Blue Ocean Strategy

PRESENTED BY : NISHANT NAGDA

UNIVERSAL BUSINESS SCHOOL

BLUE OCEAN STRATEGY

BY W. CHAN KIM & RENÉE MAUBORGNE

How to Create Uncontested Market Space and Make the Competition Irrelevant

Author and Article Information W. Chan Kim ([email protected]) is the Boston

Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management at Insead in Fontaine-Bleau, France.

Renée Mauborgne ([email protected]) is the Insead Distinguished Fellow and professor of strategy and management at Insead.

This article is adapted from their forthcoming book, BLUE OCEAN STRATEGY : HOW TO CREATE UNCONTESTED MARKET SPACE AND MAKE THE COMPETITION IRRELEVANT (Harvard Business School Press, 2005)

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BLUE OCEAN STRATEGY

Competing in overcrowded industries is no way to sustain high performance. The real opportunity is to create BLUE OCEANS of uncontested market space

Cirque du Soleil Founded in 1984 by street performers Stages productions seen by 40 million people in 90

cities around the world Cirque du Soleil has achieved in 20 years time

what Ringling Bros. And Barnum & Bailey – the world’s leading circus – more than 100 years to attain

Circus Industry Negatives

When CDS was founded the circus industry was in decline (and is still declining)

Other forms of entertainment was available (sports, TV, videos)

Animal rights issues High priced Circus star performers Ringling and Barnum’s name a barrier to entry

(more than 200 years combined)

CdS’ Blue Ocean Strategy

Revealing Tagline : “We Reinvent the Circus” CdS did not make money by competing within the

confines of an existing industry CDS did not steal from Ringling or Barnum CdS created uncontested market space that made

the competition irrelevant RESULT : CdS increased revenues by a factor of 22

over the last 10 years

BLUE OCEAN vs. RED OCEAN

Red Oceans represent all the industries in existence today – the known market space

Red Oceans’ industries boundaries are defined and accepted

Red Ocean’s competitive rules are well understood

What’s it like in a Red Ocean?

Companies try to outperform rivals in order to grab greater share of existing demand

Space gets more crowded Prospects for profits and growth reduced Products turn into commodities Increasing competition turns water bloody

What is the BLUE OCEAN?

Blue oceans denote all industries NOT in existence today

The Unknown market space Untainted by competition In Blue Oceans, demand is created not fought over In Blue Oceans, growth is profitable and rapid

2 ways to create Blue Oceans

Companies can give rise to complete new industries, example : Ebay with the online auction industry

Created WITHIN a Red Ocean when a company alters the boundaries of an existing company, example : Cirque du Soleil

Authors’ studies on Blue Oceans

Cirque du Soleil is just one of more than 150 blue ocean creations

Studies encompass over 30 industries Data used stretches more than 100 years Analyzes companies that create blue oceans vs.

companies that are TRAPPED in red oceans

Insights on Blue Ocean Strategy

There is a consistent pattern of strategic thinking behind the creation of new markets and strategies (called Blue Ocean Strategy)

Blue Ocean strategies part with traditional models focused on competing in existing market space

Managers’ failure to differentiate between blue and red ocean strategy lies behind the difficulties many companies encounter to break from the competition

Once upon a time …

The term blue oceans is NEW but it has always been with us

What industries were unknown 100 years ago?AutomobilesMusic recordingAviationPetrochemicalsPharmaceuticalsManagement Consulting

AUTOMOBILEKey Blue Ocean Creations

Blue Ocean created by a new entrant or incumbent?

Driven by technology or value pioneering?

At time of creation, industry attractive or unattractive?

