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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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