Lecture 6

Marketing and Competition Jan 25, 2011

Today

• HW Presentation• Progress in interviewing

– Issues• Personalized Clinic• Lecture

HW for Tuesday, Feb 1

• Present results of your interviews and other research to date– What did you learn?– Do your hypotheses need modification?– What is your plan to “fill in the gaps”

• Characterize the industry your company would play in using Porter’s forces

A Business Ecosystem

• Think of the business as a occupying an ecological niche in a rapidly changing environment

• What are some of the ways you could characterize this environment?– Competitors– Suppliers– Customers– Government– Others?

Six Forces Diagram to Determine how Competitive a Company is (after Porter)

Your Business

Power, Vigor and Competence of Existing Competitors

Power, Vigor and Competence of Customers

Power, Vigor and Competence of Complementors

Power, Vigor and Competence of Suppliers

Power, Vigor and Competence of Potential Competitors

Possibility that what your business is doing can be done in a different way

The intensity of competitive rivalry (known)

–number of competitors – rate of industry growth – intermittent industry overcapacity –diversity of competitors – informational complexity and asymmetry –brand equity –fixed cost allocation per value added – level of advertising expense

The threat of new entrants – the existence of barriers to entry

• Have a hub• IP• Gov license• Limited market• R&D costs• Economies of scale• Factory• Knowing market

– Barriers to exit – Economics of product development– Brand equity – Customer “stickiness” switching costs – capital requirements – access to distribution – absolute cost advantages – learning curve advantages – expected retaliation – government policies

Discussion

• Is it a good thing to have competition in your market?– Existing– New entries?

The bargaining power of suppliers

– supplier switching costs relative to firm switching costs

– degree of differentiation of inputs – presence of substitute inputs – supplier concentration to firm concentration

ratio – threat of forward integration by suppliers

relative to the threat of backward integration by firms

– cost of inputs relative to selling price of the product

– importance of volume to supplier

– Examples?

The bargaining power of customers

– ratio of buyer concentration to seller concentration– bargaining leverage – buyer volume – Buyer switching costs relative to firm switching costs – buyer information availability – ability to backward integrate – availability of existing substitute products – buyer price sensitivity – price of total purchase

– Examples?

The bargaining power of complementors

– Relative strengths– Customer perception – Future R&D – Switching costs– Trust– ability to sideways integrate– Anti-trust – Competition for margin

– Examples?

Six Forces Diagram to Determine how Competitive a Company is (after Porter)

Your Business

Power, Vigor and Competence of Existing Competitors

Power, Vigor and Competence of Customers

Power, Vigor and Competence of Complementors

Power, Vigor and Competence of Suppliers

Power, Vigor and Competence of Potential Competitors

Possibility that what your business is doing can be done in a different way

Six Forces Diagram to Determine how Competitive a Company is (with 10X disruptive force)

Your Business

Power, Vigor and Competence of Existing Competitors

Power, Vigor and Competence of Customers

Power, Vigor and Competence of Complementors

Power, Vigor and Competence of Suppliers

Power, Vigor and Competence of Potential Competitors

Possibility that what your business is doing can be done in a different way. Disruptively! Or can you be the disrupter?

The threat of substitute products –buyer propensity to substitute –relative price performance of

substitutes –buyer switching costs –perceived level of product

differentiation

Differentiating yourself from the competition

Price, etc.

Features, etc.

You

CompB

CompC

CompA

Are you adding features that don’t add value?

SWOT AnalysisStrengths, Weaknesses, Opportunities and Threatsby James Manktelow, editor of Mind Tools and an experienced

business strategist. Strengths (with respect to competitors): What advantages do you have? What do you do well? What relevant resources do you have access to? What do other people see as your strengths? Be sure to distinguish a strength in the market, from a necessity. Look from the customers perspective!

Weaknesses: What could you improve? What do you do badly? What should you avoid?

