Pay It Forward

Hello Friends,

el RED has been inspired by many great books. I use a kindle to highlight the parts I would love to reread . Sharing those here, hoping it would come of use to someone. Pay it forward.




How to keep users Hooked ?

Feel a tad bored and instantly open Twitter

Pang of loneliness scrolling through their Facebook feeds

A question comes. They query Google.

The first-to-mind solution wins.

A trigger is the actuator of behavior—the spark plug in the engine. Triggers come in two types: external and internal.

Habit-forming products start by alerting users with external triggers like an e-mail, a website link, or the app icon on a phone.

Following the trigger comes the action: the behavior done in anticipation of a reward

Companies leverage two basic pulleys of human behavior to increase the likelihood of an action occurring: the ease of performing an action and the psychological motivation to do it.

Variable Reward. ability to create a craving.intrigue is created.

What distinguishes the Hooked Model from a plain vanilla feedback loop is the Hook’s ability to create a craving.

Variable rewards are one of the most powerful tools companies implement to hook users;

Investment. The last phase of the Hooked Model is where the user does a bit of work. The investment phase isn’t about users opening up their wallets and moving on with their day. Rather, the investment implies an action that improves the service for the next go-around. Inviting friends, stating preferences, building virtual assets, and learning to use new features are all investments users make to improve their experience.

These commitments can be leveraged to make the trigger more engaging, the action easier, and the reward more exciting with every pass through the Hooked Model.

Choice architecture, a concept described by famed scholars Thaler, Sunstein, and Balz in their same-titled scholarly paper, offers techniques to influence people’s decisions and affect behavioral outcomes.

The Hooked Model has four phases: trigger, action, variable reward, and investment.

Like nail biting, many of our daily decisions are made simply because that was the way we have found resolution in the past. The brain automatically deduces that if the decision was a good one yesterday, then it is a safe bet again today and the action becomes a routine.

If our programmed behaviors are so influential in guiding our everyday actions, surely harnessing the same power of habits can be a boon for industry. Indeed, for those able to shape them in an effective way, habits can be very good for the bottom line.

While the viability of some products depends on habit-formation to thrive, that is not always the case. For example, companies selling infrequently bought or used products or services do not require habitual users—at least, not in the sense of everyday engagement.

Life insurance companies, for instance, leverage salespeople, advertising, and word-of-mouth referrals and recommendations to prompt consumers to buy policies. Once the policy is bought, there is nothing more the customer.

Some products have a very high CLTV. For example, credit card customers tend to stay loyal for a very long time and are worth a bundle. Hence, credit card companies are willing to spend a considerable amount of money acquiring new customers.

Buffett and his partner, Charlie Munger, realized that as customers form routines around a product, they come to depend upon it and become less sensitive to price.

In the free-to-play video game business, it is standard practice for game developers to delay asking users to pay money until they have played consistently and habitually. Once the compulsion to play is in place and the desire to progress in the game increases, converting users into paying customers is much easier

Viral Cycle Time is the amount of time it takes a user to invite another user, and it can have a massive impact. “For example, after 20 days with a cycle time of two days, you will have 20,470 users,” Skok writes. “But if you halved that cycle time to one day, you would have over 20 million users! It is logical that it would be better to have more cycles occur, but it is less obvious just how much better.”

Many entrepreneurs fall into the trap of building products that are only marginally better than existing solutions, hoping their innovation will be good enough to woo customers away from existing products.

Old habits die hard and new products or services need to offer dramatic improvements to shake users out of old routines.

Products that require a high degree of behavior change are doomed to fail even if the benefits of using the new product are clear and substantial.

Users also increase their dependency on habit-forming products by storing value in them—further reducing the likelihood of switching to an alternative. For example, every e-mail sent and received using Google’s Gmail is stored indefinitely, providing users with a lasting repository of past conversations.

Memories and experiences captured on Instagram are added to one’s digital scrapbook. Switching to a new e- mail service, social network, or photo-sharing app becomes more difficult the more people use them. The nontransferable value created and stored inside these services discourages users from leaving.

The nontransferable value created and stored inside these services discourages users from leaving. To borrow a term from accounting, behaviors are LIFO—“last in, first out.” In other words, the habits you’ve most recently acquired are also the ones most likely to go soonest.

Altering behavior requires not only an understanding of how to persuade people to act—for example, the first time they land on a web page—but also necessitates getting them to repeat behaviors for long periods, ideally for the rest of their lives

The enemy of forming new habits is past behaviors, and research suggests that old habits die hard. Even when we change our routines, neural pathways remain etched in our brains, ready to be reactivated when we lose focus. For new behaviors to really take hold, they must occur often.

Habits keep users loyal. If a user is familiar with the Google interface, switching to Bing requires cognitive effort.

Although many aspects of Bing are similar to Google, even a slight change in pixel placement forces the would- be user to learn a new way of interacting with the site.

For an infrequent action to become a habit, the user must perceive a high degree of utility, either from gaining pleasure or avoiding pain.

Amazon is so confident in its ability to form user habits that it sells and runs ads for directly competitive products on its site.Customers often see the item they are about to buy listed at a cheaper price and can click away to transact elsewhere. Not only does Amazon make money from the ads it runs from competing businesses, it also utilizes other companies’ marketing dollars to form a habit in the shopper’s mind. Amazon seeks to become the solution to a frequently occurring pain point—the customer’s desire to find the items they want. By allowing users to comparison shop from within the site, Amazon provides tremendous perceived utility to its customers.

A company can begin to determine its product’s habit-forming potential by plotting two factors: frequency (how often the behavior occurs) and perceived utility (how useful and rewarding the behavior is in the user’s mind over alternative solutions).

Some behaviors never become habits because they do not occur frequently enough. No matter how much utility is involved, infrequent behaviors remain conscious actions and never create the automatic response that is characteristic of habits.

Remember, the Hooked Model does not get people to do things they don’t want to do. Your product must ultimately be useful.

Facebook, Twitter, Instagram, and Pinterest. What are they selling—vitamins or painkillers? Most people would guess vitamins, thinking users aren’t doing much of anything important other than perhaps seeking a quick boost of social validation.

Before making up your mind on the vitamin versus painkiller debate for some of the world’s most successful tech companies, consider this idea: A habit is when not doing an action causes a bit of discomfort. The sensation is similar to an itch, a feeling that manifests within the mind until it is satisfied. The habit-forming products we use are simply there to provide some sort of relief.

My answer to the vitamin versus painkiller question: Habit-forming technologies are both. These services seem at first to be offering nice-to-have vitamins, but once the habit is established, they provide an ongoing pain remedy.

It is worth noting that although some people use the terms interchangeably, habits are not the same things as addictions. The latter describes persistent, compulsive dependencies on a behavior or substance that harms the user. Addictions, by definition, are self-destructive.

When successful, forming strong user habits can have several business benefits including: higher customer lifetime value (CLTV), greater pricing flexibility, supercharged growth, and a sharper competitive edge.

Habit-forming products often start as nice-to-haves (vitamins) but once the habit is formed, they become musthaves (painkillers). Habit-forming products alleviate users’ discomfort by relieving a pronounced itch.

If you are building a habit-forming product, write down the answers to these questions: What habits does your business model require? What problem are users turning to your product to solve? How do users currently solve that problem and why does it need a solution? How frequently do you expect users to engage with your product once they are habituated? What user behavior do you want to make into a habit?

The chain reaction that forms a habit always starts with a trigger. Habits are not created, they are built upon.

New habits need a foundation upon which to build. Triggers provide the basis for sustained behavior change.

Triggers take the form of obvious cues like the morning alarm clock but also come as more subtle, sometimes subconscious signals that just as effectively influence our daily behavior

Triggers come in two types: external and internal

External Triggers Habit-forming technologies start changing behavior by first cueing users with a call to action.

External triggers are embedded with information, which tells the user what to do next. Online, an external trigger may take the form of a prominent button, such as the large “Log in to Mint” prompt in the email from

More choices require the user to evaluate multiple options. Too many choices or irrelevant options can cause hesitation, confusion, or worse—abandonment.Reducing the thinking required to take the next action increases the likelihood of the desired behavior occurring with little thought.

