1. Lecture 6 Marketing and Competition Jan 25, 2011

2. Today HW Presentation Progress in interviewing – Issues Personalized Clinic Lecture

3. HW for Tuesday, Feb 1 Present results of your interviews and other research to date – What did you learn? – Do your hypotheses need modification? – What is your plan to “fill in the gaps” Characterize the industry your company would play in using Porter’s forces

4. A Business Ecosystem Think of the business as a occupying an ecological niche in a rapidly changing environment What are some of the ways you could characterize this environment? – Competitors – Suppliers – Customers – Government – Others?

5. Six Forces Diagram to Determine how Competitive a Company is (after Porter) Your Business Power, Vigor and Competence of Existing Competitors Power, Vigor and Competence of Customers Power, Vigor and Competence of Complementors Power, Vigor and Competence of Suppliers Power, Vigor and Competence of Potential Competitors Possibility that what your business is doing can be done in a different way

6. The intensity of competitive rivalry (known) – number of competitors – rate of industry growth – intermittent industry overcapacity – diversity of competitors – informational complexity and asymmetry – brand equity – fixed cost allocation per value added – level of advertising expense

7. The threat of new entrants – the existence of barriers to entry Have a hub IP Gov license Limited market R&D costs Economies of scale Factory Knowing market – Barriers to exit – Economics of product development – Brand equity – Customer “stickiness” switching costs – capital requirements – access to distribution – absolute cost advantages – learning curve advantages – expected retaliation – government policies

8. Discussion Is it a good thing to have competition in your market? – Existing – New entries?

9. The bargaining power of suppliers – supplier switching costs relative to firm switching costs – degree of differentiation of inputs – presence of substitute inputs – supplier concentration to firm concentration ratio – threat of forward integration by suppliers relative to the threat of backward integration by firms – cost of inputs relative to selling price of the product – importance of volume to supplier – Examples?

10. The bargaining power of customers – ratio of buyer concentration to seller concentration – bargaining leverage – buyer volume – Buyer switching costs relative to firm switching costs – buyer information availability – ability to backward integrate – availability of existing substitute products – buyer price sensitivity – price of total purchase – Examples?

11. The bargaining power of complementors – Relative strengths – Customer perception – Future R&D – Switching costs – Trust – ability to sideways integrate – Anti-trust – Competition for margin – Examples?

12. Six Forces Diagram to Determine how Competitive a Company is (after Porter) Your Business Power, Vigor and Competence of Existing Competitors Power, Vigor and Competence of Customers Power, Vigor and Competence of Complementors Power, Vigor and Competence of Suppliers Power, Vigor and Competence of Potential Competitors Possibility that what your business is doing can be done in a different way

13. Six Forces Diagram to Determine how Competitive a Company is (with 10X disruptive force) Your Business Power, Vigor and Competence of Existing Competitors Power, Vigor and Competence of Customers Power, Vigor and Competence of Complementors Power, Vigor and Competence of Suppliers Power, Vigor and Competence of Potential Competitors Possibility that what your business is doing can be done in a different way. Disruptively! Or can you be the disrupter?

14. The threat of substitute products – buyer propensity to substitute – relative price performance of substitutes – buyer switching costs – perceived level of product differentiation

16. Are you adding features that don’t add value?

17. SWOT Analysis Strengths, Weaknesses, Opportunities and Threats by James Manktelow, editor of Mind Tools and an experienced business strategist.James Manktelow Strengths (with respect to competitors): What advantages do you have? What do you do well? What relevant resources do you have access to? What do other people see as your strengths? Be sure to distinguish a strength in the market, from a necessity. Look from the customers perspective!

