Marketing Strategy

Chapter 6 (Offerings)

Marketing Principle #3
All Competitors React  Managing
Offering-based Sustainable Competitive
Advantage

© Robert Palmatier 1
 Agenda

 Introduction

 Offering and Innovation Strategies

 Developing Innovative Offerings
 Repositioning and Disruptive Innovations
 Conjoint Analysis
 Launching and Diffusing Innovation Strategies
 Psychological, People, and Products Factors
 Bass Diffusion Model

 Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

 Takeaways

© Palmatier 2
 Developing an Innovative Offering is
Critical to Many Firms’ SCA
 GE is pursuing 100 “imagination breakthrough” projects to drive growth
 “Innovation is the only way that Microsoft can keep customers happy
and competition at bay” (Ballmer)
 Today, innovationis the number one strategic priority at 40% of
companies versus 19% in 2005 (BCG)
 86% of senior managers believe that “innovation is more important than
cost reduction for long-term success” (Bain)
 However: short-term business pressures often undermines
innovation
 CEOs want returns from marketing in 6-12 months
 Resources taken from long-term initiatives to hit short-term targets
 Accounting practices for market-based assets impact decisions

© Palmatier 3
3
 Innovation Offering

 Innovative new offerings help firms build and maintain SCA

and barriers to the competitive attacks that arise because
competitors continually react to a firm’s success (MP#3)
 Offering is a purposely broad term that captures both
tangible products and intangible services provided by firms
 Most offerings must be augmented by and linked to brands
and relationships to ensure the firm’s SCA, because it
generally is relatively easy for competitors to copy offerings,
given enough time and money

© Palmatier 4
 Example: Dell (US)

 Dell operates in a technology space, but perhaps its most compelling

innovation has been the ordering and logistics processes that it
introduced in the market

 Building-to-order “semi-custom” computer products and selling them

directly to consumers online was radical when it first appeared

 Dell’s SCA did not depend on its design or manufacturing competencies;

Dell even outsourced the manufacturing. Rather, the SCA came from an
offering in which it built computers to order, sold them online, and
significantly cut costs by avoiding the expenditures associated with
maintaining storefronts and inventory or suffering obsoletion costs

© Palmatier 5
 What Is Innovation?

 Innovation is the “creation ofsubstantial new value for

customers and the firm by creatively changing one or more
dimensions of the business”
See 12 Different
 Key Aspects of Innovation Ways for
 Broader than product or technology innovation Companies to
Innovate
 Must generate new value for customer and seller
 Involves change leading to differentiation and SCA
 How did Starbucks, Dell, and IPod create value and SCA?

© Palmatier (Sawhney, Wolcott, and Arroniz) 6

 Many Aspects of the Offering Can be
Innovated
 There are many different ways a firm can innovate; it helps define the
innovation space according to what, who, how, and where aspects
 Change what the firm offers, in line with a traditional view of new product or
service innovation
 Changing who the customer is represents another route that involves
innovations related to customers, experiences, and value capture
 Changing how you sell to customers pertains to the processes, organizations,
and supply chains that a firm uses
 Changing where to sell to customers comprises presence, networking, and
brand innovations

 Innovation Rader
 Captures many different ways a firm can innovate; helps define the innovation
space according to what, who, how, and where

© Palmatier 7
 Innovation Radar

Changing Brand Offering W

where to sell Leverage HA Changing
to customers RE Develop new T what the firm
E the brand products or offers
H into new services Platform
W Networking markets Use
Interconnections
interchangeable
as a strength
designs

Presence Solutions
Change where Provide a total
products are sold solution

Organization Value capture

Change firm Change how
structure customers pay

Experience
Supply chain Change Changing who
Change supply customer the customer
Changing
how to sell to
chain Processes Customer interactions is

HO
Change
H

customers Change
OW

customers to

W
operating
processes target

Adapted from Sawhney, M., Wolcott, R.C., & Arroniz, I. (2006),

“The 12 Different Ways for Companies to Innovate,” MIT
Sloan Management Review, Vol. 47 (3), p. 75.

© Palmatier 8
 Starbucks

Offering
Brand
(WHAT) Platform

Networking Solution

Presence Customers
(WHERE) (WHO)

Supply Chain Customer Experience

Organization Value Capture

Process
(HOW)

