Blue Ocean Strategy Chapter 6: Get the Strategic Sequence Right

1. Blue Ocean StrategyChapter 6: Get the Strategic Sequence Right Team 2: Joshua Zamarron Elizabeth Allen James Stariha Michael Johnson Mike Mullin

2. Get the Strategic Sequence Right • Fourth Principle of Blue Ocean Strategy • Building a Robust Business Model • Commercial Viability • Reducing Business Model Risk

3. The Right Strategic Sequence • Buyer Utility • Is there a compelling reason for people to buy? • Price • Priced to attract target consumers and have a compelling ability to pay? • Cost • Can a healthy profit margin be attained? • Adoption • Hurdles faced in implementing idea?

4. The Sequence of Blue Ocean Strategy

5. Testing for Exceptional Utility • Philips’ CD-I • “Imagination Machine” • Technology VS Utility • Value innovation not the same as technology innovation • Buyer Utility Map

6. The Buyer Utility Map

7. The Buyer Experience Cycle • Purchase • Delivery • Use • Supplements • Maintenance • Disposal

8. Purchase - How long does it take to find the product you need? - Is the place of purchase attractive and accessible? - How secure is the transaction? - How rapidly can you make a purchase?

9. Delivery - 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?

10. Use • Does the product require training or expert assistance? • Is the product easy to store when not in use? • How effective are the product’s features and functions? • Does the product or service deliver far more power or options than required by the average user? Is it overcharged with bells and whistles?

11. Supplements • 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 much pain do they cause? • How easy are they to obtain?

12. Maintenance • Does the product require external maintenance? • How easy is it to maintain and upgrade the product? • How costly is maintenance?

13. Disposal • 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 safety? • How costly is disposal?

14. The Six Utility Levers • Utility Levers: the ways in which companies can unlock exceptional utility for buyers • Most levers are obvious • Customer Productivity • Simplicity • Convenience • Risk • Fun and Image • Environmental Friendliness

15. Ask yourself these questions • In which stage are the biggest blocks to customer productivity? • In which stage are the biggest blocks to simplicity? • In which stage are the biggest blocks to convenience? • In which stage are the biggest blocks to reducing risk? • In which stage are the biggest blocks to fun and image? • In which stage are the biggest blocks to environmental friendliness?

16. Ford Model T. • Competitors • Sold custom-made luxury autos for the wealthy • Focused on image in the use phase • 1/36 utility spaces were occupied • Blocks to utility • Muddy dirt roads • Risk in the maintenance phase • The Model T • A car for great multitude

17. Ford Model T. • One color, one model • Black • Made for everyday use • Reliable, durable, easy to fix & use • Ford’s offering passed the exceptional utility test

18. Securing a strong revenue stream • To set a strong revenue stream you must set the right strategic price. • This leads to a compelling ability to pay • Some firms take a reverse course, testing the market with higher prices and then lowering them overtime to attract mainstream customers. There are two reasons for this: 1. Volume generates higher returns than it used to 2. To a buyer, the value of a product or service may be closely tied to the total number of people using it

19. Non-rival Goods • Use of rival good by one firm precludes its use by another • The use of a non-rival good by one firm does not limit its use by another. This makes competitive imitation not only possible but less costly • Excludability is a Function both of the nature of the good and of the legal system. Good is excludable if the company can prevent others from using it by limited access or patent protection

20. What This All Means • The strategic price you set for your offerings must not only attract buyers in large numbers but retain them. • An offering’s reputation must be earned on day one because brand building increasingly relies heavily on word-of-mouth recommendations. • Because of this companies must start with an offer buyers can’t refuse to discourage free-riding imitations

21. Addressing A question • Strategic pricing addresses this question: Q: Is your offering priced to attract the mass of target buyers from the start so that they have a compelling ability to pay for it? • After addressing this question, the key for imitation discouragement is: - When exceptional utility is combined with strategic pricing, imitation is discouraged.

22. Our Company: Amgen • Amgen uses its Strategic Pricing for its very differentiated products to control the share of the market for medical therapies and drugs to treat serious illnesses • Due to their brand recognition, and the combination of their exceptional utility with strategic pricing, imitations are discouraged for their very unique products

24. The Price Corridor of the Mass • Step 1- Identify the Price Corridor • Same Form- Same Products or Services. • Different Form, Same Function- Different look, but same use. 3. Different Form and Function- Completely different, but same overall objective.

