Blue Ocean Strategy Ch. 3 Reconstruct Market Boundaries Team 4: Ty Parasiliti Josh Fernino Lance Hollister Chris Kerschen Brent Hare Vincent Ukwu Victor Hemmati

Overview Six Paths Framework: 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 Product and Service Offerings Path 5: Look Across Functional or Emotional Appeal to Buyers Path 6: Look Across Time

Path 1: Look Across Alternative Industries

Path 1: Look Across Alternative Industries Alternatives VS. Substitutes Substitutes: products in different forms that have the same functionality Alternatives: products with different functions that serve the same purpose Buyers will ALWAYS weigh alternatives, even if unconsciously Sellers consider alternatives less frequently

Path 1: Look Across Alternative Industries Why do sellers not think the same way? Small changes WITHIN AN INDUSTRY will trigger responses from rivals Changes in alternative industries often go unnoticed This behavior provides space between alternative industries for value innovation

Example of NetJets Created fractional jet ownership for corporate travelers Grew larger than many airlines in less than twenty years Created their blue ocean by looking across alternative industries Commercial airlines Private jet ownership

Example of NetJets Advantages of commercial airlines Avoids fixed costs of a private jet aircraft Companies can purchase only the amount of tickets they need (reduces variable costs) What NetJets offers Partial ownership starting at $375K Smaller planes, smaller airports, and limited staff keep costs low

Example of NetJets Advantages of private jets What NetJets offers Dramatically cuts total travel time Reduces hassle of congested airports Allows point-to-point travel What NetJets offers Offers access to 5,500 airports nationwide Available in four hours’ notice

Path 2: Look Across Strategic Groups Within Industries Blue Oceans can also be created by looking across strategic groups

Strategic Groups Companies in a particular industry that pursue a similar strategy Based on two dimensions Price Performance Key to creating blue oceans is to break out of this narrow tunnel vision

Curves Grown Significantly Total Revenues exceeding $1 Billion Curves built on advantages of two main strategic groups Health clubs Home exercise programs

Traditional Health Club Trendy facilities Unnecessary Amenities Aim for socializing

Curves vs. Health Club Health club is not appealing to most Exercising at home can lead to laziness and excuses to not work out Key is working out with others

Curves: Ideal No useless amenities Machines are organized to facilitate interchange among members No mirrors $30 vs. $100

Curves: Ideal Curves is not competing with health club norms New blue ocean demand Over 8,000 stores expected at end of 2004 Global expansion

Other Examples Lexus offers luxury at a cheaper price Sony Walkman Champion enterprises Prefabricated homes High-end finishing touches

Path 3: Look Across the Chain of Buyers

Path 3: Look Across the Chain of Buyers There is a chain of “buyers” who are directly or indirectly involved in the buying decision Purchasers: pay for the product or service Users: people who use the product or service Influencers: influence a decision one way or the other These groups may overlap, but often differ

Path 3: Look Across the Chain of Buyers Individual companies in an industry target different customer segments: Pharmaceutical industry focuses on influencers: doctors Office equipment industry focuses on purchasers: corporate purchasing departments Clothing industry focuses mainly on users Challenging an industry’s conventional wisdom can lead to discovery of new blue ocean

Novo Nordisk Novo Nordisk, the Danish insulin producer, saw that by changing their focus from selling to doctors, they would sell directly to patients Came up with the NovoPen Then later the NovoLet, which brought about the Innovo His strategy shifted the industry landscape and transformed the company from an insulin producer to a diabetes care company

Bloomberg Bloomberg is an online financial information industry, providing news and prices in real time to the brokerage and investment community Thought to focus on traders and analysts and not IT managers Formed a system that offers traders better value, easy to use terminals and keyboards labeled with familiar financial terms Built in “what if” scenarios for convenience

Path 3 Concluded By questioning conventional definitions of who can and should be the target buyer, companies can often see new ways to unlock value What is the chain of buyers in your industry? Which buyer group does your industry typically focus on? If you shifted the buyer group of your industry, how could you unlock new value?

Path 4: Look Across Complementary Product and Service Offerings

Path 4: Look Across Complementary Product and Service Offerings Rivals converge within the bounds of their industry’s product and service offerings. e.g. Movie Theatres and Babysitters “Imagine a movie theatre with a babysitter service.”