18. Weaknesses: What could you improve? What do you do badly? What should you avoid?

19. Opportunities: Where are the best opportunities? What are the interesting trends? Changes in technology Changes in markets Changes in government policy Globalization opportunities Changes in social patterns Demographics Partnerships

20. Threats: What obstacles do you face? What is your competition doing? Are the required specifications for your products or services changing? Is changing technology threatening your position? Do you have bad debt or cash-flow problems? Could any of your weaknesses seriously threaten your business? You can also apply SWOT analysis to your competitors. This may produce some interesting insights You can apply SWOT analysis to yourself and your career prospects

21. Interesting... But what do you do with the SWOT analysis?

22. Example: A start-up small consultancy business Strengths: Can respond very quickly as we have no red tape, no need for higher management approval, etc. Can provide really good customer care, as current small work load means we can focus on customers. Our lead consultant has strong reputation We can change direction quickly if need be We have little overhead, so can offer good value to customers Weaknesses: Our company has no market presence or reputation We have a small staff with a shallow skills base in many areas We are vulnerable to vital staff being sick, leaving, etc. Our cash flow will be unreliable in the early stages

23. Example: A start-up small consultancy business Weaknesses: Our company has no market presence or reputation We have a small staff with a shallow skills base We are vulnerable to vital staff being sick, leaving, etc. Our cash flow will be unreliable in the early stages

24. Example: A start-up small consultancy business Opportunities: Our business sector is expanding, with many future opportunities for success Our locality wants to encourage local businesses with work where possible Our competitors may be slow to adopt new technologies

25. Example: A start-up small consultancy business Threats: Will developments in technology change this market beyond our ability to adapt? A small change in focus of a large competitor might wipe out any market position we achieve

26. Example: A start-up small consultancy business Conclusions: Specialize in rapid response, good value services to local businesses. Promotion in selected local publications, to get the greatest possible market presence for a set advertising budget. Must keep up-to-date with changes in technology

27. Key points: SWOT analysis is a framework for analyzing your strengths and weaknesses, and the opportunities and threats you face. This will help you to focus on your strengths, minimize weaknesses, and take the greatest possible advantage of opportunities available.

28. In all of the E/ME 102 businesses there is competition. You will attack! Why is it difficult?

29. “de l'audace, encore de l'audace, et toujours de l'audace” -Napoleon

30. In all of the E/ME 102 businesses there is competition. You will attack! Why is it difficult? “de l'audace, encore de l'audace, et toujours de l'audace” -Napoleon Not a good idea -Pickar

31. Bill Davidow (Intel, Mohr Davidow) “Marketing High Technology- an insiders view”, William H. Davidow 1985 – If you attack a well-established competitor, you must plan on spending ~70% of the sales of the competitive leader has spent in building his business. Why is this so?

32. Cost of Attacking a Competitor Investment required to – Establish market presence – Establish distribution channels – Develop a product line – Plants – Equipment – Inventory – Working Capital

33. Entrepreneurial bias (truth hurts!) Caltech bias Underestimate what it takes to achieve position (Discount Davidow thesis) Competition has already solved problems that perhaps you don’t know existed The competition may not even be a player at present but is plotting in labs even as you are. (Particularly true in high-visibility areas such as homeland defense) Consider the broader problem- why is it easy to underestimate the competition?

34. Your knowledge is incomplete i.e., You don’t know what you don’t know. Consider the broader problem- why is it easy to underestimate the competition?

35. The Reality: What does the entrenched competition have? Assume a “good” company or companies By definition they have market share Brand Management A product that generally satisfies the market. Knowledge of the Customer – Sales Force – Distribution

36. The Reality: What does the entrenched competition have? Assume a “good” company or companies Technology relationships Technology Strengths Industry knowledge of trends – Industry groups Supplier relationships Distribution relationships $$$$$ for response

37. Attacking an entrenched competitor working on an “old” technology Capability of “Old” Technology Number of researchers working to advance “old” technology

38. Attacking an entrenched competitor working on an “old” technology Capability of “Old” Technology Number of researchers working to advance “old” technology You

39. Common pitfalls We are 20% better so we will win! The competition is not important because It doesn’t exist We are disruptive We are not attacking them head on

