Blue Ocean Strategy Chapter 6 Getting the Strategic

Blue Ocean Strategy Chapter 6 Getting the Strategic Sequence Right Team 2 Shawn Buck Ashley Burnett Whitney Horton Kelly Riester Jennifer Shotts Mickea Smith Sam Snelling

Introduction �In this chapter we will discuss throwing out and validating blue ocean ideas to ensure their commercial viability �By understanding the concepts of the right strategic sequence, we can reduce business model risk.

Sequence of Blue Ocean Strategy Buyer Utility Is there exceptional buyer utility in your business idea? Ye s Price Is your price easily accessible to the mass of buyers? Ye s Cost Can you attain your cost target to profit at your strategic price? No- Rethink Ye s. Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? A Ye s Commercially Viable Blue Ocean Idea No- Rethink

Testing for Exceptional Utility �Companies fail to convey exceptional value because they are preoccupied by the novelty of their product. �Value innovation is not the same as technology innovation �EX: ◦ Sony’s mini-disc players. Converting music files from CD’s to mini-disc. Held more music and smaller but ultimately failed because of MP 3 players.

Buyer Utility Map purchase delivery use supplements maintenance disposal customer productivity simplicity convenience Risk Fun and Image Environmental friendilness

The six stages of the Buyer experience cycle �Purchase �Delivery �Use �Supplements �Maintenance �Disposal

The Six Utility Levers �The six levers are customer productivity, simplicity, convenience, risk, fun/image and environmental friendliness. �Utility levers according to the book are “the ways in which companies can unlock exceptional utility for buyers. ” �A company should check whether their offering has detached the blocks to utility across the buyer experience cycle.

Example-Dell computers �Before dell, other computer companies did not have any customization. �Dell focused on convenience in the delivery phase by being able to order online. �They also focused on customer productivity in the use phase by being able to customize your own computer.

From Exceptional Utility to Strategic Pricing �Objective: Determine a price for your product/service that will quickly capture a majority of the market. �Factors to consider when determining the right strategic price: ◦ 1. Volume generates higher returns than in the past. �Example: Software �Cost is greater in development than in manufacturing. ◦ 2. The value of a product/service may be closely tied to the total number of people using it. �Example: Cell phones – Now vs. 10 years ago

Strategic Pricing Issue: Free Riders - those who consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production. �Rival Good: One firm using a rival good will prevent the use of this good by any other firms. ◦ Example: A Nobel Prize-winning scientist who is fully employed by IBM cannot be simultaneously employed by another company. �Nonrival Good: The use of a nonrival good by one company does not limit the good’s use by another company. ◦ Competitive imitation makes free riding easy. ◦ Example: Value menu (service) at fast food restaurants. �Sonic, Mc. Donalds, KFC, Wendy’s, Taco Bell, etc.

Excludability �If the company can prevent others from using a good because of limited access or patent protection. ◦ Example: New medications are patent protected for 20 years. �If a good or service lacks excludability, it will be easy for other firms to imitate. ◦ Lack of excludability makes free riding easier. ◦ Example: Lower calorie alternatives.

In order to be successful… �The price determined for your good or service must: ◦ Attract buyers in large numbers. ◦ Also, retain the buyers in the future. �The good/service reputation must be established from the beginning. �Start with an offer that buyers cannot refuse.

Step 1: Identify the price corridor of the mass � All companies look first at the products and services that most closely resemble their idea in terms of form. � Look at other products and services within their industries � The main challenge in determining a strategic price is to understand the price sensitivities of those people who will be comparing the new products or services with a host of very different-looking products and services offered outside the group of traditional competitors. � Two categories: ◦ Those that take different forms but perform the same function ◦ Those that take different forms and functions but share the some over arching objective.

Step 1: Identify the price corridor of the mass � Many companies that create blue oceans attract customers from other industries who use a product or service that performs the same function or bears the same core utility as the now one but takes a very different physical form. � Example ◦ Ford’s model T, ford looked to the horse drawn carriage. The carriage had the same core utility as the car: transportation for individual and families. But it had a very different from. ◦ Mon and dad lunches compared to lunch line in the cafeteria.

Step 2: Specify a level within the price corridor �Managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services. �Two principal factors ◦ The degree to which the product or service is protected legally through patents or copyrights ◦ The degree to which the company owns some exclusive asset or core capability, such as an expensive production plant, that can block imitation.

Step 2: Specify a level within the price corridor � Examples: ◦ Dupont with its Lycra brand in specialty chemicals ◦ Philips’ ALTO in the professional lighting industry ◦ SAP in the business applications software industry ◦ Bloomberg in the financial software industry

Step 2: Specify a level within the price corridor � Companies would be wise to pursue mid-to-low boundary strategic pricing from the start if any or the following apply: ◦ Their blue ocean offering has high fixed costs and marginal variable costs ◦ Their attractiveness depends heavily on network externalities ◦ Their cost structure benefits from steep economies of scale and scope. In these cases, volume brings with it significant cost advantages, something that makes pricing for volume even more key.

Price Corridor � Price corridor of the mass not only 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. � Example ◦ Apple IPHONE.

