Chapter 3 (BOS) Reconstruct Market Boundaries

Chapter 3 (BOS)Reconstruct Market Boundaries Kelly Bredensteiner Christine Cox Cailtin Greenwood Michele Haynes

Reconstruct Market Boundaries • Main principle is to reconstruct market boundaries to break from the competition and create blue oceans • Successfully identify commercially compelling blue ocean opportunities • There is a systematic pattern for reconstructing boundaries to create blue oceans • There are six assumptions companies have that keep them in the red ocean

Six Assumptions • Define their industry similarly and focus on being the best within it • Look at their industry through the lens of generally accepted groups (such as luxury automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they play in • Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry)

Six Assumptions continued • Define the scope of the products and services offered by their industry similarly • Accept their industry’s functional and emotional orientation • Focus on the same point in time- and often on current competitive threats- in formulating strategy

How to Get into the Blue Ocean • To break into the blue ocean, there are six paths that a company can follow • 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 • A company not only competes with other firms in their industry but also with companies in those other industries that produce alternative products or services • Alternatives are products or services that have different functions and forms but the same purpose • Ex: Movies vs. Restaurant • Two very different experiences • Restaurant- Food and Conversation • Movies- Visual entertainment • Both are designed to enjoy a night out

NetJets • NetJets is a company that created its own blue ocean by looking across alternative industries • Mainly compared itself with commercial airline travel • NetJets offers: • Fractional jet ownership • One-sixteenth ownership • 50 hours of flying time a year • Starting at $375,000.

About NetJets • Purchased by Berkshire Hathaway • 500 or more aircrafts • Operating 250,000 flights • Travels to 140 countries • Aimed directly at corporate travel • Biggest segment of airline customers

What Makes NetJets Successful • Flexible • Plane will be ready with only a 4 hour advance notice • Short travel time • Point-to-point travel • Hassle-free travel experience • Minutes from car to plane rather than hours • Increased reliability • Strategic pricing • Minimum costs due to smaller airplanes, the use of smaller regional airports, and limited staff

NetJets’ Competition • There have been companies that tried to duplicate NetJets’ strategy • Of the 57 companies that have gone into the fractional jet operations, all went out of business • This leaves NetJets at the very top of the industry

NTT DoCoMo’si-mode • Another product from Japan that created its own blue ocean was the i-mode • With the deregulation of telecommunications in Japan, extreme competition was the norm • Launched in 1999 • Converged the mobile phone and data transmission • Mobile phone with a few applications from the Internet that were the most popular (weather, news, phone directory, and games) • Very simple one button access to the Internet

Advantages Over Other Companies • Reduced the over flow of information that the Internet provided on a PC • Already connected to the Internet so no dial-up was necessary • All on one bill so there was no need to transfer credit card information over the internet • Although it was 25% more expensive when most cell phones, it was cheaper than a PC and had high mobility

NTT DoCoMo’s Competition • All of the other companies that tried to duplicate the i-mode made the phone too complicated and sophisticated rather than a simple one button access to popular online applications • Increased market to youth and senior citizens • No major competitors • By 2003, there were 40.1 million subscribers • Revenues went from $2.6 million in 1999 to $8 billion in 2003

Path 2: Look Across Strategic Groups Within Industries • Blue Oceans Can be unlocked by looking across strategic groups. • Strategic Groups are generally ranked in a hierarchical order • Price and Performance • Focus on improving competitive position within strategic group • Key to creating a blue ocean in existing strategic groups is to understand which factors determine customers’ decisions to trade up or down from one group to another.

Curves (Women’s Fitness) • Started franchising in 1995, acquiring more than 2mill members in more than 6 thousand locations with revs exceeding more than 1 Billion • Was thought that it was entering an oversaturated market, making its offering to customers who would not want it and making its offerings blander than the competitions • Built on two strategic groups in the U.S. fitness industry • Traditional health clubs and home exercise programs

The BIG Question • What made women trade either up or down between these strategic groups? • Women don’t want to see men while working out • Not enough time to spend hours at the gym • Also the locations present traffic challenges which increase stress and discourages going to the gym • Women trade up to health clubs because it is to easy to find an excuse when working out at home.

Eliminating the Unwanted to Get it Right • Curves has eliminated all the aspects of the health blub that are of little interest • Machines are set up in a circle to encourage interchange among members • Nonjudgmental atmosphere • Members move around the machines and in 30 min. the circle is complete and so is a full workout • Curves created a new blue ocean demand

Others Creating Blue Oceans • Ralph Lauren created blue ocean of “high fashion with no fashion” • Toyota’s Lexus created new blue ocean by offering the quality of the high-end luxury cars with prices closer to the lower-end Cadillac’s.

