Download - January 2005
January 2005
Identifying markets
Creating sustainable competitive advantage
Douglas Abrams
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Douglas Abrams
Identifying markets and creating SCA
• Choose the right market
• Create sustainable competitive advantage
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Choose the right market
Create a value proposition
Understand customer adoption
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Target an increasing returns business
Up-front costs are high relative to marginal costs
Network externalities
Complementary technologies are important to use
Producer learning is strong
Switching costs are high
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What problem are you solving for customers?
Start a business with a product that meet a real customer need
Develop a solution to the customers’ problem
Meet customer needs better than competitors
Evaluate customer preferences – traditional market research ineffective – listen to customers
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Market research for start-ups
Focus groups, market research limited value
Observation-fueled insight makes innovation possible
Watch people using products
What comes naturally to them?
Asking people is not enough – Fine is a four-letter word
Users cannot explain what is wrong or what is missing
It’s not the customer’s job to be visionaries
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Responding to customer preferences – Kleenex
Originally a cold cream remover
Users started wiping their noses with it
Kimberly-Clark started to market it as disposable handkerchief
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Talking to potential customers: Igloo
Asked college kids what they liked (more room for six-packs!)
Created Space Mate.
Could fit one and a half six packs more in the same fridge size.
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Case study – not solving the right problem
RCA’s Videodisc– Superior image quality, but lack
of recording capability lost out to videotape. Loss: $500 million
IBM’s PC Jr– The awkward Chiclet keyboard,
slow microprocessor, unattractive price and a late launch cost IBM $40 million
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Case study – not listening to customers
Coca-Cola’s New Coke– This “answer” to Pepsi’s new
formula provoked a national uproar; later led to Coke Light
RJ Reynolds's Premier– Smoke-less cigarette with a
terrible taste; cost to develop: $800 million
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Focused observation a source of innovation
Infer motivation and emotion
What do people think and do?
Why do they think and do?
Integrate research, design, marketing and manufacturing
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The fist phenomenon
Kids grip toothbrush with whole fist rather than fingers
Kid’s toothbrushes should be fatter than adult’s
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Categorize customer needs in designing product
Things that are necessary
Things that are nice to have
Things that are unnecessary
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Be realistic
Start a business only if your new product is better than those of competitors.
Be realistic about how your product or service stands against that of the competition.
Consider new products or services that other entrepreneurs are about to introduce.
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Meet customer needs in an economic manner
Figure out a way to create your product or service for less than you are going to sell it.
Figure our how to make money on at least some transactions regardless of the quantity that you can sell.
Note that new product will not sell itself, but will require personal selling
Note that pricing is important
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Choose the right market
Create a value proposition
Understand customer adoption
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The Normal Distribution of Product Adoption
Num
ber o
f Ado
pter
s in
Tim
e Pe
riod
Innovators 16% Laggards 16%Majority of customers
68%
Most customers adopt new products to the middle of the
product cycle
A small portion of the market adopts new products late
in the product cycle
In the beginning there are relatively
few adopters
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Implications for entrepreneurs
Different adopters have different preferences
You must do different things to drive adoption
Proportion of the market adopting at any point in time is not linear – another S-curve
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Market adoption S-curve
Cum
ulat
ive
perc
ent
of m
arke
t ado
ptin
g
Time
0 5 10 15 20 25 30 35
20%
40%
60%
80%
100%
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Crossing the chasm
Change the way you sell your new product or service when you want to make the transition to the majority of the market.
Focus on the customers with the most compelling need to buy your product or service before you transit to the mainstream market.
Provide customers with evidence of value
Offer a whole product solution
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Remember the S-shaped adoption curve
Use dynamic estimates to evaluate the size of the market for your new product or service
Include factors that influence diffusion and substitution in calculating the growth of the market for your new product or service
Substitution is an important part of strategy for competing with established firms
Effective when established firms have economies of scale, as substitution erodes their scale economies
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Factors influencing diffusion
Discrete technologies diffuse faster than systemic
Inexpensive diffuse faster than expensive
Offering greater advantage diffuse faster
Characteristics of target market, external environment, political and regulatory factors, events or obstacles
Easier to understand technologies diffuse faster
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Simple products - simple as a Frisbee
No moving parts, requires no instructions and delivers fun with very little practice with fifteen cents worth of molded plastic.
