CHAPTER 11
Developing Alternative Blue Ocean Opportunities
AFTER THEIR SIX PATH market explorations, the blue ocean initiative team members are typically tired but on a high. Factors the industry has long competed on have been shown to be over-delivered or no longer relevant. Market segmentations that had long been taken for granted have now been called into question, as powerful commonalities that cut across strategic groups are revealed. Complementary products and services the industry had never paid much heed to are now recognized as potentially powerful levers for unlocking innovative value. In sum, the team’s energy and feeling of empowerment are palpable and, in one way or another, the rest of the organization will feel it too.
What is especially noticeable is the way people engaged in the initiative speak. Instead of quoting reports and facts when they discuss what the blue ocean process is revealing, they recount stories. Stories that have color, names, and places, and draw on specific observations that cause others in the organization to reflect on and question industry practices and to feel viscerally connected to the findings.
Now it’s time to distill the team’s insights and observations into well-formulated blue ocean strategic options. To this end, we introduce the four actions framework, a tool that will enable you to translate the findings from the team’s market exploration into concrete, actionable, strategic options that pursue both differentiation and low cost.
The Four Actions Framework
As figure 11-1 illustrates, the four actions framework is built on four key questions. The questions help you to challenge an industry’s strategic logic and business model to arrive at blue ocean moves that break the trade-off between differentiation and low cost. Let’s quickly run through them.
Which factors that the industry takes for granted should be eliminated? This question forces you to consider eliminating factors that the industry has long competed on, but which your team found to be irrelevant through the six paths market exploration in the field. Even though these factors no longer add value, or may even decrease it, they are rarely questioned because of long-held industry practice. Other times, organizations are so focused on benchmarking one another that they do not act on, or even perceive fundamental changes in what buyers value. Because these factors buttress an organization’s cost structure for little to no gain, substantial cost savings can be made by eliminating them.
Figure 11-1
The Four Actions Framework
Which factors should be reduced well below the industry’s standard? This question pushes you to determine whether products or services have been overdesigned in the race to match and beat the competition. Here organizations over-serve customers, increasing their cost structure for no gain. By reducing these factors, your costs can be lowered further.
Which factors should be raised well above the industry’s standard? This question pushes you to uncover and eliminate the compromises buyers are forced to make. These compromises are usually caused by an industry’s failure to see that buyers want more of some factors than the standard offering provides. But because the standard is the standard, no one thinks to challenge it.
Which factors that the industry has never offered should be created? This last question drives you to offer entirely new kinds of value for buyers and to create new demand by converting once noncustomers into customers.
The first two questions of eliminate and reduce give you insight into how to drop your cost structure vis-à-vis competitors. By contrast, the second two questions of raise and create drive you to create a leap in buyer value. Of particular importance here are the actions of eliminating and creating because they push the team to go beyond traditional, value-maximization exercises, which aim to deliver greater value mainly by reducing and raising levels of the existing factors of competition. If reducing and raising are all that you focus on, you may produce a higher degree of buyer value and might even build an advantage over the competition in your existing industry space. But you won’t make the existing rules of competition irrelevant, because they don’t change the key factors on which everyone else is competing. To open up a new value-cost frontier and leave the competition behind, new kinds of buyer value need to be offered through the elimination of existing factors and the creation of new ones.
To ensure that blue ocean teams pursue differentiation and low cost simultaneously, we created the eliminate-reduce-raise-create (ERRC) grid, which complements the four actions framework. Together, these two tools allow you to translate team members’ insights and observations gleaned from the field into the concrete, strategic actions needed to make a blue ocean shift. If the team is focused on only a subset of the four actions—not on all four—the grid visually flags the issue and warns the team by showing the blank space(s). Let’s walk through this process so you can see how it works.
How One Company Developed Its Blue Ocean Move
“If there ever were a red ocean,” observed Michael Levie, co-founder of citizenM Hotels, “the hotel industry would be it. It’s redder than red.” Four-star hotels offer roughly four-fifths of what five-star hotels offer. Three-star hotels offer roughly three-quarters of what four-star hotels provide and so on down to one-star hotels that offer roughly half of what two-star hotels provide. That is, they all compete on essentially the same set of factors, just more or less of them. “In this industry,” noted Michael, “people think they’ve innovated if they change the paint color on the walls or switch the type of chocolate on the pillow.” Against this backdrop, Michael and Rattan Chadha, the CEO, cofounder, and lead investor of citizenM, set out in 2007 to open up a new value-cost frontier that would capture the growing mass of frequent travelers, mobile citizens, whether they were traveling for business, on a weekend shopping excursion, or to explore a new locale. As new entrants to the hotel industry, these two entrepreneurs wanted to create a blue ocean with a new kind of hotel chain.
