1. Blue Oceans – Reconstructing Market Boundaries Chapter 3:

2. Blue Ocean – Ch. 3 Reconstruct Market Boundaries As we know, in order to create Blue Oceans you must reconstruct market boundaries The trick is to successfully identify commercially compelling blue ocean strategies out of numerous possibilities Are there systematic patterns for reconstructing market boundaries? In fact there are very clear patterns for creating blue oceans This system is called the “6 Paths Framework” None of these requires special vision or foresight about the future But companies are trapped by continually hypnotically staying on the following 6 assumptions;

3. Ch. 3 Reconstruct Market Boundaries Conventional Logic Blue Ocean Logic Conventional Logic Blue Ocean Logic Industry focus on rivals within its industry looks across alternative industries Strategic Group focus on competitive position looks across strategic groups within strategic group within industry Buyer Group focus on better serving redefines the industry buyer the buyer group group Scope of product focus on maximizing the value looks across to complimentary or service offering of product and service offerings product or service offerings within the bound of its industry Functional-Emotional focuses on improving price- rethinks the functional- Orientation performance within the functional emotional orientation of emotional orientation of its industry its industry emotional orientation of its industry its industry Time focuses on adapting to external participates in shaping external trends as they occur trends over time trends as they occur trends over time

4. Ch. 3 Reconstruct Market Boundaries The 6 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 Complimentary Product and Service Offerings Path – 5: Look Across Functional or Emotional Buyers Path – 6: Look Across Time With these 6 Paths in mind let us examine each one and understand the concept from the inside out.

5. PATH 1: Look Across Alternative Industries Companies compete not only in their own industry but also in other industries Alternatives are broader than substitutes Products that have different forms but offer the same functionality are often substitutes However, alternatives include products or services that have different functions and forms, but the same purpose However, alternatives include products or services that have different functions and forms, but the same purpose (CPA vs. Software vs. Pen and Paper – TAXES) Products or services can take different forms yet serve the same customer (movie theatre vs. Restaurant – they are not substitutes but alternatives) Buyers simply weigh the alternatives, often unconsciously Sadly, rarely do Seller think consciously about how customers make trade off’s across alternative industries It is the space between Industries that often creates opportunities for Blue Oceans

6. Ch. 3 Reconstruct Market Boundaries PATH 1: (Cont.) Consider the Case of NetJets In less than 20 years they have grown larger than many traditional airlines and immensely more profitable They have over 500 aircraft and operate more than 250,000 flights to 140 countries Revenues are growing at 30-35% per year Success is based on flexibility, short travel time, hassle- free experience, improved reliability and good pricing NetJets reconstructed market boundaries, making Blue Oceans by looking across alternative industries The most lucrative mass of customers are corporate travelers They can either fly commercially or the company can buy its own Jet The questions is why choose one alternative over the other, when there is now a MIDDLE GROUND – NetJets BY focusing on the key factors that lead Corporations to trade across alternatives and reduce everything else NetJets created Blue Oceans BY focusing on the key factors that lead Corporations to trade across alternatives and reduce everything else NetJets created Blue Oceans

7. Ch. 3 Reconstruct Market Boundaries PATH 1: (Cont.) Let’s examine the underlying logic of NetJets Who do corporations choose commercial airlines? – The answer is not long lines, nasty check-=in times, transfers, red-eye, IT IS ONE REASON COST! By doing this they only buy the number of tickets they actually need thereby controlling costs Alternatively companies that purchase jets have to now behave like an airline and that is costly as well NetJets offers companies a 1/16 th ownership for $375,000 and have a share in a $6 m aircraft. A study found that a business trip from Newark to Austin cost $19,400 commercially vs. $10,100 on NetJets. NetJets do not fly to the expensive 30 large airports, but fly instead to over 5,000 regional airports close to town. A trip from D.C. to Sacramento takes 10.5 hours commercially and only 5.2 hours in NetJets. NetJets is available on 4 hours notice BY offering the best of commercial travel and Private jets, and by eliminating everything else NetJets opened up a multi-billion dollar Blue Ocean BY offering the best of commercial travel and Private jets, and by eliminating everything else NetJets opened up a multi-billion dollar Blue Ocean

