TALKING POINTS

Blue Ocean Straten

In blue oceans, demand is created rather than fought over.There is ample opportunity for growth that is both profitable and rapid. ^

creating a leap in value for both buyers and the com- pany 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 strat- egy is that it rejects the fundamental tenet of conven- tional strategy: that a trade-off exists between value and cost. According to this thesis, companies can either cre- ate 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 evi- dence shows that successful companies pursue differen- tiation and low cost simultaneously.

To see how this is done, let us go back to Cirque du Soleil. At the time of Cirque's debut, circuses focused on benchmarking one another 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 substantially altering the circus expe- rience. The result was rising costs without rising revenues and a downward spiral in overall circus demand. Enter Cirque. Instead of following the conventional logic of outpacing the competition by offering a better solution to the given problem-creating a circus with even greater fun and thrills-it redefined the problem itself by offering people the fun and thrill of the circus and the intellectual sophistication and artistic richness 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 circuses offer animal acts. These are a heavy economic burden, because circuses have to shell out not only for the animals but also for their training, medical care, housing, insurance, and transpor- tation. Yet Cirque found that the appetite 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 promoted their performers as stars, Cirque realized 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 confusion 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 heing taken for a ride.

Cirque found that the lasting allure of the traditional circus came down to just three factors: the clowns, the tent, and the classic acrobatic acts. So Cirque kept the clowns, while shifting their humor away from slapstick to a more enchanting, sophisticated style. It glamorized the tent, which many circuses had abandoned 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 fiair.

Even as Cirque stripped away some of the traditional circus offerings, it injected new elements drawn from the world of theater. For instance, unlike traditional circuses featuring a series of unrelated acts, each Cirque creation 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 Broadway. For example, rather than putting on the traditional "once and for all" show, Cirque mounts multiple produc- tions based on different themes and story lines. As with Broadway productions, too, each Cirque show has an original musical score, which drives the performance, lighting, and timing of the acts, rather than the other way around. The productions feature abstract and spiri- tual dance, an idea derived from theater and ballet. By introducing these factors, Cirque has created highly so- phisticated entertainments. And by staging multiple pro- ductions. Cirque gives people reason to come to the circus more often, thereby increasing revenues.

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Blue Ocean Strategy

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 underpinning blue ocean strategy, see the exhibit "The Simultaneous Pur- suit 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 activ- ities is properly aligned. It is this whole-system approach that makes the creation of blue oceans a sustainable strat- egy. Blue ocean strategy integrates the range of a tirm's functional and operational activities.

A rejection ofthe trade-off between low cost and dif- ferentiation implies a fundamental change in strategic m i n d - s e t - w e cannot emphasize enough how funda- mental a shift it is. The red ocean assumption that indus- try structural conditions are a given and firms are forced to compete within them is based on an intellectual world- view that academics call the structuralist view, or environ- mental determinism. According to this view, companies and managers are largely at the mercy of economic forces greater than themselves. Blue ocean strategies, by con- trast, are based on a worldview in which market bound- aries and industries can be reconstructed by the actions and beliefs of industry players. We call this the recon- structionist 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 circus with all that it has elimi- nated, reduced, raised, and created? Or is it theater? If it is theater, then what genre - Broadway show, opera, ballet? The magic of Cirque was created through a recon- struction of elements drawn from all of these alternatives. In the end. Cirque is none of them and a little of all of them. From within the red oceans of theater and circus, Cirque has created a blue ocean of uncontested market space that has, as yet, no name.

Barriers to Imitation Companies that create blue oceans usually reap the ben- efits without credible challenges for ten to 15 years, as was the case with Cirque du Soleil, Home Depot, Federal Express, Southwest Airlines, and CN N, to name just a few. The reason is that blue ocean strategy creates consider- able economic and cognitive barriers 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 continu- ing cost disadvantage. The huge economies of scale in purchasing that Wal-Mart enjoys, for example, have sig- nificantly discouraged other companies from imitating its business model. The immediate attraction of large num- bers of customers can also create network externalities. The more customers eBay has online, the more attrac- tive the auction 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 activities, organizational politics may impede a would-be competitor's ability to switch to the divergent business mode! of a blue ocean strategy. For instance, airlines trying to follow Southwest's exam- ple of offering the speed of air travel with the fiexibility and cost of driving would have faced major revisions in

The Simultaneous Pursuit of Differentiation and Low Cost A blue ocean is created in the region where a company's

actionsfavorably affect both its cost structure and its value

proposition to buyers. Cost savings are made from eliminat-

ing and reducing the factors an industry competes on. Buyer

value is lifted by raising and creating elements the industry

has never offered. Over time, costs are reduced further as

scale economies kick in, due to the high sales volumes that

superior value generates.

OCTOBER 2004 83

Blue Ocean Strategy

routing, training, marketing, and pricing, not to men- tion culture. Few established airlines had the flexibility to make such extensive organizational and operating changes overnight. Imitating a whole-system approach is not an easy feat.

The cognitive barriers can be just as effective. 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 cam- paigns struggle to unseat a blue ocean creator. Microsoft, for example, has been trying for more than ten years to occupy the center of the blue ocean that Intuit created with its financial software 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 example, shuns top models and makes no promises of eternal youth and beauty. For the estab- lished cosmetic brands like Est^e Lauder and L'Oreal, im- itation 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 ofthe pattern may be new, blue ocean strategy has always existed, whether or not companies have been conscious ofthe fact. Just con- sider the striking parallels between the Cirque du Soleil theater-circus experience and Ford's creation of the Model T.

At the end ofthe nineteenth century, the automobile industry was small and unattractive. More than 500 auto- makers in America competed in turning out handmade luxury cars that cost around $1,500 and were enormously unpopular with all but the very rich. Anticar activists tore up roads, ringed parked cars with barbed wire, and orga- nized boycotts of car-driving businessmen and politicians. Woodrow Wilson caught the spirit ofthe times when he said in 1906 that "nothing has spread socialistic feeling more than the automobile." He called it "a picture ofthe arrogance of wealth."

Instead of trying to beat the competition and steal a share of existing demand from other automakers. Ford reconstructed the industry boundaries of cars and horse-drawn carriages to create a blue ocean. At the time, horse-drawn carriages were the primary means of local transportation across America. The carriage had two distinct advantages over cars. Horses could easily ne- gotiate 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 ex-

pensive and in short supply. It was Henry Ford's under- standing of these advantages that showed him how he could break away from the competition and unlock enor- mous untapped demand.

Ford called the Model T the car "for the great multi- tude, constructed ofthe best materials." 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 justify. 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 leam 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 igo8, 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 circus- goers. Sales ofthe Model T boomed. Ford's market share surged from 9% in 1908 to 6i% in 1921, and by 1923, a ma- jority 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 interchangeable parts. Ford was able to scrap the prevail- ing manufacturing system in which cars were constructed by skilled craftsmen who swarmed around one work- station and built a car piece by piece from start to finish. Ford's revolutionary assembly line replaced craftsmen 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, demands that companies understand the strategic 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 hlue oceans intensifies. 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 re- alize that the strategies 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. ^

Reprint R0410D To order, see page 159.

84 HARVARD BUSINESS REVIEW