Blue Oceans: Part Two:Formulating Blue Ocean Strategy

Blue Oceans
BACHELOR OF INNOVATION
Part Two:Formulating Blue Ocean Strategy
1 innovation.uccs.edu
Formulation Principles Risk Factors

Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Lowers Search risk Lowers Planning risk
Lowers Scale risk
Lowers Business model risk
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Reach Beyond Existing Demand

The Three Tiers of Noncustomers
1st Tier
Your Market
2nd Tier
3rd Tier

First Tier : Soon-to-be noncustomers
1st Tier
On the edge of your market

Waiting to jump ship.Minimally use the current market offerings to get by as they search for something better.
Your Market

Second Tier: Refusing noncustomers
Consciously choose against your market.Their needs are either dealt with by other mean or ignored. Harboring within refusing noncustomers, however, is an ocean of untapped demand waiting to be released.
2nd Tier

Third Tier : Unexplored Have not been targeted or thought of as potential customers by any player in the industry Their needs and the business opportunities somehow always been assumed to belong to other markets.
3rd Tier
Get the Strategic Sequence Right
Buyer utility Is there exceptional buyer utility in your business idea?

Yes
No-Rethink
Price Is your price easily accessible to the mass of buyers?

Yes No-Rethink
Cost
Can you attain your cost target to profit at your strategic price?
Yes No-Rethink
Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?
Yes No-Rethink
A commercially Viable Blue Ocean Idea

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Buyer Experience Cycle

Purchase How long does it take to find the product you need? Is the place of purchase attractive and accessible? How secure is the transaction environment? How rapidly can you make a purchase? Delivery How long does it take to get the product delivered? How difficult is it to unpack and install the new product? Do buyers have to arrange delivery themselves? If yes, how costly and difficult is this? Use Does the product require training or expert assistance? Is the product easy to store when not in use? How effective are the products features and functions? Does the product or service deliver far more power or options than required by the average user? Is in overcharged with bells and whistles? Supplements Do you need other products and services to make this product work? If so, how costly are they? How much time do they take? How easy are they to obtain? Maintenance
A buyers experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyers experience.
Disposal
Does the product Does use of require external the product maintenance? create waste items? How easy is it to maintain and How easy is it upgrade the to dispose of product? the product? How costly is maintenance? Are there legal or environmental issues in disposing of the product safely? How costly is disposal?
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Uncovering Blocks to Buyer Utility
Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utilit map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in t way of converting noncustomers into customers. Purchase Delivery Use Supplements Maintenance Disposal
Customer Productivity:
In which stage are the biggest blocks to customer productivity?
Simplicity: Convenience:
Risk:
In which stages are the biggest blocks to simplicity? In which stage are the biggest blocks to convenience?
In which stage are the biggest blocks to reducing risks?
Fun and Image:

Environmental Friendliness:
In which stage are the biggest blocks to fun and image?

In which stage are the biggest blocks to environmental friendliness?
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Buyer Utility Map

The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service.
The Six Stages of the Buyer Experience Cycle

1. Purchase Customer Productivity 2. Delivery 3. Use 4. 5. 6. Disposal SupplementsMaintenance
The Six Utility Levers
Simplicity
Convenience
Risk Fun and Image
Environmental friendliness
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This tool helps managers find the right price for an irresistible offer, which, by the way, isnt necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets.
Price Corridor of the Mass
Step 1: Identify the price corridor of the mass. Three alternative product/service types:
Same form Different form, same function Different form and function, same objective
Step 2: Specify a price level within the price corridor.
High degree of legal and resource protection Difficult to imitate Some degree of legal and resource protection Low degree of legal and resource protection Easy to imitate
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Mid-level pricing
Price Corridor of the Mass
Reconstructing Market Boundaries
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BACHELOR BACHELOR OF OF INNOVATION INNOVATION
The first principle of blue ocean strategy is to reconstruct market boundaries:

break from the competition create blue oceans.
Challenge:
successfully identify $ compelling blue oceans

Six Approaches that Look Across:
Alternative Industries
Strategic Groups Within Industries The Chain of Buyers Complementary Product and Service Offerings Functional or Emotional Appeal to Buyers
Look Across Time

Look Across: Alternative Industries
Broader than substitutes Products & Service Substitutes:
different forms but same functionality
Products & Service Alternatives:

different functionality and forms but same purpose
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Look Across: Alternative Industries: QUESTION:

Name the 2 examples the book uses?
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Look Across: Alternative Industries: FIRST EXAMPLE CLUE:

