TALKING POINTS

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BlueOceanStrategy_2.pdf

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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

New entrant

Incumbent

New entrant

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)

Unattractive

Attractive

Unattractive

Nonexistent

Unattraaive

Nonexistent

Unattractive

Nonexistent

Attractive

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

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