BLUE OCEAN STRATEGY SIMULATION

INTRODUCTION TO ROUND RED

BLUE OCEAN STRATEGY THEORY OVERVIEW

THE BLUE OCEAN STRATEGY BOOK

Published in 2005 by HBS Press The book presents a framework on how to create uncontested market space and make competition irrelevant 40+ local translations Based on a study of 150 strategic moves spanning more than 100 years of business history Multiple awards

RED OCEAN STRATEGY VERSUS BLUE OCEAN STRATEGY

BLUE OCEAN STRATEGY METHODOLOGIES & TOOLS

INTRODUCTION TO THE BOSS WORLD

THE BOSS SIMULATION STARTS IN YEAR 40 OF THE VIDEO GAME CONSOLE ERA
The Magnavox Odyssey and the Atari Pong were the first home video game consoles marketed in the early seventies. At that time, consoles were analog rather than digital, and they had rather simple graphics, poor controller responsiveness and no sound! 40 years later, tremendous progress has been made and a handful of competitors are engaged in a fierce battle to dominate this market.

You are now part of them !

THERE ARE TWO BROAD GEOGRAPHIC MARKETS, ROUNDLAND AND STARLAND, LIKE TWO CONTINENTS
ROUNDLAND
STARLAND

Population of 125 million Resembles North America. Home country of all competitors. Market where new products are launched first Region-wide media and channels

Population of 130 million Resembles Europe with multiple languages and countries. Local media and channels Geographic expansion into this market is financially rewarding, although it takes more investment initially.

THE MARKET IS WORTH $3.7 BILLION IN YEAR 40

Market includes the video game consoles and the video games themselves Annual sales of video console units peaked at $5.0 billion 5 years ago and have been in decline since then

7 COMPETING FACTORS ARE MOST IMPORTANT TO RED OCEAN CUSTOMERS AND COMPETITORS
1. 2. 3. 4. 5. 6. 7. Price Sophistication of Gaming Experience Graphics Sophistication Controller Sophistication Multimedia Add-ons Quality of Online Support Online Gaming Consoles can be upgraded through Development projects The higher the features of the console, the higher the unit production cost

10

THE MARKET IS DIVIDED IN 3 GROUPS OF CUSTOMERS HAVING SIMILAR NEEDS AND PURCHASING BEHAVIOR
36+ Year Olds 22-35 Year Olds 6-21 Year Olds Not price sensitive, Gaming Experience, Audio & Graphics sophistication, Online support Price sensitive, Gaming Experience, Controller sophistication, Multimedia add-ons, Simple fun online gaming Highly price sensitive, Controller sophistication, Simple fun online gaming

SALES GENERATED BY CURRENT CUSTOMERS ARE THROUGH THREE MAIN CHANNELS

Low Price-orientated Channels : Hypermarkets, catalogue companies, online electronics stores, auction sites,
Sell a very wide variety of goods and services Service is virtually non-existent; no advice or guidance is given at point of sale

Specialized Electronics Stores : Independent regional distributors or major multiples with national presence
Sell electronic & computing goods such as televisions, computers, MP3 players,

Video Game Chains : Distributors dedicated to selling consoles and games

Carry an extensive range of gaming console bundles from low end to high deluxe Strong relationship with customers, including loyalty cards for discounts

SHOPPING PREFERENCES OF EACH SEGMENT THROUGHOUT THE CHANNELS

Percentage of purchases made in each channel by each of the three customer segments

How to read this chart: 30% of the 22-35 Year Olds will usually shop in Low Price-Oriented Channels

THE COMPETITORS AND THEIR PRODUCTS

Four well-known organizations compete fiercely with one another for a share of the gaming industry market
Shiny Apples (Shiny Station) Purple Plums (Purple Player) Yellow Bananas (Yellow Console) Blue Buddies (Red Box) : YOUR TEAM

EXPECTED PRODUCT UPGRADES OVER NEXT 3 YEARS

Blue Buddies and its three competitors are likely to continue their relentless technology race over the next few years All competitors are expected to upgrade their existing offering while decreasing their price simultaneously
Competitor Main brand Expected Upgrade Date New features announced Shiny Apples Shiny Station Year 42
Major improvements in Graphics Sophistication and Audio Sophistication $660 $600

