Value Propositions through Innovation for High Technology Companies

Gestione dell’Innovazione

a.a. 2004/2005

AB

Agenda

What is a value proposition?High technology market segmentationProduct functional capabilities and customer benefitsWhat is a “whole product”?Value propositions through Innovation

Challenge: Create a Value Proposition

TechnologyProduct

ValuePropositionBenefits

MarketNeedProblem

The Value Proposition

A combination of a product’s functional capabilities, customer benefits and a business modelwhich creates a value for a specific customer segmentSolves a market “need”Its what you sell

High Technology - Market Segmentation What is a “Market Segment”?

Set of potential customersWho have similar needs Who reference each other when buyingAre alike in the way they:

View and evaluate productsPerceive valuePurchase products

Housing Market Segments

ApartmentsCondosTrailer homesSingle family tract homesCustom built luxury homesManufactured home

HotelsMotelsPrisonsRetirement homesNursing homesMilitary basesCollege dorms

Why Define a Market Segment?

Easier to understand customer needsCan design the product to a narrower set of customer requirementsEasier to become a leader in a smaller market (Big fish in small pond)More effective use of marketing dollarsGenerally more profitable

Profit Impact of Marketing Strategies (PIMS) 1/2

Originally a General Electric studyNow the Strategic Planning InstituteStudied 2600 business units since1960sEvaluated 28 factors related to ROIDetermined the factor that most affected ROI was market share

Profit Impact of Marketing Strategies (PIMS) 2/2

ROI = profit return on invested capital

Firms with market shares over 40% have an average ROI of 2 1/2 times more than firms with market shares under 10%

Increasing market share by 10% results in an additional 5% increase in ROI

Profitability Increases with Market Share 1/2

Market share of up to 10% = 13.2% ROI10% - 20%, ROI = 18.0%20% - 30%, = 23.6%30% - 40%, = 24.4%Over 40% market share, ROI = 32.3%

Profitability Increases with Market Share 1/2

Strategy:

Define market segment small enough to allow you to capture 25% to 30% share in a few years

Be a “Big fish in small pond”

Don’t enter a market that already has more than 3 or 4 strong competitors

A Market Segmentation - Example

Do You Recognize any of these U.S. Firms?

Codar TechnologyElta ElectronicsDatametricsRaymond EngineeringOption Computers

In what market segment do they compete?

Industrial ,“Ruggedized” Personal Computers

Segment of the worldwide PC marketIndustrialMilitary

PCs to military forces worldwideInstalled in planes, tanks, vehicles, missile launchers, shipsA well defined market segment

$1 billion worldwide, 13% CAGR

Product Issues in “Ruggedized” PC Segment

Precise design and military specsEnvironmental design requirementsHigh reliability, MTBF performanceVariety of power sourcesStronger, sealed cases, rack mountedExtensive acceptance testsMilitary labeling in many languages

Product Packaging “Ruggedized” PC Segment

Extensive documentation per mil-specsSpare parts programsMaintenance supportExtensive and detailed warrantyPhysical packagingShipping requirements

Sales Processes “Ruggedized” PC Segment - 1/2

Formal proposal, bidding processVery long, formal sales cyclesPricing may vary: cost plus fee, competitive fixed price, CPIF, etc.Federal acquisitions regulations apply in U.S.

Sales Processes “Ruggedized” PC Segment - 2/2

Extensive purchasing documentationProximity to & contacts with the U.S. Pentagon and/or local militarySales team and management should be ex-military personnelImpacted by politics, budgets, foreign relations, trade restrictionsPosting completion bond is common

Trade Journals for“Ruggedized” PC Segment

Journal of Defense Electronics

Government Computer News

Corporate Image in “Ruggedized” PCs

Must have extensive high level contacts in military procurement & government Lobbyists in Washington and/or foreign capitalsMust be profitable & financially stable

Selling PCs to the military is very different from selling typical PCs to a business

Product requirements are differentProduct packaging is differentSales process is differentCorporate imaging is differentEach market segment has unique set of important requirements

Another example of a niche market

FanucPaintingRobot

Fanuc RobotFunctional Capability

100% electric motors

Explosion proof enclosurePositional repeatable accuracy is +/- .02”

