1. Chapter 13 CRAFTING A DEPLOYMENT STRATEGY
Strategic Management of Technological Innovation Melissa Schilling
Chapter 13 CRAFTING A DEPLOYMENT STRATEGY

2. Deployment Tactics in the U.S. Video Game Industry
1972, Nolan Bushnell founded Atari and introduced the game Pong ( that was played on a TV set with an Atari console. Pong earned $1million revenue in its first year
By 1984, video game console and game sales reached $3 billion in the US alone. Console makers did not provide strict security and unauthorized games of poor quality flooded the market. Sales dropped dramatically and by 1985 the video game industry was declared dead.
Much to everyone’s surprise, Nintendo and Sega entered the market with 8-bit systems. They spent $15 million on advertising. Nintendo had a near monopoly from
Nintendo made games in-house and through 3rd part developers with strict licensing policies
Limited number of titles a licensee could produce
Developer had to pre-order a minimum number of cartridges
Developer could not make similar games for other consoles
Very profitable policies but they were sanctioned by the FTC and alienated distributors and developers

3. Deployment Tactics in the U.S. Video Game Industry
In 1989, Sega was able to overthrow Nintendo’s dominance by introducing the 16-bit Genesis system 1½ years before Nintendo.
Backward compatible to their 8-bit games
Nintendo introduced its 16-bit system in 1991 but Sega had too much of a jump on them and was the market leader
Nintendo did not make it backward compatible
In 1995, Sony was able to break into the video game industry by introducing a 32-bit system, investing heavily in game development, and leveraging its massive clout with distributors.
By 1996, Sony’s installed base was 2.9 million units vs Sega’s 1.2 million units
In late 2001, Microsoft entered the video game industry with a 128-bit system. It had an advanced machine, and spent a lot on marketing and games, but Playstation2 (also 128-bit) already had an installed base of 20 million.
On the first weekend of PS2 sales (March 4, 2000), 1 million units were sold. The website had more than 100,000 hits in one minute and had to temporarily shut down

4. Deployment Tactics in the U.S. Video Game Industry
In late 2005, Microsoft introduces the Xbox 360, beating the Playstation3 to market.
The figures as of 5/4/2008 ( are in the chart below – the game never ends and has now extended into the hand-held market as well.

5. Overview
Only part of the value of any technological innovation is determined by what the technology can do.
A large part is determined by the degree to which people understand it, access it and integrate it with their lives.
An effective deployment strategy is thus a key element in a technological innovation strategy.
It is not just a way for the firm to earn revenues but is a core part of the innovation process itself

6. Overview Deployment strategies can
influence the receptivity of customers, distributors and complementary goods providers
Reduce uncertainty about the product, lower resistance to switching from competitors and accelerate adoption
3DO and Phillips introduced the first two 32-bit systems but they failed because they were priced too high and had few games
Sega’s 32-bit system was priced right but weak distribution hobbled its deployment
Sony, on the other hand, used intense marketing, low prices, strong game availability and aggressive distribution to ensure a very successful launch of the Playstation

7. Launch Timing
The timing of a market launch can be an important deployment strategy
Nintendo held back on releasing its 16-bit system for fear of cannibalizing their 8-bit system even though Sega had released Genesis
Strategic Launch Timing
Firms can use the timing of product launch to take advantage of business cycle or seasonal effects
e.g., video game consoles are always launched just before Christmas.
Timing also signals customers about the generation of technology the product represents.
e.g., if a next generation console is launched too soon after a previous generation console, the market may not want to spend money on a new console after having just purchased a previous generation console.
Xbox next generation but launched too close to PS2s launch
Timing must be coordinated with production capacity and complements availability, or launch could be weak.