When it came to mobile citizens, Rattan, Michael, and their team noticed that many were frequenting either three-star or luxury hotels. Having sensed that a blue ocean opportunity could exist across these two strategic groups (path two), they wanted to understand why frequent travelers chose luxury hotels over three-star hotels and vice versa. As they did, a host of insights began to emerge.
Here’s a glimpse.
“Why do you choose a five-star hotel over a three-star hotel? For the price?”
“Price? No. Who likes paying more?”
“So, is it because of the bellhops and doormen? They’re usually much nicer at five-star hotels.”
“That may be true. But that’s not why I choose five-star hotels over three stars. For me, bellhops tend to take too long to bring your luggage up, and then I always feel the need to fork over a tip. Bellhops are certainly helpful if you have a lot of luggage. But as a frequent traveler, I travel light. For convenience and simplicity, I prefer to carry my own bag. Same for doormen. They may be nice to have, but I don’t choose a five-star hotel because of them.”
“So, is the front desk a factor?”
“No. Even in a five-star hotel, you usually have to wait. And then, when you do check in, you can get the feeling that the person checking you in is sort of checking you out, judging you. I hate that.”
“What about the concierge? Does that influence your decision?”
“No. With Google maps and restaurant and travel apps, it’s usually faster and easier for me to figure things out myself than to ask a concierge. Besides, most concierges use these services too nowadays.”
“Is it because you prefer the restaurants in five-star hotels to those in three-stars’?”
“No. It’s nice that they have them. But I tend to eat out, since five-star hotels are in great locations.”
“So location matters?”
“Yes, great locations are important in my decision. Five-star hotels usually are in prime locations, which is what I’m after.”
“Room service?”
“Room service is usually expensive and slow. I only use it when I have to.”
“What about Internet and phone?”
“That’s a real pet peeve of mine. When you stay in a luxury hotel, you’re already paying a lot. And then many of them take you for a ride by charging you for Internet and phone services at sky-high rates.”
“What matters to me isn’t the size of the room. It’s a great bed, great sheets, quietness, and a great shower. Water pressure, please!”
“What’s the biggest turnoff of three-star hotels that makes you decide not to stay there?”
“They’re just not inspiring. They feel so institutional and mediocre. That feeling of luxury, of beauty, of quality, is central to why I choose five-star hotels.”
In short, despite all the factors the hotel industry competes and ranks itself on, it turned out that only three factors stood out as decisive in determining why frequent travelers traded up to five-star hotels over those rated three stars: the meta-feeling of luxury and beauty they experience there, the more luxurious sleeping environment, and the hotels’ prime location.
Conversely, as the team probed why people choose a three-star hotel over a five-star, price jumped out as the most common factor, followed by one other: Five-star hotels often felt too formal and pretentious. “They feel too uptight. Like you have to dress a certain way and act a certain way to fit in. They feel too rarified, not relaxed enough, for me.”
To turn these insights into clear actions and a concrete strategy, the team challenged itself to translate them into specific factors to eliminate, reduce, raise, and create. As they did, they started to realize several interesting patterns. For example, the customers of neither five-star nor three-star hotels saw the front desk, concierge service, bellhops, or doormen as key to their purchase decision. The team realized that the front desk does not bring value to customers; it exists for the benefit of hotels to register and process people and payments. Similarly, for frequent travelers, who almost always travel light, bellhops were also seen as unnecessary, and often even as a nuisance. As for the concierge, frequent travelers were for the most part tech-savvy and preferred finding directions and locating restaurants and sights themselves.
“We could potentially eliminate these factors,” the team reasoned, “and there would be no real impact on value for most frequent travelers—whether they are five-star or three-star hotel goers today, while also lowering our cost structure.”
Room size could also be reduced without a real impact on value, as people rarely stayed in their rooms much. It didn’t escape the team that smaller rooms also meant being able to have more rooms per square foot of real estate space, creating greater yield. “Luxury is a great sleeping environment not room size,” the team realized. “Given the high cost of space, significant cost savings can be realized from building smaller rooms. Instead, if we raise the quality of the sleeping environment by furnishing rooms with king-size beds, fine linens, good sound insulation, big fluffy towels, and amazing showers,” the team reckoned, “we’d delight guests while keeping our cost per room much lower than the industry average.”
