Chapter 3 Reconstruct Market Boundaries Ryan Martin Chris Carruthers Matt Porter Adam Kogler Rachel Rose Michael Dickerson Michael Ostrowsky Yao Hai

Introduction  Created a Blue Ocean by looking across alternative industries

Introduction In this chapter, the authors attempted to identify systematic patterns for reconstructing market boundaries to create blue oceans.  Do these patterns apply across all industry sectors, or are they limited to specific industries?

Introduction Developed the 6 paths framework for remaking market boundaries  The 6 paths challenge the 6 fundamental assumptions underlying many companies’ strategies. 1. Define their industry similarly and focus on being the best within it 2. Look at their industries through the lens of generally accepted strategic groups, and strive to stand out in the strategic group they play in 3. Focus on the same buyer group, be it the purchaser, user, or the influencer 4. Define the scope of their products and services offered by their industry similarly 5. Accept their industries functional or emotional orientation 6. Focus on the same point in time–and often current competitive threats-in formulating strategy

Introduction Companies must break out of accepted boundaries that define how they compete in order to leave red oceans.  The 6 paths to break boundaries and create blue oceans Path 1: Look across alternative Industries Path 2: Look across strategic groups within industries Path 3: Look across the chain of buyers Path 4: Look across complementary products and service offerings Path 5: Look across functional or emotional appeal to buyers Path 6: Look across time

PATH 1: Look Across Alternative Industries What is an alternative? Products or services that have different functions and forms but the same purpose CPA v. Tax Software v. Pencil and Paper Restaurant v. Movie Theatre

NetJets and NTT DoCoMo i-Mode

Path 2: Look Across Strategic Groups Within Industries Strategic Group- Group of companies within any industry that use the same or a very similar strategy Multiple Strategic Groups These groups can normally be ranked using two dimensions, price and performance Goal is to try to find blue oceans while looking across these groups Understand which factors cause a customer to trade up or down across the different groups

Automobile Industry These companies have notoriously chosen to compete among one another and try to improve their position within the strategic group Two different groups within this industry Luxury car- BMW, Mercedes, Jaguar Economy Car- Kia, Honda, Ford Lexus- Low priced luxury cars

Curve’s Strategy Canvas

Path 3: Looking Across the Chain of Buyers “The purchasers who pay for the product or service may differ from actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ. When they do, they frequently hold different definitions of value.” Pg. 61 -Purchasing Agent for a corporation- Values costs -Corporate user- Values ease of use -Retailer- Values just-in-time stock replenishment and innovative financing -Consumer- Although strongly influenced by the channel, do not value these things.

-Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of new blue ocean. Example: Insulin Buyer group: Doctors - Key influencer of the insulin purchasing decision of diabetics Novo Nordisk- Danish insulin producer -Created a blue ocean by shifting the industry’s long standing focus on doctors to the patients themselves. -Launched the NovoPen in 1985, the first user friendly insulin delivery solution.

By looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers Example: Reuters and Telerate, dominated the online financial information industry until the early 1980’s. -Provided news and real time prices to the brokerage and investment community. -Focused on purchasers: IT managers -Bloomberg -Focused on previously overlooked aspects. The traders and analysts, who are the ones making rapid decisions in the active market, not the IT managers.

-Bloomberg -designed a system to offer traders better value -Multiple flat-panels- for easier viewing capability without closing or opening new windows. -Built in analytic capability- with the press of a button, important financial calculations can be performed. -Improving the personal lives of traders- adding information and purchasing services such as flowers, clothing, travel arrangements……..

By questioning conventional definitions of who can and should be the target buyer, companies can often see fundamentally new ways to unlock value. Example: Canon copiers -Shifting the target customer of the copier industry from corporate purchasers to users.

Path 4: Look Across Complementary Product and Service Offerings Untapped value is hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. Ex. Airline industry/ground transportation

Path 4 continued Questions to ask about business to find out how to look across complementary product and 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?

More Examples: Barnes & Noble (B&N) Virgin Entertainment’s megastores Dyson vacuum cleaners

Path 5: Emotional vs. functional appeals Emotional appeals- when a company competes with their product by using peoples “feelings” to buy that particular product. Functional appeals- companies make their product attractive with price and how your utility will go up because of how functional the product is.

Too functional or emotional? The ways companies compete in the market affect what kind of product the consumer EXPECT in the market Companies behaviors affect expectations in a reinforcing cycle. If nothing changes, functional companies become more functionally oriented and emotional companies become more emotionally involved. When the companies do keep acting in the same manner the companies market research will come back saying the consumer just wants more for less.

