Strategic and Service Design

Strategic and service design

Prof. Cabirio Cautela and Gianluca Carella

L00_Introduction (16/09) by Cabirio Cautela

Through this course we’ll learn how to transform ideas into business ideas. The process includes three main factors: strategy, design and management ruling. Visualizing them as groups composed of different elements, what we are looking for is the perfect combination between these factors, so those elements that coexist into the three main groups.

Let’s start from the word “strategy” which can be seen as a process, a position, a plan or even a path. A plan made of goals and means, it helps us move money and resources towards a specific goal. A method that makes the company fit in a precise environment. It could represent the position of the company and its competitors (meaning of “competitor factors”); for example in the industry of air flights Ryanair offers low cost flights while Lufthansa offers security and comfort. These factors can be chosen from: customers the company aims to, competitors that the company has or even resources that the company can move. Lastly, strategy can be seen as a path to follow in order to achieve precise goals.

The ways through which we can create a strategy are divided between market driven strategies and resources moved strategies. The concept of strategy deeply changed over the years and nowadays it has developed in new complex ways and it can be considered as a transforming, changing and improving flow of changes. We’ll see that there is a kind of old concept of strategy because for a long period “strategic management” is seen as a process that is analytical and rational. Characterized by the need to evaluate and look for the “one best option”. Planning is top-down. “Commoditization” is a term that depicts the undifferentiation of goods and services.

A Red Ocean (bloody) is a competitive space crowded and where the differentiation value of offering is low. Starting from that we’ll talk about the concept of Blue Ocean strategy, which reflects the new concept of strategy. Nowadays we try not to make the company fit in the current market (Red Ocean), instead, we want to create new markets for new companies (Blue Ocean). For example companies such as Apple, Nintendo, Tesla and Facebook are some of the pioneers because they created a market model where they had (at first) no competitors. The Blue Ocean strategy is about creating a new market for new consumers with new business models.

The management ruling makes the company survive, it gives and provides rational criterias to establish the company in the market. It is about creating rules and efficiency. It can be seen as a surviving stock of rules. Saying that strategy is a transforming flow of changes means that if we want to drive a new change you need a new management.

To design means to project things, products, experiences, visual communications, services etc. but also offering new items to the customer: firstly by creating new business models and secondly by organizing a culture which is strictly related with design and the way in which people work/live.

Innovation methods

Innovation usually happens in three ways:

• Market pull: innovation is pulled by the market or consumers
• Technology push: nothing is requested by the market but the industry gives the consumer new technological products making them feel like they need that new particular item to live in a better way.
• Design driven: meaning innovation approach, new values to give the consumer a reason to choose/buy our products and services instead of others. This represents one tool to avoid the Red Ocean famous “commoditization” (undifferentiated products sold in the market at “low” costs like sugar, oil etc.) that makes the market space crowded and with no differentiations in the value. That is why Blue Ocean has been so successfully applied.

Service design

Let's pass to the other course key-word: “service”. We’ll take into consideration the IHIP service model in which services have four main characteristics: they are intangible, heterogeneous, inseparable and perishable. The user is always included into the process, he’s not located at the end of it (as it happens with products). For example restaurants, flights, adventures, insurance etc. are consumed at the exact moment in which they are being produced (production and consumption happen at the same time). If products are standardized, this is impossible for services because they are made of history, culture and meanings. They deeply depend on the people. In addition, services can not be stocked while with products there is the “sell-in” (between the production company and the warehouse/resellers/stores) and “sell-out” (between resellers and consumer/customer) process that allows stocks.

Service design added new definitions to the word “service” since the consumer is involved with tasks: user participation, lack of ownership, intangibility, inseparability, variability and perishability. Today companies offer blendings of products and services in order to create new solutions (the “servuction” framework). From a “Goods-Dominant Logic” we are moving to a “Service-Dominant Logic”. “Within the research tradition of the Nordic School of service marketing it was established early on that the only aspect of services that clearly distinguishes them from physical goods is their process nature. Services emerge in ‘open’ processes where the customers participate as co-producers and hence can be directly influenced by the progress of these processes. Traditionally, physical goods are produced in ‘closed’ processes where the customer only perceives the goods as outcomes of the process.” (Grönroos, 2006)

Design

Let’s finally talk about the third keyword: “design”. Design is a good tool through which we can differentiate our offer. Is it a way to create a temporary fad? Is it a means to generate long-lasting things? Or is it a way to change user behavior? The power of design is that it can be considered as the changing agent of the (competitive) “rules of the game”.

