Notes

Value Innovation: The Cornerstone
of Blue Ocean Strategy
What consistently separated winners from losers in creating blue
oceans was their approach to strategy. The companies caught in
the red ocean followed a conventional approach, racing to beat the
competition by building a defensible position within the existing
industry order. The creators of blue oceans, surprisingly, didn’t
use the competition as their benchmark. Instead, they followed a
different strategic logic that we call value innovation. Value innovation
is the cornerstone of blue ocean strategy. We call it value innovation
because instead of focusing on beating the competition,
you focus on making the competition irrelevant by creating a leap
in value for buyers and your company, thereby opening up new and
uncontested market space.
Value innovation places equal emphasis on value and innovation.
Value without innovation tends to focus on value creation on
an incremental scale, something that improves value but is not suf-
ficient to make you stand out in the marketplace. Innovation without
value tends to be technology-driven, market pioneering, or
futuristic, often shooting beyond what buyers are ready to accept
and pay for. In this sense, it is important to distinguish between
value innovation as opposed to technology innovation and market
pioneering. Our study shows that what separates winners from losers
in creating blue oceans is neither bleeding-edge technology nor
“timing for market entry.” Sometimes these exist; more often, however,
they do not. Value innovation occurs only when companies
align innovation with utility, price, and cost positions. If they fail
to anchor innovation with value in this way, technology innovators
and market pioneers often lay the eggs that other companies hatch.
Value innovation is a new way of thinking about and executing
strategy that results in the creation of a blue ocean and a break
from the competition. Importantly, value innovation defies one of
the most commonly accepted dogmas of competition-based strategy:
the value-cost trade-off. It is conventionally believed that
companies can either create greater value to customers at a higher
cost or create reasonable value at a lower cost. Here strategy is
seen as making a choice between differentiation and low cost. In
contrast, those that seek to create blue oceans pursue differentiation
and low cost simultaneously.
Let’s return to the example of Cirque du Soleil. Pursuing differentiation
and low cost simultaneously lies at the heart of the entertainment
experience it created. At the time of its debut, other
circuses focused on benchmarking one another and maximizing
their share of already shrinking demand by tweaking traditional
circus acts. This included trying to secure more famous clowns and
lion tamers, a strategy that raised circuses’ cost structure without
substantially altering the circus experience. The result was rising
costs without rising revenues, and a downward spiral of overall circus
demand.
These efforts were made irrelevant when Cirque du Soleil appeared.
Neither an ordinary circus nor a classic theater production,
Cirque du Soleil paid no heed to what the competition did. Instead
of following the conventional logic of outpacing the competition
by offering a better solution to the given problem—creating a circus
with even greater fun and thrills—it sought to offer people the
fun and thrill of the circus and the intellectual sophistication and
artistic richness of the theater at the same time; hence, it redefined
the problem itself. By breaking the market boundaries of theater
and circus, Cirque du Soleil gained a new understanding not only
of circus customers but also of circus noncustomers: adult theater
customers.
This led to a whole new circus concept that broke the value-cost
trade-off and created a blue ocean of new market space. Consider
the differences. Whereas other circuses focused on offering animal
shows, hiring star performers, presenting multiple show arenas in
the form of three rings, and pushing aisle concession sales, Cirque
du Soleil did away with all these factors. These factors had long
been taken for granted in the traditional circus industry, which
never questioned their ongoing relevance. However, there was increasing
public discomfort with the use of animals. Moreover, animal
acts were one of the most expensive elements, including not
only the cost of the animals but also their training, medical care,
housing, insurance, and transportation.
Similarly, while the circus industry focused on featuring stars, in
the mind of the public the so-called stars of the circus were trivial
next to movie stars. Again, they were a high-cost component carrying
little sway with spectators. Gone, too, are three-ring venues.
Not only did this arrangement create angst among spectators as
they rapidly switched their gaze from one ring to the other, but it
also increased the number of performers needed, with obvious cost
implications. And although aisle concession sales appeared to be a
good way to generate revenue, in practice the high prices discouraged
audiences from making purchases and made them feel they
were being taken for a ride.
