Ch3 - Reconstruct Market Boundaries

Team 4:
Ty Parasiliti
Josh Fernino
Lance Hollister
Chris Kerschen
Brent Hare
Vincent Ukwu
Victor Hemmati
 Six Paths Framework:
 Path 1: Look Across Alternative Industries
 Path 2: Look Across Strategic Groups Within
Industries
 Path 3: Look Across the Chain of Buyers
 Path 4: Look Across Complementary Product and
Service Offerings
 Path 5: Look Across Functional or Emotional
Appeal to Buyers
 Path 6: Look Across Time
 Alternatives VS. Substitutes
◦ Substitutes: products in different forms that have
the same functionality
◦ Alternatives: products with different functions that
serve the same purpose
 Buyers will ALWAYS weigh alternatives, even if
unconsciously
 Sellers consider alternatives less frequently
 Why do sellers not think the same way?
◦ Small changes WITHIN AN INDUSTRY will trigger
responses from rivals
◦ Changes in alternative industries often go
unnoticed
 This behavior provides space between
alternative industries for value innovation
 Created fractional jet ownership for corporate
travelers
 Grew larger than many airlines in less than
twenty years
 Created their blue ocean by looking across
alternative industries
◦ Commercial airlines
◦ Private jet ownership
 Advantages of commercial airlines
◦ Avoids fixed costs of a private jet aircraft
◦ Companies can purchase only the amount of tickets
they need (reduces variable costs)
 What NetJets offers
◦ Partial ownership starting at $375K
◦ Smaller planes, smaller airports, and limited staff
keep costs low
 Advantages of private jets
◦ Dramatically cuts total travel time
◦ Reduces hassle of congested airports
◦ Allows point-to-point travel
 What NetJets offers
◦ Offers access to 5,500 airports nationwide
◦ Available in four hours’ notice
Blue Oceans can also be created by looking
across strategic groups
 Companies in a particular industry that
pursue a similar strategy
 Based on two dimensions
◦ Price
◦ Performance
Key to creating blue oceans is to break out of this

narrow tunnel vision
 Grown Significantly
◦ Total Revenues exceeding $1 Billion
 Curves built on advantages of two main
strategic groups
◦ Health clubs
◦ Home exercise programs
 Trendy facilities
 Unnecessary Amenities
 Aim for socializing
 Health club is not appealing to most
 Exercising at home can lead to laziness and
excuses to not work out

 Key is working out with others
 No useless amenities
 Machines are organized to facilitate
interchange among members

 No mirrors
 $30 vs. $100
 Curves is not competing with health club
norms
 New blue ocean demand
 Over 8,000 stores expected at end of 2004
◦ Global expansion
 Lexus offers luxury at a cheaper price
 Sony Walkman
 Champion enterprises
◦ Prefabricated homes
◦ High-end finishing touches
 There is a chain of “buyers” who are directly
or indirectly involved in the buying decision
◦ Purchasers: pay for the product or service
◦ Users: people who use the product or service
◦ Influencers: influence a decision one way or the
other
 These groups may overlap, but often differ
 Individual companies in an industry target
different customer segments:
◦ Pharmaceutical industry focuses on influencers:
doctors
◦ Office equipment industry focuses on purchasers:
corporate purchasing departments
◦ Clothing industry focuses mainly on users
 Challenging an industry’s conventional
wisdom can lead to discovery of new blue
ocean
 Novo Nordisk, the Danish insulin producer,
saw that by changing their focus from selling
to doctors, they would sell directly to patients
 Came up with the NovoPen
 Then later the NovoLet, which brought about
the Innovo
 His strategy shifted the industry landscape
and transformed the company from an insulin

producer to a diabetes care company
 Bloomberg is an online financial information
industry, providing news and prices in real
time to the brokerage and investment
community
 Thought to focus on traders and analysts and
not IT managers
 Formed a system that offers traders better
value, easy to use terminals and keyboards

labeled with familiar financial terms
 Built in “what if” scenarios for convenience
 By questioning conventional definitions of
who can and should be the target buyer,
companies can often see new ways to unlock
value
 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?

