1. Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne Chapter 6
Team 2:
Caitlin Clark
Stephen Massimi
Will Mayrath
Katie Trevino
Matt Vatankhah

2. Get the Strategic Sequence Right
The next challenge of a blue ocean strategy is to build a robust business model
4th Principle of blue ocean strategy: Get the strategic sequence right
Fleshing out and validating blue ocean ideas to ensure commercial validity
With the right strategic sequence, you can dramatically reduce business model risk

3. The Right Strategic Sequence
Need to build blue ocean strategy in the sequence of buyer utility, price, cost, and adoption
Buyer utility is the starting point
If there is no buyer utility, there is no potential for blue ocean to begin with
The first two steps address the revenue side
The cost side ensures that a company creates a leap in value for itself in the form of profit
Adoption: the blue ocean strategy is complete only when you address adoption hurdles to ensure the success of your idea

4. A Commercially Viable Blue Ocean Idea
Buyer Utility
Is there exceptional buyer utility in your business idea?
Yes
No—Rethink
Price
Is your price easily accessible to the mass of buyers?
Yes
No—Rethink
The Right Strategic Sequence, continued
Figure 6-1 (page 118)
Cost
Can you attain your cost target to profit at your strategic price?
Yes
No—Rethink
Adoption
What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?
Yes
No—Rethink
A Commercially Viable Blue Ocean Idea

5. Test for Exceptional Utility
Example: Philips’ CD-i
Value innovation is not the same as technology innovation
To get around this, create a strategic profile that passes the initial litmus test of being focused, being divergent, and having a compelling tagline that speaks to buyers
The buyer utility map helps managers look at this issue from the right perspective
Outlines all the levers companies need to pull to deliver exceptional utility to buyers as well as various experiences buyers can have with the product or service

6. Test for Exceptional Utility, continued—Figure 6-2 (page 121)
The Six Stages of the Buyer Experience Cycle
The Six Utility Levers
4. Supplements
5. Maintenance
6. Disposal
1. Purchase
2. Delivery
3. Use
Customer Productivity
Simplicity
Convenience
Risk
Fun and Image
Environmental Friendliness

7. The Six Stages of the Buyer Experience Model
A buyer’s experience can usually be broken down into six stages, running more or less sequentially from purchase to disposal
At each stage, managers can ask a set of questions to gauge the quality of buyers’ experiences

8. The Six Stages of the Buyer Experience Model, continued
Figure 6-3 (page 123)
Purchase—How long does it take to find the product you need?
Delivery—How long does it take to get the product delivered?
Use—Does the product require training or expert assistance?
Supplements—Do you need other products or services to make this product work?
Maintenance—Does the product require external maintenance?
Disposal—Does use of the product create waste items?

9. The Six Utility Levers
Cutting across the stages of the buyer’s experience are what we call utility levers
The way in which companies can unlock exceptional utility for buyers
The most commonly used lever is customer productivity, in which an offering helps a customer do things faster and better
The greatest blocks to utility often represent the greatest and most pressing opportunities to unlock exceptional value
Using the buyer utility map, you can clearly see how, and whether, a new idea removes the biggest blocks in converting noncustomers into customers

10. The Six Utility Levers, continued—Figure 6-4 (page 124)
Purchase
Delivery
Use
Supplements
Maintenance
Disposal
Customer Productivity:
In which stage are the biggest blocks to customer productivity?
Simplicity:
In which stage are the biggest blocks to simplicity?
Convenience:
In which stage are the biggest blocks to convenience?
Risk:
In which stage are the biggest blocks to risk?
Fun and image:
In which stage are the biggest blocks to fun and image?
Environmental Friendliness:
In which stage are the biggest blocks to environmental friendliness?

11. The Six Utility Levers, continued
Example: Ford Model T
The buyer utility map highlights the differences between ideas that genuinely create new and exceptional utility, and those that are essentially revisions from existing offerings
The aim is to check whether your offering passes the exceptional utility test

12. From Exceptional Utility to Strategic Pricing
To secure a strong revenue stream for your offering, you must set the right strategic price
It is very important to know from the start what price will capture buyers
Companies are implementing this strategy because:
Volume generates higher returns than it used to
Companies bear more costs in product development than in manufacturing
Example: Software Industry
To a buyer, the value of a product or service may be closely tied to the total number of people using it
Network Externalities—you sell millions or you sell nothing at all

13. From Exceptional Utility to Strategic Pricing, continued
Free Riding
The rise of knowledge-intensive products creates the potential for free riding
Relates to the non-rival and partially excludable nature of knowledge
Rival Good
One firm precludes its use by another
Example: IBM
Non-rival Good
One firm does not limit its use by another
Example: Virgin Atlantic Airways
Excludability
A good is excludable if the company can prevent others from using it because of limited access or patent protection
Enforces the risk of free riding
Example: Intel, Curves

14. From Exceptional Utility to Strategic Pricing, continued
All this means is companies must set a strategic price to attract buyers and also retain them
Given the high risk for free riding, companies must set a strategic price from day one
Strategic pricing addresses one question:
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?

