CHAPTER 13 Finalizing and Launching Your Blue Ocean Move

WITH YOUR BLUE OCEAN move chosen, and its market potential confirmed, it’s time to formalize your business model. The aim here is laying out the big picture: the economic logic that shows how the value and cost sides of your move interact and come together to deliver a leap in value for buyers in a way that generates strong, profitable growth for you. Such a business model allows you to appreciate and see how the individual operational tasks need to fit together to produce the bottom line. It will serve as an excellent road map while the move is actualized at the operational level. Once your big-picture business model is in hand, your blue ocean move is finalized and ready for launch.

To this end, the initiative team, with the mandate of senior management, now expands, pulling in and engaging people with the requisite operational expertise from across the organization, and shifting from part time to full time to ensure that team members have the capacity they need. The guide for their work is the to-be strategy canvas, which provides a clear picture of not only what to eliminate, reduce, raise, and create, but also the price the organization needs to hit to open the new value-cost frontier. It aligns people around what they will need to deliver on and be held accountable for, and empowers them to start thinking creatively about how that can be done with lower costs.

Fair process is just as applicable here as it has been thus far: By providing the wider organization with updates on the key takeaways gleaned from each step of the process, you’ve gone a long way toward keeping everyone up to speed, and priming the pump for cooperation and commitment. Now you need to continue to exercise fair process among all the people you’ll have to engage, whether they are part of the expanded team or not.

Formalizing Your Big-Picture Business Model

By applying the four actions framework in creating your blue ocean move, the initiative team has already done a large part of the legwork needed to formalize your big-picture business model. On the one hand, they have identified the factors the industry currently competes on and invests in that can be eliminated or reduced, because they add little if any value to buyers and may even decrease it. While these decisions were based on buyer value, not on cost, in our experience most of what’s identified for elimination or reduction typically lowers—often significantly—an organization’s cost structure and has clear operational implications. At the same time, they’ve also identified the factors the industry currently under-delivers or fails to offer that should be raised or created, because they provide a decisive leap in value from the buyers’ point of view. These factors, too, almost always have cost implications as well as direct operational implications. Only, here, the factors to be raised or created typically augment the organization’s cost structure.

As an example, let’s return to citizenM’s affordable luxury hotels discussed in chapter 11. While its hotels enjoy 90 percent occupancy rates, and earn guest rankings on par with those of five-star hotels, citizenM’s blue ocean offering strips out a host of costly factors—such as the front desk, a traditional lobby, bellhops, the doorman, the concierge, room service, and even full-service restaurants—which it didn’t find to be decisive for the mass of frequent travelers. Every one of these factors citizenM eliminated directly cuts the number of hotel staff required (its hotels operate with less than half the staff of comparable, 200–400-room hotels) and, with it, overall staffing costs. By eliminating a traditional lobby and restaurant, and reducing room size by 50 percent, the costly factor of real estate is also significantly reduced. The impact goes well beyond the space that customers can see, because it means citizenM can also eliminate the space for a professional kitchen as well as all the associated costs that come with building out and maintaining a kitchen. Moreover, by reducing the guest-room variety to one standard format, citizenM is able to not only streamline building the rooms, which results in efficiency gains, but also, as we’ll see below, make use of other, innovative, high-value and low-cost construction approaches.

At the same time, the citizenM team also identified three factors to raise: the sleeping environment of its rooms (with extra-large beds, fine linens, plush towels, quiet—or sound insulation—and strong showers); a prime city location; and connectivity for guests (with free high-speed WiFi and movies on demand as well as Skype phone rates, which are much desired by guests but actually cheap to deliver). And it identified three factors to create: simple self check-in kiosks; a unique and compelling communal living space, with a 24/7 bar and pantry; and multitasking ambassadors. Lastly, the team committed to deliver this experience at a price accessible to three-star customers. The result: an offering with the potential to attract the mass of “mobile citizens,” regardless of whether they currently frequented three-star or luxury hotels.

