wek6BLUEOCEANSTRATEGY.pdf

13 Apr,2022

STRATEGby W. Chan Kim andRenee Mauborgne A

ONETIME ACCORDION PLAYER, Stilt Walker, a n dfire-eater, Guy Lalibertd is now CEO of one of

i Canada's largest cultural exports. Cirque duSoleil. Founded in 1984 by a group of street performers,Cirque has staged dozens of productions seen by some40 million people in 90 cities around the world. In 20years, Cirque has achieved revenues that Ringling Bros,and Barnum & Bailey-the world's leading circus-tookmore than a century to attain.

Cirque's rapid growth occurred in an unlikely setting.The circus business was (and still is) in long-term decline.Alternative forms of entertainment – sporting events,TV, and video games – were casting a growing shadow.Children, the mainstay of the circus audience, preferredPlayStations to circus acts. There was also rising sentiment.

76 HARVARD BUSINESS REVIEW

fueled by animal rights groups, against the use of animals,traditionally an integral part of the circus. On the supplyside, the star performers that Ringling and the other cir-cuses relied on to draw in the crowds could often nametheir own terms. As a result, the industry was hit by steadilydecreasing audiences and increasing costs. What's more,any new entrant to this business would be competingagainst a formidable incumbent that for most of the lastcentury had set the industry standard.

How did Cirque profitably increase revenues by a fac-tor of 22 over the last ten years in such an unattractiveenvironment? The tagline for one of the first Cirque pro-ductions is revealing: "We reinvent the circus."Cirque didnot make its money by competing within the confinesof the existing industry or by stealing customers fromRingling and the others. Instead it created uncontestedmarket space that made the competition irrelevant. Itpulled in a whole new group of customers who were tra-ditionally noncustomers of the industry-adults and cor-

porate clients who had turned to theater, opera, or balletand were, therefore, prepared to pay several times morethan the price of a conventional circus ticket for an un-precedented entertainment experience.

To understand the nature of Cirque's achievement, youhave to realize that the business universe consists oftwo distinct kinds of space, which we think of as red andblue oceans. Red oceans represent all the industries inexistence today-the known market space. In red oceans,industry boundaries are defined and accepted, and thecompetitive rules of the game are well understood. Here,companies try to outperform their rivals in order to graba greater share of existing demand. As the space getsmore and more crowded, prospects for profits and growthare reduced. Products turn into commodities, and in-creasing competition turns the water bloody.

Blue oceans denote all the industries not in existencet o d a y – t h e unknown market space, untainted by com-petition. In blue oceans, demand is created rather than

OCTOBER 2004 77

Blue Ocean Strategy

fought over. There is ample opportunity for growth tbatis both profitable and rapid. There are two ways to createblue oceans. In a few cases, companies can give rise tocompletely new industries, as eBay did with the onlineauction industry. But in most cases, a blue ocean is cre-ated from within a red ocean when a company alters theboundaries of an existing industry. As will become evi-dent later, this is what Cirque did. In breaking throughthe boundary traditionally separating circus and theater,it made a new and profitable blue ocean from within thered ocean of the circus industry.

Cirque is just one of more than 150 blue ocean cre-ations that we have studied in over 30 industries, usingdata stretching back more than too years. We analyzedcompanies that created those blue oceans and their lesssuccessful competitors, which were caught in red oceans.In studying these data, we have observed a consistentpattern of strategic thinking behind the creation of newmarkets and industries, what we call blue ocean strategy.The logic behind blue ocean strategy parts with tradi-tional models focused on competing in existing marketspace. Indeed, it can be argued that managers' failureto realize the differences between red and blue oceanstrategy lies behind the difficulties many companiesencounter as they try to break from the competition.

In this article, we present the concept of blue oceanstrategy and describe its defining characteristics. We as-sess the profit and growth consequences of blue oceansand discuss why their creation is a rising imperative forcompanies in the future. We believe that an understand-ing of blue ocean strategy will help today's companies asthey struggle to thrive in an accelerating and expandingbusiness universe.

