Stanford University

Dept. of Engineering-Economic Systems & Operations Research

EES&OR483 Strategy and Marketing Primer (version 3.0)

This set of "crib notes" is a review of mar eting and strategy too!s and concepts that yo" may find "sef"! for yo"r pro#ect in EES&OR $%&. The intention is not to give yo" more wor or reading materia!' b"t rather to provide yo" with an aid and reference in form"!ating and ana!y(ing yo"r prob!em. )!! of the concepts covered in !ect"re and the assigned readings are reviewed here. *o" might find the s"mmaries a he!pf"! reminder of what the concepts are and how they can be va!"ab!e in yo"r pro#ect. )!so' some topics fo"nd here are not covered in !ect"res or assigned readings +specifica!!y' Sections ,.,' ,.$' and -..--.-/. These are additiona! topics on concept"a! +i.e. 01)/ mar eting and strategy. Since !ect"res in this pro#ect co"rse are !imited and emphasi(e 2"antitative mode!s for strategy' we do not have the time to cover a!! the topics in c!ass. 3owever' if yo" are not a!ready fami!iar with basic mar eting and strategy framewor s' we want to offer yo" more e4pos"re to them. *o" may find this broader e4pos"re he!pf"! for severa! reasons5 "nderstand the conte4t of what is covered in !ect"re proper!y frame yo"r pro#ect find !eads to other concepts that may be partic"!ar!y re!evant to yo"r pro#ect

CON EN S ! "ENER#C S R$ E"%& %PES O' COMPE # #(E $)($N $"E...............................................* * CONCEP +$, S R$ E"% 'R$ME-OR.S& /O- COMPE # #(E $)($N $"E #S CRE$ E).......................................................................................................................................................3 ,.. 6ORTER7S - 8OR9ES & :;DUSTR* STRU9TURE.......................................................................................& ,., 9ORE 9O06ETE;9E );D 9)6)1:<:T:ES.................................................................................................= ,.& RESOUR9E-1)SED >:E? O8 T3E 8:R0 +R1>/.......................................................................................@ ,.$ )<TER;)T:>E 8R)0E?ORAS5 E>O<UT:O;)R* 93);BE );D 3*6ER9O06ET:T:O;.............................% 3 $))# #ON$, OO,S 'OR S R$ E"#C /#N.#N" $N) $N$,%S#S......................................!0 &.. B)0E T3EOR*.......................................................................................................................................C &., O6T:O;S.................................................................................................................................................. &.& STR)TEB:9 S9E;)R:OS..........................................................................................................................$ &.$ OT3ER 6)RT:9U<)R<* RE<E>);T EES&OR 9ORE 9O;9E6TS...........................................................4 M$R.E #N" MO)E,S 'OR PRO)+C S R$ E"%....................................................................!0 $.. ;E? 6RODU9T D:88US:O; 0ODE<S......................................................................................................= $., 9O;DO:;T );)<*S:S..............................................................................................................................@ 1 CONCEP +$, M$R.E #N" 'R$ME-OR.S................................................................................*0 -.. T3E 8OUR 6ES O8 T3E 0)RAET:;B 0:F..............................................................................................,C -., 0)RAET-OR:E;TED STR)TEB:9 6<);;:;B.........................................................................................,C -.& 0)RAET SEB0E;T)T:O;' T)RBET:;B' );D 6OS:T:O;:;B..................................................................,, -.$ );)<*G:;B :;DUSTR:ES );D 9O06ET:TORS.......................................................................................,$ -.- T3E TE93;O<OB* )DO6T:O; <:8E 9*9<E5 D:S9O;T:;UOUS :;;O>)T:O;S......................................,-

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Strategy 6rimer &.C

1 Generic Strategy: Types of Competitive Advantage

1asica!!y' strategy is abo"t two things5 deciding where yo" want yo"r b"siness to go' and deciding how to get there. ) more comp!ete definition is based on competitive advantage' the ob#ect of most corporate strategy5 Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation. -- 0ichae! 6orter' Competitive dvantage' .H%-' p.& The fig"re be!ow defines the choices of "generic strategy" a firm can fo!!ow. ) firm7s re!ative position within an ind"stry is given by its choice of competitive advantage +cost !eadership vs. differentiation/ and its choice of competitive scope. 9ompetitive scope disting"ishes between firms targeting broad ind"stry segments and firms foc"sing on a narrow segment. Beneric strategies are "sef"! beca"se they characteri(e strategic positions at the simplest and broadest level. 6orter maintains that achieving competitive advantage re2"ires a firm to ma e a choice abo"t the type and scope of its competitive advantage. There are different ris s inherent in each generic strategy' b"t being "a!! things to a!! peop!e" is a s"re recipe for mediocrity - getting "st"c in the midd!e". Treacy and ?iersema +.HH-/ offer another pop"!ar generic framewor for gaining competitive advantage. :n their framewor ' a firm typica!!y wi!! choose to emphasi(e one of three Iva!"e discip!ines !: product leadership, operational excellence, and customer intimacy. Porter2s "eneri3 Strategies +so"rce5 6orter' .H%-' p..,/

COMPE # #(E $)($N $"E <ower 9ost Differentiation

1road Target COMPE # #(E SCOPE ;arrow Target

.. 9ost <eadership

,. Differentiation

&). 9ost 8oc"s

&1. Differentiation 8oc"s

References5 6orter' 0ichae!' Competitive dvantage' The 8ree 6ress' ;*' .H%-. 6orter' 0ichae!' "?hat is strategyJ" "arvard #usiness $eview v@$' n= +;ov-Dec' .HH=/5=. +.% pages/. Treacy' 0.' 8. ?iersema' The %iscipline of &ar'et (eaders' )ddison-?es!ey' .HH-.

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Strategy 6rimer &.C

2 Conceptual Strategy Frameworks: How Competitive Advantage is Created

8ramewor s vs. 0ode!s ?e disting"ish here between strategy framewor s and strategy mode!s. Strategy mode!s have been "sed in theory b"i!ding in economics to "nderstand ind"stria! organi(ation. 3owever' the mode!s are diffic"!t to app!y to specific company sit"ations. :nstead' 2"a!itative framewor s have been deve!oped with the specific goa! of better informing b"siness practice. :n another sense' we may a!so ta! abo"t Iframewor sK in this c!ass as referring to the g"iding ana!ytica! approach yo" ta e to yo"r pro#ect +i.e. decision ana!ysis' economics' finance' etc./. Some 6erspective on Strategy 8ramewor s5 :nterna! and E4terna! 8raming for Strategic Decisions :t may be he!pf"! to thin of strategy framewor s as having two components5 interna! and e4terna! ana!ysis. The external ana!ysis b"i!ds on an economics perspective of ind"stry str"ct"re' and how a firm can ma e the most of competing in that str"ct"re. :t emphasi(es where a company sho"!d compete' and what7s important when it does compete there. 6orter7s - 8orces and >a!"e 9hain concepts comprise the main e4terna!!y-based framewor . The e4terna! view he!ps inform strategic investments and decisions. )nternal ana!ysis' !i e core competence for e4amp!e' is !ess based on ind"stry str"ct"re and more in specific b"siness operations and decisions. :t emphasi(es how a company sho"!d compete. The interna! view is more appropriate for strategic organi(ation and goa! setting for the firm. 6orter7s foc"s on ind"stry str"ct"re is a powerf"! means of ana!y(ing competitive advantage in itse!f' b"t it has been critici(ed for being too static in an increasing!y fast changing wor!d. The interna! ana!ysis emphasi(es b"i!ding competencies' reso"rces' and decision-ma ing into a firm s"ch that it contin"es to thrive in a changing environment. Tho"gh some framewor s re!y more on one type of ana!ysis than another' both are important. 3owever' neither framewor in itse!f is s"fficient to set the strategy of a firm. The interna! and e4terna! views most!y frame and inform the prob!em. The act"a! firm strategy wi!! have to ta e into acco"nt the partic"!ar cha!!enges facing a company' and wo"!d address iss"es of financing' prod"ct and mar et' and peop!e and organi(ation. Some of these strategic decisions are event driven +partic"!ar pro#ects or reorgs responding to the environment and opport"nity/' whi!e others are the s"b#ect of periodic strategic reviews.

2.1

Porter's 5 Forces & Industry Structure

?hat is the basis for competitive advantageJ )ndustry structure and positioning within the industry are the basis for mode!s of competitive strategy promoted by 0ichae! 6orter. The I8ive 8orcesK diagram capt"res the main idea of 6orterEs theory of competitive advantage. The 8ive 8orces define the r"!es of competition in any ind"stry. 9ompetitive strategy m"st grow o"t of a sophisticated "nderstanding of the r"!es of competition that determine an ind"stry7s attractiveness. 6orter c!aims' "The "!timate aim of competitive strategy is to cope with and' idea!!y' to change those r"!es in the firm7s behavior." +.H%-' p. $/ The five forces determine ind"stry profitabi!ity' and some ind"stries may be more attractive than others. The cr"cia! 2"estion in determining profitabi!ity is how m"ch va!"e firms can create for their b"yers' and how m"ch of this va!"e wi!! be capt"red or competed away. :nd"stry str"ct"re determines who wi!! capt"re the va!"e. 1"t a firm is not a comp!ete prisoner of ind"stry str"ct"re - firms can inf!"ence the five forces thro"gh their own strategies. The five-forces framewor high!ights what is important' and directs manager7s towards those aspects most important to !ong-term advantage. #e careful in using this tool5 #"st composing a !ong !ist of forces in the competitive environment wi!! not get yo" very far L itEs "p to yo" to do the ana!ysis and identify the few driving factors that rea!!y define the ind"stry. Thin of the 8ive 8orces framewor as sort of a chec !ist for getting started' and as a reminder of the many possib!e so"rces for what those few driving forces co"!d be.