Sorting out personal finances
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Look Across: Alternative Industries: FIRST EXAMPLE:
Installing financial software packages on a computer:
hiring a CPA
using pencil and paper
What is it?: different forms but same functionality different functionality and forms but same purpose
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Look Across: Alternative Industries: FIRST EXAMPLE:
Installing financial software packages on a computer: hiring a CPA using pencil and paper
What is it?: different forms but same functionality Helps people manage financial affairs
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Look Across: Alternative Industries: SECOND EXAMPLE CLUE:

Cinemas vs. Restaurants
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Look Across: Alternative Industries: SECOND EXAMPLE:
Restaurants: offer conversational & gastronomical pleasure Cinemas: visual entertainment
What is it?: different forms but same functionality

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Restaurants: offer conversational & gastronomical pleasure
Cinemas: visual entertainment
What is it? CLUE:

Same objective but its not a substitite:
about enjoying a night out - therefore they are alternatives of each other:
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Restaurants: offer conversational & gastronomical pleasure Cinemas: visual entertainment
What is it?:
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Look Across: Alternative Industries: RECAP:

different forms but same functionality

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Look Across: Alternative Industries: QUESTION: What was the deal with NetJets?
What was Netjets Blue Ocean?

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fractional jet ownership

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Look Across: Alternative Industries: NetJets:
Blue ocean of fractional jet ownership In less than 20 years, it was the fastest growing airline company Over 500 aircraft - Operating in over 40 countries Purchased by Berkshire Hathaway in 1998 Revenue growth from 30-35% each year
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Look Across: Alternative Industries: NetJets SUMMARY:
NetJets reconstructed market boundaries to create their blue ocean by looking across alternative industries
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How did they reconstruct market boundaries to create their blue ocean?
They asked:
Why do corporations use commercial airlines for their travel? What are the Costs.
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They responded:
Offerering customers 1/16th ownership of an aircraft shared with 15 other customers who all Receive
50 hrs of flight time per year for $375,000
Private jet at the price of a commercial airline ticket
Due to NetJets smaller airplanes, use of smaller regional airports, and limited staff, their costs are kept to a minimum
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What are dead head fees?
Dead head fees are:

Additional client costs, calculated per mile, that apply when the pick up, drop off location, or
The service area is not within 25 miles of the bus company, or

Charters where the mileage fee is greater than the hourly fees.
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Look Across: Functional or Emotional Appeal to Buyers
What Industries should compete on
Rational appeal
Emotional appeal Appeal usually a result of how companies have competed in the past Ex: Functionally oriented companies become more functionally oriented
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Change
Emotionally oriented industries offer extras at extra price without enhancing functionality
By stripping those extras it would create a fundamentally simpler business model

Functionally oriented industries can add emotion to their products to stimulate demand
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Example: Quick Beauty House
Traditional Japanese haircuts - took around an hour because of rituals Price was around $27 to $45 -Reduced to around $9 Decided working professionals did not want to waste an hour Stripped the emotional service of the haircut - focused on basic cuts
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Look Across: Buyerss Utility and how they purchase

Example: Cemex
Worlds 3rd-largest cement producer: Blue ocean: functional to emotional
Cement houses were the dreams of the people of Mexico - unaffordable Foundation of tandas While competitors were selling cement, Cemex was selling dreams
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What defines the Bottom of the Pyramid?

Annual per capita income (1)
More than $20,000
Population in millions
75-100
$ 1,500 - 20,000
1,500 1,750
Less than $ 1,500
4,000
(1) Based on purchasing parity in US $
Source: U.N. World Development Reports

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Six Assumptions You May Be Making

1. The poor are not our target customers because with our current cost structures, we cannot profitably compete for that market. 2. The poor cannot afford and have no use for the products and services sold in developed markets. 3. Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology. 4. The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits. 5. Managers are not excited by business challenges that have a humanitarian dimension. 6. Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid.
Source: C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy + business, Issue 26
Every single one of these assumptions is generally wrong.

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Cemex Launched the Patrimonio Hoy Project for the Poor People of Guadalajara (Mexico)
How can we give poor people access to the home-owning experience faster?
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The Challenge for Poor People: Building Their Home One Room at a Time
Cement bag
Selfconstruction market
How can we accelerate access to the cement bag for poor people?
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Patrimonio Hoy Builds on an Existing Community Called a Tanda

Tanda concept A tanda is a traditional Mexican community savings scheme.
For example, 10 people save 1 peso per month.
Every five months, the accumulated savings is won in a lottery by one of five people, who receives 50 pesos.
All participants win the 50 pesos one time only.
Traditionally, the tanda money goes toward festive events. With Patrimonio Hoy, the winner receives a bag of cement from Cemex.
The value is in the acceleration of access to the larger sum, and in the discipline of savings that is created (community peer pressure).
Communities nearly always play a role in solving bottomof-the-pyramid problems

