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HIGH TECH STRATEGIES Introduction to High Technology Industries 1 Common Characteristics of High Tech Environments • Market Uncertainty • Technological Uncertainty • Competitive Volatility 2 Market Uncertainty Market Uncertainty is the ambiguity about the type and extent of customer needs that can be satisfied by a particular technology • 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 3 Technology Uncertainty Technology Uncertainty is not knowing whether the technology or the company can deliver on its promise • 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 4 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 5 High Tech Strategy Field Market Uncertainty Technological Uncertainty High -Technology Strategies Competitive Volatility 6 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 = n2 (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 7 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 8 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. 9 Self-reinforcing Nature of Standards Reduce customer fear, uncertainty, & doubt Larger installed base STANDARDS Increased demand for product More complementary products developed Increased customer value 10 INTRODUCTION • Lecture based on the concepts developed by the best all-time hightech 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. 11 BASIC CONCEPTS 12 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 too13 Discontinuous Innovations Continuous Discontinuous Electric car Diesel cars Better mileage cars Multimedia Set-Tops Programmable VCRs Remote-control tuning Video Conferencing Conference Calling Voice Mail High Tech Marketing Specializes in Discontinuous Innovations 14 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.) 15 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 16 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 17 Value Chain Technology Products & Consumables Consulting Sales & Support Applications Customer Service Product Providers Service Providers Technical Buyers End Users $$ Economic Buyers Customers All these linkages are required for a new technology wave to succeed 19 Technology Adoption Life Cycle Pragmatists: Stick with the herd! Conservatives: Hold on! Visionaries: Get ahead of the herd! Skeptics: No way! Techies: Try it! Innovators Early Early Majority Adopters Late Majority Laggards Pragmatists create the dynamics of high-tech market development. 20 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 21 Innovators - Technology Enthusiasts • 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 22 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 23 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 hightech) – 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 24 customer 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 25 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) 26 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 27 them Laggards - Skeptics • Primary Motivation: – To maintain things as they have traditionally been: prefer lowcost 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 28 Four Marketing Frameworks 1 on 1 Marketing Mass Marketing Deal Driven Niche Marketing 29 Customer Satisfaction Four Product Management Priorities Competitive Price/Performance Solution Enablers End User Delighters Core Product Early Market Bowling Alley Tornado Main Street Time 30 Product/Service Mix Services Products Products + Services = The Whole Product 32 Three Service Models Professional Services Transaction Services Distribution Services 33 Sample Service Offerings Professional Services Distribution Services Transaction Services • Consultative selling • Competitive selling • Order processing • Business process reengineering • System configuration • Maintenance • Facilities management • Systems integration • Implementation support • Project management • Train-the-trainers • Custom training • Customer service • System conversion • Technical support • Contract management • Warranty • Outsourcing • Upgrade management • Broadcast data feeds • Proprietary database access privileges 34 Service Management Priorities Low margin Standard High margin Custom Medium margin Customized Shallow Water Deep Water 35 Part Two: Go-to-Market Strategy Models 36 Assessing Innovation Discontinuity A B C D 4 Shadow Area 3 Ideal Positioning of the Innovation according to its stage in the TALC 2 Pain 1 Gain 39 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) 41 Strategy Template Checklist Source of money 1. Target Customer 2. Compelling Reason to Buy To fulfill the compelling reason to buy 3. Whole Product 4. Partners and Allies Function of whole product integration complexity Function of all other factors 7. Competition 8. Positioning Next move Needed for whole product 5. Distribution 6. Pricing For the customer's money Source of demand Relative to competition 9. Next Target This template holds for all stages in the Life Cycle. 42 Target Customer Economic Buyers Financial Executive LOB Executive IT Director Department Manager Technology Evaluator Lead End Users Technical Buyers End Users • 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 43 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)? 44 Compelling Reasons to Buy - 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 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. 45 Whole Product Elements Consulting Hardware Complementary Services Post-sales service & support Pre-sales services Software Complementary Products The Product Peripherals Legacy interfaces Connectivity The whole product is the minimum set of products and services needed to fulfill the target customer's compelling reason to buy. 46 Whole Product Generic Product Augmented Product Expected Product Potential Product 47 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… 48 Evolution of the Whole Product Generic Product Potential Product Mostly custom work Expected Product Augmented Product Assimilated Product Plug & play Fully Mass some integrated customized customization Different whole product priorities at different stages of the life cycle. 