Reconstructing Market

Boundaries
Blue Ocean
Day II
Reconstructing Market Boundaries
(Six Fundamental Assumptions)
• 1st principle of blue ocean strategy is to reconstruct
market boundaries to break from the competition.
• Six Fundamental Assumptions companies work on today:
(RED OCEAN)
– Define industry similarly and focus on being the best within the
industry
– Look at industry through generally accepted strategic groupings,
and strive to stand out.
– Focus on same buyer group
– Define scope of product offerings similarly
– Accept industries functional and emotional orientation (customer)
– Focus on same point in time – and often competitive threats – in
formulating strategy.
 Six Paths Framework
• To break out of red oceans, companies must
break out of accepted boundaries that define
how they compete.
• Instead of looking within boundaries, look across
them systematically to create blue oceans,
similar to ABC.
• Look across: (6 paths)
– Alternative industries, strategic groupings, buyer
groups, complementary products and service
offerings, functional-emotional orientation, and time.
 Path 1: Look Across Alternative
Industries
• Alternatives are broader than substitutes.
– Substitute is a product or service that have different
forms but offer the same functionality or core utility.
(ex. electric vs. regular toothbrush)
– Alternative is a product or service that have different
functions and forms but the same purpose. (ex. Dinner
vs. movie – entertainment).
– Example NetJets – offer one-sixteenth ownership in a
plane for business traveller’s vs. 1st class travel on
commercial flights (avoid initial investment, reduce
travel/wait time, allow point-to-point travel, energized
exec’s)
– Home Depot – offers expertise and low costs to
professionals and do-it-yourself publics.
 Questions – Path 1
• What are the alternative industries to your
industry?
• Why do customers trade across them?
– By focusing on the key factors that lead
buyers to trade across alternative industries
and eliminating or reducing everything else, a
new blue ocean of new market space can be
developed.
 Path 2: Look Across Strategic
Groups within Industries
• Strategic Groups: a group of companies within
an industry that pursue a similar strategy.
• Most strategic groups can be ranked on a two
dimensionally hierarchy based upon Price and
Performance (also price/volume).
• Most companies compete in trying to focus on
out-competing one another in the segment.
• Key to blue ocean is to determine the factors
which cause customers to trade up or down from
one group to another.
 Examples
• Curves health centers for woman
– Eliminated all things woman do not like in gym
(mirrors, special machines, juice bars, etc.) and made
it interactive by focusing machines facing each other
to increase interaction.
• Toyota – Lexus, offering high quality of
Mercedes, BMW at a cost of lower-end Lincoln
and Cadillac
• Sony – Looking at High Fidelity Boombox with
low end transistor radios developed the portable-
stereo market.
 Questions to Ask? – Path 2
• What are the strategic groups in your
industry?
• Based on strategic canvas. Why do
customers trade up for the higher group,
and why do they trade down to the lower
one?
 Path 3: Look Across the Chain of
Buyers
• In most industries, competitors converge around
a common definition of who the target buyer is.
• There is, in reality, a chain of buyers who either
directly or indirectly involved in the buying
decision.
– The person who pays for the product or service may
not be the one using it. there may be other influencers
(friends & family members).
– Ex. Purchasing department does not use the product
in production. Engineers may have an influence on
decision.
 Looking across Buyers
• By looking across buyer groups, companies can
gain insights into how to redesign their value
curves to focus on previously overlooked set of
buyers.
• Novo Nordisk – producer of insulin
– Normally, industry focused on doctors to promote and
sell products
– They focused on customers and devised a pre-filled
disposable insulin injection pen with dosing system
that provided ease of use and convenience.
