Blue Ocean Strategy

Blue Ocean Strategy Study Group Project On Yotel

Submitted to:-

Professor Kim Chan and Renee Mauborgne

Prepared by:-

Aania Alam Alka Ladha Charlotte Burgess Costanza Eufemi Maanvi Prasad Dutt Aman Chopra Amit Singh Antoine Comar Manish Dadhich Siddhartha Jain

Q1&2. The Name of the focal Company launching the Blue Ocean Strategic move and the focal Country where it was launched.

We are doing our Blue Ocean Strategy project on a chain of hotels called YOtel. It is owned by YO! Company, a British company fully owned by entrepreneur Simon Woodroffe.

YOTEL was created by YO! Founder Simon Woodroffe OBE and YOTEL CEO Gerard Greene. Simon conceived the idea after he was upgraded into first class on a British Airways flight. Inspired by this experience he decided to transform the luxury of airline travel and a touch of Japanese influence into a small but luxurious cabin. Gerard spent a lot of time in staying at expensive hotels while traveling and wanted to do something about it. He met Simon in 2002, secured funds and pulled together a team to evolve the idea into reality. The first Hotel was opened in 2007 at London’s Gatwick and Heathrow airports.The Yotel airport hotels are located inside terminal buildings. They aim at giving customers an extraordinary experience while they are minutes away from departure or have just arrived. Check-in and Check-out times are flexible and customers 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 blocks west of Times Square in New York. Cabins are 30% bigger than the airport product and come with floor to ceiling windows.

Will guests choose Yotel over other hotels? Will it be sustainable? Will it be scalable? Will it revolutionize the hotel industry? It’s too early to answer these questions. However, we chose Yotel as our project because we felt they are applying Blue Ocean principles in a very unique way. It’s a hotel that takes its design cues from Airline cabins rather than hotel rooms, a hotel that hires aircraft designers rather than architects to design its cabins, a hotel where robots take care of your luggage rather than humans.

Our group felt that it’s a new age company that is going to revolutionize the Hotel industry. They created a blue ocean in the highly competitive red ocean of hospitality industry. Moreover, they are using Blue Ocean concepts on a regular basis to offer new services to customers to ward off competitors and sustain their blue ocean.

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 SettingThe 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.

America39%

Europe31%

Asia Pacific26%

Middle East and Africa4%

% Share of Industry Value

Source: DATAMONITOR 360, report on “Global Hotels and Motels”.

Snapshot of the UK Hotel Industry in 2007 – Market Characteristics and GrowthThe 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 2007

1 Calculated on the basis of Datamonitor data on Global Hotel Industry, the industry had a compound growth rate of 3.6% between 2006 and 2010, industry size in 2010 was $ 543.9 billion.

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 segmentso Leisure segment: representing approximately 70% of the total industry valueo 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;

2 Source: Data monitor 360. Report on “Global Hotels and Motels”.3 Source: Data monitor 360. Report on “Global Hotels and Motels”.

Reliance on direct sales to try and boost revenues and beat competition; Due to negligible switching costs for the customer price based competition in isolation was no longer a recipe for success. Brand recognition and innovation increasingly became important to help attract first-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 value driven customer; Increased buyer power levels due to negligible switching costs and price sensitivity of buyers with the exception of the premium segment.Supplier Power Suppliers include providers of various goods and services, as well as a qualified workforce. Due to a high reliance on sophisticated technology and systems 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 well trained staff who can provide customers with good levels of service. However since staff do not exert major supplier power in the absence of well-defined labor unions; Overall the supplier power was becoming stronger with the reliance on 3rd party providers of technology and IT solutions and the increased importance of mobile communication channels (including digital marketing).

Threat of New Entrants Threat of new entrants was low to moderate because of the capital intensive nature of the business. It would be an expensive proposition to enter the industry because of the upfront investment in buildings, décor and furnishings, ICT infrastructure and staff; The competitive nature of the UK market at the time would have made it difficult for a new entrant to compete credibly. In order to succeed a new entrant would really have find a way to distinguish itself from what currently exists in the market – International chains, budget hotels, bed and breakfasts etc. Given the relative saturation of the UK market it would be essential for a new entrant to grow by grabbing market share from existing players which is not an easy proposition.Threat of Substitutes Low to moderate threat from substitutes. Substitutes to hotels include alternative forms of leisure accommodation, such as camping facilities or recreational vehicles, or informal accommodation with friends and family; Switching costs range from negligible to high (e.g. the purchase price of a recreational vehicle). While all these substitutes offer the same basic function of a place to stay, up-market hotels and motels often provide added benefits, such as spas and restaurants. Additionally, whilst some of

these substitutes offer reduced costs to hotels and can undercut the hotels and motels industry, this switch is often out of necessity rather than choice so when consumers are in a more generally affluent position, the threat from substitutes is not likely to be significant.Key factors the Industry was competing on Our analysis suggests that the industry at the time was competing on the following 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 lastminute.com, expedia, hotels.com etc to secure customers who urgently need rooms (this also helps to increase room occupancy rate).