49 Types of Partnerships Complementors Suppliers Focal Firm Distribution Customers Competitors 51 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” 52 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 53 Product Life Cycle, Innovation, and the Role of Alliances High Product Innovation Rate of Major Innovation Process Innovation Low Stage of Product Life Cycle Emergence Growth Maturity Decline Alliance Types Standards Licensing Technology Licensing R&D Marketing Manufacturing Marketing Process R&D Attacker Incumbent 54 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. 55 Risks in Partnering • 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-sellproducts instead of creating a better solution for the customer • Resource commitments do not materialize 56 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) 57 Partners and Allies Assemble for the project Us ? ? Us Recruit for the whole product US Us ? ? Limit to reduce friction Us Eliminate to retain margin 58 Distribution Channels Evangelists Global Systems Systems Integrators Marketing Complexity WANs Mainframes Direct Sales Minis LANs VARs PC Servers Desktop PCs Retail Printers Keyboards Web, Telesales Toner Service Technicians Solution Complexity 60 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 61 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!) 62 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) 63 Distribution Options Suppliers Agent/Broker/Distributor Manufacturers/OEMs Distributor/Broker Resellers Resellers End Customers 65 Evaluation of Distribution Performance Reseller’s contribution to supplier profits Reseller’s contribution to supplier sales Reseller’s contribution to growth Reseller’s competence Reseller’s compliance Reseller’s adaptability Reseller’s loyalty Customer satisfaction with reseller 66 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 67 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 68 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 69 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 70 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 71 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 72 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 73 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 74 Pricing Buyer Motivation Gain Pain Early market Bowling alley Value-based vs. status quo vs. price leader Pricing Frame of Reference Competition-based Main Street vs. status quo Tornado vs. market leader 75 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 76 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…) 77 Computing Customer Equity 60 50 40 Profit from Referrals 30 20 Profit from Increased Purchases 10 0 -10 -20 Base Profit Year 1 Year 2 Year 3 Year 4 Year 5 Acquisition Cost -30 -40 -50 78 Customer Acquisition Strategies High Retention Profit Potential Low Take them all! Pay as You Go Short Selective Restructure/ Divest Long Acquisition Investment Recovery Time 79 Aspects of Cost to Serve • Acquisition Costs • Production Costs • Distribution Costs • Service Costs 80 Competition Product vs. Product Company vs. Company Category vs. Category Market vs. Market Product vs. Service Reference competition (with a set of alternatives in the same category) Economic competition (set of alternatives competing for the same budget) 81 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 82 Next Target Customer Main Street The Tornado The Bowling Alley The Early Market Niche expansion: Grow profitable revenue from installed base through 1-on-1 marketing and mass customization Niche penetration: First customers Go get another big deal Dominate first niche then go after adjacent niches Mass market growth: Grow horizontally into new channels, platforms, and geographies 83 Strategy Thumbnail: Early Market Target Customer Visionary LOB executive Compelling Reason to Buy Dramatic competitive advantage Whole Product Technology-based project Partners and Allies Consultants and integrators Distribution Direct sales Pricing Value-based, gain motivated Competition Category vs. category Positioning Technology-based leadership Next Target Customer Another LOB exec in a different industry 85 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 89 Strategy Thumbnail: Bowling Alley Target Customer Pragmatist departmental manager Compelling Reason to Buy Fix a problem business process Whole Product Niche-focused application Partners and Allies Emerging value chain Distribution Direct sales transitioning to VARs Pricing Value-based, pain motivated Competition Market vs. market Positioning Niche market leadership Next Target Customer Adjacent niche market 96 Strategy Thumbnail: Tornado Target Customer Pragmatist technical buyer Compelling Reason to Buy Get on the new infrastructure Whole Product Platform products Partners and Allies Consolidating value chain Distribution Drive to higher-volume, lower-touch Pricing Competition-based, pain motivated Competition Company vs. company Positioning Market-share-based leadership Next Target Customer New platforms, channels, geographies 108 Strategy Thumbnail: Main Street Target Customer End-users Compelling Reason to Buy Better values with no risk Whole Product Add-ons, consumables, transactions Partners and Allies Disintermediated value chain Distribution Low-cost, high-touch Pricing Competition-based, gain motivated Competition Offer vs. offer Positioning Better experience for end users Next Target Customer Next micro-niche 119