The next step in formalizing your big-picture business model is to determine the target profit margin you want to earn to ensure a healthy win for your organization. What works best, we’ve found, is to start with a more aggressive profit margin than you think would be reasonable, given existing industry practices. Then your target costs—what your costs will ultimately need to be—can be derived by deducting this target margin from the strategic price the team has identified.

The more aggressive the target profit margin you set, the more aggressive your target costing will be. Challenging people to meet aggressive profit and cost targets stretches them to think beyond their usual practices and to search for innovations across their entire operation. Just as industries often compete on factors that buyers no longer value, standard industry operating practices often leave tremendous room for fresh thinking and innovations that can lower costs. So even though people may initially push back on aggressive profit and cost targets, we encourage you to hold firm. With some encouragement, they will strive to perform and deliver on their assignments in innovative, high-value, and low-cost ways, often with surprising results.

Unlike the more familiar practice of cost-plus pricing, in which prices are set by adding a desired profit margin to the organization’s costs, target costing is based on price-minus costing. In our experience, organizations that fail to apply target costing to their blue ocean moves typically build out their business models only to find that their costs are too high to earn a profit at the strategic price set. So, they either raise the price of the offering or cut back on the value they intend to deliver—in both cases compromising the move and sending the organization drifting back into the red ocean. The lesson we’ve learned: Your to-be strategy canvas has to be nonnegotiable. What is negotiable is how your business model delivers it.

How to Hit a Challenging Cost Target

Beyond what organizations have eliminated and reduced in their blue ocean move to lower costs, there are several other ways organizations can pursue to hit their challenging target cost without compromising on their blue ocean offering to buyers. While there is no magic formula, there are several questions teams should explore, as they formalize their business model, to ensure the organization achieves the low costs required to actualize their blue ocean move: “Who can we partner with?” “How can we streamline and innovate operations?” And “How can we multiply people’s positive energy and contributions?” Let’s probe each of these in turn.

Who can we partner with? In bringing a new idea to market, many organizations mistakenly try to carry out every aspect of the operation themselves. Sometimes this is because they see the product or service as a platform for developing new capabilities. More often, however, it’s simply because that’s the way things have always been done, and no one thinks to question this approach. While doing everything yourself may give you more control, it usually takes more time and can be a lot more costly than partnering with an organization that’s already more proficient and efficient in an area of your business model where you’re a novice. By leveraging other companies’ expertise and economies of scale, partnering (including making small acquisitions when doing so is faster and cheaper than other options) can pare costs and time, and close capability gaps quickly.

The citizenM team, for example, identified two important areas—food and housekeeping—where it could significantly lower its cost structure by outsourcing them in creative ways and enhance buyer value by benefiting from the proven expertise of others. While citizenM decided to eliminate restaurants and room service, it still aimed to provide healthy, fresh light bites in its communal living space. But food is a tough business: You need fresh ingredients, which requires volume; there is spoilage and waste; you need a kitchen, a good chef, and more. And yet, as Michael Levie observed, “Despite all that effort and cost, few hotels make food worthy of praise.”

CitizenM got around this dilemma by partnering with local boutique catering companies within blocks of each of its hotels. In this way, citizenM leverages the caterers’ proven expertise and purchasing power to ensure that only the best fresh food will be delivered and restocked in its pantries throughout the day—think fresh sushi, salads, and tasty healthy sandwiches—resulting in lower costs and a higher-quality offering. CitizenM also partners with an outside company for housekeeping and linens. But it doesn’t stop there: Its partners also order all the guest amenities and cleaning supplies and store them on the partners’ premises. Combined with the fact that citizenM’s blue ocean move eliminates restaurants and room service, this affords citizenM the unique advantage of eliminating purchasing, receiving, and storerooms in its hotels, which simultaneously provides more space for additional guest rooms and significantly lowers operational costs.