Types of External Triggers. Companies can utilize four types of external triggers to move users to complete desired actions.

Paid Triggers. Advertising, search engine marketing, and other paid channels are commonly used to get users’ attention.Habit-forming companies tend not to rely on paid triggers

Companies generally use paid triggers to acquire new users and then leverage other triggers to bring them back.

Earned Triggers. Earned triggers are free in that they cannot be bought directly, but they often require investment in the form of time spent on public and media relations. For earned triggers to drive ongoing user acquisition, companies must keep their products in the limelight—a difficult and unpredictable task.

Relationship Triggers. One person telling others about a product or service can be a highly effective external trigger for action. Whether through an electronic invitation, a Facebook “like,” or old fashioned word of mouth, product referrals from friends and family are often a key component of technology diffusion.

Sometimes relationship triggers drive growth because people love to tell one another about a wonderful offer.

When designers intentionally trick users into inviting friends or blasting a message to their social networks, they may see some initial growth, but it comes at the expense of users’ goodwill and trust.

Proper use of relationship triggers requires building an engaged user base that is enthusiastic about sharing the benefits of the product with others.

Owned Triggers. Owned triggers consume a piece of real estate in the user’s environment. They consistently show up in daily life and it is ultimately up to the user to opt in to allowing these triggers to appear.

Owned triggers are only set after users sign up for an account, submit their email address, install an app, opt in to newsletters, or otherwise indicate they want to continue receiving communications. While paid, earned, and relationship triggers drive new user acquisition, owned triggers prompt repeat engagement until a habit is formed.

When users form habits, they are cued by a different kind of trigger: internal ones.Internal triggers manifest automatically in your mind. Connecting internal triggers with a product is the brass ring of habit-forming technology.

Emotions, particularly negative ones, are powerful internal triggers and greatly influence our daily routines. Feelings of boredom, loneliness, frustration, confusion, and indecisiveness often instigate a slight pain or irritation and prompt an almost instantaneous and often mindless action to quell the negative sensation. For instance, Yin often uses Instagram when she fears a special moment will be lost forever. The severity of the Emotions, particularly negative ones, are powerful internal triggers and greatly influence our daily routines.The severity of the discomfort may be relatively minor—perhaps her fear is below the perceptibility of consciousness—but that’s exactly the point.

The desire to be entertained can be thought of as the need to satiate boredom. A need to share good news can also be thought of as an attempt to find and maintain social connections.

Users who find a product that alleviates their pain will form strong, positive associations with the product over time.

Gradually, these bonds cement into a habit as users turn to your product when experiencing certain internal triggers.The study demonstrated that people suffering from symptoms of depression used the Internet more.

The mother of all habit-forming technology, is a go-to solution for many of our daily agitations, from validating our importance (or even our existence) by checking to see if someone needs us

Building for Triggers Products that successfully create habits soothe the user’s pain by laying claim to a particular feeling. To do so, product designers must know their user’s internal triggers—that is, the pain they seek to solve. Finding customers’ internal triggers requires learning more about people than what they can tell you in a survey, though.

The ultimate goal of a habit-forming product is to solve the user’s pain by creating an association so that the user identifies the company’s product or service as the source of relief.

How do you, as a designer, go about uncovering the source of a user’s pain? The best place to start is to learn the drivers behind successful habit-forming products—not to copy them, but to understand how they solve users’ problems. Doing so will give you practice in diving deeper into the mind of the consumer and alert you to common human needs and desires. As We often think the Internet enables you to do new things … But people just want to do the same things they’ve always done.”

We often think the Internet enables you to do new things … But people just want to do the same things they’ve always done.”

Ask yourself what pain these habits solve and what the user might be feeling right before one of these actions.

Spend a lot of time writing what’s called user narratives. “He is in the middle of Chicago and they go to a coffee store … This is the experience they’re going to have. It reads like a play. It’s really, really beautiful. If you do that story well, then all of the prioritization, all of the product, all of the design and all the coordination that you need to do with these products just falls out naturally because you can edit the story and everyone can relate to the story from all levels of the organization, engineers to operations to support to designers to the business side of the house.”

Dorsey believes a clear description of users—their desires, emotions, the context with which they use the product —is paramount to building the right solution. In addition to Dorsey’s user narratives, tools like customer development,11 usability studies, and empathy maps12 are examples of methods for learning about potential users.

One method is to try asking the question “Why?” as many times as it takes to get to an emotion. Usually, this will happen by the fifth why. This is a technique adapted from the Toyota Production System, described by Taiichi Ohno as the “5 Whys Method.”

Why #1: Why would Julie want to use e-mail? Answer: So she can send and receive messages.

Why #2: Why would she want to do that? Answer: Because she wants to share and receive information quickly.

Why #3: Why does she want to do that? Answer: To know what’s going on in the lives of her coworkers, friends, and family.

Why #4: Why does she need to know that? Answer: To know if someone needs her.

Why #5: Why would she care about that? Answer: She fears being out of the loop. Now we’ve got something! Fear is a powerful internal trigger and we can design our solution to help calm Julie’s fear. It is the fear of losing a special moment that instigates a pang of stress. This negative emotion is the internal trigger that brings Instagram users back to the app to alleviate this pain by capturing a photo.

Instagram also alleviates the increasingly recognizable pain point known as fear of missing out, or FOMO. For Instagram, associations with internal triggers provide a foundation to form new habits.

Refer to the answers you came up with in the last “Do This Now” section to complete the following exercises: Who is your product’s user? What is the user doing right before your intended habit? Come up with three internal triggers that could cue your user to action. Refer to the 5 Whys Method described in this chapter. Which internal trigger does your user experience most frequently? Finish this brief narrative using the most frequent internal trigger and the habit you are designing: “Every time the user (internal trigger), he/she (first action of intended habit).”

Refer back to the question about what the user is doing right before the first action of the habit. What might be places and times to send an external trigger? How can you couple an external trigger as closely as possible to when the user’s internal trigger fires? Think of at least three conventional ways to trigger your user with current technology (e-mails, notifications, text messages, etc.). Then stretch yourself to come up with at least three crazy or currently impossible ideas for ways to trigger your user (wearable computers, biometric sensors, carrier pigeons, etc.). You could find that your crazy ideas spur some new approaches that may not be so nutty after all. In a few years new technologies will create all sorts of currently unimaginable triggering opportunities.

To initiate action, doing must be easier than thinking. Remember, a habit is a behavior done with little or no conscious thought. The more effort—either physical or mental—required to perform the desired action, the less likely it is to occur.

Fogg posits that there are three ingredients required to initiate any and all behaviors: (1) the user must have sufficient motivation; (2) the user must have the ability to complete the desired action; and (3) a trigger must be present to activate the behavior.

While a trigger cues an action, motivation defines the level of desire to take that action.

All humans are motivated to seek pleasure and avoid pain; to seek hope and avoid fear; and finally, to seek social acceptance and avoid rejection.

What motivates some people will not motivate others, a fact that provides all the more reason to understand the needs of your particular target audience.

However, even with the right trigger enabled and motivation running high, product designers often find users still don’t behave the way they want them to. What’s missing in this equation? Usability—or rather, the ability of the user to take action easily.

First, Hauptly states, understand the reason people use a product or service. Next, lay out the steps the customer must take to get the job done. Finally, once the series of tasks from intention to outcome is understood, simply start removing steps until you reach the simplest possible process. “Take a human desire, preferably one that has been around for a really long time … Identify that desire and use modern technology to take out steps.”

Posting content online is dramatically easier. The result? The percentage of users creating content online, as opposed to simply consuming it, increased.A few keyboard taps and users were sharing.

Six “elements of simplicity”—the factors that influence a task’s difficulty.These are:

Time—how long it takes to complete an action.

Money—the fiscal cost of taking an action.

Physical effort—the amount of labor involved in taking the action.