Mix it up Companies who challenge the makeup for the appeal of their product usually find new blue oceans

Emotional to more functional Emotional companies typically have a product or service with lots of extras on it that make the price go up. When we remove all these extras there could be a product that is simpler, and have a lower cost that more customers are welcome too. Functional to more emotional Functional companies tend to try to spice up their product by adding some emotion to it which can create a new demand.

QB (Quick Beauty) example In Japan before QB it took most men an hour to receive a haircut and cost anywhere from dollars Haircuts included shoulder rubs, shaving, washing the hair and receiving coffee or tea. QB challenged its market by removing all of those extras from its service and focused on the essentials, which was peoples time and money Waiting times are shown outside, price is lowered, and air wash system

Cemex example Cemex was a company in Mexico that just sold bags of cement to people, though most of their market was too poor to pay for cement Cemex changed its functional makeup to a more emotional makeup with the creation of the Ptriamonio Hoy program. This program was advertised as being the gift of dreams.

Cemex (Cont.) The Ptriamonio Hoy program started off by getting their customers believe that they wanted to create “rooms of love” with their cement. How they got people to save for their product was through a super-tanda. A super-tanda is kind of like a lottery that everyone wins at least once but everyone throws in the same amount. When you win the tanda Cemex provided the materials for building a room, construction classes, and a technical advisor to help complete the rooms. When Cemex sold of a bag of cement they clamied they were selling a dream. To reinforce this emotional feeling, after the consumer was done building the room Cemex would throw small parties for that family.

Path 6: Look Across Time To maintain or develop a Blue Ocean, a firm must be able to predict market trends. The trend itself is not important, it’s the value that the trend will provide Growing concern for environmental protection Demographic shifts (Baby Boomer retirement) Rapid rise of the Internet

Traditional Approach Adapt incrementally as events unfold. Managers focus on projecting the trend itself or predicting how a technology will evolve. Example: Plasma TVs are in high demand. Focus on developing and marketing new plasma technologies. This method does not result in the creation of new market space.

Blue Ocean Approach Focus on how the trend will affect the value customers receive. What value are customers looking for? What value drives customer behavior? What features are ancillary? Example: Plasma TVs are in high demand. Customers want high picture quality, the specific technology isn’t important. Focus on providing cheaper ways to meet customer demands for performance and quality (LCD/LED, etc.)

Three Principles Trends must be decisive They have a high probability of impacting your business. Must be irreversible The environment will not switch back. Customer preferences will not reverse. Must have a clear trajectory The trend will continue moving in a particular direction.

Apple’s creation of ITunes Rise of illegal downloading (Napster, LimeWire, Kazaa, etc.) in the late 1990s. High demand for ‘free digital music’ Other businesses believed the primary driver was cost: desire for ‘free music’. Apple believed the primary driver was format: desire for ‘digital music’.

Developing ITunes Price is definitely a factor, but not the most important one. Customers found value in other aspects of digital music. Speed- I can get music almost instantly Selection- Music stores only carry a limited assortment Flexibility- I have the option of only purchasing a single song instead of an entire album Only the essentials- Individuals were not willing to pay extra just for a physical disk and packaging

Avoiding Head-to-Head Competition Apple still needed to find ways to improve ITunes- create a Blue Ocean, not just a substitute for File- Sharing: predict value trend. Legality- Record labels have filed suit against individuals who illegally share copyrighted music. Enhanced Searches- ITunes is more intuitive. It can give recommendations for new music. Sound Quality- File-Sharing usually comes with poor audio quality. CDs ripped at low bit-rates.

From Head-to-Head Competition to Blue Ocean Creation Competitive Approaches Head-To-Head Competition Blue Ocean Creation IndustryFocuses on rivals within its industry Looks across alternative industries Strategic GroupFocuses on competitive position within the group Looks across strategic groups within industry Buyer GroupFocuses on better serving the buyer group Redefines the industry buyer group Scope of Product or service offering Maximize the value offered within industry boundaries Looks for complementary product and service offerings Functional/Emotional Orientation Improve price performance within the industry orientation Rethink the orientation of the industry TimeFocuses on adapting to external trends as they occur Participates in shaping external trends over time

Conclusion Six Wrong Assumptions: 1. Define the industry and try to best within it 2. Group themselves and industry by commonly accepted strategic groups and try to stand out within strategic group 3. Focus on the same buyer group 4. Define the scope of the products and services offered by their industry similarly 5. Accept their industry as either emotional or functional 6. Focus on the same point in time when formulating strategies

Conclusion Managers should focus on looking across: 1. Alternative industries 2. Strategic groups 3. Buyer groups 4. Complementary products and service offerings 5. Functional and emotional orientations of industries 6. Time

Conclusion “By thinking across conventional boundaries of competition, you can see how to make convention- altering, strategic moves that reconstruct established market boundaries and create blue oceans.” P.79