The US-based retail chain Wawa, which serves over 600 million customers a year in more than 700 stores in six states, and has annual sales approaching US$10 billion, has been similarly savvy about partnering. Customers are so gaga about Wawa that some (like Jeremy Plauche) have even tattooed its logo on their arms. While Wawa’s management team considered it a blue ocean company, in 2009 Howard Stoeckel, then its CEO, saw it drifting into the red ocean. The economy was tough after the global financial collapse, and competitors were catching up to Wawa. Determined to steer clear of the impending red ocean, Howard and his top team applied the blue ocean approach to open a new value-cost frontier. Up until then, Wawa’s blue ocean had been created by the way it had perfected the intersection of its three businesses—convenience store, fuel retailer, and food service—under one roof, while delivering outstanding customer service. The perfection was apparent in the numbers: While not a convenience store per se, Wawa’s in-store sales are more than three times those of the average 7-Eleven convenience store.

As Howard and the team worked with the blue ocean tools, and created what became known as their “blue ocean strategic plan,” they identified food service as the weakest link in the company’s overall offering and the one with the greatest profitable growth potential. As Howard reflected, “If you sell gas, people have traditionally assumed you can’t be a high-quality food restaurant.” As the team set out to make a blue ocean shift, it set its sights on completely changing this perception. It aimed to create a leap in value in the quality, freshness, and healthfulness of the food Wawa sold at the best possible price that would recast Wawa from a convenience store and gas station that also sells food, to a leading quick-service restaurant that also sells gas and convenience items. The result was a total rethinking of what food to offer, how fresh and healthy it had to be, how to display it for it to be inviting and appetizing, and how to make the selection process easy and food fulfillment fast—all at the best possible price for buyers. Now Wawa offers freshly baked breads; fresh salads like kale and quinoa; healthy wraps and soups; made-to-order hoagies with fresher and more innovative ingredients; hot lunch, dinner, and breakfast sandwiches; and what is described by some as coffee nirvana. With this rethinking, food sales skyrocketed, as did the quality of the overall Wawa experience. The power of its blue ocean shift is reflected in the numbers: Today, Wawa’s per-store food sales are ahead of McDonald’s per-store sales. What’s amazing, however, is the way the team built a business model for the new food and beverage offering, which simultaneously enabled Wawa to earn an aggressive profit margin and hit its aggressive cost target.

Wawa eliminates a number of things that other quick-service restaurants offer, such as in-store tables and drive-throughs. But what’s key to its low costs and efficiency are the dramatic differences in its behind-the-scenes operations. It not only partners with grocery logistics leader McLane Company but also set up a daily fresh channel that allows Wawa to outsource its entire supply chain in food. It partners with bakeries for all its freshly baked offerings and with Taylor Farms and the Safeway Group for all the preprepared fresh food. To get fresh food delivered to every store, every day, Wawa partners with Penske Corporation, which manages a cross-dock distribution facility, where the perishable food made by Wawa’s food partners is delivered daily. And Wawa operates none of these activities: Its involvement is limited to a small group of employees who work with its partners on communications and quality control to ensure reliable, high-quality deliveries.

As Howard observed, “By applying the blue ocean approach, we were able to identify what it would take to create a leap in the quality, value, convenience, and presentation of food for customers that would simultaneously raise the convenience and quality experience for Wawa overall. But we had no food preparation facilities and expertise in the league we were aiming to deliver on—which was world-class—to be able to make that happen. Rather than compromise our blue ocean offering, or make a costly attempt at developing this expertise in-house, we have partnered with the best to realize our vision fast and at low cost.” According to Chris Gheysens, Wawa’s current CEO, “Fresh food and beverage now account for more than 40 percent of Wawa’s merchandise sales. We’ve grown from what had been a traditional convenience store to a restaurant to go with fuel. It’s hard even to categorize us.”