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EES&OR $%& Porter2s 1 'or3es 4 E5ements o6 #nd7stry Str73t7re +so"rce5 6orter' .H%-' p.=/
Entry 9arriers M Economies of sca!e M 6roprietary prod"ct differences M 1rand identity M Switching costs M 9apita! re2"irements M )ccess to distrib"tion M )bso!"te cost advantages 6roprietary !earning c"rve )ccess to necessary inp"ts 6roprietary !ow-cost prod"ct design M Bovernment po!icy M E4pected reta!iation

Strategy 6rimer &.C

Ne8 Entrants

Threat of ;ew Entrants

Riva5ry )eterminants M :nd"stry growth M 8i4ed +or storage/ costs N va!"e added M :ntermittent overcapacity M 6rod"ct differences M 1rand identity M Switching costs M 9oncentration and ba!ance M :nformationa! comp!e4ity M Diversity of competitors M 9orporate sta es M E4it barriers

S7::5iers

1argaining 6ower of S"pp!iers

#nd7stry Com:etitors

1argaining 6ower of 1"yers

97yers

:ntensity of Riva!ry
)eterminants o6 S7::5ier Po8er M Differentiation of inp"ts M Switching costs of s"pp!iers and firms in the ind"stry M 6resence of s"bstit"te inp"ts M S"pp!ier concentration M :mportance of vo!"me to s"pp!ier M 9ost re!ative to tota! p"rchases in the ind"stry M :mpact of inp"ts on cost or differentiation M Threat of forward integration re!ative to threat of bac ward integration by firms in the ind"stry

)eterminants o6 97yer Po8er 9argaining ,everage M 1"yer concentration vs. firm concentration M 1"yer vo!"me M 1"yer switching costs re!ative to firm switching costs M 1"yer information M )bi!ity to bac ward integrate M S"bstit"te prod"cts M 6"!!-thro"gh Pri3e Sensitivity M 6riceNtota! p"rchases M 6rod"ct differences M 1rand identity M :mpact on 2"a!ityN performance M 1"yer profits M Decision ma erEs incentives

Threat of S"bstit"tes

S7;stit7tes

)eterminants o6 S7;stit7tion <reat M Re!ative price performance of s"bstit"tes M Switching costs M 1"yer propensity to s"bstit"te

3ow is competitive advantage createdJ )t the most f"ndamenta! !eve!' firms create competitive advantage by perceiving or discovering new and better ways to compete in an ind"stry and bringing them to mar et' which is "!timate!y an act of innovation. :nnovations shift competitive advantage when riva!s either fai! to perceive the new way of competing or are "nwi!!ing or "nab!e to respond. There can be significant advantages to ear!y movers responding to innovations' partic"!ar!y in ind"stries with significant economies of sca!e or when c"stomers are more concerned abo"t switching s"pp!iers. The most typica! ca"ses of innovations that shift competitive advantage are the fo!!owing5 new techno!ogies new or shifting b"yer needs the emergence of a new ind"stry segment shifting inp"t costs or avai!abi!ity changes in government reg"!ations 3ow is competitive advantage imp!ementedJ 1"t besides watching ind"stry trends' what can the firm doJ )t the !eve! of strategy imp!ementation' competitive advantage grows o"t of the way firms perform discrete activities - conceiving new ways to cond"ct activities' emp!oying new proced"res' new techno!ogies' or different inp"ts. The "fit" of different strategic activities is a!so vita! to !oc o"t imitators. 6orters ">a!"e 9hain" and ")ctivity 0apping" concepts he!p "s thin abo"t how activities b"i!d competitive advantage. The value chain is a systematic way of e4amining a!! the activities a firm performs and how they interact. :t scr"tini(es each of the activities of the firm +e.g. deve!opment' mar eting' sa!es' operations' etc./ as a potentia! so"rce of advantage. The va!"e chain maps a firm into its strategica!!y re!evant activities in order $

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to "nderstand the behavior of costs and the e4isting and potentia! so"rces of differentiation. Differentiation res"!ts' f"ndamenta!!y' from the way a firm7s prod"ct' associated services' and other activities affect its b"yer7s activities. )!! the activities in the va!"e chain contrib"te to b"yer va!"e' and the c"m"!ative costs in the chain wi!! determine the difference between the b"yer va!"e and prod"cer cost. ) firm gains competitive advantage by performing these strategica!!y important activities more cheap!y or better than its competitors. One of the reasons the va!"e chain framewor is he!pf"! is beca"se it emphasi(es that competitive advantage can come not #"st from great prod"cts or services' b"t from anywhere a!ong the va!"e chain. :t7s a!so important to "nderstand how a firm fits into the overa!! value system' which inc!"des the va!"e chains of its s"pp!iers' channe!s' and b"yers. ?ith the idea of activity mapping' 6orter +.HH=/ b"i!ds on his ideas of generic strategy and the va!"e chain to describe strategy imp!ementation in more detai!. 9ompetitive advantage re2"ires that the firm7s va!"e chain be managed as a system rather than a co!!ection of separate parts. 6ositioning choices determine not on!y which activities a company wi!! perform and how it wi!! config"re individ"a! activities' b"t a!so how they re!ate to one another. This is cr"cia!' since the essence of imp!ementing strategy is in the activities choosing to perform activities different!y or to perform different activities than riva!s. ) firm is more than the s"m of its activities. ) firm7s va!"e chain is an interdependent system or networ of activities' connected by !in ages. <in ages occ"r when the way in which one activity is performed affects the cost or effectiveness of other activities. <in ages create tradeoffs re2"iring optimi(ation and coordination. 6orter describes three choices of strategic position that inf!"ence the config"ration of a firm7s activities5 variety*based positioning - based on prod"cing a s"bset of an ind"stry7s prod"cts or servicesO invo!ves choice of prod"ct or service varieties rather than c"stomer segments. 0a es economic sense when a company can prod"ce partic"!ar prod"cts or services "sing distinctive sets of activities. +i.e. Diffy <"be for a"to !"bricants on!y/ needs*based positioning - simi!ar to traditiona! targeting of c"stomer segments. )rises when there are gro"ps of c"stomers with differing needs' and when a tai!ored set of activities can serve those needs best. +i.e. : ea to meet a!! the home f"rnishing needs of a certain segment of c"stomers/ access*based positioning - segmenting by c"stomers who have the same needs' b"t the best config"ration of activities to reach them is different. +i.e. 9armi e 9inemas for theaters in sma!! towns/ 6orter7s ma#or contrib"tion with "activity mapping" is to he!p e4p!ain how different strategies' or positions' can be implemented in practice. The ey to s"ccessf"! imp!ementation of strategy' he says' is in combining activities into a consistent fit with each other. ) company7s strategic position' then' is contained within a set of tai!ored activities designed to de!iver it. The activities are tight!y !in ed to each other' as shown by a re!evance diagram of sorts. 8it !oc s o"t competitors by creating a "chain that is as strong as its strongest !in ." :f competitive advantage grows o"t of the entire system of activities' then competitors m"st match each activity to get the benefit of the who!e system. 6orter defines three types of fit5 simp!e consistency - first order fit between each activity and the overa!! strategy reinforcing - second order fit in which distinct activities reinforce each other optimi(ation of effort - coordination and information e4change across activities to e!iminate red"ndancy and wasted effort. 3ow is competitive advantage s"stainedJ 6orter +.HHC/ o"t!ines three conditions for the s"stainabi!ity of competitive advantage5 "ierarchy of source +durability and imitability, - !ower-order advantages s"ch as !ow !abor cost may be easi!y imitated' whi!e higher order advantages !i e proprietary techno!ogy' brand rep"tation' or c"stomer re!ationships re2"ire s"stained and c"m"!ative investment and are more diffic"!t to imitate. -umber of distinct sources - many are harder to imitate than few.

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Constant improvement and upgrading - a firm m"st be "r"nning scared'" creating new advantages at !east as fast as competitors rep!icate o!d ones.

References5 6orter' 0ichae!' Competitive dvantage' The 8ree 6ress' ;*' .H%-. 6orter' 0ichae!' The Competitive dvantage of -ations' The 8ree 6ress' ;*' .HHC. 6orter' 0ichae!' "?hat is strategyJ" "arvard #usiness $eview v@$' n= +;ov-Dec' .HH=/5=. +.% pages/.

2.2

Core Competence and Capabilities

6roponents of this framewor emphasi(e the importance of a dynamic strategy in today7s more dynamic b"siness environment. They arg"e that a strategy based on a "war of position" in ind"stry str"ct"re wor s on!y when mar ets' regions' prod"cts' and c"stomer needs are we!! defined and d"rab!e. )s mar ets fragment and pro!iferate' and prod"ct !ife cyc!es acce!erate' "owning" any partic"!ar mar et segment becomes more diffic"!t and !ess va!"ab!e. :n s"ch an environment' the essence of strategy is not the str"ct"re of a company7s prod"cts and mar ets b"t the dynamics of its behavior. ) s"ccessf"! company wi!! move 2"ic !y in and o"t of prod"cts' mar ets' and sometimes even b"siness segments. Under!ying it a!!' tho"gh' is a set of core competencies or capabi!ities that are hard to imitate and disting"ish the company from competition. These core competencies' and a contin"o"s strategic investment in them' govern the !ong term dynamics and potentia! of the company. ?hat are core competencies and capabi!itiesJ 6raha!ad and 3ame! +.HHC/ spea of core competencies as the co!!ective !earning in the organi(ation' especia!!y how to coordinate diverse prod"ction s i!!s and integrate m"!tip!e streams of techno!ogy. These s i!!s "nder!ie a company7s vario"s prod"ct !ines' and e4p!ain the ease with which s"ccessf"! competitors are ab!e to enter new and seeming!y "nre!ated b"sinesses. Three tests can be app!ied to identify core competencies5 +./ provides potentia! access to wide variety of mar ets' +,/ ma es significant contrib"tion to end "ser va!"e' and +&/ diffic"!t for competitors to imitate. .xamples of core competence5 Sony in miniat"ri(ation' a!!owing it to ma e everything from ?a! mans to video cameras to noteboo comp"ters. 9anon7s core competence in optics' imaging' and microprocessor contro!s have enab!ed it to enter mar ets as seeming!y diverse as copiers' !aser printers' cameras' and image scanners. Sta! ' Evans' and Sch"!man +.HH,/ spea of capabilities simi!ar!y' b"t defined more broad!y to encompass the entire va!"e chain rather than #"st specific technica! and prod"ction e4pertise. .xamples of capabilities5 ?a!-mart in inventory management' 3onda in dea!er management and prod"ct rea!i(ation. :mp!ications for strategyJ /ortfolio of competencies. )n essentia! !esson of this framewor is that competencies are the roots of competitive advantage' and therefore b"sinesses sho"!d be organi(ed as a portfo!io of competencies +or capabi!ities/ rather than a portfo!io of b"sinesses. Organi(ation of a company into a"tonomo"s strategic b"siness "nits' based on mar ets or prod"cts' can cripp!e the abi!ity to e4p!oit and deve!op competencies - it "nnecessari!y restricts the ret"rns to sca!e across the organi(ation. 9ore competence is comm"nication' invo!vement' and a deep commitment to wor ing across organi(ationa! bo"ndaries. /roducts based on competencies. 6rod"ct portfo!ios +at !east in techno!ogy-based companies/ sho"!d be based on core competencies' with core prod"cts being the physica! embodiment of one or more core competencies. Th"s' core competence a!!ows both foc"s +on a few competencies/ and diversification +to whichever mar ets firm7s capabi!ities can add va!"e/. To s"stain !eadership in their chosen core competence areas' companies sho"!d see' to maximi0e their world manufacturing share in core products. This part!y determines the pace at which competencies can be enhanced and e4tended +thro"gh a !earning-by-doing sort of improvement/.

