Source:  Kim, W.C., and Mauborgne, R. (2004). Blue ocean strategy. Harvard Business Review, 82(10), 76–84.

Abstract: Despite a long-term decline in the circus industry, Cirque du Soleil profitably increased revenue 22-fold over the last ten years by reinventing the circus. Rather than competing within the confines of the existing industry or trying to steal customers from rivals, Cirque developed uncontested market space that made the competition irrelevant. Cirque created what the authors call a blue ocean, a previously unknown market space. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In red oceans--that is, in all the industries already existing--companies compete by grabbing for a greater share of limited demand. As the market space gets more crowded, prospects for profits and growth decline. Products turn into commodities, and increasing competition turns the water bloody. There are two ways to create blue oceans. One is to launch completely new industries, as eBay did with online auctions. But it's much more common for a blue ocean to be created from within a red ocean when a company expands the boundaries of an existing industry. In studying more than 150 blue ocean creations in over 30 industries, the authors observed that the traditional units of strategic analysis--company and industry--are of limited use in explaining how and why blue oceans are created. The most appropriate unit of analysis is the strategic move, the set of managerial actions and decisions involved in making a major market-creating business offering. Creating blue oceans builds brands. So powerful is blue ocean strategy, in fact, that a blue ocean strategic move can create brand equity that lasts for decades.

Insight:

In this article, the authors stress the importance of challenging the rules in an industry by presenting the cases of a number of companies that have done just that. The authors suggest that new entrants can identify the opportunity to create a blue ocean and change the rules of the game, especially when the industry is currently unattractive based on existing business models. They use the example of Cirque du Soleil, which combines theatre and circus, and hence has developed an entirely new genre. The authors argue that, in an uncontested market space, companies can also offer higher value at a lower price (what they call ‘breaking the value/cost trade-off’).

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