Chapter 3 (BOS) Reconstruct Market Boundaries

Chapter 3 (BOS)Reconstruct Market BoundariesKelly BredensteinerChristine CoxCailtin GreenwoodMichele HaynesReconstruct Market BoundariesMain principle is to reconstruct market boundaries to break from the competition and create blue oceansSuccessfully identify commercially compelling blue ocean opportunitiesThere is a systematic pattern for reconstructing boundaries to create blue oceansThere are six assumptions companies have that keep them in the red oceanSix AssumptionsDefine their industry similarly and focus on being the best within itLook 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 inFocus 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 continuedDefine the scope of the products and services offered by their industry similarly

Accept their industrys functional and emotional orientation

Focus on the same point in time- and often on current competitive threats- in formulating strategyHow to Get into the Blue OceanTo break into the blue ocean, there are six paths that a company can followPath 1: Look Across Alternative IndustriesPath 2: Look Across Strategic Groups Within IndustriesPath 3: Look Across the Chain of BuyersPath 4: Look Across Complementary Products and Service OfferingsPath 5: Look Across Functional or Emotional Appeal to BuyersPath 6: Look Across Time

Path 1: Look Across Alternative IndustriesA company not only competes with other firms in their industry but also with companies in those other industries that produce alternative products or servicesAlternatives are products or services that have different functions and forms but the same purposeEx: Movies vs. RestaurantTwo very different experiencesRestaurant- Food and ConversationMovies- Visual entertainmentBoth are designed to enjoy a night outNetJetsNetJets is a company that created its own blue ocean by looking across alternative industriesMainly compared itself with commercial airline travelNetJets offers:Fractional jet ownershipOne-sixteenth ownership 50 hours of flying time a year Starting at $375,000.

About NetJetsPurchased 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 SuccessfulFlexiblePlane will be ready with only a 4 hour advance noticeShort travel timePoint-to-point travelHassle-free travel experienceMinutes from car to plane rather than hoursIncreased reliabilityStrategic pricingMinimum costs due to smaller airplanes, the use of smaller regional airports, and limited staffNetJets CompetitionThere 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 industryNTT DoCoMos i-modeAnother product from Japan that created its own blue ocean was the i-modeWith the deregulation of telecommunications in Japan, extreme competition was the normLaunched in 1999Converged 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 CompaniesReduced the over flow of information that the Internet provided on a PCAlready connected to the Internet so no dial-up was necessaryAll on one bill so there was no need to transfer credit card information over the internetAlthough it was 25% more expensive when most cell phones, it was cheaper than a PC and had high mobilityNTT DoCoMos 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 applicationsIncreased market to youth and senior citizensNo major competitorsBy 2003, there were 40.1 million subscribers Revenues went from $2.6 million in 1999 to $8 billion in 2003Path 2: Look Across Strategic Groups Within IndustriesBlue Oceans Can be unlocked by looking across strategic groups.Strategic Groups are generally ranked in a hierarchical orderPrice and PerformanceFocus on improving competitive position within strategic groupKey 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.

Strategic groups refers to a group of companies within an industry that pursue a similar strategy.

Price and Performanceevery jump in price tends to bring a corresponding jump in some dimensions of performance

Improving positionExample: Mercedes, BMW, and Jaguar focus on outcompeting each other in the luxury cars14Curves (Womens Fitness)Started franchising in 1995, acquiring more than 2mill members in more than 6 thousand locations with revs exceeding more than 1 BillionWas 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 competitionsBuilt on two strategic groups in the U.S. fitness industryTraditional health clubs and home exercise programsGrowth was triggered almost entirely through world of mouth

-Health clubs-catered to both men and women offering full range of exercise and sporting options in upscale urban areas-customers typically spend a few hours there enjoying saunas, juice bars, instructors and enjoying the social atmosphere as well as exercise time-Home exercise programs-such as exercise videos, books, and magazines-small fraction of cost, and used at home, require little or no equipment. Instructions are minimal bc they are confined to video or book and and mag. Examples

15The BIG QuestionWhat made women trade either up or down between these strategic groups?Women dont want to see men while working outNot enough time to spend hours at the gymAlso the locations present traffic challenges which increase stress and discourages going to the gymWomen trade up to health clubs because it is to easy to find an excuse when working out at home.When working out at home its hard to be disciplined unless you are already a committed sports enthusiast, it is much easier ane more motivating working out with people.16Eliminating the Unwanted to Get it RightCurves has eliminated all the aspects of the health blub that are of little interestMachines are set up in a circle to encourage interchange among membersNonjudgmental atmosphereMembers move around the machines and in 30 min. the circle is complete and so is a full workout

Curves created a new blue ocean demandThe machines are specificially designed for women, by reducing impact stress and build strength and muscle.