People today want more integration and simplicity.
Reality is that it takes time.
Often can’t achieve in the first version of the product.
Version 2.0 may be the best bet
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Jumping the barrier – fax machines
Fax Machines
In most countries– Unreliable, expensive & few
advantages over telegraph
In Japan– Existing telegraph & text based
system couldn’t easily handle ideographic Japanese language.
– Launched massive research efforts & urged manufacturers to adopt common communications standard
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Epidemic diffusion – Hush Puppies
Stay in touch with the consumers
Hush Puppies shoes - nearly discontinued– Revived due to sudden grassroots consumer interest
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Jumping the barrier – Palm pilot
Originally tried to integrate too many features
Realized consumers wanted complement, not replacement for PC
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Jumping the barrier – answering machines
Answering Machines
Initially considered rude
Within a few years, became rude if didn’t own one.
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Jumping the barrier - biometrics
Biometrics Access Device (Digital Handprint)– Rough outline of hand,
relative length of fingers or spacing of knuckles
– Handprints thought of like fingerprints
– Seen as intrusive and makes people feel like criminals
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Jump the barrier – vacuum cleaners
Vacuum Cleaners
America– Loud vacuums associated with
powerful motors & suction
Japan– Quieter, less powerful, smaller
motors, fuzzy logic, insulation
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Identifying markets and creating SCA
• Choose the right market
• Create sustainable competitive advantage
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Create sustainable competitive advantage
Competing with established companies
Protect your intellectual property
Create barriers to entry
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Advantages of established companies
The learning curve
Reputation effect
Cash flow
Economies of scale
Complementary assets
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Established company weaknesses
A focus on efficiency makes it difficult to introduce new products
Effort to exploit existing capabilities makes it difficult to innovate
They need to satisfy existing customers
Existing organizational structure is appropriate to current tasks
Employees generally not rewarded for innovation
Difficult to innovate in a bureaucracy – low communication density
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Opportunities that favor new firms
Discrete versus systemic technologies
Opportunities that are based on human capital – difficult for existing companies to protect
General purpose rather than specific purpose technologies – provide flexibility
Uncertainty – existing firms’ advantages in market research are neutralized
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Case study: E-Schwab
Initially their brokers complained about low on-line flat fee
Spread same low web trade commission to all of its customers
Shot ahead of traditional high-end firms like Merrill Lynch
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Case study - snowboarding
Journalists & ski resorts called it a fad; Time dubbed it America’s “Worst New Sport”
Ski resorts banned boarders
Mainstream ski manufacturers figured it was a passing fancy
Now 90% of US resorts have accepted snowboards and 5 MM Americans are boarding
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Case study – mountain biking
Schwinn wrote off mountain biking as a fad.
Early mountain bikers tackled rugged mountain paths with souped-up Schwinns.
Today 70% of full-sized cycles sold are mountain bikes; Schwinn is irrelevant
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Case study – Dell computers
Direct sales
Easy configuration of memory, peripherals
Direct, reliable customization experience
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Create sustainable competitive advantage
Competing with established companies
Protect your intellectual property
Create barriers to entry
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Competitors will copy your product
Reverse engineering
Hire ex-employees
Look at patent documents
May be working on similar products
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Protecting your intellectual property - secrecy
Few alternative sources of information
Limited number of people who could make use of the information
The necessary knowledge is tacit
Process of creation is poorly understood
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Protecting your intellectual property - patents
A government monopoly
Only possible for a small number of products
Patents must be strong to be useful
Patents require disclosure
Patenting is expensive
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Create sustainable competitive advantage
Competing with established companies
Protect your intellectual property
Create barriers to entry
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Capturing the returns to innovation
Control of resources – key sources of supply
Building brand-name reputations
Exploiting learning curves
First mover advantages when market structure allows
Control of complementary assets in manufacturing and marketing
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Sources and references
Finding Fertile Ground by Scott Shane, Wharton School Publishing
The Art of Innovation by Tom Kelley with Jonathan Littman, Doubleday
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Contact us
Douglas Abrams
65-9780-5381 (hp)