In the broadest sense, a company competes not only with the other firms in its own industry but also with companies in those other in- dustries that produce alternative products or services. Alternatives are broader than substitutes. Products or services that have differ- ent forms but offer the same functionality or core utility are often substitutesfor each other. On the other hand, alternativesinclude products or services that have different functions and forms but the same purpose.
For example, to sort out their personal finances, people can buy and install a financial software package, hire a CPA, or simply use pencil and paper. The software, the CPA, and the pencil are largely substitutes for each other. They have very different forms but serve the same function: helping people manage their financial affairs.
In contrast, products or services can take different forms and perform different functions but serve the same objective. Consider cinemas versus restaurants. Restaurants have few physical fea- tures in common with cinemas and serve a distinct function: They provide conversational and gastronomical pleasure. This is a very different experience from the visual entertainment offered by cine- mas. Despite the differences in form and function, however, people go to a restaurant for the same objective that they go to the movies:
to enjoy a night out. These are not substitutes, but alternatives to choose from.
In making every purchase decision, buyers implicitly weigh al- ternatives, often unconsciously. Do you need a self-indulgent two hours? What should you do to achieve it? Do you go to movie, have a massage, or enjoy reading a favorite book at a local café? The
thought process is intuitive for individual consumers and indus- trial buyers alike.
For some reason, we often abandon this intuitive thinking when we become sellers. Rarely do sellers think consciously about how their customers make trade-offs across alternative industries. A shift in price, a change in model, even a new ad campaign can elicit a tremendous response from rivals within an industry, but the same actions in an alternative industry usually go unnoticed. Trade jour- nals, trade shows, and consumer rating reports reinforce the verti- cal walls between one industry and another. Often, however, the space between alternative industries provides opportunities for value innovation.
Consider NetJets, which created the blue ocean of fractional jet ownership. In less than twenty years NetJets has grown larger than many airlines, with more than five hundred aircraft, operating more than two hundred fifty thousand flights to more than one hun- dred forty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a multibillion-dollar business, with revenues grow- ing at 30–35 percent per year from 1993 to 2000. NetJets’ success has been attributed to its flexibility, shortened travel time, hassle- free travel experience, increased reliability, and strategic pricing.
The reality is that NetJets reconstructed market boundaries to cre- ate this blue ocean by looking across alternative industries.
The most lucrative mass of customers in the aviation industry are corporate travelers. NetJets looked at the existing alternatives and found that when business travelers want to fly, they have two principal choices. On the one hand, a company’s executives can fly business class or first class on a commercial airline. On the other hand, a company can purchase its own aircraft to serve its corpo- rate travel needs. The strategic question is, Why would corpora- tions choose one alternative industry over another? By focusing on the key factors that lead corporations to trade across alternatives and eliminating or reducing everything else, NetJets created its blue ocean strategy.
Consider this: Why do corporations choose to use commercial airlines for their corporate travel? Surely it’s not because of the
long check-in and security lines, hectic flight transfers, overnight stays, or congested airports. Rather, they choose commercial air- lines for only one reason: costs. On the one hand, commercial travel avoids the high up-front, fixed-cost investment of a multimillion- dollar jet aircraft. On the other hand, a company purchases only the number of corporate airline tickets needed per year, lowering variable costs and reducing the possibility of unused aviation travel time that often accompanies the ownership of corporate jets.
So NetJets offers its customers one-sixteenth ownership of an aircraft to be shared with fifteen other customers, each one entitled to fifty hours of flight time per year. Starting at $375,000 (plus pilot, maintenance, and other monthly costs), owners can purchase a share in a $6 million aircraft.1Customers get the convenience of a private jet at the price of a commercial airline ticket. Comparing first-class travel with private aircraft, the National Business Avia- tion Association found that when direct and indirect costs—hotel, meals, travel time, expenses—were factored in, the cost of first- class commercial travel was significantly higher. In a cost-benefit analysis for four passengers on a theoretical trip from Newark to Austin, the real cost of the commercial trip was $19,400, compared with $10,100 in a private jet.2As for NetJets, it avoids the enormous fixed costs that commercial airlines attempt to cover by filling larger and larger aircraft. NetJets’ smaller airplanes, the use of smaller regional airports, and limited staff keep costs to a minimum.
To understand the rest of the NetJets formula, consider the flip side: Why do people choose corporate jets over commercial travel?
Certainly it is not to pay the multimillion-dollar price to purchase planes. Nor is it to set up a dedicated flight department to take care of scheduling and other administrative matters. Nor it is to pay so- called deadhead costs—the costs of flying the aircraft from its home base to where it is needed. Rather, corporations buy private jets to dramatically cut total travel time, to reduce the hassle of congested airports, to allow for point-to-point travel, and to gain the benefit of having more productive and energized execu- tives who can hit the ground running upon arrival. So NetJets built on these distinctive strengths. Whereas 70 percent of commercial
flights went to only thirty airports across the United States, Net- Jets offered access to more than five thousand five hundred airports across the country, in convenient locations near business centers.
On international flights, your plane pulls directly up to the cus- toms office.
