Team 2:
Caitlin Clark
Stephen Massimi
Will Mayrath
Katie Trevino
Matt Vatankhah
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
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
Buyer Utility
Is there exceptional buyer utility in your business idea?
No—Rethink
Yes
Price
Is your price easily accessible to the mass of buyers?
The Right
Strategic
Sequence,
continued
Yes
Cost
Can you attain your cost target to profit at your strategic
price?
No—Rethink
Yes
Adoption
What are the adoption hurdles in actualizing your business
idea? Are you addressing them up front?
Figure 6-1
(page 118)
No—Rethink
Yes
A Commercially
Viable Blue
Ocean Idea
No—Rethink
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
Test for Exceptional Utility,
continued—Figure 6-2 (page 121)
The Six
Utility
Levers
Customer
Productivity
Simplicity
Convenience
Risk
Fun and
Image
Environmental
Friendliness
The Six Stages of the Buyer Experience Cycle
4.
5.
6.
Supplements Maintenance Disposal
1. Purchase 2. Delivery 3. Use
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
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?
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
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?
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
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
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
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?
Price Corridor of the Mass—Figure 65 (page 128)
Step 1: Identify the price
corridor of the mass.
Three alternative product/service
types:
Different form
Same Different form, and function,
Form same function same objective
Step 2: Specify a price
level within the price
corridor.
High degree of legal and
resource protection
Difficult to imitate
Price Corridor
of the Mass
Mid-level pricing
Some degree of legal and
resource protection
Low degree of legal and
resource protection
Easy to imitate
Size of circle is proportional to
number of buyers that
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
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
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
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
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
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%
From Strategic Pricing to Target
Costing, continued

To hit cost target, companies have three
principal levers that they can pull:
1. Streamlining operations and introducing
cost innovations from manufacturing to
distribution
2. Partnering
3. Changing the pricing model of the industry
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
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
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
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
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
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
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
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 highquality 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
From Strategic Pricing to Target Costing,
continued—Figure 6-6 (page 136)
The Strategic
Price
The
Target
Profit
The Target Cost
Streamlining and
Cost Innovations
Pricing Innovation
Partnering
1. A company begins with its
strategic price
2. Deduct target profit margin to
arrive at target cost
3. To hit the cost target that
supports that profit, there are
2 key levers
• Streamlining and cost
innovations
• Partnering
4. 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
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
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%
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
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
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
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
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?
The Blue Ocean Idea Index,
continued—Figure 6-7 (page 140)
Philips Motorol DoCoM
CD-i
a Iridium
o imode
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?
-
-
+
-
+/-
+
Adoptio Have you addressed adoption hurdles up
n
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
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
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
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
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
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 imode web pages
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 886.3 billion yen ($8 billion)
 DoCoMo now exceeds its parent company, NTT,
in terms of market capitalization as well as
potential for profitable growth
