CHAPTER 6 : GET THE STRATEGIC SEQUENCE RIGHT

CYNTHIA, BEN, PEYTON, RUSSELL

Blue Ocean Strategy

Introduction

The next challenge is to build a robust business model to ensure that you make a healthy profit on your blue ocean idea

#1-Discusses sequence of fleshing out and validating blue ocean ideas to ensure their commercial viability This dramatically reduces business risk

The Right Strategic Sequence

To become a commercially viable blue ocean idea they must pass these four tests:

Buyer Utility

Price

Cost

Adoption

Buyer Utility/Testing for Exceptional Utility

Does your offering show exceptional utility? Is there a reason the masses should buy it?

Do not get caught up in the novelty of the product and forget to test for exceptional utility

Phillips CD-IHave value innovation: Be focused, divergent,

and have compelling taglineExpress how the new product will change

lives of buyers

Allows managers to identify the full range of utility spaces that a product or service can potentially fill

Buyer Utility Map

Six Utility Levers

To test for exceptional utility, a companies should check whether their offering has removed the greatest utility blocks.

Companies need to find “the most compelling hot spots to unlock exceptional utility.”

The product needs to create a different utility and remove as many blocks by using the buyer utility map.

If the product fills the same part of the map as an existing product, then a red ocean is about to be entered.

Buyer Experience Cycle

Model T Example

More than 500 American car companies focused on custom-made luxury cars.

The roads were poor and the current cars had problems. The cars often broke down and took an expert to fix them.

Model T corrected 2 main blocks of utility: convenience and risk in the maintenance phase.

Model T

Model T lost the image customers, but gained a mass of customers who wanted a reliable and durable car for every day use.

The Model T was successful because it was aimed at the masses, made life easier for the average person, and lowered risk.

Strategic Pricing

Buyers not only should want to buy your product, but also need the ability to pay for it.

Many companies take the opposite, by starting with price-insensitive customers then dropping the price for every day customers. Example: Video game systems and Iphone

It is more efficient to know from the beginning what the mass of customers are willing to pay.

Volume generates higher returns than in the past. Example: Windows XP

Strategic Pricing

Another reason that volume sales are important because buyers will not want items if nobody else has it.

Free riding has become more frequent and does not include rival goods. Example: IBM

Free riding is acceptable for non-rivals. Ideas are in this category. Example: Virgin Atlantic Airways.

The competitive imitation is not only possibly but also less costly. The innovator takes the majority of the costs.

Strategic Pricing

Excludability- the company can prevent others from using their idea using limited access or patent protection. Example: Intel chips

The lack of excludability reinforces the risk of free riding.

Due to free riders, the strategic pricing must not only attract buyers but also help retain them.

Companies must start with a price buyers cannot resist and keep it that way to discourage free riding.

Price Corridor of the Mass-Step #1

Price corridor of the mass- tool used to help managers find the right price for an irresistible offer, which is not always the lowest price.

Step 1: Identify the price corridor of the massLook at other products and services within

their industry. But that’s not enough. Different form, same function: Attract

customers from other industries who perform the same function in very different physical forms. Example: Model T vs. Horse-drawl carriage

Price Corridor of the Mass

Different form and function, same objective: Some attempt to lure customers from industries not related at all. Example: Cirque du Soleil.

Listing a group of alternative products allows managers to see who they can attract from other industries.

This strategy shows where the mass of customers are, and how much they are willing to spend on their current products or services.

It is important to remember to pursue pricing against substitutes and alternatives across industries.

Step #2-Specify a level within the price corridor.

Helps Management determine how high of a price they can afford without inviting competition

1. Is your product protected by patents and copyrights?

2. Does the company own some exclusive assets to help block potential imitators?

On the other hand

Companies without patent and asset protection should consider price somewhere in the middle.

Companies should consider low pricing if: If their blue ocean offering has high fixed cost and

marginal variable cost. If the companies attractiveness depends on network

externalities. If the cost structure benefits from economies of scale.

Target Costing

To maximize profit companies should starts with strategic price and then deduct it’s desired profit margin from the price to arrive at the target cost.

Price-minus costing and not cost-plus pricing is essential if you are to arrive at a cost structure that is profitable.

Hitting Your Cost Target

1. Streamline operations and introduce cost innovations from manufacturing to distribution.

Example: switch from metal to plastic if it saves you money.

2. Partnering with other providers can secure needed capabilities, create leverage over competition, and add expertise to your company.

3. Changing the price model of the industry.Example: Blockbuster

From Utility, Price, and Cost to Adoption

An unbeatable business model may not be enough to guarantee the commercial success of a blue ocean idea.

Why? Threatens the status quo May provoke fear and resistance among a company’s

three main stakeholders Employees Business partners General public

Employees

Before companies go public with an idea, they should make an effort to communicate with employees that they are aware of the threats posed by the execution of the idea.

Will allow for less resistance and division between employees and the company. Merrill Lynch vs. Morgan Stanley

Business Partners & The General Public

The resistance of business partners may be even more damaging to a company. Fear that their revenue streams or market positions

are threatened by a new business idea. Ex. SAP and their ASAP software

Opposition to a new business idea can also spread to the general public, especially if the idea is very new and innovative and can threaten established social or political norms. Ex. Monsanto

Key Challenge

Engage in an open discussion about why the adoption of the new idea is necessary.

Important to explain its merits, set clear expectations for its ramifications, and describe how the company will address them. Stakeholders

The Blue Ocean Idea (BOI) Index

Blue Ocean Idea (BOI) Index is a simple yet robust tool to verify if a new business idea meets the criteria of a Blue Ocean Strategy.

The Blue Ocean Idea index tests the following four criteria in this order: Utility: Does the new offering provide exceptional utility? Price: Is the price easily accessible to the mass of target

buyers? Cost: Does the cost structure meet the target cost? Adoption: Are adoption hurdles addressed up front?

It is very important that the answer to all of the questions mentioned above is YES.

Takeaways

In order to dramatically reduce business risk you must flesh out and validate blue ocean ideas to ensure their commercial viability. To have value innovation: Be focused, divergent, and have

compelling taglineTo ensure commercial success, companies should

build their blue ocean strategy in the sequence of utility, price, cost, and adoption to form an integral whole.

Utility-Do not get caught up in the novelty of the product and forget to test for exceptional utility

Takeaways cont.

Price-Price Corridor of a Mass-tool used to help managers find the right price for an irresistible offer, which is not always the lowest price #1-Identify the price corridor of the mass #2-Specify a price level within the corridor

Cost-To maximize profit companies should starts with strategic price and then deduct it’s desired profit margin from the price to arrive at the target cost. Streamlining, partnering, and changing the price model can help you

hit your target cost.Adoption-Engage in an open discussion about why the

adoption of the new idea is necessary. Explain its merits, set clear expectations for its ramifications, and

describe how the company will address them