JetBlue: Blue Ocean Strategy

JetBlue's Background and Growth

• JetBlue was founded in 2000 by David Neeleman
• It pursued a blue ocean strategy, combining cost leadership and differentiation
• By 2019, it was the sixth-largest U.S. airline
• JetBlue had 1,000 daily flights, 22,000 crew members, and 42 million annual customers

Blue Ocean Strategy Implementation

• JetBlue used a single aircraft type (Airbus A-320)
• It lowered maintenance, training, and operational costs with this move
• The airline focused on transcontinental flights connecting the East and West coasts, known as a Point-to-Point Model
• This reduced layover costs
• JetBlue achieved one of the lowest costs per available seat-mile in the U.S. airline industry

Customer Differentiation Strategy

• JetBlue provided high-touch service with U.S.-based, work-from-home reservation agents
• The company had a functional website for bookings and advanced customer support, exhibiting high-tech features
• In-flight amenities included free DirecTV, XM Satellite Radio, and leather seats
• Mint Class was a premium service which included private suites, lie-flat beds, free Wi-Fi, and gourmet meals

Challenges Faced

• JetBlue had issues balancing cost leadership and premium service, causing operational challenges
• The airline encountered many crises
• The 2007 "snowmageddon" incident caused 1,600 canceled flights

Strategic Shifts Under New Leadership

• Robin Hayes became CEO in 2015
• Hayes attempted to refine the blue ocean strategy
• The airline focused on reducing operating costs by adding more seats and cutting legroom
• JetBlue expanded the successful Mint class to more flights
• The Airbus A-321 was introduced to improve customer satisfaction

Outcome

• JetBlue experienced difficulties, including ranking last in a 2017 WSJ airline survey for service quality
• Efforts were made to balance cost management with premium customer experience

Key Strategy Terms

• Cost-leadership strategy seeks to create the same or similar value for customers at a lower cost
• Differentiation strategy seeks to create higher value for customers than competitors while containing costs
• Diseconomies of scale happen when the cost per unit increases as output increases
• Economies of scale happen when the cost per unit decreases as output increases
• Economies of scope creates savings by producing two or more outputs at less cost than producing each separately
• Focused cost-leadership strategy mirrors the cost-leadership strategy
• Its distinct feature is a narrow focus on a niche market
• Focused differentiation strategy mirrors the differentiation strategy
• Its distinct feature is a narrow focus on a niche market
• Minimum efficient scale (MES) is the output range minimizing per-unit cost, securing a low-cost position
• Scope of competition relates to the narrowness or breadth of the market a firm targets
• Strategic trade-offs is a choice between cost and value, with higher value creation driving higher costs
• Strategy canvas portrays a company's performance against key industry success factors
• Value curve connects points on the strategy canvas
• It helps leaders diagnose and plan actions
• Value innovation simultaneously pursues differentiation and low cost, creating a leap in value

Business-Level Strategy Overview

• Business strategy defines how a firm competes in a single product market
• Its goal is to establish and maintain a competitive edge

Generic Strategies

• Differentiation Strategy: Focuses on unique features, superior quality, brand image, or service
• It strengthens customer loyalty and enables premium prices
• This strategy requires R&D, marketing, and innovation investments
• Risks involve imitation and changing customer preferences
• Cost Leadership Strategy: Aims to be the lowest-cost producer in the industry
• It leverages economies of scale, efficient operations, and cost controls
• This strategy allows for low prices or higher margins
• Risks include price wars, lower quality, and innovation lags

Value Drivers vs. Cost Drivers

• Value Drivers are product features, customer service, and complements used for differentiation
• Cost Drivers are input costs, economies of scale, and learning curves used for cost leadership

Integration Strategy (Best-Cost Strategy)

• Integration Strategy combines cost leadership and differentiation
• The goal is to deliver high value at a reduced cost
• There is a risk of being "stuck in the middle"

Blue Ocean Strategy

• It creates new market spaces rather than competing in existing markets
• This strategy combines differentiation and low cost
• It uses Value Innovation and Strategy Canvas
• Success comes from eliminating irrelevant factors and raising new value

Netflix's Founding and Early Business Model

• Netflix was founded in 1997 by Reed Hastings
• It was created after experiencing frustration with Blockbuster's late fees
• The company began as an online DVD rental service using a subscription model without late fees
• DVDs were mailed in red envelopes with pre-paid return postage

