Blue Oceans

1. Blue Oceans Part Two:Formulating Blue Ocean Strategy 1

3. Reach Beyond Existing Demand 3

4. Reach Beyond Existing Demand • The Three Tiers of Noncustomers 2nd Tier 3rd Tier 1st Tier Your Market 4

5. Reach Beyond Existing Demand • The Three Tiers of Noncustomers • First Tier : “Soon-to-be” noncustomers • On the edge of your market • Waiting to jump ship.Minimally use the current market offerings to get by as they search for something better. 1st Tier Your Market 5

6. Reach Beyond Existing Demand • The Three Tiers of Noncustomers • Second Tier: “Refusing” noncustomers • Consciously choose against your market.Their needs are either dealt with by other mean or ignored. • Harboring within refusing noncustomers, however, is an ocean of untapped demand waiting to be released. 2nd Tier 6

7. Reach Beyond Existing Demand • The Three Tiers of Noncustomers • Third Tier : “Unexplored” Have not been targeted or thought of as potential customers by any player in the industry • Their needs and the business opportunities somehow always been assumed to belong to other markets. 3rd Tier 7

8. Get the Strategic Sequence Right 8

9. 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? No-Rethink 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? No-Rethink Yes A commercially Viable Blue Ocean Idea 9

10. Buyer Experience Cycle A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyer’s experience. Purchase Delivery Use Supplements Maintenance Disposal How long does it take to find the product you need? Is the place of purchase attractive and accessible? How secure is the transaction environment? How rapidly can you make a purchase? 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? 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 in overcharged with bells and whistles? 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 easy are they to obtain? Does the product require external maintenance? How easy is it to maintain and upgrade the product? How costly is maintenance? 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 safely? How costly is disposal?

11. Uncovering Blocks to Buyer Utility Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utility map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers.

12. Buyer Utility Map The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. The Six Stages of the Buyer Experience Cycle 1. Purchase 2. Delivery 3. Use 4. Supplements 5. Maintenance 6. Disposal Customer Productivity Simplicity The Six Utility Levers Convenience Risk Fun and Image Environmental friendliness

13. Price Corridor of the Mass This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets. Step 1: Identify the price corridor of the mass. Step 2: Specify a price level within the price corridor. Three alternative product/service types: Different form and function, same objective Same form Different form, same function High degree of legal and resource protection Difficult to imitate Upper-level pricing Some degree of legal and resource protection Mid-level pricing Price Corridor of the Mass Low degree of legal and resource protection Easy to imitate Lower-level pricing

14. Reconstructing Market Boundaries 14

15. Reconstructing Market Boundaries • The first principle of blue ocean strategy is to reconstruct market boundaries: • break from the competition • create blue oceans. • Challenge: • successfully identify $ compelling blue oceans 15

16. Reconstructing Market Boundaries • Six Approaches that Look Across: • Alternative Industries • Strategic Groups Within Industries • The Chain of Buyers • Complementary Product and Service Offerings • Functional or Emotional Appeal to Buyers • Look Across Time 16

17. Reconstructing Market Boundaries • Look Across: Alternative Industries • Broader than substitutes • Products & Service Substitutes: • differentformsbut samefunctionality • Products & Service Alternatives: • different functionalityandformsbut same purpose 17

18. Reconstructing Market Boundaries • Look Across: Alternative Industries: QUESTION: • Name the 2 examples the book uses? 18

19. Reconstructing Market Boundaries • Look Across: Alternative Industries: FIRST EXAMPLE CLUE: • Sorting out personal finances 19

20. Reconstructing Market Boundaries • Look Across: Alternative Industries: FIRST EXAMPLE: • Sorting out personal finances • Installing financial software packages on a computer: • hiring a CPA • using pencil and paper • What is it?: • different forms but same functionality • different functionalityand forms but same purpose 20

21. Reconstructing Market Boundaries • Look Across: Alternative Industries: FIRST EXAMPLE: • Sorting out personal finances • Installing financial software packages on a computer: • hiring a CPA • using pencil and paper • What is it?: • different forms but same functionality • Helps people manage financial affairs 21

22. Reconstructing Market Boundaries • Look Across: Alternative Industries: SECOND EXAMPLE CLUE: • Cinemas vs. Restaurants 22

23. Reconstructing Market Boundaries • Look Across: Alternative Industries: SECOND EXAMPLE: • Cinemas vs. Restaurants • Restaurants: offer conversational & gastronomical pleasure • Cinemas: visual entertainment • What is it?: • different forms but same functionality • different functionalityand forms but same purpose 23

24. Reconstructing Market Boundaries • Look Across: Alternative Industries: SECOND EXAMPLE: • Cinemas vs. Restaurants • Restaurants: offer conversational & gastronomical pleasure • Cinemas: visual entertainment • What is it? CLUE: • Same objective but its not a substitite: • about enjoying a night out - therefore they are alternatives of each other: 24

25. Reconstructing Market Boundaries • Look Across: Alternative Industries: SECOND EXAMPLE: • Cinemas vs. Restaurants • Restaurants: offer conversational & gastronomical pleasure • Cinemas: visual entertainment • What is it?: • different functionalityand forms but same purpose 25

26. Reconstructing Market Boundaries • Look Across: Alternative Industries: RECAP: • Sorting out personal finances • different forms but same functionality • Cinemas vs. Restaurants • different functionalityand forms but same purpose 26

27. Reconstructing Market Boundaries • Look Across: Alternative Industries: QUESTION: • What was the deal with NetJets? 27