How can we streamline and innovate operations? Contained within this question are multiple possibilities for lowering costs without sacrificing buyer value. Subsequent questions teams can ask to uncover these possibilities include: “Can we replace raw materials with unconventional, less expensive ones?” “Can we eliminate high-cost, low-value-added activities and facilities or replace them with low-cost, effective ones?” “Can we shift the location of our offering to lower-cost real estate?” “Can we truncate the number of parts or steps in the production process?” “Can we factory-manufacture things that industry competitors construct manually?” “Are there off-the-shelf technologies we can use or activities we can digitize to reduce our costs?” The National Youth Orchestra of Iraq asked this question, for example, and answered it brilliantly by holding auditions via YouTube and using Skype for project management. These creative innovations not only eliminated the cost and logistical nightmare of attempting to do either task in person in Iraq, but also allowed NYOI to build a social media presence in the process.

Likewise, by delving into questions such as those listed above, the citizenM team discovered an innovative way to lower its building costs dramatically while simultaneously raising the quality of its rooms. In the hotel industry, construction is one of the largest cost factors. Because citizenM’s blue ocean move envisioned only one type of guest room, the team was prompted to reflect on how other industries made standardized products. After all, that’s what its guest rooms would be—standardized. Framed this way, the obvious answer jumped out at them: Standardized products are rarely made by hand; they’re factory-manufactured. This led the team to question whether they could also manufacture citizenM’s rooms, instead of using traditional construction methods. The answer was a resounding yes. Modular manufacturing would allow the rooms to be built at far lower cost and with greater speed, higher quality assurance and consistency, and, very importantly, optimized sound insulation and wiring using value engineering. So, although citizenM builds the lower floors of its hotels using traditional construction methods, its guestrooms are factory-manufactured. And because its blue ocean move reduces the size of the guestrooms significantly, they can arrive preassembled, so they can be easily stacked and snapped together. This innovation helped citizenM cut its room-construction costs by as much as 35 percent, compared to the average four-star hotel, and its overall construction time by around 35–50 percent, compared to other three-star and luxury hotels.

CitizenM also realized it could further lower costs by eliminating call centers and phone reservations and replacing them with a simple, fast, online reservation system. For one thing, the growing mass of mobile citizens is tech-savvy and accustomed to doing things online. For another, most hotels’ call centers and phone reservations are pretty annoying—a long message detailing which button to press for what, then pushing the right reservation button, then waiting for the next available receptionist while ads or uninspiring music play endlessly. Who likes that?

How can we multiply people’s positive energy and contributions? The people who are the face of your brand, and ultimately determine a large part of your blue ocean offering’s integrity, are the people who interact directly with your customers if you’re a business, your donors if you’re a nonprofit, or your citizens if you are a government entity. These customer-facing people need to walk the talk every day to create that tingly experience that gives their customers pause, makes them smile, and motivates them to come back again and again. Yet these very people are often viewed and treated as if they were the lowest level on the hierarchical totem pole. If you’re serious about creating an offering with integrity and lowering your business model’s costs, however, they shouldn’t be. When the energies of the people on your front lines are engaged and multiplied, their productivity goes up, turnover rates drop, and their commitment to go the extra distance rises. This can be achieved by following a process that embraces humanness in the way you treat them. As discussed in chapter 4, such a humanistic process makes your front-line people feel recognized and appreciated for who they are as people, not because they are brilliant and perfect, but because they have something to contribute and want to make a difference. This humanistic approach is a powerful lever to explore as you finalize your blue ocean move. Let’s see how it is put into action with customer-facing employees.

CitizenM, Wawa, and NYOI, for example, all practiced this approach in formalizing their business models. One common denominator, which costs nothing, is the titles they give their people, which convey a sense of dignity. At citizenM you’re not a front-desk clerk, or a bellhop, or a doorman, you’re an “ambassador.” At Wawa, you’re not a convenience store cashier, or a deli worker, or a stock boy or stock girl. Every single one of its nearly 22,000 storefront employees is an “associate.” As for the National Youth Orchestra of Iraq, its players were not only musicians but also “cultural diplomats” and “peace makers.” All of these titles convey a larger sense of responsibility, grace, and purpose than merely getting a job done. Think of the impact any one of them could have on a person’s sense of mission and pride.