Question 4: Describe how the focal organization/company/government challenged the conventional assumptions of competing to create a blue ocean.  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 even decided to continue business as a 4* hotel.

Metric of performance measurement: measured against a maximum of 100% occupancy. Too much focus on increasing efficiency and accuracy while ignoring the big picture – nobody challenged the competitive boundaries, rather continued to compete within those boundaries by getting better at it. Lack of innovation: incumbents and new entrants all followed Standard Operating Procedures. Market segmented based on customers’ Willingness To Pay, served by hotels 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 similar service and with relatively little differentiation. Airport hotels usually high end, with big rooms and lots of services, that business travelers staying for a few hours during the flight connections wouldn’t even need.

 How Yotel challenged these conventional assumptions to create Blue Ocean:

Customer segmentation based on their needs rather than their WTP: They realized that travelers at airports need short term/overnight accommodation for a little shut-eye only and these customers can’t even use all the services that 5*

hotels provide.

Expanded customer base: Airport hotels are generally 5* hotels which are very expensive and usually occupied by business travelers only. Yotel, given its relatively lower price-point appeals to regular middle class travelers as well thus appealing to a whole class of non-customers.

Product: Yotel, removed all the bells and whistles from the hoteling business 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 that double as a sofa, a pull-down desk and foldable chair – thus cutting down on space, while increasing the number of rooms for the same area.

Tertiary income: Yotel made drinks and light meals available 24x7. Since the customers are generally at the hotel for a short period of time, they don’t need fancy restaurants, but need easily available snacks and drinks even at odd hours. With its 24x7 café, they have simple food and drinks that suffices the requirements of the customers, who are virtually trapped since they don’t want to go to the city during their short stay at the airport, and thus provides for a substantial revenue source for Yotel.

Challenged 100% occupancy limit: Yotel challenged the overnight stay concept and broke it down into 4 hour slots (for their airport hotels) which is the typical 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. Also there is no hassle of checking in/out, as it is automatic; this efficiency appeals to business travelers who are often pressed for time. While the quality of service, especially the services that customers want during their short stay, namely light snack, drinks, clean room, shower etc are provided 24/7. Therefore their product has increased the effectiveness of attributes (cleanliness, efficiency) that customers do value, thus creating a highly differentiated product customized to the needs of their customers.

Pricing: By removing all the facilities that their target customers don’t need and can’t use anyway, Yotel has been able to cut down on their costs significantly. For example services like spa, receptionists, chefs etc. have been eliminated,

thus providing differentiated product at a much lower price point

7) Discuss how the strategic move grew demand and drew in new customers. Discuss who these once noncustomers are. In the charity industry, for example, it could be a new group of donors like college students.

VALUE PROPOSITION – FIRST CLASS EXPERIENCE AT AN AFFORDABLE PRICE

For the frequent travelers, particularly those having to brace against odd-houred flights (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 the airport is a headache in itself. Additionally, it eats into the limited hours travelers 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.

Price

Yotels offer three cabin types at airports (optimizing space utilization), a 'Standard' bunk style single cabin (can be shared by two), 'Premium' double cabins and 'Premium' twin cabins. This allows Yotel to price discriminate depending on cabin type. The rates for the standard cabin are 25 GBP for 4 hours and upward for 55 GBP overnight. The rates for the premium cabin are 40 GBP for 4 hours and upward of 80 GBP overnight.

Quality and Convenience

Yotel offers the luxury of first class travel, in combination with Japanese minimalist elegance. Leveraging on its partnership with the IFA Hotels and Resorts, it plays up the theme of affordability effectively by offering comfortable and new edge functionalities and quality service:

Techno wall with clothes storage, pull down working desk with charging points, 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 body wash, hairdryer, and soft towels with a heated mirror; Flat screen TV system with over 60 free TV stations including Sky Sports plus on demand blockbuster and classic movies. 80 radio channels plus a jukebox with over 5,000 music tracks and a headphone jack; Snacks, club meals and refreshments ordered from the TV system and then delivered to the cabin or the ability to visit ‘The Galley’ where the cabin crew is available 24 hours a day.

