Blue Oceans

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Blue Oceans

• Part TwoFormulating Blue Ocean Strategy

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

• The Three Tiers of Noncustomers

1st Tier
3rd Tier
2nd Tier
Your Market
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Reach Beyond Existing Demand

• The Three Tiers of Noncustomers
• First Tier Soon-to-be noncustomers
• 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.

1st Tier
Your Market
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Reach Beyond Existing Demand

• The Three Tiers of Noncustomers
• 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
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Reach Beyond Existing Demand

• The Three Tiers of Noncustomers
• 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
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Get the Strategic Sequence Right
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Buyer Experience Cycle
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.
Purchase
Delivery
Use
Supplements
Maintenance
Disposal
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?
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?
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?
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?
Does the product require external
maintenance? How easy is it to maintain and
upgrade the product? How costly is maintenance?
Does use of the product create waste items? How
easy is it to dispose of the product? 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
utility 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 the 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 In which stages are the biggest blocks to simplicity?
Convenience In which stage are the biggest blocks to convenience?
Risk In which stage are the biggest blocks to reducing risks?
Fun and Image In which stage are the biggest blocks to fun and image?
Environmental Friendliness 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
2. Delivery
3. Use
4. Supplements
5. Maintenance
6. Disposal






Customer Productivity
Simplicity
The Six Utility Levers
Convenience
Risk
Fun and Image
Environmental friendliness
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Price Corridor of the Mass
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.
Step 1 Identify the price corridor of the mass.
Step 2 Specify a price level within the price
corridor.
Three alternative product/service types
Different form and function, same objective
Same form
Different form, same function
High degree of legal and resource
protection Difficult to imitate



Upper-level pricing
Some degree of legal and resource protection
Mid-level pricing
Price Corridor of the Mass
Low degree of legal and resource protection Easy
to imitate
Lower-level pricing
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Reconstructing Market Boundaries
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Reconstructing Market Boundaries

• 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

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Reconstructing Market Boundaries

• 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

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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• Look Across Alternative Industries QUESTION
• Name the 2 examples the book uses?

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Reconstructing Market Boundaries

• Look Across Alternative Industries FIRST
  EXAMPLE CLUE
• Sorting out personal finances

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Reconstructing Market Boundaries

• Look Across Alternative Industries FIRST
  EXAMPLE
• Sorting out personal finances
• 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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Reconstructing Market Boundaries

• Look Across Alternative Industries FIRST
  EXAMPLE
• Sorting out personal finances
• 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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Reconstructing Market Boundaries

• Look Across Alternative Industries SECOND
  EXAMPLE CLUE
• Cinemas vs. Restaurants

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Reconstructing Market Boundaries

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

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Reconstructing Market Boundaries

• Look Across Alternative Industries SECOND
  EXAMPLE
• Cinemas vs. Restaurants
• 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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Reconstructing Market Boundaries

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

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Reconstructing Market Boundaries

• Look Across Alternative Industries RECAP
• Sorting out personal finances
• different forms but same functionality
• Cinemas vs. Restaurants
• different functionality and forms but same purpose

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Reconstructing Market Boundaries

• Look Across Alternative Industries QUESTION
• What was the deal with NetJets?

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Reconstructing Market Boundaries

• What was Netjets Blue Ocean?

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Reconstructing Market Boundaries

• fractional jet ownership

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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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?
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Reconstructing Market Boundaries

• They asked
• Why do corporations use commercial airlines for
  their travel?
• What are the Costs.

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Reconstructing Market Boundaries

• 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?
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• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• Look Across Functional or Emotional Appeal to
  Buyers
• 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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Reconstructing Market Boundaries

• Look Across Functional or Emotional Appeal to
  Buyers
• 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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Reconstructing Market Boundaries

• Look Across Functional or Emotional Appeal to
  Buyers
• 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)
Population in millions
More than 20,000
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
Self-construction market
Cement bag
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
bottom-of-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.

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Results for Cemex

• Results from Cemexs standpoint
• Excellent credit results
• On-time payments better than 99.
• Demand expansion
• Accelerated cement use.
• Creation of a new market valued at 500-600 MM.
• Growing quickly.
• Branding
• Increased brand loyalty.
• Brand preference in other segments based on
  demonstrated socially responsible programs.
• Generating its own growth resources
• Customers become Cemex cement salespeople.

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• Curves

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Reconstructing Market Boundaries

• Look Across Strategic Groups Within Industries
  CURVES
• Blue ocean demand for women failing to keep in
  shape
• Built on two strategic groups
• 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. and North America and have expanded
  into Europe

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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• Look Across The Chain of Buyers
• 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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Reconstructing Market Boundaries

• Look Across The Chain of Buyers
• 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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Reconstructing Market Boundaries

• Look Across The Chain of Buyers
• 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.

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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• Complementary Product and Service Offerings
• Examples
• Virgin Entertainments Megastores
• Dyson Vacuums
• Zenecas Salick Cancer Centers

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Reconstructing Market Boundaries

• Alternative Industries QUESTION
• What was the deal with NTT DoCoMos i-mode?

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Reconstructing Market Boundaries

• What was DoCoMos Blue Ocean?

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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• Look Across Strategic Groups Within Industries
  QUESTION
• What company does the author focus on?

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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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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Reconstructing Market Boundaries

• 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 From Head-to-Head Competition to Blue ocean Creation From Head-to-Head Competition to Blue ocean Creation
Head-to-Head Competition Head-to-Head Competition Blue Ocean Creation
Industry Focuses on rivals within its industry Looks across alternative industry Looks across alternative industry
Strategic group Focuses on competitive position Within strategic group Looks across strategic groups within industry Looks across strategic groups within industry
Buyer Group Focuses on better serving the buyer group Redefines the industry buyer group Redefines the industry buyer group
Scope of product or service offering Focuses on maximizing the value of product service offerings within the bounds of its industry Looks across to complementary product and service offerings Looks across to complementary product and service offerings
Functional emotional orientation Focuses on improving price performance within the functional-emotional orientation of its industry Rethinks the functional-emotional orientation of its industry Rethinks the functional-emotional orientation of its industry
Time Focuses on adapting to external trends as they occurs Participants in shaping external trends over time Participants in shaping external trends over time
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The Big Picture, Not the Numbers
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The Big Picture, Not the Numbers

• 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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The Big Picture, Not the Numbers

• 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.

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The Big Picture, Not the Numbers

• 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

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The Big Picture, Not the Numbers

• 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.

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In My view it should be Big PictureTHEN 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.

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