Powerful minicomputer

Benefit

Clean, no hydraulic fluid leaksVery safe to operate

Very precise painting

Fast execution, able to store many objects

Can Segment Markets by:

DemographicsGeographyApplication & UsagePlatformsTechnical Sophistication

PriceDistribution channelCustomersPurchase volumesHardware architecturePsychographics

Psychographics Segmentationusing the Technology Adoption Curve

“Crossing the Chasm” by Geoffrey Moore

Moore’s Technology Adoption Curve

Innovator

Early Majority

Late Majority

Laggard1/3 1/31/6

Chasm

Early Adopter

Moore’s Segmentation:Technology Adoption Curve

Normal population distribution of buyersSegmented into buying groupsUses standard deviation boundariesBased on psychographics: propensity to buy technology based productsIt’s a metaphor, a model

Moore’s Technology Adoption Curve Segments

Innovators: (Techies) = first 4%Early Adopters (Visionaries) = 13%Early Majority (Pragmatists) = 33%Late Majority (Conservatives) = 33%Laggards (Skeptics) = 17%

Innovators / Techies

Technology enthusiasts; they love itFirst to buy, even at high pricesWilling to learn, very tolerantGatekeeper role, but minimal buying powerWill bug the heck out of youProblem: Not many of them…3%

Marketing to Innovators / Techies

Product must be technically interestingProduct must work functionally, not have to be perfectDraft manuals okHave them beta test Want to talk with “techie” developersDeliver papers at conferencesPublish in technical journals

Early Adopters /VisionariesWant new technology to dramatically improve their business in a strategic mannerWant discontinuous breakthrough improvement in critical business processGoal: improve business, not use technology“Builders” not “maintainers”Project oriented Anxious, champions High risk/high reward typesMake “bet their career” decisionsMountain Climbers

Marketing To Early Adopter / Visionaries

Sell the “dream”, but clearly define scope & deliverables..watch out!!Relate directly to their business objectiveHave them reference other visionaries who have bought; your best salesmenPrice is secondary: they want it right, complete, quickly & on time

Early Majority / Pragmatists

Only want incremental improvementEvolutionary not revolutionary productsWant proven, established productsCan’t sell them new, risky technologyCan’t sell them “dreams”, only “reality”Live with their decisions long timeHill climbers at best

Marketing To Early Majority / Pragmatists

They want:Proven product, based on standardsMany satisfied customers to reference in their own vertical industry To buy whole product from market leadersCompetition: lower prices, other vendor alternatives

Late Majority / Conservatives

“Back side” of curve = 1/3 populationSignificant opportunity for sales & profitsTechnology adverse; don’t like changeWant only mature whole products, fully packaged and supported....at a low price…buy “off the shelf”Most technology products they buy are sold through retail distribution channels

Laggards / Skeptics

Last 1/6 of population = 17%Don’t buy any technology unless they are forced toJust now buying microwave ovens & VCRsNot worth talking aboutNot worth me making this slide!

Enough said....

“Initial Target” or “Beach head” Market

Target Market = 17% of Total Market

Adoption goes from left to right, along the curve

I = 3%EA = 14%

Early Stage Sales Strategy

You first must sell to Innovators and Early Adopters/VisionariesInitial Target market is 17-20% of the Total Available MarketYou cannot initially sell to Early Majority/ Pragmatists…don’t waste your time & effort…you can’t skip over Early Adopters / Visionaries

Summary:

Define initial market segment small enough to allow you to capture 25% to 30% market share in a few years

Don’t enter a market that already has more than 3 or 4 strong competitors

First sell to Innovators & Early Adopters

“Whole” or “Complete” Products

Technology to Customer Benefits

Functional Capabilities

CustomerBenefitsTechnology

Example: Portable PCs

Functional CapabilitiesLow weightSmall size/volumeLarge storage mediaHigh processor speed MhzHigh amp-hours /volume & /weight in battery

Customer Benefits

Ease of portability

Adequate storage capacityEffective computing power Maximum battery time without power connection

Example: Fiber Optic Cable

Functional CapabilitiesLow weight cableSmall size cableLess signal loss/ft, attenuationHigh message volume capacity -MB/secImmune to cross talk, RFI and EMI