8. Ch. 3 Reconstruct Market Boundaries Strategy Canvas for NetJets HIGH Private Jet Corp LOW Price Mgmt Deadhead Speed Ease Flexibility In-flight serv ` Commercial Airlines NetJets Value

9. Ch. 3 Reconstruct Market Boundaries PATH 2: Look Across Strategic Groups Within Industries Strategic Groups are companies within an industry that pursue a similar strategy They tend to be ranked according to two dimensions; price and performance They focus on improving competitive position within a strategic group (Mercedes – Jaguar and BWM) They compete by out-luxuriating each other And then along came LEXUS and kicked their ass – A Toyota in Luxury clothing Now consider Curves, Texas based women's’ fitness company – 1 opening now every 4 hours somewhere in the world They have 6,000 locations grossing $1b a year Members are created almost solely by word-of-mouth Like [yellow tail], Curves created a NEW GROUP of fitness customers, women who never went!

10. Ch. 3 Reconstruct Market Boundaries PATH 2: Curves - cont. Curves built their company on the advantages of two existing strategic groups in the US Fitness industry – Traditional Health Clubs and Home Fitness Traditional health clubs cost $500k to start and are expensive to maintain and lose members all the time Curves costs about $50,000 to start and use less than 1,500 square feet in cheap locations They are not fancy inside, and have simple machines facing each other for community feeling, no mirrors and no men Typical clubs cost around $100 a month Curves cost $30 Curves focused on making it easy and un-confrontational to get healthy for the ‘cost of a cup of coffee a day’ No food, no spa, no locker rooms Established Curves franchises resell for up to $150,000 in 1 year Curves does not compete with traditional Clubs, it created Blue Ocean demand.

11. Ch. 3 Reconstruct Market Boundaries Strategy Canvas of CURVES HIGH Curves LOW Price Amenities Workout Workout Instructor Environ. Same-sex conven Womanly equipment time avail. encouraging non-threat. ience fun atmos Home exercise Prog. Traditional Health Clubs

12. Ch. 3 Reconstruct Market Boundaries PATH 3: Look Across the Chain of Buyers In all industries there are a chain of buyers who are involved in the purchase decision The purchasers who pay for the product, differ from the actual user and from the influencer Companies typically converge on a single buyer group Pharmaceutical Industry focuses on influencers - Doctors Office equipment industry focuses on purchasers – corporate buyers Clothing industry focuses on users Examine the case of Novo Nordisk, the Danish Insulin manufacturers who moved the focus away from the Doctor to the patient Novo created the NovoPen to stop Diabetics form having to carry around Insulin paraphernalia They followed up the Pen with the NovoLet, a pre-filled disposable injection pen – convenience and ease Novo now controls 60-70% of the Insulin industry in Europe

13. Ch. 3 Reconstruct Market Boundaries PATH 3: Look Across the Chain of Buyers Bloomberg totally revolutionized the Financial Information Industry by moving the focus from IT Managers to Analysts and Traders They created a system of two-panel info where it is all in front of yours eyes – no clicking They gave the Traders and Analysis personal shopping assistance for their busy lives Bloomberg created a value curve that was radically different from Reuters and Telerate Consider how Canon created small desktop copier industry by shifting the target customer from corporate buyer to personal user

14. Ch. 3 Reconstruct Market Boundaries PATH 4: Look Across the Complimentary Product and Service Offerings Few products are used in a vacuum and other products and services affect their value Going to the movies involves tickets, baby-sitter, parking, food/drink and transportation Now simply think about what happens when your product or service is used Software and hardware work together – airlines and ground transportation Consider the case of NABI the Hungarian bus company They looked at the major customers in the $1 b bus industry They found that the major element of decision making was NOT the price of the bus but the ‘on-going maintenance costs’ NABI realized the this industry did not have to be ‘commodity-price-driven’