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A win-win solution for Cemex and tandas

Microcredit lending to the tanda: Based on solidarity of a group of at least 3 people. No collateral required. $4 credit for each $1 saved. Security of supply: Frozen prices for 70-week periods. Warehousing services to store materials according to customer needs.
Technical advice: Customized house growth project for each family, phased one room at a time.
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Results from the customers standpoint
More than 75,000 families have participated. Customers in 23 cities served by 48 Cemex offices. Families have built the equivalent of 33,000 additional 11-square meter rooms. Accelerated access to home-owning: 1 room in 16 months vs. 48 months historically.
2 2 2 2
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Results for Cemex

Results from Cemexs standpoint Excellent credit results:
On-time payments better than 99%.

Accelerated cement use. Creation of a new market valued at $500-600 MM. Growing quickly. Increased brand loyalty. Brand preference in other segments based on demonstrated socially responsible programs. Customers become Cemex cement salespeople.
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Demand expansion:

Branding:

Generating its own growth resources:
Curves
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Look Across: Strategic Groups Within Industries: CURVES

Built on two strategic groups:
Blue ocean demand for women failing to keep in shape
traditional health clubs and home exercise programs eliminated everything else
Asked: What makes women trade either up or down from these two strategic groups?
Curves low-cost business model makes its franchises easy to afford and are profitable within the first couple of months Curves facilities now exist in most towns all over the U.S. 51 and North America and have expanded into Europe innovation.uccs.edu

Look Across: Strategic Groups Within Industries: CURVES
Asked: What makes women trade either up or down from these two strategic groups?
Makes its franchises easy to afford

profitable within the first couple of months All over the U.S. / North America and Europe
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Look Across: Strategic Groups Within Industries: Group Others
Polo Ralph Lauren
Toyotas Lexus as a Luxury Car

Sonys Walkman in the late 1970s Champion Enterprises prefabricated housing
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Look Across: The Chain of Buyers
Typically, industry focuses on who the target buyer is. In reality, there is a chain of buyers
purchasers, users, and influencers
Each hold different definitions of value
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Individual companies in an industry often target different customer segments.
large vs. small customers
An industry typically converges on a single buyer group

Pharmaceutical industry - influencers Office Equipment industry - purchasers
Clothing industry - users

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Novo Nordisk created a blue ocean in the insulin industry and transformed from an insulin producer to a diabetes care company. Industry focused on doctors - shifted to users (patients) rather than doctors.
NovoPen = 1st user-friendly insulin delivery system

NovoLet = prefilled disposable insulin pen
Innovo = electronic memory records

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Industry focused on purchasers (IT managers) Bloomberg saw traders & analysts making the crucial decisions for their employers
-Designed system to offer users better value with a easy-to-use, broker-friendly computer system
-Also added information and purchasing services to enhance their personal lives In return the traders & analysts exerted their power within the firm to drive IT managers to purchase from Bloomberg.

Look Across: Complementary Product & Service Offerings
What is the context in which your product or service is used? What happens before, during, and after?
Can you identify the pain points?

How can you eliminate these pain points through a complementary product or service offering?
Untapped value is often hidden in complementary products and services. Define the total solution buyers seek when they choose a product or service.
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Complementary Product and Service Offerings
Examples Virgin Entertainments Megastores Dyson Vacuums Zenecas Salick Cancer Centers
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Alternative Industries: QUESTION: What was the deal with NTT DoCoMos i-mode?
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What was DoCoMos Blue Ocean?

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Look Across: Alternative Industries: DoCoMo:
Largest telecommunications company in Japan
Changed the way people communicate and access information

Created blue ocean by thinking of why people trade across alternatives of mobile phones and the internet
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Look Across: Alternative Industries: DoCoMo:
Largest telecommunications company in Japan - Changed the way people communicate and access information Created blue ocean by thinking of why people trade across alternatives of mobile phones and the internet Deregulation of telecommunication industry in Japan, it was easy for new competitors to enter the market
Result: rising costs, and the average revenue per consumer fell
Broke out of red ocean by creating wireless transmission of voice, text, data, and pictures
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Look Across: Strategic Groups Within Industries
Companies in an industry that pursue similar domain:
Mercedes, BMW, and Jaguar all focus on outcompeting one another in the luxury car segment versus
Economy car makers who focus on excelling over one another in their strategic group.
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Look Across: Strategic Groups Within Industries: QUESTION