Path 3: Look Across the Chain of Buyers • The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. • Industries typically converge on a single buyer • Examples: • Pharmaceutical industry focuses on influencersthe doctors • Office equipment industry focuses on purchasers • Clothing industry sells predominantly to users

Challenging • By challenging the industry’s conventional wisdom about what buyer group to target can lead to the discovery of new blue ocean. • Example • Insulin produces for people who are diabetic • Originally focused on influencers such as doctors • Novo Nordisk created a blue ocean by shifting the focus to the patients themselves • The NovoPen was the first user-friendly insulin delivery soltion

Bloomberg • Until the early 1980’s the online financial industry only provided news and prices to the brokerage and investment community. • Bloomberg designed a system specifically to offer traders better value with an easy to use system with familiar financial terms • Bloomberg focused on the users • Question conventional definitions and who the target buyer companies can then see new ways to unlock value

Path 4: Look Across Complementary Product and Service Offerings • Untapped value is often hidden in complementary products and services • The objective is to define the total solution buyers seek when they choose a product or service • Key questions to ask: • What is the context in which a product or service is used? • What happens before, during, and after? • Can the pain points be identified? • How can pain points be eliminated through a complementary service or product offering?

NABI: Hungarian Bus Company • Companies competed to offer the lowest purchase price • Industry problems: outdated designs, late delivery times, low quality, prohibitive price of options • Question: Why were bus companies only concerned with the initial purchase price? • Discovered major costs came after the bus was purchased • Result: created a unique bus

Examples • Barnes and Noble • Virgin Entertainment’s Megastores • Dyson Vacuums • Zeneca’s Salick Cancer Centers

Path 5: Look Across Functional or Emotional Appeal to Buyers • Industries should compete on: • Rational Appeal • Compete on price and function • Emotional Appeal • Compete on feelings • Appeal is typically a result of the way companies competed in the past

Challenge • Often discover new market space • Two Patterns: • Emotionally orientented industries offer extras that add price with out enhancing functionality • Taking away the extras may create a simpler, lower-priced, lower-cost business model • Functionally oriented industries can add more emotion to their products to stimulate demand

Quick Beauty House • Traditional Japanese haircuts • Took about an hour because of rituals • Time spent cutting hair only a fraction the time • Price was about $27 to $45 • QB House • Recognized many people didn’t want to waste an hour • Removed the emotional service of the haircut • Cut time is about ten minutes • Price was reduced to $9

Cemex • World’s 3rd largest cement producer • Cement houses were the dreams of people in Mexico • Most people could not afford it • Launched Patrimonio Hoy Program • Shifted orientation of cement from a functional product to the gift of dreams • System of tandas: community savings scheme • Competitors were selling cement while Cemex was selling dreams

Path 6: Looking Across Time • What NOT to do: • Most companies adapt to change gradually, incrementally, and passively • Most companies pace their actions just to keep up with trends. • Don’t be most people!

Path 6: Looking Across Time • What you should do: • Look Across Time • If you: • Project how a trend will change customer value and impact company business model not just react to trend. • Look at the customer value today and compare to what it might be tomorrow • Then you: • can ACTIVELY shape strategy and the future of the business, and be ready to seek out a new blue ocean

Steps to Looking Across Time • Assess trends • Envision what the market might look like in the future based on the trends • Change strategy today to reflect the possible blue oceans of tomorrow

Step 1: How to Actively Assess Trends • In order for trends to be the foundation of your strategy, they must: • Be decisive to your business • Many trends affect your business (In an energy company- affected by season, fuel prices, legislation, etc.) • Usually only one or two have a DECISIVE impact (legislation and higher emissions standards) • Be irreversible • Thomas Friedman, Hot Flat and Crowded: Companies won’t and should not invest in expensive capital and R&D if new cap and trade legislation will expire in the future(as it has in the past), reversing the race to cleaner forms of energy. • Have a clear trajectory • Financial Crisis- no one knows where it was going or where it will lead- not a good foundation for strategy

Steps 2&3: Envisioning and Changing • What will the market look like based on the trends? • Ex: Apple and the IPOD • Trend- illegal music sharing becoming more rampant, but not efficient or diverse • Vision- To provide shareable music online • Change: through iTunes which mitigates efficiency, diversity and legal problems • Ex: Thomas Friedman article • Trend And Vision • energy conservation trends suggest energy costs will rise and policies will turn attention to data center efficiency • Strategy: • Current: data centers bill customers based on SPACE allocation • Have to maximize energy efficiency, but how? Cisco- rather than focus on peak processing rates (current practice) focused on tailoring process rates to use. • Result: Cisco spends less energy on less processing power and produces more output, and customers demand this business model because bills are based on ENERGY consumption, not space. The more efficient model is cheaper.

Review: Path 6 • What trends will impact your industry, are irreversible, and have a clear path? • How will they impact your industry? • How can you create unprecedented customer value from this impact?

Review: Paths 1-6

Remember: Blue Ocean Strategy • Is NOT about predicting or preempting trends • Is NOT trial and error • It IS a structured 6-path process that reorders the market in a new way to find blue oceans

Chapter 3 (BOS) Reconstruct Market Boundaries