The high growth and profits an organization can generate by creating new demand in an uncontested market space, or a “Blue Ocean”, than by competing head-to-head with other suppliers for known customers in an existing industry. 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. 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. Quantifying the impact of creating blue oceans on a company’s growth in both revenues and profits in a study of the business launches of 108 companies is given below.
Competition-based red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what the academics call the structuralist view, or environmental determinism. In contrast, value innovation is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view. In the red ocean, differentiation costs because firms compete with the same best-practice rule. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing valuecost trade-off and thereby creating a blue ocean.