Blue and Red OceansAlthough the term may be new, blue oceans have alwaysbeen with us. Look back 100 years and ask yourselfwhich industries known today were then unknown. Tbeanswer: Industries as basic as automobiles, music record-ing, aviation, petrochemicals, Pharmaceuticals, and man-agement consulting were unheard-of or had just begunto emerge. Now turn the clock back only 30 years andask yourself the same question. Again, a plethora of

W. Chan Kim (chan.kim@insead.edu) is the Boston Con-sulting Group Bruce D. Henderson Chair Professor of Strat-egy and International Management at Insead in Eontaine-bleau, Erance. Renee Mauborgne (renee.mauborgne@insead.edu) is the Insead Distinguished Eellow and a pro-fessor of strategy and management at Insead. This articleis adapted from their forthcoming book Blue Ocean Strat-egy: How to Create Uncontested Market Space and Makethe Competition Irrelevant (Harvard Business SchoolPress, 2005).

A Snapshot ofBlue Ocean CreationThis table identifies the strategic elements that were

common to blue ocean creations in three different

industries In different eras. It is not intended to be

comprehensive in coverage or exhaustive in content

We chose to show American industries because

they represented the largest and least-regulated

market during our study period. The pattern of blue

ocean creations exemplified by these three industries

is consistent with what we observed in the other

industries in our study.

multibillion-dollar industries jump out: mutual funds,cellular telephones, biotechnology, discount retailing,express package delivery, snowboards, coffee bars, andhome videos, to name a few. Just three decades ago, noneof these industries existed in a meaningful way.

This time, put the clock forward 20 years. Ask your-self: How many industries that are unknown today willexist tben? If history is any predictor of the future, theanswer is many. Companies have a huge capacity to cre-ate new industries and re-create existing ones, a fact thatis reflected in the deep changes that have been necessaryin the way industries are classified. The half-century-oldStandard Industrial Classification (SIC) system was re-placed in 1997 by the North American Industry Classifi-cation System (NAICS). The new system expanded theten SIC industry sectors into 20 to refiect the emergingrealities of new industry territories-blue oceans. The ser-vices sector under the old system, for example, is nowseven sectors ranging from information to health care andsocial assistance. Given that these classification systemsare designed for standardization and continuity, such a re-placement shows how significant a source of economicgrowth the creation of blue oceans has been.

Looking forward, it seems clear to us that blue oceanswill remain the engine of growth. Prospects in mostestablished market spaces – red oceans – are shrinkingsteadily. Technological advances have substantially im-proved industrial productivity, permitting suppliers toproduce an unprecedented array of products and services.And as trade barriers between nations and regions fall andinformation on products and prices becomes instantly andglobally available, niche markets and monopoly havensare continuing to disappear. At the same time, there is lit-tle evidence of any increase in demand, at least in the de-veloped markets, where recent United Nations statisticseven point to declining populations. The result is that inmore and more industries, supply is overtaking demand.

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ifiooEo

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Key blue ocean creations

Was the blue oceancreated by a newentrant or anincumbent?

Was it driven bytechnology pioneeringor value pioneering?

At the time of the blueocean creation, wasthe industry attractiveor unattractive?

Ford Model TUnveiled in 1908,theModetT was the first mass-producedcar, priced so that many Americans could afford it.

GM's "car for every purse and purpose"GM created a blue ocean in 1924 by injecting fun andfashion into the car.

Japanese fuel-efficient autosJapanese automakers created a blue ocean in the mid-1970swith small, reliable lines of cars.

Chrysler minivanWith its 1984 minivan, Chrysler created a new class of auto-

mobile that was as easy to use as a car but had the passengerspace of a van.

CTR's tabulating machineIn 1914, CTR created the business machine industry by

simplifying, modularizing,and leasing tabulating machines.CTR later changed its name to IBM.

IBM 650 electronic computer and System/360In 1952, IBM created the business computer industry by simpli-fying and reducing the power and price of existing technology.And it exploded the blue ocean created by the 650 when in1964 it unveiled the System/360, the first modularized com-puter system.

Apple personal computerAlthough it was not the first home computer, the all-in-one,

simple-to-use Apple II was a blue ocean creation when itappeared in 1978.

Compaq PC serversCompag created a blue ocean in 1992 with its ProSignia

server, which gave buyers twice the file and print capabilityof the minicomputer at one-third the price.

Dell built-to-order computersIn the mid-1990s, Deli created a blue ocean in a highlycompetitive industry by creating a new purchase and deliveryexperience for buyers.

NickelodeonThe first Nickelodeon opened its doors in 1905, showing short

films around-the-clock to working-class audiences for five cents.

Palace theatersCreated by Roxy Rothapfel in 1914, these theaters providedan operalike environment for cinema viewing at an affordableprice.

