1. Blue Ocean Strategy Chapter 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 Blocks to utility The Model T
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 Made for everyday use
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?