1 Chapter 1: Introduction to High-TechnologyMarketing of High-Technology Products and Innovations Jakki J. Mohr, Sanjit Sengupta, and Stanley Slater Chapter 1: Introduction to High-Technology

2 Technology is UbiquitousExamples of traditional “high-tech” industries: Computers and information technology Biotechnology Telecommunications Internet © Mohr, Sengupta, Slater 2005

3 Technology is UbiquitousExamples of some industries where technological innovation is creating radical changes: Waste management Agriculture Automotive Oil and Gas Consumer Products © Mohr, Sengupta, Slater 2005

4 Definition of TechnologyThe stock of relevant knowledge that allows new techniques to be derived Product technology: ideas embodied in the product and its components Process technology: ideas involved in the manufacture of a product; a manner of accomplishing a task especially using technical processes, methods, or knowledge © Mohr, Sengupta, Slater 2005

5 Definitions of “High-Tech”Government perspective “Common underlying characteristics” perspective © Mohr, Sengupta, Slater 2005

6 Government Perspective: Defining High-TechClassify industries based on objective, measurable indicators: the number of technical employees $ spent on R&D # of patents filed in industry Used by the Bureau of Labor Statistics, Organization for Economic Cooperation and Development, and the National Science Foundation © Mohr, Sengupta, Slater 2005

7 Technology-IntensiveTABLE 1-1  HIGH-TECHNOLOGY INDUSTRY EMPLOYMENT 2000 Level 1 Industries: Technology-Intensive © Mohr, Sengupta, Slater 2005

8 Technology-Intensive (Cont.)Level 1 Industries: Technology-Intensive (Cont.) © Mohr, Sengupta, Slater 2005 n.e.c. Not elsewhere classified

9 Level II Industries: Technology Moderaten.e.c Not elsewhere classified © Mohr, Sengupta, Slater 2005

10 Shortcomings to the government classification approach:Some industries are R&D intensive (i.e., high-tech), but new products are not revolutionary Ex: Cigarettes May exclude industries who are technology-driven Ex: Textiles production Some industries with standardized output produced in mass quantities Ex: Some computing equipment © Mohr, Sengupta, Slater 2005

11 Definitions of High Technology: Common, Underlying CharacteristicsMarket Uncertainty Technological Uncertainty Competitive Volatility Other Characteristics © Mohr, Sengupta, Slater 2005

12 Market Uncertainty: ambiguity about the type and extent of customer needs that can be satisfied by a particular technology Consumer fear, uncertainty and doubt (FUD) Customer needs change rapidly and unpredictably Customer anxiety over the lack of standards and dominant design Uncertainty over the pace of adoption Uncertainty over/inability to forecast market size © Mohr, Sengupta, Slater 2005

13 Technology Uncertainty: not knowing whether the technology or the company can deliver on its promiseUncertainty over whether the new innovation will function as promised Uncertainty over timetable for new product development Ambiguity over whether the supplier will be able to fix customer problems with the technology Concerns over unanticipated/unintended consequences Concerns over obsolescence © Mohr, Sengupta, Slater 2005

14 Competitive Volatility: changes in competitors, offerings, strategiesUncertainty over who will be future competitors Uncertainty over “the rules of the game” (i.e., competitive strategies and tactics) Uncertainty over “product form” competition competition between product classes vs. between different brands of the same product Implication: Creative destruction © Mohr, Sengupta, Slater 2005

15 Characterizing the High-Tech Environment© Mohr, Sengupta, Slater 2005

16 Network ExternalitiesWhen the value of the product increases as more people adopt it Also called demand-side increasing returns or bandwagon effects Ex: portals on the Internet Metcalf’s Law: Value of the network = n2 (where n=# of users) © Mohr, Sengupta, Slater 2005

17 Implications of Network ExternalitiesReliance on strategies to quickly grow the size of the “installed base” (or customers using the particular product/technology) May give away products for low price or even free Work to develop industry standards © Mohr, Sengupta, Slater 2005

18 Development of Industry StandardsStandards create a common, underlying architecture for products offered by different firms in the market. © Mohr, Sengupta, Slater 2005

19 Why are industry standards important?Customers gain compatibility Lowers their perceived risk (FUD factor—fear, uncertainty, and doubt) Allows for seamless interface of product components. Due to network externalities, standards can increase the value a customer receives (when more customers adopt/use products sharing a common standard). © Mohr, Sengupta, Slater 2005

20 Why are industry standards important? (Cont.)Availability of complementary products determined by the size of the “installed base” of a given product. Therefore, standards help ensure greater availability of complementary products by helping to ensure a larger size of the installed base. Customers get more value from the base product as more complementary products are available. © Mohr, Sengupta, Slater 2005

21 Self-reinforcing Nature of StandardsReduce customer fear, uncertainty, & doubt Larger installed base More complementary products developed Increased value demand for product © Mohr, Sengupta, Slater 2005

22 Implications from StandardsOriginator of new technology can set standards— Even when technology standard may be inferior Ex: QWERTY keyboards Critical success factor: Grow installed base quickly Antitrust implications when de facto standards become near monopolies © Mohr, Sengupta, Slater 2005

23 Strategies to Set Industry Standards(1) Licensing/OEM Agreements Pros: Can ensure initial wide distribution Can co-ops competitors from developing competing technology Limits customer confusion over competing standards Sends signal to complementors that installed base may be significant, stimulating development of ancillary products Cons: Licensees may attempt minor technological alterations to bypass need to pay licensing fees Original developer “creates” competitors © Mohr, Sengupta, Slater 2005

24 Strategies to Set Industry Standards (Cont.)(2) Strategic Alliances to jointly sponsor development of a particular technological standard Pros: Same four “pros” as the prior strategy, plus: By combining skills, alliances may produce superior technologies than a single company could. Cons: Partner might access and misuse other firm’s proprietary information Need for close attention to structure and management of the alliance © Mohr, Sengupta, Slater 2005

25 Strategies to Set Industry Standards (Cont.)(3) Product Diversification: Create a standard by developing the necessary complementary products to create more value for customers. Pros: Can “jump-start” the market when no installed base of customers exists and complementors have no incentive to develop products Diversifies revenue base of the firm Cons: Commitment of resources Potential incompatibility with core competencies © Mohr, Sengupta, Slater 2005

26 Strategies to Set Industry Standards (Cont.)(4) Aggressive Product Positioning via penetration pricing, product proliferation, and wide distribution. Requires investments in production capacity, product development, and building market share Costs of failure are very high © Mohr, Sengupta, Slater 2005

27 Conditions That Affect the Choice of Standards-Setting Strategy:Barriers to imitation Via patents or copyrights, for example Skills and resources in technology, manufacturing, marketing, finances, and firm reputation Existence of capable competitors Potential suppliers of complementary products © Mohr, Sengupta, Slater 2005

28 Which Strategy Under Which Conditions?Aggressive Sole Provider when: Barriers to imitation are high Firm possesses required skills and resources Suppliers of complementary products exist Apparent absence of capable competitors Passive Multiple Licensing when: Barriers to imitation are low Firms lacks required skills and resources Presence of many capable competitors © Mohr, Sengupta, Slater 2005

29 Which Strategy Under Which Conditions? (Cont)Aggressive Multiple Licensing (combines licensing with aggressive positioning) when: Firm possesses needed skills and resources Barriers to imitation are low Presence of many capable competitors Selective Partnering when: High barriers to imitation Firm lacks needed skills and resources Presence of capable competitors © Mohr, Sengupta, Slater 2005

30 Other Characteristics Common to High-Tech Markets:“Unit-one” costs: when the cost of producing the first unit is very high relative to the costs of reproduction Ex: development vs. reproduction of software © Mohr, Sengupta, Slater 2005

31 Other Characteristics Common to High-Tech Markets: (Cont.)Tradability problems Arise because it is difficult to value the know-how which forms the basis of the underlying technology Ex: How much to charge for licensing the rights to a waste-eating microbe? The perceived problem and valuation Pricing on tangible goods vs. intangible goods © Mohr, Sengupta, Slater 2005

32 Other Characteristics Common to High-Tech Markets: (Cont.)Knowledge spillover: Technological developments in one domain spur new developments and innovations in other areas. Ex: Human Genome Project © Mohr, Sengupta, Slater 2005

33 A Supply Chain Perspective of Technology—a case of Auto IndustryInterwoven impacts on facing innovation Suppliers Car Manufacturers Car Dealers Customers -personal consumption -business use (fleets, etc.) -raw materials -components -production equipment -services © Mohr, Sengupta, Slater 2005

34 Critical ideas on a Supply Chain Perspective on TechnologyOften, technological innovations occur at upstream (i.e., supplier) levels in the supply chain Such innovations may radically affect the manufacturing process or the inner workings of a product, but End-user behavior may not be significantly affected Examples: cars, food, computing, hair styling, Internet © Mohr, Sengupta, Slater 2005

35 Continuum of Innovations© Mohr, Sengupta, Slater 2005

36 Supplier vs. Customer Perceptions of Nature of InnovationMismatch: Delusion Incremental Breakthrough Shadow © Mohr, Sengupta, Slater 2005

37 Contingency Theory Type of marketing strategy is contingent upon the nature of the innovation. © Mohr, Sengupta, Slater 2005

38 Examples of Implications of Contingency Theory:Breakthrough Incremental R&D/Marketing Interaction R&D leads; “technology push” Marketing leads; “customer pull” Type of Marketing Research Lead users; empathic design Surveys; focus groups Role of Advertising Primary demand; customer education Selective demand; build image Pricing May be premium More competitive © Mohr, Sengupta, Slater 2005

39 Framework for High-Tech Marketing Decisions© Mohr, Sengupta, Slater 2005

40 Job Opportunities in High-TechFor non-technical backgrounds: Find temporary work or internships to develop knowledge and language Read industry publications; join industry trade groups Work for high-tech company customers or suppliers © Mohr, Sengupta, Slater 2005

41 Appendix: Outline of a Marketing PlanExecutive Summary Market Analysis Company Analysis Objectives & Positioning Value Proposition Marketing Strategy Budgeting and Control © Mohr, Sengupta, Slater 2005

42 Marketing of High-Technology Products and InnovationsChapter 2: Strategy and Corporate Culture in High-Tech Firms

43 Questions to consider What is the strategic marketing planning process in high-tech firms? What constitutes competitive advantage in a high-tech firm? What characterizes an innovative culture in high-tech companies? What are the unique challenges faced by small high-tech start-ups? © Mohr, Sengupta, Slater 2005

44 Internal (within the firm) Considerations in High-Tech Marketing© Mohr, Sengupta, Slater 2005

45 The Strategy Process Market Planning Market Strategy CompetitiveAdvantage Evaluation & Control © Mohr, Sengupta, Slater 2005

46 Strategic Market Planning Process in High-Tech MarketsImplement strategy Define goals and mission Choose arena (from Ryans, et al.) Understand profit model Identify opportunities Planning Process Complete the strategy Plan key relationships Make tough choices © Mohr, Sengupta, Slater 2005

47 Define Mission and GoalsWhy does the business exist? Who are our customers? What needs are we trying to solve? How will we solve them? Goals Profit Growth New product acceptance Customer satisfaction © Mohr, Sengupta, Slater 2005

48 Select the Business ArenaPotential customer segments that could be served; Potential applications or functionality that could be provided to these customers; Possible technologies and capabilities that could be used to create the applications or functionality; and Possible role for the organization in providing the value to the customer versus the roles of others in the market chain. © Mohr, Sengupta, Slater 2005

49 Identify Attractive OpportunitiesScan and understand the market environment Carefully segment the market Evaluate “fit” of company capabilities and resources to market needs Identify current, potential, and indirect competitors Determine competitors’ strengths and likely strategies Assess profitability of serving each segment © Mohr, Sengupta, Slater 2005

50 Make Tough Strategic ChoicesDecide whether opportunity should be pursued What will it be worth to win? Is the market opportunity attractive enough? Is the strategy powerful enough to generate a sufficient level of profitability? If not, are there compelling reasons to proceed? © Mohr, Sengupta, Slater 2005

51 Make Tough Strategic Choices (Cont.)Select/develop best strategy to take advantage of opportunity Achieve leadership position in the opportunity? Do synergies exist within the portfolio of opportunities being considered Leverage a common technology Leverage a common market chain Are the strategies for the various opportunities reasonably consistent? © Mohr, Sengupta, Slater 2005

52 Plan Critical RelationshipsWith other firms in the market chain With organizations outside the market chain Company with a complementary product or service © Mohr, Sengupta, Slater 2005

53 Complete the Winning StrategyPositioning Product Development and Management Pricing Distribution path/channeling Marketing promotion Political relationship Meeting 4C (customer/cost/convenience/communication) © Mohr, Sengupta, Slater 2005

54 Understand the Profit DynamicDevelop a detailed financial model for each opportunity More refined profitability analysis based on detailed understanding of complete marketing strategy and associated costs Look for modifications to enhance opportunity’s overall profitability. Beyond expectation retaliation from competitors market/technology uncertainty © Mohr, Sengupta, Slater 2005

55 Implement the StrategyMake sure people who will implement are involved in the strategy formulation process Design the effective organization: Leadership Structure and relationships Systems Culture and values © Mohr, Sengupta, Slater 2005

56 Key Strategy DecisionsWho are our target customers? What mix of products and services should we offer? When should we enter a market? The timing decision The requisite guts How can we execute our strategy efficiently and effectively? Championship © Mohr, Sengupta, Slater 2005

57 Who are Target Customers?“Served” market Potential pitfall: Tyranny of the served market The marketing myopia Bi-focal vision Search for new market space Independent unit & spin-off corporate © Mohr, Sengupta, Slater 2005

58 Product/Service Mix Provide value for customers Man/machine interfaceThe usage analysis Functionality, performance, price, post-sale maintenance, disposal © Mohr, Sengupta, Slater 2005

59 Timing of Market Entry: Be a Market Pioneer?PROS CONS First mover advantage creates entry barriers Economies of scale Experience effects Reputational effects Technological leadership Buyer switching costs Higher profits and higher share Define product exemplar Higher consumer awareness Large development costs Market uncertainty © Mohr, Sengupta, Slater 2005

60 Pioneers (“First Movers”) (Cont.)Successful Pioneers Have technological foresight Understand the market Have marketing acumen Understand competitors’ strengths and weaknesses A bit of luck © Mohr, Sengupta, Slater 2005

61 An Advantage of Being A Follower© Mohr, Sengupta, Slater 2005

62 When do “late” movers succeed?Identify overlooked product position Undercut pioneer on price Out-advertise or out-distribute the pioneer Innovate superior product Innovate superior business/marketing strategy Reshape the category © Mohr, Sengupta, Slater 2005

63 Drivers of Strategy InnovationBring new voices into the dialogue Foster new connections inside and outside of the company Look at the “business” from a new perspective Exude passion for discovery and novelty Experiment and learn! © Mohr, Sengupta, Slater 2005

64 Sources of Competitive AdvantageTangible assets: Products Facilities Financial Resources Intangible assets: Brands/reputation Know-how Culture Competencies: Routines Processes © Mohr, Sengupta, Slater 2005

65 Three Characteristics of Core CompetenciesDifficult for competitors to imitate Significantly related to benefits end-user receives—valuable assets Allow access to a wide variety of disparate product-markets—high potential © Mohr, Sengupta, Slater 2005

66 Tree Analogy to Core Competencies—a case of Honda MotorAircraft engine © Mohr, Sengupta, Slater 2005

67 Implications of Core Competencies in Strategic PlanningResource allocations may defy conventional logic Violate ROI criterion Development learning Accumulation Transferring Exploitation © Mohr, Sengupta, Slater 2005

68 An Illustration of Sources of Competitive Advantage for DellTangible Product Convenience Intangible Reputation Confidence Supply Chain Competency Price/Cost Management © Mohr, Sengupta, Slater 2005

69 Requirements for Competitive AdvantageIs the resource/competency: Valuable to Buyers No Yes Superior to Competitors No Yes Difficult to Imitate No Yes Competitive Advantage Disadvantage Parity Temporary Sustainable Profitable No Average Superior Consistently Rarity is a variation on superiority. Transparency, replicability, and transferability are variations on imitability. © Mohr, Sengupta, Slater 2005