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Continuous investment in core competencies or capabilities. The costs of !osing a core competence can be on!y part!y ca!c"!ated in advance - since the embedded s i!!s are b"i!t thro"gh a process of contin"o"s improvement' it is not something that can be simp!y bo"ght bac or "rented in" by o"tso"rcing. ?a!-mart' for e4amp!e' has invested heavi!y in its !ogistics infrastr"ct"re' even if the individ"a! investments co"!d not be #"stified by ROR ana!ysis. They were strategic investments that enab!ed the company7s re!ent!ess foc"s on c"stomer needs. ?hi!e ?a!-mart was b"i!ding "p its competencies' A-mart was o"tso"rcing whenever it was cheapest. Caution: core competencies as core rigidities. 1owen et a!. ta! abo"t the !imitations to restricting prod"ct deve!opment to areas in which core competencies a!ready e4ist' or core rigidities. Bood companies may try to incrementa!!y improve their competencies by bringing in one or two new core competencies with each new ma#or deve!opment pro#ect they p"rs"e.

References5 1owen' 9!ar ' 3o!!oway' ?hee!right' 6erpet"a! Enterprise 0achine' O4ford 6ress' .HH$. 6raha!ad' 9.A. and Bary 3ame!' "The 9ore 9ompetence of the 9orporation'" "arvard #usiness $eview' v=%' n& +0ay-D"ne' .HHC/5@H +.& pages/. Sta! ' B.' Evans' 6.' and <. Sch"!man' "9ompeting on 9apabi!ities5 the ;ew R"!es of 9orporate Strategy'" v@C' n, +0arch-)pri!' .HH,/5-@ +.& pages/.

2.3

Resource- ased !ie" o# t$e Firm %R !&

?hat is R1>J The R1> framewor combines the interna! +core competence/ and e4terna! +ind"stry str"ct"re/ perspectives on strategy. <i e the framewor s of core competence and capabi!ities' firms have very different co!!ections of physica! and intangib!e assets and capabi!ities' which R1> ca!!s reso"rces. 9ompetitive advantage is "!timate!y attrib"ted to the ownership of a va!"ab!e reso"rce. Reso"rces are more broad!y defined to be physica! +e.g. property rights' capita!/' intangib!e +e.g. brand names' techno!ogica! now how/' or organi(ationa! +e.g. ro"tines or processes !i e !ean man"fact"ring/. ;o two companies have the same reso"rces beca"se no two companies have had the same set of e4perience' ac2"ired the same assets and s i!!s' or b"i!t the same organi(ationa! c"!t"re. )nd "n!i e the core competence and capabi!ities framewor s' tho"gh' the va!"e of the broad!y-defined reso"rces is determined in the interp!ay with mar et forces. Enter 6orter7s - 8orces. 8or a reso"rce to be the basis of an effective strategy' it m"st pass a n"mber of external mar et tests of its va!"e. 9o!!ins and 0ontgomery +.HH-/ offer a series of five tests for a va!"ab!e reso"rce5 .. )nimitability - how hard is it for competitors to copy the reso"rceJ ) company can sta!! imitation if the reso"rce is +./ physically unique' +,/ a conse2"ence of path dependent deve!opment activities' +&/ causally ambiguous +competitors don7t now what to imitate/' or +$/ a cost!y asset investment for a !imited mar et' res"!ting in economic deterrence. ,. %urability - how 2"ic !y does the reso"rce depreciateJ &. ppropriability - who capt"res the va!"e that the reso"rce creates5 company' c"stomers' distrib"tors' s"pp!iers' or emp!oyeesJ $. 1ubstitutability - can a "ni2"e reso"rce be tr"mped by a different reso"rceJ -. Competitive 1uperiority - is the reso"rce rea!!y better relative to competitorsJ Simi!ar!y' b"t from a more e4terna!' economics perspective' 6eteraf +.HH&/ proposes fo"r theoretica! conditions for competitive advantage to e4ist in an ind"stry5 .. "eterogeneity of resources PQ rents e4ist ) basic ass"mption is that reso"rce b"nd!es and capabi!ities are heterogeneo"s across firms. This difference is manifested in two ways. 8irst' firms with s"perior reso"rces can earn Ricardian rents +profits/ in competitive mar ets beca"se they prod"ce more efficient!y than others. ?hat is ey is that the s"perior reso"rce remains in !imited s"pp!y. Second' firms with mar et power can earn monopo!y

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,. &. $.

profits from their reso"rces by de!iberate!y restricting o"tp"t. 3eterogeneity in monopo!y mode!s may res"!t from differentiated prod"cts' intra-ind"stry mobi!ity barriers' or first-mover advantages' for e4amp!e. .x*post limits to competition PQ rents s"stained S"bse2"ent to a firm gaining a s"perior position and earning rents' there m"st be forces that !imit competition for those rents +imitabi!ity and s"bstit"tabi!ity/. )mperfect mobility PQ rents s"stained within the firm Reso"rces are imperfect!y mobi!e if they cannot be traded' so they cannot be bid away from their emp!oyerO competitive advantage is s"stained. .x*ante limits to competition PQ rents not offset by costs 6rior to the firm estab!ishing its s"perior position' there m"st be !imited competition for that position. Otherwise' the cost of getting there wo"!d offset the benefit of the reso"rce or asset.

:mp!ications for strategyJ 0anagers sho"!d b"i!d their strategies on reso"rces that pass the above tests. :n determining what are va!"ab!e reso"rces' firms sho"!d !oo both at e4terna! ind"stry conditions and at their interna! capabi!ities. Reso"rces can come from anywhere in the va!"e chain and can be physica! assets' intangib!es' or ro"tines. 9ontin"o"s improvement and "pgrading of the reso"rces is essentia! to prospering in a constant!y changing environment. 8irms sho"!d consider ind"stry str"ct"re and dynamics when deciding which reso"rces to invest in. :n corporations with a divisiona! str"ct"re' it7s easy to ma e the mista e of optimi(ing divisiona! profits and !etting investment in reso"rces ta e a bac seat. Bood strategy re2"ires contin"a! rethin ing of the company7s scope' to ma e s"re it7s ma ing the most of its reso"rces and not getting into mar ets where it does not have a reso"rce advantage. R1> can inform abo"t the ris s and benefits of diversification strategies. References5 9o!!is' David D.O 0ontgomery' 9ynthia ). "9ompeting on reso"rces5 strategy in the .HHCs"' "arvard #usiness $eview' v@&' n$ +D"!y-)"g"st' .HH-/5..% +.. pages/. 0.). 6eteraf' "The 9ornerstones of 9ompetitive )dvantage5 ) Reso"rce-1ased >iew'" in 1trategic &anagement 2ournal .HH&' >o!. .$' pp. .@H-.H..

2.'

(lternati)e Frame"or*s+ ,)olutionary C$an-e and .ypercompetition

Recent!y' strategy !iterat"re has foc"sed on managing change as the centra! strategic cha!!enge. 9hange' the story goes' is the stri ing feat"re of contemporary b"siness' and s"ccessf"! firms wi!! be the ones that dea! most effective!y with change' not simp!y those that are good at p!anning ahead. ?hen the direction of change is too "ncertain' managers simp!y cannot p!an effective!y. ?hen ind"stries are rapid!y and "npredictab!y changing' strategy based on ind"stry ana!ysis' core capabi!ities' and p!anning may be inade2"ate by themse!ves' and wo"!d be we!! comp!emented by an orientation towards dea!ing with change effective!y and contin"o"s!y. Evo!"tionary 9hange Theories that draw ana!ogies between bio!ogica! evo!"tion and economics or b"siness can very satisfying5 they e4p!ain the way things wor in the rea! wor!d' where ana!ysis and p!anning is often a rarity. 0oreover' they s"ggest that strategies based on f!e4ibi!ity' e4perimentation and contin"o"s change and !earning can be even more important than rigoro"s ana!ysis and p!anning. :ndeed' overp!anning is a danger to be avoided.