Brain cycles—the level of mental effort and focus required to take an action.

Social deviance—how accepted the behavior is by others.

Non-routine—according to Fogg, “How much the action matches or disrupts existing routines.”


Twitter helps people share articles, videos, photos, or any other content they find on the web. The company noticed that 25 percent of tweets contained a link.

To ease the way for link sharing, Twitter created an embeddable Tweet button for third-party sites, allowing them to offer visitors a one-click way to tweet directly from their pages

Google’s PageRank algorithm proved to be a much more effective way to index the web. By ranking pages based on how frequently other sites linked to them, Google improved search relevance.

Infinite scroll. whenever the user nears the bottom of a page, more results automatically load. Users never have to pause as they continue scrolling through pins or posts without end

Even though users are often unaware of these influences on their behavior, heuristics can predict their actions.

The Scarcity Effect. The appearance of scarcity affected their perception of value.

The Framing Effect. Context also shapes perception. The mind takes shortcuts informed by our surroundings to make quick and sometimes erroneous judgments. perception can form a personal reality based on how a product is framed, even when there is little relationship with objAbility is influenced by the six factors of time, money, physical effort, brain cycles, social deviance, and nonroutineness. Ability is dependent on users and their context at that moment.ective quality.

The Anchoring Effect. After doing some quick math I discovered that the undershirts not on sale were actually cheaper per shirt than the discounted brand’s package. People often anchor to one piece of information when making a decision.

The Endowed Progress Effect. The study demonstrates the endowed progress effect, a phenomenon that increases motivation as people believe they are nearing a goal. On LinkedIn every user starts with some semblance of progress . The next step is to “Improve Your Profile Strength” by supplying additional information.

Ability is influenced by the six factors of time, money, physical effort, brain cycles, social deviance, and nonroutineness. Ability is dependent on users and their context at that moment.

Walk through the path your users would take to use your product or service, beginning from the time they feel their internal trigger to the point where they receive their expected outcome. How many steps does it take before users obtain the reward they came for? How does this process compare with the simplicity of some of the examples described in this chapter? How does it compare with competing products and services?

Ability is influenced by the six factors of time, money, physical effort, brain cycles, social deviance, and nonroutineness. Ability is dependent on users and their context at that moment.

Users must come to depend on the product as a reliable solution to their problem—the salve for the itch they came to scratch.

Variable reward phase, in which you reward your users by solving a problem, reinforcing their motivation for the action taken in the previous phase

Nucleus accumbens was not activating when the reward (in this case a monetary payout) was received, but rather in anticipation of it.The study revealed that what draws us to act is not the sensation we receive from the reward itself, but the need to alleviate the craving for that reward.

Without variability we are like children in that once we figure out what will happen next, we become less excited by the experience.To hold our attention, products must have an ongoing degree of novelty.

Habits help us conserve our attention for other things while we go about the tasks we perform with little or no conscious thought. However, when something breaks the cause-and-effect pattern we’ve come to expect—when we encounter something outside the norm—we suddenly become aware of it again.4 Novelty sparks our interest, makes us pay attention, and—like a baby encountering a friendly dog for the first time—we seem to love it. Rewards.

Recent experiments reveal that variability increases activity in the nucleus accumbens and spikes levels of the neurotransmitter dopamine, driving our hungry search for rewards.

Variable rewards come in three types: the tribe, the hunt, and the self.

Rewards of the Tribe We are a species that depends on one another. Rewards of the tribe, or social rewards, are driven by our connectedness with other people. Our brains are adapted to seek rewards that make us feel accepted, attractive, important, and included. Facebook, Twitter, Pinterest, and several other sites collectively provide over a billion people with powerful social rewards on a variable schedule. With every post, tweet, or pin, users anticipate social validation. People who observe someone being rewarded for a particular behavior are more likely to alter their own beliefs and subsequent actions. This technique works particularly well when people observe the behavior of people most like themselves or who are slightly more experienced (and therefore, role models).

The uncertainty of what users will find each time they visit the site creates the intrigue needed to pull them back again. “Likes” and comments offer tribal validation for those who shared the content, and provide variable rewards that motivate them to continue posting.

Stack Overflow is the world’s largest question-and-answer site for software developers.

Stack Overflow devotees write responses in anticipation of rewards of the tribe. Each time a user submits an answer, other members have the opportunity to vote the response up or down. The best responses percolate upward, accumulating points for their authors . When they reach certain point levels, members earn badges, which confer special status and privileges. On Stack Overflow, points are not just an empty game mechanic; they confer special value by representing how much someone has contributed to his or her tribe. Users enjoy the feeling of helping their fellow programmers and earning the respect of people whose opinions they value.

The online video game was filled with “trolls”—people who enjoyed bullying other players while being protected by the anonymity the game provides. League of Legends soon earned a nasty reputation for having an “unforgiving—even abusive—community.”To combat the trolls, the game creators designed a reward system leveraging Bandura’s social learning theory, which they called Honor Points (figure 20). The system gave players the ability to award points for particularly sportsmanlike conduct worthy of recognition. These virtual kudos encouraged positive behavior and helped the best and most cooperative players to stand out in the community. The number of points earned was highly variable and could only be conferred by other players. Honor Points soon became a coveted marker of tribe- conferred status and helped weed out trolls by signaling to others which players should be avoided.

Rewards of the Hunt. Early humans killed animals using a technique known as “persistence hunting,” During the chase, the runner is driven by the pursuit itself; this same mental hardwiring also provides clues into the source of our insatiable desires today. The search for resources defines the next type of variable reward—the rewards of the hunt. Slot machines provide a classic example of variable rewards of the hunt.By awarding money in random intervals, games of chance entice players with the prospect of a jackpot.

Twitter. The “feed” has become a social staple of many online products. The stream of limitless information displayed in a scrolling interface makes for a compelling reward of the hunt. The Twitter timeline, for example, is filled with a mix of both mundane and relevant content. This variety creates an enticingly unpredictable user experience.

Pinterest, a company that has grown to reach over 250 million monthly users worldwide, also employs a feed, but with a visual twist.The online pinboarding site is a virtual smorgasbord of objects of desire. The site is curated by its community of users who ensure that a high degree of intriguing content appears on each page. As the user scrolls to the bottom of the page, some images appear to be cut off. Images often appear out of view below the browser fold. However, these images offer a glimpse of what’s ahead, even if just barely visible. To relieve their curiosity, all users have to do is scroll to reveal the full picture

Rewards of the Self Finally, there are the variable rewards we seek for a more personal form of gratification. We are driven to conquer obstacles, even if just for the satisfaction of doing so. The rewards of the self are fueled by “intrinsic motivation” as highlighted by the work of Edward Deci and Richard Ryan. Their self-determination theory espouses that people desire, among other things, to gain.

Video games. Rewards of the self are a defining component in video games, as players seek to master the skills needed to pursue their quest.

The humble e-mail system provides an example of how the search for mastery, completion, and competence moves users to habitual and sometimes mindless actions. Have you ever caught yourself checking your email for no particular reason? Perhaps you unconsciously decided to open it to see what messages might be waiting for you. For many, the number of unread messages represents a sort of goal to be completed. Yet to feel rewarded, the user must have a sense of accomplishment. What happens when in-boxes become flooded with too many messages? Users can give up when they sense the struggle to get their in-boxes under control is hopeless. To combat the problem and give users a sense of progress, Google created “Priority Inbox.”20 Using this feature, Gmail cleverly segments emails into sorted folders to increase the frequency of users achieving “in-box zero”—a near-mystical state of having no unread emails.

Codecademy seeks to make learning to write code more fun and rewarding. The site offers step-by-step instructions for building a web app, animation, and even a browser-based game. The interactive lessons deliver immediate feedback, At Codecademy users can enter a single correct function and the code works or doesn’t, providing instant feedback.

Important Considerations for Designing Reward Systems Variable Rewards Are Not a Free Pass. Why, then, have users remained highly engaged with Quora but not with Mahalo, despite its variable monetary rewards?