 Questions – Path 3
• What is the chain of buyers in your
industry?
• Which buyer group does your industry
typically focus on?
• If you shifted the buyer group of your
industry, how could you unlock new value?
 Path 4: Look across Complementary
Product and Service Offerings
• In most industries, rivals converge within the
bounds of their industry’s product and service
offerings, although there is often complementary
products or services which go along with them.
– Example: going to movie, requires babysitters and
parking. In Canada, they now offer Matinee “Moms
with Strollers” features on Wednesday afternoons.
(Changed now to “Parents with strollers”.
• Key is to find the total solution buyers seek when
they choose a product or service.
• Think about what happens both before and after
your product is used.
 Note 26 intangible
transactions before
a tangible ($) one.
Process
 Example: NABI bus lines
• Sold buses to municipalities, but most cost
came from after market service
(maintenance, wear and tear, rust, etc.)
• Developed a total solution of
comprehensive activities:
– Adopted fiberglass buses:
• Do not rust
• Body repairs faster and easier
• Light weight reduced gas consumption
• More environmentally friendly
• Lower manufacturing cost
 Questions? – Path 4
• What is the context in which your product
is used?
• What happens before, during and after?
• Can you identify the pain points?
• How can you eliminate these pain points
through a complementary product or
service offering?
 Path 5: Look across Functional or
Emotional Appeal to Buyers
• Industries tend to converge on accepted
notions of scope of products or services,
and also on the possible basis of appeal.
– Some industries compete on the basis of price
based on utility, while others on the basis of
emotional appeal to consumers.
– Industries have essentially, over time, trained
customers what to expect (Pavlovian
response).
 Two common patterns to find Blue
Oceans
• Emotionally orientated industries offer many
extras that add price without enhancing
functionality.
– Stripping away those extras may create a simpler,
lower priced, lower cost business model. (Ex. Body
Shop or QB House – Japanese Barbershop reduced
time from 1 hour to 10 minutes, and deleted
ceremony that went with haircut.)
• Functionally orientated industries can often
infuse commodity products with new life by
adding a dose of emotion and, in doing so,
stimulate new demand. (Ex. Swatch, Viagra from
medical treatment to lifestyle enhancement.)
 Questions? Path 5
• Does your industry compete on
functionality or emotional appeal?
• If you compete on emotional appeal, what
elements can you strip out to make it
functional?
• If you compete on functionality, what
elements can be added to make it
emotional?
 Path 6: Look across Time
• All industries are subject to external trends that
affect a business over time.
– Rise of Internet, Globalization, Aging population,
lowering tariffs and trade barriers.
• Most companies adapt incrementally to changes
as they unfold (environmental scanning)
• Most try to project the trend and try to keep up
with trend.
• Blue ocean is developed by focusing on insight
as to how the trend will change value to
customers and impact the company’s business
model. (value delivered today to value it might
deliver tomorrow).
 Three Principles to assessing
trends across time
• The trends must be:
– Decisive to your business
– Must be irreversible
– They must have a clear trajectory
• Ex. development of European Union
• Ex. Reichman Brothers – Olympia & York
• Ex. Apple observed trend of illegal download of
music
– Developed the iPod, made arrangements with record
companies and charged minimal fee for download of
songs ($0.99).
 Questions – Path 6
• What trends have a high probability of
impacting on your industry, are
irreversible, and are evolving in a clear
trajectory?
• How will these trends impact on your
industry?
• Given this, how can you open up
unprecedented customer utility?
 Conceiving New Markets
• By thinking across the 6 paths, you can
reconstruct established market boundaries
and create blue oceans.