15. Ch. 3 Reconstruct Market Boundaries PATH 4: Cont. NABI set out to create a bus unlike any in the industry, how? - They adopted high-strength fiberglass - They adopted high-strength fiberglass - This created a corrosion free body cutting maintenance costs dramatically - This created a corrosion free body cutting maintenance costs dramatically - Body repairs were faster and cheaper and easier - Body repairs were faster and cheaper and easier - The weight of the new vehicle was 30-35% lighter than steel, making it cheaper to operate with smaller cheaper engines. - The weight of the new vehicle was 30-35% lighter than steel, making it cheaper to operate with smaller cheaper engines. - This allowed for more passengers and therefore more passenger-revenue miles - This allowed for more passengers and therefore more passenger-revenue miles - The new bus was also ecologically cleaner to run - The new bus was also ecologically cleaner to run - NABI captures 20% of the total US bus market - NABI captures 20% of the total US bus market - It has now more than $1 b in back orders - It has now more than $1 b in back orders - In 2002 it was given the Economist Intelligence Unit Award as one of the 30 most successful companies in the world. - In 2002 it was given the Economist Intelligence Unit Award as one of the 30 most successful companies in the world.

16. NABI – North American Bus Industries

17. Ch. 3 Reconstruct Market Boundaries Strategy Canvas for Nabi Hungarian Bus Company HIGH U.S. Transit Bus LOW Initial Corrosion Maint. Fuel Environm. Aesthetic Customer purchase Costs consump. Friendliness design friendliness NABI

18. Ch. 3 Reconstruct Market Boundaries PATH 5: Look Across Functional or Emotional Appeal to Buyers Competition is based on the scope of products and services but also on appeal Some industries compete strictly on the basis of price and function, and their appeal is rational Other industries compete largely on feelings, and their appeal is emotional The weight of the new vehicle was 30-35% lighter than steel, making it cheaper to operate with smaller cheaper engines Over time functionally oriented industries become more functional and emotionally oriented industries become more emotional Industries have trained customers what to expect Customers echo back – MORE FOR LESS When companies are willing to challenge the functional- emotional orientation of their industry they find new market space.

19. Ch. 3 Reconstruct Market Boundaries PATH 5: Look Across Functional or Emotional Appeal to Buyers When companies are willing to challenge the functional-emotional orientation they often find new markets Emotionally oriented companies of ten add price without enhancing functionality The opposite is also true, Functionally oriented companies can add life by infusing emotion and stimulating demand Two great examples of this are Swatch and The Body Shop Swatch transformed the functionally driven budget watch industry into an emotionally driven fashion statement The Body Shop did the reverse, transforming the emotionally driven cosmetics industry into a functional no-nonsense cosmetic house Also consider the Japanese experience of QB (Quick Beauty) transforming barbershops into beauty houses – going from 1 shop in 2006 to 200 in 1993, with visitors growing from 57,000 in 1996 to over 3.5 million in 2002 QB changed the emotionally oriented industry to a functionally oriented one – they reduced the time for a haircut from 1 hour to TEN minutes (no hot towels, blow drying nonsense Time to cut hair was reduced drastically, increasing revenue and reducing costs (Value innovation)

20. Ch. 3 Reconstruct Market Boundaries Strategy Canvas for QB House HIGH Avg. Barbershop LOW Price Reservation Extra Range of Hygiene Time saved Time saved Air wash desk services hair treatments on washing cutting system QB House