40. Common pitfalls We are dis-intermediating them- rendering them irrelevant E-Commerce- the example of E-Toys, Webvan, Pets.com, etc., etc. B2Bs- the example of WholesaleExchange Amazon vs Barnes and Noble

41. What are some of their weaknesses? Large company – Bureaucracy – Slow decision making in meetings Structure Silos – Career avoidance of failure – Annual funding cycle – Complacency – Maybe don’t work so hard – others Small company – Harder to respond to an attack to the side of their business – Overcommittment – Others

42. Additional Reasons related to missing disruptive technologies Wrong Value Network – Context of corporation’s business leads to missing competition arising from outside Organizational Structure – Companies organized by a products substructure fail when fundamental architecture changes Core Competencies – Firms fail when a technological change destroyed the value of competencies previously cultivated and succeeded when new technologies enhanced them

43. Additional Reasons related to missing disruptive technologies Technology S-curves – Firms fail when they miss inflection points along their main product thrust and specifically when they miss technologies advancing in related fields Wishful thinking

44. Blinders – Arrogance – Tunnel vision Well-defined positions The problem with success

45. Thoughts on countering competition Look for weaknesses – Dissatisfied customers e.g., quality or service – Unaddressed pain – Cracks in supply chain – Geographic hole Address with Total Customer Satisfaction Address with Total product- addresses all the pain Don’t attack an entrenched position frontally! Think twice about competing on cost Find a (neglected?) niche Have proprietary technology that “changes the game” – i.e., 10X improvement

46. More thoughts Have understanding of the market on your team Hire from your customer or best competitor Have leadership that either has a track record or learns fast. Think strategically – How will the big guys respond? How would you counter that response? Focus on a few key customers Keep under the radar screen? Speed! Fail quickly and correct

47. Opportunity for Entrepreneurial company Look for need not being served now by big company Look for a 10X cost reduction to service these companies After you have established yourself, move up market and attack big company with a much cheaper, solution for their customers. Think main frames to minis to micro

48. Kent Kresa’s game theory checkerboard Put each of your competitors on a “checkerboard”. From what you know of them (SWOT analysis). What move would they make if you were to enter the market with your product? How could you counter that move a priori or afterwards? What other moves could they make to counter you?

49. Overconfidence Paranoia ? Where are you in this spectrum?

51. Disruptive Technologies Why do some good companies fail? – Companies that are well-managed and progressive listen to their customers study and act on market trends invest significant resource in R&D allocate capital to provide the best return – in short do all the “right things” and are held as paragons for their success....and then collapse

52. Disruptive Vs Sustaining Technology Sustaining Technology can be incremental or radical improve the performance of established products along the trajectory that mainstream customers have historically valued

53. Examples of Sustaining Technologies Semiconductor process technologies Automotive technologies e.g. IC engines DRAM, CISC microprocessor Jet Engines Construction Factory automation

54. Examples of Disruptive Technologies? Internet MEMS Disk Drive Genetic Engineered foods Genetic Engineered drugs Wal-Mart, Dell inventory management Hybrid Vehicles Small Turbines Fuel Cells Biotech What companies are Vulnerable?

55. Disruptive technologies

56. Why do good companies miss the revolution? Companies depend on investors and customers for resources – requires high profits – requires following the lead of customers who may themselves be blindsided mainframe industry minicomputer industry Markets that don’t exist can’t be analyzed Technology Supply may not meet market demand

57. Are these companies clueless? Not every technology that looks disruptive is feasible. You cannot chase every possible disruptive technology to cover all your bets Even for technologies which are well-researched and appear to be potentially disruptive can be very difficult to bring to market Companies are unable to allocate sufficient resource to test marketing them because they will always fail any rational allocation process (we will discuss how this allocation process called portfolio management works in the future) – Their normal customers aren’t interested – The markets seem small and uncertain – Resource for main line technologies will receive the dominant share to maintain sales growth and profits