Transcript Lecture 7 - California Institute of Technology

Lecture 7
Jan 28, 2010
HW 3
Homework for next Tuesday
1. Potential customers: What are the top three segments
(consumer) or top three companies (B to B)
2. Write script for interview
3. Show a plan for Market Research. . .
1. Secondary
1. Internet, Publications ,e.g., Trade Journals
2. Marketing reports (free if possible)
2. Primary
1. Identify Experts
2. Show Schedule and continue Interviews
1. Of experts
2. Of potential customers
2
Secondary Research
• Kristin Buton Caltech libraries
3
Marketing 101
The 4 Ps
4
What is Marketing?
4 Ps of Marketing
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Product
Promotion
Pricing
Place (or distribution system)
What follows is necessary for Business Plan but
not for Tuesday Homework
5
Product
• What is your product? Describe in terms of
benefit to the customer
• Product packaging (is this relevant?)
– Discuss form-factor, pricing, look, strategy
– Summarize Cost of Goods and high-level Bill of
Materials
– Shipping issues
– Customs issues
Promotion
• Direct marketing
– Overview of strategy, vehicles & timing
– Overview of response targets, goals & budget
• Third-party marketing
– Co-marketing arrangements with other companies
• Marketing programs
– Other promotional programs
Pricing
• Pricing
– Summarize specific pricing or pricing strategies
– Compare to similar products or compare to doing
nothing
• Strategy
– Summarize strategy relevant to understanding key
pricing issues
Placement (Distribution)
• Distribution strategy
• Channels of distribution
– Summarize channels of distribution
• Distribution by channel
– Show plan of what percent share of distribution
will be contributed by each channel -- a pie chart
might be helpful
• Discuss fulfillment issues
Vertical Markets/Segments
• Vertical market opportunities
– Discuss specific market segment opportunities
– Address distribution strategies for those markets
or segments
– Address use of third-party partner role in
distribution to vertical markets
Placement (International)
• International distribution
– Address distribution strategies
– Discuss issues specific to international distribution
• International pricing strategy
• Localization issues
– Highlight requirements for local product variations
Marketing Summary
• Some good references
• Marketing
– Marketing Triangle
– Market Segmentation
– Technology Adoption Curve
– Interview Process
– Forming Hypotheses
– Creating a Vision Statement
– 4 Ps
Strategy and Competition
• What is your company’s plan for gaining
competitive advantage?
Tools and Models
• Business
– Creation of Models
– Ecosystem
– Porter’s Forces
– SWOT
– Differentiation
– Disruptive Technologies
A Business Ecosystem
• Think of the business as a occupying an
ecological niche in a rapidly changing
environment
• What are some of the ways you could
characterize this environment?
– Competitors
– Suppliers
– Customers
– Government
– Others?
Six Forces Diagram to Determine how Competitive a
Company is (after Porter)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Possibility that what your
business is doing can be
done in a different way
Power, Vigor and
Competence
of Customers
The intensity of competitive rivalry
(known)
– number of competitors
– rate of industry growth
– intermittent industry overcapacity
– exit barriers
– diversity of competitors
– informational complexity and asymmetry
– brand equity
– fixed cost allocation per value added
– level of advertising expense
The threat of new entrants
– the existence of barriers to entry
• Have a hub
• IP
• Gov license
• Limited market
• R&D costs
• Economies of scale
• Factory
• Knowing market
– Economies of product differences
– Brand equity
– switching costs
– capital requirements
– access to distribution
– absolute cost advantages
– learning curve advantages
– expected retaliation
– government policies
Discussion
• Is it a good thing to have competition in your
market?
– Existing
– New entries?
The bargaining power of suppliers
– supplier switching costs relative to firm
switching costs
– degree of differentiation of inputs
– presence of substitute inputs
– supplier concentration to firm concentration
ratio
– threat of forward integration by suppliers
relative to the threat of backward integration by
firms
– cost of inputs relative to selling price of the
product
– importance of volume to supplier
– Examples?
The bargaining power of customers
– buyer concentration to firm concentration ratio
– bargaining leverage
– buyer volume
– Buyer switching costs relative to firm switching costs
– buyer information availability
– ability to backward integrate
– availability of existing substitute products
– buyer price sensitivity
– price of total purchase
– Examples?
The bargaining power of complementors
– Relative strengths
– Customer perception
– Future R&D
– Switching costs
– Trust
– ability to sideways integrate
– Anti-trust
– Competition for margin
– Examples?