Ford Model T New Entrant Value (mostly existing technologies)

Unattractive

GM’s “car for every purse and purpose”

Incumbent Value (some new technologies)

Attractive

Japanese fuel-efficient cars


Unattractive

Chrysler minivan

Incumbent Value (mostly existing technologies)

Unattractive

COMPUTERSKey Blue Ocean Creations




CTR tabulating machine (CTR is now IBM)


Unattractive

Apple personal Computer

New Entrant Value (mostly existing technologies)

Unattractive

Compaq PC Servers


Nonexistent

Dell built-to-order computers

New Entrant Value (mostly existing technologies)

Unattractive

MOVIE THEATERSKey Blue Ocean Creations




Nickelodeon New Entrant Value (some new technologies)

Nonexistent

Palace Theaters


Attractive

AMC multiplex Incumbent Value (mostly existing technologies)

Unattractive

AMC megaplex Incumbent Value (mostly existing technologies)

Unattractive

The Paradox of Strategy

In a study of 108 companies86% of new ventures were line extensions or

incremental improvements to existing industriesONLY 14% were aimed at creating new markets

or strategies Line extensions provided 62% of total revenues but

ONLY 39% of TOTAL PROFITS In contrast, on the 14% invested in creating new

markets it delivered 38% of the total revenues BUT it delivered 61% of TOTAL PROFITS!!!

Why the imbalance?

Corporate strategy is heavy influenced by its roots in military strategy

The language of strategy is imbued with military references like “officers”, “headquarters”, “troops”, “front lines”

The language is the that of a red ocean strategy The language is about confronting the enemy and

driving him off a battlefield of limited territory

What focusing on the red ocean means

It means accepting the key constraints of warLimited terrainThe need to beat an enemy to succeed

Denying the distinctive strength of the business world – the capacity to create new market space that is uncontested

Competition Matters but …

It ignores two very IMPORTANT and FAR MORE LUCRATIVE aspects of strategy :To find and develop markets where there is

little or no competition (blue oceans)To exploit and protect blue oceans

BLUE OCEAN FINDINGS

Blue Oceans are not about technology innovation Incumbents often create blue oceans – and usually

within their core businesses Company and industry are wrong units of

analysis Creating Blue Oceans builds brands

Blue Oceans are not about Technology Innovation

Leading-edge technology is INVOLVED but not the defining feature

This is true EVEN with technology-intensive industries

Blue oceans are SELDOM the result of technology innovation – the underlying technology is often already in existence

About linking technology to what buyers want and/or simplifying the technology

Incumbents often create Blue Oceans and usually within their core businesses

GM, Chrysler, IBM and Compaq were the incumbents when they created Blue Oceans

Only Ford, Apple, Dell and Nickelodean were new entrants in their industries

This suggests that incumbents are not at a disadvantage in creating new market spaces

These blue oceans are within their core businesses. New markets are NOT necessarily distant waters

Company and Industry are wrong units of analysis

Traditional units of analysis, company and industry have little explanatory power on how and why blue oceans are created

There is NO consistently excellent company Every company rises and falls over time There is no perpetually excellent industry Relative attractiveness of an industry is driven

largely by the creation of blue oceans WITHIN them

What then is the most appropriate unit of analysis?

To explain blue oceans it must be the :

STRATEGIC MOVE – the set of managerial actions and decisions involved in making a major market-creating business offering

Example : Compaq is considered “unsuccessful” because of its acquisition by HP in 2001 and ceased to be a company. But this “move” led to the creation of a multibillion-dollar market in PC servers. This was key to it’s comeback in the 1990s.

Red Ocean vs. Blue Ocean(a comparison of imperatives)

Compete in existing market space

Beat the competition Exploit existing

demand Make the value/cost

trade-off Align the whole system

of company’s activities with its strategic choice of differentiation OR low cost

Create uncontested market space

Make the competition irrelevant

Create and capture new demand

Break the value/cost trade-off

Align the whole system of a company’s activities in pursuit of differentiation AND low cost

Red Ocean vs. Blue Ocean(a comparison of wold views)

Structuralist or Environmental Determinism worldview

Companies and managers are at the mercy of economic forces greater than themselves

Reconstructionist worldview

Market boundaries and industries can be reconstructed by the actions and beliefs of industry players

The Simultaneous Pursuit of Differentiation and Low Cost

Blue Oceans are created in the region where a company’s action affects BOTH its cost structure and its value proposition to buyers

Cost savings are made from eliminating and reducing the factors an industry competes on

Buyer value is lifted by creating elements the industry NEVER OFFERED

Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates

Marketing

Blue Ocean Strategy