By reducing and focusing service on essentials prices fall to around $30 per month opening the market to a broad mass of women17Others Creating Blue OceansRalph Lauren created blue ocean of high fashion with no fashionToyotas Lexus created new blue ocean by offering the quality of the high-end luxury cars with prices closer to the lower-end Cadillacs.Ralph Lauren designer name elegance of stores, luxury of materials captures what customers look for in fashion. It also have a great updated classical look and price capture the best of the classical linesby combining the most attractive factors of both groups (high fashion with good prices) and eliminating or reducing everything else Ralph Lauren captured shares from both segments and new customers

18Path 3: Look Across the Chain of BuyersThe 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 buyerExamples:Pharmaceutical industry focuses on influencers the doctorsOffice equipment industry focuses on purchasersClothing industry sells predominantly to users

ChallengingBy challenging the industrys conventional wisdom about what buyer group to target can lead to the discovery of new blue ocean.ExampleInsulin produces for people who are diabeticOriginally focused on influencers such as doctorsNovo Nordisk created a blue ocean by shifting the focus to the patients themselvesThe NovoPen was the first user-friendly insulin delivery soltionLook across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers

Example-Originally insulin had to be given with vials and syringes and needles and patients feel uncomfortable with having to inject insulin in public-The NovoPen looked like a fountain pen, contained an insulin cartridge and made for easy carriage in one self contained unit with about a weeks worth of insulin. The pen had integrated click meechanism with made it possible for the blind to use and be able to control the dosing. -Nordisk also created the Novolet a prefilled disposable injection pen with a dosing system and the Innovo to manage the delivery of insulin through built-in memory and to display the dose and previous doses

20BloombergUntil the early 1980s 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 termsBloomberg focused on the users

Question conventional definitions and who the target buyer companies can then see new ways to unlock valueThe industry originally focused on purchasers (the IT managers) who valued standardized systems which made their lives easier

Bloomberg also added a what if scenario to the computers that would compute returns on alternative investments

By focusing on the users he was able to make it that traders can use services to buy items such as flowers and jewelry or to make travel arrangements when they had time.

21Path 4: Look Across Complementary Product and Service OfferingsUntapped value is often hidden in complementary products and servicesThe objective is to define the total solution buyers seek when they choose a product or serviceKey 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 CompanyCompanies competed to offer the lowest purchase priceIndustry problems: outdated designs, late delivery times, low quality, prohibitive price of optionsQuestion: Why were bus companies only concerned with the initial purchase price?Discovered major costs came after the bus was purchased Result: created a unique busExamplesBarnes and Noble Virgin Entertainments MegastoresDyson VacuumsZenecas Salick Cancer CentersPath 5: Look Across Functional or Emotional Appeal to BuyersIndustries should compete on:Rational AppealCompete on price and functionEmotional AppealCompete on feelingsAppeal is typically a result of the way companies competed in the pastChallengeOften discover new market spaceTwo Patterns:Emotionally orientented industries offer extras that add price with out enhancing functionalityTaking away the extras may create a simpler, lower-priced, lower-cost business modelFunctionally oriented industries can add more emotion to their products to stimulate demandQuick Beauty HouseTraditional Japanese haircutsTook about an hour because of ritualsTime spent cutting hair only a fraction the timePrice was about $27 to $45QB HouseRecognized many people didnt want to waste an hourRemoved the emotional service of the haircutCut time is about ten minutesPrice was reduced to $9CemexWorlds 3rd largest cement producerCement houses were the dreams of people in MexicoMost people could not afford itLaunched Patrimonio Hoy ProgramShifted orientation of cement from a functional product to the gift of dreamsSystem of tandas: community savings schemeCompetitors were selling cement while Cemex was selling dreamsPath 6: Looking Across TimeWhat NOT to do:Most companies adapt to change gradually, incrementally, and passively

Most companies pace their actions just to keep up with trends.

Dont be most people!

Path 6: Looking Across TimeWhat 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 TimeAssess 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 TrendsIn order for trends to be the foundation of your strategy, they must:Be decisive to your businessMany 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 irreversibleThomas Friedman, Hot Flat and Crowded: Companies wont 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 trajectoryFinancial Crisis- no one knows where it was going or where it will lead- not a good foundation for strategy

Steps 2&3: Envisioning and ChangingWhat will the market look like based on the trends?

Ex: Apple and the IPODTrend- illegal music sharing becoming more rampant, but not efficient or diverseVision- To provide shareable music online Change: through iTunes which mitigates efficiency, diversity and legal problemsEx: Thomas Friedman articleTrend And Visionenergy conservation trends suggest energy costs will rise and policies will turn attention to data center efficiencyStrategy:Current: data centers bill customers based on SPACE allocationHave 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 6What 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 StrategyIs 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