Exercise:
• For McDonalds corporation, identify how
they used these 6 principles to deliver
healthier sandwiches to open a blue
ocean.
Focus on the Big Picture, Not
the Numbers
For
Blue Oceans
(Accountants please close your eyes)!!!
 Focus on the big picture, not the
numbers
• Alternative approach to strategic planning
– Don’t focus on business plan and get bogged
down in numbers, budgets, etc.
– Instead of preparing a document, develop a
strategic canvas.
• Visual Strategizing
– 4 steps to drawing a strategy canvas
 4 steps of Visualizing Strategy
1. Visual 2. Visual 3. Visual 4. Visual
Awakening Exploration Strategy Communic-
Fair ation
Compare your Go into the field to Draw your “to be” Distribute your
business with your explore the six paths strategy canvas before/after strategic
competitors by - customers, non- based on insight profiles on one page
drawing your “as is” customers, lost from field for easy comparison
canvas customers. (Tiers) observation

See where your Observe the Get feedback on Support only those
strategy needs to distinctive alternative strategy projects and
change advantages of canvases from operational moves
alternative customers, that allow your
products/service competitor company to close
customers and non- the gaps to actualize
customers (tiers) the new strategy
See which factors Use feedback to
you should change, build the best “to be”
eliminate or create future strategy
 Process
• Visual Awakening – devise current
strategy canvas (quick – 90 minutes)
• Visual Exploration – go into the field and
interview clients, potential clients and lost
clients
• Visual Strategy Fair – revise strategy
canvas maps
• Visual Communication – distribute 1 page
before/after strategic profiles.
 Pioneer-Migrator-Settler Map
• Pioneer – company that offer unprecedented
value – mass of customers
• Settler – company that follows leaders (Stuck in
red ocean – competitive benchmarking,
imitation, price competition)
• Migrator – somewhere in between (extend value
curve by offering customers more for less)
– Moderate growth potential but costly to develop
 Growth Potential

Pioneer
.
. .
Migrator
.. ...
Settler
. .. . .
.
• Caution: moving each business
in a portfolio, realize that
settlers may often be Cash
Cows that can finance Today Tomorrow
Migrators/Pioneers. (Need a
balance).
Reach Beyond Existing
Demand
Blue Ocean
 Maximize Size of Ocean
• How do you maximize the size of the blue ocean
you are creating?
– Reach Beyond Existing Demand
– By aggregating the greatest demand for the offering,
reduces the scale risk (size of market) associated with
creating a new market.
• To achieve this, challenge two strategic
practices. (Retain and expand existing
customers)
– Focus on Existing customers
– Drive for finer segmentation to accommodate different
buyer groups.
 Take a reverse course
• Instead of focusing on customers, look to
non-customers.
• Ex. Callaway Golf looked to why people
had not taken up golf.
– Cost
– Hitting the ball accurately, hand-eye
coordination.
• Developed the Big Bertha, with large head, that
made it easier to hit the ball (greater sweet spot).
 Questions to Ask
• Where is your focus of attention:
– Capturing a greater share of existing customers, or on
converting non-customers of the industry into new
demand?
• Do you seek out key commonalities in what
buyers value, or do you strive to embrace
customer differences through finer customization
and segmentation?
• To reach beyond existing demand, think non-
customers before customers; commonalities
before differences; and de-segmentation before
pursuing finer segmentation.
 Three Tiers of Non-customers
• Differ in relative distance from your market.
– First Tier: Soon to be customers who sit on edge of
your market, minimal purchasers out of necessity.
They can be pushed into industry if opportunity
presents itself. If offered leap in value, frequency of
purchase would increase (ex. Golf Industry)
– Second Tier: Non-customers who refuse to use your
industry’s offering. (ex. Sports enthusiasts who
choose to play a different sport)
– Third Tier: Unexplored non-customers who have
never thought of your market’s offerings as an option
(ex. African Americans and golf).
 Three Tiers
First Tier : “Soon to be
customers”
Second Tier: “Refusing”

Second Third Tier: “Unexplored”

tier Third
First Tier tier
Your
market
 First Tier
• Looking for something better within more broadly defined
market.
• Ocean of untapped demand waiting to be released
– Ex. Subway restaurants, offered healthy alternative to fast food
restaurants (McDonalds is now copying).
– Survey existing and non-current customers.
• Lesson: Non-customers tend to offer far more insight into
how to unlock and grow a blue ocean than do relatively
content existing customers.
– Look for commonalities across responses of non-customers
– Focus on these, and not the differences between them.
 Second Tier
• Refusing non-customers, do not use (current
market unacceptable) or cannot afford the use of
the current market offering.
– Ex. Media advertising on benches in cities while
waiting for bus. Offered free to city, but advertisers
who could not afford big billboards could afford these.
• Questions: What are the key reasons second-
tier non-customers refuse to use the products of
your service or industry?
– Look for commonalities across responses. Focus on
these not differences.
 Third Tier
• Typically unexplored non-customers have not
been targeted or thought of as potential
customers by any player in the industry.
• Needs and business opportunities were not
connected or thought to belong to another
market. Ex. African Americans with golf vs.
basketball.
• Example: Dental Care and teeth whitening gel.
 Go for the biggest Tier
• No specific tier to focus as the scale of the
blue ocean opportunities that a specific tier
of non-customers differs across time and
industries.
• Focus on the biggest tier at the time.
• Explore if there are overlapping
commonalities across all three tiers of
non-customers. (Ex. New technology
unlocks opportunities).