Opportunities: Where are the best opportunities? What are the interesting trends?• Changes in technology• Changes in markets• Changes in government policy • Globalization opportunities• Changes in social patterns• Demographics• Partnerships

Threats: What obstacles do you face? What is your competition doing? Are the required specifications for your products or services changing? Is changing technology threatening your position? Do you have bad debt or cash-flow problems? Could any of your weaknesses seriously threaten your business? You can also apply SWOT analysis to your competitors. This may produce some interesting insights

You can apply SWOT analysis to yourself and your career prospects

Interesting. . . But what do you do with the SWOT analysis?

Example: A start-up small consultancy business

Strengths: • Can respond very quickly as we have no red tape, no need for higher management approval, etc.

• Can provide really good customer care, as current small work load means we can focus on customers. • Our lead consultant has strong reputation

• We can change direction quickly if need be

• We have little overhead, so can offer good value to customers

Weaknesses: Our company has no market presence or reputation We have a small staff with a shallow skills base in many areas We are vulnerable to vital staff being sick, leaving, etc. Our cash flow will be unreliable in the early stages

Example: A start-up small consultancy business

Weaknesses: •Our company has no market presence or reputation

•We have a small staff with a shallow skills base

•We are vulnerable to vital staff being sick, leaving, etc.

•Our cash flow will be unreliable in the early stages

Example: A start-up small consultancy business

Opportunities: •Our business sector is expanding, with many future opportunities for success

•Our locality wants to encourage local businesses with work where possible •Our competitors may be slow to adopt new technologies

Example: A start-up small consultancy business

Threats: •Will developments in technology change this market beyond our ability to adapt? •A small change in focus of a large competitor might wipe out any market position we achieve

Example: A start-up small consultancy business

Conclusions:Specialize in rapid response, good value services to local businesses.

Promotion in selected local publications, to get the greatest possible market presence for a set advertising budget.

Must keep up-to-date with changes in technology

Key points: SWOT analysis is a framework for analyzing your strengths and weaknesses, and the opportunities and threats you face. This will help you to focus on your strengths, minimize weaknesses, and take the greatest possible advantage of opportunities available.

In all of the E/ME 102 businesses there is competition.

You will attack!

Why is it difficult?

In all of the E/ME 102 businesses there is competition.

You will attack!

Why is it difficult?

“de l'audace, encore de l'audace, et toujours de l'audace” -Napoleon

In all of the E/ME 102 businesses there is competition.

You will attack!

Why is it difficult?

“de l'audace, encore de l'audace, et toujours de l'audace” -Napoleon

Not a good idea -Pickar

Bill Davidow (Intel, Mohr Davidow)

• “Marketing High Technology- an insiders view”, William H. Davidow 1985

– If you attack a well-established competitor, you must plan on spending ~70% of the sales of the competitive leader has spent in building his business.

Why is this so?

Cost of Attacking a Competitor

• Investment required to – Establish market presence– Establish distribution channels– Develop a product line– Plants– Equipment– Inventory– Working Capital

• Entrepreneurial bias (truth hurts!)• Caltech bias • Underestimate what it takes to achieve position

(Discount Davidow thesis)• Competition has already solved problems that

perhaps you don’t know existed• The competition may not even be a player at

present but is plotting in labs even as you are. (Particularly true in high-visibility areas such as homeland defense)

Consider the broader problem- why is it easy to underestimate the competition?

• Your knowledge is incomplete i.e., You don’t know what you don’t know.

Consider the broader problem- why is it easy to underestimate the competition?

The Reality: What does the entrenched competition have?

Assume a “good” company or companies

• By definition they have market share• Brand• Management• A product that generally satisfies the

market.• Knowledge of the Customer

– Sales Force– Distribution

The Reality: What does the entrenched competition have?

Assume a “good” company or companies

• Technology relationships• Technology Strengths• Industry knowledge of trends

–Industry groups• Supplier relationships• Distribution relationships • $$$$$ for response

Attacking an entrenched competitor working on an “old” technology

Capability of “Old”Technology

Number of researchers working to advance “old” technology

Attacking an entrenched competitor working on an “old” technology

Capability of “Old”Technology

Number of researchers working to advance “old” technology

You

Common pitfalls

We are 20% better so we will win!