AMC multiplexIn the 1960s, the number of multiplexes in America's subur-ban shopping malls mushroomed.The multiplex gave viewersgreater choice while reducing owners'costs.

AMC megaplexMegaplexesjntroducedin 1995,offered every current block-buster and provided spectacular viewing experiences in

theater complexes as big as stadiums, at a lower cost totheater owners.

New entrant

Incumbent

New entrant

Incumbent

New entrant

Incumbent

Value pioneering*(mostly existing technologies)

Value pioneering(some new technologies)

Value pioneering

(some new technologies)

Value pioneering

(mostly existing technologies)

Value pioneering[some new technologies)

Value pioneering(650: mostly existing technologies)

Value and technology pioneering(System/360: new and existingtechnologies)

Value pioneering(mostly existing technologies)

Unattractive

Attractive

Unattractive

Nonexistent

Unattraaive

Nonexistent

Unattractive

Nonexistent

Attractive

Unattractive

*Driven by value pioneering does not mean that technologies were not involved. Rather, it means thatthe defining technologies used had largely been in existence, whether n that industry or elsewhere.

OCTOBER 2004 79

Blue Ocean Strategy

This situation has inevitably hastened the commoditi-zation of products and services, stoked price wars, andshrunk profit margins. According to recent studies, majorAmerican brands in a variety of product and service cate-gories have become more and more alike. And as brandsbecome more similar, people increasingly base purchasechoices on price. Peopie no ionger insist, as in the past,that their laundry detergent be Tide. Nor do they neces-sarily stick to Colgate when there is a special promotionfor Crest, and vice versa. In overcrowded industries, dif-ferentiating brands becomes harder both in economicupturns and in downturns.

The Paradox of StrategyUnfortunately, most companies seem becalmed in theirred oceans. In a study of business launches in 108 compa-nies, we found that 86% of those new ventures were lineextensions-incremental improvements to existing indus-try offerings-and a mere 14% were aimed at creating newmarkets or industries. While line extensions did accountfor 62% of the total revenues, they delivered only 39% ofthe total profits. By contrast, the 14% invested in creatingnew markets and industries delivered 38% of total reve-nues and a startling 61% of total profits.

So why the dramatic imbalance in favor of red oceans?Part of the explanation is that corporate strategy is heav-ily influenced by its roots in military strategy. The verylanguage of strategy is deeply imbued with military ref-erences – chief executive "officers" in "headquarters,""troops" on the "front lines." Described this way, strategyis all about red ocean competition. It is about confrontingan opponent and driving him off a battlefield of limitedterritory. Blue ocean strategy, by contrast, is about doingbusiness where there is no competitor. It is about creatingnew land, not dividing up existing land. Focusing on thered ocean therefore means accepting the key constrain-ing factors of war-limited terrain and the need to beat

an enemy to succeed. And it means denying the distinc-tive strength of the business world-the capacity to createnew market space that is uncontested.

The tendency of corporate strategy to focus on win-ning against rivals was exacerbated by the meteoric riseof Japanese companies in the 1970s and 1980s. For thefirst time in corporate history, customers were desertingWestern companies in droves. As competition mountedin the global marketplace, a slew of red ocean strategiesemerged, all arguing that competition was at the core ofcorporate success and failure. Today, one hardly talksabout strategy without using the language of competi-tion. The term that best symbolizes this is "competitiveadvantage." In the competitive-advantage worldview,companies are often driven to outperform rivals andcapture greater shares of existing market space.

Of course competition matters. But by focusing oncompetition, scholars, companies, and consultants haveignored two very important – and, we would argue, farmore lucrative – aspects of strategy: One is to find anddevelop markets where there is little or no competi-tion-blue oceans-and the other is to exploit and protectblue oceans. These challenges are very different fromthose to which strategists have devoted most of theirattention.