© Palmatier 9
 Walmart

© Palmatier 10
 Innovation Radar Exercise: Take a Few
Minutes and Develop Innovation Ideas
1. Offering: Develop new products or new services
 Team exercise (IPOD)
2. Platform: Design modular platforms and
 Think of one way to innovate strategic control points (Nissan)
for the assigned radar 3. Solution: Solve end-to-end customer problems
(John Deere)
dimension 4. Customer: Discover unmet customer needs or
underserved segments (DIY)
 Use one of the companies 5. Experience: Rethink how customers interface
below: with you (IKEA)
6. Value Capture: Redefine how you get paid
 Your firm (Google)
 T-Mobile 7. Processes: Innovate in your core operating
 Microsoft processes (Progressive)
8. Organization: Change form, function or scope
 Alaska Airlines (IBM, Arrow)
 Nordstrom 9. Supply chain: Rethink sources (Dell)
10. Presence: Innovative points of presences
(Starbucks at airport)
11. Networking: Integrated offering, leverage others
(Otis elevator)
12. Brand: Leverage the brand into new domains
© Palmatier (Virgin) 11
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 Benefits of Innovation and Offering’s Equity

 By building offering equity, an innovative firm can make it more difficult

for competitors to encroach on its business

 Offering equity refers to the core value that the performance of the
product or service offers the customer, absent any brand or relationship
equity effects

 New offerings often motivate customers to switch from competitors to

the innovative firm, to gain access to the new product

 New offerings also can help the firm acquire new customers or enter new
markets when they offer similar performance but at a lower price

 Offering new and innovative products tends to enhance the firm’s brand,
even if customers don’t buy the new offering

© Palmatier 12
 Example: BlueScope (Australia)

 BlueScope is an international supplier of steel products based in

Australia

 Patented groundbreaking Castrip process that produces 70% less

greenhouse gas emissions and requires 10% of the floor space of
conventional steel mills

 To protect its offering equity from foreign competitors, the innovation is

patented. The protected innovation is highly anticipated to enhance
BlueScope’s positioning as a leading global supplier of steel products and
solutions.

© Palmatier 13
 Example: TomTom (the Netherlands)

 Netherlands-based electronics company TomTom launched its first

navigation product in 2002 when there were relatively few firms focusing
on this area

 Through quick innovation and responding to customers’ needs, TomTom

was able to stay ahead of its competitors and build itself into a world-
recognized brand that, by 2007, had more than 50% of the market share
in Europe for navigational devices

 However, GPS-enabled smartphones have now disrupted TomTom’s once

strong position in this application.

© Palmatier 14
 Agenda

 Introduction

 Offering and Innovation Strategies

 Developing Innovative Offerings
 Repositioning and Disruptive Innovations
 Conjoint Analysis
 Launching and Diffusing Innovation Strategies
 Psychological, People, and Products Factors
 Bass Diffusion Model

 Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

 Takeaways

© Palmatier 15
 Offering and Innovation Strategies

 Marketing contributes to and defines offering and innovation strategies

in two main ways:
1. It helps the firm develop innovative offerings by collecting customer input
and forecasting customer and market trends, so that the firm can understand
the trade-offs among potential product attributes
2. Marketing is responsible for launching the new offering to customers to
generate sales with acceptable profit levels

 Many good products fail to achieve their set financial objectives due to
poor product launches

 Extensive efforts go in to test marketing and understanding the factors

that will influence whether customers adopt a new offering and increase
the likelihood of a successful launch

© Palmatier 16
 Developing Innovative Offerings

 Most firms rely on a stage-gate development process to increase the

speed of their offering development and enhance their likelihood of
success, while also reducing development costs

 A stage-gate model divides the development process into a series of steps

or stages

 Each project gets evaluated, on multiple dimensions, by independent

evaluators in each stage

 This method thus helps ensure effective development approaches

through several elements

© Palmatier 17
Stage-Gate Design Review Process for Effective
Product Development
Concept and Definition Design and Development Validation and Production Final Audit

Initial
ideas

New Product

The concept and The design and development The validation and production The audit stage consists of
definition stage consists stage consists of product and stage consists of continued final product and product
of an initial screening of process design and development. market launch planning and assessments. It often
all potential ideas, Financial feasibility product manufacturing and includes some reflection on
concept assessment, considerations also are pertinent, process validation. It also may the previous steps.
project definition, and including testing of price points include test marketing and
feasibility assessment. and customer acceptance. evaluation of launch plans. 18
 Example: Tata Motors (India)

 Tata Motors innovated the Nano, the cheapest car in the world, launched
in 2009 at a sale price of just $2,000

 Most car manufacturers use a sedan chassis to begin building new

models; Tata challenged the conventional wisdom and started with a
blueprint featuring a scooter’s backbone

 The ultimate product cost less to build and thus was affordable in the
Indian market, but perhaps even more important, it turned out to be
better suited to busy Indian traffic patterns, which require quick and
frequent maneuvering

© Palmatier 19
 Repositioning Strategies

 An innovative offering can result from dramatically repositioning an

existing offering, such as removing some features or adding others, so
that the total offering appeals to a different customer segment with a
“new” value proposition

 The advantage of this strategy is that it generally does not require a new
technology or invention, and marketers thus can to take the lead in these
efforts

