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1 HIGH TECH STRATEGIES Introduction to High Technology Industries.

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1 1 HIGH TECH STRATEGIES Introduction to High Technology Industries

2 2 Common Characteristics of High Tech Environments Market Uncertainty Technological Uncertainty Competitive Volatility

3 3 Market Uncertainty Consumer fear, uncertainty and doubt 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 Market Uncertainty is the ambiguity about the type and extent of customer needs that can be satisfied by a particular technology

4 4 Technology Uncertainty Uncertainty 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 Technology Uncertainty is not knowing whether the technology or the company can deliver on its promise

5 5 Competitive Volatility Uncertainty 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

6 6 High Tech Strategy Field Market Uncertainty Technological Uncertainty Competitive Volatility High-Technology Strategies

7 7 Network Externalities When 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 = n 2 (where n=# of users) Reliance 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

8 8 Development of Industry Standards Standards create a common, underlying architecture for products offered by different firms in the market Standards are important because: –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

9 9 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.

10 10 Self-reinforcing Nature of Standards

11 11 Lecture based on the concepts developed by the best all-time high- tech strategies guru, Geoffrey Moore Books from Geoffrey Moore: - Crossing the Chasm: Very good, sometimes difficult to read - Inside the Tornado: Moore’s best book - The Gorilla Game: high tech investor’s perspective - Living in the Fault Line: Some parts are excellent, other parts have changed much after the internet bubble. INTRODUCTION


13 13 CONTINUOUS INNOVATIONS: - Build upon existing standards and infrastructure - To enjoy the product benefits, users only need to buy the product and start using it DISCONTINUOUS INNOVATIONS: - Require new technologies and infrastructure that is incompatible with the existing one - Users will have to go through a a learning process - Vendors, partners, suppliers of complementary products will have to adapt to the new technology in order for the new product to be marketed -Ex: when you buy a VCR you need movies to rent -Ex: when you buy a fax, you expects others to have it too

14 14 Discontinuous Innovations High Tech Marketing Specializes in Discontinuous Innovations Discontinuous Electric car Multimedia Set-Tops Video Conferencing Continuous Better mileage cars Remote-control tuning Voice Mail Diesel cars Programmable VCRs Conference Calling

15 15 UNSUCCESSFUL DISCONTINUOUS INNOVATION: THE ELECTRIC CAR General Motors and Honda introduced electric-powered car in California in mid 90s Positive features: –Silent motor –Non-polluting –California legislature at the time required car manufacturers to sell a percentage of non-polluting automobiles Challenges: –Unpredictable battery charging needs (every 70 to 100 miles) –Risk of getting without power on the road: against “freedom” feeling represented by a car in US –Lack of support by service infrastructure: Service stations, insurance, mechanics and repair Result: A failure –Product was not ready to satisfy core aspects consumer value (freedom, safety…) –There is no successful introduction without the support of the rest of the product infrastructure (service providers, etc.)

16 16 Industries where discontinuous innnovations are a driving force: High-tech industries: –Telecommunications (mobile phones, infrastructure, telecommunications services) –Computers and ”hardware” –Chemicals –Software –Biotechnology –Electronics –Fiber optics –Microelectronics –Multimedia systems –Pharmaceutical industry –Robotics –Semiconductors –Defense –Other emerging high-tech

17 17 Industries where discontinuous innovations are a driving force: Main Industries outside high-tech but highly influenced by high-tech: –Financial services –Insurance –Health care –Aerospace –Utilities –Retailing –Publishing –Broadcasting

18 18 Part One: The Market Models

19 19 CustomersService ProvidersProduct Providers Value Chain $$ All these linkages are required for a new technology wave to succeed Applications Products & Consumables Technology Customer Service Sales & Support Consulting Economic Buyers End Users Technical Buyers

20 20 Technology Adoption Life Cycle Pragmatists create the dynamics of high-tech market development. InnovatorsEarly Adopters Early MajorityLate MajorityLaggards Techies: Try it! Pragmatists: Stick with the herd! Conservatives: Hold on! Skeptics: No way! Visionaries: Get ahead of the herd!