Six Forces Diagram to Determine how Competitive a
Company is (after Porter)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Possibility that what your
business is doing can be
done in a different way
Power, Vigor and
Competence
of Customers
Six Forces Diagram to Determine how Competitive a
Company is (after Porter)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Possibility that what your
business is doing can be
done in a different way
Power, Vigor and
Competence
of Customers
Six Forces Diagram to Determine how Competitive a
Company is (with 10X disruptive force)
Power, Vigor and Competence
of Existing Competitors
Power, Vigor and
Competence
of Suppliers
Power, Vigor and Competence
of Complementors
Your Business
Power, Vigor and Competence
of Potential Competitors
Power, Vigor and
Competence
of Customers
Possibility that what your business is doing can be done in a
different way. Disruptively!
The threat of substitute products
–buyer propensity to substitute
–relative price performance of
substitutes
–buyer switching costs
–perceived level of product
differentiation
SWOT Analysis
Strengths, Weaknesses, Opportunities and Threats
by James Manktelow, editor of Mind Tools and an experienced
business strategist.
Strengths (with respect to competitors):
What advantages do you have?
What do you do well?
What relevant resources do you have access to?
What do other people see as your strengths?
Be sure to distinguish a strength in the market, from a necessity.
Look from the customers perspective!
Weaknesses:
What could you improve?
What do you do badly?
What should you avoid?
Opportunities:
Where are the good opportunities?
What are the interesting trends you are
aware of?
Useful opportunities can come from such
things as:
Changes in technology and markets on
both a broad and narrow scale
Changes in government policy related
to your field
Changes in social patterns, population
profiles, lifestyle changes, etc.
Threats:
What obstacles do you face?
What is your competition doing?
Are the required specifications for your job,
products or services changing?
Is changing technology threatening your
position?
Do you have bad debt or cash-flow problems?
Could any of your weaknesses seriously threaten
your business?
You can also apply SWOT analysis to your
competitors. This may produce some interesting
insights!
Example:
A start-up small consultancy business
Strengths:
Can respond very quickly as we have no red tape, no need for higher
management approval, etc.
Can provide really good customer care, as current small amount of
work means we have plenty of time to devote to customers
Our lead consultant has strong reputation within the market
We can change direction quickly if we find that our marketing is not
working
We have little overhead, so can offer good value to customers
Weaknesses:
Our company has no market presence or reputation
We have a small staff with a shallow skills base in many areas
We are vulnerable to vital staff being sick, leaving, etc.
Our cash flow will be unreliable in the early stages
Opportunities:
Our business sector is expanding, with many future
opportunities for success
Our locality wants to encourage local businesses with work
where possible
Our competitors may be slow to adopt new technologies
Threats:
Will developments in technology change this market
beyond our ability to adapt?
A small change in focus of a large competitor might wipe
out any market position we achieve
The consultancy might therefore decide to specialize in
rapid response, good value services to local businesses.
Marketing would be in selected local publications, to get the
greatest possible market presence for a set advertising
budget. The consultancy should keep up-to-date with
changes in technology
Key points:
SWOT analysis is a framework for
analyzing your strengths and
weaknesses, and the opportunities and
threats you face.
This will help you to focus on your
strengths, minimize weaknesses, and
take the greatest possible advantage of
opportunities available.
Attacking entrenched competition
Why is it difficult?
Bill Davidow (Intel, Mohr Davidow)
• “Marketing High Technology- an insiders
view”, William H. Davidow 1985
– If you attack a well-established competitor, you
must plan on spending ~70% of the sales of the
competitive leader has spent in building his
business.
Why is this so?
Cost of Attacking a Competitor
• Investment required to
– Establish market presence
– Establish distribution channels
– Develop a product line
– Plants
– Equipment
– Inventory
– Working Capital
Consider the broader problem- why is it easy to
underestimate the competition?
• Knowledge is incomplete
• Entrepreneurial bias (truth hurts!)
• Underestimate what it takes to achieve position
(Discount Davidow thesis)
• They have solved problems that perhaps you don’t
know existed
• The competition may not even be a player at
present but is plotting in labs even as you are.
(Particularly true in high-visibility areas such as
homeland defense)
• You don’t know what you don’t know.
What does the entrenched competition have?
Assume a “good” company or companies
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By definition they have market share
Brand
Management
A product that generally satisfies the market.
Knowledge of the Customer
– Sales Force
– Distribution
• Technology relationships
• Technology Strengths
• Industry knowledge of trends
– Industry groups
• Supplier relationships
• Distribution relationships
• $$$$$ for response
Attacking an entrenched competitor
working on an “old” technology
Rate of
Progress
Of “Old”
Technology
Number of researchers
working to advance technology
Attacking an entrenched competitor
working on an “old” technology
Rate of
Progress
Of “Old”
Technology
You
.