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:n Competing on the .dge' Eisenhardt +.HH%/ advocates a strategy based on what she ca!!s "competing on the edge'" combining e!ements of comp!e4ity theory with evo!"tionary theory. :n s"ch a framewor ' firms deve!op a "semi-coherent strategic direction" of where they want to go. They do this by having the right ba!ance between order and chaos - firms can then s"ccessf"!!y evo!ve and adapt to their "npredictab!e environment. 1y competing at the "edge of chaos'" a firm creates an organi(ation that can change and prod"ce a contin"o"s f!ow of competitive advantages that form the "semi-coherent" direction. 8irms are not hindered by too m"ch p!anning or centra!i(ed contro!' b"t they have eno"gh str"ct"re so that change can be organi(ed to happen. They s"ccessf"!!y evo!ve' beca"se they p"rs"e a variety of moves' and in doing so ma e some mista es b"t a!so re!ent!ess!y reinvent the b"siness by discovering new growth opport"nities. This strategy is characteri(ed by being "npredictab!e' "ncontro!!ed' and inefficient' b"t it wor s. :t7s important to note that firms sho"!d not #"st react we!! to change' b"t m"st a!so do a good #ob of anticipating and !eading change. :n s"ccessf"! b"sinesses' change is time*paced' or triggered by the passage of time rather than events. :n #uilt to (ast' 9o!!ins and 6orras +.HH$/ o"t!ine habits of !ong-s"ccessf"!' visionary companies. Under!ying the habits is an orientation towards evo!"tionary change5 try a !ot of st"ff and eep what wor s. Evo!"tionary processes can be a powerf"! way to stim"!ate progress. :mportant!y' tho"gh' 9o!!ins and 6orras a!so find that s"ccessf"! companies each have a core ideo!ogy that m"st be preserved thro"gho"t the progress. There is no one form"!a for the "right" set of core va!"es' b"t it is important to have them. :n strategy-spea ' it is this core ideo!ogy that most f"ndamenta!!y differentiates the firm from competitors' regard!ess of which mar et segments they get into. They are deep!y he!d va!"es that go beyond "vision statements" - they are mechanisms and systems that are b"i!t into the system over time. )ttention to the core be!iefs may sometimes defy short-term profit incentives or conventiona! b"siness wisdom' b"t it is important to maintain them. E4amp!es of core ideo!ogies are5 367s commitment to ma ing an "origina! technica! contrib"tion" in every mar et they enter' ?a!-mart7s "e4ceed c"stomer e4pectations'" 1oeing7s "being on the !eading edge of aviation'" and &07s "respect for individ"a! initiative." ;otice the "ma4imi(e shareho!der wea!th" is not an ade2"ate core ideo!ogy - it does not inspire peop!e at a!! !eve!s and provides !itt!e g"idance. :n the conte4t of strategy and p!anning' this boo offers a co"p!e of important !essons5 Unp!anned' evo!"tionary change can be an important component to s"ccess. Strategy and p!anning sho"!d foster and comp!ement s"ch change' not s"ffocate it. 9ertain core be!iefs are f"ndamenta! to organi(ations' and sho"!d be preserved at a!! costs. ;ot everything abo"t an organi(ation is a candidate for change in considering a!ternative strategies.

3ypercompetition Traditiona! approaches to strategy stress the creation of advantage' b"t the concept of hypercompetition teaches that strategy is a!so the creative destr"ction of an opponent advantage. This is beca"se in today7s environment' traditiona! so"rces of competitive advantage erode rapid!y' and s"staining advantages can be a distraction from deve!oping new ones. 9ompetition has intensified to ma e each of the traditiona! so"rces of advantage more v"!nerab!eO the traditiona! so"rces are5 price & 2"a!ity' timing and now-how' creation of strongho!ds +entry barriers have fa!!en/' and deep poc ets. The primary goa! of this new approach to strategy is disr"ption of the stat"s 2"o' to sei(e the initiative thro"gh creating a series of temporary advantages. :t is the speed and intensity of movement that characteri(es hypercompetition. There is no e2"i!ibri"m as in perfect competition' and on!y temporary profits are possib!e in s"ch mar ets. S"ccessf"! strategy in hypercompetitive mar ets is based on three e!ements5 >ision for how to disr"pt a mar et +setting goa!s' b"i!ding core competencies necessary to create specific disr"ptions/ Aey capabi!ities enab!ing speed and s"rprise in a wide range of actions Disr"ptive tactics i!!"minated by game theory +shifting the r"!es of the game' signa!ing' sim"!taneo"s and strategic thr"sts/

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Additional Tools for Strategic T!inking and Analysis

3.1 /ame 0$eory
Bame Theory in Strategy Bame theory he!ps ana!y(e dynamic and se2"entia! decisions at the tactica! !eve!. The main va!"e of game theory in strategy is to emphasi(e the importance of thin ing ahead' thin ing of the a!ternatives' and anticipating the reactions of other p!ayers in yo"r "game." Aey concepts re!evant to strategy are the payoff matri4' e4tensive form games' and the core of a game. )pp!ication areas in strategy are5 new prod"ct introd"ction !icensing vers"s prod"ction pricing R&D advertising reg"!ation The :mportance of Understanding "The Bame" S"ccessf"! strategy cannot depend #"st on one firm7s position in ind"stry' capabi!ities' activities' or what have yo". :t depends on how others react to yo"r moves' and how others thin yo" wi!! react to theirs. 1y f"!!y "nderstanding the dynamic with others' yo" can recogni(e win-win strategies that ma e yo" better off in the !ong term' and signa!ing tactics that avoid !ose-!ose o"tcomes. 0oreover' if yo" "nderstand the game' yo" can ta e actions to change the r"!es or p!ayers of the game in yo"r favor. 1randenb"rger and ;a!eb"ff +.HH-/ give some good e4amp!es of this. One way a company can change the game and capt"re more va!"e is by changing the va!"e other p!ayers can bring to it' as the ;intendo e4amp!e i!!"strated. :n s"mmary' companies can change their game of b"siness in their favor by changing5 players +">a!"e ;et"/ - c"stomers' s"pp!iers' s"bstit"tors' and comp!ementors +not #"st the competitors/ added values - the va!"e that each p!ayer brings to the co!!ective game rules - !aws' c"stoms' contracts' etc. that give a game its str"ct"re tactics - moves "sed to shape the way p!ayers perceive the game and hence how they p!ay scope - bo"ndaries of the game. Bame theory has been a b"rgeoning branch of economics in recent years. :t is a comp!e4 s"b#ect that spans games of static +one-time/ and dynamic +repeated/ nat"re "nder perfect or imperfect information. The references be!ow wi!! be he!pf"! for those wishing to e4p!ore the theory and mode!ing of game theory in more detai!. 8or strategy' tho"gh' it can often be a ma#or step #"st to recogni(e certain sit"ations as games' and thin ing abo"t how a p!ayer can set o"t to change the game. References5 :ntrod"ction to game theory in corporate strategy Oster' S.0.' &odern Competitive nalysis' 9hapter' .&' O4ford 6ress' .HH$' pp.,&@-,-C. 1randenb"rger' )dam 0.O ;a!eb"ff' 1arry D. "The right game5 "se game theory to shape strategy" "arvard #usiness $eview v@&' n$ +D"!y-)"g"st' .HH-/5-@. 1asic introd"ction to game theory concepts ).A. Di4it and 1. D. ;a!eb"ff' Thin'ing 1trategically: The Competitive .dge in #usiness, /olitics, and .veryday (ife' ?.?. ;orton & 9ompany' pp. &$@-&=@ Bibbons' R.' 3ame Theory for pplied .conomists' 6rinceton5 6rinceton University 6ress' .HH,. 1inmore' A.' 4un and 3ames: Text on 3ame Theory' <e4ington5 D.9. 3eath & 9o.' .HH,. 0ore advanced economics te4ts on game theory

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8"denberg' D. and D. Tiro!e' 3ame Theory' 9ambridge5 0:T 6ress' .HH.. 0yerson' R.' 3ame Theory: n nalysis of Conflict' 9ambridge5 3arvard University 6ress' .HH..

3.2

1ptions

Options theory has inf!"enced corporate strategy "n!i e any other paradigm coming from ?a!! Street. The Irea! optionK is ana!ogo"s to the financia! option in that a company with an investment opport"nity ho!ds the right b"t not the ob!igation to p"rchase an asset at some time in the f"t"re. 1"siness schoo!s have ta"ght managers to ana!y(eNeva!"ate investment decisions "sing net present va!"e +;6>/' which ass"mes one of two things5 ./ the investment is reversib!e or ,/ if not' it is a now-or-never proposition. :n fact' most investment decisions are irrevocab!e a!!ocations of reso"rces and capab!e of being de!ayed. Di4it and 6indyc +.HH-/ disc"ss how the options approach to capita! investment provides a richer framewor that a!!ows managers to address the iss"es of irreversibi!ity' "ncertainty' and timing more direct!y. The options framewor p!aces va!"e on f!e4ibi!ity + eeping the investment option a!ive/ and mod"!arity +creating options/5 4lexibility examples: ./ :nvestments in R&D can create options that a!!ow the company to "nderta e other investments in the f"t"re sho"!d mar et conditions be favorab!e. ,/ ) mining faci!ity operating at a !oss given c"rrent prices may be de!iberate!y ept open beca"se c!os"re wo"!d inc"r the opport"nity cost of giving "p the option to wait for higher f"t"re prices. &odularity examples: ./ ) !and p"rchase co"!d !ead to deve!opment of minera! reserves. ,/ )n e!ectric "ti!ity co"!d invest in sma!! additions to capacity as needed to meet "ncertain demand instead of b"i!ding e4pensive' !arge-sca!e p!ants. The option is str"ct"red s"ch that the company can e4ercise it when profitab!e and !et it e4pire when it is not' depending on how "ncertainty is reso!ved. )s !ong as there are some contingencies "nder which the company wo"!d choose not to invest' the option has value. Th"s' options theory capt"res the fact that the greater the "ncertainty' the greater the va!"e of the opport"nity and the greater the incentive to wait and eep the option a!ive rather than e4ercise it. :mp!ications for strategyJ The options approach is partic"!ar!y appropriate for companies in very vo!ati!e and "npredictab!e ind"stries' s"ch as e!ectronics' te!ecomm"nications' biotech' and pharmace"tica! ind"stries. ?hen raising capita!' greater va!"e sho"!d be p!aced on investments that create options' compared to those that exercise options. Options are especia!!y appropriate for ana!y(ing a series of phased investments. Options theory he!ps "s "nderstand how traditiona! disco"nted cash f!ow ana!ysis systematica!!y "nderestimates the benefits of waiting. Rea! options a!so provide a means for eva!"ating disinvestment' an often over!oo ed opport"nity to avoid f"t"re !osses +e.g.' c!osing a faci!ity in response to a mar et downt"rn/. 9onsider whether the c!ient wo"!d be in a better position after some "ncertainty is reso!ved. :n framing a!ternatives' consider strategies that inc!"de downstream decisions. Options might be the idea! way to mode! s"ch decision opport"nities. #ntrod73tory 9ooks on Rea5 O:tions )mram' 0. and ;. A"!ati!a a' Rea! Options 5 0anaging Strategic :nvestment in an Uncertain ?or!d' 3arvard 1"siness Schoo! 6ress' .HH%. - ta'es the finance approach to real options, much li'e the (uenberger text. 4ocus is on problems in which ris's are priced by exchange traded securities +mar'et ris's,.