What company does the author focus on?
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Look Across: Time
All industries are subject to external trends that effect their businesses over time Internet Going Green to protect the planet Most companies adapt incrementally / passively as trends emerge focusing: projecting the trend itself paceing themselves to keep up with the trend. HOW: Get out of Red Oceans and develop a Blue Ocean strategy?
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Look Across: Time
Example Internet
buying text books online
cheaper to purchase books online

trend increasing - local stores beware: will have to see how they can create a blue ocean strategy
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Look Across: Time
Example protecting the planet.
Many companies adapted to consumer needs such as creating hybrid vehicles. however these companies are still competing within the red ocean.
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Look Across: Time Blue oceans arise from seeing how the trend will change value to customers - Three Principles: Trends must be decisive to your business Trends must be irreversible Trends must have a clear trajectory Example: The Asian Crisis of 1997 vs. the Euro
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Look Across: Time
Digital music downloading: Apples iTunes Legal, easy to use, flexible While more digital music stores enter the market, Apple kept a blue ocean with the iPhone. High-Speed data exchange: Cisco Systems File share downloading by kazaa, limewire, and napster was rapidly growing; however - illegal, sound quality was bad, few complete cds
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Look Across: Time Questions
What trends have a high probability of impacting your industry, are irreversible, and are evolving? How will these trends impact your industry? Given this, how to start unprecedented customer utility
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From Head-to-Head Competition to Blue ocean Creation Head-to-Head Competition

Industry Strategic group
Focuses on rivals within its industry
Blue Ocean Creation

Looks across alternative industry Looks across strategic groups within industry
Focuses on competitive position Within strategic group

Focuses on better serving the buyer group Focuses on maximizing the value of product & service offerings within the bounds of its industry Focuses on improving price performance within the functional-emotional orientation of its industry Focuses on adapting to external trends as they occurs
Buyer Group
Scope of product or service offering Functional emotional orientation
Redefines the industry buyer group
Looks across to complementary product and service offerings
Rethinks the functional-emotional orientation of its industry

Participants in shaping external trends over time
Time
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The Big Picture, Not the Numbers
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Visual Awakening
Compare your business with your competitors by drawing your as is strategy canvas. See where your strategy needs to change.
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Visual Exploration
Go into the field to explore the six paths to creating blue oceans.
Observe the distinctive advantages of alternative products and services.

See which factors you should eliminate, create, or change.

Visual Strategy Fair
Draw your to be strategy canvas based on insights from field observations.
Get feedback on alternative strategy canvases from customers, competitors customer, and noncustomers. Use feedback to build the best to be future strategy

Visual Communication
Distribute your before-and-after strategic profiles on one page for easy comparison. Support only those projects and operational moves that allow your company to close the gaps to actualize the new strategy.
In My view it should be Big Picture THEN the numbers
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The Big Picture, THEN the mumbers

If you are driving innovation from below.. good visuals like value-curves are often key to getting quick buy-in from upper management. But some (what MB type are they??) will quickly want to drill down into supporting data so be ready to back it up.

Blue Oceans: Part Two:Formulating Blue Ocean Strategy

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Blue Oceans

Part Two:Formulating Blue Ocean Strategy

Formulation Principles Risk Factors

Lowers Business model risk

Reach Beyond Existing Demand

Reach Beyond Existing Demand

Reach Beyond Existing Demand

On the edge of your market

Reach Beyond Existing Demand

Reach Beyond Existing Demand

Get the Strategic Sequence Right

Buyer utility Is there exceptional buyer utility in your business idea?

Price Is your price easily accessible to the mass of buyers?

A commercially Viable Blue Ocean Idea

Buyer Experience Cycle

Uncovering Blocks to Buyer Utility

In which stage are the biggest blocks to customer productivity?

Fun and Image:

In which stage are the biggest blocks to fun and image?

Buyer Utility Map

The Six Stages of the Buyer Experience Cycle

The Six Utility Levers

Risk Fun and Image

Price Corridor of the Mass

Step 2: Specify a price level within the price corridor.

Price Corridor of the Mass

Reconstructing Market Boundaries

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

The first principle of blue ocean strategy is to reconstruct market boundaries:

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

Look Across Time

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

Products & Service Alternatives:

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

Look Across: Alternative Industries: QUESTION:

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

Look Across: Alternative Industries: FIRST EXAMPLE CLUE:

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

Look Across: Alternative Industries: SECOND EXAMPLE CLUE:

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

What is it?: different forms but same functionality

different functionality and forms but same purpose

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

Cinemas: visual entertainment

What is it? CLUE:

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries

different functionality and forms but same purpose

BACHELOR BACHELOR OF OF INNOVATION INNOVATION

Reconstructing Market Boundaries