70 Culture and Climate in High-Tech FirmsObstacles to Innovativeness Core Rigidities Innovator’s Dilemma Liability of Bigness Facilitators of Innovativeness Creative Destruction Firm Dominance Unlearning Corporate Imagination Expeditionary Marketing Indulgence in the past successes Laggard response to challenges Self-cannibalization Reshape the business mind-set © Mohr, Sengupta, Slater 2005

71 When Core Competencies Become Core RigiditiesCore rigidities: ingrained routines, knowledge, and skills become strait-jackets that inhibit a firm’s ability to develop new products built around unfamiliar skills, routines, and new knowledge. Ex: cultural norms, over-reliance on existing technologies © Mohr, Sengupta, Slater 2005

72 The Innovator’s Dilemma"The innovator's dilemma is that many of the very same good management practices that help a company succeed, in the end cause it to fail. For example, listening to your best customers and incorporating their needs into the stream of new products you develop is absolutely essential to becoming a successful company. But the dilemma is that this can be very misleading when certain innovations - which I call 'disruptive technologies' - emerge in the market. Very often, mainstream customers in existing markets can't use new technologies when they first emerge; they can only be used by different customers in different applications." Clayton Christensen © Mohr, Sengupta, Slater 2005

73 “Liability of Bigness”Traits of large firms can inhibit their ability to develop radical innovations: Bureaucratic Focused on economies of scale Core competencies become core rigidities Fear of cannibalization Incumbent’s dilemma © Mohr, Sengupta, Slater 2005

74 Facilitators of InnovativenessCreative Destruction (see next slide) Proactively develop next-generation technology that may obsolete current technology Ex: Develop Web-sites that undermine current distribution channels © Mohr, Sengupta, Slater 2005

75 Creative Destruction A term coined in 1942 by Joseph Schumpeter in his work, Capitalism, Socialism and Democracy, to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." In other words, creative destruction occurs when something new kills an old thing. A great example of this is personal computers. The industry, led by Microsoft and Intel, destroyed many mainframe computer companies--but in doing so, entrepreneurs created one of the most important inventions of this century. Creative destruction may be the antidote to the Innovator’s Dilemma if it can overcome internal rigidity. © Mohr, Sengupta, Slater 2005

76 Leveraging Firm Dominance EffectivelySources of dominance: Investments in the existing product generation Market share Wealth The first two factors can inhibit innovation; the latter facilitates the development of innovation © Mohr, Sengupta, Slater 2005

77 Leveraging Firm Dominance (cont.)Manager’s fears of obsolescence: Positively related to innovation (the willingness to cannibalize) © Mohr, Sengupta, Slater 2005

78 Final thoughts on Leveraging Firm DominanceDominant firms reap greater rewards from introducing radical innovations if they quick follow the industrial dynamics Smaller firms can overcome their disadvantage by: Marketing support (e.g., sales effort) Technology support (e.g., R&D spending, patent protection, etc.) from some key complements © Mohr, Sengupta, Slater 2005

79 “Unlearning” Innovation is facilitated by unlearning practices that worked in the past but are not useful, or even detrimental, to future success. © Mohr, Sengupta, Slater 2005

80 Technology Life Cycles© Mohr, Sengupta, Slater 2005

81 Some Implications of Technology Life CyclesNew technologies often come from companies not selling current generation of technology Incumbents often invest in both improving existing technology and developing new Incumbents often underestimate viability of new developments Therefore, new technologies can catch/attack established firms by surprise © Mohr, Sengupta, Slater 2005

82 Corporate Imagination (by Hamel & Prahalad)Overturn price/performance assumptions (see next slide) Escape the “tyranny of the served market” Use new sources of ideas for innovation Get out in front of customers © Mohr, Sengupta, Slater 2005

83 4 Elements of Corporate Imagination(1) Willingness to overturn price/performance assumptions Incremental improvements to existing technologies, which move along the same price/performance curve, vs. Radical innovations that allow greatly-improved performance at roughly comparable prices as existing technology Technology life cycles Ex: Moore’s Law © Mohr, Sengupta, Slater 2005

84 4 Elements of Corporate Imagination (Cont.)(2) Escape the “tyranny of the served market” Excessive focus on current customers Obscures the fact that customer needs may change over time and may be solved in radically new ways Therefore, look for market opportunities outside of existing product/markets. © Mohr, Sengupta, Slater 2005

85 4 Elements of Corporate Imagination (Cont.)(3) Use new sources of ideas for innovation Rather than using standard marketing research tools, use lead users Who are the browser’s lead users? and ethnographic observation (empathic design) (Discussed fully in Chapter 5) © Mohr, Sengupta, Slater 2005

86 4 Elements of Corporate Imagination (Cont.)(4) Get out in front of customers. Lead them where they want to go before they themselves know it. Requires being “close to the customer” AND not being blinded by existing rules and procedures. © Mohr, Sengupta, Slater 2005

87 The Learning Organization“In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage ‘is knowledge’” Ikujiro Nonaka The Knowledge Creating Company “A unique characteristic of knowledge is that it is one of the few assets that grows most - usually exponentially - when shared” James Brian Quinn Intelligent Enterprise “Learning may be the only source of sustainable competitive advantage” Ray Stata CEO, Analog Devices © Mohr, Sengupta, Slater 2005

88 Learning OpportunitiesMarket-focused Learning (users’ expectation) Competitive Benchmarking (competitors’ excellence) (師夷之長技以制夷) Learning from Alliances, Joint Ventures, Partnerships, and Acquisitions (approaches) Continuous Improvement through Experience (feedback control, adaptation & adjustment) Market or Operational Experiments (uncertainty & expectation management) Utilization of Outside Experts or Consultants (objectivity of bystander’s standpoint) Organizational Memory (the possibility of core rigidity) © Mohr, Sengupta, Slater 2005

89 Do We Know Anything for Sure?Life is pretty simple: you do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is in the doing something else. You must take pot shots at today’s star before you are mimicked. Today’s radiantly blooming flowers are tomorrow’s mulch. Don’t forget that for a moment. But don’t think about it too long either. Tom Peters © Mohr, Sengupta, Slater 2005

90 Expeditionary MarketingFrequent fast-paced market incursions (see next slide) More accurate learning of customer needs Time between market learning and product launch is shortened Maximizes odds that product delivered matches customer’s needs as needs are less likely to change in the short-term Implication: Issue is less being right the first time, but being able to accumulate market experience, and quickly adapt market offerings the try-out strategy Beta testing © Mohr, Sengupta, Slater 2005

91 Expeditionary MarketingSuccessive times at bat Many small bets © Mohr, Sengupta, Slater 2005

92 Nurturing a Culture of InnovationCharacteristics of a firm that fosters innovation— Disciplined rather than unfettered creativity Continued R&D efforts, even in cyclical downturns Broaden the absorptive capability Enlightened experimentation An useful and economical way of R&D—simulation and prototype before great bets © Mohr, Sengupta, Slater 2005

93 Characteristics of Firms that Nurture a Culture of Innovation (cont.)Identifies market needs that are divergent from (rather than congruent with) existing strategies Roles and responsibilities of key players may not be clearly defined in early stages Compensation for taking risk and challenges Screening for new product ideas not based on formal criteria, but done informally based on technical/market merit Unexpected success or failure! © Mohr, Sengupta, Slater 2005

94 Characteristics of Organizations Who Foster Innovation (Cont.)Role of product champion is key Tireless crusaders for idea Innovative firms have reward system and culture to promote influence of product champions Personnel given time and incentives to be innovative Tolerate risk and “mistakes” Only paranoid survives! © Mohr, Sengupta, Slater 2005

95 Skunk Works Isolate new venture groups outside the normal organizational hierarchy Pros: - Allows for more creativity, unfettered by existing corporate protocols. Cons: - Signals a corporate culture that has impediments to innovation (Creativity doesn’t happen within normal operating procedures) - Isolates the creative process © Mohr, Sengupta, Slater 2005

96 Applying Lessons of Innovativeness to Businesses’ Internet ExperiencesNew business models came from industry outsiders Competitive Volatility Core rigidities and the tyranny of the served market: Existing companies bound by existing rules of the game and existing customers Underestimation of new competitors Need for creative destruction © Mohr, Sengupta, Slater 2005

97 Applying Lessons of Innovativeness to Businesses’ Internet Experiences (Cont.)Expeditionary Marketing: Shorter learning cycles Quicker opportunity to adapt strategies Understand core competencies Reliance on skunk works Pioneering advantages © Mohr, Sengupta, Slater 2005

98 “The Liability of Smallness:” Challenges for High-Tech Start-upsSources of Funding Other Resources (complements) Navigating Complex Environments © Mohr, Sengupta, Slater 2005

99 Sources of Funding Friends and Family BootstrappingReliance on venture capital Informal “angels” Formal companies/banks © Mohr, Sengupta, Slater 2005

100 Considerations of Venture CapitalistsWhat Venture Capitalists Look For: Management Team Marketing Plan Technology/Product ROI © Mohr, Sengupta, Slater 2005

101 Other Resources for Start-UpsTechnology incubators Partners (Ch. 3) © Mohr, Sengupta, Slater 2005

102 Navigating a Complex EnvironmentKey Success Factors for Small High-Tech Firms Speed to market positioning Flexibility to respond changes Time Orientation to anticipate and disseminate insights and coordinate the young management team © Mohr, Sengupta, Slater 2005

103 Marketing of High-Technology Products and InnovationsChapter 3: Relationship Marketing: Partnerships and Alliances

104 Chapter Outline Partnerships Relationship MarketingTypes of Partnerships Reasons to Partner Risks in Partnering Keys to Success Relationship Marketing Customer Equity Customer Acquisition Customer Retention © Mohr, Sengupta, Slater 2005

105 Types of Partnerships Complementors Suppliers Focal Firm DistributionCustomers Competitors © Mohr, Sengupta, Slater 2005

106 Types of Partnerships (cont.)Vertical partnerships: with members at other levels of the supply chain Suppliers Distribution channel members Customers Horizontal partnerships: with members at the same level of the supply chain “Complementors:” makers of jointly-used products Competitors—”competition” © Mohr, Sengupta, Slater 2005

107 Antitrust Laws Related to Competitive CollaborationNational Cooperative Research Act (1984) Eased traditional antitrust laws to allow competitors to form relationships to jointly pursue research and development projects. National Cooperative Production Amendment (1993) Expanded the 1984 Act to allow joint production © Mohr, Sengupta, Slater 2005

108 Example of Competitive Collaboration: SematechThe semiconductor manufacturing technology consortium of US semiconductor manufacturers and the US government © Mohr, Sengupta, Slater 2005

109 Reasons to Partner Access resources and skills Gain cost efficienciesSpeed time-to-market Access new markets Define industry standards Develop innovations and new products Develop complementary products Gain market clout © Mohr, Sengupta, Slater 2005

110 The Product Life Cycle, Innovation, and the Role of AlliancesHigh Rate of Major Innovation Process Innovation Low Stage of Product Life Cycle Emergence Growth Maturity Decline Alliance Types Standards Licensing Technology Licensing R&D Marketing Manufacturing Marketing Process R&D Attacker Incumbent © Mohr, Sengupta, Slater 2005

111 Risks in Partnering Outright failure of relationshipsLoss of autonomy and control Loss of proprietary information to partner Potential legal issues and antitrust problems Failure to achieve alliance objectives Residual allocation when success Responsibility delineation when failure © Mohr, Sengupta, Slater 2005

112 Factors Contributing to Partnership SuccessJoint (bilateral) interdependence Caution warranted with partners of unequal size Governance Structure (next slide) Joint Commitment (credible, safeguarding) Trust in the partner’s motives and intents Effective Communication Compatible Corporate Cultures Integrative conflict resolution and negotiation (vs. “hard,” win/lose bargaining) © Mohr, Sengupta, Slater 2005

113 Factors Contributing to Partnership Success (Cont.)Effective structure to govern the alliance Unilateral: one party has authority to make decisions Bilateral: governance based on mutual expectations regarding behaviors and activities © Mohr, Sengupta, Slater 2005

114 More on Governance Match type of governance to degree of risk:High risk (arising from uncertainty or investments dedicated to the relationship) warrants either: “Credible commitments” and safeguards that create mutual dependence -or- Narrow terms and conditions that keep the firms only loosely-coupled Bilateral governance based on commitment, trust, and communication Escape clause © Mohr, Sengupta, Slater 2005

115 Relationship Marketing“The formation of long-term relationships with customers and other business partners, which yield mutually-satisfying, win/win results.” Why relied upon so heavily? Time to market cycle is short Development costs/risks are high Faster and more cost efficient to pursue projects jointly than alone Synergy! © Mohr, Sengupta, Slater 2005

116 Relationship MarketingBuilding strong and lasting relationships is hard work and difficult to sustain. But I believe that in a world where the customer has so many options, even in narrow product-market segments, a personal relationship is the only way to retain customer loyalty. Regis McKenna © Mohr, Sengupta, Slater 2005

117 Customer Relationship MarketingForming long-term relationships with customers that provide mutually-beneficial solutions Cheaper to keep current customers coming back than to prospect for new ones. May require sacrificing short-term profits for long-term gains. © Mohr, Sengupta, Slater 2005

118 Computing Customer EquityProfit stream from customer acquisition costs © Mohr, Sengupta, Slater 2005

119 Computing Customer Equity© Mohr, Sengupta, Slater 2005

120 Customer Acquisition StrategiesHigh Full Throttle Selective Retention Profit Potential Restructure/ Divest Pay as You Go Low Short Long Acquisition Investment Recovery Time © Mohr, Sengupta, Slater 2005

121 Aspects of Cost to ServeAcquisition Costs Production Costs Distribution Costs Service Costs Why do some customers cost more to serve than others? © Mohr, Sengupta, Slater 2005

122 Customer Acquisition RulesAcquire any customer as long as the discounted future value of the customer exceeds the acquisition costs for that customer. When you broaden the acquisition effort, be prepared for lower response rates. The greater its profits from retention, the greater a firm's customer acquisition investment should be. The higher the percentage of the initial acquisition investment that a firm recovers in the first period, the greater its acquisition investment should be. © Mohr, Sengupta, Slater 2005

123 Developing and Maintaining Relationships: Acquiring CustomersSegment the market by value perceptions Target segments that appreciate value Segment attractiveness Competitive position ( & capability assessment) Generate awareness (promotion & communication) Pricing Skimming or penetration Trial Post-purchase service © Mohr, Sengupta, Slater 2005

124 Switching Costs Arising from:investments in equipment, procedures, or people that make it costly or risky for a customer to switch to another firm’s products. perceived risk of making a bad choice Other factors related to switching costs: Platform considerations (inter-operability) Vendor Considerations (the lock-in effect) © Mohr, Sengupta, Slater 2005

125 Customer Relationship and Retention StrategiesIs Customer Loyalty Profitable? Claim 1: It costs less to serve loyal customers. Claim 2: Loyal customers pay higher prices for the same bundle of benefits. Claim 3: Loyal customers market the company. As opinion leaders & benchmarks © Mohr, Sengupta, Slater 2005

126 Which Customers Are Really Profitable?Transaction Relationship Service provider 20% Grocery retail 15% Mail-order 19% Brokerage 18% Service provider 30% Grocery retail 36% Mail-order 31% Brokerage 32% High Profit Service provider 29% Grocery retail 34% Mail-order 29% Brokerage 33% Service provider 21% Grocery retail 15% Mail-order 21% Brokerage 17% Low Profit © Mohr, Sengupta, Slater 2005

127 Loyalty Strategies Transaction Relationship High Profit Low ProfitButterflies: Good fit High profit potential Transaction satisfaction Milk active accounts Cease investing True Friends: Good fit Best profit potential Consistent communication Attitudinal & behavioral loyalty Delight customers High Profit Strangers: Little fit Lowest profit potential Make no investment Max transaction profit Barnacles: Limited fit Low profit potential Measure size and share of wallet Low share, up- and cross-sell Small wallet, strict cost control Low Profit © Mohr, Sengupta, Slater 2005

128 Relationship MarketersPerform a long-term business planning function for their customers. Help customers define their businesses, their markets, and their product-service needs. Maintain high-level, multi-function access in customer companies. Sell systems of products and services. Draw on the full complement of company functions and services for support. IBM plans businesses for her IT users MS provides anything for her users © Mohr, Sengupta, Slater 2005

