pattern by which blue oceans are
created and high performance achieved. We studied more than one
hundred fifty strategic moves made from 1880 to 2000 in more than
thirty industries, and we closely examined the relevant business
players in each of these events. Industries ranged from hotels, the
cinema, retail, airlines, energy, computers, broadcasting, and construction to automobiles and steel. We analyzed not only winning
business players who created blue oceans but also their less successful competitors.
Both within a given strategic move and across strategic moves,
we searched for convergence among the group that created blue
oceans and within less successful players caught in the red ocean.
We also searched for divergence across these two groups. In so
doing, we tried to discover the common factors leading to the creation of blue oceans and the key differences separating those winners from the mere survivors and the losers adrift in the red ocean.
Our analysis of more than thirty industries confirms that neither
industry nor organizational characteristics explain the distinction
between the two groups. In assessing industry, organizational, and
strategic variables we found that the creation and capturing of blue
oceans were achieved by small and large companies, by young and
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old managers, by companies in attractive and unattractive industries, by new entrants and established incumbents, by private and
public companies, by companies in low- and high-tech industries,
and by companies of diverse national origins.
Our analysis failed to find any per …
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