21 21 Innovators - Technology Enthusiasts Primary Motivation: –Natural attitude to explore-learn about new technologies Key Characteristics: –Where to find them Advanced technological departments of big firms: usually empowered to buy new products for exploration “Techies” of smaller firms: Part of the MIS or product design team –Believe in the value of technology as such –Strong ability for understanding technical information –Like to be the first ones to test new products –Do not mind if the product has still missing elements or features (low speed, poor documentation, questionable performance) as long as it is the newest technology

22 22 Key Characteristics -Do whatever they can to help to develop the product -Great source of technical feedback -Crucial for identifying if the technology is truly innovative or not -Will discover bugs and problems with the new technology -Will try to develop the technology beyond what is possible -They have strong referencing power for later stages: their opinion is relevant Challenges/Difficulties: - Want unrestricted access to top technical people whenever there is a technical problem (risky from the company side) - Will test the new technology for free (they usually have more passion than money) - They do not represent strong buying power - Not a market by themselves, but a test “if the product works”: crucial to find technology enthusiasts with access to big bosses Innovators - Technology Enthusiasts

23 23 Early Adopters - The Visionaries Primary Motivation: –To gain dramatic competitive advantage respect to competitors, through a revolutionary use of the technology in their business processes That is the visionary’s “dream” that must be understood They are not looking for improvements, but for fundamental breakthroughs Key Characteristics: –Great imagination for applying technology to specific business processes –Top executives, attracted by high-risk, high-reward business plans –Charisma for getting the rest of their organization to buy the project

24 24 Early Adopters - The Visionaries Key Characteristics: –Will commit to create the missing elements of the new technology, for making it ready to be used –They are not price-sensitive: emphasize more the potential future gains (they bring real big money to develop the product): best source of high-tech development capital –Motivated by the potential return on investment of their dream –Effective in informing the business community about technology advances: draw media attention to themselves and indirectly to our product –Easy to sell, hard to please (dreams are difficult to fulfill as initially imagined) Challenges/Difficulties: –Want to market the new technology fast (not always easy in high- tech) –Demand high degree of customization of the technology to their very particular needs, and demand a lot of technical support/resources: Too much money can be spent in customization for just one customer

25 25 Early Majority - Pragmatists Primary Motivation: –They want to gain productivity improvements through evolutionary changes in the new technology, only if the new technology has previous successes Key Characteristics: –Intelligent department managers, responsible for critical business applications –Risk averse: risks will be undertaken only when all safety nets in place –They are the mass –They aim technology to serve their purposes for the long term –Require competition for feeling safe and having alternatives

26 26 Early Majority - Pragmatists Key Characteristics: –Do not love technology: they accept technology only in proven applications, where improved productivity is guaranteed, and if the mass goes with them –Price sensitive –Like to go with the market leader because: Everyone will adapt its products to the leader (leader sets the standard) Leader attracts many third parties for complementary products and services: the market will be more responsible to the leader product Challenges: –Insist on good references from other pragmatists, not from visionaries –Want to see the solution working well at the site that provided the references/recommendations (product must be ready)

27 27 Late Majority - Conservatives Primary Motivation: –They acquire technology just to stay at the same level with the competition (skeptical about value gains from technology). Key Characteristics: –Fear technology a little bit –Do not have high aspirations about high-tech investments: will not support high margins –Not risk takers –Very much price-sensitive: buying late provides them with the opportunity to negotiate better prices and conditions –Highly reliant on a single, trusted advisor Challenges: –Package required: Pre-assembled and bundled solution Single-use and simple User friendly solutions –Would benefit from value-added services but do not want to pay for them

28 28 Laggards - Skeptics Primary Motivation: –To maintain things as they have traditionally been: prefer low- cost and non-technical solutions Key Characteristics: –Good at criticizing technology marketing ”booms” –Do not believe productivity-improvement gain from technology –Seek to block purchases of new technology Challenges: –Not a customer, but should be considered –Can form a strong opposition to early technology adoption

29 29 Four Marketing Frameworks Deal Driven Niche Marketing Mass Marketing 1 on 1 Marketing

30 30 Four Product Management Priorities Customer Satisfaction Time Solution Enablers Bowling Alley Competitive Price/Performance Tornado End User Delighters Main Street Early Market Core Product

31 31 Product Mix Application Systems Core Products Aftermarket Products Photography Color printing Wireless telephony Word processing Internetworking Worldwide Web Cameras Inkjet printers Cell phones Word processors Routers, switches Browsers/servers Film, lenses Cartridges, paper trays Batteries, modems Suite upgrades Performance tools Plug-ins