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EES&OR $%& Rea! Options in 9apita! :nvestment' Trigeorgis' <' editor' .HH-. * collection of articles intended for both academic and professional audience.

Strategy 6rimer &.C

Trigeorgis' <.' Rea! Options 5 0anageria! 8!e4ibi!ity and Strategy in Reso"rce )!!ocation' 0:T 6ress' .HH=. * /erhaps the best overall general introduction to real options, without ta'ing a strictly finance or strictly decision analytic approach. 4eatures a good comparison of various approaches to valuing ris'y investments. practical approach that is not as academic as %ixit and /indyc'. $3ademi3 Re6eren3es Di4it' )vinash A. and Robert S. 6indyc ' :nvestment Under Uncertainty, 6rinceton' .HH$. The boo' to read if you are interested in mathematical formulations of real options problems +i.e. dynamic programming and stochastic differential equations, <"enberger' D.' :nvestment Science' O4ford Univ. 6ress' .HH@ (uenberger5s binomial lattice approach is a useful simplification of dynamic programming approaches to real options. The boo' also includes some powerful finance tools for pricing mar'et ris'. Smith' Dames E.' IOptions in the rea! wor!d5 <essons !earned in eva!"ating oi! and gas investments'K Operations Research' DanN8eb .HHH. Smith' Dames E. and Robert ;a"' I>a!"ing Ris y 6ro#ects5 Option 6ricing Theory and Decision )na!ysis'K 0anagement Science' >o!. $.' ;o. -' 0ay .HH-. Smith' Dames E.' I>a!"ing Oi! 6roperties5 :ntegrating Option 6ricing and Decision )na!ysis )pproaches'K Operations Research' 0arN)pr .HH%. * 2im 1mith5s wor' has been instrumental in integrating the decision analysis and finance approaches to ris'y investments. 4ocuses mainly on problems that are at least partly influenced by mar'et*spanning ris's +i.e. ris's that are priced by exchange traded derivatives, such as oil and gas futures, Po:75ar 97siness Re6eren3es ) n"mber of recent artic!es have promoted rea! options to the genera! management a"dience5 )mram' 0.' ;. A"!ati!a a' IDiscip!ined decisions5 )!igning strategy with the financia! mar ets'K "arvard #usiness $eview' DanN8eb .HHH. * a concise summary of the concepts in their boo' +see above,. Di4it' )vinash A. and Robert S. 6indyc ' IThe Options )pproach to 9apita! :nvestment'K 3arvard 1"siness Review' 0ay .HH-. * a good overview of why flexibility in decision ma'ing is important. 6ritten by the authors who are also experts in the academic real options literaure. ) good starting point for those who are a!ready fami!iar with decision ana!ysis. <es!ie' A. and 0ichae!s' 0. IThe Rea! 6ower of Rea! Options'K 0cAinsey R"arter!y' .HH@ ;o &. * promotes the intuition from analysis of real options as a framewor' for strategic thin'ing. 9ope!and' T. and 6. Aeenan' I3ow m"ch is f!e4ibi!ity worth'K 0cAinsey R"arter!y' .HH% ;o , * general introduction to real options as a means to price mar'et ris', focusing more on the finance tradition of real options +no arbitrage pricing, than the decision analysis tradition. 7seful if you are dealing with uncertainties that are trac'ed well by the mar'et +i.e. oil and gas prices, etc., <"ehrman' T.' I:nvestment Opport"nities as Rea! Options5 Betting Started on the ;"mbers'K 3arvard 1"siness Review' D"!y .HH%. <"ehrman' T.' IStrategy as a 6ortfo!io of Rea! Options'K 3arvard 1"siness Review' September .HH%. .,

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* try to generali0e the #lac'*1choles basis for real options thin'ing to a genera ! a"dience. ) bit ho y and simplistic.

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3.3

Strate-ic Scenarios

Scenarios are powerf"! vehic!es for cha!!enging o"r menta! mode!s of the wor!d. The va!"e is not in predicting the f"t"re' b"t in ma ing better decisions today. The decision ma ers co"!d be individ"a!s' b"sinesses' or po!icy ma ers. Scenarios are a nice comp!ement to the princip!es of decision ana!ysis5 the D) cyc!e ends in decisions and insights' whi!e the scenario process ends in a scenario. ?hy Deve!op ScenariosJ - Uncovering the Decision 1esides predicting the f"t"re' scenarios aid in strategic decision ma ing5 &a'e the decision conscious. The first step in the scenario process is ma ing the decision conscio"s. 6eop!e7s decision agenda is often "nconscio"s' and peop!e sho"!d not avoid a decision #"st beca"se they fee! power!ess. rticulate current mindsets. Scenarios are !i e stories we can te!! o"rse!ves - they are a powerf"! way of s"spending disbe!ief and avoiding the dangers of denia!. Often' peop!e may ref"se to thin abo"t possibi!ities that are "nappea!ing to them. The process of scenario b"i!ding' considering both optimistic and pessimistic and #"st p!ain different f"t"res' over!y e4poses "menta! mode!s" and ass"mptions that may be inbred in the organi(ation. %evelop insights and solid instincts. :nsights come from as ing the right 2"estions - from having to consider more than one scenario. )!so' scenario b"i!ding he!ps deve!op a g"t fee!ing for a sit"ation' and ass"res "s that we7ve been comprehensive in covering the bases re!evant to o"r decision. 3ow to Deve!op ScenariosJ Deve!oping scenarios is simi!ar to deve!oping and pr"ning inf!"ence diagrams in D)' b"t the scope of consideration is a !itt!e broader with scenarios. Sti!!' scenario b"i!ders sho"!d consider both narrow +sit"ation specific/ and broad 2"estions. Typica!!y' the scenario b"i!ding e4ercise wi!! res"!t in no more than fo"r scenarios - any more is too comp!e4 to draw insights. The set of scenarios sho"!d span a range of o"tcomesO typica!!y something !i e "same b"t better'" "worse'" and "different b"t better." Steps to deve!oping scenarios are as fo!!ows5 .. :dentify the foca! iss"e or decision. +D) ana!og"e5 frame the decision/ ,. :dentify the basic driving forces inf!"encing the o"tcome5 socia!' techno!ogica!' economic' po!itica!' environmenta!. +D) ana!og"eJ/ &. :dentify the ey forces in the !oca! environment5 determining the predetermined e!ements and critica! "ncertainties. +D) ana!og"e5 identify the "ncertainties/ $. Ran the "ncertainties in order of importance. +D) ana!og"e5 tornado diagram/ -. Se!ecting scenario p!ots +!ogics/. Scenario p!ots typica!!y r"n according to certain !ogics' !i e5 winners & !osers' cha!!enge & response' evo!"tion' revo!"tion' cyc!es' etc. =. 8!esh o"t scenarios. Each p!ot wi!! !ead to a different decision today. 8rom the different p!ots' narrow and combine them to form two or three coherent scenarios. @. )ssess imp!ications of scenarios on decision. %. :dentify !eading indicators and signposts. <earn to notice symptoms' c"es' and warning signa!s of certain p!ots "nrave!ing before yo". References5 Schwar(' 6eter' The rt of the (ong View: /lanning for the 4uture in an 7ncertain 6orld ' Do"b!eday' ;ew *or ' .HH.. Schwart(' 6eter' "9omposing a 6!ot for *o"r Scenario'" /lannning $eview ,C' no. & +.HH,/5$.-$=. 0ason' David 3. "Scenario-based 6!anning5 Decison 0ode! for the <earning Organi(ation ,8 /lanning $eview ,,' no. , +.HH$/5=-... +This a!so introd"ces the idea of organi(ationa! !earning/. Simpson' Danie! B.' "Aey <essons for )dopting Scenario 6!anning in Diversified 9ompanies'" /lanning $eview ,C' no. & +.HH,/5 .C-.@' $@-$%.

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3.'

1t$er Particularly Rele)ant ,,S&1R Core Concepts

St"dents in EES&OR have a host of ana!ytica! too!s avai!ab!e to add insight to strategic thin ing and ana!ysis. Some of the more direct!y re!evant topics inc!"de5 Decision )na!ysis - decision hierarchy and framing - strategy tab!es - tornado diagrams - ana!ysis of decisions "nder "ncertainty - va!"e of information - options in decisions 8inance - investment ana!ysis - rea! options Economics - demand-oriented pricing +dynamic' monopo!istic pricing/ - game theory

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" #arketing #odels for $roduct Strategy

EES&OR $%& teaches two prod"ct p!anning methodo!ogies that may be "sed independent!y or as comp!ements to each other. They add rigor to strategy at the !eve! of prod"ct p!anning and imp!ementation. )n e4ce!!ent reference for these and other mar eting mode!s is <i!ien and Rangasaway +.HH%/.

