For starters, it’s good to be back on the blogging scene. I spent most of May traveling to Asia (Hong Kong, China, and Bangkok) getting an whirlwind overview on their economies, doing business in these booming markets, and what we can expect over the next few years. Needless to say it was a great education…
Now… back to the topic at hand. To clarify when I say “Blue is the new Black”, I’m not referring to fashion – in fact, I’m the last person that should be writing about that topic! I’m talking about business… in accounting slang, it’s understood that when your business is operating in the “black”, the company is actually operating above the bottom line – in other words, doing well. Conversely, when the company is operating in the “red”, it means the company is on fire and may need to be saved (or shut down – depending on which is more prudent).
So how does a company operate in the black? That’s where “blue” comes in – Blue Ocean Strategy that is. When starting a new venture, one of the first things I think about is the competitive climate and whether I’m entering a “blue ocean” or “red ocean”. The concept, based upon the book written by W. Chan Kim and Renée Mauborgne, speaks to companies developing a strategy to break free from the red ocean of bloody competition by creating uncontested market space (new, untouched, blue ocean) that makes competition irrelevant.
Below is an excerpt from the book that illustrates the concept. One thing to note – while there are many concepts in business and many, many business books, retaining all of this information can be very difficult. That said, I think the key points to take away are this: First, just know that the concept exists and be able to draw upon it if, and when, necessary. Second, when launching a new venture, ask yourself, “Am I about to embark on a blue ocean or red ocean?”
Have fun in the water… but be safe!
A onetime accordion player, stilt walker, and fire-eater, Guy Laliberté is now CEO of one of Canada’s largest cultural exports, Cirque du Soleil. Founded in 1984 by a group of street performers, Cirque has staged dozens of productions seen by some 40 million people in 90 cities around the world. In 20 years, Cirque has achieved revenues that Ringling Bros. and Barnum & Bailey—the world’s leading circus—took more 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, preferred PlayStations to circus acts. There was also rising sentiment, fueled by animal rights groups, against the use of animals, traditionally an integral part of the circus. On the supply side, the star performers that Ringling and the other circuses relied on to draw in the crowds could often name their own terms. As a result, the industry was hit by steadily decreasing audiences and increasing costs. What’s more, any new entrant to this business would be competing against a formidable incumbent that for most of the last century had set the industry standard.
How did Cirque profitably increase revenues by a factor of 22 over the last ten years in such an unattractive environment? The tagline for one of the first Cirque productions is revealing: “We reinvent the circus.” Cirque did not make its money by competing within the confines of the existing industry or by stealing customers from Ringling and the others. Instead it created uncontested market space that made the competition irrelevant. It pulled in a whole new group of customers who were traditionally noncustomers of the industry—adults and corporate clients who had turned to theater, opera, or ballet and were, therefore, prepared to pay several times more than the price of a conventional circus ticket for an unprecedented entertainment experience.
To understand the nature of Cirque’s achievement, you have to realize that the business universe consists of two distinct kinds of space, which we think of as red and blue oceans. Red oceans represent all the industries in existence today—the known market space. In red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood. Here, companies try to outperform their rivals in order to grab a greater share of existing demand. As the space gets more and more crowded, prospects for profits and growth are reduced. Products turn into commodities, and increasing competition turns the water bloody.
Blue oceans denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. There are two ways to create blue oceans. In a few cases, companies can give rise to completely new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the boundaries of an existing industry. As will become evident later, this is what Cirque did. In breaking through the boundary traditionally separating circus and theater, it made a new and profitable blue ocean from within the red ocean of the circus industry.
Cirque is just one of more than 150 blue ocean creations that we have studied in over 30 industries, using data stretching back more than 100 years. We analyzed companies that created those blue oceans and their less successful competitors, which were caught in red oceans. In studying these data, we have observed a consistent pattern of strategic thinking behind the creation of new markets and industries, what we call blue ocean strategy. The logic behind blue ocean strategy parts with traditional models focused on competing in existing market space. Indeed, it can be argued that 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 and Red Oceans
Although the term may be new, blue oceans have always been with us. Look back 100 years and ask yourself which industries known today were then unknown. The answer: Industries as basic as automobiles, music recording, aviation, petrochemicals, pharmaceuticals, and management consulting were unheard-of or had just begun to emerge. Now turn the clock back only 30 years and ask yourself the same question. Again, a plethora of multibillion-dollar industries jump out: mutual funds, cellular telephones, biotechnology, discount retailing, express package delivery, snowboards, coffee bars, and home videos, to name a few. Just three decades ago, none of these industries existed in a meaningful way.