Toward Blue Ocean Strategywhat kind of strategic logic is needed to guide the cre-ation of blue oceans? To answer that question, we lookedback over lOO years of data on blue ocean creation to seewhat patterns could be discerned. Some of our data arepresented in the exhibit "A Snapshot of Blue OceanCreation." It shows an overview of key blue ocean cre-ations in three industries that closely touch people'slives: autos – how people get to work; computers – whatpeople use at work; and movie theaters – where peoplego after work for enjoyment. We found that:

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Blue Ocean Strategy

Blue oceans are not about technology innovation.Leading-edge technology is sometimes involved in thecreation of blue oceans, but it is not a defining feature ofthem. This is often true even in industries that are tech-nology intensive. As the exhibit reveals, across all threerepresentative industries, blue oceans were seldom theresult of technological innovation per se; the underlyingtechnology was often already in existence. Even Ford'srevolutionary assembly line can be traced to the meat-packing industry in America. Like those within the autoindustry, the blue oceans within the computer industrydid not come about through technology innovationsalone but by linking technology to what buy-ers valued. As with the IBM 650 and the Com-paq PC server, this often involved simplifyingthe technology.

Incumbents often create blue o c e a n s -and usually within their core businesses.GM, the Japanese automakers, and Chryslerwere established players when they createdblue oceans in the auto industry. So were CTRand its later incarnation, IBM, and Compaqin the computer industry. And in the cinemaindustry, the same can be said of palace the-aters and AMC. Of the companies listed here,only Ford, Apple, Dell, and Nickelodeon werenew entrants in their industries; the first threewere start-ups, and the fourth was an estab-lished player entering an industry that wasnew to it. This suggests that incumbents arenot at a disadvantage in creating new marketspaces. Moreover, the blue oceans made by in-cumbents were usually within their core busi-nesses. In fact, as the exhibit shows, most blue oceans arecreated from within, not beyond, red oceans of existingindustries. This challenges the view that new markets arein distant waters. Blue oceans are right next to you inevery industry.

Company and Industry are the wrong units of analy-sis. The traditional units of strategic analysis – companyand industry – have little explanatory power when itcomes to analyzing how and why blue oceans are created.There is no consistently excellent company; the samecompany can be brilliant at one time and wrongheadedat another. Every company rises and falls over time. Like-wise, there is no perpetually excellent industry; relativeattractiveness is driven largely by the creation of blueoceans from within them.

The most appropriate unit of analysis for explainingthe creation of blue oceans is the strategic move-the setof managerial actions and decisions involved in makinga major market-creating business offering. Compaq, forexample, is considered by many people to be "unsuccess-ful" because it was acquired by Hewlett-Packard in 2001and ceased to be a company. But the firm's ultimate fate

does not invalidate the smart strategic move Compaqmade that led to the creation of the multibillion-dollarmarket in PC servers, a move that was a key cause of thecompany's powerful comeback in the 1990s.

Creating blue oceans builds brands. So powerful isblue ocean strategy that a blue ocean strategic move cancreate brand equity that lasts for decades. Almost all ofthe companies listed in the exhibit are remembered inno small part for the blue oceans they created long ago.Very few people alive today were around when the firstModel T rolled off Henry Ford's assembly line in 1908, butthe company's brand still benefits from that blue ocean

Red Ocean Versus Blue Ocean StrategyThe imperatives for red ocean and blue oceanstrategies are starkly different.

Red ocean strategy

Compete in existing market space.

Beat the competition.

Exploit existing demand.

Make the value/cost trade-off.

Align the whole system of a com-pany's activities with its strategic

choice of differentiation or low cost.

Blue ocean strategy

Create uncontested market space.

Make the competition irrelevant.

Create and capture new demand.

Break the value/cost trade-off.

Align the whole system of a company'sactivities in pursuit of differentiationand low cost.

move. IBM, too, is often regarded as an "American insti-tution" largely for the blue oceans it created in comput-ing; the 360 series was its equivalent of the Model T.

Our findings are encouraging for executives at the large,established corporations that are traditionally seen as thevictims of new market space creation. For what they revealis that large R&D budgets are not the key to creating newmarket space. The key is making the right strategic moves.What's more, companies that understand what drives agood strategic move will be well placed to create multipleblue oceans over time, thereby continuing to deliver highgrowth and profits over a sustained period. The creationof blue oceans, in other words, is a product of strategy andas such is very much a product of managerial action.