As team members continued to work through and interpret the market insights they’d gathered, they also recognized new kinds of value they could create. “If we eliminate the front desk, couldn’t we adapt and use self check-in kiosks so guests could check in with no lines? And we could complement them by replacing scripted front desk staff with multitasking “ambassadors,” who are ready to explain how the kiosks work and in what ways they might be of help in a warm and friendly way.”
“If we don’t have a front desk, concierge, or bellhop, why would we need a traditional lobby, which is pretty much empty, wasted space? Couldn’t we create a communal living space instead, where guests can eat, drink, meet, work, and play freely anytime they want, 24/7, as they can at home? If the living space is comfortable and relaxed, but also surprisingly beautiful, luxury customers’ need for beauty and inspiration would be immediately met on entering the hotel and so would three-star customers’ need for less formality and pretension.” Figure 11-2 shows the results of the team’s probing.
Figure 11-2
The Eliminate-Reduce-Raise-Create (ERRC) Grid: The Case of citizenM
In 2008, with the launch of its first hotel in Amsterdam’s Schiphol Airport, citizenM opened up a new value-cost frontier of affordable luxury for frequent travelers. Soon after, citizenM began opening hotels in major cities, like London, Paris, and New York. Consider these facts: Its hotels earn the highest guest rankings in the hospitality industry, placing them in the “fabulous” and “superb” categories, right alongside five-star hotels. Yet, they’re priced to be affordable to three-star customers. The result is an average occupancy rate of 90 percent across its hotels. As for costs, its total costs per room are roughly 40 percent lower than the average four-star hotel’s, while its cost of staff is a staggering 50 percent lower than the industry’s. CitizenM outperforms all traditional players, its profitability per square meter being about twice that of comparable upscale hotels. Today citizenM hotels are further expanding across the major cities of the world. “Stylish, high-tech, and cheap,” “an overnight revolution,” and “a form of religion” are among the accolades the media has showered on citizenM’s blue ocean move.
Generating Your Blue Ocean Strategic Options
The citizenM example illustrates how the insights and observations generated from one of the six paths, in this case path two (looking across strategic groups), were translated into a clear and concrete set of actions that formed the basis of its blue ocean strategic move. As citizenM was a start-up, only a small group of people, including the two entrepreneurial cofounders, were involved in developing its blue ocean move. For organizations that had separate subteams doing the six paths market exploration, only the members who did the fieldwork for a given path should develop the corresponding move. Because the translation process for each of the six paths is the same, we’ll continue using the citizenM example to show how the process works for a path. As we lay out the action steps involved in the process, for the sake of simplicity, we won’t use the phrase the subteam and will just refer to the team. Here is how the action steps unfold.
Extract the key insights revealed by the path
First, get clear on the key insights revealed by exploring the path. Team members should carefully read and review the completed recording templates with all the comments they received and observations they made during the fieldwork. If the team has not yet grouped like-minded comments across the completed recording sheets for a given path, now is the time to do so.
As they work through the comments, the team should pay special attention to the most common factors cited—both positive and negative. Those will be their key factors. Then team members need to push themselves to consider what each factor really means by providing a short, cogent description of the elements that make it up. In the case of citizenM, for example, the team could see that, when it came to room quality, the factor frequent travelers most commonly cited was the sleeping environment. Then when they pushed themselves to identify exactly what in the sleeping environment mattered, they were able to define sleeping environment concretely as “bed size, quality sheets and towels, quietness (or sound insulation), and water pressure in the shower.” Reaching agreement on what the salient factors are and exactly what they encompass not only puts everyone on the same page when they talk about their results, but also forces the team to ground insights in specific factors that can later get acted on and are relatively easy to cost.
One of the reasons the first path you work on to create a blue ocean option is typically the hardest is that translating comments into practically framed factors calls on people to think in a way few have ever been asked to do. As a result, anxiety may build, and team members may start to second-guess their ability “to do it correctly.” Reassure them that this is natural and that as they work through the path together, and share their results and learn from one another, they’ll find that they will do just fine.
Drill down into which factors to eliminate, reduce, raise, and create
Next, you need to decide if the factors you’ve identified should be eliminated, reduced, raised, or created. Use the four actions framework and the ERRC grid to help organize your answers. These materials are provided for your free download and use at www.blueoceanshift.com/ExerciseTemplates.