Quora demonstrated that social rewards and the variable reinforcement of recognition from peers proved to be much more frequent and salient motivators.Quora instituted an upvoting system that reports user satisfaction with answers and provides a steady stream of social feedback.

Only by understanding what truly matters to users can a company correctly match the right variable reward to their intended behavior. When there is a mismatch between the customer’s problem and the company’s assumed solution, no amount of gamification will help spur engagement. if the user has no ongoing itch at all—say, no need to return repeatedly to a site that lacks any value beyond the initial visit—gamification will fail because of a lack of inherent interest in the product or service offered. Rewards must fit into the narrative of why the product is used and align with the user’s internal triggers and motivations.

Maintain a Sense of Autonomy. the company committed a very public blunder—one that illustrates another important consideration. “Views,” which revealed the real identity of people visiting a particular question or answer. For users, the idea of knowing who was seeing content they added to the site proved very intriguing. Users could now know, for example, when a celebrity or prominent venture capital investor viewed something they created. However, the feature backfired.. In an instant, users lost their treasured anonymity when asking, answering, or simply viewing Quora questions that were personal, awkward, or intimate. For users, the idea of knowing who was seeing content they added to the site proved very intriguing. Users could now know, for example, when a celebrity or prominent venture capital investor viewed something they created. However, the feature backfired. In an instant, users lost their treasured anonymity when asking, answering, or simply viewing

Few words, placed at the end of a request, are a highly effective way to gain compliance, doubling the likelihood. “But you are free to accept or refuse.”The “but you are free” technique demonstrates how we are more likely to be persuaded to give when our ability to choose is reaffirmed.reactance, the hair-trigger response to threats to your autonomy. However, when a request is coupled with an affirmation of the right to choose, reactance is kept at bay. Yet

Keeping a food diary was not part of my daily routine and was not something I came to the app wanting to do.I soon began to feel obligated to confess my mealtime transgressions to my phone. MyFitnessPal became MyFitnessPain.I soon began to feel obligated to confess my mealtime transgressions to my leverages familiar behaviors users want to do, instead of have to do.

Before my reactance alarm went off, I started receiving kudos from other members of the site after entering my very first run. Curious to know who was sending the virtual encouragement, I logged in, whereupon I immediately saw a question from “mrosplock5,” a woman looking for advice

Fitocracy is first and foremost an online community. The app roped me in by closely mimicking real-world gym jabber among friends. The ritual of connecting with like-minded people existed long before Fitocracy, and the company leverages this behavior by making it easier and more rewarding to share encouragement, exchange advice, and receive praise.

The ritual of connecting with like-minded people existed long before Fitocracy, and the company leverages this behavior by making it easier and more rewarding to share encouragement, exchange advice, and receive praise.

Social acceptance is something we all crave,

To be fair, MyFitnessPal also has social features intended to keep members engaged. However, as opposed to Fitocracy, the benefits of interacting with the community come much later in the user experience, if ever.

The fact remains that the most successful consumer technologies are the ones that nobody makes us use.

Unfortunately, too many companies build their products betting users will do what they make them do instead of letting them do what they want to do

Companies fail to change user behaviors because they do not make their services enjoyable for its own sake, often asking users to learn new, unfamiliar actions instead of making old routines easier.

Companies that successfully change behaviors present users with an implicit choice between their old way of doing things and a new, more convenient way to fulfill existing needs.

Beware of Finite Variability. Companies that successfully change behaviors present users with an implicit choice between their old way of doing things and a new, more convenient way to fulfill existing needs. Experiences with finite variability become less engaging because they eventually become predictable.

Businesses with finite variability are not inferior per se; they just operate under different constraints. They must constantly churn out new content and experiences to cater to their consumers’ insatiable desire for novelty.

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Zero to One

Twitter went public in 2013, it was valued at $24 billion-more than 12 times the Times’s market capitalization-even though the Times earned $133 million in 2012 while Twitter lost money. What explains the huge premium for Twitter?

The answer is cash flow. This sounds bizarre at first, since the Times was profitable while Twitter wasn’t . But a great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspapers’ monopoly days are over.

The concept of “Disruption” was coined to describe threats to incumbent companies, so startups’ obsession with disruption means they see themselves through older firms’ eyes. If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path. But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create. As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.

If a CEO collects $300,000 per year ,he risks becoming more like a politician than a founder. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash poor executive, by contrast, will focus on increasing the value of the company as a whole.

High cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future. A cash bonus is slightly better than a cash salary-at least it’s contingent on a job well done. But even so-called incentive pay encourages short-term thinking and value grabbing. Any kind of cash is more about the present than the future.

Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. Sending out a company wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.

The startup uniform encapsulates a simple but essential principle ; everyone at your company should be different in the same way, a tribe of like-minded people fiercely devoted to the company ‘s mission . Max Levchin, my co-founder at PayPal,says that startups should make their early staff as personally similar as possible

The most valuable business of the coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.

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Blue Ocean Strategy

The surge in social network sites, blogs, micro-blogs, video-sharing services, user-driven content, and internet ratings that have become close to ubiquitous around the globe have shifted the power and credibility of voice from organizations to individuals.

Cirque du Soleil’s

It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price several times as great as traditional circuses for an unprecedented entertainment experience.

Look back 120 years and ask yourself, How many of today’s industries were then unknown? The answer: many industries as basic as automobiles, music recording, aviation, petrochemicals, health care, and management consulting were unheard of or had just begun to emerge at that time. Now turn the clock back only forty years. Again, a plethora of multi billion- and trillion-dollar industries jumps out—e-commerce; cell phones; laptops, routers, switches, and networking devices; gas-fired electricity plants; biotechnology; discount bars to name a few. Just four decades ago, none of these industries existed in a meaningful way.

Now put the clock forward twenty years —or perhaps fifty years—and ask yourself how many now unknown industries will likely exist then.

The overriding focus of strategic thinking has been on competition based red ocean strategies. Part of the explanation for this is that corporate strategy is heavily influenced by its roots in military strategy. The very language of strategy is deeply imbued with military references – chief executive “officers” in “headquarters”, “troops” on the “front lines”. Described this way, strategy is about confronting an opponent and fighting over a given piece of land that is both limited and constant.

To focus on the red ocean is therefore to accept the key constraining factors of war—limited terrain and the need to beat an enemy to succeed—and to deny the distinctive strength of the business world: the capacity to create new market space that is uncontested.

Our study shows that the strategic move, and not the company or the industry, is the right unit of analysis for explaining the creation of blue oceans and sustained high performance. A strategic move is the set of managerial actions and decisions involved in making a major market-creating business offering.

What consistently separated winners from losers in creating blue oceans was their approach to strategy.

The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. Instead, they followed a different strategic logic that we call value innovation. Value innovation is the cornerstone of blue ocean strategy. We call it value innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.

Value innovation places equal emphasis on value and innovation. Value without innovation tends to focus on value creation on an incremental scale, something that improves value but is not sufficient to make you stand out in the marketplace. Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for.

Value innovation occurs only when companies align innovation with utility, price, and cost positions. If they fail to anchor innovation with value in this way, technology innovators and market pioneers often lay the eggs that companies hatch.

Value innovation is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy: the value-cost trade-off. It is conventionally believed that companies can either create greater value to customers at a higher cost or create reasonable value at a lower cost. Here strategy is seen as making a choice between differentiation and low cost.In contrast, those that seek to create blue oceans pursue differentiation and low cost simultaneously.

Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.

Value innovation is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view.

Effective blue ocean strategy should be about risk minimization and not risk taking.

Our research found that customers can scarcely imagine how to create uncontested market space. Their insight also tends toward the familiar “offer me more for less.” And what customers typically want “more” of are those product and service features that the industry currently offers.

To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to noncustomers of the industry. To pursue both value and low cost, you should resist the old logic of benchmarking competitors in the existing field and choosing between differentiation and cost leadership.

Sometimes there is a fundamental change in what buyers’ value, but companies that are focused on benchmarking one another do not act on, or even perceive, the change.