Book to read: “Overcrowded” Design Meaningful Products in a World Awash with Ideas by Roberto Verganti.

L01_Blue Ocean Strategy (22/09)

Re-framing strategic principles and creating visions of innovation

The old and obsolete orthodox process:

• Analysis

It is important to scan and understand four main points during the analysis:

• Macro-environment: the forces that impact on society, the economy, the politics and on the market (so the macro level environment) can not be controlled by the company. For example the rising price of energy and gas and these issues.
• Micro-environment: aspects that can be directly influenced by the company such as suppliers, competitors and distributors. We define an industry as a group of companies which produce the same product and compete in the same field.
• Market/user: study the market and the user in order to identify their behaviors.
• Competitors: companies are in competition if they aim at the same market, if they want to attract the same user. For example Lufthansa can look like a Ryanair’s competitor since the need they cover is the same: bringing people from one place to another. But according to the professor they are not competitors. In contrast, Ryanair competes with PlayStation. Why? Because it depends on the user, both the activities they offer represent solutions for the weekend for example (the user could decide to take a trip or stay on the couch and play videogames).

According to the orthodox process, everything that happens on a macro level can not have a direct impact on the industry, on the other hand the market, companies and suppliers can directly influence the industry. We’ll see that this observation is not true. Some companies such as Apple, Ryanair, Instagram or Nintendo influence the macro environment and they prove that this system is no longer true, obsolete and totally reliable (today borders can be overcome). The old system was focused on needs and technologies, the new one is based on options.

• Strategic decision

Some analytic schemes such as the positioning map can help the company to better visualize the market cluster in which they compete. Each company chooses its own competitive factors and they compete and invest resources in order to establish their brand. The consumer sees these factors as discriminant values. The positioning map shows the direct (companies that insist on the same competitive factors and try to cover the same market or strategy cluster) and indirect competitors.

• Implementation

Product, price, promotion, place (“4P” model).

The positioning map, and in particular the strategic cluster frame, are the essential of strategy because through it we can understand in which cluster the company competes and if two or more companies compete into the same frame (they are into the same cluster frame if they base their strategy on the same competitive factors). The competitive factors are the only way through which we can differentiate markets. The positioning map is a micro-picture that helps the company to choose where to invest their resources. This “old” way to see competition brought companies to lose their values (vicious circles due to the lowering of the prices). This kind of process and analysis, which is incomplete and inaccurate, led to the well-known “Red Ocean” since the lowering of prices allowed new small/medium companies to enter the market because the barriers were getting lower and lower. Nastro Azzurro and Corona for example operate in the same strategic cluster (very similar industries that produce very similar products for the same consumer). The lower price is called “entry price”, while “premium price” players offer the maximum.

The paradigm “Structure→Behavior (SBP)→Performance”

What are Red Ocean?

Red ocean markets are red because they are associated with blood. This reference to blood means that companies lose a lot of value over the years because of a vicious circle: when a company sets a lower cost the others, in most of the cases, are kind of obliged to lower their prices as well because they are located into the same cluster. As a result, if a company lowers the price of its products, it also increases the chance for other competitors to enter in the market because the barriers of the industries are lower. Within a market of very similar products, the price becomes a relevant aspect for the consumer.

The Red Ocean are characterized by:

• Competitive crowding
• Product “commoditization”
• Strategies alignment: companies can choose between two different strategies such as cost reduction (have the standard offer of the industry by lowering prices) or differentiation (differentiate the offers).
• Margins and profitability decrease: they decrease as a result of the Red Ocean’s phenomenon. We define a margin as the difference between the price of the product and the cost that the company has to bear to produce it (fix costs included).
• Undifferentiated value curves

Red Ocean Strategy vs Blue Ocean Strategy

This crowded environment/market brought a lot of companies to failure. The problem of strategy was reframed over the last years and another one has been set up: the Blue Ocean.

• The Red Ocean approach leads companies to compete in the existing market space, the market is considered as something static, already prepared and set so it would just be possible to position a new brand in the existing market. On the other hand, the Blue Ocean strategy tries to explore and create an uncontested market space.
• Another point of the Red Ocean strategy is to beat the competition, while the Blue Ocean approach makes the competition irrelevant. The industry in this case just wants to capture another slice of the pie or even enlarge it (pie as the market), while in the old approach industries where eating from the same pie.
• In the Red Ocean companies wanted to exploit the existing demand, while in the Blue Ocean companies want to create and capture new demand, capture a new user, someone who is completely off the market. They want to create a new kind of cluster.
• The Red Ocean makes the value-cost trade-off (need to find a compromise) while the Blue Ocean strategy breaks the value-cost trade-off.