32 32 Product/Service Mix Products + Services = The Whole Product Services Products

33 33 Three Service Models Professional Services Distribution Services Transaction Services

34 34 Sample Service Offerings Professional Services Consultative selling Business process reengineering Systems integration Project management Custom training System conversion Contract management Transaction Services Order processing Maintenance Facilities management Outsourcing Upgrade management Broadcast data feeds Proprietary database access privileges Distribution Services Competitive selling System configuration Implementation support Train-the-trainers Customer service Technical support Warranty

35 35 Service Management Priorities Deep Water Shallow Water High margin Custom Medium margin Customized Low margin Standard

36 36 Part Two: Go-to-Market Strategy Models

37 37 Icons for Model Classification Early Market Chasm & Bowling Alley Tornado Main Street All-Purpose

38 38 Assessing Innovation Discontinuity A:Provides modest enhancements B:Adds substantial new value C:Gives dramatic productivity gains D: Changes the competitive field ABCD 4 3 2 1 Gain Pain 4: Major reengineering, new systems 3: Broad changes to existing systems 2: Local changes to existing systems 1: Integrates with existing systems BENEFITS TO THE USERS PAIN FOR THE USERS

39 39 Assessing Innovation Discontinuity ABCD 4 3 2 1 Shadow Area Gain Pain Ideal Positioning of the Innovation according to its stage in the TALC

40 40 Assessing Innovation Discontinuity - How to use the Chart: - Assess individually the position of every innovation in the grid - Be realistic when carrying out your assessment - Share and discuss the individual positioning in the team - Compare the position of your innovation with the “ideal position” of every innovation according to its stage in the TALC - Analysis - Areas not to be: - A2, A3, A4: High pain without a clear gain: technology by itself is not enough

41 41 Assessing Innovation Discontinuity - Analysis - Shadow zone: - Future is uncertain - There is gain at an equivalent level of pain - Not very compelling: markets will not move these innovations forward - Areas in the periphery are easier to dealt with than areas in the shadow zone (where benefit/pain tradeoffs are less visible - Action: Decide a specific TALC stage into which to move, and assess the needed strategy (explained further)

42 42 Strategy Template Checklist 1.Target Customer 2.Compelling Reason to Buy 3.Whole Product 4.Partners and Allies 5.Distribution 6.Pricing 7.Competition 8.Positioning 9.Next Target Source of money To fulfill the compelling reason to buy Function of whole product integration complexity For the customer's money Next move Source of demand Needed for whole product Function of all other factors This template holds for all stages in the Life Cycle. Relative to competition

43 43 Target Customer Economic Buyers Technical Buyers End Users LOB Executive Department Manager Lead End Users Financial Executive IT Director Technology Evaluator Business-to-business model supports up to six roles Titles change, but roles are the same Consumer markets fuse these roles into three or fewer Purchase influence migrates over the the life cycle

44 44 Target Customer Success with a set of prospects will depend on: Are customers identifiable? Can customers be accessed through sales and marketing efforts? Do customers have funds for purchasing in a reasonable time under appropriate circumstances? Are customers able to make the purchase (power and financial ability)?

45 45 Compelling Reasons to Buy Go ahead of the herd for competitive advantage. Go ahead of the herd to fix a broken business process. Go with the herd to get on the new infrastructure. Go after the herd to get better values. - Main motive: economic consequences of doing nothing vs. making an investment to address a current problem/exploit an opportunity - Motivation is more apparent in bowling alley and tornado markets - Motivation is more latent in Early Markets and Main Street (more emotional as well) - Purchase must be justified to oneself, colleagues and superiors Compelling Reasons to Buy and the TALC

46 46 Whole Product Elements The whole product is the minimum set of products and services needed to fulfill the target customer's compelling reason to buy. The whole product is the minimum set of products and services needed to fulfill the target customer's compelling reason to buy. The Product Hardware Software Legacy interfaces Connectivity Pre-sales services Post-sales service & support Peripherals Consulting Complementary Products Complementary Services

47 47 Whole Product Potential Product Augmented Product Expected Product Generic Product