Initial Challenges and Rejection

• Netflix experienced slow growth, reaching only 300,000 subscribers by 2000
• Blockbuster declined a partnership proposal for 49% of Netflix
• Despite Blockbuster's dominance, Netflix survived the dot-com bust and went public in 2002

Disrupting the TV Industry

• Netflix launched streaming services in 2007
• It adapted to rising broadband internet and smart devices
• The company expanded streaming access to phones, tablets, game consoles, Roku, and smart TVs
• Netflix's subscription base grew to 12 million by 2009

Competition and Response

• Netflix encountered skepticism from industry leaders like Time Warner
• Networks stopped licensing content to Netflix and chose Hulu instead
• Hulu offered original shows
• Netflix invested heavily in original content

Original Content Success

• Netflix launched hits like House of Cards, Orange Is the New Black, and The Crown
• Netflix received many awards including Emmys and Golden Globes
• Netflix spent $15 billion on content in 2019

Key Takeaway

• By innovating and focusing on high-quality content, Netflix disrupted the TV industry
• The company established a sustainable competitive advantage

Further Key Terms

• Architectural innovation reconfigures existing technologies to target new markets
• The Crossing-the-chasm framework explains how customer groups dominate industry lifecycle stages
• Disruptive innovation applies new technologies to attack existing markets from the bottom
• Early adopters buy new technology early and appreciate its potential
• The early majority enters the market when innovation serves practical purposes
• Entrepreneurs

Additional Key Terms

• Entrepreneurship is...
• First-mover advantage means...
• Innovation
• Industry life cycle goes through introduction, growth, shakeout, maturity, and decline phases
• Innovation
• Innovation ecosystem
• Invention
• Laggards
• Late majority
• Long tail
• Markets-and-technology framework
• Network effects
• Patent
• Platform business
• Platform ecosystem
• Process innovation
• Product innovation
• Radical innovation
• Reverse innovation
• Social entrepreneurship
• Standard
• Strategic entrepreneurship
• Technology enthusiasts
• Trade secret
• Winner-takes-all market

Innovation and Industry Lifecycle

• Innovation drives long-term growth and competitive advantage
• Types of innovation include incremental and radical
• Innovation happens in products, processes, or business models
• Introduction: High uncertainty, innovation focus, few competitors
• Growth: Rising demand, scaling, standards emerge
• Shakeout: Slower growth, weaker firms exit, efficiency focus
• Maturity: Market saturation, cost-focused competition
• Decline: Falling sales, firms exit or reinvent
• Architectural Reconfigures known components
• Disruptive New tech serving underserved markets
• Incremental Small improvements (dominant form)
• Radical New methods or technologies

Entrepreneurship & Strategic Renewal

• Entrepreneurs introduce new ideas, methods, and markets
• Corporate entrepreneurship fuels internal innovation
• Strategic renewal repositions firms for long-term success

Platform Business Models

• Platform business models involve interactions between producers and consumers
• Network effects are vital
• They compete with pipeline models

Amazon's Background and Growth

• Jeff Bezos founded Amazon in 1994 as an online bookstore out of a garage
• By 2019, Amazon was one of the world's valuable companies at a $1 trillion market cap
• Amazon was active in e-commerce, cloud computing (AWS), advertising, entertainment, and logistics
• The Amazon wesbite launched in 1995, and quickly gained book lovers
• Amazon's mission is "to be Earth's most customer-centric company”

Blue Ocean Strategy Implementation

• Marketplace Platform (2000): Third-party sellers access customers globally, boosting variety and scale
• Prime Membership (2005): A loyalty program launched with free two-day shipping, later adding video/music streaming (over 100M subscribers by 2019)
• Logistics Innovation: Over 100 U.S. distribution centers were built, and Prime Air (drone delivery) launched to bypass UPS/FedEx
• "Last-Mile" Solutions: Campus hubs like amazon@purdue minimize delivery costs and time
• Product Diversification: Amazon expanded into private labels (Amazon Basics) and cloud hosting (AWS)

Customer Differentiation Strategy

• Customer-Centric Features: This includes one-click shopping, product reviews, tracking, and personalized recommendations
• Prime Student: Perks include a free 6-month trial, discounted Prime membership, and campus delivery
• Amazon Campus (2015): University-specific sites offer books, apparel, and student essentials
• High Convenience: Fast delivery, campus return centers, and widespread locker networks

Challenges Faced

• Amazon was managing rapid growth
• Amazon was maintaining service quality and cost control, while addressing the costly "last-mile problem" in logistics
• Amazon was increasing Prime membership costs while retaining value perception among customers