• Rivals converge within the bounds of their
industry’s product and service offerings.
• e.g. Movie Theatres and Babysitters
• “Imagine a movie theatre with a babysitter

service.”
 The key is to define the total solution buyers seek
when they choose a product or service.
 Way to do this is by thinking about what happens

before, during, and after your product is used.
 e.g. Babysitting and parking, operating and

application software, airline ground transportation
 Applied Path 4 to the $1 billion U.S. bus transit
industry.
 Municipally owned bus companies v. NABI
 NABI discovered the main source of costs were

those that came with the purchase, like repairs,
fuel usage, and the wear and tear over the years.
 NABI created a bus unlike anything every seen in
that industry. They used fiberglass in place of
steel.
 Gained SEVERAL benefits from the transformation.
 NABI captured 20% of the industry since its
inception in 1993, and creating a win-win situation

for itself.
 Similar to the thinking of NABI, Philips looked
at the larger problem of brewing tea in
Britain.
 People figured the problem lies in the kettle
when in fact, the problem was with the lime

in the water.
 Created the filtered kettle.
 Path 5 looks at the competition in an industry
not just in the scope of its products and
services but also on two possible bases of
appeal.
◦ Functional Appeal
◦ Emotional Appeal
 Functional Appeal
◦ Some industries compete based on price and
function largely on calculations of utility, their
appeal is rational.
 Emotional Appeal
◦ Other industries compete largely on feelings: their
appeal is emotional, more personal.
 Company behavior affects buyer expectations
in a reinforcing cycle.
 The way companies have competed in the
past, has given consumers a taste of what to

expect.
 Over time functional oriented industries
become more functional and emotional

oriented industries become more emotional.
 This removes new insight into what attracts
customers.
 When companies are willing to challenge the
functional-emotional orientation of their industry,
they often find new market space.
 Emotionally oriented industries may offer extras that

add price without enhancing functionality. Removing
those extras that add price will create lower-priced,
lower-cost, more fundamentally simpler business
model.
 Functionally oriented industries can often combine

commodity products with new life by adding a dose
of emotion and, in doing so, can stimulate new
demand.
 Path 5 raises three questions about an
industry:
◦ Does your industry compete on functionality or
emotional appeal?
◦ If you compete on emotional appeal, what elements
can you strip out to make if functional?
◦ If you compete on functionality, what elements can
be added to make it emotional?
• All industries are subject to external trends
that affect their businesses over time
- Rapid rise of the internet
- Global movement toward protecting the
environment
• These trends can help create blue ocean
opportunities
 Key insights into blue ocean strategy rarely
come from projecting the trend itself
 They arise from business insights into how
the trend will change value to customers and

impact the company’s business model
 By looking across time managers can actively
shape their future and lay claim to a new blue

ocean
 Three principles are critical to assessing
trends across time, through the basis of a
blue ocean strategy
1. They must be decisive
2. Must be irreversible
3. Must have a clear trajectory
 Many trends can be observed at any one
time-
For Example:
- A discontinuity in technology
- The rise of a new lifestyle
- A change in regulatory or social environments
 Usually only one or two will have a decisive
impact on any particular business

 In identifying a trend, you can look across
time to figure out what the market would
look like if the trend were taken to its logical
conclusion
 Working back from that vision of a blue ocean

strategy, one can identify what must be
changed today to unlock a new blue ocean
A Prime Example:
- Apple observed the flood of illegal music file
sharing that began in the late 1990s

- Technology allowed anyone to access free
music, instead of buying CDs

- Apple capitalized on this trend by launching
the iTunes music online store

- Today the iTunes music store offers more
than 700,000 songs and now accounts for

70% of the legal music download market
From Head-to-Head Competition to Blue Ocean Creation
Head-to-Head Competition Blue Ocean Creation
Industry Focuses on rivals within its Looks across alternative
industry industries
Strategic Group Focuses on competitive Looks across strategic
position within strategic groups within industry
group
Buyer Group Focuses on better serving Redefines the industry
the buyer group buyer group
Scope of product Focuses on maximizing the Looks across to
or service offering value of product and service complementary product
offerings within the bounds and service offerings
of its industry
Functional- Focuses on improving price Rethinks the functional-
emotional performance within the emotional orientation of
orientation functional-emotional its industry
orientation of its industry
Time Focuses on adapting to Participates in shaping
external trends as they occur external trends over
time

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Team 4:

Key to creating blue oceans is to break out of this

excuses to not work out

interchange among members

and transformed the company from an insulin

value, easy to use terminals and keyboards

typically focus on?

industry, how could you unlock new value?

• e.g. Movie Theatres and Babysitters

• “Imagine a movie theatre with a babysitter

 Way to do this is by thinking about what happens

 e.g. Babysitting and parking, operating and

 Municipally owned bus companies v. NABI

 NABI discovered the main source of costs were

inception in 1993, and creating a win-win situation

when in fact, the problem was with the lime

past, has given consumers a taste of what to

become more functional and emotional

 Emotionally oriented industries may offer extras that

 Functionally oriented industries can often combine

the trend will change value to customers and

shape their future and lay claim to a new blue

impact on any particular business

 Working back from that vision of a blue ocean

sharing that began in the late 1990s

music, instead of buying CDs

the iTunes music online store

than 700,000 songs and now accounts for

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