Blue Ocean Strategy
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  • 1. Blue Ocean Strategy Study Group Project On Yotel Submitted to:- Professor Kim Chan and Renee Mauborgne Preparedby:-AaniaAlamAlkaLadhaCharlotte BurgessCostanzaEufemiMaanvi Prasad DuttAmanChopraAmit SinghAntoine ComarManish DadhichSiddhartha Jain
  • 2. Q1&2.The Name of the focal Company launching the Blue Ocean Strategicmove and the focal Country where it was launched.We are doing our Blue OceanStrategy project on a chain ofhotels called YOtel. It is ownedby YO! Company, a Britishcompany fully owned byentrepreneur Simon Woodroffe.YOTEL was created by YO!Founder Simon Woodroffe OBEand YOTEL CEO Gerard Greene.Simon conceived the idea after hewas upgraded into first class on aBritish Airways flight. Inspired by this experience he decided to transform theluxury of airline travel and a touch of Japanese influence into a small butluxurious cabin.Gerard spent a lot of time in staying at expensive hotels while traveling andwanted to do something about it. He met Simon in 2002, secured funds andpulled together a team to evolve the idea into reality. The first Hotel wasopened in 2007 at London’s Gatwick and Heathrow airports.The Yotel airport hotels are located inside terminal buildings. They aim atgiving customers an extraordinary experience while they are minutes away fromdeparture or have just arrived. Check-in and Check-out times are flexible andcustomers are charged by the hour.Airports locations are Gatwick Airport, South Terminal. Heathrow Airport,Terminal 4 and Amsterdam Airport Schiphol.In June 2011 YOTEL opened their flagship city centre hotel just two blockswest of Times Square in New York. Cabins are 30% bigger than the airportproduct and come with floor to ceiling windows.Will guests choose Yotel over other hotels? Will it be sustainable? Will it bescalable? Will it revolutionize the hotel industry? It’s too early to answer these questions. However, we chose Yotel as ourproject because we felt they are applying Blue Ocean principles in a veryunique way. It’s a hotel that takes its design cues from Airline cabins ratherthan hotel rooms, a hotel that hires aircraft designers rather than architects todesign its cabins, a hotel where robots take care of your luggage rather thanhumans.Our group felt that it’s a new age company that is going to revolutionize theHotel industry. They created a blue ocean in the highly competitive red ocean ofhospitality industry. Moreover, they are using Blue Ocean concepts on a regularbasis to offer new services to customers to ward off competitors and sustaintheir blue ocean.
  • 3. Q3. Describe the red ocean setting prior to the launch of the Blue Ocean strategic move. For example, growth rate, number of competitors and intensity of competition, factors the industry was competing on etc. Please be as concrete and concise as possible. We should be able to get a real feel for the difficulty of the setting. Context of the Red Ocean Setting The red ocean setting underlying our study describes the conditions that prevailed in the hotel industry prior to the launch of YOtel in 2007. Snapshot of the Global Hotel Industry Size of global hotel industry in terms of total revenues in 2007 was $ 472 billion1; Europe and the US accounted for more than 70% of total industry value; Both Europe and the US saw a decline in growth with the onset of the Global Financial Crisis with business and leisure travelers decreasing their spend on travel and on hotels; Asia continued to grow in importance as the “growth geography” in this industry. Middle East and % Share of Industry Value Africa 4% Asia Pacific America 26% 39% Europe 31% Source: DATAMONITOR 360, report on “Global Hotels and Motels”. Snapshot of the UK Hotel Industry in 2007 – Market Characteristics and Growth The graph below and the facts presented below it provide a high level overview of the market environment before the launch of YOtel in 2007. UK Hotels & Motels Industry Value in 20071 Calculated on the basis of Datamonitor data on Global Hotel Industry, the industry had a compoundgrowth rate of 3.6% between 2006 and 2010, industry size in 2010 was $ 543.9 billion.