Purple Plums Purple Player Year 41

Major improvements in Sophistication of Gaming Experience and Controller Sophistication $535 $500

Yellow Bananas Yellow Console Year 44

Major improvements in Audio Sophistication

Pricing trends

$300 $250

YOUR ROLE OVER THE NEXT 9 YEARS

YOUR CHALLENGES OVER THE NEXT 9 YEARS

Your team will take over the management of Blue Buddies as of Year 41 You will be leading the company for 9 years, organized in 4 Rounds

Round Red 3 runs of one year each

Round Blue 1 1 run

Round Blue 2 2 runs

Round Blue 3 3 runs

Year 41

Year 42

Year 43

Year 44

Year 45

Year 46

Year 47

Year 48

Year 49

Each Round will bring you new challenges

Round Red: Management of your existing product Red Box for 3 years Round Blue 1: Creation of a high value and low cost Blue Ocean product offering comprising competing factors beyond those upon which the industry traditionally competes. Round Blue 2: Further unlocking demand through the right Strategic Price. Round Blue 3: Extending your Blue Ocean using Service and Delivery platforms.

INTRODUCTION TO BOSS APPLICATION

BOSS IS AN EASY-TO-USE PLATFORM WHICH NEEDS NO PREVIOUS COMPUTER SKILLS OR EXPERTISE

Information on your company and your products, feedback messages, key performance indicators etc.

Information on marketed brands, competitors, customer preferences, market size and growth rate, etc.

Access to online documentation Decision forms and decisionsupport tools

A TYPICAL CHART: SALES & MARKET SHARES

The current chart can be printed at any time

Choice boxes to zoom in on a specific year, company, brand, customer group, distribution channel, etc.
Menu and Sub-Menu Selected data, in tabulated and graphical formats

Budget surplus or deficit

MAKING ROUND RED DECISIONS

MAKING DECISIONS
The Red Round focuses on the existing market You will have to make the following decisions each year in the Red Round
Product Upgrades Production level Price Marketing Budget and Segmentation Strategy Geographical Expansion & Distribution Coverage Corporate Projects to build the capability of the organization Finance

Each of these decisions is explained in detail on the following pages

RED OCEAN DECISIONS FORM

YOU ARE RESPONSIBLE FOR INITIATING PRODUCT UPGRADE PROJECTS

You may upgrade Red Box to address the changing needs of customers and/or to compete against the technological advances of your competitors. Product upgrade decisions must be based on thorough analysis of your reports
Check Brand characteristics and Brand preferences in ONGOING STUDIES

The simulation computes both the unit cost of the upgraded product and the required R&D budget Product upgrades are immediately available within the market.

YOUR PRODUCTION PLAN DECISION INFORMS THE PRODUCTION DEPARTMENT OF FORECASTED SALES
Your Production Plan decision will depend on
The forecasted market size as a whole Your expected market share Expected moves of your competitors Your own product upgrades and your marketing plan

The Production department is highly flexible and will always manufacture the required quantities in the best possible conditions Your forecast should be as accurate as possible as errors in planning have financial consequences

MONITORING THE FINANCIAL CONSEQUENCES OF YOUR PRODUCTION PLAN DECISIONS

Reminder of the Production Plan decision made at the beginning of the period

Number of units actually produced. This is equal to the number of units sold.
= Units produced Production plan The higher this number (in absolute value), the higher your error in sales forecasting Cost for producing one unit of your brand. This cost depends on the characteristics of your product Total reduction negotiated by the Production department, based on the production plan Cost charged by the Production department in case it had to produce more or less units than what was specified in the production plan. The penalty is proportional to the production surplus or deficit. = (Units produced x Unit cost) Volume based COGS reduction + Penalty for under- or over- production = Cost of Goods Sold Units produced

YOU MAY ADJUST THE PRICE OF RED BOX EACH YEAR

This is the price at which you sell your product to distributors
All distribution channels apply the same margin to all competing products, so you should not be concerned with this.