'.1

2e" Product 3i##usion 4odels

The diffusion process is the spread of an idea or the penetration of a mar et by a new prod"ct from its so"rce of creation to its "!timate "sers or adopters. ;ote that adoption refers to the decision to "se an innovation reg"!ar!y' whereas diffusion is on!y concerned with initia! tria! of the prod"ct. +So"rce5 <i!ien' Aot!er and 0oorthy' .HH,' p. $=./ There are two types of diff"sion effects5 )nnovation5 tria! of prod"ct ca"sed by advertising and promotions )mitation5 tria! of prod"ct ca"sed by word-of-mo"th recommendations and rep"tation 6rior to 1ass +.H=H/' diff"sion mode!s were either p"re innovative +ass"me diff"sion on!y ca"sed by e4terna! forces/ or p"re imitative +ass"me diff"sion on!y ca"sed by imitation N word of mo"th/. The 1ass mode! combines innovative and imitative behavior into one mode!5 q +t / =p +m n+t / = - +t // + - +t /+m - +t // m innovation effect or e4terna! inf!"ence where5
+t / n+t / =-

imitation effect or interna! inf!"ence

- +t /

m
p q

P 0agnit"de of tria! demand +P the n"mber of adopters at time t P derivative of - with respect to t/ P 9"m"!ative n"mber of adopters P 6otentia! n"mber of "!timate adopters P :nf!"ence parameter for innovation P :nf!"ence parameter for imitation

This e4pression can be rewritten for additiona! int"itive "nderstanding "sing the e2"iva!ent representation5 q +t / = Tm - +t /ST p + 9 +t /S m

"npenetrated mar et si(e

adoptive press"re pPinnovative qPimitative

Terms can be interpreted as representing one gro"p of innovators and one gro"p of imitators' or as representing both the interna! and e4terna! inf!"ences on a!! adopters.

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:mportant B"ide!ines for 0ar et 8orecasting The mode! forecasts total mar et potentia! for a prod"ct' not sa!es for a partic"!ar company. 9ompany sa!es wo"!d depend on mar et share of the tota!' which depends on partic"!ar prod"ct variab!es !i e 2"a!ity' cost' and promotion' and distrib"tion. Diff"sion mode!s on!y he!p with the big pict"reO "se con#oint ana!ysis or other methods to forecast mar et share. :n practice the act"a! coefficients are "s"a!!y estimated by ana!ogy to past prod"cts. 9oefficients for past prod"cts are genera!!y avai!ab!e in tab!es' or may be estimated by regression. Remember that diff"sion mode!s on!y represent demand associated with the tria! of a prod"ct. )dditiona! terms need to be added to acco"nt for repeat p"rchase. ) mode! that ta es into consideration both tria! and repeat p"rchase demand wo"!d be a comp!ete sa!es forecast. The 1ass mode! is a predictive mode! that is most appropriate for forecasting sa!es of a discontinuous new techno!ogy or d"rab!e prod"ct that has no competitors. :n s"ch sit"ations' the s"ccess of the prod"ct may be partic"!ar!y "ncertain' and the 1ass mode! forecast may on!y depict one possib!e o"tcome. ?here yo" are in the prod"ct !ife cyc!e dictates the mar eting and c"stomer segmentation strategy. ?ith discontin"o"s innovations different mar eting strategies are ca!!ed for at different stages of the techno!ogy !ife cyc!e to ens"re that the prod"ct reaches a mass mar et +see Section -.-/. 0ore recent research has foc"sed on re!a4ing the ass"mptions of the 1ass mode!5 )!!owing mar et potentia! to vary over time ;ot restricting that diff"sion of an innovation be independent of a!! other innovations )!!owing geographica! bo"ndaries of the system in which diff"sion ta es p!ace to vary over time :ncorporating the effect of mar eting actions s"ch as pricing' advertising' etc. on the diff"sion process 9onsidering s"pp!y restrictions 9onsideration of "ncertainty 9onsider variations in diff"sion rates in different co"ntries )!!ow word of mo"th effects to vary over time The area of mar eting p!anning mode!ing inc!"des the incorporation of feedbac effects into diff"sion mode!s to t"rn advertising and pricing decisions over time into optima! contro! prob!ems. References <i!ien' Bary <.' 6hi!ip Aot!er' and A. Sridhar 0oorthy' &ar'eting &odels +.HH,/5$-@ +$$ pages/ <i!ien' Bary' and ). Rangasaway' &ar'eting .ngineering' )ddison-?es!ey' .HH%' pp..H--,C$. 0aha#an'>i#ay' Eitan 0"!!er' and 8ran 0. 1ass' I;ew-6rod"ct Diff"sion 0ode!s'K "andboo's in :$ ; &1, v. - +.HH&/5 &$H +,& pages/.

'.2

Con5oint (nalysis

9on#oint ana!ysis is mar et research methodo!ogy for mode!ing the mar et. ) 2"antitative' grass-roots approach' con#oint ana!ysis is "sed to predict cons"mer preferences for m"!tiattrib"te a!ternatives. :t is based on economic and psycho!ogica! research on cons"mer behavior' especia!!y at the individ"a! !eve!' which is considered ey to ma ing acc"rate predictions of the tota! mar et. The s"b#ect of a con#oint st"dy can be either a physica! prod"ct or a service' and the mar et can inc!"de both new and e4isting prod"ctsNservices. ?hat is con#oint ana!ysisJ Thin of the decision process that cons"mers go thro"gh when choosing between comp!e4 a!ternatives. 6rod"cts vary in terms of their feat"res' performance' and 2"a!ity and th"s are offered at vario"s prices. 9on#oint ana!ysis considers a prod"ct in terms of a b"nd!e of attributes' or characteristics. Thro"gh an interview' data are co!!ected from respondents to capt"re the tradeoffs they ma e between attrib"tes. These data are processed to estimate a utility f"nction that e4presses each respondentEs va!"e for prod"ct attrib"tes. These "ti!ity va!"es are then "sed in a mar et mode! or sim"!ator to ma e predictions abo"t how .@

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cons"mers wo"!d choose among new' modified' and e4isting prod"cts. 9on#oint ana!ysis a!!ows "s to ana!y(e f"t"re mar et scenarios based on primary mar et research. Other techni2"es' s"ch as historica! ana!ysis' wo"!d be ins"fficient to forecast the mar et for new prod"cts' whereas con#oint ana!ysis can mode! cons"mersE reaction to hypothetica! prod"cts that may not yet e4ist. 9on#oint ana!ysis is a decompositional mode! in that va!"es are derived from cons"mersE responses to interview 2"estions' as compared to as ing cons"mers to direct!y estimate mode! parameters. :n direct assessment' respondents are as ed how !i e!y they are to b"y a certain prod"ct or how m"ch they wo"!d be wi!!ing to pay for a prod"ct with an attrib"te improvement. This techni2"e is !imited in that prod"cts are not shown in a competitive conte4t and these 2"estions do not genera!!y represent rea!istic p"rchase decisions. )!ternative!y' con#oint ana!ysis "ses inference' which provides a more acc"rate pict"re of cons"mersE b"ying behavior. :n the ana!ysis of responses to 2"estions abo"t hypothetica! prod"ct concepts' we can infer the va!"e to each respondent of having each attrib"te !eve!. Rather than e4pecting respondents to provide direct assessments' they are as ed to ma e a n"mber of decisions that are more rea!istic and nat"ra!. :n a typica! pairwise comparison' two prod"ct concepts are considered <oint!y. 8or instance5 -<i3< dr7g treatment 8o75d yo7 :re6er= 0a#or side effects 3igh efficacy ) 0inor side effects 0oderate efficacy 1

:mp!ications for strategyJ The scope of prod"ct p!anning iss"es addressed with con#oint ana!ysis ranges from the tactica! !eve! to the strategic !eve!. The fo!!owing is a !ist of some of the prod"ct p!anning decisions for which con#oint ana!ysis is c"rrent!y "sed wor!dwide5 6ricing ;ew prod"ct design 6rod"ct positioning 9ompetitive strategy 0ar eting strategies 0ar et segmentation :nvestment decisions Sa!es forecasting 9apacity p!anning Distrib"tion p!anning

9on#oint ana!ysis is a widespread' time-proven strategic too!. To ens"re s"ccess' practitioners m"st caref"!!y set c!ient e4pectations regarding what con#oint can and cannot do. 9on#oint sim"!ators are directiona! indicators that can provide significant insight into the re!ative importance of prod"ct feat"res and preferences for prod"ct config"rations. These mar et sim"!ators predict preference share' that is mar et share potential. 0any interna! and e4terna! inf!"ences s"ch as awareness' mar eting' sa!es force effectiveness' and distrib"tion drive mar et share in the rea! wor!d. Un!ess these effects are e4p!icit!y mode!ed in' care sho"!d be ta en to regard the mode! res"!ts as preference shares that ass"me perfect mar et penetration. 9on#oint ana!ysis is imp!emented "sing commercia!!y avai!ab!e software and c"stom-programmed app!ications. Descriptions of pac ages avai!ab!e from one of the !eading deve!opers' Sawtooth Software' are !isted in the references be!ow.