Number of researchers
working to advance technology
Common pitfalls
The competition is not important because It
doesn’t exist
Anywhere in concept, space and time?
We are disruptive
Overused word!
We are not attacking them head on
The perils of “The Matrix” with you in the sweet
spot
Common pitfalls
We are dis-intermediating them- rendering them
irrelevant
• E-Commerce- the example of E-Toys, Webvan,
Pets.com, etc., etc.
• B2Bs- the example of WholesaleExchange
Amazon vs Barnes and Noble
What are some of their weaknesses?
• Large company
– Bureaucracy
– Slow decision making in Meetings
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• Structure
• Silos
Career avoidance of failure
Annual funding cycle
Complacence
others
• Small company
– Harder to respond to an attack to the side of their
business
– Overcommittment
– Others
Additional Reasons related to missing disruptive
technologies
• Wrong Value Network
– Context of corporation’s business leads to missing competition
arising from outside
• Organizational Structure
– Companies organized by a products substructure fail when
fundamental architecture changes
• Core Competencies
– Firms fail when a technological change destroyed the value of
competencies previously cultivated and succeeded when new
technologies enhanced them
Additional Reasons related to missing disruptive
technologies
• Technology S-curves
– Firms fail when they miss inflection points
along their main product thrust and
specifically when they miss technologies
advancing in related fields
• Wishful thinking
• Blinders
–Arrogance
–Tunnel vision
• Well-defined positions
• The problem with success
Thoughts on countering competition
• Look for weaknesses
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Dissatisfied customers e.g., quality
Unaddressed pain
Cracks in supply chain
Geographic hole
• Address with Total Customer Satisfaction
• Address with Total product- addresses all the pain
• Don’t attack an entrenched position frontally! Think
twice about competing on cost
• Find a (neglected?) niche
• Have proprietary technology that “changes the game”
– i.e., 10X improvement
More thoughts
• Have understanding of the market on your
team
• Hire from your customer or best competitor
• Have leadership that either has a track record
or learns fast.
• Think strategically
– How will the big guys respond?
• How would you counter that response?
• Focus on a few key customers
• Keep under the radar screen?
• Speed! Fail quickly and correct
Kent Kresa’s game theory checkerboard
Put each of your competitors on a
“checkerboard”. From what you know of them
(SWOT analysis). What move would they make
if you were to enter the market with your
product? How could you counter that move a
priori or afterwards? What other moves could
they make to counter you?
Disruptive Technologies
• Why do some good companies fail?
– Companies that
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are well-managed and progressive
listen to their customers
study and act on market trends
invest significant resource in R&D
allocate capital to provide the best return
– in short do all the “right things” and are held as
paragons for their success
. . . .and then collapse
Disruptive Vs Sustaining Technology
Sustaining Technology
• can be incremental or radical
• improve the performance of established
products along the trajectory that mainstream
customers have historically valued
Examples of Sustaining Technologies
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Semiconductor process technologies
Automotive technologies e.g. IC engines
DRAM, CISC microprocessor
Jet Engines
Construction
Factory automation
Examples of Disruptive
Technologies?
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Internet
MEMS
Disk Drive
Genetic Engineered foods
Genetic Engineered drugs
Wal-Mart, Dell inventory
management
Hybrid Vehicles
Small Turbines
Fuel Cells
Biotech
What companies
are Vulnerable?
Disruptive technologies
Why do good companies miss the
revolution?
• Companies depend on investors and customers
for resources
– requires high profits
– requires following the lead of customers who may
themselves be blindsided
• mainframe industry
• minicomputer industry
• Markets that don’t exist can’t be analyzed
• Technology Supply may not meet market
demand
Are these companies clueless?
• Not every technology that looks disruptive is feasible.
• You cannot chase every possible disruptive technology to cover all
your bets
• Even for technologies which are well-researched and appear to be
potentially disruptive can be very difficult to bring to market
• Companies are unable to allocate sufficient resource to test
marketing them because they will always fail any rational allocation
process (we will discuss how this allocation process called portfolio
management works in the future)
– Their normal customers aren’t interested
– The markets seem small and uncertain
– Resource for main line technologies will receive the dominant share to
maintain sales growth and profits
Opportunity for Entrepreneurial company
• Look for need not being served now by big
company
• Look for a 10X cost reduction to service these
companies
• After you have established yourself, move up
market and attack big company with a much
cheaper, solution for their customers.
• Think main frames to minis to micro
Where are you in this spectrum?
?
Paranoia
Overconfidence