Customer Benefits

Easier to installFewer retransmission amplifiersEasier to trouble shoot & maintainLower cost/ MBMore clear signals

Example: DSL Lines

Functional CapabilitiesUses existing twisted pair copper telephone line15-20 times faster than 56kbps dial up modemMinimal additional modem hardware

Customer BenefitsMinimal installation time & cost

No new phone lineMinimal hardware

Enables service operators to sell more broadband servicesCan be incrementally introduced to market

The “Whole” Product Includes

The Device:Basic core product, invention, what engineers designed, what customers actually use

Product “Packaging” is in addition to the device:Things, processes, services and extras that are “wrapped around” the device to produce a more attractive value proposition

3 Types of Product “Packaging” – 1/2

1. Product related:Technology platform, technology standards, migration strategy, upgrade policies, ease of conversion, documentation

2. During the sale:Financing, warranty, trade-in allowance, sales process, pricing, terms & conditions

3 Types of Product “Packaging” – 2/2

3. After the sale:Delivery, installation, training, customer support, user groups, maintenance & parts

All of these topics need to be determined before:Selling the productPreferably before finalizing the product design

A “Must Have” Reason To Buy

The value proposition is so good that you “must have” it. Examples?

Critical to success of any new product

Becomes the central theme of the overall marketing strategy, including advertising and promotion

If you have a technology based product:

The strength of the value proposition must exceed the reluctance, fear and risk of buying a high technology product

Most buyers initially resist buying new technology products

Only a few innovators & early adopters

If you have a no tech or low tech product:

The strength of the value proposition must exceedthe comfort and habit of customer’s current buying habits and choicesYou have to overcome buyers’ natural inertia to keep on buying the same products and buying them in the same way

Developing a Value Proposition

Frequently the product is already defined

Then have only 2 variables: Customer and functional capabilities/benefits

Can use a spreadsheet analysis:Rows: Features that provide applicationsColumns: Customer target market segments

A “Must Have” Reason To Buy

Critical to product launch successWithout it you’ll probably never get to see the chasm, let alone cross itThe strength of the value proposition must exceed customer’s fear and risks of buying a new, high technology discontinuous product

3 Sources of a “Must Have” Value Proposition

#1 - Provides a dramatic competitive advantage

#2 - Radically improves productivity

#3 - Significantly reduces costs

“Must Have” #1: Provides a DRAMATICCompetitive Advantage

Advantage not previously availableDramatic, significant, not minorIn a major operational areaExamples are ATM machine, CT scanner, iPod, iTunes, Polaroid camera, Xerox 914 copier, laparoscopic surgery

“Must Have” #2: It RADICALLY Improves Productivity

Improves productivity of a well-understood critical success factorSuperior price-performanceExamples are CAD software, e-mail, Internet search engines, word processing & spreadsheet software, Sun Sparc workstations, blade servers, laparascopicsurgery

“Must Have” #3: It SIGNIFICANTLY Reduces Operating Costs

Must be visible, verifiable, significant, quantifiable, easy to prove“Free” offers get attentionExamples are ATM, laparoscopic surgery, Napster, spreadsheet & word processing software, online software distribution

Final Notes

Difficult to cross the chasm if you only have 1 of the 3 sources of “must have”

Better to have 2 of 3 sources

Best to have all 3 sourcesATMs Laparascopic surgery

Laparoscopic Surgery – 1/3

Why has this method of surgery become so popular?

Can you determine the sources of the Reason To Buy?

Laparoscopic Surgery – 2/3

New procedure for hip replacement surgeryTwo 2 inch incisions replaces one 10”Minimal cutting of musclesSame prothesisOut patient basis versus five days in hospitalLess pain and discomfort

Laparoscopic Surgery – 3/3

Dramatic competitive advantageFaster patient recovery, reduced pain, saferPatients go to doctors & hospitals who do it

Radically improves productivityDoctors spend less time per surgery & post op

Significantly reduces costsLess time in hospital = less costInsurance companies benefit, lower premiums

A “Must Have” value proposition for Automated Teller Machines

Dramatic competitive advantageOpen 24 hours, much faster transaction time

Radically improves productivityNeed fewer tellers per branchFocus on better service and selling new services

Significantly reduces costsLess paperwork, labor costs91 cents w/teller to 27 cents w/ATM