The Eliminate-Reduce-Raise-Create Grid

Three complementary qualities: focus, divergence, and a compelling tagline.


Every great strategy has focus, and a company’s strategic profile, or value curve, should clearly show it.


When a company’s strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness.

Compelling Tagline

A good strategy has a clear-cut and compelling tagline.

Reading the Value Curves

The strategy canvas enables companies to see the future in the present. To achieve this, companies must understand how to read value curves.

A Blue Ocean Strategy

The first question the value curves answer is whether a business deserves to be a winner. When a company’s value curve, or its competitors’, meets the three criteria that define a good blue ocean strategy—focus, divergence, and a compelling tagline that speaks to the market—the company is on the right track. These three criteria serve as an initial litmus test of the commercial viability of blue ocean ideas.

On the other hand, when a company’s value curve lacks focus, its cost structure will tend to be high and its business model complex in implementation and execution. When it lacks divergence, a company’s strategy is a me-too, with no reason to stand apart in the marketplace. When it lacks an internally driven or a classic example of innovation for innovation’s sake with no great commercial potential and no natural take-off capability.

A Company Caught in the Red Ocean

When a company’s value curve converges with its competitors, it signals that a company is likely caught within the red ocean of bloody competition. A company’s explicit or implicit strategy tends to be trying to outdo its competition on the basis of cost or quality. This signals slow growth unless,

Overdelivery without Payback

When a company’s value curve on the strategy canvas is shown to deliver high levels across all factors, the question is, does the company’s market share and profitability reflect these investments? If not, the strategy canvas signals that the company may be oversupplying its customers, offering too much of those elements that add incremental value to buyers.

Strategic Contradictions

Are there strategic contradictions? These are areas where a company is offering a high level on one competing factor while ignoring others that support that factor. An example is investing heavily in making a company’s website easy to use but failing to correct the site’s slow speed of operations.

An Internally Driven Company

In drawing the strategy canvas, how does a company label the industry’s competing factors? For example, does it use the word megahertz instead of speed, or thermal water temperature instead of hot water? Are the competing factors stated in terms buyers can understand and value, or are they in operational jargon?

Reconstruct Market Boundaries

This principle addresses the search risk many companies struggle with. The challenge is to successfully identify, out of the haystack of possibilities that exist, commercially compelling blue ocean opportunities. These patterns applied across all types of industry sectors—from consumer goods, to industrial products, to finance and services, to telecoms and IT, to pharmaceuticals and B2B

Looking at familiar data from a new perspective. These paths challenge the six fundamental assumptions underlying many companies’ strategies.

Specifically, companies tend to do the following: Define their industry similarly and focus on being the best within it

Look at their industries through the lens of generally accepted strategic groups (such as luxury automobiles, economy care, and family vehicles), and strive to stand out in the strategic group they play in

Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as in the clothing industry), or the influencer (as in the pharmaceutical industry)

Define the scope of the products and services offered by their industry similarly

Accept their industry’s functional or emotional orientation

Focus on the same point in time —and often on current competitive threats—in formulating strategy

The more that companies share this conventional wisdom about how they compete, the greater the competitive convergence among them.

Instead of looking within these boundaries, managers need to look systematically across them to create blue oceans. They need to look across alternative industries, across strategic groups, across buyers groups, across complementary product and service offering, across the functional-emotional orientation of an industry, and even across time.

Path 1: Look Across Alternative Industries

Products or services that have different forms but offer the same functionality or core utility are often substitutes for each other. On the other hand, alternatives include products or services that have different functions and forms but the same purpose.

For example, to sort out their personal finance, people can buy and install a finance software package, hire a CPA, or simply use pencil and paper. And nowadays there are also apps that help with this. The software, the CPA, the pencil and financial apps are largely substitutes for each other.

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 alternatives, often unconsciously.


The thought process is intuitive for individual consumers and industrial buyers alike. For some reason, we often abandon this intuitive thinking when we become sellers. 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 are usually so unnoticed.

Path 2: Look Across Strategic Groups Within Industries

Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and performance. Each jump in price tends to bring a corresponding jump in some dimensions of performance.

The key to creating a blue ocean across existing strategic groups is to break out of this narrow tunnel vision by understanding which factors determine customers’ decisions to trade up or down from one group to another.

In the luxury car market, Toyota’s Lexus carved out a new blue ocean by offering the quality of the high-end Mercedes, BMW, and Jaguar at a price closer to the lower-end Cadillac and Lincoln.

What are the strategic groups in your industry? Why do customers trade up for the higher group, and why do they trade down for the lower one?

Path 3: Look Across the chain of buyers

There is a chain of “buyers” who are directly or indirectly involved in the buying decision. The purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influencers as well. Although these three groups may overlap, they often differ. When they do, they frequently hold different definitions of value. A corporate purchasing agent, for example, may be more concerned with cost than the corporate user, who is likely to be far more concerned with ease of use. Similarly, a retailer may value a manufacturer’s just-in-time stock replenishment and innovative financing. But consumer purchasers, although strongly influenced by the channel, do not value these things. The pharmaceutical industry, for example, focuses overridingly on influencers: doctors. The office equipment industry focuses heavily on purchasers: corporate purchasing departments. And the clothing industry sells predominantly to users. Sometimes there is a strong economic rationale for this focus. But often it is the result of industry practices that have never been questioned.

What is the chain of buyers in your industry? Which buyer group does your industry typically focus on? If you shifted the buyer group of your industry, how could you unlock new value?

Path 4: Look across Complementary Product and Service Offerings

Path 5 Looks Across Functional or Emotional Appeal to Buyers

When companies are willing to challenge the functional emotional orientation of their industry, they often find new market space. We have observed two common patterns. Emotionally oriented industries offer many extras that add price without enhancing functionality. Stripping away those extras may create a fundamentally simpler, lower-priced, lower-cost business model that customers would welcome. Conversely, functionally oriented industries can often infuse commodity products with new life by adding a dose of emotion and, in so doing, can stimulate new demand.

Swatch, which transformed the functionally driven budget watch industry into an emotionally driven fashion statement, or The Body Shop, which did the reverse, transforming the emotionally driven industry of cosmetics into a functional, no-nonsense cosmetic house.

Patrimonio Hoy program.

At the foundation of patrimonio Hoy was the traditional Mexican system of tandas, a traditional community savings scheme. In a tanda, ten individuals (for example) contribute 100 pesos per week for ten weeks. In the first week, lots are drawn to see who “wins” the 1,000 pesos ($93) in each of the ten weeks. All participants win the 1,000 pesos one time only,

Patrimonio Hoy building materials club.

Whereas Cemex’s competitors sold bags of cement, Cemex was selling a dream, with a business model involving innovative financing and construction know-how. Cemex went a step further, throwing small festivities for the town when a room was finished and thereby reinforcing the happiness it brought to people and the tanda tradition

A burst of blue ocean creation has been under way in a number of service industries but in the opposite direction—moving from an emotional to a functional orientation, Relationship businesses, such as insurance, banking, and investing, have relied heavily on the emotional bond between broker and client. They are ripe for change.

Does your industry compete on functionality or emotional appeal? If you compete on emotional appeal, what elements can you strip out to make it functional? If you compete on functionality what elements can be added to make it emotional?

Path 6: Look Across Time

Whether it’s the emergence of new technologies or major regulatory changes, managers tend to focus on projecting the trend itself. That is, they ask in which direction a technology will evolve, how it will be adopted, whether it will become scalable. They pace their own actions to keep up with the development of the trends they’re tracking.

But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise from business insights into how the trend will change value to customers and impact the company’s business model. By looking across time—from the value a market delivers today to the value it might deliver tomorrow.

Three principles are critical to assessing trends across time. These trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory.

Many trends can be observed at any one time—for example, a discontinuity in technology, the rise of a new lifestyle, or a change in regulatory or social environments. But usually only one or two will have a decisive impact on any particular business. Having identified a trend of this nature, you can then look across time and ask yourself what the market would look like if the trend were taken to its logical conclusion. Working back from that vision of a blue ocean strategy, you can identify what must be changed today to unlock a new blue ocean.