48 48 Whole Product Generic Product -What is shipped when the purchase is made Expected Product -What the customer things to be buying when the generic order is placed - Example: If the generic order is a computer, the expected product is the CPU, keyboard, mouse, monitor and cabling Augmented Product -The idealized form of the product in which the buyer will achieve the buying objective - Example: In a PC, the software, printer, Internet connections and other services Potential Product -An extension of the product benefits through a set of products and services - Example: TV view hardware and software, infrared mouse…

49 49 Evolution of the Whole Product Different whole product priorities at different stages of the life cycle. Mostly custom work Plug & play some customization Fully integrated Mass customized Generic Product Potential Product Expected Product Augmented Product Assimilated Product

50 50 Whole Product Focus Application-focused Product-focused DifferentiatedStandard Value Chain’s Frame of Reference Customer Preference Early marketBowling alley TornadoMain Street

51 51 Types of Partnerships

52 52 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”

53 53 Reasons to Partner Accelerate Product Development Access resources and skills Gain cost efficiencies Speed time-to-market Access new markets Define industry standards Differentiate the Product Develop complementary products Gain market clout

54 54 Product Life Cycle, Innovation, and the Role of Alliances EmergenceGrowthMaturityDecline Process Innovation Product Innovation Standards Licensing Technology Licensing R&D Marketing Manufacturing Marketing Process R&D Attacker Incumbent High Low Rate of Major Innovation Stage of Product Life Cycle Alliance Types

55 55 Risks in Partnering Failure of the relationship –Adversarial rather than cooperative thinking – Mistrust, insecurity, impatience, hidden agendas – Partners don’t invest energy in the alliance because it requires a level of intimacy they are not used to Failure to understand the other Party’s Goal Machiavellian attitudes – Example: Strategic Alliance for Technology where the only real goal is to access each other customers –Example: Lets join forces so me (A) and you (B) can both sell our products, degenerates into “lets partner so you (B) can sell our products for us (A)”, or A tries to sell in B, rather than sell through B.

56 56 Loss of autonomy and control Loss of proprietary information to partner Potential legal issues and antitrust problems Failure to achieve alliance objectives Unchecked Executive Egos Excessive promises when negotiations are done without checking the organization and colleagues capabilities to deliver them Absence of a real strategy Joint development fails, and ends up in both parties bundling or packaging difficult-to-sell- products instead of creating a better solution for the customer Resource commitments do not materialize Risks in Partnering

57 57 Factors Contributing to Partnership Success Joint (bilateral) interdependence –Caution warranted with partners of unequal size Governance Structure Joint Commitment Trust in the partner’s motives and intents Effective Communication Compatible Corporate Cultures Integrative conflict resolution and negotiation (vs. “hard,” win/lose bargaining)

58 58 Partners and Allies Us ? ? ? ? US Assemble for the project Recruit for the whole product Limit to reduce friction Eliminate to retain margin

59 59 Partners and the Life Cycle Product evolution Higher margins

60 60 Distribution Channels Direct Sales VARs Retail Web, Telesales Systems Integrators Mainframes Minis LANs PC Servers Desktop PCs Printers Keyboards Toner WANs Global Systems Marketing Complexity Solution Complexity Higher Value Added Higher Volume Evangelists Service Technicians

61 61 Distribution Channels Distribution Channel concepts: - Define System Integrators Dealers that manage very large and complex computer projects Create customized solutions for customers (high level of consulting and tailoring required) Bundle and Re-Sell different brands of equipment, providing the missing elements, and tailoring them for specific customer needs Define Direct Sales Sales from Manufacturer to the customer through manufacturer’s own sales force or through the internet Define Value Added Retailers (VARs or VADs) Purchase products from several hi-tech companies and add value to them for meeting the customer’s specific needs Ex.: VAR purchases hardware, operating system and bundles it with specific medical software for dentists. Some degree of tailoring, at much smaller scale than system integrators Retail Web, Telesales

62 62 Distribution Channels Primary Objective of Distribution Channel Selection To ensure that a relationship can be created and sustained with the most influential customer (economic, technical or final user) as the product moves through the TALC Criteria to design the Distribution Channel Choice: Solution Complexity: How complex is the product to install, deploy and use? Marketing Complexity: How difficult is the product to source, buy and support? Potential difficulties (outside the dotted-line) High marketing complexity / Low solution complexity (Upper-left quadrant) The product is too easy for the channel use that wont be able to provide enough services/do enough businesses Bad deal for the customer (channel will charge too much), customer feels paying for something which is not needed Example: Sell PC through direct sales Solution: Change the channel (killing flies with cannonballs!)