129 Appendix: Inter-firm LearningIssue: Must learn to have effective partnership, but too much information sharing can dilute source of competitive advantage Types of knowledge: Explicit (migratory) Tacit (embedded) © Mohr, Sengupta, Slater 2005

130 Managing the Paradox Want closest partnership possible to enhance learning Want loosely-coupled partnership to prevent unintended transfers of information Use caution! Cross-licensing agreements © Mohr, Sengupta, Slater 2005

131 Marketing of High-Technology Products and InnovationsChapter 4: Market Orientation and R&D/ Marketing Interaction in High-Technology Firms

132 Chapter Outline Market Orientation Marketing/R&D InteractionWhat it means to be Market Oriented Knowledge Management Facilitators of and Barriers to Being Market Oriented The Hidden Downside of a Market Orientation Marketing/R&D Interaction Relative to Innovation Type Barriers to Effective Interaction Strategies for Achieving Effective Interaction Keeping the Customer in Marketing/R&D Interaction © Mohr, Sengupta, Slater 2005

133 Market Orientation What is a market orientation?What would you expect a market-oriented firm to look like? What are some advantages and disadvantages to being market-oriented? What are some advantages and disadvantages to being customer-focused vs. competitor-driven? What constitutes a knowledge management system? © Mohr, Sengupta, Slater 2005

134 Market Orientation Philosophy of doing business that emphasizes shared gathering, dissemination, and utilization of market information in decision making. Impact of market orientation on performance: Firms that are strong technologically see a greater impact of market orientation on performance (than firms which are not strong technologically) © Mohr, Sengupta, Slater 2005

135 Aspects of a Market Orientation© Mohr, Sengupta, Slater 2005

136 How market-oriented firms use information:Gather information Current and future customers Competitive information Market trends Disseminate information Across functions and divisions Utilize information Across functions and divisions to enhance commitment Execute decisions in coordinated fashion © Mohr, Sengupta, Slater 2005

137 Capturing Value from Knowledge Assets“The essence of the firm is its ability to create, transfer, assemble, integrate, and exploit knowledge assets.” David Teece © Mohr, Sengupta, Slater 2005

138 Knowledge Management Proactive management of firm’s bases of knowledge to better share and use information Requires conscious oversight to overcome natural boundaries (between functions/divisions) © Mohr, Sengupta, Slater 2005

139 From Data to Knowledge Knowledge Information that enables prediction.Applicability & exploitability Organized data. Data purpose & meaning Facts determined from a measurement of some kind. Scaling & accuracy © Mohr, Sengupta, Slater 2005

140 Influences on Achieving a Market OrientationBarriers Turf Protection Results Top Management Leadership Decentralized Responsibility Market-based Rewards Facilitating Conditions Core Rigidities Market Orientation Innovativeness New Product Success Superior Profitability Served Market © Mohr, Sengupta, Slater 2005

141 Barriers to Being Market-OrientedPeople hoard information (selective behavior in the gathering and dissemination process) Core rigidities can cause people to disparage/disregard information about/from users (technology enthusiasm/arrogance) Tyranny of the served market: Listening only to current customers (marketing myopia) Users’ inability to envision new solutions Solving problems only with current technologies © Mohr, Sengupta, Slater 2005

142 The Hidden Downside to Being Market-OrientedListening too closely to customers can inhibit innovativeness Customers may be inaccurate both in their positive endorsement of new products as well as in their rejection of new ideas. feedback fanatic syndrome © Mohr, Sengupta, Slater 2005

143 Overcoming the Pitfalls in Being Market-OrientedFocus less on what customers SAY and more on what they DO. Empathic design Match use of customer feedback to the type of innovation: For incremental innovations: Customer feedback is vital and useful. For breakthrough innovations: Customers bounded by current solutions, and insights about new technologies may be sketchy at best. © Mohr, Sengupta, Slater 2005

144 Overcoming the Pitfalls in Being Market-Oriented (Cont.)Focus on future customers (and not just existing customers) (investigate the possible causes of unexpected failure/success) Champion new ideas Work in cross-functional teams © Mohr, Sengupta, Slater 2005

145 Customer-Led and Market-Oriented: Don’t Confuse the TwoExpressed Wants Served Market Customer Satisfaction Linear Learning Customer Surveys Key Accounts Concept Testing Market-Oriented Unarticulated Needs New Customers Customer Value Breakthrough Learning Customer Observation Lead-Users Experimentation © Mohr, Sengupta, Slater 2005

146 Effective Marketing/R&D InteractionMatch nature of 1 interaction to the type of innovation 2 Examine and overcome core rigidity of elevation of engineering over marketing 3 Use formal and informal interactions to build bridges 4 Enhance opportunities for communication © Mohr, Sengupta, Slater 2005

147 Nature of Marketing/R&D Interaction Matched to Type of InnovationBreak-through innovations Success based on technological (R&D) prowess Role of marketing: To provide market-related feedback on market opportunity areas, market development, feedback on product features/engineering feasibility Marketing brings voice of customer and marketplace into the development process © Mohr, Sengupta, Slater 2005

148 Nature of Marketing/R&D Interaction Matched to Type of Innovation (Cont.)Incremental Innovations Because customers can provide useful feedback for product development, role of marketing is critical Role of R&D: Ensure marketing understands technological capabilities Assist with marketing efforts Assist with understanding customers R&D remains “close to the customer” © Mohr, Sengupta, Slater 2005

149 Barriers to R&D/Marketing InteractionCorporate culture/core rigidity that is technology-driven Elevates status of engineering over marketing personnel Engineering takes on important marketing tasks Spatial distance in physical locations of marketing and R&D Justifies and institutionalizes disregard for market-related information/feedback © Mohr, Sengupta, Slater 2005

150 R&D and Marketing StereotypesTime Orientation Projects Preferred Ambiguity Tolerance Department Structure Bureaucratic Orientation Primary Loyalty Professional Orientation Long Breakthrough Low Informal Less Profession Science Short Incremental High Moderately Formal More Firm Customer © Mohr, Sengupta, Slater 2005

151 Strategies to Enhance R&D – Marketing InteractionCo-optation Coordination Positive Interaction Communication Constructive Conflict © Mohr, Sengupta, Slater 2005

152 Co-optation. Effective marketers:Build informal networks and bridges to engineering Give the credibility to those who understand products, technology, markets and be able to communicate articulately about the other’s domain Form strategic coalitions with upper management Risk: May alienate peers If necessary, bypass engineering to get the job done via external partners (a way of governance) © Mohr, Sengupta, Slater 2005

153 Cooperative StrategiesCo-locate marketing and R&D in close proximity Rotate personnel through different functions Develop cross-functional networks Create group incentives that encourage cooperation Build consensus in a nondirective fashion © Mohr, Sengupta, Slater 2005

154 Communication Increased frequency of communication beyond minimum threshold (125/3-month), but below overload (525/3-month) Disseminate information through formal channels when possible for credibility Create norms for extensive sharing of information between functions Make it clear that the organization’s goals are subordinate to either marketing’s or R&D’s individual goals © Mohr, Sengupta, Slater 2005

155 Constructive ConflictSpirited discussion creates new and innovative ideas Pressure for harmony stifles emergence of alternative viewpoints Result of emphasis on harmony may be “groupthink” where contrary opinions are not expressed and problems are ignored Key to “constructive” conflict is respect Once a decision is made, no second guessing! © Mohr, Sengupta, Slater 2005

156 Caveat: Effective marketing/R&D interaction must be firmly grounded in an understanding of customer needs and wants. © Mohr, Sengupta, Slater 2005

157 Keeping the Customer In R&D/Marketing Interaction?Product Technology Customer Marketing Engineering Rock Pile Sure Would you like a rock? Find me a big, cheap, fast, dense, OK sharp...rock Here’s a Wrong rock blue ro ck? What’s wrong Do you have a red rock? with blue? OK, but only I can make a if its square purple one … We don’t have square ones © Mohr, Sengupta, Slater 2005

158 Marketing of High-Technology Products and InnovationsChapter 5: Marketing Research In High-Tech Markets

159 Chapter Outline Aligning Market Research with Innovation TypeHigh-Tech Marketing Research Tools Concept Testing Conjoint Analysis Customer Visit Programs Lead Users Empathic Design Quality Function Deployment Prototypes and Beta Testing Gathering Competitive Intelligence Forecasting Demand Delphi method Analogous Products Information Acceleration © Mohr, Sengupta, Slater 2005

160 Customer Input During Product Development at MicrosoftActivity Based Planning Wish Lines Calls Data Analysis and User Needs Definition Specification Development Product Prototyping Usability Lab Testing Additional Product Development Internal Alpha Release Feedback Analysis and Product Refinements Beta Site Testing Feedback Analysis & Product Refinements External Product Release Surveys Studies © Mohr, Sengupta, Slater 2005

161 Quality Function DeploymentAligning Market Research with Type of Innovation Survey Research Concept Testing Conjoint Studies Customer Visits Empathic Design Lead Users Quality Function Deployment Prototype Testing Market Intuition Incremental Innovation (need known) Breakthrough Innovation (technical solution precedes customer need) © Mohr, Sengupta, Slater 2005

162 Concept Testing Generate multiple product conceptsObservation Focus groups Brainstorming Judgmentally reduce number of concepts Describe their key attributes and benefits in paragraph form Potential customers rate each concept on dimensions such as trial interest and perceived value Further reduce number of concepts based on results from previous stage Representative sample of potential customers complete a battery of questions and diagnostic ratings on each finalist © Mohr, Sengupta, Slater 2005

163 Conjoint Analysis To determine how respondents value various attributes, and levels of attributes, in the product If we learn how buyers value the components of a product, we are in a better position to design those that improve profitability © Mohr, Sengupta, Slater 2005

164 The Conjoint Task If you were in the market to buy a new PC today and these were your only options, which would you choose? IBM Dell Compaq None: I Wouldn't Choose Any of These 2.4 GHz Processor 3.2 GHz Processor 2.8 GHz Processor 512 Meg RAM 256 Meg RAM 256 Meg RAM 21-Inch Monitor 21-Inch Monitor 17-Inch Monitor $1,200 $2,000 $1,550 © Mohr, Sengupta, Slater 2005

165 Customer Visit ProgramsUse cross-functional teams Engineering, marketing, sales account manager Supportive corporate culture Visit different kinds of customers: Competitor’s customers, lost customers, lead users, channel intermediaries, internal personnel Customer councils © Mohr, Sengupta, Slater 2005

166 Customer Visits (Cont.)Go to the customer’s site and get out of the conference room (versus bringing them on-premise for a “dog and pony” show) Ask probing questions Ensure customer visits are programmatic/ systematic for a deep reviewing of all profiles of product (not ad hoc) © Mohr, Sengupta, Slater 2005

167 Empathic Design Because users may be unable to articulate their needs, this technique focuses on observations of customer behavior and workarounds to develop a deep understanding the user’s environment. Types of insights (unexpected success and failure) Triggers of Use (what? why? ) Coping strategies with unarticulated user needs (how?) New usage situations (what’s new?) Customization (when, where, who?) Intangible Attributes © Mohr, Sengupta, Slater 2005

168 5 Steps in Empathic Design1. Observation Who should be observed? Who should do the observing? What behavior should be observed? 2. Capture the Data Less focus on words/text; more on visual, auditory, and other sensory cues Via photos, etc. © Mohr, Sengupta, Slater 2005

169 5 Steps in Empathic Design (Cont.)3. Reflection and Analysis Identify all customers’ possible problems and solutions 4. Brainstorm for Solutions Transform observations into ideas 5. Develop prototypes of solutions Tangible representation or role play/simulation of ideas © Mohr, Sengupta, Slater 2005

170 Use of Empathic Design At IntelSuccess rate based on engineers’ ideas: only 20% Example: video-phone Team of 8 design ethnographers to find how technology can help solve user problems Salmon industry in the Alaska (video monitoring) Business owners (handwriting recognition) Teenagers (exchanging pictures with others) The lesson: What a user does with a product is more important than what the product can do. © Mohr, Sengupta, Slater 2005

171 Lead Users Some customers face needs before a majority of the market place; Their needs may be more extreme than typical customers Ex: auto racers and military’s combat fighters need for better brakes They stand to benefit substantially by obtaining solutions to their needs sooner rather than later They struggle with the inadequacies of existing products tend to innovate their own solutions to their needs (see Table 5-1) © Mohr, Sengupta, Slater 2005

172 Lead Users © Mohr, Sengupta, Slater 2005

173 Lead Users in Market ResearchThe lead user process can create breakthrough products by systematically identifying lead users and learning from them. © Mohr, Sengupta, Slater 2005

174 Steps in Lead User Research1. Identify important trend Via standard environmental scanning 3M identified trend of detecting small features via medical imaging, which required higher-quality, and high-resolution images © Mohr, Sengupta, Slater 2005

175 Steps in Lead User Research2. Identify and question lead users Personal contacts with customers, surveys, networking with experts, empathic design Respect possible sensitivity of information Ex: 3M identified radiologists working on most challenging medical problems, who had developed imaging innovations to meet their needs Networking to other fields in pattern recognition (the military) and semiconductors © Mohr, Sengupta, Slater 2005

176 Steps in Lead User Research3. Develop the breakthrough product(s) Host a workshop for experts and lead users to brainstorm Ex: medical imaging, experts in high-resolution imaging, and pattern recognition developed ideas 4. Assess how well lead user data and experiences apply to more typical users Gather market research from typical users The possibility of extrapolation © Mohr, Sengupta, Slater 2005

177 Benefits of the Lead User ProcessNew insights from gathering and using information in new ways Cross-functional in nature Identifying and capturing the innovation sources earlier than competitors (appropriability) Collaboration with innovative customers Requires corporate support, skilled teams, time. © Mohr, Sengupta, Slater 2005

178 Example of Lead User Process: 3M Corporation and Infection Control1. Identify important trends in infection control Travel to extreme situation: surgical environments in developing countries 2. Identify lead users Veterinary hospitals, make-up artists in Hollywood (a surprising findings: substantial benefit to Vet and artist) © Mohr, Sengupta, Slater 2005

179 Example of Lead User Process: 3M Corporation and Infection ControlDevelop the breakthrough ideas at a workshop with experts and lead users Economy line of surgical drapes, hand-held devices to apply anti-microbial substances to skin, “armor” line to coat catheters and tubes with anti-microbial protection, and upstream containment of infection prior to surgery for high-risk patients. © Mohr, Sengupta, Slater 2005

180 Quality Function DeploymentWhat: A tool that provides a bridge between the voice of the customer and product design Purpose: Ensure tight correlation between customer needs and product specifications. Requirement: Close/intensive collaboration between marketing, engineers, and customers © Mohr, Sengupta, Slater 2005

181 QFD can: Reduce product development time by 50%Cut start-up and engineering costs by 30% Reduce time-to-market Reduce number of design changes Reduce rework Lower facility’s maintenance and operation costs Improve quality (meeting the requirements) Increase customer satisfaction © Mohr, Sengupta, Slater 2005

182 QFD Process Collect the “voice of the customer”Identify customer needs regarding desired product benefits via customer visits or empathic design Weight or prioritize desired benefits/attributes Collect customer perceptions of competitive products Transform data into design requirements: “Customer requirements deployment”: identify product attributes that will meet customer needs “House of quality”: a planning approach that links customer requirements, design parameters and competitive data. © Mohr, Sengupta, Slater 2005

183 Steps to Building The House of QualityDetermine what, specifically, is important to customers. Rank customer requirements in terms of importance. Translate customer requirements into design specifications. Rate the design attributes by organizational difficulty. Assess the current marketplace. How effective are you at meeting customer requirements? How effective are competitors? Why is one product perceived to be better than another? Conduct research to determine the target values for the design requirements. (try-out) Complete and evaluate new design. © Mohr, Sengupta, Slater 2005

184 QFD—Using the Kano ConceptSatisfaction Attractive One-dimensional Dysfunctional Functional Must-be Known vs. Unknown Spoken vs. Unspoken Dissatisfaction 「狩野紀昭」(Noriaki Kano) 品質概念圖 © Mohr, Sengupta, Slater 2005