 Red Ocean markets—thus named to reflect the metaphor of blood in

the water—are very competitive and populated by “sharks” fighting over
the same customers

 To pursue more disruptive repositioning strategies, firms instead can

seek out Blue Ocean markets, a metaphor reflecting the blue hue of the
deep ocean waters that are far from land

© Palmatier 20
 Red vs. Blue Ocean Innovation Approach

 Classic STP focuses on red ocean strategies and

incremental innovation
 Known market space, competitive rules, and industry boundaries
(lifecycle mindset)
 Product mature and become commodities
 Can be managed, tested, and analyzed

 Disruptive positioning focuses on the blue ocean

 Market space does not exist (unknown boundaries)
 Demand is created rather than fought over (often no direct
competition)
 Hard to test, more of an art, often requires intuition, high risk

© Palmatier (Kim and Mauborgne) 21

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 Example: Cirque du Soleil (Canada)

 Cirque du Soleil removed two familiar features associated with

traditional circuses like Ringling Bros. and Barnum & Bailey: large
animals (e.g., elephants, lions) and big name stars (e.g., The Flying
Wallendas, Antoinette Concello). Then it added theater-like productions,
each with a different theme and original music

 Cirque du Soleil raised prices and redefined their target market. Rather
than children and families, it sought to appeal to adults, couples on dates,
and business clientele

 Cirque du Soleil removed substantial cost drivers from the innovative

offering, added new and unexpected features, and developed a new
target market

© Palmatier 22
 Defining Characteristics of Blue Ocean
Initiatives

 Don’t use competitors as the benchmark

 Rejects tradeoff of value versus cost

 Redefines value proposition See Blue Ocean

Strategy Reading
 Example: Cirque du Soleil
 Reduced cost-animals and stars
 Added value-theater like production with theme, original musical

 Often first mover develops barrier to imitation

 Economies of scale (Wal-Mart, Fed-Ex)
 Brand (Cirque du Soleil, Fed-Ex)
 Switching costs (Quicken)

© Palmatier 23
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 Comparison of Red and Blue Ocean Strategies
Red Ocean Strategies
New offerings are brand and line
extensions, representing incremental
innovations (uses STP processes)
Account for the majority of sales but
earn lower relative profit levels
High competitive rivalry in existing
markets
Must beat existing competition
Attempts to capture a portion of existing
market demand
© Palmatier
Blue Ocean Strategies
Less numerous but more radical and
repositioned offerings, focused on
creating new markets
Success generates higher profit levels
Creates a new market with less
competitive rivalry
Often transforms the image of
competitors’ brand features, such that
they become a negative attribute in the
new market
Attempts to create new market demand
24
 New Technology – Based Innovation Strategies

 A technological innovation can undermine a firm’s

leadership position in a market, even if that firm is doing
everything else well
 To describe the process and ultimate outcomes of innovative
technologies, Clayton Christensen has offered the
framework, which highlights two main categories of these
technologies
 Sustaining technologies are well understood and typically exploited
by market leaders, which produce continuous, incremental
improvements over time
 Disruptive technologies accordingly present highly different price
and performance characteristics or value propositions

© Palmatier 25
 Sustaining Versus Disruptive “Technological”
Innovation
 Companies doing everything well can lose their leadership
position due to failing to manage disruptive innovations
(Polaroid, Xerox, DEC)
 Sustaining technologies improve performance of established
products along dimensions valued by mainstream customers in
major markets
 Products often overshoot customer needs
 Processes support incremental product improvements (lower risk)

 Disruptive technologies result in “worse” product

performance, at least in the near term
 Brings to market a different value proposition than available previously
 Underperforms established products in mainstream markets
 Typically cheaper, simpler, smaller, or more convenient to use
 Small off-road motorcycles and transistor radios
 Eventually are good enough (servers vs. mainframes)

© Palmatier (Christensen) 26
26
 Sustaining Versus Disrupting Technical
Innovations
Disruptive technology
With its very different price Sustaining technology
and performance This well-understood
characteristics this technology will lead to
technology often improves continuous, incremental
Performance Features

very quickly. improvements over time.

Incremental
enhancement High-End Customers

Incremental
enhancement
Low-End Customers

Time

Adapted from Christensen, C.M. (1997), The Innovator's Dilemma: When

New Technologies Cause Great Firms to Fail. (Boston, Mass.: Harvard
Business School Press)

© Palmatier 27
 Incumbents Usually Win the Battles of
Sustaining Innovation

Digital to Optical

MOST DEMANDING CUSTOMERS

Performance Measure

Caller ID
MAIN STREAM CUSTOMERS
Analog to Digital

LEAST DEMANDING CUSTOMERS

Time

Source: Christensen
© Palmatier (Christensen) 28
 New Entrants Usually Win the Battles
of Disruptive Innovations