Target Costing �Addresses the profit side of the business model �To maximize profits of a blue ocean: strategic price – desired profit margin = target cost �Continuing with Cirque du Soleil: ◦ Elimination of Animals ◦ Modernizing their act �Ford’s Model T: understood that to appeal to the masses, their automobile must meet consumer budgets. (Low target cost)

Model T vs. The “Birkin” • First of it’s kind � Prior logic in the industry • One of a kind revolved around a single, highly skilled worker producing the car. � Revolutionized this logic by creating the assembly line ◦ Speed and efficiency ◦ 21 day process shrunk to 4 � Discovering a creative way to mass produce their automobile, Ford fed their blue ocean and achieved their target costs. Rarest Crocodile skins, hundreds of diamonds, hand sew by one artisan Very specific clientele ◦ Victoria Beckham, Jennifer Aniston, Eva Longoria Retail: $65, 000 (VB’s: $150, 000) Limited number produced yearly Core Competency: Quality, Innovative techniques This world-renown purse achieves its target cost through limited production (high retail value) and yet retains its desirability by every woman.

More on Achieving Target Cost �Both Ford and Hermès (the maker of Birkin) developed their strategic plan to conquer the market, and subtracted the number of goods at market to achieve their unique target cost. ◦ Each have remarkably different impacts on the market (high vs. low volume)

Hitting the Target Cost �Three levels: ◦ Cost innovativeness and streamlining �Wal-Mart (low cost leader), IKEA (COGS), Southwest Airlines (Hassle fee flying-secondary airports) ◦ Partnerships �Computer Logistics: Oracle � 3 PL Providers: Inbound Logistics, Kenco Logistics ◦ Changing the pricing model of the industry �Purchasing original VHS tapes: $80 �How could a company make money by selling videos at only a few dollars if it followed the path of using strategic pricing? �Answer: IT CAN’T �Blockbuster attained blue ocean’s through rentals (Founded 1985) �Since we are on the topic of stream lining: Red Box rentals �Are they innovative, or did they overlook their strategic pricing and arrive at an already declining market?

Other Models Based on Price � The Strategic Price Time Share: Part ownership ◦ Hotels, condos, cars, planes � Slice Share: The Target Profit ◦ “Slivers” of high quality portfolio services sold to smaller investors. Based on Products � Equity interest: The Target Cost ◦ HP and Silicon Valley- servers for revenues ◦ BOS calls this a “Pricing Innovation” � Price of the server is exceeded by revenues: win-win scenario “When a company successfully addresses the profit side of the business model, the company is ready to advance to the final step in the sequence of BOS” Streamlining and Cost Innovation Partnering Pricing Innovation

From Utility, Price, and Cost to Adoption Even the best business model is not enough to have a successful implementation. � A new Blue Ocean idea can create fear and resistance among the companies stakeholders � Employees Failure to address employees about the new business can be very expensive � Before a company goes public with a new idea they need to address employees about the threats posed by the new idea � Companies also need to work with employees to find ways of defusing these threats � ex) Morgan Stanley Dean Witter & Co. worked with their employees with an internal discussion for meeting the challenges of the blue ocean idea. This increased the company shares 13% �

From Utility, Price, and Cost to Adoption Business Partners � Resistance of partners to the new idea can be even more damaging. � The threat of a loss of income for partners can hinder a relationship, that is why Business Partners need to informed on the changes and keep their fears in consideration. � ex) SAP had to explain how their new venture with ASAP will continue to make money for their partner. Showing how this idea would create new customers who would cover the loss of money incurred by larger customers

From Utility, Price, and Cost to Adoption The General Public �The public can be very opposed to the new idea, especially if it is a change to the social norms. �You need to make sure the public is well informed on your new business. �Ex. ) Monsanto created genetically modified food was introduced in Europe, but was attacked by environmental groups. If they would have informed the public what they were doing then there may have not been such opposition. They could have been seen as a new technology for the future.

Keys to Success �The challenge is to engage in an open discussion about why the adoption of the new idea is necessary �Need to explain it’s merits, set clear expectations for its ramifications, and describe how the company will address them. �Companies that take the trouble to address the employees, business partners and the general public will be more successful with their new venture.

Blue Ocean Idea (BOI) Index Phillip s CD-i Price Is there exceptional utility? Are there compelling reasons to buy your offering? Is your price easily accessible to the mass of buyers? Cost Does your cost structure meet the target cost? Utility Adoptio n Have you addressed adoption hurdles up front? Motorola Iridium Do. Co. M o i-mode Japan

Phillips CD-i Offered complex technological functions - Limited software titles - Priced too expensive - More than 30 minutes to explain and try to sell -

Motorola’s Iridium �Unreasonably expensive �High production costs �Not portable, size of brick �Overcame many regulations and secured transmissions �Reasonably motivated �Motorola not able to follow up sales leads effectively

Do. Co. Mo i-mode Japan �Offered internet on cell phones in 1999 �Created unique and superior buyer utility �Brought together cell phone and PCInternet industries �Exceptional buyer utility at an affordable price �Focused to maintain competitive edge � 40. 1 million subscribers by the end of 2003

Take Aways �Utility ◦ Value Innovation is not the same as technological innovation. ◦ Companies should assess the six utility levers to unlock exceptional utility. �Pricing ◦ Set a price that will quickly capture the majority of the market. ◦ Be aware of free riders. ◦ Strive for excludability. ◦ Identify and specify a level within the price corridor.

Take Aways �Target Cost ◦ Addresses profit side of the business model. ◦ Strive to be Cost Innovative. �Adoption ◦ Needs to include the employees, business partners, and the public to avoid friction in the process. �BOI Index ◦ Assess to determine whether or not an endeavor is worthwhile.