Blue Ocean Strategy by W Chan Kim Renee

Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne Chapter 6: Get the Strategic Sequence Right Team 2 Presenters Quintin Jordan Sarah Doyle Raquel Vasquez Nancy Nguyen Chris Flockerzy Lydia Herschap Monica Del Bosque Gabriel Gamez

Sequence of Blue Ocean Strategy

Testing for Exceptional Utility q. Important questions to ask: q. Does the product/idea have too many tasks? q. Do people know how to use it? q. Do customers lack a compelling reason to use the product/idea?

Technology with Limits q. Do not revel in the “bells and whistles” of new technology q. Bleeding edge technology is NOT bleeding edge utility for buyers q. Most companies fall into this trap (Phillips/Motorola) q. Technology awards usually do NOT make buyers lives dramatically simpler, more convenient, more productive, less risky, or more fun/fashionable

Buyer Utility Map

Testing Exceptional Utility q. GOING ACROSS – In what stages are the biggest blocks to buyer utility q. Remove the greatest blocks to utility q. OBJECTIVE – (1)To convert noncustomers into customers q. OBJECTIVE – (2)You want your offering to fall on spaces that are different from other players to create a blue ocean

Buyer Utility Map

Strategic Pricing q. Buyers want to buy/Buyers can buy q. Sell to mass markets from the start Ø MKT (3352): § Market Penetration/Market Skimming q. Why mass market pricing? Ø “Volume generates higher returns than it used to” Ø Network externalities: “sell millions at once, or nothing at all” § Popularity of a product helps determine its value § Coca-Cola: • 1887 -Free Coca-Cola Coupons given out

Strategic Pricing q Rival goods: the use of a good by one firm precludes its use by another q Nonrival goods: the use of a good by one firm does not limit use by another firm Ø Ideas: Coca-Cola changing the shape of their 2 liter bottle. q Excludability: goods are excludable if the company can prevent others from using them Ø Ex: “Limited access or patent protection” Ø Coca-Cola: Syrup trade secret q Coca Cola should understand that Blue Ocean strategies can be developed with out “new technological discoveries” Ø Strategies can be easily copied by other companies § Coca Cola’s new bottle design

Strategic Pricing q. Attract buyers and retain them ØRely on word of mouth to help build brand image § Brand Image (MKT 4354) q. Price corridor of the mass Ø“The right price for an irresistible offer”

The Price Corridor of the Mass q. The Price Corridor of the Mass is a tool used to help find the right offer price of the new product or service, so that it attracts and retains buyers in large numbers. q. It is a graphical display of the price and volume of alternatives in order to capture the most target buyers. q. It is a two-step process that attracts the target mass of buyers from the start so they both want and have the ability to pay for it. ØStep 1: Identify the price corridor of the masses ØStep 2: Specify a price level within the price corridor

Step 1: Identify the Price Corridor of the Mass q Uses match-pricing within and between industries and ideas. q Attempts to understand the price sensitivities of customers. q When choosing a price that will initially target a large population, two techniques emerge to help look at products/services in other industries: Ø Different forms, but same function § Example: Coke vs. Water Ø Different forms, different functions, but same overall objective. q The goal is for managers to identify the full range of potential buyers by listing groups of alternative products and services from other industries and nonindustries, and price against them.

Step 2: Specify a Level Within the Price Corridor q Determines how high the firm can afford to set the price within the price corridor, without increasing competition from imitation products/services. q Two factors help set the price level: Ø The degree to which the product is legally protected by patents or copyrights. Ø The degree to which the company owns exclusive assets or core capabilities. q There are three ranges that make up the corridor: Upper-level pricing, Mid-level pricing, and Lower-level pricing. q Higher protection allows a company to strategically set the price higher to attract the mass of target buyers. No protection from imitation means the company must set a relatively low price, because it is easier to compete.