With point-to-point service and the exponential increase in the number of airports to land in, there are no flight transfers; trips that would otherwise require overnight stays can be completed in a single day. The time from your car to takeoff is measured in min- utes instead of hours. For example, whereas a flight from Washing- ton, D.C., to Sacramento would take 10.5 hours on a commercial airline, it is only 5.2 hours on a NetJets aircraft; from Palm Springs to Cabo San Lucas takes 6 hours commercial, and only 2.1 hours via NetJets.3NetJets offers substantial cost savings in total travel time.
Perhaps most appealing, your jet is always available with only four hours’ notice. If a jet is not available, NetJets will charter one for you. Last but not least, NetJets dramatically reduces issues re- lated to security threats and offers clients customized in-flight ser- vice, such as having your favorite food and beverages ready for you when you board.
By offering the best of commercial travel and private jets and eliminating and reducing everything else, NetJets opened up a multibillion-dollar blue ocean wherein customers get the conven- ience and speed of a private jet with a low fixed cost and the low variable cost of commercial airline travel (see figure 3-1). And the competition? According to NetJets, in the past seven years fifty- seven companies have set up fractional jet operations; of those, fifty-seven have gone out of business.
The biggest telecommunications success in Japan since the 1980s also has its roots in path 1. Here we are speaking of NTT DoCoMo’s i-mode, which was launched in 1999. The i-mode service changed the way people communicate and access information in Japan. NTT DoCoMo’s insight into creating a blue ocean came by thinking about why people trade-across the alternatives of mobile phones and the Internet. With deregulation of the Japanese tele-
communications industry, new competitors were entering the mar- ket and price competition and technological races were the norm.
The result was that costs were rising while the average revenue per user fell. NTT DoCoMo broke out of this red ocean of bloody com- petition by creating a blue ocean of wireless transmission not only of voice but also of text, data, and pictures.
NTT DoCoMo asked, What are the distinctive strengths of the Internet over cell phones, and vice versa? Although the Internet of- fered endless information and services, the killer apps were e-mail, simple information (such as news, weather forecasts, and a tele- phone directory), and entertainment (including games, events, and music entertainment). The key downside of the Internet was the far higher price of computer hardware, an overload of information, the nuisance of dialing up to go online, and the fear of giving credit
F I G U R E 3-1
The Strategy Canvas of NetJets
High
Low
Price Need for Deadhead Speed of total Ease of travel Flexibility In-flight customers costs travel time (including and service
to manage check-in, reliability
aircraft customs, etc.)
(aircraft management and administration) Private Jet Corporate travel
NetJets’ Value Curve
Commercial Airlines First- and business-class business travel
(fixed purchase + variable price per flight)
card information electronically. On the other hand, the distinctive strengths of mobile phones were their mobility, voice transmission, and ease of use.
NTT DoCoMo broke the trade-off between these two alterna- tives, not by creating new technology but by focusing on the deci- sive advantages that the Internet has over the cell phone and vice versa. The company eliminated or reduced everything else. Its user- friendly interface has one simple button, the i-mode button (istand- ing for interactive, Internet, information, and the English pronoun I), which users press to give them immediate access to the few killer apps of the Internet. Instead of barraging you with infinite infor- mation as on the Internet, however, the i-mode button acts as a hotel concierge service, connecting only to preselected and preap- proved sites for the most popular Internet applications. That makes navigation fast and easy. At the same time, even though the i-mode phone is priced 25 percent higher than a regular cell phone, the price of the i-mode phone is dramatically less than that of a PC, and its mobility is high.
Moreover, beyond adding voice, the i-mode uses a simple billing service whereby all the services used on the Web via the i-mode are billed to the user on the same monthly bill. This dramatically re- duces the number of bills users receive and eliminates the need to give credit card details, as on the Internet. And because the i-mode service is automatically turned on whenever the phone is on, users are always connected and have no need to go through the hassle of logging on.
Neither the standard cell phone nor the PC could compete with i-mode’s divergent value curve. By the end of 2003 the number of i-mode subscribers had reached 40.1 million, and revenues from the transmission of data, pictures, and text increased from 295 million yen ($2.6 million) in 1999 to 886.3 billion yen ($8 billion) in 2003.
The i-mode service did not simply win customers from competitors.
It dramatically grew the market, drawing in youth and senior citi- zens and converting voice-only customers to voice and data trans- mission customers.
Ironically, European and U.S. counterparts who have been scram- bling to unlock a similar blue ocean in the West have so far failed.
Why? Our assessment shows that they have been focused on deliver- ing the most sophisticated technology, WAP (wireless application protocol), instead of delivering exceptional value. This has led them to build overcomplicated offerings that miss the key common- alities valued by the mass of people.
Many other well-known success stories have looked across alter- natives to create new markets. The Home Depot offers the expertise of professional home contractors at markedly lower prices than hard- ware stores. By delivering the decisive advantages of both alterna- tive industries—and eliminating or reducing everything else—The Home Depot has transformed enormous latent demand for home improvement into real demand, making ordinary homeowners into do-it-yourselfers. Southwest Airlines concentrated on driving as the alternative to flying, providing the speed of air travel at the price of car travel and creating the blue ocean of short-haul air travel. Simi- larly, Intuit looked to the pencil as the chief alternative to personal financial software to develop the fun and intuitive Quicken software.
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, you can create a blue ocean of new market space.