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January 2005 Identifying markets Creating sustainable competitive advantage Douglas Abrams.

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Presentation on theme: "January 2005 Identifying markets Creating sustainable competitive advantage Douglas Abrams."— Presentation transcript:

1 January 2005 Identifying markets Creating sustainable competitive advantage Douglas Abrams

2 2 6XXXX Douglas Abrams Identifying markets and creating SCA Choose the right market Create sustainable competitive advantage

3 3 6XXXX Douglas Abrams Choose the right market  Create a value proposition  Understand customer adoption

4 4 6XXXX Douglas Abrams 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

5 5 6XXXX Douglas Abrams 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

6 6 6XXXX Douglas Abrams 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

7 7 6XXXX Douglas Abrams 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

8 8 6XXXX Douglas Abrams 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.

9 9 6XXXX Douglas Abrams 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

10 10 6XXXX Douglas Abrams 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

11 11 6XXXX Douglas Abrams 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

12 12 6XXXX Douglas Abrams The fist phenomenon  Kids grip toothbrush with whole fist rather than fingers  Kid’s toothbrushes should be fatter than adult’s

13 13 6XXXX Douglas Abrams Categorize customer needs in designing product  Things that are necessary  Things that are nice to have  Things that are unnecessary

14 14 6XXXX Douglas Abrams 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.

15 15 6XXXX Douglas Abrams 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

16 16 6XXXX Douglas Abrams Choose the right market  Create a value proposition  Understand customer adoption

17 17 6XXXX Douglas Abrams The Normal Distribution of Product Adoption

18 18 6XXXX Douglas Abrams 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

19 19 6XXXX Douglas Abrams Market adoption S-curve

20 20 6XXXX Douglas Abrams 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

21 21 6XXXX Douglas Abrams 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

22 22 6XXXX Douglas Abrams 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

23 23 6XXXX Douglas Abrams 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

24 24 6XXXX Douglas Abrams 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

25 25 6XXXX Douglas Abrams Epidemic diffusion – Hush Puppies  Stay in touch with the consumers  Hush Puppies shoes - nearly discontinued –Revived due to sudden grassroots consumer interest

26 26 6XXXX Douglas Abrams Jumping the barrier – Palm pilot  Originally tried to integrate too many features  Realized consumers wanted complement, not replacement for PC

27 27 6XXXX Douglas Abrams Jumping the barrier – answering machines  Answering Machines  Initially considered rude  Within a few years, became rude if didn’t own one.

28 28 6XXXX Douglas Abrams 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

29 29 6XXXX Douglas Abrams Jump the barrier – vacuum cleaners  Vacuum Cleaners  America –Loud vacuums associated with powerful motors & suction  Japan –Quieter, less powerful, smaller motors, fuzzy logic, insulation

30 30 6XXXX Douglas Abrams Identifying markets and creating SCA Choose the right market Create sustainable competitive advantage

31 31 6XXXX Douglas Abrams Create sustainable competitive advantage  Competing with established companies  Protect your intellectual property  Create barriers to entry

32 32 6XXXX Douglas Abrams Advantages of established companies  The learning curve  Reputation effect  Cash flow  Economies of scale  Complementary assets

33 33 6XXXX Douglas Abrams 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

34 34 6XXXX Douglas Abrams 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

35 35 6XXXX Douglas Abrams 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

36 36 6XXXX Douglas Abrams 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

37 37 6XXXX Douglas Abrams 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

38 38 6XXXX Douglas Abrams Case study – Dell computers  Direct sales  Easy configuration of memory, peripherals  Direct, reliable customization experience

39 39 6XXXX Douglas Abrams Create sustainable competitive advantage  Competing with established companies  Protect your intellectual property  Create barriers to entry

40 40 6XXXX Douglas Abrams Competitors will copy your product  Reverse engineering  Hire ex-employees  Look at patent documents  May be working on similar products

41 41 6XXXX Douglas Abrams 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

42 42 6XXXX Douglas Abrams 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

43 43 6XXXX Douglas Abrams Create sustainable competitive advantage  Competing with established companies  Protect your intellectual property  Create barriers to entry

44 44 6XXXX Douglas Abrams 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

45 45 6XXXX Douglas Abrams Sources and references  Finding Fertile Ground by Scott Shane, Wharton School Publishing  The Art of Innovation by Tom Kelley with Jonathan Littman, Doubleday

46 46 6XXXX Douglas Abrams Contact us  Douglas Abrams    (hp)


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