Chapter 14 Appendix C Market Dynamics Analysis of Value Innovation

Value innovation is completely different from traditional technological innovation.The latter usually set a high price strategy, restrict consumption, and use high prices as compensation for innovation investment.Only in the later stage, in order to maintain market share and crack down on imitators, did the product price be lowered. However, when it comes to the knowledge and ideas of value innovation, scale, price and cost become extremely important due to the potential for scale efficiency and revenue enhancement.In the case of value innovation, the business will try to expand the target customer base from the beginning as much as possible, and expand the scope of the market through reasonable pricing.

As shown in Figure C-1 (omitted), value innovation increases the attractiveness of the product, shifting the demand curve from D1 to D2.In the case of the Swatch watch (swatch), product pricing was strategically dropped from P1 to P2 to attract as many customers as possible.As a result, sales increased from Q1 to Q2, and a strong brand was created, injecting unprecedented value into the brand. While implementing target pricing, the company is also committed to reducing the long-term average cost curve from LRAC1 to LRAC2 in order to expand profitability and prevent "free-riding" competitors and imitators.Therefore, the value obtained by customers is enhanced, and the consumer surplus expands from the axb area to the eyf area.The company's profit has also been greatly improved, and the profit area has expanded from abcd to efgh.

While creating value for the market, enterprises reduce costs, gain economies of scale, increase returns, and make it difficult for competitors to catch up, all of which rapidly increase brand recognition.The company wins a dominant position in the market, and customers also benefit from it, presenting a win-win situation. Traditional monopoly enterprises will cause two kinds of losses of social welfare.First, companies will set high prices in order to maximize profits.This prevents consumption by some customers who need the product but cannot afford it.Second, the lack of competition makes monopoly enterprises not pay enough attention to improving efficiency and reducing costs, thus wasting scarce resources.As shown in Figure C-2 (omitted), in the traditional monopoly structure, the price level increases from P1 under the competition structure to P2 under the monopoly structure, so consumption decreases from Q1 to Q2.At this level, the monopoly firm's profits increase by region R compared to the competitive situation.But because of the artificially high price, consumer surplus decreases from area C+R+D to area C.At the same time, due to the waste of social resources, the loss of area D occurs.Thus, monopoly profits come at the expense of society and consumers.

A blue ocean strategy will not formulate a high-price strategy like a traditional monopoly. Its purpose is by no means to restrict sales through high prices, but to create value for consumers at a reasonable price to open up new demand.This allows businesses to keep costs as low as possible from the start and keep prices as low as possible to deter potential imitators.In this way, consumers benefit and social welfare is effectively improved, forming a win-win situation in which consumers, enterprises, and society all benefit.