Blue Ocean Strategy
Chapter 6: Get the Strategic
Sequence Right
Team 2:
Joshua Zamarron
Elizabeth Allen
James Stariha
Michael Johnson
Mike Mullin
Get the Strategic Sequence Right
• Fourth Principle of Blue Ocean Strategy
• Building a Robust Business Model
• Commercial Viability
• Reducing Business Model Risk
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?
The Sequence of Blue Ocean Strategy
Testing for Exceptional Utility
• Philips’ CD-I
• “Imagination Machine”
• Technology VS Utility
• Value innovation not the same
as technology innovation
• Buyer Utility Map
The Buyer Utility Map
The Buyer Experience Cycle
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Purchase
Delivery
Use
Supplements
Maintenance
Disposal
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?
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?
Use
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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?
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?
Maintenance
• Does the product require external maintenance?
• How easy is it to maintain and upgrade the product?
• How costly is maintenance?
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?
The Six Utility Levers
• Utility Levers: the ways in which companies can unlock
exceptional utility for buyers
• Most levers are obvious
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Customer Productivity
Simplicity
Convenience
Risk
Fun and Image
Environmental Friendliness
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?
Ford Model T.
• Competitors
• 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
Ford Model T.
• One color, one model
• Black
• Made for everyday use
• Reliable, durable, easy to fix & use
• Ford’s offering passed the exceptional utility test
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
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
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
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.
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
The Price Corridor of the Mass
• Step 1- Identify the Price Corridor
1. Same Form- Same Products or Services.
2. Different Form, Same Function- Different look, but
same use.
3. Different Form and Function- Completely different,
but same overall objective.
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
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
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
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%
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
Hitting The Cost Target
• Three principle levers
1. Streamlining operations and introducing cost
innovations from manufacturing to distributing
2. Partnering
3. Change the pricing model of the industry
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
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
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
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
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
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
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
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
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!
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%
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
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
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
Blue Ocean Idea Index
Any Questions?