The respectful message these titles send is reinforced by the ways the leadership sets the business model up to elevate customer-facing people in the corporate hierarchy. At citizenM, for example, the “reverse pyramid” is a central part of the culture, with hotel staff at the top of the organizational pyramid and top management at the bottom. At Wawa, every executive is expected to spend a minimum of one full day every month typically visiting 12 to 15 stores to talk with associates and store managers. At Christmas, it’s a long-standing tradition for executives to spend the day visiting stores (with the majority dressed in Santa hats!), thanking associates for outstandingly serving customers 365 days a year. On every visit, management is there to listen, thank, learn about associates’ concerns, and ask associates and store managers to share ideas for improving operations and stories of customers’ delight. At NYOI, Paul MacAlindin assembled all the orchestra members and, using a facilitator from the Iraqi Peace Foundation who spoke both Kurdish and Arabic, invited them to define what they wanted their orchestra to stand for. The values, chosen by the players, were love, commitment, and respect. We can imagine no greater way for Paul to have demonstrated that this orchestra was about them, and that they had a mission to be a light of hope for their country as well as musicians.

Empowering customer-facing service staff and trusting them to use their best judgment when speaking with customers, instead of giving them scripts as though they were robots, is another powerful way to activate commitment and energy. Consider the way citizenM and Wawa hire, train, and reward their staff to make this possible. Both companies, for example, hire for attitude and values and train for competence. Among the sentiments echoed at both are “Skills we can teach. Attitude and values are tough to alter.” And indeed, skills are taught intensively. But far more important is imbuing staff with a deep sense of what the brand stands for, and what its blue ocean move’s promise to the customer is, and what their role is in making that promise a reality.

As Howard Stoeckel notes, “I tell all our associates, ‘You may brew coffee, work the register, or make a sandwich. But your real job at Wawa is to help people have a better day.’ There’s no higher calling than that.” Once hired, customer-facing staff get to interpret for themselves how to deliver on that brand promise, which is how and why they make authentic, inspired human connections with customers. Whether that means saying, “Hi, honey,” or helping someone with the door, or asking a person who looks sad, “What’s wrong?” they are on the case. This personal accountability for delivering on the brand’s promise is reinforced and comes full circle with the bonus policies these companies follow. At citizenM, for example, ambassadors—not executives—can earn (or lose) a 30 percent bonus each month, based 100 percent on customer satisfaction. CitizenM budgets for the full 30 percent. Why? Just look to its consistently high five-star guest satisfaction ratings, delivered by its multitasking ambassadors.

As for Wawa, it has one of the 10 largest employee stock ownership programs in the United States, based on the number of participants. Close to 40 percent of its private stock is owned by employees, with the greatest share of that held not by senior management, but by associates and store managers. With stories of dozens of associates who retired as millionaires to motivate them, associates take their stock ownership seriously. Meaningful performance incentives; hiring based on attitude; training customer-facing staff both for skills and, crucially, to internalize the brand’s promise; and then empowering them to bring that brand to life through exceptional service—taken together, these practices multiply people’s energy, engender a culture of strong accountability, create genuine and memorable experiences for customers, and lower the cost of staff turnover. It’s a win all around. These organizations don’t have customers; they have fans they delight, day in and day out.

Drawing the Big Picture

A big-picture business model shows how the value and cost sides of an organization’s blue ocean move come together to generate strong profitable growth at the set strategic price. Figure 13-1 depicts a big-picture business model, in this case for citizenM, and shows how its components interact. While the left side of the figure presents how the cost dynamics of the organization work to achieve its target cost, the right side shows what buyers receive to ensure they will have a compelling reason to purchase the new offering and an ability to pay for it. Directional arrows show how the elements on both sides of the model interact to create a profitable business model for the company and a win for its customers.

In the case of citizenM, through the big-picture business model presented in the figure, one can easily understand and see how it achieves strong profitable growth. In fact, citizenM’s profitability outperforms all the traditional players with its profitability per square meter being about twice that of comparable upscale hotels. This big-picture business model allows people to grasp the economic logic of the blue ocean move in one graphic and to appreciate how their individual operational tasks will fit together to produce the bottom line. It provides a road map for the organization to lay out the operational details and actions, including key milestones of what is to happen when and the objectives and deliverables for each function.