Digital to Optical

MOST DEMANDING CUSTOMERS

Performance Measure

Caller ID
MAIN STREAM CUSTOMERS
Analog to Digital

LEAST DEMANDING CUSTOMERS

VOIP

Time

© Palmatier (Christensen) 29
 Mini-Mills Took 50% Share by Starting
with Low-End Rebar

- - 55 %
STEEL T EEL
TS
QUALITY 25-30% SHEE

STE EL – 22%
TURAL
STRUC
15%
%
& RODS – 8
, BAR
ANGLE

12%
R– 4%
REBA

7%
% IN TONS

TIME
1975 1980 1985 1990

© Palmatier (Christensen) 30
 Transistors Were First Used in New
Markets
Performance

Different m t u b es
Performance Vacuu
Measure

op roc essors
r
 Mic
emo ry c hi p
C ch ip  M Time
ns is to rI
Tra

Time

Non-consumers or
Non-consuming contexts

Sonotone 1952
© Palmatier
Sony 1955 31
 Disruptive Innovations Occur in Either
Low-End of Existing or in New Markets
Low End Disruptions New Market Disruptions
 Nucor’s steel mini-mills  Bell telephone (telegraph)
 Vanguard’s index mutual funds  eBay online marketplace
 Dell’s direct-to-customer business model Transistor radios

Why?
 Cannot compete with existing, sustaining products

 Leaders want to incorporate new technologies into existing markets

and products

© Palmatier (Christensen) 32
 Why do Market Leaders Fall into This
Trap?
 Companies find it difficult to invest in disruptive innovations –
lower-margin opportunities that their customers don’t want
 Growth targets bias firm’s toward larger markets

 Markets for disruptive innovations cannot be quantified, which

biases decision making
 Competition leads to oversupplying performance relative to
what customers want
 Solution: set up an autonomous organization tasked with
building an independent business around the disruptive
innovations (e.g., H&R Block Tax Cut Software in response to
Turbo Tax)

© Palmatier 33
33
 Overall: Must Manage Portfolio of Red
Ocean/Sustaining and Blue Ocean/Disruptive
Innovations
 Ensure business is conducting classical STP and stage-gate
innovation
 Constant flow of new products (incremental)
 Need uncompromised customer/competitive input

 Develop a forum/process to enable/manage radical and

disruptive innovation
 Challenge managers to change the game
 Radical changes to offering and new markets
 Disgruntled customers (lost customers)
 Offsite scenarios
 Outsource, partners, alliances, acquisitions
 Hire outsiders from different industries
 Track potentially disruptive technologies, use internal “start ups”

© Palmatier 34
34
 Conjoint Analysis Helps Make New
Offerings “More” Successful
 Product superiority drives financial success
 Largest predictor of new product success
 Good designs are 5 times more likely to succeed than poor designs

 Product design requires making tradeoff decisions (price,

performance, size, location, features…)
 Conjoint analysis: process for determining the “unit-less”
tradeoff among attributes and set of attributes that
maximizes appeal (sales, share)

© Palmatier 35
35
 DAT 6.1 Conjoint Analysis

Description When to Use It

With a conjoint analysis, marketers can design and develop
new products by thinking of products as bundles of
attributes, then determining which combination of
attributes is best suited to meet the preferences of
customers.
• To identify product attribute trade-offs that customers are willing to make for a
new product.
• To predict the market share and impact of a proposed new product (i.e., bundle of
attributes).
• To determine the amount that customers are willing to pay for a new product

How it Works

In this view, a product consists of multiple attributes that together provide benefits to a customer. For example, a smartphone customer might
think about call quality, operating system, screen size, and camera quality benefits. If a firm decides to design a new smartphone, it cannot just
ask customers about what features they care about; most customers would say they wanted the best version of all the features. Instead, the firm
can simulate a trade-off: Would you rather have better camera quality or a smaller (or bigger) screen size? The trade-offs reflect how customers
actually make decisions, because few of them can afford the best options for all attributes in every product. Another basic assumption
underlying conjoint measurement is that customers cannot reliably express how they weight the separate product features when forming their
preferences. Instead, marketers need to infer these relative weights by asking for evaluations (or choices) of alternate product concepts, using a
structured process. Thus, during a conjoint exercise, rather than directly asking customers about the significance of product attributes, the
analyst uses a more realistic setting and asks customers to evaluate alternative scenarios or product profiles, each with multiple product
attributes. Then it is possible to infer the significance of each product attribute from the ratings that customers provide for each scenario,
reflecting their overall product preference. The conjoint formula is:

where P is the product bundle, comprising certain attributes; R(P) is the rating associated with product P; ij is the part-worth utility associated
with the jth level (j = 1, 2, 3, ..., kj) of the ith attribute; kj is the number of levels of attribute I; m is the number of attributes; and x ij equals 1 if the jth
level of the ith attribute is present in product P, and 0 otherwise.