28. Reconstructing Market Boundaries • What was Netjets’ Blue Ocean? 28

29. Reconstructing Market Boundaries • fractional jet ownership 29

30. Reconstructing Market Boundaries • Look Across: Alternative Industries: NetJets: • Blue ocean of fractional jet ownership • In less than 20 years, it was the fastest growing airline company • Over 500 aircraft - Operating in over 40 countries • Purchased by Berkshire Hathaway in 1998 • Revenue growth from 30-35% each year 30

31. Reconstructing Market Boundaries • Look Across: Alternative Industries: NetJets SUMMARY: • NetJets reconstructed market boundaries to create their blue ocean by looking across alternative industries 31

32. How did they reconstruct market boundaries to create their blue ocean?

33. Reconstructing Market Boundaries • They asked: • Why do corporations use commercial airlines for their travel? • What are the Costs. 33

34. Reconstructing Market Boundaries • They responded: • Offerering customers 1/16th ownership of an aircraft shared with 15 other customers who all Receive • 50 hrs of flight time per year for $375,000 • Private jet at the price of a commercial airline ticket Due to NetJets smaller airplanes, use of smaller regional airports, and limited staff, their costs are kept to a minimum 34

36. What are dead head fees?

37. Dead head fees are: • Additional client costs, calculated per mile, that apply when the pick up, drop off location, or • The service area is not within 25 miles of the bus company, or • Charters where the mileage fee is greater than the hourly fees.

38. Reconstructing Market Boundaries • Look Across: Functional or Emotional Appeal to Buyers • What Industries should compete on • Rational appeal • Emotional appeal • Appeal usually a result of how companies have competed in the past • Ex: Functionally oriented companies become more functionally oriented 38

39. Reconstructing Market Boundaries • Look Across: Functional or Emotional Appeal to Buyers • Change • Emotionally oriented industries offer extras at extra price without enhancing functionality • By stripping those extras it would create a fundamentally simpler business model • Functionally oriented industries can add emotion to their products to stimulate demand 39

40. Reconstructing Market Boundaries • Look Across: Functional or Emotional Appeal to Buyers • Example: Quick Beauty House • Traditional Japanese haircuts - took around an hour because of rituals • Price was around $27 to $45 -- Reduced to around $9 • Decided working professionals did not want to waste an hour • Stripped the emotional service of the haircut - focused on basic cuts 40

41. Reconstructing Market Boundaries • Look Across: Functional or Emotional Appeal to Buyers • Look Across: Buyers’s Utility and how they purchase • Example: Cemex • World’s 3rd-largest cement producer: Blue ocean: functional to emotional • Cement houses were the dreams of the people of Mexico - unaffordable • Foundation of tandas • While competitors were selling cement, Cemex was selling dreams 41

42. What defines the “Bottom of the Pyramid”? Annual per capita income (1) Population in millions More than $20,000 75-100 $ 1,500 - 20,000 1,500 – 1,750 Less than $ 1,500 4,000 (1) Based on purchasing parity in US $ Source: U.N. World Development Reports

43. Six Assumptions You May Be Making 1. The poor are not our target customers because with our current cost structures, we cannot profitably compete for that market. 2. The poor cannot afford and have no use for the products and services sold in developed markets. 3. Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology. 4. The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits. 5. Managers are not excited by business challenges that have a humanitarian dimension. 6. Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid. Source: C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy + business, Issue 26 Every single one of these assumptions is generally wrong.

44. Cemex Launched the Patrimonio Hoy Project for the Poor People of Guadalajara (Mexico) “How can we give poor people access to the home-owning experience faster?”

45. The Challenge for Poor People: Building Their Home One Room at a Time “Self-construction” market Cement bag “How can we accelerate access to the cement bag for poor people?”

46. Patrimonio Hoy Builds on an Existing Community Called a Tanda Tanda concept • A tanda is a traditional Mexican community savings scheme. • For example, 10 people save 1 peso per month. • Every five months, the accumulated savings is won in a lottery by one of five people, who receives 50 pesos. • All participants win the 50 pesos one time only. • Traditionally, the tanda money goes toward festive events. • With Patrimonio Hoy, the winner receives a bag of cement from Cemex. • The value is in the acceleration of access to the larger sum, and in the discipline of savings that is created (community peer pressure). Communities nearly always play a role in solving bottom-of-the-pyramid problems

47. A win-win solution for Cemex and tandas Microcredit lending to the tanda: • Based on solidarity of a group of at least 3 people. • No collateral required. • $4 credit for each $1 saved. Security of supply: • Frozen prices for 70-week periods. • Warehousing services to store materials according to customer needs. Technical advice: • Customized house growth project for each family, phased one room at a time.

48. 2 8 2 2 2 Results from the customer’s standpoint • More than 75,000 families have participated. • Customers in 23 cities served by 48 Cemex offices. • Families have built the equivalent of 33,000 additional 11-square meter rooms. • Accelerated access to home-owning: 1 room in 16 months vs. 48 months historically.

49. Results for Cemex Results from Cemex’s standpoint • Excellent credit results: • On-time payments better than 99%. • Demand expansion: • Accelerated cement use. • Creation of a new market valued at $500-600 MM. • Growing quickly. • Branding: • Increased brand loyalty. • Brand preference in other segments based on demonstrated socially responsible programs. • Generating its own growth resources: • Customers become Cemex cement salespeople.

50. Curves 50