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Re6eren3es +organi(ed by needsNinterest and ordered by "sef"!ness/5 ) host of references and g"ides to choosing software are avai!ab!e at http5NNwww.sawtoothsoftware.comN Betting Started with 9on#oint on *o"r 6ro#ect 9"rry' Doseph' I9on#oint )na!ysis5 )fter the 1asicsK Orme' 1ryan' I?hich 9on#oint 0ethod Sho"!d : UseK +.HH@/ 9!ient :nteraction 9"rry' Doseph' IUnderstanding 9on#oint )na!ysis in .- 0in"tesK Orme' 1ryan' I3e!ping 0anagers Understand the >a!"e of 9on#ointK Sawtooth Software' IUsing 9hoice-1ased 9on#oint to )ssess 1rand Strength and 6rice SensitivityK +.HH=/ 9hoosing the )ppropriate Software Sawtooth Software' I)9) System L )daptive 9on#oint )na!ysis' >ersion $.CK +.HH.-.HH=/ Sawtooth Software' I9>) L ) 8"!!-6rofi!e 9on#oint System from Sawtooth Software' >ersion ,.CK Sawtooth Software' IThe 919 System for 9hoice-1ased 9on#oint )na!ysisK +Dan .HH-/ Str"h!' Steven' IDiscrete 9hoice 0ode!ing5 Understanding a I1etter 9on#oint than 9on#ointK 9on#oint 0ethodo!ogy Design and Research Breen' 6a"! E. and )bba 0. Arieger' I9on#oint )na!ysis with 6rod"ct-6ositioning )pp!ications'K "andboo's in :$ ; &1, v. - +.HH&/5$=@ +&- pages/ <i!ien' Bary' and ). Rangasaway' &ar'eting .ngineering' )ddison-?es!ey' .HH%' pp.%$-.H$. 3"ber' Doe!' I?hat ?e 3ave <earned from ,C *ears of 9on#oint Research5 ?hen to Use Se!fE4p!icated' Braded 6airs' 8"!! 6rofi!es or 9hoice E4perimentsK 0c8adden' Danie! 8.' I9onditiona! <ogit )na!ysis of R"a!itative 9hoice 1ehavior'K 4rontiers of .conometrics +.H@&/ Breen' 6a"! and )bba Arieger' I:ndivid"a!i(ed 3ybrid 0ode!s for 9on#oint )na!ysisK' &anagement 1cience=Vol.>?, -o.@ +D"ne .HH=/ 3"ber' Doe!' Dan )rie!y' and Bregory 8ischer' IThe )bi!ity of 6eop!e to E4press >a!"es with 9hoices' 0atching and RatingsK +.HH%/ Orme' 1ryan' 0ar )!pert' and Ethan 9hristensen' I)ssessing the >a!idity of 9on#oint )na!ysis9ontin"edK 3"ber' Doe!' Dic ?ittin ' and Richard Dohnson' I<earning Effects in 6reference Tas s5 9hoice1ased >ers"s Standard 9on#ointK +.HH,/ ?ittin ' Dic ' and Doe! 3"ber' Dohn 8ied!er' and Richard 0i!!er' IThe 0agnit"de of and an E4p!anationNSo!"tion for the ;"mber of <eve!s Effect in 9on#oint )na!ysisK +.HH./ 9ase St"dies 6age' )!bert and 3aro!d Rosenba"m' IRedesigning 6rod"ct <ines with 9on#oint )na!ysis5 3ow S"nbeam Does :tK +.H%@/ ?ind' Derry' 6a"! Breen' Do"g!as Shiff!et' and 0arsha Scarbro"gh' I9o"rtyard by 0arriott5 Designing a 3ote! 8aci!ity with 9ons"mer-1ased 0ar eting 0ode!sK +.H%H/ 9on#oint 3istory Breen' 6a"! and >. Srinivasan ' I9on#oint )na!ysis in 0ar eting5 ;ew Deve!opments with :mp!ications for Research and 6racticeK +post-.H@%/ Breen' 6a"! and >. Srinivasan ' I9on#oint )na!ysis in 9ons"mer Research5 :ss"es and O"t!oo 'K 2ournal of Consumer $esearch, Vol. A +.H@%/

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<i!ien' Bary' 6hi!ip Aot!er' and A. Sridhar 0oorthy' IDecision 0ode!s for 6rod"ct Design'K &ar'eting &odels +.HH,/5,&%

% Conceptual #arketing Frameworks

0"ch of the 01) !eve! mar eting materia! is not concerned with #"st sa!es and services' b"t rather with iss"es of strategic importance. ?hi!e this materia! is not ta"ght in EES&OR$%&' it may be he!pf"! to be aware of some ey themes in mar eting. The fo!!owing !ists and descriptions provide an overview of important mar eting concepts. *o"7!! notice that some of the concepts over!ap with strategy framewor s. )n e4ce!!ent reference te4tboo for mar eting framewor s5 Aot!er' 6hi!ip. &ar'eting &anagement : nalysis, /lanning, )mplementation, and Control ' Hth ed. Upper Sadd!e River' ;D 5 6rentice 3a!!' .HH@.

5.1

0$e Four P6s o# t$e 4ar*etin- 4i7

The phrase Ithe fo"r pEsK is an easy way to remember and characteri(e the fo"r most important mar eting decision variab!es. The fo"r 6Es are price' prod"ct' promotion' and p!ace5 I6riceK variab!es5 )!!owances and dea!s Distrib"tion and retai!er mar "ps Disco"nt str"ct"re I6rod"ctKvariab!es5 R"a!ity 0ode!s and si(es 6ac aging 1rands Service I6romotionK variab!es5 )dvertising Sa!es promotion 6ersona! se!!ing 6"b!icity I6!aceK variab!es5 9hanne!s of distrib"tion O"t!et !ocation Sa!es territories ?areho"sing system So"rce5 Aot!er' .HH@

5.2

4ar*et-1riented Strate-ic Plannin-

I0ar et-oriented strategic p!anning is the manageria! process of deve!oping and maintaining a viab!e fit between the organi(ationEs ob#ectives' s i!!s' and reso"rces and its changing mar et opport"nities. The aim of strategic p!anning is to shape and reshape the companyEs b"sinesses and prod"cts so that they yie!d target profits and growth.K - Aot!er' .HH@ Three ey ideas5 0anage the companyEs b"siness as an investment portfo!io.

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)ssess the f"t"re profit potentia! of each b"siness by consider the mar et growth rate and the companyEs fit. Deve!op a strategic game p!an that ma es sense in !ight of the companyEs ind"stry position' ob#ectives' s i!!s' and reso"rces.

The b"siness strategic p!anning process5

E4terna! environmenta! ana!ysis 1"siness mission :nterna! environmenta! ana!ysis Boa! form"!ation Strategy form"!ation 6rogram form"!ation :mp!ementation 8eedbac and contro!

1oston 9ons"!ting Bro"p Browth-Share 0atri45 I:nvest in the stars' get rid of the dogsUK The framewor promotes the importance of mar et growth rate and mar et share in determining the strategic importance of a prod"ct. Market Growth Rate 0% 10% 20%

Stars

Question Marks

Cash Cows

Dogs

10x 1x .1x Relative Market Share

)!ternative >iews Of The >a!"e 9reation 6rocess5 One traditiona! b"siness approach ignores the impact of mar eting research on prod"ct design. Under this framewor ' the first step is to ma e the prod"ct' and then the second step is to fig"re o"t how and to whom it wi!! be so!d. This is sti!! a common prob!em in many companies today. ) more sophisticated paradigm recogni(es that the cons"mer demand sho"!d drive prod"ct design. 0ar eting research' segmentation' positioning' and con#oint ana!ysis are a!! e4amp!es of this more sophisticated approach. The diagrams be!ow i!!"strate the two paradigms. Traditiona! physica! process se2"ence5

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0a e the 6rod"ct Design prod"ct

Se!! the prod"ct )dvertiseN 6romote Distrib"te

6roc"re

0a e

6rice

Se!!

Service

The va!"e creation and de!ivery se2"ence +0cAinsey/5

9hoose the va!"e 9"stomer segmentation 0ar et se!ectionN foc"s >a!"e 6ositioning 6rod"ct deve! Service deve!

6rovide the va!"e So"rcing Distrib"ting 0a ing Servicing

9omm"nicate the va!"e )dvertising Sa!es Sa!esforce promotion

6ricing

5.3

4ar*et Se-mentation8 0ar-etin-8 and Positionin-

IST6 0ar etingK is one way to characteri(e the modern strategic mar eting approach. ST6 stands for 1egmenting' Targeting' and /ositioning. The idea is to "se a more direct Irif!eK approach instead of an "ndirected Ishotg"nK approach5
Market Segmentation .. :dentify segmentation variab!es and segment the mar et. Deve!op profi!es of res"!ting segments. .. Market argeting Eva!"ate the attractiveness of each segment. Se!ect the target segment+s/. .. Market Positioning :dentify possib!e positioning concepts for each target segment. Se!ect' deve!op' and comm"nicate the chosen positioning concept.

,.

,.

,.

)dditiona! ;otes On Segmentation' Targeting )nd 6ositioning5 The fo!!owing set of notes provides a brief o"t!ine some of the ey ideas in this area. )!ternative approaches to mar eting strategy5 0ass mar eting5 one prod"ct for a!! c"stomers 6rod"ct-variety mar eting5 a variety of prod"cts for c"stomers to choose from Target mar eting5 targeted prod"cts for specific c"stomer gro"ps 6atterns of mar et segmentation5 3omogeneo"s preferences Diff"sed preferences 9!"stered preferences 0ar et segmentation proced"re +one common approach/ +Aot!er' .HH@/5 ./ S"rvey Stage5 E4p!oratory interviews and foc"s gro"ps' fo!!owed by 2"estionnaires to assess5 )ttrib"tes and their importance ratings ,,

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&/

1rand awareness 6rod"ct-"sage patterns )ttit"des toward the prod"ct category Demographics' etc. )na!ysis Stage5 8actor ana!ysis app!ied to remove high!y corre!ated variab!es. 9!"ster ana!ysis app!ied to Icreate a specific n"mber of ma4ima!!y different segmentsK. 6rofi!ing Stage5 Each c!"ster is profi!ed in terms of its disting"ishing attit"des' behavior' V Each c!"ster is a mar et segment.

0ar et targeting5 & criteria for eva!"ating mar et segments5 Segment si(e and growth Segment str"ct"ra! attractiveness +6orterEs - forces/ 9ompany ob#ectives and reso"rces 8ive patterns of target mar et se!ection +)be!!/ +p. ,%$/5
M1 M2 M3 P1 P2 P3 Single seg!ent "on"entration P ' Pro%u"t P1 P2 P3 Single seg!ent "on"entration M ' Market M1 M2 M3 P1 P2 P3 Market s#e"iali$ation M1 M2 M3 P1 P2 P3 Pro%u"t s#e"iali$ation M1 M2 M3 P1 P2 P3 &ull "overage M1 M2 M3

Deve!oping a positioning strategy5 I6ositioning is the act of designing the companyEs offer and image so that it occ"pies a distinct and va!"ed p!ace in the target c"stomersE minds.K +Aot!er/ US65 Uni2"e Se!!ing 6osition. 6romotion of a sing!e benefit to the mar etp!ace. Effective strategy +as opposed to to"ting m"!tip!e benefits/. 6ositioning strategies5 )ttrib"te positioning 1enefit positioning UseNapp!ication positioning User positioning 9ompetitor positioning 6rod"ct category positioning R"a!ityNprice positioning Three steps5 .. :dentify differences ,. 9hoose most important differences &. Effective!y signa! differences to the target mar et Economics5 Differentiation premi"m pricing Treacy and ?iersema5 & strategies that !ead to s"ccessf"! differentiation and mar et !eadership5 Operationa! e4ce!!ence

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9"stomer intimacy 6rod"ct !eadership

Differentiation5 6rod"ct differentiation5 Service differentiation5 6ersonne! differentiation5 :mage differentiation5

5.'