  • 4. Source: DATAMONITOR 360, report on “Global Hotels and Motels”. The size of the UK hotel industry during 2007 in terms of total revenues generated was US$20.7 billion (13.4 billion GBP)2; The UK accounted for approximately 14% of the European hotels industry value3; The UK hotel industry grew by a meager 1.2% from 2006-2007 although since then the rate of growth increased such that the period 2006- 2010 saw a CAGR of 2.5%; The UK hotel industry was broadly classified into 2 segments o Leisure segment: representing approximately 70% of the total industry value o Business segment: representing the remaining 30% of total industry value Development of new capacity in 2006-2007 added more fuel to the fire and increased competition for the customer’s wallet. According to the British Hospitality Association (BHA), over 140 new hotels opened in 2007 with 64% of those in the budget segment. London saw the most number of new developments with 19 new hotels totaling 2700 rooms; Increased investment on refurbishments and re-launches. According to BHA estimates over 3 Billion GBP were invested in the UK hotel industry for refurbishments and re-launches. All this was further increasing competition in an already competitive market; The UK hotel industry was increasingly characterized by thinner margins with price based competition along with competition on other non-price factors; Industry Analysis Internal Rivalry High rivalry in the industry with a few global chains dominating the market and fighting to grab market share and boost profitability;2Source: Data monitor 360. Report on “Global Hotels and Motels”.3Source: Data monitor 360. Report on “Global Hotels and Motels”.
  • 5. Reliance on direct sales to try and boost revenues and beatcompetition; Due to negligible switching costs for the customer price basedcompetition in isolation was no longer a recipe for success. Brandrecognition and innovation increasingly became important to help attractfirst-time customers and ensure repeat business; Increased importance of brand positioning and differentiation.Emergence of boutique hotels etc.Buyer Power Increased rivalry was also driven by an increasingly discerning valuedriven customer; Increased buyer power levels due to negligible switching costs andprice sensitivity of buyers with the exception of the premium segment.Supplier Power Suppliers include providers of various goods and services, as well as aqualified workforce. Due to a high reliance on sophisticated technology andsystems and the growing importance of mobile communication channels,some suppliers exerted strong supplier power; The hotel industry is fairly labor intensive and relies a lot on welltrained staff who can provide customers with good levels of service.However since staff do not exert major supplier power in the absence ofwell-defined labor unions; Overall the supplier power was becoming stronger with the reliance on3 rd party providers of technology and IT solutions and the increasedimportance of mobile communication channels (including digitalmarketing).Threat of New Entrants Threat of new entrants was low to moderate because of the capitalintensive nature of the business. It would be an expensive proposition toenter the industry because of the upfront investment in buildings, décorand furnishings, ICT infrastructure and staff; The competitive nature of the UK market at the time would have madeit difficult for a new entrant to compete credibly. In order to succeed a newentrant would really have find a way to distinguish itself from whatcurrently exists in the market – International chains, budget hotels, bedand breakfasts etc. Given the relative saturation of the UK market it would be essential fora new entrant to grow by grabbing market share from existing playerswhich is not an easy proposition.Threat of Substitutes Low to moderate threat from substitutes. Substitutes to hotels includealternative forms of leisure accommodation, such as camping facilities orrecreational vehicles, or informal accommodation with friends and family; Switching costs range from negligible to high (e.g. the purchase price ofa recreational vehicle). While all these substitutes offer the same basicfunction of a place to stay, up-market hotels and motels often provideadded benefits, such as spas and restaurants. Additionally, whilst some of
  • 6. these substitutes offer reduced costs to hotels and can undercut the hotelsand motels industry, this switch is often out of necessity rather than choiceso when consumers are in a more generally affluent position, the threatfrom substitutes is not likely to be significant.Key factors the Industry was competing onOur analysis suggests that the industry at the time was competing on thefollowing factors: Price reduction to entice customers Increased efficiency and room occupancy rates Branding and brand recognition Emerging focus on innovation and service differentiation Location Increasing use of technology to make it easier for the customer to find,book and pay for their rooms Liasion with third party websites such as, expedia, etc to secure customers who urgently need rooms (this alsohelps to increase room occupancy rate).Question 4: Describe how the focal organization/company/governmentchallenged the conventional assumptions of competing to create a blueocean.Major characteristics of the hotel industry in 2008:Intense price pressure in the hotel industry. For example in Amsterdam, 5*hotels were running at the rate of 3* hotel rates. Sheraton Amsterdam evendecided to continue business as a 4* hotel. Metric of performance measurement: measured against a maximum of100% occupancy. Too much focus on increasing efficiency and accuracy while