63 63 Distribution Channels High solution complexity / Low marketing complexity (Lower-right quadrant) Too complicated product for the used channel Distribution channel will suffer Ex: Trying to sell a complex supply chain mgmt software application through avge. computer reseller Solution: distribution channel will change the pricing (higher)

64 64 Distribution Channels Direct Sales VARsRetailWeb, Mail Order Systems Integrators

65 65 Distribution Options

66 66 Evaluation of Distribution Performance

67 67 Blurring of Distinctions Distributors/resellers backward integrating into assembling products Suppliers forward integrating into computer manufacturing Channel assembly –Customization, speedy turnaround –Based on build-to-order model Co-location –Distributor’s employees work from vendor’s site –Customization Shift into services

68 68 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

69 69 Causes of Gray Markets Pricing policies with large volume discounts Differential 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 Producers perform marketing functions –Reduces customer’s risk in buying from unauthorized distributors Incompatible compensation policies –Utilize plant capacity –Meet sales volume quotas

70 70 Solutions to Gray Markets Track 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

71 71 Black Markets, Piracy, and Restricted Exports Black Markets –Counterfeit goods –Piracy –Especially problematic with unit-one cost structures Export Restrictions on sales of “dual use” products to some countries

72 72 Adding New Channels: The Internet Hybrid 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

73 73 Avoiding Conflict with Existing Channel Use 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

74 74 Trends in Supply Chain Management Vertical 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

75 75 Pricing Value-based Competition-based Gain Pain Pricing Frame of Reference Buyer Motivation Early market Bowling alley Tornado Main Street vs. status quo vs. price leader vs. market leader vs. status quo

76 76 Pricing Pricing in high-tech highly associated with customer value Who are the target customers? Do they have budget/power to buy? What are the customer objectives when buying our product? How grave for them is the risk of doing nothing? How is the product assembled to meet customer objectives? How is the product delivered, supported and complemented? Will partners get a fair return for their efforts? Pricing in perspective: Our product vs. status quo Used in Early Markets and Crossing the Chasm Value-based pricing Based on returns from visionary’s dream or gains from switching to new paradigm Inelastic Pricing should reflect the need for margins in order to fund the creation of product infrastructure

77 77 Pricing Pricing in perspective: Our product vs. market leader (used in tornado strategies) Product infrastructure is in place, product is commoditized New Entrants in the industry Our product vs. Price Leader (Main Street) Price can be higher or lower depending on strategy adopted (low price, differentiation, segmentation…)

78 78 Computing Customer Equity

79 79 Customer Acquisition Strategies Retention Profit Potential Acquisition Investment Recovery Time High Low Short Long Take them all! Selective Pay as You Go Restructure/ Divest

80 80 Aspects of Cost to Serve Acquisition Costs Production Costs Distribution Costs Service Costs

81 81 Competition Market vs. Market Company vs. Company Product vs. Product Category vs. Category Product vs. Service Reference competition (with a set of alternatives in the same category) Economic competition (set of alternatives competing for the same budget)

82 82 Basis for Positioning Strength Thought leader in a new category “Owns” one or more market niches Has market share in a hypergrowth market Continually makes great new offers

83 83 Next Target Customer Mass market growth: Grow horizontally into new channels, platforms, and geographies The Tornado Niche penetration: Dominate first niche then go after adjacent niches The Bowling Alley Niche expansion: Grow profitable revenue from installed base through 1-on-1 marketing and mass customization Main Street The Early Market Go get another big deal First customers

84 84 The Early Market

85 85 Strategy Thumbnail: Early Market Target Customer Compelling Reason to Buy Whole Product Partners and Allies Distribution Pricing Competition Positioning Next Target Customer Visionary LOB executive Dramatic competitive advantage Technology-based project Consultants and integrators Direct sales Value-based, gain motivated Category vs. category Technology-based leadership Another LOB exec in a different industry

86 86 Early Market Target Customer Economic Buyers Technical Buyers End Users LOB Executive Department Manager Lead End Users Financial Executive IT Director Technology Evaluator Key Sponsor in Early Markets Secondary Sponsor In Early Markets