With data collected from such a conjoint experiment, we can estimate the underlying value of each product attribute, or its part-worth utility
(ij). The estimated part-worth utilities from a conjoint analysis can provide the answers to many marketing questions, such as which product
configurations are optimal and how much market share an offering is likely to capture.

© Palmatier 36
 DAT 6.1 Conjoint Analysis Example

Example

A smartphone manufacturer wants to design a new phone for its target demographic. The main product attributes the manufacturer
wants to focus on are camera resolution quality, screen size, and price. The manufacturer also wants to understand customers’
willingness to pay for the new smartphone. Thus, it designs a conjoint study for 250 customers to provide a product rating score (0 =
least preferred, 100 = most preferred) for eight alternative smartphones, according to their price, camera resolution, and screen size.
One of the eight products is provided here for illustration:

How likely are you to buy this smartphone?

(Use a scale from 0 to 100, where 0=“definitely will not purchase” and 100 means “definitely will purchase”.)

Price $500
Camera Resolution 5 MP
Screen size 2.5 inches
Your Rating (0 to 100, where 100 is most likely to buy):

With the rating scores from the 250 customers, the manufacturer can apply the conjoint formula and estimate the part-worth utilities
associated with each product attribute. Let’s say that our hypothetical customers, reasonably, prefer the $500 smartphone more (part-
worth = 25) than the $600 option (part-worth = 0). They also want an 8 MP smartphone (part-worth = 10) rather than a 6 MP one
(part-worth = 0) and a 6.5-inch screen (part-worth =20) more than a 5.5-inch one (part-worth = 0).

The part-worth difference between the 5.5- and 6-inch phone options (20 – 0 = 20) is twice as great as the difference between the 8 and
6 MP versions (10 – 0 = 10), so screen size appears twice as important as camera resolution quality. The part-worth difference between
the $500 and $600 smartphones was 25 (25 – 0 = 25), which implies that each part-worth unit is worth $4 ($100 = 25 units, or 1 unit =
$4). Noting that the part-worth difference between the 5.5- and 6-inch phone options was 20 units, the manufacturer can estimate that
customers are willing to pay $80 (i.e. $4 x 20 units = $80) more for a 6-inch screen than for a 5.5-inch version.

Thus, this manufacturer should produce a phone with 6 MP camera quality, a 6-inch screen size, and a price that is $80 more than the
base price of $500.

© Palmatier 37
 Conjoint Analysis Process

1. Design study
 Select attributes and levels (range and #)
 Develop bundles (< 16 optimal)

2. Collect data from respondents

 Design data collection instrument
 Calculate partworths

3. Evaluate product design options

 Evaluate market simulations
 Evaluate different choice rules

© Palmatier 38
 Designing an EMBA Program

Attributes A total of 24(2x2x3x2) different

 Cost of Program (2 levels) programs can be developed from
 Rigor of Program (2 levels) these options!
 Location of Program (3 levels)
 Prestige of Program (2 levels)

Location of Program
Cost of Program  More than 30 miles from home
 More than $20,000 per year  Between 10 and 30 miles from
 Less than $20,000 per year  Within 10 miles of home

Rigor of Program Prestige of Program

 Requires more than 10 hrs/week  Top 10 ranked business school
outside of class  Not top 10 ranked business school
 Requires less than 10 hrs/week
outside of class

© Palmatier 39
39
 Collecting EMBA Ratings Data

 Model generates bundles

 Each respondent rates each bundle from 0 to 100 on likely

to buy this offering
© Palmatier 40
40
 Partworths Computation and
Interpretation
 Understanding partworth utilities (for each respondent):
 Least favorable level in each attribute is 0
 Most favorable level across all attributes sum to 100
 Can compare relative importance across attributes and respondents

 Best product for customer 1: Less than $20,000 per year, requires more than
10/hrs/week work outside of class, between 10 and 30 miles from home, and
is a top ranked business school. Ranking is most important and is over 12
times more important than cost (< or > 20k$).

© Palmatier 41
 Using Conjoint Analysis to Evaluate
Strategic Alternatives

 Enter alternatives and/or competitive offerings into model

 Can also enter market share of any known offerings to “tune”

model

© Palmatier 42
42
 Model Estimates Market Share of Each
Offering for Different Decision Rules
Market Share by Offering
Cheap-N-Easy
Decision Rules Flashy MBA Value MBA
MBA
First choice 5% 72.5% 22.5%
Share of 11.8% 50.2% 38.0%
preference
Logit choice 15% 48.6% 36.4%

 First choice rule: each customer selects the product that offers
him/her the highest utility among the competing alternatives
 Share of preference rule: customer selects each product with a
probability that is proportional to the utility of that compared to
the total utility derived from all the products in the choice set
 Logit choice rule: alternative to share rule by using an
exponential weighted utility
© Palmatier 43
 MarkStrat Conjoint 1: Relative Importance
Across Attributes (by segment)