ignoring thebig picture – nobody challenged the competitive boundaries, rather continued tocompete within those boundaries by getting better at it. Lack of innovation: incumbents and new entrants all followed StandardOperating Procedures. Market segmented based on customers’ Willingness To Pay, served byhotels at different price points ranging from 1* to 5* hotels. Overnight bookings only especially at airport hotels Hotels of similar stature, usually at similar price points providing similarservice and with relatively little differentiation. Airport hotels usually high end, with big rooms and lots of services, thatbusiness travelers staying for a few hours during the flight connectionswouldn’t even need.How Yotel challenged these conventional assumptions to create BlueOcean: Customer segmentation based on their needs rather than their WTP: Theyrealized that travelers at airports need short term/overnight accommodation fora little shut-eye only and these customers can’t even use all the services that 5*
  • 7. hotels provide. Expanded customer base: Airport hotels are generally 5* hotels which arevery expensive and usually occupied by business travelers only. Yotel, given itsrelatively lower price-point appeals to regular middle class travelers as well thusappealing to a whole class of non-customers. Product: Yotel, removed all the bells and whistles from the hotelingbusiness providing only what the customers valued i.e. fast and efficient check-in and luggage storage; small, yet clean rooms with a TV, reclining beds thatdouble as a sofa, a pull-down desk and foldable chair – thus cutting down onspace, while increasing the number of rooms for the same area. Tertiary income: Yotel made drinks and light meals available 24x7. Sincethe customers are generally at the hotel for a short period of time, they don’tneed fancy restaurants, but need easily available snacks and drinks even at oddhours. With its 24x7 café, they have simple food and drinks that suffices therequirements of the customers, who are virtually trapped since they don’t wantto go to the city during their short stay at the airport, and thus provides for asubstantial revenue source for Yotel. Challenged 100% occupancy limit: Yotel challenged the overnight stayconcept and broke it down into 4 hour slots (for their airport hotels) which is thetypical time that a commuter wants to book a room for, during his/her transit.As a result Yotel enjoys over 200% occupancy. Highly differentiated product both in terms of quality of service and price:The price point is usually 50% to 70% below a regular 5* airport hotel. Alsothere is no hassle of checking in/out, as it is automatic; this efficiency appeals tobusiness travelers who are often pressed for time. While the quality of service,especially the services that customers want during their short stay, namely lightsnack, drinks, clean room, shower etc are provided 24/7. Therefore their producthas increased the effectiveness of attributes (cleanliness, efficiency) thatcustomers do value, thus creating a highly differentiated product customized tothe needs of their customers.Pricing: By removing all the facilities that their target customers don’t need andcan’t use anyway, Yotel has been able to cut down on their costs significantly.For example services like spa, receptionists, chefs etc. have been
  • 8. eliminated,thus providing differentiated product at a much lower price point
  • 9. 7) Discuss how the strategic move grew demand and drew in newcustomers. Discuss who these once noncustomers are. In the charityindustry, for example, it could be a new group of donors like collegestudents.VALUE PROPOSITION – FIRST CLASS EXPERIENCE AT AN AFFORDABLE PRICEFor the frequent travelers, particularly those having to brace against odd-houredflights (such as early in the morning and late at night) or multiple transits,having to make hotel reservations and arranging for conveyance to and from theairport is a headache in itself. Additionally, it eats into the limited hourstravelers have, to catch their breath either between flights or during short stays.Yotel recognized this blue ocean opportunity and positioned itself as the front-runner in affordable and convenient luxury for travelers.PriceYotels offer three cabin types at airports (optimizing space utilization), aStandard bunk style single cabin (can be shared by two), Premium doublecabins and Premium twin cabins. This allows Yotel to price discriminatedepending on cabin type. The rates for the standard cabin are 25 GBP for 4hours and upward for 55 GBP overnight. The rates for the premium cabin are40 GBP for 4 hours and upward of 80 GBP overnight.Quality and ConvenienceYotel offers the luxury of first class travel, in combination with Japaneseminimalist elegance. Leveraging on its partnership with the IFA Hotels andResorts, it plays up the theme of affordability effectively by offeringcomfortable and new edge functionalities and quality service: Techno wall with clothes storage, pull down working desk with chargingpoints, network cable socket and free Wifi and wired internet access; Mood lighting and luxury bedding to induce relaxation; Bathroom with luxury fittings including shower, bespoke revitalizing bodywash, hairdryer, and soft towels with a heated mirror; Flat screen TV system with over 60 free TV stations including Sky Sportsplus on demand blockbuster and classic movies. 80 radio channels plus ajukebox with over 5,000 music tracks and a headphone jack; Snacks, club meals and refreshments ordered from the TV system and thendelivered to the cabin or the ability to visit ‘The Galley’ where the cabin crew isavailable 24 hours a day.In addition - the Premium cabins include: A double bed that deploys to a couch by the touch of button (think firstclass private cabins on an aircraft); Input for MP3/CD player to play music of choice through the TV Speakers.Being located inside airport terminals (New York, Heathrow, Gatwick, Schipol)it gives customers the convenience of being minutes away from the check-incounters and security clearance, without having to take buses or taxis even to