185 QFD—3 Types of Attributes1. “One-dimensional quality”: Increases in level of attribute linearly related to customer satisfaction Typically “known” attributes identified by customer EX: battery life in lap tops © Mohr, Sengupta, Slater 2005

186 QFD—3 Types of Attributes (Cont.)2. “Must-be quality”: Increases in level of attribute has negligible effect on customer satisfaction; However, decreases in attribute has strong negative effect on customer satisfaction. Because they are so basic to product functionality, they are typically unspoken attributes: customer expects product to deliver these. EX: ability of laptop to handle bumps and rough handling. © Mohr, Sengupta, Slater 2005

187 QFD—3 Types of Attributes (Cont.)3. “Attractive Quality”: Increases in level of attribute associated with exponential increase in customer satisfaction But, because attribute is one that “delights” the customer, its absence does not necessarily lead to dissatisfaction Typically unknown to customer at conscious level Ex: de-compressible/expandable laptop © Mohr, Sengupta, Slater 2005

188 QFD: Summary Firmly grounds product design in customer needsAllows product development team to develop common understanding of design issues and trade-offs Reveals friction points and enhances collaboration © Mohr, Sengupta, Slater 2005

189 QFD and Total Quality ManagementTQM grounded in customer knowledge and ability to deliver customer value, which is enhanced by: Customer excellence Cycle-time excellence Cost excellence Cultural excellence © Mohr, Sengupta, Slater 2005

190 Customer excellence Tied to being customer-focused and market-orientedKnowledge of customer environment and product usage © Mohr, Sengupta, Slater 2005

191 Cycle-time excellenceProducts late to the market suffer negative impacts to profitability from two reasons: Long time-to-market cycles typically experience cost over-runs More importantly, products late to the market suffer loss of market share Lesson: Being fast to market is important, but only when combined with ability to accurately deliver customer requirements Therefore, link QFD with TQM © Mohr, Sengupta, Slater 2005

192 Relationship between Entries in the Market and Quality© Mohr, Sengupta, Slater 2005

193 Does this approach to cycle time excellence make sense?Bring higher levels of product functionality to the market incrementally over time with successive product iterations. Yes! Striving for complicated set of features with initial offering can lead to delays Delays mean that customer needs may have changed or a competitor beats firm to the market Purchasers of first generation of new product become installed base for later generations (compatibility consideration) © Mohr, Sengupta, Slater 2005

194 QFD and TQM (Cont.) Cost Excellence Cultural Excellence:Provide necessary customer value with lowest possible cost Use supply partnerships Use downsizing cautiously, lest negative impact on customer value Cultural Excellence: Align goals of the organization and of personnel to be able to capitalize on market opportunities Ex: culture of innovation, effective marketing/R&D interaction © Mohr, Sengupta, Slater 2005

195 Kano’s House of QualityObjectives Customer satisfaction Quality Circle,… QFD,… PDCA, … Approach Organizations Techniques Concepts Motivation Incentive mechanism Base technology & IT infrastructure © Mohr, Sengupta, Slater 2005

196 Prototype Testing Prototype: an experimental design of the whole or part of a product that is used for illustration or testing purposes. Rapid prototyping: a process for producing fully functional prototypes in reduced time. Made possible by shorter design cycle time or the decoupling of design and manufacturing. Enables the designer to experiment before deciding on a final design. © Mohr, Sengupta, Slater 2005

197 Beta Testing Beta version: A pre-release (potentially unreliable) version of a piece of software or hardware made available to a small number of trusted customers. An item "in beta test" is mostly working but still under test. In practice, systems (hardware or software) often go through two stages of release testing: Alpha (internal) and Beta (external). To become a Beta tester, go to Intuit © Mohr, Sengupta, Slater 2005

198 Competitive IntelligenceWhat: Information about competitors Why: Provides information for better decision making and improved strategies An early warning system A strategy is the firm’s best response to its competitors’ response and vice versus. © Mohr, Sengupta, Slater 2005

199 Competitor Analysis Competitor’s goals and objectivesCompetitor’s strategy What strategic changes will the competitor initiate? How will the competitor respond to our initiatives? Competitor’s assumptions about the industry Competitor’s key strengths and weaknesses How can you develop this information? © Mohr, Sengupta, Slater 2005

200 Effective Competitive Intelligence ProgramsAffect decisions of top managers Are proactive in reading the market Look beyond existing market boundaries Utilize the Web Gauge/measure potential for misleading signals © Mohr, Sengupta, Slater 2005

201 Forecasting Customer Demand for High-Tech InnovationsFailed! “Who the hell wants to hear actors talk?” Harry M. Warner (1927) reacting to addition of audio technology to silent movies “Television won’t be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.” Darryl Zanuck, 20th Century Fox Films, 1946  “There is little reason for any individual to have a computer in their home.” Ken Olsen, president and founder of the DEC Corporation,1977 © Mohr, Sengupta, Slater 2005

202 Qualitative Forecasting ToolsDelphi method Rely on a panel of experts Analogous data Rely on similar products Risk of commensurability Internet dialed up to 90M users by 3 years, while Radio took 13 years to 60 and TV 15 years. Information Acceleration Use “virtual” prototypes to obtain customer feedback © Mohr, Sengupta, Slater 2005

203 High-Tech Forecasting HazardsLack of historical data Difficult for customers to articulate preferences Inflated projects from over-enthusiasm Competition from incumbent technologies (deterrence) Don’t confuse confidence in the forecast with reality (quality of the information) © Mohr, Sengupta, Slater 2005

204 Appendix: Conjoint AnalysisProducts/Services are Composed of multiple Features/Attributes Personal Computer: Brand + Microprocessor Speed + RAM + CD Speed + HD Size + Price © Mohr, Sengupta, Slater 2005

205 How to Learn What Customers WantAsk Direct Questions about preference: What brand do you prefer? What hard drive size would you like? What processor speed would you like? How much do you want to pay? Answers often trivial and unenlightening (e.g. respondents prefer low price to high price, faster speeds to lower speeds) © Mohr, Sengupta, Slater 2005

206 How to Learn What Is ImportantAsk Direct Questions about importances How important is it that you get the <> that you want? Importance Ratings often have low discrimination: © Mohr, Sengupta, Slater 2005

207 What is Conjoint Analysis?Research technique developed in early 1970s Measures how buyers value components of a product/service bundle Dictionary definition-- “Conjoint: Joined together, combined.” Marketer’s catch-phrase-- “Features CONsidered JOINTly” © Mohr, Sengupta, Slater 2005

208 How Does Conjoint Analysis Work?We vary the product features (independent variables) to build many (usually 12 or more) product concepts. We ask respondents to rate/rank those product concepts (dependent variable). Based on the respondents’ evaluations of the product concepts, we figure out how much unique value (utility) each of the features added. (Regress dependent variable on independent variables; betas equal part worth utilities.) © Mohr, Sengupta, Slater 2005

209 What’s So Good About Conjoint? More Realistic QuestionsWould you prefer Horsepower or Horsepower 17 MPG MPG If choose left, you prefer power. If choose right, you prefer fuel economy. Rather than ask directly whether you prefer power over fuel economy, we present realistic tradeoff scenarios and infer preferences from your product choices. When respondents are forced to make difficult tradeoffs, we learn what they truly value. For application examples, go to Sawtooth Software. © Mohr, Sengupta, Slater 2005

210 First Step: Create Attribute ListAttributes assumed to be independent (Brand, Speed, Color, Price, etc.) Each attribute has varying degrees, or “levels” Brand: Dell, Gateway, Compaq, IBM Speed: 3.2 Ghz, 2.8 Ghz, 2.4 Ghz Price: $500, $1200, $2000 Each level is assumed to be mutually exclusive of the others (a product has one and only one level level of that attribute). © Mohr, Sengupta, Slater 2005

211 The Conjoint Task If you were in the market to buy a new PC today and these were your only options, which would you choose? IBM Dell Compaq None: I Wouldn't Choose Any of These 2.4 GHz Processor 3.2 GHz Processor 2.8 GHz Processor 512 Meg RAM 256 Meg RAM 21-Inch Monitor 17-Inch Monitor $1,200 $2,000 $1,550 © Mohr, Sengupta, Slater 2005

212 Output: Conjoint UtilitiesNumeric values that reflect how desirable different features are: Feature Utility Dell Compaq Ghz P4 Processor Ghz P4 Processor Ghz Celeron Processor 1.2 The higher the utility, the better © Mohr, Sengupta, Slater 2005

213 Output: Conjoint ImportancesMeasure of how much influence each attribute has on people’s choices Best minus worst level of each attribute, percentaged: Dell - Compaq ( ) = % 3.2 – 2.4 Ghz Processor ( ) = % Totals: % Importances are directly affected by the range of levels you choose for each attribute © Mohr, Sengupta, Slater 2005

214 Chapter 6: Understanding High-Tech CustomersMarketing of High-Technology Products and Innovations Mohr, Sengupta, and Slater Chapter 6: Understanding High-Tech Customers

215 Chapter Outline Customer Purchase Decisions Choosing A Customer TargetFactors Affecting Technology Adoption Categories of Adopters The Chasm Choosing A Customer Target Market Segmentation Process Customer Strategies to Avoid Obsolescence Migration/Upgrade Decisions Mohr, Sengupta, Slater © 2005

216 Critical Issues in Understanding High-Tech CustomersMohr, Sengupta, Slater © 2005

217 Stages in the Purchase ProcessProblem Recognition Information Search Evaluate Alternatives Purchase Decision Post-purchase Evaluation Mohr, Sengupta, Slater © 2005

218 Explaining Rate of AdoptionPerceived Attributes Relative advantage Compatibility Complexity Trialability Ability to communicate product benefits Observability/visibility Mohr, Sengupta, Slater © 2005

219 Adoption and Diffusion of Innovation: Factors Affecting Rate of AdoptionRelative Advantage Benefits of adopting the new technology compared to the costs, i.e., P/P ratio Implication: Marketers must understand customer perceptions of benefits vs. costs Compatibility Similarity/familiarity to existing ways of doing things Compatibility with cultural norms Implication: Marketers must educate customers if compatibility is low Mohr, Sengupta, Slater © 2005

220 Factors Affecting Rate of Adoption (Cont.)Complexity Difficulty of use of new product Implication: Try to simplify use; easier to learn; offer training and education Trialability The extent to which a new product can be tried on a limited basis. Reduces perceived risk. Implication: Design products as independent modules or offer on trial basis. Mohr, Sengupta, Slater © 2005

221 Factors Affecting Rate of Adoption (Cont.)Ability to communicate product benefits Ease and clarity of communicating benefits to prospective customers Implication: Talk in terms customers understand and that meaningfully convey the compelling reason to own the new technology Observability Customer’s ability to assess benefits Ability of others to observe customer’s benefits obtained from using new product Implication: If benefits are elusive to both the users and their friends, adoption will be slow. Mohr, Sengupta, Slater © 2005

222 Final Thoughts on AdoptionThese six factors are crucial hurdles to overcome in effective marketing. Marketers must provide compelling reasons for adoption, and overcome customers’ fears, uncertainties, and doubts. Traditional marketing methods (which assumes customers understand the usefulness of the products and know how to evaluate them) are often insufficient. Often, must focus more on educating potential users about benefits and how to use new product Mohr, Sengupta, Slater © 2005

223 Final Thoughts on AdoptionInvolve customers in evaluating new product ideas Don’t base assessment on inventor’s familiarity with, and enthusiasm for, technology. Understand who is likely to be an early adopter and how they differ from the mainstream market. Mohr, Sengupta, Slater © 2005

224 Marketing Hi-Tech ProductsDemonstrable advantage Reduce risk Secure testimonials from early adopters Price to create value Patience! How does TiVo stack up? Net Income  -$ Million (2005) Mohr, Sengupta, Slater © 2005

225 TiVo DVD Personal Video RecoderCompetitors: Intel Viiv CPU platform aligned with Microsoft Window XP Media Center Edition (MCE) Mohr, Sengupta, Slater © 2005

226 Categories of Adopters-2σ -σ +σ The Chasm! 34% 34% 16% 2.5% 13.5% The Chasm Mohr, Sengupta, Slater © 2005

227 Innovators: Technology EnthusiastsAppreciate technology for its own sake Motivated by idea of being a change agent Will tolerate initial glitches Will develop make-shift solutions Willing to alpha/beta test and work with technical personnel in compensation with lower pricing Provide early revenue for marketers—but not a large group Importance: They are the gatekeeper to the next group of adopters. Mohr, Sengupta, Slater © 2005

228 Early Adopters: “Visionaries”Want to revolutionize competitive rules in their industry Attracted by high-risk/high-reward projects (in returns of psychological and substantive benefits) Not necessarily very price sensitive Demand customized solutions and intensive tech support Will supply missing elements of total solution Product Form Competition: Between categories of solutions (determinates of standard/dominant design) Early adopters communicate horizontally (across industry boundaries) Opinion leaders, change agents Mohr, Sengupta, Slater © 2005

229 Early Majority: “Pragmatists”Comfortable with only evolutionary changes in business practices, in order to gain productivity enhancements Risk aversion to disruptions in their operations Want proven applications, reliable service Seek the convenient “whole product” design A total solution provided at once Buy only with a reference from trusted colleague in same industry Mohr, Sengupta, Slater © 2005

230 Pragmatists (Cont.) This group is the bulwark of the mainstream market: They want to move together (herd mentality). They want to pick the same technology solution (avoid risk). Once they make a decision, they want to implement it quickly (high visibility of performance). Requires industry standards Mohr, Sengupta, Slater © 2005

231 Late Majority: “Conservatives”Risk averse, technology shy Very price sensitive Require completely pre-assembled, bullet-proof (reliable performance) solutions Motivated only by need to keep up with competitors in their industry Rely on single, trusted advisor Mohr, Sengupta, Slater © 2005

232 Laggards: “Skeptics” Want to maintain status quoTechnology is a hindrance to operations Luddites (the guys resist to the technological progress) Buy only if all other alternatives worse Mohr, Sengupta, Slater © 2005

233 Target Innovators or the Early Majority?Target the majority when: Word of mouth effects are low Consumer products industries (vs. b-to-b i.e., business users) Low ratio of innovators to majority users Profit margins decline slowly with time Long time period for market acceptance (the danger of chasm!) Mohr, Sengupta, Slater © 2005

234 What is the “Chasm?” Gap between early market and mainstream market—Visionaries vs. Pragmatists Visionary market is saturated, but mainstream not yet ready to buy. Marketing that was successful with visionaries simply is not effective with pragmatists. Mohr, Sengupta, Slater © 2005

235 Visionaries vs. PragmatistsPrudent; stay within zone of “reasonable,” and within budget Make slow, steady progress Think visionaries are dangerous Visionaries Adventurous Think/spend big Psychological vision, revolutionary ideal state Want to be first in implementing new ideas in their industries Think pragmatists are pedestrian These two groups want no part of each other! Mohr, Sengupta, Slater © 2005

236 Early Market Strategies: Marketing to VisionariesHigh level of customized tech support given to visionaries pulls firm in too many directions—costly Yet, it’s a catch-22 (i.e., a self-contradictory, circular logic) because this is the initial source of revenue. Products sometimes released too early Vendor goal: Establish reputation Exciting time! Engineering drives, brilliance is rewarded. Focus on developing the best possible solution. Mohr, Sengupta, Slater © 2005

237 The Chasm Firm takes on more visionaries than it can handle.Cost too much! Firm takes on more visionaries than it can handle. Cannot take on more custom projects, but no pragmatists ready to buy. Early market becomes saturated, and revenue growth tapers off or declines Key personnel become disillusioned VC well (venture capital stock) begins to runs dry Marketing strategies that lead to success in selling to visionaries actually hinder success in selling to pragmatists. Idle growth damage! Mohr, Sengupta, Slater © 2005

238 Goal: Minimize time in the ChasmLook to the new strategies necessary to reach the mainstream market. Pick a single target market with specific application. (Establishing reputation quickly) R&D must: build interfaces to legacy systems (linking to the compatible standard as credible reliable technology) work with partners (for gathering complements) ride the line between service and engineering Mohr, Sengupta, Slater © 2005