Today iTunes offers more than 37 million songs as well as movies, TV shows, books, and podcasts.

Cisco Systems created a new market space by thinking across time trends. It started with a decisive and irreversible trend that had a clear trajectory: the growing demand for high-speed data exchange.

CNN created the first real-time twenty-four-hour global news network based on the rising tide of globalization.

Focus on the big picture, not the numbers. This approach consistently produces strategies that unlock the creativity of a wide range of people within an organization, open companies’ eyes to blue oceans, and are easy to understand and communicate for effective execution.

Drawing a strategy canvas does three things.

First, it shows the strategic profile of an industry by depicting very clearly the factors (and the possible future factors) that affect competition among industry players.

Second, it shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically.

Finally, it shows the company’s strategic profile—or value curve—depicting how it invests in the factors of competition and how it might invest in them in the future.

The strategic profile with high blue ocean potential has three complementary qualities: focus, divergence, and a compelling tagline. If a company’s strategic profile does not clearly reveal those qualities, its strategy will likely be muddled, undifferentiated, and hard to communicate. It is also likely to be costly to execute.

Drawing Your Strategy Canvas

Most managers have a strong impression of how they and their competitors fare along one or two dimensions within their own scope of responsibility, but very few can see the overall dynamics of their industry. The catering manager of an airline, for example, will be highly sensitive to how the airline compares in terms of refreshments. But that focus makes consistent measurement difficult; what seems to be a very big difference to the catering manager may not be important to customers, who look at the complete offering.

Step 1: Visual Awakening

Many people had pet ideas of which they were the sole champions.

Step 2: Visual Exploration

The next step is to send a team into the field, putting managers face-to-face with what they must make sense of: how people use or don’t use their products or services. This step may seem obvious, but we have found that managers often outsource this part of the strategy-making process. They rely on reports that other people (often at one or two removes form the world they report on) have put together. A company should never outsource its eyes.

For example, account relationship managers, whom nearly everyone had agreed were a key to success and on whom EFS prided itself, turned out to be the company’s Achilles’ heel. Customers hated wasting time dealing with relationship managers. To buyers, relationship managers were seen as relationship savers because EFS failed to deliver on its promises.

Each team had to draw six new value curves using the six path framework explained in chapter 3. Each new value curve had to depict a strategy that would make the company stand out in its market. By demanding six pictures from each team, we hoped to push managers to create innovative proposals and break the boundaries of their conventional thinking.

For each visual strategy, the teams also had to write a compelling tagline that captured the essence of the strategy and spoke directly to buyers. Suggestions included “Leave It to Us,” “Make ME Smarter,” and “Transactions in Trust.” A strong sense of competition developed between the two teams, making the process fun, imbuing it with energy, and driving the teams to develop blue ocean strategies.

Step 3: Visual Strategy Fair

After the twelve strategies were presented, each judge—an invited attendee—was given five sticky notes and told to put them next to his or her favorites. The judges could put all five on a single strategy if they found it that compelling. The transparency and immediacy of this approach freed it from the politics that sometimes seem endemic to the strategic planning process.

Step 4: Visual Communication

After the future strategy is set, the last step is to communicate it in a way that can be easily understood by any employee.

Employees were so motivated by the clear game plan that many pinned up a version of the strategy canvas in their cubicles as a reminder of EFS’s new priorities and the gaps that needed to be closed.

Using the pioneer-Migrator-Settler (PMS) Map

All the companies that created blue oceans in our study have been pioneers in their industries, not necessarily in developing new technologies but in pushing the value they offer customers to new frontiers.

A company’s pioneers are the businesses that offer unprecedented value. These are your blue ocean offerings, and they are the most powerful sources of profitable growth. At the other extreme are settlers—businesses whose value curves conform to the basic shape of the industry’s. These are me-too businesses.

The potential of migrators lies somewhere in between. Such businesses extend the industry’s curve by giving customers more for less, but they don’t alter its basic shape. These businesses offer improved value, but not innovative value. These are businesses whose strategies fall on the margin between red oceans and blue oceans.

The more an industry is populated by settlers, the greater is the opportunity to value-innovate and create a blue ocean of new market space. Chief executives should instead use value and innovation as the important parameters for managing their portfolio of businesses. They should use innovation because, without it, companies are stuck in the trap of competitive improvements. They should use value because innovative ideas will be profitable only if they are linked to what buyers are willing to pay for.

Aristotle pointed out, “The soul never thinks without an image.”

Reach Beyond Existing Demand

Companies should challenge two conventional strategy practices. One is the focus on existing customers. The other is the drive for finer segmentation to accommodate buyer differences.

Typically, to grow their share of a market, companies strive to retain and expand existing customers. This often leads to finer segmentation and greater tailoring of offerings to better meet customer preferences. The more intense the competition is, the greater, on average, is the resulting customization of offerings. As companies compete to embrace customer preferences through finer segmentation, they often risk creating too-small target markets. To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. That allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.

To reach beyond existing demand, think noncustomers before customers; commonalities before differences; and desegmentation before pursuing finer segmentation.

The Three Tiers of Noncustomers

The first tier of noncustomers is closest to your market. They sit on the edge of the market. They are buyers who minimally purchase an industry’s offering out of necessity but are mentally noncustomers of the industry.

The second tier of noncustomers is people who refuse to use your industry’s offerings.

The third tier of noncustomers is farthest from your market. They are noncustomers who have never thought of your market’s offerings as an option.

Lesson: noncustomers tend to offer far more insight into how to unlock and grow a blue ocean than do relatively content existing customers. What are the key reasons first –tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to desegment buyers and unleash an ocean of latent untapped demand.

Go for the Biggest Catchment

Because the scale of blue ocean opportunities that a specific tier of noncustomers can unlock varies across time and industries, you should focus on the tier that represents the biggest catchment that your organization has the capability to act on. But you should also explore whether there are overlapping commonalities across all three tiers of noncustomers. In that way, you can expand the scope of latent demand you can unleash

The point here is not to argue that it’s wrong to focus on existing customers or segmentation but rather to challenge these existing, taken-for-granted strategic orientations.

The Right Strategic Sequence

As shown in figure 6-1, companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.

Unless the technology makes buyers’ lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins. Value innovation is not the same as technology innovation.

Many companies take a reverse course, first testing the waters of a new product or service by targeting novelty seeking, price-insensitive customers at the launch of a new business idea; only over time do they drop prices to attract mainstream buyers. It is increasingly important, however, to know from the start what price will quickly capture the mass of target buyers.

Like the creative concepts of Pret A Manger or JCDecaux, many of the most powerful blue ocean ideas have tremendous value but in themselves consist of no new technological discoveries. As a result they are neither patentable nor excludable and hence are vulnerable to imitation.

All this means that the strategic price you set for your offering must not only attract buyers in large numbers but also help you to retain them. Given the high potential for free riding, an offering’s reputation must be earned on day one, because brand building increasingly relies heavily on word-of-mouth recommendations spreading rapidly through our networked society. Companies must therefore start with an offer that buyers can’t refuse and must keep it that way to discourage any free-riding imitations. This is what makes strategic pricing key.

Step 1: Identify the Price Corridor of the Target Mass

The main challenge in determining a strategic price is to understand the price sensitivities of those people who will be comparing the new product or service with a host of very different-looking products and services offered outside the group of traditional competitors.

A good way to look outside industry boundaries is to list products and services that fall into two categories: those that take different forms but perform the same function, and those that take different forms and functions but share the same overarching objective.

Different form, same function.

Many companies that create blue oceans attract customers from other industries who use a product or service that performs the same function or bears the same core utility as the new one but takes a very different physical form. In the case of Ford’s Model T, Ford looked to the horse-drawn carriage. The horse-drawn carriage had the same core utility as the car:

Different form and function, same objective.

Some companies lure customers from even further away. Cirque du Soleil, for example, has diverted customers from a wide range of evening activities. To enjoy a night out

The key here is not to pursue pricing against competition within an industry but rather to pursue pricing against substitutes and alternatives across industries and non-industries.