15. Price Corridor of the Mass—Figure 6-5 (page 128)
Step 1: Identify the price corridor of the mass.
Step 2: Specify a price level within the price corridor.
Three alternative product/service types:
Different form and function, same objective
Same Form
Different form, same function
High degree of legal and resource protection
Difficult to imitate
Upper-level pricing
Price Corridor
of the Mass
Some degree of legal and resource protection
Mid-level pricing
Low degree of legal and resource protection
Easy to imitate
Lower-level pricing
Size of circle is proportional to number of buyers that product/service attracts

16. Price Corridor of the Mass, continued
Step 1: Identify the Price Corridor of the Mass
Main challenge is to understand the price sensitivities of those people who will be comparing the new product or service with the host of very different-looking products and services offered outside the traditional competitors
Different Form, Same Function—a product or service that performs the same function but takes a different form
Example: Ford’s Model T

17. Price Corridor of the Mass, continued
Step 1: Identify the Price Corridor of the Mass, continued
Different Form and Function, Same Objective—a product or service takes a different form and serves a different function but has the same objective
Example: Cirque du Soleil
Managers should then list the groups of alternative products and services, and graphically plot the price and volume of these alternatives
The price bandwidth that captures the largest groups of target buyers is the price corridor of the mass

18. Price Corridor of the Mass, continued
Step 2: Specify a Level Within the Price Corridor
Helps managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services
Two factors
Degree to which the product or service is legally protected
Degree to which the company owns some exclusive asset or core capability

19. Price Corridor of the Mass, continued
Upper-Boundary Strategic Pricing—are protected legally and have an exclusive asset or core capability
Companies should pursue mid-to-lower Boundaries if any of the following apply:
Their blue ocean offering has high fixed costs and marginal variable costs
Their attractiveness depends heavily on network externalities
Their cost structure benefits from steep economies of scale and cope; volume brings significant cost advantages

20. From Strategic Pricing to Target Costing
To maximize profit potential, a company should start with the strategic price and then deduct its desired profit margin from the price to arrive at the target cost
Will make it difficult for potential followers to match as well as be profitable
Company must reduce costs to get to cost target
Cirque du Soleil saved by eliminating animals and stars
Ford made Model T in one color with very few options

21. From Strategic Pricing to Target Costing, continued
Sometimes, these cost reductions are not enough to hit the cost target
Ford introduced the assembly line
Replaced expensive skilled craftsmen with less expensive unskilled laborers
Reduced labor hours by 60%

22. From Strategic Pricing to Target Costing, continued
To hit cost target, companies have three principal levers that they can pull:
Streamlining operations and introducing cost innovations from manufacturing to distribution
Partnering
Changing the pricing model of the industry

23. From Strategic Pricing to Target Costing, continued
Lever 1: Streamlining operations and introducing cost innovations
Can raw materials be replaced by unconventional, less expensive ones?
Switching from metal to plastic
Can your physical location be moved from prime real estate to lower-cost locations?
Home Depot, IKEA, Wal-Mart
Southwest Airlines is doing business at secondary airports
Love Field, not DFW

24. From Strategic Pricing to Target Costing, continued
Lever 1: Streamlining operations and introducing cost innovations, continued
Swatch Example
By using this lever, Swatch was able to arrive at a cost structure 30% lower than any other watch company in the world
Was able to sell “cheap” watches at $40 as opposed to the $75 other watch companies were charging
This low price left no profit margin for Japanese or Hong Kong-based companies to copy Swatch and undercut its price

25. From Strategic Pricing to Target Costing, continued
Lever 1: Streamlining operations and introducing cost innovations, continued
Swatch Example: How did they do it?
Knowing the price in which the watch would be sold, the Swatch project team worked backwards to arrive at the target cost
Involved determining the margin needed to support marketing and services and earn a profit
Because of high cost of Swiss labor, radical changes in the product and production methods were needed to achieve the target cost of $40
Used plastic instead of metal or leather
Reduced the number of inner parts from 150 to 51
Developed new and cheaper assembly techniques
Used ultrasonic welding instead of screws to seal the watch cases