21. Ch. 3 Reconstruct Market Boundaries PATH 5: Look Across Functional or Emotional Appeal to Buyers Now look at ‘Cemex’ world’s 3 rd largest cement company, which went from functional to emotional In Mexico they cement sold in bags to the ‘do it yourselfer’ represented 85% of the total cement market The market was stagnant and unattractive, with more non-customers than customers Poor families would not spend money on home improvement, focusing rather on festivals, quinceaneras, etc. Cemex believed that the market could grow $500-$600 m if they could unlock the latent demand They launched an advertising campaign, “Patrimonio Hoy” (the Gift of Dreams) Cemex tied into the ‘tandas’ community savings approach Whereas Cemex’s competitors sold bags of cement, Cemex sold “Dreams”. The company threw small festivals in towns when a room project was completed, reinforcing status and dreams. Cemex now enjoyed a 15% annual growth in sales in a previously stagnant market Demand grew from 2,300 pounds/household every 4 years to the same amount in 15 months

22. Ch. 3 Reconstruct Market Boundaries PATH 5: Look Across Functional or Emotional Appeal to Buyers Similarly as Viagra became successful, Pfizer shifted the focus from medical treatment to lifestyle enhancement Likewise look how Starbucks transformed the coffee industry by shifting its focus from commodity coffee sales to an emotional atmosphere for coffee and social enjoyment In the United Kingdom insurance giant Direct Line Group has totally eliminated its commissioned broker group, reasoning that customers would not need hand holding if DL paid claims faster and more efficiently DL substituted costly Brokers with high level technology (internet access) eliminating nasty, messy paperwork, and thereby improving claims processing Lower costs were passed onto customers in the form of premium savings Just look what Stock Market giant ‘Charles Schwab’ did by eliminating commissioned brokers and encouraging online trading They went from emotionally oriented personal relationships to functional low cost trading

23. Ch. 3 Reconstruct Market Boundaries PATH 6: Look Across Time All industries are subject to external trends that affect their business Look at the enormous impact that the Internet had on us Industries tend to focus on projecting the trend itself Blue Oceans are created where industries examine how the trend will change value to the customers and impact the business model of the company By looking at time, and examining the value it must deliver tomorrow, managers can actively shape their future This Path is a little more complicated but is done with the same principles It does not involve trying to predict the future, but instead it is about finding insights into trends There are three principles that are critical to assessing trends across time;

24. Ch. 3 Reconstruct Market Boundaries PATH 6: Look Across Time - cont 1: They must be decisive to your business 2: They must be reversible 3: They must have a clear trajectory The Euro currency has been evolving along a constant trajectory, and is decisive; irreversible and clearly developing along a constant trajectory Apple observed the flood of illegal music file sharing in the late 1990’s They looked at Napster, Kazaa and Limewire and saw over 2 billion illegal files shared in 2002 The trend towards digital music was clear The record industry fought this with lawsuits, Apple invented iTunes in 2003 and offer over 1.5 m songs Then in order to store and play this downloaded music they invented the iPod iTunes then added essentials such as Best Hair Bands, Best Love Songs, etc.

25. The Battle of the ED Med’s Total spent on advertising in 2007 was $110.4 m Total revenue in 07 was $1.7 billion Use celebrities in adv. Campaign Total users 16.2 million Pill works for 4 hours Price per pill is $9.70 Compelling tagline is?? Market size is 1b worldwide China exclusive seller Total spent on advertising in 2007 was $10 million Total revenue in 07 was $272 million Do not use celebrities in advertising campaign Total users 1.32 million Pill works for 36 hours Price per pill is $9.70 Compelling tagline is?? Market size 1b worldwide

27. Head-to-Head vs. Blue Ocean Creation Industry Focuses in rivals within its industry Looks across alternative industries Strategic Groups Focuses on competitive position within strategic group Looks across strategic groups within industry Buyer Groups Focuses 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 complimentary product and service offerings Functional- emotional orientation Focuses on improving price performance in the F-E orientation Rethinks the functional-emotional orientation Time Focuses on adapting to external trends as they occur Participates in shaping external trends over time