Strategic Options AnalysisApplying the Value Function

Ken Homa

PRODUCT VALUATION MODEL

V = Value of Product

i = Product attribute

b = Magnitude of benefit from attribute i (proximity to ideal point)

a = Importance weighting of benefit

P = Price of product

V = ( ) /*a b Pi

n

i i

1

V = ( ) /*a b Pi

n

i i

1

V = Value of Product i = Product attribute

MARKSTRAT WORLD

There are 5 given product attributes (n=5): power, design, volume, weight, frequency

V = ( ) /*a b Pi

n

i i

1

Incorporate a highly weighted attribute (i) that is not currently in the product design.

Add a CD-ROM or modem as standard features in mobile PCs

Add an attribnute

V = ( ) /*a b Pi

n

i i

1

Incorporate a highly weighted attribute (i) that is not currently in the product design.

Add an attribnute

MARKSTRAT WORLDNot an option since all brands

have the 5 fixed product attributes

V = ( ) /*a b Pi

n

i i

1

Introduce a new attribute (i = n +1) that was previously not available, but satisfies a salient or latent need

… iMac’s radical ‘space age’ industrial design

…‘Bags and brakes’: air bags & ABS in cars

Add a newnew attribute

V = ( ) /*a b Pi

n

i i

1

Introduce a new attribute (i = n +1) that was previously not available, but satisfies a salient or latent need

Add a newnew attribute

MARKSTRAT WORLDNot an option: all brands constrained

to the 5 fixed product attributes

V = ( ) /*a b Pi

n

i i

1

V = Value of Product

i = Product attribute

b = Magnitude of benefit from attribute i (proximity to ideal point)

Ideal Points

• Perceptions (vs. actual)

• Aggregate of individuals…Distribution around points

• Segment variations

• Evolutionary progression…Nice to have => must have

• Different ‘shapes’…Optimal point, vectors

Ideal Points

Attribute Attribute

Preference Preference

Point Preference Vector Preference

Ideal Point

IncreasingPreference

DecreasingPreference

(eg, sweetness) (eg, service speed)

Ideal Point Strategies

• What is the ideal point?Specific ‘going in’ criteria

• Does a product satisfy the ideal point?Objective criteria vs. perceptions

• Do customers think that a product satisfies the ideal point (better than competitive products)?Relative perception

• Can the ideal point be ‘shaped’?

Product does match the target market’s ideal point,but not current perceptions ..

V = ( ) /*a b Pi

n

i i

1

Communicate proximity to ideal points (b)

“Pepsi Challenge”: highly publicized blind test tastes demonstrate that Pepsi is preferred to Coke on a heavily weighted (dominant) product attribute : taste

V = ( ) /*a b Pi

n

i i

1

Communicate proximity to ideal points (b)

• If perceptions are accurate and awareness is low, advertise to build awareness (intensity)

• If perceptions are inaccurate and awareness is low, reposition the brand by specifying ‘perceptual objectives’ while building awareness (message).

• If perceptions are inaccurate and awareness is high, either reposition - a potentially very high cost option - or launch a new brand with similar specs (relaunch).

Product specs do not match the target market’s ideal point

V = ( ) /*a b Pi

n

i i

1

Redefine product specifications to match current or projected ideal points (b’s)

Customers want increasing CPU speed in PCs. Existing units are 700 Mhz, competitors have intro’d 900 Mhz units

Redesign for speeds in excess of 700 Mhz to hit projected ideal point

Design closer to ideal point

V = ( ) /*a b Pi

n

i i

1

Redefine product specifications to match current or projected ideal points (b’s)

Design closer to ideal point

MARKSTRAT WORLD

Each market segment (Hi-earners, Buffs, etc.) has an ideal combination of specific product attributes (that may change over time).

Design (or redesign) products to hit projected ideal points of attractive market segments.

V = ( ) /*a b Pi

n

i i

1

V = Value of Product

i = Product attribute

b = Magnitude of benefit from attribute i (proximity to ideal point)

a = Importance weighting of benefit

V = ( ) /*a b Pi

n

i i

1

Target a segment with importance weights (a) and ideal points (b) matched to product

British Air promotes “business class” amenities including preferred check-in, enroute services, arrival shower facilities, etc.

V = ( ) /*a b Pi

n

i i

1

Change importance weights (a) via promotion

Federal Express promotes “absolutely, positively” next day delivery service for packages

Shifts focus to an advantaged attribute (e.g. speed versus economy)

V = ( ) /*a b Pi

n

i i

1

Persuade target customers that more (or less) of an attribute is more desirable.

Higher horsepower uses more fuel

High fat content tastes good but raises cholesterol levels.

‘Reshape’ the ideal point

V = ( ) /*a b Pi

n

i i

1

Communicate proximity to ideal points (anyway)

• Obvious ethical issue Caveat emptor

• Short-term fix at bestPerceptions eventually catch up to reality

• Common rationalization: “no harm, no foul”

• Unjustifiable desperate act

V = ( ) /*a b Pi

n

i i

1

Communicate proximity to ideal points (anyway)

• Obvious ethical issue Caveat emptor

• Short-term fix at bestPerceptions eventually catch up to reality

• Common rationalization: “no harm, no foul”

• Unjustifiable desperate act

… in real life, but not in MARKSTRAT

V = ( ) /*a b Pi

n

i i

1

V = Value of Product

i = Product attribute

b = Magnitude of benefit from attribute i (proximity to ideal point)

a = Importance weighting of benefit

P = Price of product

V = ( ) /*a b Pi

n

i i

1

Cost reduce existing products to allow a price reduction (P) which improves relative perceived value position, i.e. rebalance benefits and price

Reduce costs / price

Core NPD Question

How to translate the ideal point point into product specifications?

QFD

Customer Requirements

Importance to Cust.

Easy to close

Stays open on a hill

Easy to open

Doesn’t leak in rain

No road noise

Importance weighting

Engineering Characteristics

Ene

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need

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to c

lose

doo

r

Che

ck fo

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on

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und

Ene

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need

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to o

pen

door

Wat

er re

sist

ance

10 6 6 9 2 3

7

5

3

3

2

X

X

X

X

X

Correlation:

Strong positive

Positive

NegativeStrong negative

X

*

Competitive evaluation

X = UsA = Comp. AB = Comp. B(5 is best)1 2 3 4 5

X AB

X AB

XAB

A X B

X A B

Relationships:

Strong = 9

Medium = 3

Small = 1Target values

Red

uce

ener

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leve

l to

7.5

ft/lb

Red

uce

forc

eto

9 lb

.

Red

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7.5

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.

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Technical evaluation(5 is best)

5

4

3

21

B

A

X

BA

X B

A

X

B

X

A

BXABA

X

Doo

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Win

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Value FunctionReal World Implications

• Must be at least parity on all heavily weighted attributes to be competitive

• Must win on some differentiating attribute

• Little leverage from low weighted variables

• Best case : introduce a new (proprietary) attribute and drive weighting up

• Cost reduction both an on-going necessity and a last resort

Strategic Options AnalysisApplying the Value Function