BLUE OCEAN STRATEGY SIMULATION

ROUND RED DEBRIEF

Theory by

Design and Development by

W. CHAN KIM & RENEE MAUBORGNE

RED MARKET ANALYSIS OF INITIAL SITUATION (YEARS 39 & 40)

16/10/2013

STRATX

MARKET IS DECLINING IN NUMBER OF CONSOLES SOLD

Year 39

Year 40

Growth -4.6%

16/10/2013

STRATX

MARKET IS DECLINING EVEN MORE IN VALUE

Year 39

Year 40

Growth -5.6%

16/10/2013

STRATX

GROWTH OF THE 3 SEGMENTS VARIES SIGNIFICANTLY (IN VALUE)

22-35 Growth : -9.8%$ 6-21 Growth : -9.2%$ 36+ Growth : +5.3%$

Year 39

Year 40

16/10/2013

STRATX

RED BOX INITIAL SHARES BY SEGMENT VARY AS WELL (IN VALUE)

#2 RMS: 0.70

#1 RMS: 1.06

#3 RMS: 0.41

16/10/2013

STRATX

RED BOX BCG MATRIX

BOSS RED OCEAN SITUATION IN YEAR 40

16/10/2013

STRATX

OTHER SEGMENT ATTRACTIVENESS MEASURES

RELATIVE MARKET SIZE (%U) RELATIVE MARKET SIZE (%$) AVERAGE PRICE AVERAGE UNIT COST AVERAGE MARGIN REQUIRED R&D EFFORTS

6-21 49% 43% $ 391 $ 116 $ 275 MEDIUM

22-35 27% 28% $ 462 $ 149 $ 313 LOW

36+ 25% 29% $ 536 $ 182 $ 354 HIGH

16/10/2013

STRATX

CONCLUSION : OUR RED OCEAN MARKET IS TOUGH

The structural conditions of the Red Ocean market are difficult Two of the three market segments are declining in units The third segment is only moderately growing; Customers are very demanding: they want more-for-less Competition from the three competitors is very intense at all levels:
product characteristics are continuously being upgraded; marketing and distribution expenditure is very high; prices are declining.

16/10/2013

STRATX

POTENTIAL STRATEGIES STATUS QUO, LOW-END, HIGH-END

16/10/2013

STRATX

10

POTENTIAL STRATEGIES (1/2)

Status Quo Strategy
Maintain the same decisions for 3 years Do not upgrade the Red Box offering Expected performance: market share drops by 10%U / 7%$ ; SPI in Year 43 around 650, the lowest of the industry.

Low-End Strategy
Copy Yellow Console and focus on the 6-21 year old segment Red Box offering downgraded so as to lower the production unit cost Segmentation Strategy adjusted to 6-21 year olds Decrease price Distribution Coverage focused on Low-Price Oriented Channels; Expected performance: market share in %U will increase; the market share in %$ will drop slightly; EBIT will go down because increase in market share cannot compensate the required price decrease. SPI stabilized in Year 43 at around 900.

16/10/2013

STRATX

11

POTENTIAL STRATEGIES (2/2)

High-End Strategy
Copy Shiny Station and focus on the 36+ year old segment Upgrade the Red Box offering so as to reduce the gap with Shiny Station Segmentation Strategy adjusted to 36+ year olds Price should be raised to compensate for the increase in production unit cost and to maximize margin; Distribution Coverage should be focused on Specialized Electronics Stores Expected performance: market share in %U will most likely drop by about 5%; market share in %$ will stabilize or even increase. The SPI stabilized in Year 43 at around 900 to 950.

16/10/2013

STRATX

12

TEAM STRATEGIES

16/10/2013

STRATX

13

SEGMENTATION STRATEGIES (COPY OF TEAM DECISIONS)

Focus on low-end segments

16/10/2013 STRATX

Focus on high-end segments

14

DEVELOPMENT STRATEGIES PRODUCT UPGRADE VERSUS YEAR 40

"Team-07" Audio Sophistication [1-9 index] Console Power (Sophistication of Gaming Experience) [2-10 GHz] Controller Sophistication [4-20 #buttons] Graphics Sophistication [32-288 Mb] Multimedia Add-ons [1-9 #format] Online Gaming [10-90 index] Quality of Online Support [10-90 Hours] Unit Cost [$] -2 0 -6 -26 -1 30 0 -46

"Team-10" -1 0 -4 -21 -1 20 15 -36

"Team-11" 1 0 3 24 0 0 0 15

"Team-13" -2 -1 -6 0 -2 60 40 -58

"Team-20" 0 0 0 0 0 0 5 -15

16/10/2013

STRATX

15

PRICING STRATEGIES

16/10/2013

STRATX

16

DISTRIBUTION STRATEGIES (COPY OF COVERAGE DECISIONS)

Distribution strategy should be aligned with segmentation strategy

16/10/2013

STRATX

17

TEAM RESULTS

16/10/2013

STRATX

18

MARKET SHARES (%$) SEGMENT 6-21 YEAR 43

YEAR 40 22%

CONGRATULATIONS TO TEAM 7 #1 IN 6-21

16/10/2013 STRATX

19

MARKET SHARES (%$) SEGMENT 22-35 YEAR 43

YEAR 40 32%

CONGRATULATIONS TO TEAM 20 #1 IN 22-35

16/10/2013

STRATX

20

MARKET SHARES (%$) SEGMENT 36+ YEAR 43

CONGRATULATIONS TO TEAM 11 #1 IN 22-35

YEAR 40 21%

16/10/2013

STRATX

21

RED BOX EBIT (M$)

EBIT DECREASES DRAMATICALLY FOR ALL TEAMS FROM $330M IN YEAR 40

CONGRATULATIONS TO TEAM 7 #1 IN EBIT

16/10/2013

STRATX

22

TEAM SPI YEAR 43

TEAM #4 was 1st

16/10/2013

STRATX

23

AVERAGE SPI SCORES AT END OF ROUND RED

How to read this chart ? At the end of Round Red, 35% of teams have obtained a Share Price Index (SPI) comprised between 650 and 750.

16/10/2013

STRATX

24

24

RED OCEAN KEY LEARNING POINTS

16/10/2013

STRATX

25

RED OCEAN KEY LEARNING POINTS

Red Ocean strategies, when successful, can generate growth in both revenues and EBIT although these tend to be modest compared to those generated by Blue Ocean Strategies. The structural conditions of our market are difficult: decreasing market size, at least for some customer groups; demanding customers who want more-for-less; tough competition from all players in the industry; competitive offerings being continuously upgraded; very high marketing and distribution expenditures; decreasing prices; etc. When competition is limited to such an existing market, sales and EBIT will decline overall if no-one creates a Blue Ocean offering. The key success factors are: to perform a data-driven analysis based on traditional market research; to identify & target the most attractive consumer groups; to continuously optimize products (Raise/Reduce) to adapt to fast changing customer needs and to competitor moves; to invest massively in marketing to build awareness and interest; to compete primarily on price. Results are most likely to be poor because: only moderate increases in market shares as competition is tough; price pressure; low market growth or even market decline; strong decrease in profits due to R&D, increased marketing expenditure; etc. Innovation for innovations sake particularly regarding technology can cause an organization to have disastrous financial results.

16/10/2013

STRATX

26