239 Marketing to PragmatistsVendor must assume total responsibility for complete, end-to-end solution (“whole” product) Hardware, software, connectivity, training, support, etc. Requires significant work with partners Develop standards and compatibility Customer services vital (seeking the useful applications) Focus on best solution possible (rather than best possible solution) Simplify complex product features Mohr, Sengupta, Slater © 2005

240 Marketing to Pragmatists (Cont.)Brand Competition: between vendors of different brands of the new technology A sign of legitimacy for the new technology through competition Complement strong technological skills with strong partnering skills Find partners to complete product offerings Leverage partner power changes with market evolution Mohr, Sengupta, Slater © 2005

241 Marketing to ConservativesMake product simpler, cheaper, more reliable, convenient Mohr, Sengupta, Slater © 2005

242 Crossing the Chasm SummaryThe whole product is the critical success factor Until a high-tech firm has established itself in the mainstream market, it has not proven itself. To manage the mainstream market effectively, firm must work with partners in a disciplined fashion (that prioritizes partners). Mohr, Sengupta, Slater © 2005

243 Stages to Crossing the ChasmMain Street The Tornado The Bowling Alley The Chasm Mohr, Sengupta, Slater © 2005

244 More on the Mainstream Market: Inside the TornadoFirms that are successful in crossing the chasm typically experience dramatic sales increases when they enter the mainstream (pragmatist) market. Mohr, Sengupta, Slater © 2005

245 Three phases in the “tornado” of growth1. The Bowling Alley: New product gains acceptance from niches within the mainstream market and extends easily through developing a common platform Each niche requires expertise in that vertical market, and potentially leads to access to related markets. Market coverage propagates neighborly and develop the complete product lines Externalities & bandwagon effects emerge among several related markets Mohr, Sengupta, Slater © 2005

246 Bowling Alley Market DevelopmentSeg 3 Seg 2 Seg 1 App 1 App 2 App 3 Seg 2 Seg 1 Whole Product Customer References App 1 App 2 Seg 1 App 1 The Beachhead Mohr, Sengupta, Slater © 2005

247 Engagement with customers: A solution provider perspective from SAPThe first movers vs. the followers As a trusted advisor Engagement through Discovery (awareness), Evaluation (customer-specific), Implementation (reliable & minimize risk), Operations (stable & convenient), Continuous improvement (fine tune existing solutions) Product modifications for future releases (satisfy the majority) Mohr, Sengupta, Slater © 2005

248 Three phases in the “tornado” of growthPeriod of mass-market adoption when the general marketplace switches over to the new technology Driven by application that provides compelling benefits to mass market: the “killer app” Requires strong operational excellence to keep up with demand Mohr, Sengupta, Slater © 2005

249 Post-Tornado Market ShareMoore refers to the dominant, post-tornado competitor as the Gorilla. Typically, there are two other major competitors, the Chimps. The rest of the market is accounted for by numerous niche competitors, the Monkeys. Mohr, Sengupta, Slater © 2005

250 Three phases in the “tornado” of growth3. “Main Street” Market growth stabilizes Focus on cross-selling and upgrading to existing customers Mohr, Sengupta, Slater © 2005

251 Selecting a Market SegmentMust identify the best “beachhead” A single target market from which to pursue the mainstream market Cannot afford to pursue many segments at once Starting point / Igniting the fire Make offering simple and valuable without costing much. Mohr, Sengupta, Slater © 2005

252 Steps in Market Segmentation1. Divide market into groups based on common characteristics Demographics Geographics Psychographics (Values and lifestyles) Behavioral Variables Usage Volume (heavy or light users Benefits Sought (ease or functionality) Usage Occasion Mohr, Sengupta, Slater © 2005

253 Steps in Market Segmentation2. Profile (describe) typical customers in each segment Significantly different between segments Mohr, Sengupta, Slater © 2005

254 Examples of Tech Customer Segments: “Technographics”Mohr, Sengupta, Slater © 2005

255 Examples of Tech Customer Segments: “Technographics”SIDELINED CITIZENS: Not interested in technology Mohr, Sengupta, Slater © 2005

256 Examples of Tech Customer Segments: “Technographics”HAND-SHAKERS: Older consumers – typically managers – who don't touch their computers at work. They leave that to younger assistants. TRADITIONALISTS: Willing to use technology but slow to upgrade. Not convinced upgrades and other add-ons are worth paying for. MEDIA JUNKIES: Seek entertainment and can't find much of it online. Prefer TV and older media. Mohr, Sengupta, Slater © 2005

257 Examples of Tech Customer Segments: “Technographics”TECHNO-STRIVERS: Use technology from cell phones and pagers to online services primarily to gain career edge. DIGITAL HOPEFULS: Families with a limited budget but still interested in new technology. Good candidates for the under-$1000 PC GADGET-GRABBERS: They also favor online entertainment but have less cash to spend on it. Mohr, Sengupta, Slater © 2005

258 Examples of Tech Customer Segments: “Technographics”FAST FORWARDS: These customers are the biggest spenders, and they're early adopters of new technology for individual use. NEW AGE NURTURERS: Also big spenders, but focused on technology for home users such as family PC. MOUSE POTATOES: They like the online world for entertainment and are willing to spend for the latest technotainment. Mohr, Sengupta, Slater © 2005

259 Steps in Market Segmentation3. Evaluate and select a target market: Size of segment in terms of sales volume Growth rate of the segment Competition within the segment Ability of firm to effectively meet the needs of the segment Mohr, Sengupta, Slater © 2005

260 What makes a good “beachhead”?Provides “adjacencies” to other segments Word of mouth Similarities in whole product needs Customers have a single, compelling, “must-have” reason to buy. Purchase of new technology radically improves productivity on an already well-understood critical success factor Firm must be able to dominate segment, with a whole product, and harvest in short period of time Mohr, Sengupta, Slater © 2005

261 Compelling Customer NeedsNew technology provides dramatic improvement in customer firm’s competitive advantage in its industry. Difficult to quantify a priori Therefore, unpalatable to pragmatists New technology improves firm’s productivity Easier to quantify Compelling to a pragmatist—therefore best for crossing the chasm New technology verifiably reduces operating costs May appeal to conservative, BUT: May be still risky and supporting infrastructure may not be sufficiently developed Mohr, Sengupta, Slater © 2005

262 Key in Selecting Target(s)Must not spread resources too thinly across multiple segments Mohr, Sengupta, Slater © 2005

263 Step 4 of Segmentation Process4. Position the product within the segment Consider customer perceptions Position relative to perceived competition Position on important, compelling attributes/benefits Question in each targeted segment “Who is the buyer?” vs. “Who is the user?” Mohr, Sengupta, Slater © 2005

264 Customer Strategies to Avoid ObsolescenceBasic Issue: Tension between adopting newest generations of technology and obsolete investments in prior generations. Marketing implication: Firms must manage a migration path for customers to the new generation. Mohr, Sengupta, Slater © 2005

265 What Affects Customer’s Migration Decision?Expectations about pace of improvements relative to price Expectation about magnitude of improvements relative to price ** The greater the anticipated product improvements and/or expected price declines, the greater the customer’s propensity to delay purchase. Wait and watch out! Mohr, Sengupta, Slater © 2005

266 Implication: High-tech firms must provide upgrades that allow firms to take advantage of new technology without scrapping investments in the prior generation. A “migration path” is a series of upgrades to help transition the customer to new generations. GSMGPRSEDGE WCDMAHSPDA cdmaOnecdma2000cdma2000 1xEV-DO Mohr, Sengupta, Slater © 2005

267 Managing a Migration PathCannibalizing totally One-way compatibility Mohr, Sengupta, Slater © 2005

268 Managing A Migration PathWhen customers expect a rapid pace in technology advancement: They will be willing to wait for price declines Migration assistance (i.e., trade-ins, etc.) mitigates against customer stalling and leapfrogging. Mohr, Sengupta, Slater © 2005

269 Managing A Migration PathWhen customers expect significant magnitude of improvement They realize smooth upgrading is unlikely Waiting for price declines may result in purchasing an obsolete product Therefore, migration path is less crucial, as it is meaningless, to a certain extent Wait for the extreme finality/ the definite evolution Mohr, Sengupta, Slater © 2005

270 Managing A Migration PathWhen customers have uncertainty about expectations: Migration path makes sense Sell old and new simultaneously Mohr, Sengupta, Slater © 2005

271 Marketing of High-Technology Products and InnovationsChapter 7: Product Development and Management Issues in High-Tech Markets

272 Chapter Overview Technology development “What to sell”Product modularity, platforms, and derivatives New product development teams “Stopping” rules in new product projects Developing services Intellectual property © Mohr, Sengupta, Slater 2005

273 Technology Maps Define a stream of new products (breakthrough + incremental) company plans to develop over time. Used for: Commitment to new product development Allocation of resources A flexible blueprint that must be updated regularly © Mohr, Sengupta, Slater 2005

274 Technology Map © Mohr, Sengupta, Slater 2005

275 1. Technology IdentificationInventory of firm’s valuable know-how that may be sources of revenue generation Products Processes Such as superior manufacturing skills Management practices Such as knowledge management Valuate the corporate intellectual assets & technology forecasting © Mohr, Sengupta, Slater 2005

276 e.g., Technology map of mobile standard evolutionCDMA2000 1x IS-95C CDMA2000 1x EV DO CDMA2000 1x EV DV cdmaOne IS-95A IS-95B GPRS EDGE GSM HSCSD PDC WCDMA PDC-P PHS 2G 2.5G 3G Key evolutionary route Less important evolutionary route © Mohr, Sengupta, Slater 2005

277 e.g., Technology map of telecom serviceshigh low Richness Fixed line PSTN 1G 2G 3G ADSL Cable modem WLAN VO IP DIY Wi - Max Mobility Information Mobile commerce © Mohr, Sengupta, Slater 2005

278 Identify technology landscapeScanning the important technology entities Matter Energy Information Mobility/Input e.g., mega magnets enhance the absorbability of tiny molecule e.g., mega magnets accelerate the friction-less transmission e.g., mega magnets trace micro magnetic particle sensitively transformation e.g., mega magnets enhance plastic deformation e.g., mega magnets promote the efficiency of micro-motor e.g., mega magnets facilitate the change of electricity/ microwave into voice Storage/ output e.g., mega magnets facilitate the refrigeration e.g., mega magnets possess energy durably e.g., mega magnets support MO disk for large volume of data © Mohr, Sengupta, Slater 2005

279 2. Decide on needed additionsWhat technologies does firm need to round out its offering? “Make vs. buy” decision Internal development External acquisition Partnering © Mohr, Sengupta, Slater 2005

280 Adding New Technology: Focus on Development RiskExternal Acquisition Someone else has already developed Save time and effort Let others take risks first Keep up with competitors Use existing brand name/marketing resources Internal Development New development close to existing skills Confidentiality reasons “NIH” (not invented here): Good technology can be developed only internally. Unfamiliar & untrustworthy Leverage & co-option © Mohr, Sengupta, Slater 2005

281 Commercialization Decision: “What to sell?” Focus on Marketing RiskContinuum of options, based on the additional expenditures customers must incur beyond the cost of the purchase to derive the intended benefits of the technology Know-how only “Proof of concept” Components to OEM Final products to end-user End-to-end solution, service bureau e.g., Philips’ LCD technology e.g., Nike design e.g., Cannon’s laser printer engine e.g., Acer travel mate e.g., DoCoMo’s i-mode service © Mohr, Sengupta, Slater 2005

282 Appropriate conditions for technology licensingNetwork externalities: more value as more customers use a product Quicken standardization of technological evolution discourages other’s substitute technologies Firm lacks marketing skills for end-product Major customers want a second source © Mohr, Sengupta, Slater 2005

283 Lean Towards Selling Know-How When:Technology lacks fit with corporate mission Lack of financial resources to exploit technology Tight window of opportunity and lack of speed Market smaller than expected/business unlikely to be profitable When range of technologies in market is diverse When allowing firms access to technology is most appropriate (next slide) © Mohr, Sengupta, Slater 2005

284 Lean Toward Selling End-Product When:Firm’s components are incompatible with general industry standards. What if firm competes at end-product with incompatible product? Hard to get third-party developers Demanding high coordination capability and industry leadership. e.g., NTT DoCoMo on i-mode service © Mohr, Sengupta, Slater 2005

285 Sell at Multiple Points on the “What to Sell” continuum whenOffering technology to competitors may encourage industry standardization Firm may have skills in some segments but not others Major buyers require second source Limited exploitation by a single opportunity Diversify the product lines To maximize rate of return on technology investment © Mohr, Sengupta, Slater 2005

286 A Caveat: International MarketsSales of manufacturing technology and know-how may result in setting up a new low-cost competitor © Mohr, Sengupta, Slater 2005

287 4. On-going product managementModularity Platforms and derivatives Teams “Killing” projects Developing services Protecting intellectual property © Mohr, Sengupta, Slater 2005

288 Modularity Building a complex product from smaller subsystems that can be designed independently, yet function together as a whole © Mohr, Sengupta, Slater 2005

289 Determine Product ArchitectureThe arrangement of functional elements into physical chunks which become the building blocks for the product or family of products. module module Product module module module module module module © Mohr, Sengupta, Slater 2005

290 Trailer Example: Modular Architectureprotect cargo from weather box connect to vehicle hitch minimize air drag fairing bed support cargo loads springs suspend trailer structure wheels transfer loads to road components functions © Mohr, Sengupta, Slater 2005

291 Trailer Example: Integral Architectureprotect cargo from weather upper half connect to vehicle lower half minimize air drag nose piece cargo hanging straps support cargo loads spring slot covers suspend trailer structure wheels transfer loads to road components functions © Mohr, Sengupta, Slater 2005

292 Which architecture of nail clippers is preferred?© Mohr, Sengupta, Slater 2005

293 Modular Product ArchitecturesChunks implement one or a few functions entirely. Interactions between chunks are well defined. Modular architecture has advantages in simplicity and reusability for a product family or platform. Three types of modular architectures Slot-modular Bus-modular Sectional-modular Swiss Army Knife © Mohr, Sengupta, Slater 2005

294 Product Platforms and DerivativesProduct platform is a common architecture based on a single design and underlying technology Derivative products are versions intended to fill performance gaps between platform products Proliferation of product lines © Mohr, Sengupta, Slater 2005

295 Platform Strategy is Attractive in High-Tech MarketsUnit-one cost structures Allows for rapid development of market share/revenues Speed and flexibility in going after niches: “gap filling” The product strategy of bowling alley © Mohr, Sengupta, Slater 2005

296 Platform Architecture of the Sony Walkman© Mohr, Sengupta, Slater 2005

297 Product Platforms and DerivativesRef. Figure 7-4 Intel’s product platform and product family © Mohr, Sengupta, Slater 2005

298 The product family of Intel’s CPUi86 platform 8086, 8088 80286 80386SX, 80386DX 80486SX, 80486DX, 80486DX2 Pentium platform Pentium Pro, Pentium MMX, Pentium II Pentium III, Celeron, Timna, Xeon Pentium IV platform (Willamette, Itanium, Centrino) differentiations derivatives Platform generations © Mohr, Sengupta, Slater 2005

299 The Product Family for HP’s Ink Jet PrintersDeskJet 500 platform DeskJet 500C, Deskwriter 500C(color) DeskJet 550C, Deskwriter 550C(dual pen) DeskJet 300, 340(portable) DeskJet 560C, 520C, Deskwriter 560C, 520C (lower price) DeskJet 600 platform Deskwriter 540C, 600C, 660C(better quality) DeskJet 800 platform DeskJet 850C, 855C(enterprise use) © Mohr, Sengupta, Slater 2005

300 New Platform Strategy Design for high-end of the marketIncorporate as many features as needed for this segment Willingness-to-pay helps recover high fixed costs Subtraction of features is lower incremental cost than addition Consistent with both lead user and chasm concepts Keep sustainable to be the industry leader © Mohr, Sengupta, Slater 2005