Strategic Shifts Under Continued Leadership

• Amazon expanded logistics to reduce dependency on third-party carriers
• There was an increased focus on campus-based delivery and the student market
• Heavy investments in tech, data, and infrastructure improved convenience and efficiency

Outcome

• Amazon became the largest U.S. online retailer
• It secured approximately 50% the market share
• Known as "the everything store”, Amazon is maintaining dominance through innovation, convenience, and scale
• It maintains strong customer loyalty and a powerful ecosystem through Prime, Marketplace, and AWS

Additional Key Terms

• Backward vertical integration: Changes ownership of activities upstream in the value chain
• BCG growth-share matrix: Charts business units by market share and growth for investment strategy
• Conglomerate: Combines unrelated strategic business units under one corporation
• Core competence-market matrix: Guides diversification by analyzing core competencies/markets
• Corporate strategy: Decisions/actions to gain/sustain advantage across industries/markets
• Credible commitment: A difficult and costly to reverse strategic decision
• Diversification: Increases the variety of products/services a firm offers
• Diversification discount: Stock price lower than the sum of individual business units
• Diversification premium: Stock price higher than the sum of individual business units
• External transaction costs: Costs of searching, negotiating, and enforcing contracts
• Forward vertical integration: Changes ownership of activities downstream in the value chain
• Franchising means...
• Geographic diversification strategy: Corporate strategy where a firm is active is several different countries
• Industry value chain
• Information asymmetry
• Internal transaction costs
• Joint venture
• Licensing
• Principal-agent problem
• Product diversification strategy
• Product marketing diversification strategy
• Related-constrained diversification strategy

Corporate Strategy - Defined

• It is concerned with the scope of the firm: What industries and markets should we compete in?
• It aims to create value across separate businesses

Three Dimensions of Corporate Strategy

• Vertical Integration: What stages of the industry value chain should we participate in?
• Diversification: What range of products and services should we offer?
• Geographic Scope: Where should we compete (regional, national, global)?

Vertical Integration

• There is Backward integration, which moves into raw materials or production
• There is Forward integration, which moves into distribution or retail
• Benefits include control, coordination, cost savings, protection from suppliers/distributors
• Risks include reduced flexibility, higher costs, and potential for inefficiencies

Diversification Strategy

• Related Diversification: Businesses share competencies/resources
• An example is Disney with film, TV, and streaming
• Unrelated Diversification: No relation between businesses
• An example is Berkshire Hathaway
• Core Competence: A unique strength deeply embedded in the firm
• An example is Honda's engine design

Lyft's Background and Growth

• Lyft was initially worth only $7.5 billion
• That is less than one-tenth of Uber’s valuation
• Active riders growing from 6 million to 20 million shifted the market share from 2017 to 2019 away from Uber
• Lyft preceeded Uber to an IPO, became public May 10, 2019, with a $26 billion valuation
• The valuation declined to $13 billion later that year

Underdog Strategy Implementation

• Strategic Alliances: Lyft partnered with companies such as GM to compete with Uber.
• GM Equity Investment (2016): Lyft's capital and access to automotive tech improved from this

Partnership Strategy Benefits

• Strengthen Competitive Position: GM's investment gave Lyft an edge through technology and credibility
• Enter New Markets: The GM partnership gave Lyft access to the broader transportation and logistics market via GM's vehicles
• Hedge Against Uncertainty: The alliance was a strategic move for both Lyft and GM, considering the uncertain future of car ownership and mobility services

Capability Development

• Learn New Capabilities: Expertise improved in fleet management, self-driving tech, and logistics networks
• Targeted Advertising Potential: A partnership allowed data-driven marketing and monetization strategies

Challenges Faced

• Massive Losses: In 2018, Lyft lost nearly $1 billion subsidizing rides, incentives, and new mobility modes, as well as paying high insurance costs
• Regulatory Pressure: Restrictions increased on ride-hailing services due to local government laws and required minimum driver pay
• Limited Scope: Unlike Uber, Lyft lacked global geographic reach and diversified revenue streams

Strategic Comparison with Uber

• Uber's Advantages: Global reach, Uber Eats, and wider logistics/freight options positioned it for long-term growth
• IPO Valuations: Lyft's valuation dropped from $26B at IPO to $13B by fall 2019, Uber declined but maintained a higher $52B valuation

Outcome

• Through alliances, Lyft competed with Uber, but it continued to show profitability issues and strategic disadvantages
• The "race is far from over," as the company must evolve beyond a ride-hailing service