To ensure that everyone fully understands how to apply the framework and complete the grid, let’s go back to the citizenM example. Because their prime location and more luxurious sleeping environment were decisive in causing frequent travelers to trade up to five-star hotels, the citizenM team deemed it essential to raise these two factors to an unexpected height. At the same time, because people choose three-star hotels for their lower price, the team saw the need to offer a price point that was markedly reduced from that of luxury hotels. Since customers of neither strategic group valued the front desk experience, the team judged the front desk as eliminate. This, in turn, prompted the team’s insight about creating self check-in kiosks, so that guests could access their keys and go straight to their rooms with the same kind of time savings an ATM provides over a teller’s line at a bank. This is a glimpse into how the process of drilling down works to arrive at a completed ERRC grid.
In completing the ERRC grid for a given path, remember to focus on using concrete factors that you can act on and can get a good sense of their cost implications. For example, people often list “inconvenience” as a key factor to eliminate. However, inconvenience is not a concrete factor and it doesn’t indicate how it will be eliminated. So, it’s important to push the team to get more specific by asking, “What precise actions will be taken or things changed to eliminate buyers’ inconvenience?” Likewise, when people list “convenience” as a key factor to create, the word says nothing about how that will be done. So here, too, you would need to probe for a concrete action that will create convenience for buyers. It is critical to understand the difference between concrete factors that describe actions and investments as opposed to desired outcomes, which are the result of your strategic actions. Concrete factors, not outcomes, are what you need to list in the ERRC grid. As you do, also start to think about how you might be able to creatively deliver the factors you raise and create so the cost of delivering them can be lowered. You want to be thinking about lowering cost as you raise value all along.
Occasionally, team members may want to go back to the field and reinterview a select group of people they had previously interviewed to seek further clarification and to test their ideas about what to eliminate, reduce, raise, or create. If a team feels this need, you should let them. But be sure to cap the time for doing so to a month to prevent the team from falling into analysis paralysis.
Check that you are pursuing both differentiation and low costs
The simultaneous pursuit of differentiation and low costs via value innovation is key to opening up a new value-cost frontier and hence making a blue ocean shift. In practice, however, we’ve often found that groups tasked with coming up with something new tend to focus predominantly on raising and creating. When they do, they end up conceiving of potentially costly offerings that reflect red ocean differentiation, not blue ocean strategic moves. To ensure that this does not happen, remind people that they need to put as much effort into what to eliminate and reduce as well as what to raise and create. In practical terms, that means stressing to team members that for each path they should aim to show concrete factors in the eliminate and reduce quadrants of the completed ERRC grid, as well as in the raise and create ones.
Sometimes a team will argue that there is nothing they can eliminate or reduce. If they do, push back and ask them to think harder about factors they may be taking for granted because that’s simply the way things have always been done, but that no longer add value or significantly over-deliver on what buyers need. To inspire them, point to what citizenM eliminated and reduced that had long been sacrosanct in the hotel industry or to what Comic Relief eliminated and reduced, like advocacy counseling, grant solicitation, and year-round solicitations. To spark their thinking, try flipping the question and asking, “What are the stupidest things our industry does?” Then ask them to zoom in there. That’s when lightbulbs often start to go off.
People can also fall into the trap of listing factors to “create” that are new to their organization’s offering but not to the industry. Remind the team that the only factors that qualify here are those that are largely new to the industry or market space they are focusing on—factors that are beyond the industry’s conventional boundaries. A team at one of the largest European gas service station providers, for example, initially put having clean bathrooms and the ability to purchase a fun selection of food in their “create” quadrant. But while these two factors may have been new to the company, which had a terrible reputation in both areas, they were hardly new to the industry, which was light-years ahead of the company in this regard.
Draw your blue ocean alternatives
The team is now ready to draw a “to-be” strategy canvas for the offering, based on the completed ERRC grid for the path. The to-be strategy canvas allows you to visualize how the blue ocean alternative for a given path breaks away from the existing red ocean reality. To accomplish this, the team should begin by rating the key factors in the completed ERRC grid, just as they did when they drew the industry’s existing strategy canvas (see chapter 7). Now, however, all the factors listed as eliminates should get a score of 0. For the others, the team should use the same 5-point Likert-type scale (or variant thereof) they used earlier. As before, when it comes to price, a high price should be rated as “high” and a low price should be rated as “low.”