In addition - the Premium cabins include: A double bed that deploys to a couch by the touch of button (think first class 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-in counters and security clearance, without having to take buses or taxis even to

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 hours

Business class customers and frequent fliers, who usually book expensive hotels, often situated at a reasonably far distance from the Airport can now easily avail services of Yotel cabins. Not only is Yotel conveniently located a stroll away from the departure, they offer services like Wi-Fi and multi point boards for easy access to last minute presentations, meeting preparation material.

Transit Customers

These customers would earlier be sleeping at airport terminals, but now can avail of these facilities. A comfortable bed to sleep is their basic and only requirement, which they could avail at the Standard cabin very reasonably priced and conveniently located.

Travel related to pleasure and entertainment

Younger people who often travel for pleasure and entertainment and often go back to college or work on an early Monday morning can avail of these facilities. Shower with favorite music is one feature that would definitely attract this segment along with an option to have a comfortable sleep.

Business Women & men looking to freshen up etc. for business related meetings – usually hourly

Very often client meetings are scheduled early mornings and men and women might need to quickly freshen up to attend these. This might be a good place for them to book it for an hour and change into fresh clothes or put fresh make up and 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 to provide the exact profit and revenue growth that they have experienced since their launch. In addition to this, they will have invested heavily in their fixed costs and are continuing to invest in data software and information systems (Exhibit 1), therefore looking at their NOPAT may not be the best indicator of their success.

However despite this the concept and design of the cabins have received much critical and public attention. From a design and hotel industry perspective, in 2011 alone they received Boutique Design Awards, Gold Key Awards for excellence in hospitality design, Award for most innovative concept at the Worldwide Hospitality Awards, as well as two Travel Weekly Magellan Awards. In 2009 Yotel won the winner for Business Accommodation from the Business Travel World Awards and further to this they have won awards celebrating their design and innovation every year since their launch.

In terms of publicity, the concept has generated as much press as it has collected awards. It has been dubbed ‘The iPod of the hotel industry’ and the Awards have been well documented in the press. However it is really since the launch of their fourth hotel in New York that the interest has gained breadth further than the concept and design of the cabins. With 669 cabins, it is Yotel’s first opening outside of the international airport locations, and it is also the largest hotel opening in New York in 2011. The press articles that ensue focus on the loyalty program they have started with their New York branch and the Sound Architects and Artists they have partnered with. It is difficult to quantify the value of this free publicity, however it is all compounded by the strength of the Yo! Brand.

To gauge an idea of the social publicity they are gathering online, the online tool Specify helps to aggregate all the conversations that are happening on twitter, YouTube, Flickr, etcetera to give a flavor of what is being said about the hotel chain. http://www.spezify.com/#/yotel

Exhibits

Exhibit 1:

YOTEL selects MICROS's CRS and OPERA Enterprise SolutionNews NewsWire published by MarketLine on 08 November 2011

MICROS Systems, Inc, a provider of information technology solutions for the hospitality and retail industries, has announced that YOTEL, a progressive hotel concept based in the UK, has selected MICROS's myfidelio.net Central Reservation System, or CRS, and OPERA Enterprise Solution for its new location in Times Square, New York.The new YOTEL New York Times Square was designed to be transformable with convertible spaces that possess a warm, futuristic, and technology savvy feel. To manage this new property, YOTEL has implemented a MICROS solution including myfidelio.net CRS to manage hotel distribution on GDS, MICROS Channel Manager for direct 2-way interface with major Online Travel Agencies and with OPERA Kiosk module to allow for guest self-check-in and check-out.With MICROS's cloud-based distribution product, myfidelio.net, YOTEL can control cabin inventories, rates, reservations, and guest profiles from one single point with capabilities for real-time changes that publish directly to sales channels, the company said."MICROS has provided the ideal solution to addresses all of our technology requirements and to streamline our operations," stated, Hanif Jivraj, Director of Revenue Management, YOTEL New York. "Our customers are active, on-the-move travelers and MICROS has provided a complete solution that serves to elevate the guest experience from the time a reservation is made, to guest check-in via the front desk or OPERA Kiosk, and throughout the check out process."