 Chart shows the relative importance of price and the three

physical attributes that are perceived as most important
(sums to 100)
 Insight into most important attributes per segment
© Palmatier 44
44
 MarkStrat Conjoint 2: Utility of
Attributes
 Chart show the utilities attached
Adopters
to four levels for given attribute
 Utilities are measured on a scale
from 0 (very low utility) to 100
(very high utility)
 Results are broken down by
segments
 Insight into ideal value of attribute
for segment

Resolution
© Palmatier 45
45
 Agenda

 Introduction

 Offering and Innovation Strategies

 Developing Innovative Offerings
 Repositioning and Disruptive Innovations
 Conjoint Analysis
 Launching and Diffusing Innovation Strategies
 Psychological, People, and Products Factors
 Bass Diffusion Model

 Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

 Summary

 Takeaways

© Palmatier 46
 75% of Products Launched End Up
Failing to Meet Objectives
 Failure to provide large enough perceived benefit (poor
development)
 No differential advantage (BenGay Aspirin)

 Price versus performance (Apple Newton)

 Poor product launch (slow diffusion)

 Poor targeting of new product (Earring Ken)

 Poor positioning of new product (Breakfast Mates, with

warm milk and spoon)
 Competitive response (Betamax and VHS)

© Palmatier 47
 Example: Kellogg’s (US)

 Launched Breakfast Mates – a single serving of breakfast cereal, a spoon,

and a serving of pasteurized milk that did not require refrigeration

 Kellogg’s positioned the innovation as a solution for harried parents who

wanted to give their children breakfast in the morning but were often
rushing out the door to make it to school on time

 Positioning was ineffective, because Kellogg’s failed to realize that

parents hated the idea of giving their children a product that would
enable them to spill milk all over the back seat of the car

© Palmatier 48
 Some Relevant Consumer Psychology
on Persuasion
 Social proof: looking at others is a way we
determine what to do (Jonestown, testimonials)
 More people → larger belief it is correct
 More similar people → larger impact on behavior

 Authority: we have a deep-seated sense of respect

for authority and status (Mercedes vs. Ford study)
 Scarcity: things seem more valuable when their
availability is limited
 Prospect theory: describes person’s perceived
value for an objective gain or lost

© Palmatier 49
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 Understanding Prospect Theory
Subject Value
(i.e. Psychological Impact)
Current
Wealth State V (+)
Or
“Status Quo”

- $200
Objective Losses Objective Gains
+ $600

V (-)
1) Relative to reference Endowment effect: people
point value things in their possession
2) Decreasing marginal
more than when they don’t
sensitivity have the item. Effect of loss of
item is larger than the gain
3) Loss aversion
(electric car).
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 Implications of Prospect Theory

 Adoption is often very slow

 Especially, if consumer has to give something up (endowment
effect)
 Developers’ curse
 Employees often use new product and integrate new features into
their offering (increases “value” of feature) as compared to
consumers who haven’t used product
 Results in a 9x difference in perceived value of feature

 Some example launch strategies

 Eliminate the old (US versus Canadian 1$ coin)
 10x improvement to make the benefit overwhelming
 Seek out new to category customers (not endowed with existing
features), Kodak 10$ camera

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51
 Launching and Diffusing Innovative Offerings

 To explain new offerings’ diffusion rates, it can be informative to classify

consumers into groups, according to their propensity to adopt new
products and which persuasive arguments will prompt them to adopt

 According to Geoffrey Moore, the adoption lifecycle of an innovative

offering suggests five groups of potential users:
 Innovators are the first to adopt, often before the new offering even is
officially launched
 Early adopters see the benefits of the new technology and are willing to adopt
it after just a few references
 The early majority consists of much more pragmatic consumers, who need to
be convinced that the new product really works
 Both of the last two groups, late majority and laggards, also want more
evidence, but they are especially hard to persuade

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 Crossing the Chasm: Adoption Lifecycle

Crossing the Chasm

New product launches fail
if the firm has not
prepared to sell to early
majority customers by the
time it runs out of early
adopters.