Step 2: Specify a Level within the Price Corridor

Companies with uncertain patent and asset protection should consider pricing somewhere in the middle of the corridor. As for companies that have no such protection, lower-boundary strategic pricing is advised. Companies would be wise to pursue mid- to lower-boundary strategic pricing from the start if any of the following apply:

Their blue ocean offering has high fixed costs and marginal variable costs.

The attractiveness of the blue ocean offering depends heavily on network externalities.

The cost structure behind the blue ocean offering benefits from steep economies of scale and scope. In these cases, volume brings with it significant cost advantages, something that makes pricing for volume even more key.

From Strategic Pricing to Target Costing

Price-minus costing, and not cost plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match.

Before plowing forward and investing in the new idea, the company must first overcome such fears by educating the fearful.


Business Partners

The General Public

The Blue Ocean Idea Index



Overcome Key Organizational Hurdles

They face four hurdles. One is cognitive: waking employees up to the need for a strategic shift. The second hurdle is limited resources. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it. But resources were being cut, and not raised, in many of the organizations we studied.

Third is motivation. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo? That will take years, and managers don’t have that kind of time. The final hurdle is politics. As one manager put it, “In our organization you get shot down before you stand up.”

Four hurdles that managers consistently claim limit their ability to execute blue ocean strategy: the cognitive hurdle that blinds employees from seeing that radical change is necessary; the resource hurdle that is endemic in firms; the motivational hurdle that discourages and demoralizes staff; and the political hurdle of internal and external resistance to change.

Break through the Cognitive Hurdle

Tipping point leadership does not rely on numbers to break through the organization’s cognitive hurdle. To tip the cognitive hurdle fast, tipping point leaders such as Bratton zoom in on the act of disproportionate influence: making people see and experience harsh reality firsthand. “Seeing is believing.” After a child puts a finger on a burning stove, he or she will never do it again. After a negative experience, children will change their behavior of their own accord; again, no parental pestering is required.

Tipping point leadership builds on this insight to inspire a fast change in mind-set that is internally driven of people’s own accord. Instead of relying on numbers to tip the cognitive hurdle, they make people experience the need for change in two ways.

Ride the “Electric Sewer”

To break the status quo, employees must come face-to-face with the worst operational problems. Numbers are disputable and uninspiring, but coming face-to-face with poor performance is shocking and inescapable, but actionable.

Making top brass and middle brass—starting with himself—ride the electric sewer day and night

Meet with Disgruntled Customers

To tip the cognitive hurdle, not only must you get your managers out of the office to see operational horror, but you also must get them to listen to their most disgruntled customers firsthand.

What they felt victimized by and harassed by were the constant minor irritants:

Jump the Resource Hurdle

Do they have the money to spend on the necessary changes? At this point, most reformist CEOs do one of two things. Either they trim their ambitions and demoralize their workforce all over again, or they fight for more resources from their bankers and shareholders, a process that can take time and divert attention from the underlying problems.

Hot spots, cold spots, and horse trading. Hot spots are activities that have low resource input but high potential performance gains. In contrast, cold spots are activities that have high resource input but low performance impact. In every organization, hot spots and cold spots typically abound. Horse trading involves trading your unit’s excess resources in one area for another unit’s excess resources to fill remaining resource gaps.

Redistribute Resources to Your Hot Spots

Logic was that increments in performance could be achieved only with proportional increment in resource.

Are you allocating resources based on old assumptions, or do you seek out and concentrate resources on hot spots? Where are your hot spots? What activities have the greatest performance impact but are resource starved? Where are your cold spots? What activities are resource oversupplied but have scant performance impact? Do you have a horse trader, and what can you trade ?

Jump the Motivational Hurdle

How can you motivate the mass of employees fast and at low cost? When most business leaders want to break from the status quo and transform their organization, they issue grand strategic visions and turn to massive top-down mobilization initiatives. They act on the assumption that to create massive reactions, proportionately massive action is required. But this is often a cumbersome, expensive, and time-consuming process, given the wide variety of motivational needs in most large companies. Kingpins, fishbowl management, and atomization.

Zoom In on Kingpins

To trigger an epidemic movement of positive energy, however, you should not spread your efforts thin. Rather, you should concentrate your efforts on kingpins, the key influencers in the organization. These are people inside the organization who are natural leaders, who are well respected and persuasive, or who have an ability to unlock or block access to key resources.

Place Kingpins in a Fishbowl

Fishbowl management, where kingpins’ actions and inaction are made as transparent to others as are fish in a bowl of water. By placing kingpins in a fishbowl in this way, you greatly raise the stakes of inaction. Light is shined on who is lagging behind, and a fair stage is set for rapid change agents to shine. For fishbowl management to work, it must be based on transparency, inclusion, and fair process. Biweekly crime strategy review meeting, top brass to review the performance of all. Attendance was mandatory.

As a result, an intense performance culture was created in weeks—forget about months. For this work, however, organizations must simultaneously make fair process the modus operandi. By fair process we mean engaging all the affected people in the process, explaining to them the basis of decisions and the reasons people will be promoted or sidestepped in the future, and setting clear expectations of what that means to employees’ performance.

Atomize to Get the Organization to Change Itself

The last disproportionate influence factor is atomization. To make the challenge attainable, Bratton broke it into bite-size atoms that officers at different levels could relate to. “block by block, precinct by precinct, and borough by borough.”

Knock Over the Political Hurdle

Organizational politics is an inescapable reality of corporate and public life. The more likely change becomes, the more fiercely and vocally these negative influencers—both internal and external—will fight to protect their positions, and their resistance can seriously damage and even derail the strategy execution process.

Focus on three disproportionate influence factors: leveraging angels, silencing devils, and getting a consigliere on their top management team. Angels are those who have the most to gain from the strategy. Devils are those who have the most to lose from it. And a consigliere is a politically adept but highly respected insider who knows in advance all the land mines, including who will fight you and who will support you.

Don’t fight alone. Get a higher and wider voice to fight with you. Identify your detractors and supporters—forget the middle—and strive to create a win-win outcome for both. But move quickly. Isolate your detractors by building a broader coalition with your angels before a battle begins. In this way, you will discourage the war before it has a chance to start or gain steam. Key to winning over your detractors or devils is knowing all their likely angels of attack and building up counterarguments backed by irrefutable facts and reason.

Challenging Conventional Wisdom

Don’t follow conventional wisdom. Not every challenge requires a proportionate action. Focus on acts of disproportionate influence. This is a critical leadership component for making blue ocean strategy happen.


Build Execution into Strategy

People’s minds and hearts must align with the new strategy so that at the level of the individual, people embrace it of their own accord and willingly go beyond compulsory execution to voluntary cooperation in carrying it out. Where blue ocean strategy is concerned, this challenge is heightened. Trepidation builds as people are required to step out of their comfort zones and change how they have worked in the past. They wonder, what are the real reasons for this change? Is management honest when it speaks of building future growth through a change in strategic course? Or are they trying to make us redundant and work us out of our jobs?

Management risk is relevant to strategy execution in both red and blue oceans, but it is greater for blue ocean strategy because its execution often requires significant change. Companies must reach beyond the usual suspects of carrots and sticks. They must reach a fair process in the making and executing of strategy. Our research shows that fair process is a key variable that distinguishes successful blue ocean strategic moves from those that failed. The presence or absence of fair process can make or break a company’s best execution efforts.

The Three E Principles of Fair Process

There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation.

Expectation clarity requires that after a strategy is set, managers state clearly the new rules of the game. Although the expectations may be demanding, employees should know up front what standards they will be judged by and the penalties for failure. When people understand what is expected of them, political jockeying and favoritism are minimized, and people can force on executing the strategy rapidly.

No one explained why the strategic shift was needed, how the company needed to break away from the competition to stimulate new demand, and why the shift in the manufacturing process was a key element of that strategy. Employees sat in stunned silence, with no understanding of the rationale behind the change. The managers mistook this for acceptance.