301 Six Modular Operators (lessons from IBM System 360/370)Definition Example Splitting Separating systems into components which interact across defined interfaces Interchangeable drives, keyboards, mice, monitors, and printers Substituting Switching between components which perform the same function Replacing a dot matrix printer with a laser jet printer Excluding Removing a module to reduce the functions the system can perform Removing a CD-ROM player Augmenting Adding a module to increase the functions of a system Attaching a back-up storage device Inverting Making an imbedded function into a stand alone module Having a network printer rather than dedicated printers Porting Moving a module from one system to another Using a Mac printer on a PC network by adding a translator © Mohr, Sengupta, Slater 2005

302 New Product Development TeamsComprised of individuals from different functional areas such as R&D, engineering, manufacturing, purchasing and marketing © Mohr, Sengupta, Slater 2005

303 Performance of NPD TeamsInformation + + Quality integration Product quality orientation + - + Team identity Product + + Customer innovativeness influence + + Monitoring by Encouragement for senior risk - taking management © Mohr, Sengupta, Slater 2005

304 Rewarding NPD Teams Reward team as a wholeShare reward equally among team members Share reward based on position or status Reward individual team members Process-based Outcome-based Seniority compensation For uncertain development outcome For complex product development process Hybrid rewarding mechanism © Mohr, Sengupta, Slater 2005

305 When to “Kill” New Products?Escalation of commitment Product champions and technology enthusiasts are perennial optimists Personal stake in project Biases in interpreting information Recall information that confirms beliefs Ignore information that disconfirms beliefs Re-interpret neutral information as positive, and even negative information as positive! © Mohr, Sengupta, Slater 2005

306 More information is not the answer!Foster internal culture that encourages open questioning Attend to negative feedback Re-examine, review, and redefine the problem Search the alternative course of action A team of “exit-champion” for pulling the plug Remove project from core of the firm Prepare key stakeholders for impending changes “De-couple” withdrawal decision from prior investments Different manager making the “killing” decision Rely on benchmarks established at outset Prepare “out of play” information closely tied to those with a vested interest in the project © Mohr, Sengupta, Slater 2005

307 Developing Services: Intersection of Technology & Service“High - Tech” The corporate produces which complements with necessary 1 2 Service Product Intangibility Inseparability 3 4 “Low - Tech” © Mohr, Sengupta, Slater 2005

308 Cell 1: Augment Product with ServiceGenerate service revenue after product purchase Training, repair, maintenance contract Does company have sufficient trained service personnel? Can company develop proficiency in service without losing core competence in product innovation? The vendor of service value layer embraces much more users’ added on value, and sticks to the end users. Therefore, the service complements may slow down the influence of the vendor of installed base to them. © Mohr, Sengupta, Slater 2005

309 Cell 2: High-Tech ServiceContract research, IT consulting, service provider Can technical service personnel communicate with customers in user-friendly ways? Can service reliability of underlying technology be maintained? Does company make continuous investments in upgrades? Does company invest adequately in training service personnel? © Mohr, Sengupta, Slater 2005

310 Cell 3: Low-Tech ProductUse technology Improve customer service Make supply chain more efficient The issue of corporate adoption of technologies to facilitate the operation efficiency The business transformation of purchasing corporate © Mohr, Sengupta, Slater 2005

311 Cell 4: Low-tech ServiceSubstitute automation for labor in improving customer service or supply chain efficiency The issue of customer facing and adoption of self-service technologies, e.g., ATMs The designing of user-friendly interface © Mohr, Sengupta, Slater 2005

312 External customer-facing technology solutionsAre customers comfortable using the technology? Have they been adequately trained? Does technology add value or make customers resentful? Do customers miss human interaction? Do customers have access to technology? What else must the company offer to make value compelling to customer? © Mohr, Sengupta, Slater 2005

313 Internal technology solutionsAre employees willing to embrace technology? Have they been adequately trained? Have business processes been redesigned (re-engineering) to realize the potential of technology? © Mohr, Sengupta, Slater 2005

314 Intellectual Property“Original works that are creations of the mind” which the originator has the right to earn an economic return from How to protect it? Patents Copyrights Trademarks Trade Secrets © Mohr, Sengupta, Slater 2005

315 Patents Confer owner the right to exclude others from making, using, or selling product or process for specific time period In U.S., 20 years from date of filing Three criteria invention must meet to be patentable: Useful: perform some function that benefits humanity Novel: no prior evidence of invention exists Nonobvious: no suggestion of invention exists, even when multiple writings are combined © Mohr, Sengupta, Slater 2005

316 Two Types of Patent Applications in U.S.Provisional: $160, 1 year time frame to “hold” Allows inventor to do further research Establishes a “priority date” of invention Utility: $750 for examiner to render a decision Granted or denied; applicant can appeal or re-file (another $750) © Mohr, Sengupta, Slater 2005

317 Disadvantages in Using PatentsPatents are public information Eighteen months from time of filing in the US Competitors may “invent around” patent Patent owner must enforce rights Keep watch that competitors and others are not “infringing” the patent Costly! © Mohr, Sengupta, Slater 2005

318 New Issues with Patent ProtectionCan now patent “business methods” Effective July 1998 Implications: Patents on E-commerce business models/methods Patents on medical treatment methods © Mohr, Sengupta, Slater 2005

319 Tension in Granting Intellectual Property RightsFoster creativity and “common good” Give inventors incentives (exclusive rights to revenue from their inventions) Inhibit creativity and consumer welfare Slow spread of valuable commercial innovations Lack of competition and access © Mohr, Sengupta, Slater 2005

320 Steps in Granting PatentsHire patent agent Provide thorough, accurate understanding of invention Assess state of prior art: Is the idea truly novel? Patentable? Draft the claims to define the boundaries of the invention (scope of patent) Draft drawings and application in easy-to-understand terms (licensable) © Mohr, Sengupta, Slater 2005

321 Trouble Spots in Patent ProtectionInventor has previously disclosed idea prior to filing application At a conference, with investors, etc. Fatal in foreign protection US grants one year “grace period” from disclosure Even with a patent, inventor cannot practice invention if it infringes on patent rights of others (overlap on scope of patenting) © Mohr, Sengupta, Slater 2005

322 International Filing Under Patent Cooperation Treaty (PCT)File within 1 year of national application to claim priority back to original filing date PCT enables filing one application in home language which is acknowledged as a filing in all member countries that the applicant designates PCT application published 18 months after priority date At applicant’s option, PCT examiner will issue international “search” report and/or preliminary judgment of patentability © Mohr, Sengupta, Slater 2005

323 International Filing Under PCTPCT application enters designated countries and goes before examiners in each Translation is required, with fees Rights must be enforced in each country © Mohr, Sengupta, Slater 2005

324 Patenting Costs © Mohr, Sengupta, Slater 2005

325 Copyrights Protect tangible form or manner in which idea is expressed, not the idea itself. Example: software code Grants inventor right to reproduce and distribute copyrighted works Term is: Life of author + 50 years -or- Shorter of 75 years from publication or 100 years from creation of work Easy to obtain © Register with US Copyright office in case lawsuit is filed © Mohr, Sengupta, Slater 2005

326 Trademarks Names, symbols, devices to distinguish/ identify goodsProtects firm against unscrupulous competitors who try to deceive/mislead customers © Mohr, Sengupta, Slater 2005

327 Trade Secrets Any concrete information that: Has commercial valueuseful to company Secret generally unknown Not easily ascertainable Developed at some expense Provides competitive advantage © Mohr, Sengupta, Slater 2005

328 Trade Secrets (Cont.) Financial, business, scientific, technical, information including patterns, plans, compilations, formulas, designs, methods, programs, etc. To be granted “trade secret” protection, firm must take reasonable steps to protect information © Mohr, Sengupta, Slater 2005

329 Premises on the notion of confidential relationshipsNondisclosure Agreements (NDAs) Signer will not disclose information Noncompete Agreements Signer will not establish/join a competitor’s firm within a given time frame/territory Invention assignment clauses All rights of employees’ inventions are granted to the firm/employer © Mohr, Sengupta, Slater 2005

330 Patents or Trade Secret Protection?Trade Secrets When: Secret not eligible for patent protection Product life cycle is short Patent would be hard to enforce Secret is not detectable in the product (via reverse engineering for example) Patents When: Product will have long market life Protection can/will be enforced Corporate policy (the business of technology creator and licensor) Product can be reverse-engineered © Mohr, Sengupta, Slater 2005

331 Effective Proprietary Information ProgramsFocus on employees Morale Look to senior managers’ behavior Stand behind security programs Share information on a need-to-know basis only Have minimal use of information for power/ politics © Mohr, Sengupta, Slater 2005

332 Effective Proprietary Information ProgramsHave a stated policy that is enforced via monitoring Acknowledge communication based on geographical/professional/friendship ties Use caution in sharing information in partnering relationships (including nondisclosures) Have awareness of competitive intelligence tactics of other firms © Mohr, Sengupta, Slater 2005

333 Economic Espionage Act (1996)Stealing trade secrets is a U.S. federal criminal offense Maximum punishment for U.S. citizens stealing for U.S. companies is 15 years in prison or a fine of $250,000 Maximum punishment for an agent of a foreign government or company is 25 years in prison or a fine of $250,000 © Mohr, Sengupta, Slater 2005

334 Managing Intellectual PropertyAn asset base that deserves strategic focus Licensing unfitted patents as a revenue source Patent inventions that fit business strategy Repackaging patents Donating unneeded patents to nonprofit organizations for a tax write-off © Mohr, Sengupta, Slater 2005

335 Marketing of High-Technology Products and InnovationsChapter 8: Distribution Channels and Supply Chain Management in High-Tech Markets

336 Chapter Overview Channel Design and ManagementChannel Considerations in High-Tech Markets Adding New Channels: The Internet From Distribution Channels to Supply Chains © Mohr, Sengupta, Slater 2005

337 Distribution ChannelsComprised of the various firms and players in the flow of product from producer to consumer Manufacturers must manage flow of product Manufacturer must manage relationships between firms Distribution activities Logistics and physical distribution functions Structure and management of the channel © Mohr, Sengupta, Slater 2005

338 Distribution Options (Figure 8-1)© Mohr, Sengupta, Slater 2005

339 Issues in DistributionFirms at different stages of the channel May have conflicting goals and objectives Often don’t think in terms of joint problem solving Goal: Manage all functions to provide value to end customer Meet customer needs in most effective/efficient mode possible © Mohr, Sengupta, Slater 2005

340 Effective Channels Identify redundancies that lead to inefficiency and conflict Develop relationships and alliances Work toward cost efficiency and customer satisfaction Rely on technology solutions Use channel members as partners © Mohr, Sengupta, Slater 2005

341 Complexities in Managing High-Tech ChannelsHigh value of products Pressure to minimize inventory in channel Rapid pace of market evolution Price pressures Need to maintain sales/service support Problems with piracy Complexities of the Internet as a new channel © Mohr, Sengupta, Slater 2005

342 Channel Design and Management (Table 8-1)© Mohr, Sengupta, Slater 2005

343 Channel Objectives, Constraints, External EnvironmentBase channel design on consideration of Customer behavior and needs Competitors’ channels Product characteristics © Mohr, Sengupta, Slater 2005

344 Choice of Channel StructureDirect: Manufacturer sells directly to end-users Own sales force Company owned stores Internet Indirect: Manufacturer uses intermediaries to market, sell, deliver product to end-users Hybrid (“dual”) channel: direct + indirect © Mohr, Sengupta, Slater 2005

345 Considerations in Choice of Channel StructureHybrid channel invites complexities Indirect channels subject to less control As different channels compete for customers, conflict increases Direct channels may not be cheaper Eliminate intermediary but not the functions © Mohr, Sengupta, Slater 2005

346 Choice of Type of IntermediaryResellers: between distributors and end-users Typically local May customize for end-users Distributors Typically national Buy from manufacturer, sell to reseller or retailer © Mohr, Sengupta, Slater 2005

347 Types of Resellers VARs and VADs Systems IntegratorsPurchase components from different manufacturers, customize for various vertical markets Systems Integrators Manage large or complex projects Inbound versus Outbound Has a store-front for walk-in traffic –or- dealer sales force calls on customers Traditional intermediaries Mass merchandisers, Category killers, small mom-and-pop stores, franchises © Mohr, Sengupta, Slater 2005

348 Penetration/Coverage: Number of IntermediariesCoverage vs. Intra-brand competition Price competition may damage manufacturer’s reputation, consumers’ perceived quality Dealers make lower margin, lowering incentive for service and support Vertical/territorial restrictions © Mohr, Sengupta, Slater 2005

349 Channel Management Recruit/select channel membersRely on trade shows, targeted direct mail, publicity, personal selling Control and coordination to manage, guide, and monitor reseller activities © Mohr, Sengupta, Slater 2005

350 More on Control and Coordination MechanismsAuthoritative controls Ownership Formal centralized decision making (franchising) Power Bilateral controls focused on mutual interest (see next slide) Legal controls © Mohr, Sengupta, Slater 2005

351 Bilateral Controls Relational norms (shared expectations) to work together Flexibility Mutual sharing of benefits/burdens Information sharing Joint interdependence and commitment Trust © Mohr, Sengupta, Slater 2005

352 Legal Controls Tying Exclusive DealingSale of popular product linked to second product Bundled rebates Exclusive Dealing Dealer can carry only one manufacturer’s product Designed to ensure incentive for service Antitrust issues arise if access to competition restricted © Mohr, Sengupta, Slater 2005

353 Evaluation of Performance (Table 8-2)© Mohr, Sengupta, Slater 2005

354 Channel and Supply Considerations in High-Tech Markets© Mohr, Sengupta, Slater 2005

355 Blurring of DistinctionsDistributors/resellers backward integrating into assembling products Suppliers forward integrating into computer manufacturing © Mohr, Sengupta, Slater 2005

356 Need for Indirect Channels to Provide ValueChannel assembly Customization, speedy turnaround Based on build-to-order model Co-location Distributor’s employees work from vendor’s site Customization Shift into services © Mohr, Sengupta, Slater 2005

357 Evolution of High-Tech Channels© Mohr, Sengupta, Slater 2005

358 Evolution of High-Tech Channels (Cont’d.)To “cross the chasm” Direct sales channel useful, but requires volume and predictability of revenues May need VARs and Systems Integrators Retail channel useful for mainstream market rather than crossing the chasm Does not create demand nor help develop “whole product” © Mohr, Sengupta, Slater 2005

359 Gray Markets Diversion of goods to unauthorized distributors, sold at discounted prices Manufacturer loses control over distribution Legitimate channels lose business Loss of incentive for legitimate channel members to push sales or provide service Intra-brand competition, channel conflict © Mohr, Sengupta, Slater 2005

360 Causes of Gray Markets Pricing policies with large volume discountsDifferential in international exchange rates (parallel importing) Cost differences between different types of resellers Free-riding of discount outlets on full-service outlets Selective distribution Lack of intra-brand competition may invited gray marketers © Mohr, Sengupta, Slater 2005

361 Causes of Gray Markets (Cont.)Producers perform marketing functions Reduces customer’s risk in buying from unauthorized distributors Incompatible compensation policies Utilize plant capacity Meet sales volume quotas © Mohr, Sengupta, Slater 2005

362 Solutions to Gray MarketsTrack source of units and cut off supply to gray market Signals commitment to legitimate channels Mitigates price erosion May be burdensome administratively One-price policy (no volume discounts) Increase penetration in the market Collect information on extent of the problem, consistently measure channel member performance © Mohr, Sengupta, Slater 2005

363 Black Markets, Piracy, and Restricted ExportsCounterfeit goods Piracy Especially problematic with unit-one cost structures Export Restrictions on sales of “dual use” products to some countries Ostensibly to protect U.S. security interests © Mohr, Sengupta, Slater 2005

364 Adding New Channels: The InternetHybrid channels Conflicts between manufacturer and its dealers pursuing same customers “Co-opetition” Options Avoid the Web (and conflict) Go to the Web (invite conflict and even mutiny) Disintermediate Bricks-and-clicks model © Mohr, Sengupta, Slater 2005

365 Adding an Internet ChannelDoes the Web channel add a new value proposition for end-users? Reach new customers Less likely to cannibalize existing channels Does the Web merely create distribution efficiencies? Cannibalizes existing sales © Mohr, Sengupta, Slater 2005