For us designers, this new environment is more interesting and stimulating. We want to create new products/services for unknown users and lifestyles, instead of copying already existing and “used” things.

Two clues to create a Blue Ocean

These are two main principles of Blue Ocean that will be for sure requested during the exam.

• See the non-customer: for example if I want to create a new beer I can think about a user who does not drink beer and aim at him.
• Don't see competitors: you don’t take into consideration the positioning map because that would lead the Red Ocean market space. By looking at competitions the company could just enter an existing market instead of creating a new one. Our aim, by applying the Blue Ocean strategy is to think about what values could be proposed to the new customer (value proposition).

Positioning maps often fail because they give a poor vision of the reality, a value curve is preferred instead. It allows us to see how other competitors behave on some particular values/main factors that other industries work on. The strategic frame, which contains the value curve, is a diagnostic tool to identify and interpret the competitive factors of a sector. The goal of the value curve is to show and understand how the different companies position themselves based on given “points” that I choose (as a new company). Considering the wine industry as an example, the premium wines will try to have all the factors at the maximum. Why the value curve is useful: it defines the main factors of a market and it shows how companies are positioned based on these factors.

The case of [yellow tail]

It is an Australian player that was aiming to cover the USA market. The USA market, at that time, was considered as an unusual market because they didn’t like wine, they preferred cocktails instead. This company was able to break the threatening and sophisticated image of wines in the USA by creating a market for non-wine drinkers/consumers. They applied a blue ocean approach by proposing new values such as:

• Fruity, light, sweet product (a sort of blasphemy for wine experts)
• Pleasure to Drink (not a strong body)
• Only two items: Chardonnay and Shiraz
• Same bottle - Same shape
• Simple label and language
• Fun, Adventure, Relax, Accessibility
• Kangaroo - The wine as a kangaroo jumps outside the glass

The value curve of [yellow tail]: it shows that they added three factors to the existing market. They kind of created a new wine market in the USA.

The case of Cirque du Soleil

• No big tops, shows are held in theaters - Refined environment
• No animal turns
• No different rings
• No international stars but artists and dancers
• Music and artistic dances
• Use of electronics & technology for communication
• Introduction of Topics & Storytelling
• Turnover of shows (changing schedule)
• Suspense replaced by emotion and intellectual stimuli

The case of Netflix

It can be considered as a game changer too. In the TV industry they did not want to fit in the existing market, so they created a new sector in a given industry. They created a revolution in cable TV where you had many categories such as commercials, news programs, live sports etc. but the user interaction was quite limited. In contrast, Netflix is an on demand operator where you make a subscription and you can choose what to see. You have: movie selection etc. Amazon Prime Video, Dazn, Disney+ can be considered as Netflix’s followers. This process can eventually bring to saturation the “Blue Ocean environment” making it fall into another “Red Ocean” case. It’s a cycle: when the market will be saturated, other game-changer companies will come and try to create an adjacent market.

The book “Innovator’s dilemma” deals with this kind of issue: exploitation vs exploration. Everyday companies and different industries live in conflictual conditions. It is about finding new ways to survive after creating our own market space. It is a very conflictive dynamic. Every company, even if it is innovative, is affected by this phenomenon because every year they have the dilemma whether to continue this kind of approach they already have or to create something new. In every moment our followers can overcome you. In this book they divide the companies into two main groups:

• Incumbents-exploitation: companies which exist in a given time and in a certain market. Their role is to explore the market with the existing resources, they usually invest/spend money on logistics and communication making their profit around 10/15% annual (beer industry). They are resistant to innovation and changing.
• New cumbents-exploration: like start-ups, they want to explore and create a new market or a new type of need for their consumers (a sort of “Entrepreneur logic”).

When designing, ask yourself “am I entering in a given market or am I creating a new one?” The Blue Ocean strategy creates a kind of vicious cycle. The game-changer, also called first mover, has the advantage of creating a standard, a reference (benchmark). This is the logic of the “winner takes all”. Companies such as Google, Apple etc. take quite 89% of the market. On the other hand, the advantage of the follower is to have time to make every adjustment and propose a better version.

The Value Innovation

This is the way through which companies can survive and not stay in a saturated market. Value innovation is oriented to create a new uncontested market leveraging on new factors and drivers that create a new form of value for customers.