Figure 13-1

How citizenM’s Business Model Works

Together with the to-be strategy canvas, the big-picture business model focuses everyone on the same endpoint and prevents people from getting distracted or sidetracked as they translate the blue ocean move into a tangible offering. In essence, they act as an important “decision sieve,” aligning the efforts of people across the organization, as they work out operational details.

Launching and Rolling Out Your Blue Ocean Move

The wisest rollout strategy is to start small, then go fast and wide. We can’t emphasize this strongly enough. Apple, for example, didn’t build 300 stores at once. They first built 2 and concentrated their efforts on ironing out the snags that inevitably get fully revealed only when a new offering goes live, in color. Soon thereafter, they built 25, and the rest is history. Today Apple has more than 490 stores around the world.

In this way, citizenM could quickly work out any kinks, from the way value was delivered to guests to its behind-the-scenes operations and business model, all the while conserving capital because the changes needed to be done in only one hotel. With the adjustments made, and its success clear, citizenM then launched a second hotel in the center of Amsterdam, building on the lessons learned, and providing another opportunity to validate its business model. With the Amsterdam citizenM hotel a tremendous success virtually from the get-go, citizenM management had confidence in the leap in value its hotels delivered and proof of the strong profit engine underlying it. With that, citizenM started to turn up the dial and roll out hotels in major cities around the world.

Wawa uses the same smart rollout strategy when it launches a new offering. It starts with a limited set of stores, works out the bugs, puts the offering into a few more stores to validate its strength and the effectiveness of its business model, and then hits the gas and rolls out fast across all its stores. This rollout strategy has distinct advantages on several grounds. For one, it acknowledges that there will almost always be points of refinement and correction needed in your blue ocean offering and business model. This helps keep people emotionally on track in the face of issues that arise when launching. It says, “Yes, we are aiming for the gold; but we shouldn’t get discouraged or thrown when there are initial glitches. Rather, we should expect this, keep an open mind, refuse to get discouraged or look for someone to blame, see this as a valuable learning opportunity, and set about working through the bugs as fast as possible.” This approach also minimizes financial risk, credibility risk in the market, and what we think of as demotivation risk with your people.

We’ve also seen what happens when organizations take the opposite approach, rolling out their moves far and fast, and then discovering the bugs. Only then, it’s far more costly to fix the bugs and make adjustments, which leads to frustration and, typically, finger-pointing. And because the rollout is far and wide, the press is often fast to pick up on it. So when something goes other than planned, they are also fast to publish an overly negative review, which discourages people in the organization even further. Sadly, after that, many organizations throw up their hands, call the initiative a failure, and retreat, leaving egos bruised, money wasted, people demotivated, and an organization fearful of trying anything new again, when the glitches they encountered were no bigger or worse than those that accompany any new offering. It’s just that they were magnified exponentially by the scale of the launch.

We suggest that you think about the launch and the rollout of your blue ocean move as though you were producing the next smash hit on Broadway. You’ve gone through the blue ocean shift process and come out with a compelling, original story line that everyone loves. People tell you they can’t wait to see the play. And the people who’ve worked with you to create it can’t wait to perform it at last. Moreover, by working through the big-picture business model, you’ve also worked out everything that needs to happen behind the curtain, from the stage sets, to the lights, costumes, and sound. But does that mean you don’t need to practice and iron out the details, so the play will sing and the story line come alive? Of course not. To put on a smashing play, you need to first expect glitches, and then make minor modifications to get it right. When people say, after the first preview performance, “It still needs work,” you need to listen carefully, take notes, eschew blame, and strive to unlock the magic of the script. You and your people need to fully understand that adjustments are the natural course of action for building excellence.

Now, you are ready to make your blue ocean shift. You have the tools and the process and the mindset to make this happen from start to finish. The world needs more blue oceans. We invite you to create yours.