Team 2
Shawn Buck
Ashley Burnett
Whitney Horton
Kelly Riester
Jennifer Shotts
Mickea Smith
Sam Snelling

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In this chapter we will discuss throwing out and validating blue ocean ideas to ensure their commercial viability
By understanding the concepts of the right strategic sequence, we can reduce business model risk.

Sequence of Blue Ocean Strategy
Buyer Utility
Is there exceptional buyer utility in your business idea?
Yes
Price
Is your price easily accessible to the mass of buyers?
Yes
Cost
Can you attain your cost target to profit at your strategic price?
Yes
Adoption
What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?
Yes
A Commercially Viable Blue
Ocean Idea
No- Rethink
No- Rethink
No- Rethink
No- Rethink

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Companies fail to convey exceptional value because they are preoccupied by the novelty of their product.
Value innovation is not the same as technology innovation
EX:
◦ Sony’s mini-disc players. Converting music files from
CD’s to mini-disc. Held more music and smaller but ultimately failed because of MP3 players.

customer productivity simplicity convenience
Risk
Fun and Image
Environmental friendilness purchase delivery use supplements maintenance disposal

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Purchase
Delivery
Use
Supplements
Maintenance
Disposal

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The six levers are customer productivity, simplicity, convenience, risk, fun/image and environmental friendliness.
Utility levers according to the book are
“the ways in which companies can unlock exceptional utility for buyers.”
A company should check whether their offering has detached the blocks to utility across the buyer experience cycle.

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Before dell, other computer companies did not have any customization.
Dell focused on convenience in the delivery phase by being able to order online.
They also focused on customer productivity in the use phase by being able to customize your own computer.

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Objective: Determine a price for your product/service that will quickly capture a majority of the market.
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Factors to consider when determining the right strategic price:
◦ 1. Volume generates higher returns than in the past.
 Example: Software
 Cost is greater in development than in manufacturing.
◦ 2. The value of a product/service may be closely tied to the total number of people using it.
 Example: Cell phones – Now vs. 10 years ago

Strategic Pricing Issue: Free Riders - those who consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production.
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Rival Good: One firm using a rival good will prevent the use of this good by any other firms.
◦ Example: A Nobel Prize-winning scientist who is fully employed by IBM cannot be simultaneously employed by another company.
Nonrival Good: The use of a nonrival good by one company does not limit the good’s use by another company.
◦ Competitive imitation makes free riding easy.
◦ Example: Value menu (service) at fast food restaurants.
 Sonic, McDonalds, KFC, Wendy’s, Taco Bell, etc.

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If the company can prevent others from using a good because of limited access or patent protection.
◦ Example: New medications are patent protected for 20 years.
If a good or service lacks excludability, it will be easy for other firms to imitate.
◦ Lack of excludability makes free riding easier.
◦ Example: Lower calorie alternatives.

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The price determined for your good or service must:
◦ Attract buyers in large numbers.
◦ Also, retain the buyers in the future.
The good/service reputation must be established from the beginning.
Start with an offer that buyers cannot refuse.

Step 1: Identify the price corridor of the mass
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All companies look first at the products and services that most closely resemble their idea in terms of form.
Look at other products and services within their industries
The main challenge in determining a strategic price is to understand the price sensitivities of those people who will be comparing the new products or services with a host of very different-looking products and services offered outside the group of traditional competitors.
Two categories:
◦ Those that take different forms but perform the same function
◦ Those that take different forms and functions but share the some over arching objective.

Step 1: Identify the price corridor of the mass
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Many companies that create blue oceans attract customers from other industries who use a product or service that performs the same function or bears the same core utility as the now one but takes a very different physical form.
Example
◦ Ford’s model T, ford looked to the horse drawn carriage. The carriage had the same core utility as the car: transportation for individual and families. But it had a very different from.
◦ Mon and dad lunches compared to lunch line in the cafeteria.

Step 2: Specify a level within the price corridor
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Managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services.
Two principal factors
◦ The degree to which the product or service is protected legally through patents or copyrights
◦ The degree to which the company owns some exclusive asset or core capability, such as an expensive production plant, that can block imitation.

Step 2: Specify a level within the price corridor
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Examples:
◦ Dupont with its Lycra brand in specialty chemicals
◦ Philips’ ALTO in the professional lighting industry
◦ SAP in the business applications software industry
◦ Bloomberg in the financial software industry

Step 2: Specify a level within the price corridor
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Companies would be wise to pursue mid-to-low boundary strategic pricing from the start if any or 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 scope. In these cases, volume brings with it significant cost advantages, something that makes pricing for volume even more key.

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Price corridor of the mass not only signals the strategic pricing zone central to pulling in an ocean of new demand but also signals how you might need to adjust your initial price estimates to achieve this.
Example
◦ Apple IPHONE.