8. Launch Timing Optimizing Cash Flow versus Embracing Cannibalization
Traditionally firms managed product lifecycles to optimize cash flow and return on investment
would not introduce new generation while old generation selling well.
However, in industries with increasing returns this is risky
Competitors can gain a substantial lead that will be difficult to overcome
Often better for firm to invest in continuous innovation and willingly cannibalize its own products to make it difficult for competitors to gain a technological lead.
Cannibalization: when a firm’s sales of one product (or at one location) diminish its sales of another (or another location).
In the late 1980s, Nintendo did not want to cannibalize their 8-bit system despite Sega’s launch of a 16-bit system and thus lost market share

9. Licensing and Compatibility
Protecting a technology too little can result in low quality complements and clones, a fragmented market and little revenue for the developer
Protecting too much may impede development of complements.
Firm must carefully decide:
How compatible to be with products of others
If firm is dominant, generally prefers incompatibility with others’ platforms but may use controlled licensing for complements.
If firm is at installed base disadvantage, generally prefers some compatibility with others and aggressive licensing for complements.
Whether to make product backward compatible
If installed base and complements are important, backward compatibility usually best – leverages installed base and complements of previous generation, and links generations together. Can be combined with incentives to upgrade.
Sony did this with PS2 which gave incentive to current customer base to upgrade and not forfeit existing games they own from previous generation of console
Microsoft does this with Windows; backward compatible with major s/w applications developed for previous generations

10. Pricing
Price simultaneously influences product positioning, rate of adoption, and cash flow.
In order to determine a pricing strategy, a firm has to decide on its objectives
Industry has intense price competition and/or overcapacity objective short-run strategy may be simply survival
Cover variable and some fixed costs
In the long-run the firm will want to create additional with a strategy of maximizing current profits
Firm estimates costs and demand and then sets the price to maximize cash flow or rate of return on investment
For new technological innovations, firms often emphasize maximum market skimming or maximum market share
Market skimming strategy (high initial prices)
Signals market that innovation is significant
Recoup development expenses (assuming there’s demand)
Attracts competitors, may slow adoption

11. Pricing
When seeking high volume, firms will emphasize maximum market share objective
Penetration Pricing is used to achieve this goal (very low price or free)
Accelerates adoption, driving up volume, build installed base, attract developers of complementary goods
Requires large production capacity be established early
Risky; may lose money on each unit in short run
Common strategy when competing for dominant design
Honda priced the hybrid car Insight below cost because believed it would be profitable in the long run and presented Honda as a “green” car company
Video console developers have sold their consoles at or below cost but profit from game sales and licensing royalties

12. Pricing Can manipulate customer’s perception of price
Free initial trial or introductory pricing enables consumer to overcome uncertainty about the new technology, become familiar with the technology and appreciate the benefits
Initial product free but pay for monthly service
Cable television model
Firms also use introductory pricing for a stipulated amount of time to test the market’s response without committing to a long-term pricing structure
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13. Distribution Selling Direct versus Using Intermediaries Selling direct
Gives firm great control over selling process, price and service
Firm can capture more information about customers and can facilitate the customization of products
Can be expensive and/or impractical
Intermediaries may include:
Manufacturers’ representatives: independent agents that may promote and sell the product lines of one or a few manufacturers.
Useful for direct selling when its impractical for manufacturer to have own direct sales force for all markets.
Wholesalers: firms that buy manufacturer’s products in bulk then resell them (typically in smaller, more diverse bundles)
Provide bulk breaking and carry inventory.
Handles transactions with retailers and provides transportation.

14. Distribution
Retailers: firms that sell goods to public
Provide convenience for customers
Enable on-site examination and service
Original equipment manufacturers (OEMs):
A company that buys products (or components) from other manufacturers and assembles them or customizes them and sells under its own brand name. E.g., Dell Computer
Aggregates components from multiple manufacturers
Provides single point-of-contact and service for customer
Also called Value Added Resellers (VARs)
In some industries, information technology has enabled disintermediation or reconfiguration of intermediaries.
Digital product may be delivered directly to the consumer over the Internet
E.g., online investing enables customers to bypass brokers; online bookselling requires retailer to provide delivery services, online grocery shopping shifts “the last mile” from the consumer to grocer

15. Distribution
These factors help determine whether and what types of intermediaries the firm should use:
How does the new product fit with the distribution requirements of firm’s existing product lines?
Is there is an existing distribution channel and does the new product fit into it?
How numerous and dispersed are customers, and how much product education or service will they require? Is installation or customization required?
Customers dispersed but require little training use mail order or online ordering
Customers dispersed and require moderate training or service use intermediaries
Customers not dispersed but require extensive training or service may need to provide this directly
How are competing products or substitutes sold? The sales channel can influence the customer’s perception of the product