The Defining CharacteristicsOur research shows several common characteristicsacross strategic moves that create blue oceans. We foundthat the creators of blue oceans, in sharp contrast to com-panies playing by traditional mles, never use the compe-tition as a benchmark. Instead they make it irrelevant by

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Blue Ocean Straten

In blue oceans, demand is created rather thanfought over.There is ample opportunity forgrowth 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 OceanStrategy" compares the chief characteristics of thesetwo 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 andcost. According to this thesis, companies can either cre-ate greater value for customers at a higher cost or createreasonable value at a lower cost. In other words, strategyis essentially a choice between differentiation and lowcost. 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 duSoleil. At the time of Cirque's debut, circuses focused onbenchmarking one another and maximizing their sharesof shrinking demand by tweaking traditional circus acts.This included trying to secure more and better-knownclowns and lion tamers, efforts that raised circuses' coststructure without substantially altering the circus expe-rience. The result was rising costs without rising revenuesand a downward spiral in overall circus demand. EnterCirque. Instead of following the conventional logic ofoutpacing the competition by offering a better solutionto the given problem-creating a circus with even greaterfun and thrills-it redefined the problem itself by offeringpeople the fun and thrill of the circus and the intellectualsophistication and artistic richness of the theater.

In designing performances that landed both thesepunches. Cirque had to reevaluate the components of thetraditional circus offering. What the company found wasthat many of the elements considered essential to thefun and thrill of the circus were unnecessary and in manycases costly. For instance, most circuses offer animal acts.These are a heavy economic burden, because circuseshave to shell out not only for the animals but also for theirtraining, medical care, housing, insurance, and transpor-tation. Yet Cirque found that the appetite for animalshows was rapidly diminishing because of rising publicconcern about the treatment of circus animals and theethics of exhibiting them.

Similarly, although traditional circuses promoted theirperformers as stars, Cirque realized that the public no

longer thought of circus artists as stars, at least not in themovie star sense. Cirque did away with traditional three-ring shows, too. Not only did these create confusionamong spectators forced to switch their attention fromone ring to another, they also increased the number ofperformers needed, with obvious cost implications. Andwhile aisle concession sales appeared to be a good wayto generate revenue, the high prices discouraged parentsfrom making purchases and made them feel they wereheing taken for a ride.

Cirque found that the lasting allure of the traditionalcircus came down to just three factors: the clowns, thetent, and the classic acrobatic acts. So Cirque kept theclowns, while shifting their humor away from slapstickto a more enchanting, sophisticated style. It glamorizedthe tent, which many circuses had abandoned in favorof rented venues. Realizing that the tent, more thananything else, captured the magic of the circus. Cirquedesigned this classic symbol with a glorious externalfinish and a high level of audience comfort. Gone werethe sawdust and hard benches. Acrobats and otherthrilling performers were retained, but Cirque reducedtheir roles and made their acts more elegant by addingartistic fiair.

Even as Cirque stripped away some of the traditionalcircus offerings, it injected new elements drawn from theworld of theater. For instance, unlike traditional circusesfeaturing a series of unrelated acts, each Cirque creationresembles a theater performance in that it has a themeand story line. Although the themes are intentionallyvague, they bring harmony and an intellectual elementto 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 withBroadway productions, too, each Cirque show has anoriginal musical score, which drives the performance,lighting, and timing of the acts, rather than the otherway around. The productions feature abstract and spiri-tual dance, an idea derived from theater and ballet. Byintroducing these factors, Cirque has created highly so-phisticated entertainments. And by staging multiple pro-ductions. Cirque gives people reason to come to the circusmore often, thereby increasing revenues.

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Blue Ocean Strategy

Cirque offers the best of both circus and theater. Andby eliminating many of the most expensive elements ofthe circus, it has been able to dramatically reduce its coststructure, achieving both differentiation and low cost.(For a depiction of the economics underpinning blueocean strategy, see the exhibit "The Simultaneous Pur-suit of Differentiation and Low Cost")

By driving down costs while simultaneously driving upvalue for buyers, a company can achieve a leap in valuefor both itself and its customers. Since buyer value comesfrom the utility and price a company offers, and a com-pany generates value for itself through cost structureand price, blue ocean strategy is achieved only when thewhole system of a company's utility, price, and cost activ-ities is properly aligned. It is this whole-system approachthat makes the creation of blue oceans a sustainable strat-egy. Blue ocean strategy integrates the range of a tirm'sfunctional and operational activities.

A rejection ofthe trade-off between low cost and dif-ferentiation implies a fundamental change in strategicm 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 forcedto compete within them is based on an intellectual world-view that academics call the structuralist view, or environ-mental determinism. According to this view, companiesand managers are largely at the mercy of economic forcesgreater 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 actionsand beliefs of industry players. We call this the recon-structionist view.