Dumping is strictly forbidden in the BOSS world: the price of a product must be equal to or higher than its unit production cost
Price changes greater than 30% in one period are highly discouraged as they often result in negative market reactions

MARKETING BUDGET AND SEGMENTATION STRATEGY

You must allocate a budget to marketing activities
To purchase advertising space: TV, internet, billboards, press, etc. Aimed at building and maintaining the awareness of your product The higher your share of voice the higher your awareness level among customers

You must indicate which customer group(s) you want to focus on:
6-21 Year Olds, 22-35 Year Olds and 36+ Year Olds This decision should be aligned with your upgrade decisions The total segmentation strategy must add up to 100%

GEOGRAPHICAL EXPANSION : YOU DECIDE WHAT PORTION OF THE TOTAL TERRITORY TO COVER
Geographical Expansion is in the form R%/S% where
R% is the expansion in Roundland S% the expansion in Starland.

For example: your product will be distributed only in Roundland if you enter a value lower than or equal to 100%/0% Geographic Expansion in Starland starts with a value of 100%/10% or more

DISTRIBUTION COVERAGE : YOU DECIDE WHERE YOUR PRODUCT WILL BE AVAILABLE

Distribution coverage for each of the 3 distribution channels
Low Price-orientated Channels, Specialized Electronics Stores and Video Game Chains % of stores in the channel where your product will be available

Your Sales department will automatically calculate the cost of your sales force
Salaries and benefits of sales people, POS materials, promotions, trade-shows, etc.

You may have to make choices and concentrate your efforts on the channels where your target customers shop
Refer to the shopping preferences chart presented in the handbook.

YOU MAY INVEST IN UP TO TWO INTERNAL CORPORATE PROJECTS EACH PERIOD

Corporate Projects are aimed at increasing your productivity, reducing your costs and/or improving your organization capabilities
Slick execution of strategy is the next most vital ingredient of high profit growth as the strategy itself Sloppy execution can ruin a great strategy. Where organization capabilities are weak, these need to be built for a strategy to be successful

ALL PROJECTS ARE DESCRIBED IN THE ONLINE DOCUMENTATION

Corporate Projects A. Relocation Manufacturing to a Low Labor Cost Country B. Process Re-engineering (6 Sigma) C. Restructuring for Cost Reduction (Making Employees Redundant) D. Acquisition to Access R&D Technology E. New Appraisal and Reward System for Employees F. Comprehensive New IT System G. Leadership Development H. Training Selected Employees in Project Management I. Restructuring for effectiveness (No Redundancies, Just Changes in Responsibility) J. Campaign for Internal Cost Consciousness K. Time Management Training for all Managers L. Recruiting Highly Qualified People to Stimulate Strategic Thinking M. Suggestion Scheme for 'Bottom Up' Improvement N. Radically upgrading Leadership and Service in the Customer Contact Centre O. Culture Change Project P. Hiring Expert Trainers to Train Distributors' Salespeople Q. Hiring the Top Team from a Regional Specialist Luxury Goods Retailer R. Hiring a Team Experienced in Developing and Managing a Fast Food Franchise Cost in K$ 10 000 5 000 5 000 10 000 6 000 15 000 500 500 2 000 500 1 000 2 000 2 000 3 000 2 000 3 500 2 000 2 000

Corporate projects will benefit all brands in your portfolio

YOU ARE ALLOCATED A BUDGET TO COVER YOUR EXPENSES

More on your budget :
To cover expenses in R&D, marketing, distribution and corporate projects Its amount is linked to your success/failure in the previous year Equal to 30% of revenues, with a maximum ($300m) and a minimum ($70m) It must not be exceeded: if total spending exceeds the allocated budget for a period, you will receive an error message

You do not have to spend your entire budget each year: if you are granted a large budget, spending it completely might be a waste of resources

CHECKING YOUR DECISIONS

Before submitting your decisions, it is highly recommended that you check that you have not made any significant mistakes in your decisions Look at the Errors, Warnings & Highlights chart
Errors indicate inconsistencies in your decisions These need to be corrected Warnings are shown to draw attention to potential problems Highlights remind you of the key decisions you have made

GROUP DYNAMICS
Establish a good working relationship within your team Each team member must be involved in the all discussions in order for everyone to have the same understanding of the business situation

Try to avoid letting each member concentrate solely on his/her area of professional expertise
Rotate responsibilities at regular intervals Maximize your internal resources and make sure that everyone benefits equally from the BOSS experience and key learnings