Navigate Blue Oceans To Undiscovered Business Opportunities

How is a blue ocean different from the usual business market? We continue our Leadership Hall of Fame series, a year-long look at the top business books and authors, with an excerpt from Blue Ocean Strategy (2005) by W. Chan Kim and Renée Mauborgne.

Blue Ocean Strategy 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 40 million people in 90 cities around the world. In less than 20 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.

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. 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. 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. 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. 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. 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 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. 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. 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. 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 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.

Read more about Blue Ocean Strategy and our Leadership Hall of Fame.

From the book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renée Mauborgne. Copyright 2005 by Harvard Business School Publishing Corporation. All rights reserved.

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3 Comments

  • Bette Boomer

    Thinking beyond red ocean strategies of competition & market share to create, innovate and expand existing boundaries is critical for the blue ocean future & our economic survival.This book takes it beyond "wishful thinking" & is fascinating & recommended reading

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