366 Flowchart for Adding Internet Channel© Mohr, Sengupta, Slater 2005

367 Flowchart for Adding Internet Channel (Continued)© Mohr, Sengupta, Slater 2005

368 Avoiding Conflict with Existing ChannelUse website to disseminate only product information Use website only to generate leads; direct buyers to dealers Sell limited merchandise offerings through website Take online orders from small customers; direct larger customers to dealers Launch website without publicity © Mohr, Sengupta, Slater 2005

369 Managing Conflict with Existing ChannelKeep website prices aligned with existing channels Give a cut of each Internet sale to existing channels Improve flow of information with channel members © Mohr, Sengupta, Slater 2005

370 Managing Hybrid ChannelsObjectives: Increase coverage while lowering costs Steps: Identify customer target segments Delineate tasks/functions needed by segments Allocate most effective/efficiency channel to the tasks on a by-segment basis © Mohr, Sengupta, Slater 2005

371 Contingency Model © Mohr, Sengupta, Slater 2005

372 Matching Tasks to Channels, By Segment© Mohr, Sengupta, Slater 2005

373 Supply Chain ManagementMatch inflow of supplies with the demand at every stage of the value chain based on the actual demand from end-users Reduce inventory as work-in-progress Reduce cycle time Electronic links to customers © Mohr, Sengupta, Slater 2005

374 Matching Type of Innovation to Supply Chain Functions© Mohr, Sengupta, Slater 2005

375 Implications of Contingency Model for Supply Chain ManagementFor incremental innovations: Customer needs are known Focus on managing physical functions and close coordination to gain cost efficiencies For breakthrough innovations Must read uncertain market signals, knowing what inventory is required where Focus on responsiveness (speed and flexibility) Consistent with trends to channel assembly © Mohr, Sengupta, Slater 2005

376 Trends in Supply Chain ManagementVertical electronic markets on the Internet Hubs used to connect suppliers to their manufacturing customers Often owned by cybermediaries Supply chain management software Bring data from manufacturing, inventory, and suppliers to integrate decision making Outsourcing Reduces cost but increases supply chain vulnerability Political backlash from unions and legislatures © Mohr, Sengupta, Slater 2005

377 Marketing of High-Technology Products and InnovationsChapter 9: Pricing Considerations in High-Tech Markets

378 Chapter Overview The High-Tech Pricing EnvironmentThe Three C’s of Pricing Customer-Oriented Pricing Pricing of After-Sales Service The Technology Paradox The Effect of the Internet on Pricing Decisions Additional Pricing Considerations Internet Auction Pricing

379 Pricing dynamics of AOLLow-cost Netscape brand dial-up ISP $9.95 Bundle free ISP software & service to PC manufacturers for a trial period Bundle unlimited access to Internet content for existing user at additional $14.95 30-day trial period Switch the rate of per-hour usage to the monthly flat rate $23.9 Merge Time-Warner AOL ISP pricing dynamics Unlimited Broad band Access at $54.95 Dec. 1996 May 2001 March 2002 Dec. 2002 Feb. 2004 Verizon High-end broadband ISP at $29.95 United Online Low-end dial-up ISP at $9.95 MSN $21.95

380 The Three Cs of Pricing

381 The High-Tech Pricing EnvironmentNeed to re-coup R&D investments in light of: Rapid pace of change Short, volatile product life cycles Pressure on Price/Performance Ratios: Moore’s law Network externalities Unit-one costs Compete fiercely Technology cannibalizes & obsoletes soon Market share matters High fixed/sunk R&D cost, low marginal cost

382 The High-Tech Pricing Environment (Cont.)Customer perceptions of cost/benefit Anxiety Upgrade considerations Competition The Internet Backward compatibility, derivatives Lock-in or lock-out Price war Search & Comparison Family image and incentive alignment

383 Customer Perceptions of Benefits/CostsFunctional Operational Financial Personal Costs: Monetary Non-monetary

384 Additional Customer ConsiderationsTotal Cost of Ownership Price paid Costs of financing, installation, service, operating costs, supplies, repair over the life of the equipment Implication Show total cost of ownership lower than competitor’s, despite higher initial outlay The value proposition of Linux Microsoft System Management Server 2003

385 Customer-Oriented PricingHow will the customer use the product? What are the benefits the customer will receive from using the product? Calculate customer costs and understand customer’s trade-off between costs and benefits What is the most sensitively improved p/p ratio?

386 Implications of Customer-Oriented PricingAffordability and incentive alignment Pricing decisions are part of product design decisions, should be made early Tradeoff analysis and target costing are useful tools Different segments value the product differently Therefore, different customers yield differential profitability Firms should track profitability of different customer accounts Upper-bound cost Price elasticity

387 Follow Up on Customer ProfitabilityThe Good Monitor profitable customers and provide regular customer service to prevent defection The Bad Charge higher prices to customers who spend a lot but are expensive to serve The Ugly Don’t target customers who don’t spend and are expensive to serve

388 Pricing of After-Sales ServicePrice services based on segmentation “Basic needs” want standard service with basic inspections and periodic maintenance “Risk avoiders” want to avoid big bills but don’t care about response time “Hand-holders” need high level of service and are willing to pay

389 IBM e-Business On DemandOn demand IT service is responsive, resilient, variable, and focused to clients. Flexibility for utility pricing strategy Make sure IT and services standardized but scalable as well as “virtually” dedicated Decomposition of IT service cost structure Two-part tariff pricing scheme Activity-based costing program Focused IT services evolved & optimized along the client’s business transformation

390 Technology Paradox Rapid pace of price declinesAt the extreme, technology is “free” and companies literally give product away How can businesses thrive when their prices are falling? Requires exponential growth of market to be faster than the exponential decline of prices Requires new skills to confront the profit erosion caused by price falling The success of penetration pricing ignites the rapid growth of market share and network externality.

391 Possible Solutions to the Technology ParadoxOffshore outsourcing Keep costs falling faster than prices Innovate, don’t get stuck making commodities Agility and speed Find new uses for the product Develop long-term relationships with customers Differentiation Sense & response Expand the coverage After-sale service & loyalty management

392 Developing Long-term Relationships with CustomersEstablish a market-hold to grab “mind share” (reputation, experience & attention) Establish an installed customer base to sell additional products and services Captive product pricing (charging from the complementary goods such as the video games to PS2, the ink/carbon boxes to the printer, the mobile services to the subsidized cellular phone) Offer complete solution (“end-to-end”; whole product) By all means at all times

393 Drawbacks to Low-Price StrategiesDevalues brand equity/perceived value Antitrust considerations May be considered predatory especially in the presence of network externalities Large firms scrutinized more carefully because of their greater market power. From free to fee It is a necessary task to return to the fundamentals of economic law even though it’s difficult for customers got used to something being free to pay later on.

394 Effect of Internet on PricingCost Transparency Solutions: Pricing lining/versioning (differentiated derivatives) Price bundling (functional complements, psychological promotion, quantity discounts) Innovation (additional function/utility) Dynamic pricing (self-selection mechanism) Prices near to MC

395 Additional Pricing ConsiderationsOutright Sale of Knowledge vs. Licensing With high levels of technological uncertainty, easier to valuate know-how in the short-term Leads to more licensing rather than outright sale Licensing restrictions Single vs. Multiple Users Apple iTunes licenses users to play the downloaded digital music on only three authorized computers at any time.

396 Additional Pricing Considerations (Cont’d.)Pay-Per-Use vs. Subscription Pricing Network externalities favor subscription pricing Generate more users to increase the value of the network ADSL monthly subscription fee Technological uncertainty favors subscription pricing Risk averse customers prefer flat rates to avoid uncertainty

397 Price Bundling Pure price bundling Mixed price bundlingComponents not available separately (complements) Value from synergistic use of components Mixed price bundling Bundle and separate components available Value from discount over sum of component prices Promotion purpose

398 What is an auction? An auction is a market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from the market participants, including both seller of offering and buyer of bidding. The word “auction” is derived from the Latin augere, which means “to increase.”

399 The purpose of auction Why are auctions used rather than other selling approaches such as the fixed/menu price? Heterogeneous value—the price, that is the willingness-to-pay, depends on the demand and supply conditions at a specific moment of time, and a specific spot of place Resolution of information asymmetry—promote many competitors to reveal truth

400 Some auctioning mechanismsEnglish auction Dutch auction Reverse auction First-price sealed-bid auction Second-price sealed-bid auction Multi-unit auction Yankee auction Double auction met de borden—arbitrational auction

401 English- vs. Dutch auctionRepeated, multi-staged, competitive games English auction—an ascending-bid auction that is usually used for selling goods through raising and posting price openly. E.g., antiques and artwork Dutch auction—a descending-bid auction that starts by the auctioneer’s initial high price and then lowers the price until one bidder accepts the current price. E.g., flowers in Netherlands, fish in Island, tobacco in Canada

402 English Auction optionsInitiate price Does the $1 bidding game extract more benefit? Reserved price—the seller’s bottom line Is it proper to reserve the draw-back right at the end of game? Buy-out price—in other words, an open reserved price The effect of forestall? Markup range % of initiate price or arbitrary setting History-tracing—the whole historical log or the latest? Snipping agents The influence of automatic price snipping?

403 Reverse auction A repeated descending-bid auction is launched by the buyer to invite the sellers’ participation. E.g., Priceline.com, The lower bidding price competed by the sellers, the better buyers’ utility cf., Dutch auction the lower auctioning price announced by the seller, the inferior sellers’ benefit

404 First-price vs. second-price sealed biddingOne-shot game simultaneously First-price sealed-bid auction—the bidder is awarded the sold object in expense of submitting the highest price. (Dutch equivalence) (the winner’s curse) E.g., the government sells the land or the mineral right Second-price sealed-bid (or Vickrey) auction—the bidder is awarded the sold object by submitting the highest price but in expense of the submitted second-highest price. This approach was seldom used in practice even though it possessed a theoretical efficient property—much less incentive for bidders

405 The efficiency of Vickrey auctionThe bidding criteria: valuation ≥ bidding price A will win and always be charged less than his own valuation even though he had issued his maximum valuation price as long as his valuation is the highest among the competitors. Price A’s valuation A’s price B’s valuation B’s price C’s valuation C’s price

406 The failed design of auctionsFirst-price sealed-bid auction Revealed prices under the bidders’ true valuation—bidding price=[(n-1)/n] ×valuation, n=# of participants more participants may close the gap Second-price sealed-bid auction (facilitated by some incentives) may cure the fallacy Dutch auction—the bidding price is usually less than the true valuation of bidder Partitioning the game of one price for total objects into discriminatory sale for smaller number units

407 Multi-unit auctions The supply side The demand sideA repeated auction mechanism for exchanging several identical goods is used to be conducted on the commodity market For a multi-unit auction, the necessary condition is the amount of bidders must be more than the auctioned objects The supply side 10-unit identical goods The demand side A, $100, 3 units B, $95, 4 units C, $92, 5 units D, $90, 3 units 3 4 3

408 Different incentives of multi-unit auctionsThe individual bidding price vs. the last exchanged price The supply side 10-unit identical goods The demand side A, $100, 3 units B, $95, 4 units C, $92, 5 units D, $90, 3 units 3 4 3 A, $100 X 3 B, $95 X 4 C, $92 X 3 Conservative & lower-valuation bidding behavior or Truth revelation on individual bidding price A, B, C, $92 X 10

409 Dutch multi-unit auctionAn descending-bid multi-unit auction that starts by the initial high price and then lowers the price until all products had been selected by the bidders’ prices. The agricultural commodity auction—immediate demand and short-duration goods The demand side $100, —, units $99, —, units $98, (A/5 units), 5 units $97, —, units $96, (B/3 units), 2 units $95, (C/2 units), 0 units The supply side 10-unit identical goods

410 Yankee auction A multi-criteria matching mechanism The supply sidePrioritize the allocation by the quantity, the issued time, credit rating, or other signals Apply especially on the multi-unit auctions The supply side 10-unit identical goods The demand side A, $100, 3 units B, $95, 4 units C, $95, 5 units D, $90, 3 units 3 2 5

411 Double auction (i) Several sellers and several buyers submit bids simultaneously, especially on the stock exchanges and commodity markets A sealed-bid matching process promotes transactions to occur only when the sellers’ prices less than the buyers’ prices. The sellers could not raise their own prices too high to match the buyers’ expectation, while the buyers would not post too low bidding prices to attract the sellers E.g., B2B Internet auction for industry materials

412 Double auction (ii) The demand side The supply sideA, $100, 20 units B, $90, 30 units C, $85, 40 units D, $80, 30 units The supply side a, $75, 30 units b, $80, 25 units c, $85, 20 units d, $90, 30 units 20 10 20 5 20 The matched outcomes A-a, $87.5, 20 units B-a, $82.5, 10 units; B-b, $85, 20 units C-b, $82.5, 5 units; C-c, $85, 20 units

413 Double auction (iii) If there are sufficiently many buyers and sellers, there would be no other trading mechanism the could increase some traders’ expected gains from trade without lowering the others’ expected gains down—an efficient state so called “Pareto Optimality”

414 met de Borden auction Arbitrational auction Immediately timely auctionBoth sellers and buyers can be the auction initiators to issue the bidding to the arbitrator Announce the auction item (property and quantity) Selling auction—looking for the candidate buyer Buying auction—looking for the candidate seller Compromise the disperse prices between the seller’s and the buyer’s based on the general market price Open the arbitrated price and charge the arbitration commission even though the initiator had retreated the auction at the end Immediately timely auction

415 Internet online auctionProduct category—primarily limited to standardized consumer products Computer h/w & accessories, computer s/w, consumer electronics, sporting goods, toys,… More than 5 products offered on a general auction site Business model—most focused on C2C(eBay) or B2C(uBid), less for B2B Special case—C2B, a reverse call for auction, e.g., Priceline.com & TravelBids

416 Internet auctioning rules and websMost adopted the English/straight type of auction for a specific single item, or Yankee type multi-unit auctions Few adopted the Dutch auction Intermodal Exchange for vessel container Klil-Klok for three-minute auction The most innovative & popular auction rule is reverse auction driven by the buyer A high potential business of mobile commerce Few adopted the double auction on B2B model (only for specialty trading) FastParts for electronics parts LabX for laboratory experimental equipments Dallas Gold for jewelry

417 Bidding agents The clients setup the maximum bidding amount to the agent without monitoring the auction activities, then the latter will continue to enter the lowest winning bid until the maximum bid is met. Cross-website swapping agents (but the infringement issue of copyright) E.g., BidFind.com, BidSmart.com, Bidder’sEdge.com, RU sure.com, etc

418 The revenue flow of Internet auction siteAs an intermediary for aggregating information e.g., eBay on C2C, or FairMarket on B2B for computer electronics Insertion fee for listing an item Commission of final value fee—charged only when goods had been successfully sold As a seller for online retailing, e.g., uBid Quantity discount compensation Advertisement fee

419 Marketing of High-Technology Products and InnovationsChapter 10: Advertising and Promotion in High-Tech Markets: Tools to Build and Maintain Customer Relationships

420 Chapter Overview Advertising and Promotion Mix: An OverviewThe Importance of Branding in High-Tech Markets New Product PreAnnouncements The Role of Marketing Communications in Customer Relationships

421 Advertising and Promotion Pyramid

422 Integrated Marketing CommunicationsThe use of different promotional tools such as advertising, public relations, events, and the Internet in a planned, coordinated campaign to deliver a clear and consistent message to a target audience.

423 Media Advertising Select media vehicle Select message strategyMass media or trade journals Audience overlap with firm’s target market Cost efficiency (CPM) “Fit” of editorial climate with brand message Size/Frequency of ads Ad agency or not? SRDS, CMP Media, media kits Select message strategy Break through clutter/gain attention Reinforce brand message

424 Public Relations Event sponsorship Charitable events/cause marketingCorporate advertising Publicity Press conferences, press releases Positive image, good media relations are vital

425 Direct Mail Effectiveness is a function of List qualityAppropriate mailing volume/frequency Message

426 Trade Shows To launch new products, reach sales prospects, compare competitors’ products Investment versus return Attract traffic to booth Follow-up on leads

427 Catalogs, Literature, BrochuresBuild on earlier communications Showcase key benefits in terms of Relative advantage Compatibility Scalability Service/warranty Total cost of ownership

428 Telemarketing Outbound Inbound Do Not Call listAssign people to specific customer accounts Do Not Call list

429 Personal Selling Effectiveness of this most expensive tool is a function of the foundation established by lower-level tools in the pyramid.

