TALKING POINTS

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.

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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 (renee.mauborgne@ 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.

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