26. From Strategic Pricing to Target Costing, continued
Lever 1: Streamlining operations and introducing cost innovations, continued
Swatch Example, continued
Changes enabled Swatch to reduce direct labor costs from 30% to 10% of total costs
Because of these changes, Swatch was able to profitably dominate the mass market for watches
Previously dominated by Asian manufacturers with access to cheaper labor

27. From Strategic Pricing to Target Costing, continued
Level 2: Partnering
Many companies mistakenly try to carry out all the production and distribution activities themselves
Partnering provides needed capabilities fast and effectively at a much lower cost
It allows a company to use other companies’ expertise and economies of scale

28. From Strategic Pricing to Target Costing, continued
Lever 2: Partnering, continued
IKEA Example
IKEA achieves the lowest prices possible on their some 20,000 products by partnering with around 1,500 companies, getting the lowest prices for materials and production
SAP Example
German-based business application software maker, SAP, partnered with Capgemini and Accenture, two leading consulting firms, as well as Oracle
Capgemini and Accenture afforded SAP a global sales force overnight at no extra cost
Oracle afforded SAP a world-class central database, while saving them hundreds of millions of dollars in development costs

29. From Strategic Pricing to Target Costing, continued
Lever 3: Changing the pricing model of the industry
When videos first came out, they were being sold for around $80
The strategic price of a video had to be set in relation to going to movies, not to owning a tape for life
Companies could not make money by selling the videos for a few dollars
Blockbuster changed the pricing model from selling to renting
Allowed them to strategically price videos at a few dollars per rental
They made more money by repeatedly renting out the $80 videos than they would have by selling them alone

30. From Strategic Pricing to Target Costing, continued
Lever 3: Changing the pricing model of the industry, continued
Companies have used several innovations in pricing models to profitably deliver on the strategic price
Time-shares
NetJets follows this model by selling the use of a jet for a certain amount of time to corporate customers as opposed to just selling the jet
Slice-shares
Mutual fund managers follow this model by bringing high-quality portfolio services to small investors by selling a sliver of the portfolio instead of the whole portfolio
Equity interest in the customer’s business
Hewlett-Packard has traded high-powered servers to Silicon Valley start-ups for a share of their revenues
Customers get much needed servers, while HP gets the opportunity to make much more than the price of the servers

31. Streamlining and Cost Innovations
From Strategic Pricing to Target Costing, continued—Figure 6-6 (page 136)
The Strategic Price
A company begins with its strategic price
Deduct target profit margin to arrive at target cost
To hit the cost target that supports that profit, there are 2 key levers
Streamlining and cost innovations
Partnering
When the target cost cannot be met despite all efforts to build a low-cost business model, turn to the third lever, Pricing innovation
Even when target cost can be met, pricing innovation can be pursued
The Target Profit
The Target Cost
Streamlining and Cost Innovations
Partnering
Pricing Innovation

32. From Utility, Price, and Cost to Adoption
Almost by definition, an unbeatable business model threatens the status quo, and thus may provoke fear and resistance among a company’s three main stakeholders: its employees, its business partners, and the general public
The company must first overcome such fears by educating the fearful

33. From Utility, Price, and Cost to Adoption, continued
Employees
Failure to adequately address the concerns of employees about the impact of a new business idea on their livelihoods can be expensive
Example: Merrill Lynch
When management announced plans to create an online brokerage service, reports of resistance and infighting within the brokerage division caused the stock price to fall 14%

34. From Utility, Price, and Cost to Adoption, continued
Employees, continued
Before companies go public with an idea, they should make a concerted effort to communicate to employees that they are aware of the threats posed by the execution of the idea
Example: Morgan Stanley Dean Witter & Co.
Engaged employees in open internal discussion of the company’s strategy for meeting the challenge of the Internet
The market realized that employees understood the need for an e-venture, and company shares rose 13% upon announcing the venture

35. From Utility, Price, and Cost to Adoption, continued
Business Partners
Resistance of partners who fear that their revenue streams or market positions are threatened by a new business idea can potentially be very damaging
Example: SAP
When developing the AcceleratedSAP (ASAP) product, active cooperation of large consulting firms was required
These firms were deriving substantial income from lengthy implementations of SAP’s other products, and were thus not incentivized to find the fastest way to implement the ASAP software
SAP resolved this dilemma by openly discussing the issues with partners
Executives convinced the consulting firms that they had more to gain by cooperating
Executive’s convincing points:
Although ASAP would reduce implementation time for small and midsized companies, consultants would gain access to a new client base that would more than compensate for some lost revenues from larger companies
The new system would offer consultants a way to respond to customers’ increasingly vocal concerns that business application software took too long to implement

