* How did Cirque profitably increase revenues by a factor of 22 over the last 10 years in an unattractive environment? * Tagline/branding “we reinvent the circus” – new meaning of entertainment * Eradicated the competition: pulled in a new kind of customers who were never customers of this industry = adults and corporate clients of opera, ballet = paying more for a ticket * Two kinds of business/market space:
1. Red Ocean: existent industries (increasing competition turns water bloody) * defined and accepted boundaries
* the competitive rules of the game are well understood * companies try to outperform their rivals to grab a greater share of existing demand * as space grows and becomes more crowded, the prospects of profit and growth reduce * products turn into commodities
2. Blue Ocean: not existent industries = unknown market space and untainted by competition * Demand is created rather than fought over.
* Ample opportunity for growth = profitable and rapid * Example: eBay = new online auction industry
* Two ways to create blue oceans (HE SAYS THAT IN THE ARTICLE THEN NEVER STATES THEM CLEARLY!) : * Blue Ocean is created from within a Red Ocean by altering the boundaries of an existing industry. * Blue Ocean is created from within a Red Ocean by altering the boundaries of an existing industry. * Traditional models focused on competing in existing market space. (managers’ failure to realize the differences between red and blue ocean strategy lies behind the difficulties many companies encounter as they try to break from the competition) * Blue Ocean industries that emerged the past 30 years: mutual funds, cellular telephones, biotechnology, discount retailing, express package delivery, snowboards, coffee bars, and home videos..
* There’s a huge potential to create new ones and re-create existing ones. * An example of how a blue ocean emerged: Standard Industrial Classification (SIC) system was replaced in 1997 by the North American Industry Classified System (NAICS). The new system expanded the 10 SIC industry sectors into 20 to reflect the emerging realities of new industry territories. * Another example: service sector is now 7 sectors (ranging from Information to healthcare and social assistance) * Blue oceans are the engine of growth!
* Technological advances improved industrial productivity, permitting suppliers to produce an unprecedented array of products and services. * Trade barriers between nations and regions fall and information products and prices becomes instantly and globally available = niche markets and monopoly havens are gradually disappearing * In more and more industries, supply is overtaking demand = hastening commoditization of products and services, stoked price wars, and shrunk profit margins. * The more similar products are (such as most major American brands), the more people base their purchase on price. Example: people don’t focus on Tide or Colgate when there’s better deals with other brands. The Paradox of Strategy
* Regardless of all this, there are still companies that are in their red oceans. * A study on 108 companies:
86% of new ventures were line extension (incremental improvement to existing industry offerings) = 62% of total revenues BUT only 39% of the total profitsIn contrast, 14% invested in creating new markets and industries = 38% total revenues and 61% total profits!
* Why the dramatic imbalance in favor of red oceans?
* Influence of military strategy on the roots of corporate strategy. For example, chief executive “officers” in “headquarters,” “troops” on the “front lines.” = red ocean competition. * Red Ocean = War= limited terrain and the need to beat an enemy to succeed = denying the distinctive strength of the business world: the capacity to create new market space that is uncontested. * Blue Ocean Strategy = no competition: creating new land, not dividing up existing land. * History: American companies rivaling against Japanese companies in 1970s and 80s. Therefore, strategy = competition (core of success & failure) = “competitive advantage”!
* Focusing on competition: scholars, companies, and consultants have ignored two very important (and very lucrative) aspects of strategy (challenges) : 1. To find & develop markets where there is little or NO competition = blue oceans 2. To exploit and protect blue oceans!
Toward Blue Ocean Strategy
Looking back at patterns in 100 years of data, we notice in three industries that touch people’s life closely: * Autos: how people get to work
* Computer: what people use at work
* Movie theaters: where people go after work for enjoyment! Conclusions:
1) Blue Oceans are not about technology innovation (even in tech intensive industries). The technology was already in existence (Ford = traced to meat packing! IBM650 and the Compaq PC server were being simplified). 2) Incumbents often create blue oceans – and usually within their core businesses. They’re not at a disadvantage in creating new market spaces.
For example: GM, the Japanese automakers, and Chrysler were establishes players when they created blue oceans in their industry. CTR, IBM, AND Compaq PC. Palace theaters and AMC. The only new entrants in their industries are: Ford, Apple, Dell, and Nickelodeon. 3) Company and industry are the wrong units of analysis. The traditional units of strategic analysis, company and industry, have little explanatory power of the Blue Ocean creation.
There is no excellent company and a wrongheaded company. Same goes to industries = relative attractiveness is driven largely by the creation of blue oceans from within them. * The strategic move = the most important unit of analysis to explain the blue ocean creation! The strategic move: set of managerial actions and decisions involved in making major market-creating business offering. Example: Compaq -> bought by HP (NOT “unsuccessful”) -> multibillion-dollar market in PC servers! 4) Creating blue oceans builds brands.
Strategic move = create brand equity that lasts for decades! Large R&D budgets aren’t the key to creating new market space. * The key is making the right strategic moves = understand what drives a good strategic move to create multiple blue oceans over time = continuing high growth and profits over a sustained period. Creating blue oceans is a product of strategy = managerial action!
The Defining Characteristics
* Blue Ocean: never use the competition as a benchmark.
[ 1 ]. Check page 79 for a table showing a snapshot of Blue Ocean Creation! [ 2 ]. Check page 79 for a table showing a snapshot of Blue Ocean Creation!