The lasting allure of the traditional circus came down to only
three key factors: the tent, the clowns, and the classic acrobatic
acts such as the wheelman and short stunts. So Cirque du Soleil
kept the clowns but shifted their humor from slapstick to a more enchanting,
sophisticated style. It glamorized the tent, an element
that, ironically, many circuses had begun to forfeit in favor of
rented venues. Seeing that this unique venue symbolically captured
the magic of the circus, Cirque du Soleil designed the classic
symbol of the circus with a glorious external finish and a higher
level of comfort, making its tents reminiscent of the grand epic circuses.
Gone were the sawdust and hard benches. Acrobats and
other thrilling acts are retained, but their roles were reduced and
made more elegant by the addition of artistic flair and intellectual
wonder to the acts.
By looking across the market boundary of theater, Cirque du
Soleil also offered new noncircus factors, such as a story line and,
with it, intellectual richness, artistic music and dance, and multiple
productions. These factors, entirely new creations for the circus industry,
are drawn from the alternative live entertainment industry
of theater.
Unlike traditional circus shows having a series of unrelated
acts, for example, each Cirque du Soleil creation has a theme and
story line, somewhat resembling a theater performance. Although
the theme is vague (and intentionally so), it brings harmony and an
intellectual element to the show—without limiting the potential
for acts. Le Cirque also borrows ideas from Broadway shows. For
example, it features multiple productions rather than the traditional
“one for all” shows. As with Broadway shows, too, each Cirque du
Soleil show has an original score and assorted music, which drives
the visual performance, lighting, and timing of the acts rather than
the other way around. The shows feature abstract and spiritual
dance, an idea derived from theater and ballet. By introducing
these new factors into its offering, Cirque du Soleil has created
more sophisticated shows.
Moreover, by injecting the concept of multiple productions and
by giving people a reason to come to the circus more frequently,
Cirque du Soleil has dramatically increased demand.
In short, Cirque du Soleil offers the best of both circus and theater,
and it has eliminated or reduced everything else. By offering unprecedented
utility, Cirque du Soleil has created a blue ocean and
has invented a new form of live entertainment, one that is markedly
different from both traditional circus and theater. At the same time,
by eliminating many of the most costly elements of the circus, it has
dramatically reduced its cost structure, achieving both differentiation
and low cost. Le Cirque strategically priced its tickets against
those of the theater, lifting the price point of the circus industry by
several multiples while still pricing its productions to capture the
mass of adult customers, who were used to theater prices.
Figure 1-2 depicts the differentiation–low cost dynamics underpinning
value innovation. As shown in figure 1-2, the creation of blue oceans is about driving
costs down while simultaneously driving value up for buyers.
This is how a leap in value for both the company and its buyers is
achieved. Because buyer value comes from the utility and price
that the company offers to buyers and because the value to the company
is generated from price and its cost structure, value innovation
is achieved only when the whole system of the company’s utility,
price, and cost activities is properly aligned. It is this whole-system
approach that makes the creation of blue oceans a sustainable
strategy. Blue ocean strategy integrates the range of a firm’s functional
and operational activities.
In contrast, innovations such as production innovations can be
achieved at the subsystem level without impacting the company’s
overall strategy. An innovation in the production process, for example,
may lower a company’s cost structure to reinforce its existing
cost leadership strategy without changing the utility proposition
of its offering. Although innovations of this sort may help to secure
and even lift a company’s position in the existing market space,
such a subsystem approach will rarely create a blue ocean of new
market space.
In this sense, value innovation is more than innovation. It is
about strategy that embraces the entire system of a company’s activities.
Value innovation requires companies to orient the whole
system toward achieving a leap in value for both buyers and themselves.
Absent such an integral approach, innovation will remain
divided from the core of strategy. Figure 1-3 outlines the key
defining features of red and blue ocean strategies.
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. (For more discussions
on this, see appendix B, “Value Innovation: A Reconstructionist
View of Strategy.”)
Cirque du Soleil broke the best practice rule of the circus industry,
achieving both differentiation and low cost by reconstructing
elements across existing industry boundaries. Is Cirque du Soleil,
then, really a circus, with all that it eliminated, reduced, raised,
and created? Or is it theater? And if it is theater, then what genre—
a Broadway show, an opera, a ballet? It is not clear. Cirque du Soleil
reconstructed elements across these alternatives, and, in the end, it
is simultaneously a little of all of them and none of any of them in
their entirety. It created a blue ocean of new, uncontested market
space that as of yet has no agreed-on industry name.