430 Internet Advertising Can be used in a complementary fashion at all levels of the pyramid Banner ads Live banners Interstitial ads Search engine Optimization (SEO) Paid search Contextual ads

431 Internet Promotional ToolsAffiliates Viral marketing Permission marketing ( , newsletters) versus spam Mobile advertising

432 Branding in High-Tech MarketsShort product life cycle and customer fear, uncertainty, and doubt put a premium on having brand equity

433 Brand Equity Power of a brand to positively affect consumer response to marketing

434 Advantages of Strong BrandsAdvantages of strong brands to firms Command premium prices Financial performance and stock valuation Credibility in new markets Reduce risks in new product introductions Advantages of strong brands to customers Safe choice Simplify decision-making

435 Strategies to Develop Strong BrandsSupply steady stream of innovations that deliver value Emphasize traditional media advertising and PR tools rather than sales promotion “Influence the influencers” to stimulate word-of-mouth

436 Strategies to Develop Strong Brands (Continued)Brand the company, platform, or idea (rather than the individual product) Rely on symbols and imagery to create brand personality Effectively manage all points of customer contact Work with partners (co-branding, ingredient branding) Use the Internet effectively

437 The Internet as a Branding ToolUse when Internet is part of the company’s value proposition Coordinate online and offline campaigns Take advantage of the “viewer’s” active role Focus on the customer experience at the Web site

438 Ingredient Branding Supplier OEM/Manufacturer Retailer -business useCustomers -personal consumption -business use -raw materials -components -production equipment -services

439 Ingredient Branding Stimulates derived demand for ingredientRelies on cooperative advertising

440 Pros/Cons of Ingredient BrandingSupplier Creates competitive advantage Costly Possible risk if OEM has product problem Conflict with large OEMs Large OEM Erodes ability to differentiate Risky if supplier's product has performance problems If it doesn't cobrand, consumers might question product quality Small OEM Lends credibility to its product Risky if supplier's product has Gets advertising support performance problems

441 Branding for Small BusinessResource constraints May enter market with no brand Develop relationships with one or two large customers Improve quality, customer experience Creativity can compensate for low budget

442 Pros/Cons of New Product PreannouncementsPioneering advantage: Preempt competitors Cue competitors Stimulate demand Product delays damage reputation or jeopardize firm survival Encourage customers to delay purchase Cannibalize current products Help customers plan Confuse customers Gain customer feedback Create internal conflict Stimulate development of complementary products Generate antitrust concerns Provide access to distribution Pursue a leadership position

443 Tactical Considerations in PreannouncementsTiming is a function of New product innovativeness, complexity Customer buying considerations Timing of product design decisions

444 Timing of PreannouncementsUse EARLIER preannouncements when Product complements are needed from third parties Products are novel or complex (engender buyer uncertainty) Long buying process High buyer switching costs

445 Timing of PreannouncementsUse LATER preannouncements when Need to keep development information secret from competitors Product features not known till late in the product development process Want to minimize risks of cannibalization Time preannouncements to coincide with purchase cycle of customers

446 Tactical Considerations in PreannouncementsNature and Amount of Information Reveal product attributes? Reveal how product works? Reveal how it compares to existing products? Reveal pricing/delivery?

447 Tactical Considerations in PreannouncementsCommunication Vehicles Trade shows Advertisements Press releases/press conferences

448 Tactical Considerations in PreannouncementsTarget audiences Customers Competitors Distributors Partners Shareholders Employees Industry Experts Media

449 Preannouncements Useful WhenFirm has low market dominance Faces lower cannibalization risks Faces fewer antitrust concerns Firm believes competitors not likely to respond Ex: specialized technology/patent protection To advance the customer decision process Product requires customer learning or customers face switching costs

450 Avoid Preannouncements WhenCannibalization might be high Firm has strong portfolio of products Customers would postpone current purchases Firm is large and might be accused of predatory intent

451 Customer Relationship MarketingUse database marketing to categorize customers on volume and profitability and/or on share of customer purchases and consumption level Decide on level of marketing effort and expenditure for each category Tailor marketing communications appropriately

452 Categories of CustomersLow share of purchases/Low consumption in category Absent compelling reason, avoid the customers Risk of alienating wrong customers

453 Categories of Customers (Cont.)High share of purchases/Low consumption in category Reasonably profitable, but not compelling Sustain with occasional offers Low share of purchases/High consumption in category Major opportunity Grow firm’s share of business Aggressive marketing

454 Categories of Customers (Cont.)High share of purchases/High consumption in category Bread and butter customers Attractive to competitors! Maintain loyalty; don’t be complacent

455 Other Strategies for CRMCapture the customer Event oriented prospecting Extended organization Manage by wire Mass customization Yield management

456 CRM Software Automate the sales force Automate call centersTrack accounts and prospects Automate call centers Create customer profiles Provide scripts Cross-sell Coordinate communication

457 CRM Software (Cont.) Analyze customer purchase historyDesign targeted campaigns Measure results Develop Web interface Product catalog, shopping cart, credit-card purchases Web configurator, for custom products Web analysis of shopping activity

458 Marketing of High-Technology Products and InnovationsChapter 11: E-Business, E-Commerce and the Internet

459 Chapter Overview Lessons from the Dot Com Boom and BustEffective Website Design and Management Consumer Behavior and the Internet E-business and Organizational (Business) Behavior Realizing the Internet’s Full Potential © Mohr, Sengupta, Slater 2005

460 Definitions E-business: E-commerce:the application of Internet technologies to streamline business processes E-commerce: the subset of E-business activities that enables and supports customers to do online transactions © Mohr, Sengupta, Slater 2005

461 History of the Internet© Mohr, Sengupta, Slater 2005

462 Lessons from the Dot Com Bust - StartupsDot Com founders lacked business experience Websites lacked value proposition for users Lack of vision and strategy Overspent on customer acquisition Intense competition © Mohr, Sengupta, Slater 2005

463 Lessons from the Dot Com Bust - Venture CapitalistsInadequate due diligence on startups Imitated competitors Unfamiliar with consumer marketing Understaffed, spread too thin Micro-managed startups © Mohr, Sengupta, Slater 2005

464 Lessons from the Dot Com Bust - CompetitionReactive, venture-funded startups Low entry barriers, overcapacity Lack of differentiation among Websites Formidable competition from traditional businesses, bricks-and-clicks © Mohr, Sengupta, Slater 2005

465 Lessons from the Dot Com Bust - OverallEvery E-business needs a solid foundation of business strategy Business model or business plan Capitalize on unique characteristics of online environment Lower communication cost © Mohr, Sengupta, Slater 2005

466 Framework for Online Business Strategy© Mohr, Sengupta, Slater 2005

467 Online Business ModelsPortals Market makers Seller storefronts E-tailers E-procurement © Mohr, Sengupta, Slater 2005

468 Effective Web Site Design*© Mohr, Sengupta, Slater 2005

469 Website Management Build Site TrafficNetwork effects Scale economies Retention rates Manage Online Customer Relationships © Mohr, Sengupta, Slater 2005

470 Consumer Behavior and the InternetInhibitors Not compatible with consumer behavior Access to technology Spam Viruses, hackers, and fraud Concerns about privacy Facilitators Empowerment (via access to information and transaction cost efficiencies) Bricks-and-Clicks channel Capability to join online communities Peer-to-peer commuting Broadband technologies Wireless technologies © Mohr, Sengupta, Slater 2005

471 E-Business Organizational Behavior© Mohr, Sengupta, Slater 2005

472 Realizing the Internet’s Full PotentialNew Devices for Access Diffusion of Broadband Semantic Web Overcoming Other Barriers: Quality/reliability Privacy Sociocultural/legal questions Internet taxes © Mohr, Sengupta, Slater 2005

473 Marketing of High-Technology Products and InnovationsChapter 12: Realizing the Promise of Technology: Societal, Ethical, and Regulatory Considerations

474 Realizing the Promise of Technology© Mohr, Sengupta, Slater 2005

475 Paradoxical Effects of Technology on Customers© Mohr, Sengupta, Slater 2005

476 Implications of Paradoxical EffectsMarketers must understand how customers cope with presence of paradoxical effects. Ex: Limits on computer usage Ways to lessen impacts via holistic activities Luddite movement Marketers should not be blinded by their own enthusiasm for technology. © Mohr, Sengupta, Slater 2005

477 Handling Controversies Over Unintended ConsequencesUnderstand consumers’ fears Focus on positive benefits (without disregarding negative effects) Educated trade-offs Astute marketing via consumer education, labeling, and so forth Proactive! © Mohr, Sengupta, Slater 2005

478 Handling Ethical Controversies© Mohr, Sengupta, Slater 2005

479 Benefits of the FrameworkMakes underlying issues explicit Highlights various stakeholders’ perspectives Leads to enhanced commitment to the decision Enhances ability to communicate decision to others © Mohr, Sengupta, Slater 2005

480 Social Responsibility ConsiderationsMaking business decisions that are based on concerns not solely for profit but also for societal benefits/considerations. Examples: HP building technology infrastructure in developing countries (opening vignette in chapter) Telecommunications companies building access to broadband technologies in rural areas. © Mohr, Sengupta, Slater 2005

481 Debate on Social Responsibility and Business“Doing Good” detracts from “Doing Well” Loss of focus on core business issues Spending and expenses that detract from bottom line Decisions on social concerns better made by stockholders with their own money “Doing Good” facilitates “Doing Well” Point of competitive advantage with customers Way to gain employee loyalty and boost morale Way to cultivate less hostile business environment Way to find new revenue growth opportunities © Mohr, Sengupta, Slater 2005

482 4 Domains to Enhance the Profit Impact from Social ResponsibilitySupply/input conditions Investments in social causes that develop: Company’s human resources; capital resources; physical infrastructure; natural resources; scientific/technical infrastructure Demand/customer conditions Local markets, improve sophistication of customers, provide insights into emerging customer needs, or develop product standards in the firm’s best interests © Mohr, Sengupta, Slater 2005

483 4 Domains to Enhance the Profit Impact from Social Responsibility (Cont.)Competitive context Investments in social causes that: Reduce corruption, facilitate fair competition, protect intellectual property, and support an attractive business environment Supporting infrastructure Bolster supporting industries and create vibrant industry clusters “A rising tide floats all boats” © Mohr, Sengupta, Slater 2005

484 Social Responsibility: 3 ConsiderationsDoes the mission of the company match the mission of the cause? Ex: Telecommunications companies building access to broadband technologies in rural areas Does the target market of the company have a vested interest in the cause? Ex: If target market is women-owned small businesses, then supporting educational programs might make sense, even for a telecommunications company. © Mohr, Sengupta, Slater 2005

485 Social Responsibility: 3 Considerations (Cont.)Will the socially-responsible behavior: (a) generate goodwill and (b) positive exposure? (a) Even if the behavior is not aligned with the corporate mission, and even if it reaches beyond the company’s target market, creating goodwill may be sufficient justification. Ex: donation of telecomm company to a local food bank © Mohr, Sengupta, Slater 2005

486 Social Responsibility: 3 Considerations (Cont.)Will the socially-responsible behavior: (a) generate goodwill and (b) positive exposure? (b) Likelihood of generating goodwill based on degree of exposure company will get for its socially-desirable activities. Marketing, advertising, publicity, public service announcements that share the pertinent information. © Mohr, Sengupta, Slater 2005

487 Other Considerations in Social ResponsibilityIf company is using socially responsible behaviors in one area to compensate for poor business behaviors in other areas, it can back-fire. Viewed as hypocritical by public Companies’ efforts perceived as genuine when operating at level 1 or level 2. © Mohr, Sengupta, Slater 2005

488 Social Responsibility and InnovationExtreme needs/conditions faced by the world’s impoverished people Problems that, when viewed through more traditional lens (i.e. what is used by customers in more moderate conditions) might be considered intractable Can stimulate radical thinking and breakthrough innovations Examples: telecommunications breakthroughs; health/hygiene; energy/power © Mohr, Sengupta, Slater 2005

489 Government’s Role in Technology MarketsSupport science and education to maintain innovativeness Ex: Nanotechnology Initiative On-going focus on enhancing competition and consumer welfare Initiate legislation to enhance competition in tech industries Enhance/protect consumer welfare Ex: Can-Spam legislation; privacy rules Help with dialogues over industry standards © Mohr, Sengupta, Slater 2005

490 Government Balancing Act© Mohr, Sengupta, Slater 2005

491 Update Regulatory ModelsAntitrust models Intellectual property models Fair and reasonable access to technology © Mohr, Sengupta, Slater 2005

492 Antitrust Models Developed in era of physical, vs. information-based, goods Don’t account for network externalities, unit-one costs, and knowledge spillovers These can lead to monopoly-like concentrations of economic power Two views to debate: On-going innovation provides competition –or- Such monopoly-like concentrations require active monitoring and intervention Ex: Microsoft Case © Mohr, Sengupta, Slater 2005

493 Debate over Patent ProtectionProvide inventors with incentive to innovate by giving them protection to reap the rewards from costs/risks of innovation Stifles competition, knowledge spillovers, and new innovations © Mohr, Sengupta, Slater 2005

494 Debate over Copyright Protection (Digital rights management)Grant copyright holders the rights to benefit from their works-of-art (music, movies, books, etc.) Technology developments facilitate copyright infringements Should government place restrictions on technology? What rights do purchasers of digital content have (to copy/re-use music, movies, etc.)? © Mohr, Sengupta, Slater 2005

495 Progression of Law in Digital Rights Management1984 Betamax Ruling Tech company not liable for facilitating copyright infringement Courts should not stifle potentially beneficial technologies before their usefulness fully understood 1992 Audio Home Recording Act Consumers granted right to unlimited private use of legally-purchased music, movies, books, etc. © Mohr, Sengupta, Slater 2005

496 Progression of Law in Digital Rights Management (Continued)1998 Digital Millennium Copyright Act Illegal to circumvent copy protections 1999 RIAA lawsuit with Napster over peer-to-peer computing Unlike Sony, Napster provided a service to customers characterized as a relationship (vs. a one-time sale) Napster shut down (2001) © Mohr, Sengupta, Slater 2005

497 Progression of Law in Digital Rights Management (Continued)2001 suit against “2nd generation” file sharing services More decentralized server meant inability to hold company liable Therefore, these (Morpheus, Grokster, Kazaa, etc.) were deemed legal 2003: RIAA successfully sued individuals who had downloaded music © Mohr, Sengupta, Slater 2005

498 High-Tech Lessons from Digital Rights ManagementIs entertainment industry following creative destruction? Will it foreclose revenue opportunities of tomorrow by stifling innovation today? Analogy: It tried to make selling VCR machines illegal, but today up to 50% of revenue is from sale of videotapes! © Mohr, Sengupta, Slater 2005

499 Idea of a Consumer Technology Bill of RightsDigitalConsumer.org; creativecommons.org Right to: Time shift (record for later playback) Space shift (copy to blank CDs or portable players) Make back-up copies Use content on any platform (PC, MP3 player, etc.) and to translate content into any format © Mohr, Sengupta, Slater 2005

500 Government Role in Access: The Digital DivideShould the government play a role in ensuring access to technology (i.e. bandwidth)? Analogy to development of highways and phone lines © Mohr, Sengupta, Slater 2005

501 Digital Divide Disparity in access between:Different socio-economic groups Affluent vs. poor Different geographic areas Inner-city vs. suburban vs. rural Different ethnic groups Caucasian vs. Asian vs. African American vs. Latino Different countries Developed vs. developing © Mohr, Sengupta, Slater 2005

502 Issues and Concerns over the Digital DivideGovernment efforts (pros/cons) Tech. Company efforts Innovative solutions Social responsibility Working towards facilitating “technology readiness” of affected groups Focus goes beyond mere access to developing willingness to embrace and fully utilize technology © Mohr, Sengupta, Slater 2005

503 Conclusion Technology holds the hope and promise of solving many problems and woes It simultaneously causes problems and woes Effective marketing will be aware of the interface between promise/problem, and proactively manage customer concerns. Inventors who understand effective marketing more likely to see the promise of their technology realized © Mohr, Sengupta, Slater 2005