36. From Utility, Price, and Cost to Adoption, continued
The General Public
Opposition can also spread to the general public, with devastating effects, especially if the idea is very new and innovative, threatening established social or political norms
Example: Monsanto
Intentions have been questioned by European consumers
Mistake: allowed others to take charge of the debate, rather than educating the public on the benefits of genetically modified food and its potential to eliminate world famine and disease
Monsanto
Maker of genetically modified foods
Intentions have been questioned largely because of the efforts of environmental groups such as Greanpeace, Friends of the Earth, and the Soil Association
Attacks of these groups have struck many chords in Europe, which has a history of environmental concern and powerful agricultural lobbies
When the products came out, Monsanto should have given consumers a choice between organic and genetically modified foods by labeling which products had genetically modified foods as their base
If Monsanto had taken these steps, then instead of being vilified, it might have ended up as the “Intel Inside” of food for the future—the provider of the essential technology

37. From Utility, Price, and Cost to Adoption
In educating these three groups of stakeholders, the key challenge is to engage in an open discussion about why the adoption of the new idea is necessary
Need to explain its merits, set clear expectations for its ramifications, and describe how the company will address them
Companies that take the trouble to have such a dialogue with stakeholders will find that it amply repays the time and effort involved

38. The Blue Ocean Idea Index
The Blue Ocean Idea (BOI) Index provides a simple but robust test to ensure commercial success of a company based on four criteria:
Utility—Is there exceptional utility? Are there compelling reasons to buy your offering?
Price—Is your price easily accessible to the mass of buyers?
Cost—Does your cost structure meet the target cost?
Adoption—Have you addressed adoption hurdles up front?

39. The Blue Ocean Idea Index, continued—Figure 6-7 (page 140)
Philips CD-i
Motorola Iridium
DoCoMo i-mode Japan
Utility
Is there exceptional utility? Are there compelling reasons to buy your offering? - +
Price
Is your price easily accessible to the mass of buyers?
Cost
Does your cost structure meet the target cost?
Adoption
Have you addressed adoption hurdles up front?
+/-
Had Philips’ CD-i and Motorola’s Iridium scored their ideas on the BOI Index, they would have seen how far they were from opening up lucrative blue oceans

40. The Blue Ocean Idea Index, continued
Where did they go wrong?
Philips’ CD-i
Did not create buyer utility with its complex technological functions and limited software capabilities
Priced out of reach from mass of buyers along with costly manufacturing process
Took more than 30 minutes to explain to customers, leaving no incentive for sales clerks to sell CD-i in fast-moving retail

41. Blue Ocean Idea Index, continued
Where did they go wrong?, continued
Motorola Iridium
Unreasonably expensive because of high production costs
Provided no attractive utility because of inability to be used in buildings or cars; also, being very large
Overcame many regulations and secured rights from numerous countries, but had a poor sales and marketing team

42. Blue Ocean Idea Index, continued
What did they do right?
NTT DoCoMo i-mode
Ignored the technology race and price competition over voice-based wireless devices and instead brought the Internet to cell phones
Offered exceptional buyer utility with an affordable low price in the “nonreflection” strategic zone, encouraging impulse buying and reaching the masses quickly

43. Blue Ocean Idea Index, continued
What did they do right?, continued
NTT DoCoMo i-mode, continued
Created a win-win partnership network by regularly sharing know-how and technology with its handset manufacturing partners to help them stay ahead of competition
Played the role of the gateway to the wireless network, expanding and updating the list of i-mode menu sites while attracting content providers to join the network

44. Blue Ocean Idea Index, continued
What did they do right?, continued
NTT DoCoMo i-mode, continued
Instead of using the Wireless Markup Language (WML), they used c-HTML, an existing and already widely used programming language in Japan, making the i-mode more attractive to content providers because of ease of transition from PC web pages to i-mode web pages

45. Blue Ocean Idea Index, continued
NTT DoCoMo i-mode passed all four criteria of the BOI index, ensuring its substantial success
Six months after its launch, subscribers had reached over 1 million
Within two years, subscribers had reached 21.7 million
From 1999 to 2003, revenue from the transmission of data, pictures, and text messages increased from 295 million yen ($2.6 million) to billion yen ($8 billion)
DoCoMo now exceeds its parent company, NTT, in terms of market capitalization as well as potential for profitable growth