Categories of Innovators Early Adopters Chasm Early Majority Late Majority Laggards
Product First to adopt a Perceive the Gap More pragmatic, Demands even Need the most evidence
Adopters new offering; benefits of the between such that they more evidence to persuade
actively seek new technology early must be of the product’s
new and are willing adopters convinced that functionality
technologies to buy with just and early the new product and are harder
a few references majority really works to persuade

Adapted from Moore, G.A. (2006), Crossing the Chasm: Marketing and
Selling Disruptive Products to Mainstream Customers, 1st rev. ed., (New
York: Collins Business Essentials)

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 Failing to “Cross The Chasm” is Common
Barrier to Success
 Firm takes on more visionaries than it can handle

 Cannot take on more custom projects, but no pragmatists ready to buy

 Early market becomes saturated, and revenue growth tapers off or

declines
 Key personnel become disillusioned
 Venture capital well begins to run dry

 Marketing strategies that lead to success in selling to visionaries

actually hinder success in selling to pragmatists
 The adoption lifecycle approach clearly and systematically integrates
aspects of both MP#1 and MP#2

See Marketing Input and

Innovation Strategy
reading for startups
© Palmatier 54
54
 Strategy to Cross the Chasm and Beyond

1. The Bowling Alley:

 New product gains acceptance from niches and extends through a common
platform
 Each niche requires expertise in that vertical market
 Market coverage propagates to neighbors and extends references
 Focuses marketing resources
2. The Tornado:
 Period of mass-market adoption when the general marketplace switches over to
the new technology
 Driven by application that provides compelling benefits to mass market: the
“killer app”
 Requires strong operational excellence to keep up with demand
3. Main Street:
 Market growth stabilizes
 Focus on cross-selling and upgrading to existing customers

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55
 Product-Based Factors that Influence
Innovation Diffusion
 Another long stream of research, starting with Everett
Rogers, shows that specific product characteristics can
capture 40–80 percent of the variation in the speed with
which offerings diffuse
 Changing each of the following five factors can alter the rate
of product diffusion, all else being equal
1. Relative advantage
2. Compatibility
3. Complexity
4. Trialability
5. Observability

© Palmatier 56
 Besides Psychology and People, “Product
Factors” Determine the Rate of Diffusion
1. Relative Advantage: degree to which an offering is
perceived as being better than the ideas it supersedes
 Economic: cost, price
 Status, prestige, etc. See Note on Innovation
Diffusion: Roger's Five
 Necessary but not sufficient (i.e., new keyboard)
Factors

2. Compatibility: degree to which an offering is perceived as

consistent with existing values and experiences
 Often must break habits, perceptions, beliefs
 Plastic wine corks, TiVO

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57
 49% to 87% of the Variance in Rate of
Adoption is Explained by 5 Factors
3. Complexity: degree to which an offering is perceived as relatively difficult
to understand/use
 Education is key (online banking)
 Speed of Google

4. Trialability: degree to which an offering may be experimented with on a

limited basis
 Free samples, demo, test drive
 Especially salient for high cost, time, risky products

5. Observability: degree to which the results of an offering are visible to

others
 Especially salient for status products
 Can be negative (parking by a “men’s club”)

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58
 STP/BOR Strategies Should be Adapted
Based on 3Ps (Psych, People, Product)
 Segmenting and Targeting Strategies
 Focus on vertical markets, intra-segment communication, no takeaways,
large relative advantage (10x)
 Low end and/or new markets for disruptive innovations
 Target beachheads for bowling alley effect
 Select segments where “5 factors” are best

 Positioning Strategies
 Make offering compatible to existing offering
 Education and simplicity are key to messaging
 Free samples, reduce risk, use warranty and trial periods
 Enhance visibility of users, testimonials

 Migration Strategies (Visionaries to Pragmatists)

 How to persuade gate keepers
© Palmatier Building references and testimonials

59
59
 But, Remember That Being First is Not
a Guarantee of Success
 65 year historical study on impact of market entry
 Failure rate of pioneers is 47%
 Pioneers are ultimate leaders in only 11% of categories (10 years later)

 First mover advantage is trumped by followers who

are better. Best beats first.
 Being a pioneer without the basis for sustainable
competitive advantage is a trap!

© Palmatier (Tellis and Golder) 60

 What Company is This?

Quotes from Business

Publications/Newspapers in 1960

“World’s biggest chain of highway

restaurants; Pioneer in restaurant
franchising; Most strongly entrenched
actor and highest quality; Most fabulous
success story in restaurant chains”

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 Psychology, People, and Product
Factors Determines Product Diffusion

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 Bass Diffusion Model for New Product
Adoption Capture Multiple Factors (3Ps)

 Mathematical model used to forecast the rate of

consumer adoption

nt = p ´ Remaining + q ´ Adopter Proportion ´ Remaining Potential

Potential

Innovation Effect Imitation Effect

nt = number of adopters at time t (Sales)

p = “coefficient of innovation” (propensity to adopt independent of # of previous adopters)
q = “coefficient of imitation” (propensity to adopt as a function of number of adopters)
# Adopters = n0 + n1 + • • • + nt–1
Remaining Potential = Total Potential (N) – # Adopters

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63
 Sum of Innovators and Imitators Yields Model
for New Adopters