Strategic Pricing to Target Costing q“The Price Corridor of the Mass signals the strategic pricing zone central to pulling in an ocean of new demand, but also signals how you might need to adjust your initial price estimates to achieve this. ”

From Strategic Pricing to Target Costing q. Address the profit side of the business model q. To maximize potential profit of a Blue Ocean Strategy idea start with strategic pricing q. Price- desired profit margin = target cost q. Price – cost NOT cost + price q“If companies give into the route of bumping up strategic price or cutting back on utility, they are not on the path to lucrative blue water. ”

1 st Lever: Streamlining Operations q. Introducing cost innovations from manufacturing to distribution q. Switching to less expensive raw materials ØHigh cost low level added activities in your value chain should be eliminated q. Shorten the number of parts or steps used in production q. Simplify design

Coca- Cola q. Deal to acquire Coca- Coal Enterprises Inc. q. Represents 75% of coke sold in the U. S. and all of Canada q$12 billion dollar deal marks major change in a strategy q. Strengthen the beverage industry in North America by streamlining costs, potentially lowering prices and providing more choices for consumers

nd 2 Lever: Partnering q Provides a way for companies to secure needed capabilities fast and effectively while dropping the cost structure. It also allows for leverage of other companies expertise and economies of scale. q How this works: Ø Closes the gaps in capabilities through small acquisitions when doing so is faster and cheaper. Ø Provides your company access to needed expertise that have been mastered by other organizations. q For Example: Establishing partnerships with several manufacturers to find the cheapest materials and production activities. q Why partnerships are overlooked: Ø Companies make the mistake of trying to carry out all activities of production and distribution on their own, because they identify the product as their platform for other products or services. Ø They are oblivious to other options.

rd 3 Lever: Changing the Pricing Model q Provides a way so your company does not have to compromise on a strategic price, but instead allows you to hit the target cost using a different approach by developing a new price model, also known as pricing innovation. q How this works: Ø Creates a different model for distribution of your product or service that increases the benefits for you organization as well as the customer. As a result it revives the need and want for your product. § Renting a movie instead of buying (Netflix) q For Example: In the 1890’s owner Asa G. Candler increased Cokes market by changing their method of distribution from solely offering fountain sales to also offering bottled drinks. As a result, Coke sold their product to more distributors, and were able to reach more of their customers.

The Profit Model of Blue Ocean Strategy The Strategic Price The Target Profit The Target Cost Streamlining & Cost Innovation Partnering Pricing Innovation Companies begin with strategic price, from which it deducts its target profit margin to arrive at its target cost. To hit the cost target that supports that profit, companies have 2 key levers. Streamlining and cost innovation then partnering. When the target cost cannot be met despite all efforts to build a low-cost business model the company should turn to the 3 rd lever, pricing innovation to profitably meet the strategic price.

From Utility, Price, and Cost to Adoption “Before plowing forward and investing in the new idea, the company must first overcome such fears by educating the fearful. ” q. Employees ØCommunicate ØCollaboration q. Business Partners ØOpen discussions ØCooperation q. The General Public ØInform and Educate

The Blue Ocean Idea Index q. Provides a simple test of this system view q. Strategy based on the sequence of utility, price, cost, and adoption

Energy Brands: Vitamin Water q. Developed the “Enhanced Water” category q. Utility ØProvided a healthier alternative for on-the-go lifestyles q. Price ØEntered the market with a higher price than most water (different form/same function) q. Cost ØReducing costs with partnerships q. Adoption ØEmployees were all dedicated to getting attention ØGeneral public accepted the new products

Key Take Away Points q The Right Strategic Sequence: Ø Buyer Utility- to create a blue ocean the blocks to customers and noncustomers utility must be eliminated. Ø Price- determining a price that creates an ocean of new demand by targeting the masses and setting the price against alternatives and substitutes. Ø Cost- Uses the price-cost strategy to find the cost structure that is both profitable and hard for potential followers to match. Ø Adoption- to understand be able explain to stakeholders why the adoption of the idea is necessary for the future of the company. Ø Once a company has established and passed the blue ocean idea index, the formulating of the blue ocean strategy is complete and the firm can now begin to execute the strategy. Ø A business model built in the sequence of exceptional utility, strategic pricing, and target costing produces value innovation, Unlike the practice of conventional technology innovators, value innovation is based on a win-win game among buyers, companies, and society.