The competition is not important because It doesn’t exist

We are disruptive

We are not attacking them head on

Common pitfalls

We are dis-intermediating them- rendering them irrelevant

• E-Commerce- the example of E-Toys, Webvan, Pets.com, etc., etc.

• B2Bs- the example of WholesaleExchangeAmazon vs Barnes and Noble

What are some of their weaknesses?• Large company

– Bureaucracy– Slow decision making in meetings

• Structure• Silos

– Career avoidance of failure– Annual funding cycle– Complacency– Maybe don’t work so hard– others

• Small company– Harder to respond to an attack to the side of their

business– Overcommittment– Others

Additional Reasons related to missing disruptive technologies

• Wrong Value Network– Context of corporation’s business leads to missing competition

arising from outside

• Organizational Structure– Companies organized by a products substructure fail when

fundamental architecture changes

• Core Competencies– Firms fail when a technological change destroyed the value of

competencies previously cultivated and succeeded when new technologies enhanced them

Additional Reasons related to missing disruptive technologies

• Technology S-curves– Firms fail when they miss inflection points

along their main product thrust and specifically when they miss technologies advancing in related fields

• Wishful thinking

• Blinders–Arrogance–Tunnel vision

• Well-defined positions• The problem with success

Thoughts on countering competition• Look for weaknesses

– Dissatisfied customers e.g., quality or service– Unaddressed pain– Cracks in supply chain– Geographic hole

• Address with Total Customer Satisfaction• Address with Total product- addresses all the pain • Don’t attack an entrenched position frontally! Think

twice about competing on cost• Find a (neglected?) niche• Have proprietary technology that “changes the game”

– i.e., 10X improvement

More thoughts• Have understanding of the market on your team• Hire from your customer or best competitor• Have leadership that either has a track record or

learns fast.• Think strategically

– How will the big guys respond?• How would you counter that response?

• Focus on a few key customers• Keep under the radar screen?• Speed! Fail quickly and correct

Opportunity for Entrepreneurial company

• Look for need not being served now by big company

• Look for a 10X cost reduction to service these companies

• After you have established yourself, move up market and attack big company with a much cheaper, solution for their customers.

• Think main frames to minis to micro

Kent Kresa’s game theory checkerboard

Put each of your competitors on a “checkerboard”. From what you know of them (SWOT analysis). What move would they make if you were to enter the market with your product? How could you counter that move a priori or afterwards? What other moves could they make to counter you?

OverconfidenceParanoia

?

Where are you in this spectrum?

Disruptive Technologies• Why do some good companies fail?

– Companies that • are well-managed and progressive• listen to their customers• study and act on market trends• invest significant resource in R&D• allocate capital to provide the best return

– in short do all the “right things” and are held as paragons for their success

. . . .and then collapse

Disruptive Vs Sustaining Technology

Sustaining Technology• can be incremental or radical• improve the performance of established

products along the trajectory that mainstream customers have historically valued

Examples of Sustaining Technologies

• Semiconductor process technologies• Automotive technologies e.g. IC engines• DRAM, CISC microprocessor• Jet Engines• Construction• Factory automation

Examples of Disruptive Technologies?

• Internet• MEMS• Disk Drive• Genetic Engineered foods• Genetic Engineered drugs• Wal-Mart, Dell inventory

management• Hybrid Vehicles• Small Turbines• Fuel Cells• Biotech

What companies are Vulnerable?

Disruptive technologies

Why do good companies miss the revolution?

• Companies depend on investors and customers for resources– requires high profits– requires following the lead of customers who may

themselves be blindsided• mainframe industry• minicomputer industry

• Markets that don’t exist can’t be analyzed• Technology Supply may not meet market demand

Are these companies clueless?• Not every technology that looks disruptive is feasible. • You cannot chase every possible disruptive technology to cover all your

bets• Even for technologies which are well-researched and appear to be

potentially disruptive can be very difficult to bring to market• Companies are unable to allocate sufficient resource to test marketing

them because they will always fail any rational allocation process (we will discuss how this allocation process called portfolio management works in the future)– Their normal customers aren’t interested– The markets seem small and uncertain– Resource for main line technologies will receive the dominant share to maintain

sales growth and profits