87 87 Early Market Target Customer Primary Sponsor: Visionary (Economic Buyer) –The Visionary is a Senior-level executive who has funding and influence to sponsor risky initiatives –Visionaries are not price sensitive –Good references for acquiring other visionaries –Willing to be visible, attracting media attention Secondary Sponsor: Technology Evaluator –Unclear position in the organizational hierarchy –Main role played: Analysis of the discontinuous innovation See what works and what falls apart Discover other techies opinion about the innovation Analyze the probabilities of the innovation to provide the advantage that the visionary is looking for

88 88 Early Market Reasons to Buy Acquisition of dramatic competitive advantage (think business) –Acquire a revolutionary gain through the usage of technology (leapfrogs competition) –The process is as interesting as the result Entry barriers to competition should be developed during the development process Exciting new technology –Interesting project: natural attraction towards technology –Great for the resume: participating in a cutting-edge innovation development LOB Exec (visionary) Technical Evaluator

89 89 Early Market Whole Product Technology Enthusiasts: Value GENERIC PRODUCT Will develop the elements pieces for making it work GENERIC PRODUCT can be incomplete Areas investigated in the core product by enthusiasts: Will technology work? Will technology be supportable Are other techies interested? What are the camps forming around the product? Visionaries: Value POTENTIAL PRODUCT: Ability of the product in creating competitive advantage They will need strong system integrator partnership for transforming the CORE into the POTENTIAL PRODUCT of a specific application Selling argument: The possibilities associated with specific applications of the emerging technology

90 90 Early Market Partners and Allies Assemble for the project –Advanced technology expertise –Systems integration –Project management –Business process consulting –Change management Relationship issues –Cannot recruit partners without customer in tow –Must retain key service responsibility to maintain link to customer Partner Model Whole Product Model

91 91 Early Market Distribution Marketing Complexity Solution Complexity Direct Sales VARs Retail Web, Telesales Systems Integrators Role of the Channel Trusted advisor Business oriented Enterprise qualifications OEM distribution transfers these responsibilities to the OEM

92 92 Early Market Pricing Gain motivated –Purchase is driven by an opportunity, not a problem –10X returns expected from competitive advantage –Price is discounted from 10X returns to reflect risk Value-based reference price –No competition-based, product-oriented reference points –Category just getting conceptualized –For a cost-based reference, compare to a custom project

93 93 Early Market Competition Category vs. category –Status quo customers and vendors challenge credibility –Communications battle is to validate new category –Early-market customer testimonials are critical for validation Not product vs. product –Buying decision is not between two similar products –Instead, it is between two points in the life cycle Visionary prospect’s alternatives –Custom project to achieve same goal –Find some other source of competitive advantage

94 94 Crossing the Chasm & The Bowling Alley

95 95 Chasm/Bowling Alley Combination Key Similarities –Niche market development strategy –Pragmatist target customers –Whole product key to forming a new value chain –Pain-based value propositions Critical Difference –Crossing the chasm represents developing the first niche –No references, no value chain to build off of –Much higher risk for both partners and customers –Requires extremely painful status quo to drive adoption

96 96 Strategy Thumbnail: Bowling Alley Target Customer Compelling Reason to Buy Whole Product Partners and Allies Distribution Pricing Competition Positioning Next Target Customer Pragmatist departmental manager Fix a problem business process Niche-focused application Emerging value chain Direct sales transitioning to VARs Value-based, pain motivated Market vs. market Niche market leadership Adjacent niche market

97 97 Bowling Alley Target Customer Economic Buyers Technical Buyers End Users LOB Executive Department Manager Lead End Users Financial Executive IT Director Technology Evaluator Key Sponsor Secondary Sponsor

98 98 Chasm-Crosser’s Reason to Buy Broken mission-critical business process –Customer complaints are at record levels and escalating –Departmental staff is burnt out and turning over Rest of the enterprise is jeopardized –Workflow is backlogged dangerously –Basic business processes are being delayed –Critical information is unavailable LOB Exec Dept Mgr

99 99 Bowling Alley Reason to Buy Problematic business process –Inefficient methods are the status quo –New technology creates major productivity improvement Rest of the enterprise is working around it –Problem is local to the department –Means that the department’s budget must pay –OK to go with non-standard department-specific solution LOB Exec Dept Mgr