Untapped Value The key is to define the total solution buyers seek when they choose a product or service. Way to do this is by thinking about what happens before, during, and after your product is used. e.g. Babysitting and parking, operating and application software, airline ground transportation

NABI (Hungarian Bus Company) Applied Path 4 to the $1 billion U.S. bus transit industry. Municipally owned bus companies v. NABI NABI discovered the main source of costs were those that came with the purchase, like repairs, fuel usage, and the wear and tear over the years.

Cont. NABI created a bus unlike anything every seen in that industry. They used fiberglass in place of steel. Gained SEVERAL benefits from the transformation. NABI captured 20% of the industry since its inception in 1993, and creating a win-win situation for itself.

Philips Electronics Similar to the thinking of NABI, Philips looked at the larger problem of brewing tea in Britain. People figured the problem lies in the kettle when in fact, the problem was with the lime in the water. Created the filtered kettle.

Path 5: Look Across Functional or Emotional Appeal to Buyers

Path 5: Look Across Functional or Emotional Appeal to Buyers Path 5 looks at the competition in an industry not just in the scope of its products and services but also on two possible bases of appeal. Functional Appeal Emotional Appeal

Path 5: Look Across Functional or Emotional Appeal to Buyers Functional Appeal Some industries compete based on price and function largely on calculations of utility, their appeal is rational. Emotional Appeal Other industries compete largely on feelings: their appeal is emotional, more personal.

Path 5: Look Across Functional or Emotional Appeal to Buyers Company behavior affects buyer expectations in a reinforcing cycle. The way companies have competed in the past, has given consumers a taste of what to expect. Over time functional oriented industries become more functional and emotional oriented industries become more emotional. This removes new insight into what attracts customers.

Path 5: Look Across Functional or Emotional Appeal to Buyers When companies are willing to challenge the functional-emotional orientation of their industry, they often find new market space. Emotionally oriented industries may offer extras that add price without enhancing functionality. Removing those extras that add price will create lower-priced, lower-cost, more fundamentally simpler business model. Functionally oriented industries can often combine commodity products with new life by adding a dose of emotion and, in doing so, can stimulate new demand.

Path 5: Look Across Functional or Emotional Appeal to Buyers Path 5 raises three questions about an industry: Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make if functional? If you compete on functionality, what elements can be added to make it emotional?

Path 6: Look Across Time

Path 6: Look Across Time All industries are subject to external trends that affect their businesses over time Rapid rise of the internet Global movement toward protecting the environment These trends can help create blue ocean opportunities

Path 6: Look Across Time Key insights into blue ocean strategy rarely come from projecting the trend itself They arise from business insights into how the trend will change value to customers and impact the company’s business model By looking across time managers can actively shape their future and lay claim to a new blue ocean

Path 6: Look Across Time Three principles are critical to assessing trends across time, through the basis of a blue ocean strategy They must be decisive Must be irreversible Must have a clear trajectory

Path 6: Look Across Time Many trends can be observed at any one time- For Example: A discontinuity in technology The rise of a new lifestyle A change in regulatory or social environments Usually only one or two will have a decisive impact on any particular business

Path 6: Look Across Time In identifying a trend, you can look across time to figure out what the market would look like if the trend were taken to its logical conclusion Working back from that vision of a blue ocean strategy, one can identify what must be changed today to unlock a new blue ocean

Path 6: Look Across Time A Prime Example: Apple observed the flood of illegal music file sharing that began in the late 1990s Technology allowed anyone to access free music, instead of buying CDs Apple capitalized on this trend by launching the iTunes music online store Today the iTunes music store offers more than 700,000 songs and now accounts for 70% of the legal music download market

From Head-to-Head Competition to Blue Ocean Creation Conclusion From Head-to-Head Competition to Blue Ocean Creation Head-to-Head Competition Blue Ocean Creation Industry Focuses on rivals within its industry Looks across alternative industries Strategic Group Focuses on competitive position within strategic group Looks across strategic groups within industry Buyer Group Focuses on better serving the buyer group Redefines the industry buyer group Scope of product or service offering Focuses on maximizing the value of product and service offerings within the bounds of its industry 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 Time Focuses on adapting to external trends as they occur Participates in shaping external trends over time