Next, plot all the factors along the horizontal axis. So that the strategic profile of your proposed new move can be easily appreciated and communicated, list price first, followed by all the factors that were eliminated, then reduced, then raised, and finally created. That will give you an easy-to-read strategic profile. Lastly, overlay the strategic profiles of the competition on that of your proposed new move.
Blue ocean moves seldom involve lots of bells and whistles, nor are the ideas usually fancy and shiny. In fact, once they’re completed, they often look remarkably simple and clear and have the ring of common sense. Be sure to remind the team of this, so that they don’t begin to doubt the power of their “simple” idea and start adding extraneous or clever factors that merely complicate it and seriously diminish its blue ocean potential.
Figure 11-3
Strategy Canvas of citizenM at the Time of Its Launch, 2008
“Affordable Luxury for the People”
Figure 11-3 shows the strategic profile of citizenM’s blue ocean move in contrast to those of the competition. As you can see, citizenM’s strategic profile meets the initial litmus test of a blue ocean offering in that it diverges from the competition; it is focused; and it has a compelling tagline that is true to the offering, namely, “affordable luxury for the people.”
Now reflect on the strategic profile of your blue ocean option and develop a tagline that is both true to its strategic profile and is compelling from the buyers’ point of view. One without the other is not sufficient. To develop the tagline, really dig into how the proposed offering creates a leap in value for customers and how you can best communicate that. In developing these taglines, it’s important to avoid falling into the trap of creating catchy but meaningless phrases. Should that happen, you need to redouble the team’s efforts to communicate the essence of the offering in a way that will highlight its compelling benefit and immediately speak to the market.
Outline the offerings’ economic benefits to the organization
Most industries have a fair idea of how costs generally break down across their value chain. The airline industry, for example, has a good understanding of the relative costs associated with airport fees, fuel, staff, maintenance, food and beverages, marketing, loyalty programs, and so on. Likewise, for luxury and three-star hotels, hotel industry experts like Michael Levie have a good idea of the relative costs associated with land, rooms, staff, full-service restaurants, and so on.
Based on these relative costs, the citizenM team developed a rough idea of how much cost savings would be realized by eliminating and reducing the existing features of these hotels. For those features that the citizenM team was looking to create, but luxury and three-star hotels didn’t offer—like self check-in kiosks or communal living space—the team looked outside the hotel industry to get an idea of the magnitude of cost additions. By putting cost savings and additions together, the team was able to outline how the economics of the offering would work. The aim here was to create a win not only for mobile citizens through a leap in value but also for the organization through a tidy profit.
As in the case of citizenM, here teams need to provide preliminary indicators of the economic benefits of their proposed offerings and make their business cases, however rough they may be. The blue ocean offering that ultimately gets selected would then have its economics further fleshed out with all needed operational expertise available in the organization to ensure a winning business model.
The outputs of these action steps are: a to-be strategy canvas with a compelling tagline that powerfully conveys its essence, and a completed ERRC grid that highlights how costs will be brought down, while differentiation will be driven up to create a leap in buyer value. With these inputs, rough indicators of the offering’s economic benefits, like profit and growth, are developed.
As this process gets completed for each path, what we typically find is that two or three of the paths will yield stronger and more compelling insights to create a new value-cost frontier than the others, while the rest reveal a compelling factor or two to eliminate or create, but fall short of providing enough insights to unlock a new value-cost frontier. If this happens, do not be alarmed. It’s normal. That said, you should still go through the entire exercise. Why? For one, it generates tremendous learning for everyone. Moreover, some of the insights from the “weaker” paths can become low-hanging fruit to be acted upon at a later time. So don’t short-circuit the process and lose the learning.
Move to the Final Step
With viable alternative blue ocean opportunities created, you are now ready to move to the final step of the blue ocean shift journey. The final step is where you’ll learn how to select your blue ocean move, rapidly test it in the market, and tighten and refine it to maximize its market potential. The final step ends with formalizing a big-picture business model for the chosen move and launching it. This ensures that the move you roll out generates not only a leap in value for buyers but, importantly, a tidy profit for your organization.
The team’s energy is high. Team members are proud of what they have created, but also understandably nervous, because they are on the cusp of hearing objective feedback and the market’s judgment on the proposed blue ocean moves they’ve generated from their hands-on explorations.