Why Does Fair Process Matter?

Emotionally, individuals seek recognition of their value, not as “labor,” “personnel,” or “human resources” but as human beings who are treated with full respect and dignity and appreciated for their individual worth regardless of hierarchical level. Intellectually, individuals seek recognition that their ideas are sought after and given thoughtful reflection, and that others think enough of their intelligence to explain their thinking to them.

When individuals feel recognized for their intellectual worth, they are willing to share their knowledge; in fact, they feel inspired to impress and confirm the expectations of their intellectual value, suggesting active ideas and knowledge sharing.Similarly, when individuals are treated with emotional recognition, they feel emotionally tied to the strategy and inspired to give their all. Lacking trust is the strategy-making process, people lack trust in the resulting strategies. Such is the emotional power that a fair process can provoke.

Fair Process and External Stakeholders



Align Value, Profit, and People Propositions

Define what blue ocean strategy is, how to reconstruct market boundaries and offer a leap in value to buyers. Unlocking business model innovation through strategic pricing, target costing, and the like so a company can seize new customers profitably. Releasing the creativity, knowledge sharing, and voluntary cooperation of people through the proper approach to employees and partners. While all three are correct, they are also only partial answers.

At the highest level, there are three propositions essential to the success of strategy: the value proposition, the profit proposition, and the people proposition. While good strategy content is based on a compelling value proposition for buyers with a robust profit proposition for the organization, sustainable strategy execution is based largely on a motivating people proposition. Lacking a holistic understanding of strategy, it is easy for an organization to focus overridingly on one or two strategy propositions to the exclusion of the other(s).

Strategic alignment is the responsibility of an organization’s top executives versus those in charge of marketing, manufacturing, human resource, or other functions. Executives with a strong functional bias typically cannot successfully fulfill this important role because they tend to focus on a part, not the whole, of the three strategy propositions, hence missing the alignment.

Putting It All Together

When the record labels approached Napster to work out a revenue-sharing model for the digital download of music that would create a win-win for both sides, Napster balked. The excitement over Napster’s spectacular growth prevented it from appreciating that it needed an external people proposition that offered differentiation and low cost for its key partners,


Renew Blue Oceans

Understanding the process of renewal is key to ensure that the creation of blue oceans is not a one-off occurrence but is institutionalized as a repeatable process in an organization.

Barriers to Imitation

The alignment barrier. The alignment of the three strategy propositions—value, profit, and people.

The cognitive and organizational barrier. CNN was referred to as Chicken Noodle News by the industry. Ridicule does not inspire rapid imitation as it creates a cognitive barrier. Imitation often requires companies to make substantial changes to their existing business practices, organizational politics often kick in, delaying for years a company’s commitment to imitate a blue ocean strategy.

The brand barrier.

The economic and legal barrier.

Renewal at the Individual Business level

Monitoring value curves signals when to value-innovate and when not to. When a company’s value curve still has focus, divergence, and a compelling tagline, it should resist the temptation to value innovate the business again and instead should focus on lengthening, widening, and deepening its rent stream through operational improvements of scale and market coverage. It should swim as far as possible in the blue ocean, making itself a moving target, distancing itself from early imitators, and discouraging them in the process. The aim here is to dominate the blue ocean over imitators for as long as possible.

Renewal at the Corporate Level for a Multibusiness Firm

A dynamic extension of the pioneer-migrator-settler (PMS) map introduced in chapter 4 serves this purpose well. It can be used to visually depict the movement of a corporate portfolio in one picture by capturing a corporation’s portfolio of business offerings over time. By plotting the corporate portfolio as pioneers, migrators, and settlers on the dynamic PMS map, executives can see at a glance where the gravity of its current portfolio of businesses is, how this has shifted over time, and when there is a need to create a new blue ocean to renew the portfolio. As explained in chapter 4, settlers are me-too businesses, migrators represent value improvements, and pioneers are a company’s value innovations. While settlers are today’s cash generators that typically have marginal growth potential, pioneers have high growth potential but often consume cash at the outset as they expand; migrators’ profitable growth potential lies somewhere in between. To maximize growth prospects then, a company’s portfolio should have a healthy balance between pioneers for future growth and migrators and settlers for cash flow at a given point in time.

Once Apple’s iPod began to be imitated, for example, to counter competition it rapidly launched a range of iPod variants at various price points with the iPod mini, shuffle, nano, touch, and so on. This not only served to keep encroaching competitors at arm’s length, but also expanded the size of the ocean it created, allowing Apple, not imitators, to capture the lion’s share of the profit and growth of this new market space.


Avoid Red Ocean Traps

You have to get your framing right to create blue oceans. Perspective is critical to success. Your mind-set is more ingrained than you realize.

Red Ocean Trap One: The belief that blue ocean strategy is a customer-oriented strategy that’s about being customer led.

A blue ocean strategist gains insights about reconstructing market boundaries not by looking at existing customers, but by exploring noncustomers.

Red Ocean Trap Two: The belief that to create blue oceans, you must venture beyond your core business,

Think of Casella Wines with [yellow tail] in the wine industry, Nintendo with the Wii, Chrysler with the minivan, Apple with its iMac,

Red Ocean Trap Three: The misconception that blue ocean strategy is about new technologies.

The reason buyers love these blue ocean offerings isn’t because they involve bleeding-edge technology per se, but because these offerings make the technology essentially disappear from buyer’s minds. Ask: How does your product or service offer a leap in productivity, simplicity, ease of use, convenience, fun and/or environmental friendliness? Value innovation, not technology innovation, is what opens up commercially compelling new markets.

Red Ocean Trap Four: The belief that to create a blue ocean, you must be first to market.

Blue ocean strategy is not about being first to market. Rather it’s about being first to get it right by linking innovation to value.

Red Ocean Trap Five: misconception that blue ocean strategy and differentiation strategy are synonymous.

Under traditional competitive strategy, differentiation is achieved by providing premium value at a higher cost to the company and at a higher price for customers.

Blue ocean strategy is an “and-and,” not an either-or, strategy.

Red Ocean Trap Six: The misconception that blue ocean strategy is a low-cost strategy that focuses on low pricing.

A blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing. The key here is not to pursue pricing against the competition within an industry but to pursue pricing against substitutes and alternatives that are currently capturing the noncustomers of your industry.

Red Ocean Trap Seven: The belief that blue ocean strategy is the same as innovation.

Many technology innovators fail to create and capture blue oceans by confusing innovation with value innovation.

Red Ocean Trap Eight: The belief that blue ocean strategy is a theory of marketing and a niche strategy.

Blue ocean strategy should also not be confused with a niche strategy. It is more about de-segmenting the market by focusing on key commonalities across the buyer group to open up and capture the largest catchment of demand. When practitioners confuse the two, they all too often are driven to look for customer differences for niche markets in the existing industry space rather than the commonalities that cut across buyer groups in search of blue oceans or new demand.

Red Ocean Trap Nine: The belief that blue ocean strategy sees competition as bad when in fact it can be good for companies.

Red Ocean Trap Ten: The belief that blue ocean strategy is synonymous with creative destruction or disruption.

By reconstructing existing market boundaries, blue ocean strategy creates new market space and is created beyond existing industries. When new market space is created beyond existing industry boundaries, as with Viagra, reconstruction tends to bring about non destructive creation. In many cases, even when the reconstruction occurs within industries, blue ocean strategy also produces nondestructive creation. Nintendo’s Wii, for example, created a blue ocean in the video game industry. It had an element of creative destruction.

Blue ocean strategy is about redefining the problem itself, which tends to create new demand or an offering that often complements rather than displaces existing products and services.

The focus of the blue ocean strategy is not on restricting output at a high price but rather on creating new aggregate demand through a leap in buyer value at an accessible price. This creates a strong incentive not only to keep it that way over time to discourage potential free-riding imitators. In this way, buyers win and the society benefits from improved efficiency. This creates a win-win scenario. A breakthrough in value is achieved for buyers, for the company, and for society at large.

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