100 100 Bowling Alley Whole Product The Product Hardware Software Legacy interfaces Connectivity Pre-sales services Post-sales service & support Peripherals Consulting Where you can show you have committed to solve problem and have a pre-engineered solution Legacy interfaces Connectivity Peripherals Where you can show you understand customer’s business problem and its solution Pre-sales services Post-sales service & support Consulting

101 101 Bowling Alley Partners & Allies Recruit for the whole product –Every element of the whole product must be “owned” –Each partner must get a good return –Partners can include other divisions within your company Relationship issues –No extraneous partners –No shared ownership –Do not recruit competitors to serve the same niche –Don’t require active partnering from gorillas –Other divisions are usually the worst partners Partner Model Whole Product Model

102 102 Bowling Alley Distribution Marketing Complexity Solution Complexity Direct Sales VARs Retail Web, Telesales Systems Integrators Penetrate the market with direct sales Expand market with VAR channel Retarget direct sales on next bowling pin

103 103 Bowling Alley Pricing Pain motivated –Problem-based—prospect is losing productivity today –For chasm segment, pain is enterprise-wide and a crisis –Value is based on stopping the losses Value-based reference price –Standard product not a reference point, doesn’t solve problem –Cost of a custom project is the ceiling –Typically high-margin opportunity

104 104 Bowling Alley Competition Market vs. market –Technology competitors define an emerging horizontal market –Status-quo vendors define a mature vertical market –New technology plus niche focus = an emerging vertical market Prospect’s alternatives –Continue to firefight the status quo –Use other technology vendors, fleshing out the whole-product solution in-house

105 105 Bowling Alley Next Target Stay in the bowling alley? –Is there another adjacent pin? –Are we powerful enough to take it over? Transition to tornado? –Is our product category tornadoing? –Is there an adjacent tornado category we can participate in? Transition to Main Street? –Which of our current bowling pins are saturated? –Can we do better focusing on serving our installed base than on acquiring new customers?

106 106 Bowling Alley Next Target Leverage is the key Seg 3 App 1 Seg 2 App 2 Seg 1 App 3 Seg 1 App 2App 1 Seg 2 App 1 Seg 1 Word-of-Mouth Leverage: Same segment New applications Whole Product Leverage: Same application New segments

107 107 The Tornado

108 108 Strategy Thumbnail: Tornado Target Customer Compelling Reason to Buy Whole Product Partners and Allies Distribution Pricing Competition Positioning Next Target Customer Pragmatist technical buyer Get on the new infrastructure Platform products Consolidating value chain Drive to higher-volume, lower-touch Competition-based, pain motivated Company vs. company Market-share-based leadership New platforms, channels, geographies

109 109 Tornado Target Customer Economic Buyers Technical Buyers End Users LOB Executive Department Manager Lead End Users Financial Executive IT Director Technology Evaluator Key Sponsor Secondary Sponsor

110 110 Tornado Reasons to Buy Get on the new infrastructure –Stay competitive with peers –Be compatible with future developments Get better products –Get rid of the old junk –Get current with industry expertise Technical Evaluator IT Dir

111 111 Tornado Whole Product Commoditization to drive down prices. Simplification to expand distribution. Standardization to create industry standards. Institutionalization to create market standards. Generalization to create mass market. (killer app) 5 4 3 2 1 Goal is to reduce complexity, increase proliferation.

112 112 Tornado Partners & Allies Restructure to reduce friction –Omit needless partnerships –Design out service partners wherever possible –Solidify critical relationships –Restrict number of programs for more powerful effects Relationship issues –Learn to say no to marginal partners –Migrate service partnerships to earlier-stage offers –Keep commitments –Demand the same from your partners Partner Model Dept.. or desktop Whole Product Model Partner Model Enterprise

113 113 Tornado Distribution Marketing Complexity High Low Solution Complexity High Low Mainframes Minis LANs PC Servers Desktop PCs Printers Keyboards Toner Direct Sales VARs Retail Web, Telesales Systems Integrators WANs Global Systems Drive out complexity to expand distribution. Drive out complexity to expand distribution.