25. The Price Corridor of the Mass • Step 2- Price level within the price corridor • Upper-level Pricing- Many Patents and Asset protection • Mid-level Pricing- Fewer patents and Asset safe-guards • Lower-level Pricing- With out patent protection. Costco- Volume brings cost advantages

27. From Strategic Pricing to Target Costing • Target costing is the next step in the strategic sequence • Addresses the profit side of the business model • Maximize the profit potential of a blue ocean idea • Start with the strategic price, deduct its desired profit margin, to arrive at the target cost • Price-minus costing, not cost-plus pricing is essential

28. Target Costing • When driven by strategic pricing it is usually aggressive • Build a strategic profile that has both divergence and focus, to strip out costs • Cirque du Soleil- eliminated animals • Ford- offered model T in one color

29. Target Costing • Sometimes these cost reductions are enough to hit target cost, but often are not • Fords aggressive target cost for the model T was to low to be reached • Scraped the standard manufacturing model • Introduced the assembly line • Cutting labor hours by 60%

30. Leaving Lucrative Blue Waters • Temping for companies to give in, instead of drilling down and finding ways to creatively meet the target cost • Bumping up the strategic price • Cutting back on utility • Not on a path to lucrative blue waters

31. Hitting The Cost Target • Three principle levers • Streamlining operations and introducing cost innovations from manufacturing to distributing • Partnering • Change the pricing model of the industry

32. Streamlining Operations and Introducing cost innovations • Can the product or services raw materials be replaced by less expensive ones • Can high-cost, low-value added activities in your value chain be eliminated, reduced, or outsourced • Can you reduce number of parts or steps • Can you digitize activities to reduce costs • Can physical location be shifted from prime real estate to lower cost locations • Home Depot, IKEA, Wal-Mart in retail • Southwest in service • Swatch: 30% lower cost structure

33. Partnering • Companies mistakenly try to carry out all the production and distribution activities themselves • See the product or service as a platform for developing new capabilities • Simply a matter of not considering other outside options

34. Partnering • Provides a way for companies to secure needed capabilities fast and effectively while dropping their cost structure • Leverage other companies expertise and economies of scale • Includes closing gaps in capabilities through making small acquisitions when doing so is faster and cheaper • IKEA has partnered with some 1500 manufacturing companies in 51 countries

35. Changing the Pricing Model of the Industry • By changing the pricing model used – and not the level of the strategic price - companies can often overcome these more substantial issues

36. Changing the Pricing Model of the Industry • Film industry • Videotapes cost $80 • Few people willing to pay that • The strategic price of a video had to be set in relation to going to the movies and not owning a tape for life • Could not possibly make money by selling the videos at only a few dollars if it followed the path of using strategic pricing? • It could not

37. Changing the Pricing Model of the Industry • Blockbuster • Got around this problem by changing the pricing model from selling to renting • Able to price videos at only a few dollars a rental • Made more repeatedly renting $80 video than ever possible selling it • NetJets • Make jets available to wide range of corporate clients • Buy rights to use a jet for a certain amount of time, rather than buying the whole jet

38. Abandoning the Concept of Price Altogether • Companies give products to customers in return for an equity interest in the customers business • Hewlett-Packard traded high-powered servers to Silicon Valley start-ups for a share of their future revenues • Customer gets immediate access to key capabilities, and HP stands to earn a lot more than the price of the machine • Aim is not to compromise on the strategic price but to hit the target through a new price model • Pricing innovation

39. Summary of Target Costing • Company begins with it’s strategic price, from which it deducts its target profit margin to arrive at its target cost. To hit the cost target that supports that profit, companies have two key levers: • Streamlining and cost innovation • Partnering • When the target cost cannot be met despite all efforts to build a low-cost business model, the company should turn to the third lever, Pricing innovation, to profitably meet the strategic price • When a companies offerings successfully addresses the profit side of the business model, the company is ready to advance to the final step

40. From Utility, Price, and Cost to Adoption • Blue Ocean Idea may threaten the status quo • May provoke fear and resistance among 3 main stakeholder: • Employees • Business partners • General Public • Educate the Fearful!

41. Employees • Failure to educate can be very expensive • Merrill Lynch online brokerage service • Stock Price fell 14% • Communicate to employees and make sure they are aware of the threats posed by the idea • Work with employees so that everyone in the company wins • Morgan and Stanley Dean Witter & Co. engaged employees in open internal discussion of company’s strategy • Resulted in shares rising 13%

42. Business Partners • Potentially more damaging than employee disaffection • Fear that their revenue streams or market posistions are threatened • SAP developed AcceleratedSAP (ASAP) • Required active cooperation of large consulting firms • Were deriving substantial income from SAP’s other products • Not incentivized to find the fastest way to implement the company’s new software • Resolved dilemma by openly discussing the issues with partners • Executives convinced consulting firms that they stood to gain more business by cooperating

43. General Public • New and Innovative ideas spread to general public • Monsanto (Genetically Modified Foods) • Environmental groups huge problem • Should have educated the groups as well as the public on the benefits of genetically modified food • Should have given consumers a choice between organic and genetically modified by labeling

44. Key in Educating • Engage in open discussion about why the adoption of the new idea is necessary • Explain merits, set clear expectations, describe how the company will address expectations • Stakeholders need to know that their voices have been heard and that there will be no surprises

45. Blue Ocean Idea Index

46. Any Questions?