(naly9in- Industries and Competitors

:nd"stries and competition p!ay a centra! ro!e in strategic ana!ysis. The fo!!owing notes reiterate these ideas from a mar eting perspective. :nd"stry concept of competition - factors affecting ind"stry str"ct"re and competition5 ;"mber of se!!ers and degree of differentiation Entry and mobi!ity barriers E4it and shrin age barriers 9ost str"ct"res >ertica! integration B!oba! reach :nd"stry str"ct"re types5 6"re monopo!y 6"re o!igopo!y Differentiated o!igopo!y 0onopo!istic competition 6"re competition 0ar et concept of competition5 :t may be important to consider competitors which ma e different prod"cts b"t which meet simi!ar needs. This is different from an ind"stry perspective when the view of competition is !imited to those firms offering the same or very simi!ar prod"cts. 6rod"ct segmentation 0ar et segmentation 9ompetitive inte!!igence5 gathering data abo"t competitors. 1enchmar ing. Tr"e mar et orientation ba!ances cons"mer and competitor considerations. 9hanging cons"mer needs and !atent competitors are ey factors and can be more devastating than e4isting competitor actions.

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5.5

0$e 0ec$nolo-y (doption :i#e Cycle+ 3iscontinuous Inno)ations

Some basic mar eting concepts sho"!d be considered when thin ing abo"t mar et forecasts and new prod"ct strategies. 8or instance' thin ing of the new prod"ct diff"sion cyc!e +1ass mode!/ as an inevitab!e cyc!e of sa!es can be very mis!eading. 8irst of a!!' the diff"sion mode! forecasts tota! mar et potentia!' and says nothing abo"t the mar et share at a partic"!ar company. Second' the decisions of the firm can inf!"ence the sa!es. This is fair!y obvio"s when it comes to the inf!"ence of prod"ct 2"a!ity and cost' b"t mar eting strategy is a!so critica!!y important when introd"cing new prod"cts that are discontin"o"s innovations. :n these cases' the mar et is not yet aware of the need for the new prod"ct' and an "nderstanding of how a prod"ct moves thro"gh the techno!ogy !ife cyc!e wi!! he!p a prod"ct reach its f"!! potentia! faster and with higher !i e!ihood of s"ccess. Beoff 0oore' in his boo s Crossing the Chasm +.HH./ and )nside the Tornado +.HH-/' draws on mar eting theory and high-tech e4perience to describe the e!ements of the prod"ct !ife cyc!e for techno!ogy innovations. 3is wor e4amines how comm"nities respond to discontinuous innovations - or any new prod"cts or services that re2"ire the end "ser in the mar etp!ace to dramatica!!y change their past behavior. 3e describes how companies m"st position their prod"cts different!y thro"gh the cyc!e to reach their f"!! sa!es potentia! and become an ind"stry standard instead of a nove!ty. 0any new hi-tech prod"cts start a!ong a c!assic new prod"ct diff"sion c"rve' b"t fai! soon thereafter. )nyone deve!oping strategy for discontinuous innovations sho"!d be fami!iar with the ideas 0oore writes abo"t. Thro"gh the vario"s phases of the techno!ogy adoption !ife cyc!e' very different strategies for prod"ct and service offering and positioning are ca!!ed for. The basis of the techno!ogy adoption !ife cyc!e is simi!ar to the basis for diff"sion mode!s5 different gro"ps of potentia! c"stomers react different!y to innovations' and adoption proceeds from most enth"siastic to most conservative. 9omm"nities respond to discontin"o"s innovation - when confronted with the opport"nity to switch to a new infrastr"ct"re paradigm' c"stomers se!f-segregate a!ong an a4is of ris aversion. 0oore separates c"stomers into five categories' a!ong which the cyc!e of new techno!ogy adoption proceeds5 .. :nnovators * technology enthusiasts who are f"ndamenta!!y committed to new techno!ogy on the gro"nds that sooner or !ater it wi!! improve their !ives. ,. Ear!y )dopters - visionaries and entreprene"rs in b"siness and government who want to "se the innovation to ma e a brea with the past and start an entire!y new f"t"re &. Ear!y 0a#ority - pragmatists who ma e "p the b"! of a!! techno!ogy infrastr"ct"re p"rchasesO their p"rchasing behavior is based on evo!"tion rather than revo!"tion' and they b"y on!y when there is a proven trac record of "sef"! prod"ctivity improvement. $. <ater 0a#ority - conservatives who are very price sensitive and pessimistic abo"t the added va!"e of the prod"ctO they b"y on!y when techno!ogy has been simp!ified and commoditi(ed. -. <aggards - s'eptics who are not rea!!y potentia! c"stomersO goa! is not to se!! to them' b"t se!! aro"nd their constant criticism. The c"stomer segments correspond to (ones in the "!andscape" fig"re be!ow. :n addition' there is a si4th (one that 0oore ca!!s the "chasm'" separating adoption by the ear!y mar et c"stomers +.',/ from adoption by the ear!y ma#ority +&/. 0oore describes the chasm as fo!!ows5 ?henever tr"!y innovative high-tech prod"cts are first bro"ght to mar et' they wi!! initia!!y en#oy a warm we!come in an early mar'et made "p of techno!ogy enth"siasts and visionaries b"t then wi!! fa!! into a chasm' d"ring which sa!es wi!! fa!ter and often p!"mmet. :f the prod"cts can s"ccessf"!!y cross this chasm' they wi!! gain acceptance within a mainstream mar'et dominated by pragmatists and conservatives. Since for prod"ct-oriented enterprises virt"a!!y a!! high-tech wea!th comes from this third phase of mar et deve!opment' crossing the chasm becomes an organi(ationa! imperative. +.HH-' p..H/

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Strategy 6rimer &.C

0ain Street

The Tornado

Ear!y 0ar et

The 9hasm

End of <ife

The strategy for "crossing the chasm'" as we!! as the strategy for each of the other "(ones"' are very partic"!ar to where the prod"ct is in the !ife cyc!e. The fig"re be!ow emphasi(es the different va!"e discip!ines re2"ired at different stages. ;ote that the so"rce of competitive advantage changes thro"gh the cyc!e - in 6orter terms' it draws on vario"s combinations of competing on cost +operationa! e4ce!!ence/' differentiation +prod"ct !eadership/' and foc"s +c"stomer intimacy/. (a57e )is3i:5ines and t<e ,i6e Cy35e +so"rce5 0oore' .HH-' p..@=/

6rod"ct <eadership & Operationa! E4ce!!ence 6rod"ct <eadership on!y

Operationa! E4ce!!ence & 9"stomer :ntimacy

6rod"ct <eadership & 9"stomer :ntimacy

0oore +.HH-' p.,-/ characteri(es the (ones as fo!!ows5 The .arly &ar'et ) time of great e4citement when c"stomers are techno!ogy enth"siasts and visionaries !oo ing to be first to get on board with the new paradigm. >isionaries are wi!!ing to wor thro"gh b"gs and p"t in effort themse!ves to ma e the so!"tion wor . The prod"ct se!!s itse!f. The Chasm ) time of great despair' when the ear!y mar et7s interest wanes b"t the mainstream mar et is sti!! not comfortab!e with the immat"rity of the so!"tions avai!ab!e. The on!y safe way to cross the chasm is to p"t a!! yo"r eggs in one bas et - target a sing!e beachhead of pragmatist c"stomers in a mainstream mar et segment and acce!erate the formation of .CC percent of their who!e prod"ct. ,=

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Strategy 6rimer &.C

The #owling lley ) period of niche-based adoption in advance of the genera! mar etp!ace' driven by compe!!ing c"stomer needs and the wi!!ingness of vendors to craft niche-specific who!e prod"cts. ) whole product is the minim"m set of prod"cts and services necessary to ens"re that the target c"stomer wi!! achieve his or her compe!!ing reason to b"y. 6ragmatists want a who!e prod"ct' with the necessary "ser infrastr"ct"re and c"stomer s"pport. )t this stage' companies sho"!d resist the temptation to try to provide a genera! p"rpose who!e prod"ct and simp!ify the who!e prod"ct cha!!enge. To get c"stomers on board' service content is high' RO: to end "ser m"st be high' and partnerships with other companies may be ca!!ed for. S"ccess in the niche can then be !everaged e!sewhere. The two eys to targeting the right niche c"stomers here are +./ the segment has a compe!!ing reason to b"y' and +,/ the segment is not c"rrent!y we!! served by any competitor. The Tornado )n "g!y and fren(ied period of mass-mar et adoption' when the genera! mar etp!ace +ear!y ma#ority c"stomers/ switches over to the new infrastr"ct"re paradigm. :t7s a herd menta!ity. Aeys to s"ccess in this period are to ignore c"stomer needs and prod"ct modifications and <ust ship' riding the wave. 0ar et share is critica! at this stage to !oc o"t competitors' and partners sho"!d be e!iminated. 9ompanies entering the tornado sho"!d e4pand distrib"tion channe!s' attac the competition' and price to ma4imi(e mar et share. &ain 1treet ) period of aftermar et deve!opment' when the base infrastr"ct"re has been dep!oyed and the goa! is now to f!esh o"t the potentia!. )nother reversa! of strategy is needed bac to niche-based mar eting. 1efore the prod"ct becomes obso!ete' there is an opport"nity to sett!e into a profitab!e period of differentiating the commoditi(ed who!e prod"ct with e4tensions foc"sing on the end "ser. .nd of (ife ?hich comes too soon in high-tech. 9ompanies sho"!d find careta ers that can ta e over a f"!!y commoditi(ed prod"ct with !ow profit margin.

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