Additonal Key Terms

• Acquisition: Purchasing another firm (can be friendly or unfriendly)
• Alliance management capability: Managing alliance-related tasks
• Build-borrow-or-buy framework: Strategy for obtaining resources, capabilities, and competencies
• Co-opetition: Cooperation between competitors to achieve objectives
• Corporate venture capital: Established firms' equity investments in entrepreneurial ventures
• Equity alliance: Partnership with partial ownership
• Explicit knowledge: Codifiable knowledge about a process or product
• Horizontal integration: Merging with competitors
• Hostile takeover: An acquisition against the wishes of the target company
• Learning races: Alliance partners motivated to learn from each other
• Managerial hubris: Managers' self-delusion of superior skills
• Merger: Combining two independent companies as equals
• Non-equity alliance: Partnership based on contracts
• Real options: Choices affording the right, but not the obligation, to invest
• Real-options perspective: Staging investments sequentially
• Relational view of competitive advantage: Critical resources/capabilities embedded in alliances
• Strategic alliances: Sharing knowledge/resources/capabilities
• Tacit knowledge: Knowledge that cannot be codified

Additional Key Terms

• Build: Develop internally
• Borrow: Form strategic alliances or partnerships
• Buy: Acquire or merge with another firm

Strategic Alliances

• Voluntary arrangements between firms to share knowledge, resources, and capabilities
• Types:
  • Equity alliances (ownership stake)
  • Non-equity alliances (contracts)
  • Joint ventures (new, jointly owned firm)
• Common goals include access to new markets, learn capabilities, and hedging uncertainty

Mergers and Acquisitions (M&A)

• Merger: Two companies combine as equals
• Acquisition: One firm buys another
• Benefits: Scale, synergies, market power, and access to tech or talent
• Risks: Culture clashes, integration difficulties, overpaying, and regulatory scrutiny

IKEA's Background and Global Presence

• IKEA is one of the world’s largest furniture retailers
• It is known for its affordable, flat-pack, DIY furniture
• The largest markets by 2018 sales were Germany, USA, France, UK, and China
• Germany leads with ~15%
• Regional breakdown: The company is 71% European, 18% American, and 11% Asian
• Even though the company is only 11% Asian, Asia provides 35% of IKEA’s inputs

Strategic Transformation Initiatives

• The company leverages an Urbanization strategy
• In 2050, projections anticipate that 70% of the global population will be living urban
• IKEA has created smaller stores for the urbanization trend
• In central Paris in 2019, one of the smaller stores was opened
• Customers were enabled to order online with a Click-and-Collect Model
• Temporary furniture options were available with Furniture Rentals
• This effort targeted itinerant urban populations
• To grow in-store engagement, IKEA took steps to offer customized options

Digital and Online Expansion

• IKEA heavily invested in ikea.com
• This improved shopping, scheduling deliveries, and installation services
• To appeal to busy professionals, IKEA rolled out a Convenience Strategy
• This strategy allowed urban consumers to not travel long distances to visit stores
• Brick-and-Mortar Visits are declining
• Roughly 1 billion store visits the prior year showed IKEA’s ongoing relevance

Operations and Supply Chain Strategy

• Global Supply Chain: Low-cost global inputs (especially from Asia) maintain cost leadership
• Production Innovations: Flexible lean techniques borrowed from automotive and electronics reduce complexity
• Localized Production: Responsiveness improves and regional demands are met

Technology and Automation Strategy

• TaskRabbit Acquisition was in 2017
• Customer issues with furniture were handled because of this
• Robots may be used to build furniture with AI & Robots
• Singapore research lab taught robots to build an IKEA chair in 20 minutes

Outcome

• IKEA maintains its dominance in the global market by constantly adjusting its style to the urban communities
• Its digital services continue to improve as does its testing of updated innovative options
• As consumers shopping behaviors shift due to constant retail transformation, IKEA continues to adjust

Why Go Global?

• Firms expand internationally to
  • To gain access to new markets, mainly in case the domestic growth diminishes
  • To gain access to low-cost input factors like physical materials and low-cost labor
  • To develop new competencies, or an innovative cluster

Disadvantages of Going Global

• The liability of foreignness
• Coordination Complexity, which is harder to manage over several international zones
• Reputation Risk creates harm to the name of an entity if their product are badly spread

Modes of Entry

• Vary among investment, control and loss. These briefly include the following
• Exporting
• Licensing
• Franchising
• Joint ventures
• Wholly owned subsidiaries