  • 10. shuttle around. The rooms have the flexibility of being rented by the hour,making the product offering very well suited to transiting travelers. The check-in and check-out to the hotel rooms is fully automated as well.Earlier Non customers Business class ‘corporate customers’ – usually up to a few hoursBusiness class customers and frequent fliers, who usually book expensivehotels, often situated at a reasonably far distance from the Airport can noweasily avail services of Yotel cabins. Not only is Yotel conveniently located astroll away from the departure, they offer services like Wi-Fi and multi pointboards for easy access to last minute presentations, meeting preparationmaterial. Transit CustomersThese customers would earlier be sleeping at airport terminals, but now canavail of these facilities. A comfortable bed to sleep is their basic and onlyrequirement, which they could avail at the Standard cabin very reasonablypriced and conveniently located. Travel related to pleasure and entertainmentYounger people who often travel for pleasure and entertainment and often goback to college or work on an early Monday morning can avail of thesefacilities. Shower with favorite music is one feature that would definitely attractthis segment along with an option to have a comfortable sleep. Business Women & men looking to freshen up etc. for business relatedmeetings – usually hourlyVery often client meetings are scheduled early mornings and men and womenmight need to quickly freshen up to attend these. This might be a good place forthem to book it for an hour and change into fresh clothes or put fresh make upand make last minute revisions of their presentations.Q8. Discuss performance consequences of this strategic move.Given that Yotel do not publish their financial statements, it is difficult toprovide the exact profit and revenue growth that they have experienced sincetheir launch. In addition to this, they will have invested heavily in their fixedcosts and are continuing to invest in data software and information systems(Exhibit 1), therefore looking at their NOPAT may not be the best indicator oftheir success.However despite this the concept and design of the cabins have received muchcritical and public attention. From a design and hotel industry perspective, in2011 alone they received Boutique Design Awards, Gold Key Awards forexcellence in hospitality design, Award for most innovative concept at theWorldwide Hospitality Awards, as well as two Travel Weekly MagellanAwards. In 2009 Yotel won the winner for Business Accommodation from theBusiness Travel World Awards and further to this they have won awardscelebrating their design and innovation every year since their launch.
  • 11. In terms of publicity, the concept has generated as much press as it hascollected awards. It has been dubbed ‘The iPod of the hotel industry’ and theAwards have been well documented in the press. However it is really since thelaunch of their fourth hotel in New York that the interest has gained breadthfurther than the concept and design of the cabins. With 669 cabins, it is Yotel’sfirst opening outside of the international airport locations, and it is also thelargest hotel opening in New York in 2011. The press articles that ensue focuson the loyalty program they have started with their New York branch and theSound Architects and Artists they have partnered with. It is difficult to quantifythe value of this free publicity, however it is all compounded by the strength ofthe Yo! Brand.To gauge an idea of the social publicity they are gathering online, the onlinetool Specify helps to aggregate all the conversations that are happening ontwitter, YouTube, Flickr, etcetera to give a flavor of what is being said aboutthe hotel chain. 1:YOTEL selects MICROSs CRS and OPERA Enterprise SolutionNews NewsWire published by MarketLine on 08 November 2011MICROS Systems, Inc, a provider of information technology solutions for thehospitality and retail industries, has announced that YOTEL, a progressive hotelconcept based in the UK, has selected MICROSs CentralReservation System, or CRS, and OPERA Enterprise Solution for its newlocation in Times Square, New York.The new YOTEL New York Times Square was designed to be transformablewith convertible spaces that possess a warm, futuristic, and technology savvyfeel. To manage this new property, YOTEL has implemented a MICROSsolution including CRS to manage hotel distribution on GDS,MICROS Channel Manager for direct 2-way interface with major Online TravelAgencies and with OPERA Kiosk module to allow for guest self-check-in andcheck-out.
 With MICROSs cloud-based distribution product,,YOTEL can control cabin inventories, rates, reservations, and guest profilesfrom one single point with capabilities for real-time changes that publishdirectly to sales channels, the company said.
 "MICROS has provided theideal solution to addresses all of our technology requirements and to streamlineour operations," stated, HanifJivraj, Director of Revenue Management, YOTELNew York. "Our customers are active, on-the-move travelers and MICROS hasprovided a complete solution that serves to elevate the guest experience fromthe time a reservation is made, to guest check-in via the front desk or OPERAKiosk, and throughout the check out process."