16. Distribution Strategies for Accelerating Distribution
Alliances with distributors
Providing distributor with stake in product’s success or exclusivity contract can motivate them to promote more.
Sega had limited distribution for its Saturn launch, Nintendo had unlimited distribution for Nintendo-64 and Sony had unlimited distribution and extensive experience negotiating with retailing giants such as Wal-Mart
Bundling relationships
Sell in tandem with product already in wide use.
MS Windows on almost all PCs, MS IE via AOL

17. Distribution Contracts and sponsorship Guarantees and consignment
Provide price discounts, special service contracts or advertising assistance to distributors, complementary goods providers or large and influential end users.
New medical technology is donated or lent to large teaching hospitals so that the benefits can be seen first hand by doctors and administrators which increases future purchases
Guarantees and consignment
When there is uncertainty about a product, distributors can be given guarantees to take back unsold stock thereby reducing the risk to intermediaries and complements providers.
Distributors were reluctant to carry Nintendo’s NES after crash of video-game market in the 1980s. Nintendo agreed to accept payment for sold consoles rather than require up front payment
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18. Marketing
Major marketing methods include advertising, promotions, and publicity/public relations.
Advertising
Requires effective message
Requires media that conveys message to appropriate target market
Varies in match to audience, richness, reach, and cost.
Must strike appropriate balance between entertainment or aesthetics (to make memorable) versus information content (to make useful)

19. Marketing
Advantages and Disadvantages of Advertising Media

20. Marketing Publicity and Public Relations Promotions
Temporary selling tactics that include:
Samples or free trial
Cash rebates after purchase
Including an additional product (a “premium”) with purchase
Incentives for repeat purchase
Sales bonuses to distributor or retailer sales representatives
Cross promotions between two or more non-competing products to increase pulling power
Point-of-purchase displays to demonstrate the product’s features
Publicity and Public Relations
Attempt to generate free publicity and word-of-mouth (e.g., mention in articles, television programs, etc.)
Produce own internally generated publications
Sponsor special events

21. Generating Awareness for Domosedan
Theory In Action
Generating Awareness for Domosedan
Farmos wanted to build awareness of its new innovation in animal painkillers.
Asked university professors and advanced practitioners to help with testing process for drug – acted as premarketing tool.
Drug was featured in conferences, articles, dissertations.
Farmos also hosted a large dinner party for all practicing veterinarians at the drug’s launch.
Domosedan was adopted rapidly around the world and became a commercial success.

22. Marketing Tailoring the Marketing Plan to Intended Adopters
Innovators and Early Adopters respond to marketing that offers significant technical content and emphasizes leading-edge nature of product.
Need media with high content and selective reach
Early Majority responds to marketing emphasizing product’s completeness, ease o fuse, consistency with customer’s life, and legitimacy.
Need media with high reach and high credibility
Late Majority and Laggards respond to marketing emphasizing reliability, simplicity, and cost-effectiveness.
Need media with high reach, high credibility, but low cost.

23. Marketing
Often hard to transition from selling to early adopters to early majority, resulting in “chasm.”

24. Marketing
Using Marketing to Shape Perceptions and Expectations
Perceptions and expectations of value can be as important as actual value. To influence, can use:
Preannouncements and press releases
Can build “mind share” in advance of actual market share
Can forestall purchases of competitors’ products
Reputation
Provides signal to market of likelihood of success
Credible commitments
Substantial irreversible investments can convince market of firm’s confidence and determination

25. Creating an Information Epidemic
Research Brief
Creating an Information Epidemic
Gladwell notes that some individuals have a disproportionate impact on marketplace behavior:
Connectors
Have exceptionally large and diverse circle of acquaintances
Knack for remembering names and important dates
Mavens
Driven to obtain and disseminate knowledge about one or more of their interests
Will track prices, tend to be consumer activists
Take great pleasure in helping other consumers
Salespersons
Naturally talented persuaders
Acute ability to send and respond to nonverbal cues; can infect others with their mood!

26. Discussion Questions
Can you identify one or more circumstances when a company might wish to delay introducing its product?
What factors will (or should) influence a firm’s pricing strategy?
Pick a product you feel you know well. What intermediaries do you think are used in bringing this product to market? What valuable services do you think these intermediaries provide?
What marketing strategies are used by the producers of the product you identified for question 3? What are the advantages and disadvantages of these marketing strategies?