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Addresses the profit side of the business model
To maximize profits of a blue ocean: strategic price – desired profit margin = target cost
Continuing with Cirque du Soleil:
◦ Elimination of Animals
◦ Modernizing their act
Ford’s Model T: understood that to appeal to the masses, their automobile must meet consumer budgets. (Low target cost)

• First of it’s kind
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Prior logic in the industry revolved around a single, highly skilled worker producing the car.
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Revolutionized this logic by creating the assembly line
◦ Speed and efficiency
◦ 21 day process shrunk to 4
Discovering a creative way to mass produce their automobile, Ford fed their blue ocean and achieved their target costs.
• One of a kind
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Rarest Crocodile skins, hundreds of diamonds, hand sew by one artisan
Very specific clientele
◦ Victoria Beckham, Jennifer Aniston, Eva
Longoria
Retail: $65,000 (VB’s: $150,000)
Limited number produced yearly
Core Competency: Quality,
Innovative techniques
This world-renown purse achieves its target cost through limited production (high retail value) and yet retains its desirability by every woman.

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Both Ford and Hermès (the maker of
Birkin) developed their strategic plan to conquer the market, and subtracted the number of goods at market to achieve their unique target cost.
◦ Each have remarkably different impacts on the market (high vs. low volume)

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Three levels:
◦ Cost innovativeness and streamlining
 Wal-Mart (low cost leader), IKEA (COGS), Southwest Airlines
(Hassle fee flying-secondary airports)
◦ Partnerships
 Computer Logistics: Oracle
 3PL Providers: Inbound Logistics, Kenco Logistics
◦ Changing the pricing model of the industry
 Purchasing original VHS tapes: $80
 How could a company make money by selling videos at only a few dollars if it followed the path of using strategic pricing?
 Answer: IT CAN’T
 Blockbuster attained blue ocean’s through rentals (Founded 1985)
 Since we are on the topic of stream lining: Red Box rentals
 Are they innovative, or did they overlook their strategic pricing and arrive at an already declining market?

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Based on Price
Time Share: Part ownership
◦ Hotels, condos, cars, planes
 Slice Share:
◦ “Slivers” of high quality portfolio services sold to smaller investors.
Based on Products
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Equity interest:
◦ HP and Silicon Valley- servers for revenues
◦ BOS calls this a “Pricing Innovation”
 Price of the server is exceeded by revenues: win-win scenario
“When a company successfully addresses the profit side of the business model, the company is ready to advance to the final step in the sequence of BOS”
Streamlining and Cost
Innovation
The Strategic Price
The Target Profit
The Target Cost
Pricing Innovation
Partnering

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Even the best business model is not enough to have a successful implementation.
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A new Blue Ocean idea can create fear and resistance among the companies stakeholders
Employees
Failure to address employees about the new business can be very expensive
Before a company goes public with a new idea they need to address employees about the threats posed by the new idea
Companies also need to work with employees to find ways of defusing these threats ex) Morgan Stanley Dean Witter & Co. worked with their employees with an internal discussion for meeting the challenges of the blue ocean idea. This increased the company shares 13%

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Business Partners
Resistance of partners to the new idea can be even more damaging.
The threat of a loss of income for partners can hinder a relationship, that is why Business Partners need to informed on the changes and keep their fears in consideration.
ex) SAP had to explain how their new venture with
ASAP will continue to make money for their partner.
Showing how this idea would create new customers who would cover the loss of money incurred by larger customers

The General Public
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The public can be very opposed to the new
 idea, especially if it is a change to the social norms.
You need to make sure the public is well informed on your new business.
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Ex.) Monsanto created genetically modified food was introduced in Europe, but was attacked by environmental groups. If they would have informed the public what they were doing then there may have not been such opposition. They could have been seen as a new technology for the future.

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The challenge is to engage in an open discussion about why the adoption of the new idea is necessary
Need to explain it’s merits, set clear expectations for its ramifications, and describe how the company will address them.
Companies that take the trouble to address the employees, business partners and the general public will be more successful with their new venture.

Utility
Price
Cost
Is there exceptional utility? Are there compelling reasons to buy your offering?
Is your price easily accessible to the mass of buyers?
Does your cost structure meet the target cost?
Adoption Have you addressed adoption hurdles up front?
Phillip s
CD-i
Motorola
Iridium
DoCoM o i-mode
Japan

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Offered complex technological functions
Limited software titles
Priced too expensive
More than 30 minutes to explain and try to sell

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Unreasonably expensive
High production costs
Not portable, size of brick
Overcame many regulations and secured transmissions
Reasonably motivated
Motorola not able to follow up sales leads effectively

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Offered internet on cell phones in 1999
Created unique and superior buyer utility
Brought together cell phone and PC-
Internet industries
Exceptional buyer utility at an affordable price
Focused to maintain competitive edge
40.1 million subscribers by the end of
2003

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Utility
◦ Value Innovation is not the same as technological innovation.
◦ Companies should assess the six utility levers to unlock exceptional utility.
Pricing
◦ Set a price that will quickly capture the majority of the market.
◦ Be aware of free riders.
◦ Strive for excludability.
◦ Identify and specify a level within the price corridor.

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Target Cost
◦ Addresses profit side of the business model.
◦ Strive to be Cost Innovative.
Adoption
◦ Needs to include the employees, business partners, and the public to avoid friction in the process.
BOI Index
◦ Assess to determine whether or not an endeavor is worthwhile.