114 114 Tornado Pricing Pain-motivated (risk avoidance) –Pain is being on the old infrastructure once everyone else has switched to the new –Pain is getting stuck with a weak vendor when switching costs are high Competition-based reference price –Gorilla sets the reference price –Monkeys sets the discount price –Chimps can charge a premium in niche markets where they are “local gorillas”

115 115 Tornado Competition Company vs. company –The higher the switching costs, the more important it is to pick the right company –Focus is on viability, ability to fulfill demand, ability to set market standards, power with partners Prospect’s alternatives –Safe buy (gorilla or king) –Smart shopper’s choice (monkey or serf) –Thinking person’s choice (chimp or prince)

116 116 Tornado Positioning Proprietary architectures, high switching costs –Gorilla: Market leader, dominates the category, all others obey –Chimp: Niche player, incompatible with gorilla (market risk) –Monkey: Market follower, low-cost substitute for gorilla (quality risk) Open architectures, low switching costs –King: Market leader, does not dominate, does lead –Prince: Challenger, can overthrow king (low risk) –Serf: Market follower, low-cost generic (quality risk) In the tornado, positions are not chosen—they are assigned!

117 117 Tornado Next Target Stay in the tornado? –Revenues from new customers dominate –Price competition still allows for profitability Move to Main Street? –Revenues from new customers declining –Increasing revenues from existing customers –Price competition for winning new customers is creating “profitless prosperity” Go back into the Bowling Alley? –You are a chimp losing out to a gorilla –Need to build a defensible installed base for Main Street

118 118 Main Street

119 119 Strategy Thumbnail: Main Street Target Customer Compelling Reason to Buy Whole Product Partners and Allies Distribution Pricing Competition Positioning Next Target Customer End-users Better values with no risk Add-ons, consumables, transactions Disintermediated value chain Low-cost, high-touch Competition-based, gain motivated Offer vs. offer Better experience for end users Next micro-niche

120 120 Main Street Target Customer Economic Buyers Technical Buyers End Users LOB Executive Department Manager Lead End Users Financial Executive IT Director Technology Evaluator Key Sponsor Secondary Sponsor

121 121 Main Street Reasons to Buy Better values –Personal productivity –Personal gratification No risk –Within budget (no economic risk) –Within standards (no technical risk) Dept Mgr (parent) End User (child)

122 122 Main Street Whole Product +1 Commodity Whole Product "+ 1" Program "Micro-niche" Market Growth Mass Market Main Street Customer Delighted Customer

123 123 Main Street Partners & Allies Eliminate partners to retain margins –Not enough margin in +1 programs for two companies –Not enough resources for a multi-sided relationship –Not enough residual complexity to warrant partnering Relationship issues –Reconnecting with end user is a challenge –Channel partners often seek to block access to end user –Technical buyer does not want to be end-run –Your salespeople typically know IT people only Partner Model Whole Product Model

124 124 Distribution on Main Street Marketing Complexity Solution Complexity Direct Sales VARs Retail Web, Telesales Systems Integrators Focus on the installed base Connect with the end user Lower cost of sales to increase profit margins

125 125 Distribution on Main Street Disintermediate channels for cost reduction Supply chains are collapsing Intermediaries added value has been commoditized Customer relationship is the only irreplaceable link Design out as many other links as possible Reconnect directly with end customer via +1 offers Marketing problem is to regain customer intimacy +1 offers “attract” target customers Use +1 offers to “probe” your installed base for niche opportunities Requires a channel that is lower cost yet more customer intimate

126 126 Pricing on Main Street Gain-motivated –Business end-user wants productivity or convenience –Consumer wants entertainment or convenience –Default is to take the commodity offer and keep the savings Competition-based reference price –Commodity product is the pricing reference point –Offer price must fit end user’s discretionary envelope

127 127 Four Pricing Strategies Price Sensitivity Benefit Sensitivity Low High Low High Low Cost PremiumConvenience Value

128 128 Market Renewal Model X

129 129 Main Street Next Target Stay on Main Street? –Healthy stream of profitable revenue –New paradigms have not yet penetrated majority of accounts Renew into the tornado? –Modify existing offers to leverage tornado changes –Use modifications to extend Main Street life expectancy Renew into the bowling alley? –Main Street market is running down –Use customer relationships to locate new broken processes Renew into the early market? –Long-term option –Will not resolve any short-term issues

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