Blue Ocean Strategy Chapter 6 - Lining up the ducks
This chapter gets into details of all elements of new product innovation - the features, the pricing, cost structure and mitigating adoption risks.
In terms of features we go back to the strategy canvas and see what is needed to offer a compelling value proposition. The authors give us a framework to think through dimensions of value. They ask us to think about the full life cycle of the product from a customer perspective - purchase, take delivery, use, supplement, maintain and dispose from the perspectives of productivity, simplicity, risks, environmental impact, fun & image, convenience. Honestly this model itself suffers on some of these parameters. It feels more complex that required. Simplicity and convenience sound very similar and need not have been separate parameters. And it is not clear what is productivity. On a first look it feels similar to simplicity and convenience. But I guess it means the productivity in the job the solution gets done for the customer. I wonder if value is a better term. Fun which is notional versus value which is more material.
Once product has been established, it is about the pricing. At what pricing will it sell? To do that the author suggests to list all other solution that meet the need. He says two types of solutions - ones with same function but different form and ones with both form and function different but same broader objective. Of course if alternatives had same form and function, it would become red ocean which is not considered here. Video streaming as an alternative for cable TV is a different form same function example whereas computer games or books as alternative to cable TV is an example of different function but same objective of entertainment. The author asks to look at the markets of all these alternatives and get the band of price the customer is willing to pay. Now I can see challenges when we go about this. Often solutions in other forms and function also do other jobs. So tough to determine price of the particular job our solution will do. Also there are various pricing approaches - one time investment + subscription, pay as you use etc. which make it difficult to compare. But broad approach is good to determine what is the market and what customers value that job to be.
The authors also give guidance on whether to price in upper extreme, lower extreme or middle. If solution can be easily imitated with no entry barriers such as patents or access to specific resources, it is obvious one has to price at lower band so that competition doesn't under cut. Also if one requires scale or network for solution to work, one has to be in the lower band to drive volumes.
Having determine price, one needs to set target cost structure to ensure required margin. Then the authors suggest approaches to explore cost cutting to reach necessary structure. First step is to cut features not necessarily needed by majority of target customer base and to improve manufacturing and service delivery efficiencies. Second step is to explore partnerships and outsourcing on some of the elements to reduce cost. Third step is innovative pricing models.
After costs have been optimized, one needs to address adoption risks like aligning a company's own employees and business partners as well as regulators and society in general. Challenges can emerge from anywhere and they need to be anticipated and addressed. Makes sense. If you come up with best product but your current employees don't have skills to produce and have to be laid off and given retrenchment bonus and new employees hired then all the extra cost at an overall corporate level may evaporate profits at the product level. So good thing to consider from a broader perspective.
Overall, we are getting into nitty-gritties here - of all aspects to be considered to launch a successful new product.