Presentation on theme: "Blue Ocean Strategy Chapter 6 Getting the Strategic Sequence Right"— Presentation transcript:
1Blue Ocean Strategy Chapter 6 Getting the Strategic Sequence Right Team 2Shawn BuckAshley BurnettWhitney HortonKelly RiesterJennifer ShottsMickea SmithSam Snelling
2IntroductionIn this chapter we will discuss throwing out and validating blue ocean ideas to ensure their commercial viabilityBy understanding the concepts of the right strategic sequence, we can reduce business model risk.
3A Commercially Viable Blue Ocean Idea Sequence of Blue Ocean StrategyBuyer UtilityIs there exceptional buyer utility in your business idea?No- RethinkYesPriceIs your price easily accessible to the mass of buyers?No- RethinkYesCostCan you attain your cost target to profit at your strategic price?No- RethinkYesAdoptionWhat are the adoption hurdles in actualizing your business idea? Are you addressing them up front?No- RethinkYesA Commercially Viable Blue Ocean Idea
4Testing 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 innovationEX:Sony’s mini-disc players. Converting music files from CD’s to mini-disc. Held more music and smaller but ultimately failed because of MP3 players.
5Buyer Utility Map purchase delivery use supplements maintenance purchasedeliveryusesupplementsmaintenancedisposalcustomer productivitysimplicityconvenienceRiskFun and ImageEnvironmental friendilness
6The six stages of the Buyer experience cycle PurchaseDeliveryUseSupplementsMaintenanceDisposal
7The Six Utility LeversThe 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.
8Example-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.
9From 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: SoftwareCost 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
10Strategic 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, McDonalds, KFC, Wendy’s, Taco Bell, etc.
11ExcludabilityIf 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.
12In 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.
13Step 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 industriesThe 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 functionThose that take different forms and functions but share the some over arching objective.
14Step 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.ExampleFord’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.
15Step 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 factorsThe degree to which the product or service is protected legally through patents or copyrightsThe degree to which the company owns some exclusive asset or core capability, such as an expensive production plant, that can block imitation.
16Step 2: Specify a level within the price corridor Examples:Dupont with its Lycra brand in specialty chemicalsPhilips’ ALTO in the professional lighting industrySAP in the business applications software industryBloomberg in the financial software industry
17Step 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 costsTheir attractiveness depends heavily on network externalitiesTheir 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.
18Price CorridorPrice 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.ExampleApple IPHONE.
19Target Costing Addresses the profit side of the business model To maximize profits of a blue ocean: strategic price – desired profit margin = target costContinuing with Cirque du Soleil:Elimination of AnimalsModernizing their actFord’s Model T: understood that to appeal to the masses, their automobile must meet consumer budgets. (Low target cost)
20Model T vs. The “Birkin” First of it’s kind One of a kind Prior logic in the industry revolved around a single, highly skilled worker producing the car.Revolutionized this logic by creating the assembly lineSpeed and efficiency21 day process shrunk to 4Discovering 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 artisanVery specific clienteleVictoria Beckham, Jennifer Aniston, Eva LongoriaRetail: $65,000 (VB’s: $150,000)Limited number produced yearlyCore Competency: Quality, Innovative techniquesThis world-renown purse achieves its target cost through limited production (high retail value) and yet retains its desirability by every woman.
21More 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)
22Hitting the Target Cost Three levels:Cost innovativeness and streamliningWal-Mart (low cost leader), IKEA (COGS), Southwest Airlines (Hassle fee flying-secondary airports)PartnershipsComputer Logistics: Oracle3PL Providers: Inbound Logistics, Kenco LogisticsChanging the pricing model of the industryPurchasing original VHS tapes: $80How 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’TBlockbuster attained blue ocean’s through rentals (Founded 1985)Since we are on the topic of stream lining: Red Box rentalsAre they innovative, or did they overlook their strategic pricing and arrive at an already declining market?
23Streamlining and Cost Innovation Other ModelsBased on PriceTime Share: Part ownershipHotels, condos, cars, planesSlice Share:“Slivers” of high quality portfolio services sold to smaller investors.Based on ProductsEquity interest:HP and Silicon Valley- servers for revenuesBOS 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”The Strategic PriceThe Target ProfitThe Target CostStreamlining and Cost InnovationPartneringPricing Innovation
24From 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 stakeholdersEmployeesFailure to address employees about the new business can be very expensiveBefore a company goes public with a new idea they need to address employees about the threats posed by the new ideaCompanies also need to work with employees to find ways of defusing these threatsex) 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%
25From Utility, Price, and Cost to Adoption Business PartnersResistance 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
26From Utility, Price, and Cost to Adoption The General PublicThe 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.
27Keys to SuccessThe challenge is to engage in an open discussion about why the adoption of the new idea is necessaryNeed 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.
28Blue Ocean Idea (BOI) Index PhillipsCD-iMotorolaIridiumDoCoMoi-modeJapanIs there exceptional utility? Are there compelling reasons to buy your offering?UtilityIs your price easily accessible to the mass of buyers?PriceDoes your cost structure meet the target cost?CostAdoptionHave you addressed adoption hurdles up front?
29Phillips CD-i Offered complex technological functions Limited software titlesPriced too expensiveMore than 30 minutes to explain and try to sell
30Motorola’s Iridium Unreasonably expensive High production costs Not portable, size of brickOvercame many regulations and secured transmissionsReasonably motivatedMotorola not able to follow up sales leads effectively
31DoCoMo i-mode Japan Offered internet on cell phones in 1999 Created unique and superior buyer utilityBrought together cell phone and PC- Internet industriesExceptional buyer utility at an affordable priceFocused to maintain competitive edge40.1 million subscribers by the end of 2003
32Take Aways Utility Pricing Value Innovation is not the same as technological innovation.Companies should assess the six utility levers to unlock exceptional utility.PricingSet 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.
33Take Aways Target Cost Adoption BOI Index Addresses profit side of the business model.Strive to be Cost Innovative.AdoptionNeeds to include the employees, business partners, and the public to avoid friction in the process.BOI IndexAssess to determine whether or not an endeavor is worthwhile.