© Palmatier 64
 Estimating the Parameters of the
Bass Model
 Use historical data

 Use analogous products

Innovation Imitation
Product/ parameter parameter
Technology (p) (q)
B&W TV 0.065 0.335
Color TV 0.021 0.583
Room Air conditioner 0.010 0.454
Clothes dryers 0.073 0.389
Ultrasound Imaging 0.003 0.506
CD Player 0.028 0.368
Cellular telephones 0.005 0.506
Microwave Oven 0.018 0.337
Hybrid corn 0.000 0.798
Home PC 0.003 0.253
Van den Bulte and Stremersch (2004) suggests an average value
© Palmatier
of 0.03 for p and an average value of 0.42 for q 65
65
 Example: Forecasting DirecTV
 Used Bass Diffusion model
 Market size estimate from customer survey
 Diffusion parameters estimated from managerial
judgments and analogous products (cable TV)
 Results:
Five year forecasts made 3 years before launch
were, on average, -16% below actual
Forecast justified earlier launch of a satellite for
expanded transmission capability

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66
 Agenda

 Introduction

 Offering and Innovation Strategies

 Developing Innovative Offerings
 Repositioning and Disruptive Innovations
 Conjoint Analysis
 Launching and Diffusing Innovation Strategies
 Psychological, People, and Products Factors
 Bass Diffusion Model

 Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

 Summary

 Takeaways

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 Steps to Building Offering Equity

 Building offering equity involves three main steps

1. The firm must develop an offering or offering portfolio that provides
customers with the largest relative advantage among all competitors
in the market
2. Second, in line with MP#1, offering equity requires a firm to segment,
target, and position that new offering in a way that accounts for both
people- and product-based factors
3. Third, and associated with MP#2, firms need to manage the customer
migrations from innovators and early adopters to early majority
stages

© Palmatier 68
 Research Approaches for Designing and
Launching New Offerings
 Qualitative techniques such as observation, focus groups, and
customer interviews are effective early in the development
process; they can reveal some important needs that may be
just emerging or that are unknown to the firm
 Then to avoid the risks associated with the high failure rate
of new offerings, firms can use different techniques to
improve their decision making and avoid unsuccessful
launches, such as conjoint analysis
 The Bass model captures many of the people- and product-
based factors, but it also integrates pricing and advertising
levels to predict adoption rates

© Palmatier 69
 Agenda

 Introduction

 Offering and Innovation Strategies

 Developing Innovative Offerings
 Repositioning and Disruptive Innovations
 Conjoint Analysis
 Launching and Diffusing Innovation Strategies
 Psychological, People, and Products Factors
 Bass Diffusion Model

 Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

 Takeaways

© Palmatier 70
 Takeaways

 Most firms rank innovation as a top strategic priority. Innovation involves

more than new technologies or products; it can reflect changes in
business processes or go-to-market strategies

 Firms can innovate in four primary ways: changing their offering,

changing who the customer is, changing how they sell to customers, or
changing where they sell

 Offering equity captures the core value that the customer obtains from a
new offering, absent any brand or relationship equity

 A first-mover advantage is often short-lived, so firms must continually

develop new offerings to build their SCA, in terms of offering equity

© Palmatier 71
 Takeaways

 New and innovative offerings increase firm value by providing more value
to customers (through enhanced performance or better performance for
the price), motivating customers to switch, expanding customers and
markets, and establishing a brand image as a leading, innovative company

 A stage-gate development process improves the speed of product

development, the success likelihood, and the development costs

 Two strategies for developing an innovative offering are repositioning

strategies (i.e., Blue Ocean) and technology-based strategies

 People-based factors influence innovation diffusion, according to the

adoption lifecycle, which describes differences in people’s propensity to
adopt new products (innovators, early adopters, early majority, late
majority, and laggards). Firms must bridge the chasm between early
adopters and the early majority to succeed

© Palmatier 72
 Takeaways

 Product-based factors influence innovation diffusion. Marketers need to

evaluate the relative advantage, compatibility, complexity, trialability, and
observability of new offerings, then develop ways to leverage them to
encourage adoption

 Three key steps to building offering equity are developing an offering

portfolio that provides customers with the best relative advantage among
competitors; segmenting, targeting, and positioning the new offering to
account for people- and product-based factors to speed up diffusion; and
managing customer migration from innovators and early adopters to early
majority stages

 Conjoint analysis can facilitate the design and launch of new offerings by
helping managers define the optimal product, according to the value
assigned to various product attributes by consumers. Bass models also are
helpful, because they use historical data related to the coefficients of
innovation and imitation to predict adoption rates

© Palmatier 73
 Readings

 12 Different Ways for Companies to Innovate (great framework for

thinking of many different ways to innovate in a company)

 Blue Ocean Strategy (popular way to think about incremental versus

market creating strategies, lots of examples)

 Note on Innovation Diffusion: Roger's Five Factors (discusses both

people- and product-based factors that determine a new offering’s
acceptance/diffusion)

 Marketing Strategy Book: Chapter 6

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