The founders of Cirque du Soleil clearly did not feelconstrained 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? Ifit 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 ofthem. From within the red oceans of theater and circus,Cirque has created a blue ocean of uncontested marketspace that has, as yet, no name.

Barriers to ImitationCompanies that create blue oceans usually reap the ben-efits without credible challenges for ten to 15 years, aswas the case with Cirque du Soleil, Home Depot, FederalExpress, 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 businessmodel is easier to imagine than to do. Because blue oceancreators 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 inpurchasing that Wal-Mart enjoys, for example, have sig-nificantly discouraged other companies from imitating itsbusiness 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 buyersof wares, giving users few incentives to go elsewhere.

When imitation requires companies to make changesto their whole system of activities, organizational politicsmay impede a would-be competitor's ability to switch tothe 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 fiexibilityand cost of driving would have faced major revisions in

The Simultaneous Pursuit ofDifferentiation and Low CostA 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 flexibilityto make such extensive organizational and operatingchanges overnight. Imitating a whole-system approach isnot an easy feat.

The cognitive barriers can be just as effective. Whena company offers a leap in value, it rapidly earns brandbuzz and a loyal following in the marketplace. Experienceshows 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 tooccupy the center of the blue ocean that Intuit createdwith its financial software product Quicken. Despite allof its efforts and all of its investment, Microsoft has notbeen able to unseat Intuit as the industry leader.

In other situations, attempts to imitate a blue oceancreator conflict with the imitator's existing brand image.The Body Shop, for example, shuns top models and makesno 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 signaleda complete invalidation of their current images, whichare based on promises of eternal youth and beauty.

A Consistent Patternwhile our conceptual articulation ofthe pattern may benew, blue ocean strategy has always existed, whether ornot companies have been conscious ofthe fact. Just con-sider the striking parallels between the Cirque du Soleiltheater-circus experience and Ford's creation of theModel T.

At the end ofthe nineteenth century, the automobileindustry was small and unattractive. More than 500 auto-makers in America competed in turning out handmadeluxury cars that cost around $1,500 and were enormouslyunpopular with all but the very rich. Anticar activists toreup 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 hesaid in 1906 that "nothing has spread socialistic feelingmore than the automobile." He called it "a picture ofthearrogance of wealth."

Instead of trying to beat the competition and steala share of existing demand from other automakers.Ford reconstructed the industry boundaries of cars andhorse-drawn carriages to create a blue ocean. At thetime, horse-drawn carriages were the primary means oflocal transportation across America. The carriage hadtwo distinct advantages over cars. Horses could easily ne-gotiate the bumps and mud that stymied cars-especiallyin rain and snow-on the nation's ubiquitous dirt roads.And horses and carriages were much easier to maintainthan the luxurious autos of the time, which frequentlybroke 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 hecould 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, theFord 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, wasfor everyday use. The Model T came in just one color,black, and there were few optional extras. It was reliableand durable, designed to travel effortlessly over dirt roadsin 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, lookingat horse-drawn carriages ($400), not other autos. In igo8,the first Model T cost $850; in 1909, the price droppedto $609, and by 1924 it was down to $290. In this way.Ford converted buyers of horse-drawn carriages into carbuyers – just as Cirque turned theatergoers into circus-goers. Sales ofthe Model T boomed. Ford's market sharesurged 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 structurein the industry, much as Cirque did later. By keepingthe cars highly standardized with limited options andinterchangeable parts. Ford was able to scrap the prevail-ing manufacturing system in which cars were constructedby 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 craftsmenwith unskilled laborers, each of whom worked quicklyand efficiently on one small task. This allowed Ford tomake a car in just four days – 21 days was the industrynorm-creating huge cost savings.

Blue and red oceans have always coexisted and alwayswill. Practical reality, therefore, demands that companiesunderstand the strategic logic of both types of oceans.At present, competing in red oceans dominates the fieldof strategy in theory and in practice, even as businesses'need to create hlue oceans intensifies. It is time to eventhe scales in the field of strategy with a better balance ofefforts across both oceans. For although blue ocean strate-gists have always existed, for the most part their strategieshave been largely unconscious. But once corporations re-alize that the strategies for creating and capturing blueoceans have a different underlying logic from red oceanstrategies, they will be able to create many more blueoceans in the future. ^

Reprint R0410DTo order, see page 159.

84 HARVARD BUSINESS REVIEW