january 2005

January 2005

Identifying markets

Creating sustainable competitive advantage

Douglas Abrams

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Douglas Abrams

Identifying markets and creating SCA

• Choose the right market

• Create sustainable competitive advantage

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Douglas Abrams

Choose the right market

Create a value proposition

Understand customer adoption

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Douglas Abrams

Target an increasing returns business

Up-front costs are high relative to marginal costs

Network externalities

Complementary technologies are important to use

Producer learning is strong

Switching costs are high

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What problem are you solving for customers?

Start a business with a product that meet a real customer need

Develop a solution to the customers’ problem

Meet customer needs better than competitors

Evaluate customer preferences – traditional market research ineffective – listen to customers

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Market research for start-ups

Focus groups, market research limited value

Observation-fueled insight makes innovation possible

Watch people using products

What comes naturally to them?

Asking people is not enough – Fine is a four-letter word

Users cannot explain what is wrong or what is missing

It’s not the customer’s job to be visionaries

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Responding to customer preferences – Kleenex

Originally a cold cream remover

Users started wiping their noses with it

Kimberly-Clark started to market it as disposable handkerchief

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Talking to potential customers: Igloo

Asked college kids what they liked (more room for six-packs!)

Created Space Mate.

Could fit one and a half six packs more in the same fridge size.

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Case study – not solving the right problem

RCA’s Videodisc– Superior image quality, but lack

of recording capability lost out to videotape. Loss: $500 million

IBM’s PC Jr– The awkward Chiclet keyboard,

slow microprocessor, unattractive price and a late launch cost IBM $40 million

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Case study – not listening to customers

Coca-Cola’s New Coke– This “answer” to Pepsi’s new

formula provoked a national uproar; later led to Coke Light

RJ Reynolds's Premier– Smoke-less cigarette with a

terrible taste; cost to develop: $800 million

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Focused observation a source of innovation

Infer motivation and emotion

What do people think and do?

Why do they think and do?

Integrate research, design, marketing and manufacturing

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The fist phenomenon

Kids grip toothbrush with whole fist rather than fingers

Kid’s toothbrushes should be fatter than adult’s

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Categorize customer needs in designing product

Things that are necessary

Things that are nice to have

Things that are unnecessary

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Be realistic

Start a business only if your new product is better than those of competitors.

Be realistic about how your product or service stands against that of the competition.

Consider new products or services that other entrepreneurs are about to introduce.

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Meet customer needs in an economic manner

Figure out a way to create your product or service for less than you are going to sell it.

Figure our how to make money on at least some transactions regardless of the quantity that you can sell.

Note that new product will not sell itself, but will require personal selling

Note that pricing is important

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Douglas Abrams

Choose the right market

Create a value proposition

Understand customer adoption

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The Normal Distribution of Product Adoption

Num

ber o

f Ado

pter

s in

Tim

e Pe

riod

Innovators 16% Laggards 16%Majority of customers

68%

Most customers adopt new products to the middle of the

product cycle

A small portion of the market adopts new products late

in the product cycle

In the beginning there are relatively

few adopters

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Implications for entrepreneurs

Different adopters have different preferences

You must do different things to drive adoption

Proportion of the market adopting at any point in time is not linear – another S-curve

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Market adoption S-curve

Cum

ulat

ive

perc

ent

of m

arke

t ado

ptin

g

Time

0 5 10 15 20 25 30 35

20%

40%

60%

80%

100%

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Douglas Abrams

Crossing the chasm

Change the way you sell your new product or service when you want to make the transition to the majority of the market.

Focus on the customers with the most compelling need to buy your product or service before you transit to the mainstream market.

Provide customers with evidence of value

Offer a whole product solution

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Remember the S-shaped adoption curve

Use dynamic estimates to evaluate the size of the market for your new product or service

Include factors that influence diffusion and substitution in calculating the growth of the market for your new product or service

Substitution is an important part of strategy for competing with established firms

Effective when established firms have economies of scale, as substitution erodes their scale economies

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Factors influencing diffusion

Discrete technologies diffuse faster than systemic

Inexpensive diffuse faster than expensive

Offering greater advantage diffuse faster

Characteristics of target market, external environment, political and regulatory factors, events or obstacles

Easier to understand technologies diffuse faster

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Simple products - simple as a Frisbee

No moving parts, requires no instructions and delivers fun with very little practice with fifteen cents worth of molded plastic.

People today want more integration and simplicity.

Reality is that it takes time.

Often can’t achieve in the first version of the product.

Version 2.0 may be the best bet

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Jumping the barrier – fax machines

Fax Machines

In most countries– Unreliable, expensive & few

advantages over telegraph

In Japan– Existing telegraph & text based

system couldn’t easily handle ideographic Japanese language.

– Launched massive research efforts & urged manufacturers to adopt common communications standard

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Epidemic diffusion – Hush Puppies

Stay in touch with the consumers

Hush Puppies shoes - nearly discontinued– Revived due to sudden grassroots consumer interest

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Jumping the barrier – Palm pilot

Originally tried to integrate too many features

Realized consumers wanted complement, not replacement for PC

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Jumping the barrier – answering machines

Answering Machines

Initially considered rude

Within a few years, became rude if didn’t own one.

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Jumping the barrier - biometrics

Biometrics Access Device (Digital Handprint)– Rough outline of hand,

relative length of fingers or spacing of knuckles

– Handprints thought of like fingerprints

– Seen as intrusive and makes people feel like criminals

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Jump the barrier – vacuum cleaners

Vacuum Cleaners

America– Loud vacuums associated with

powerful motors & suction

Japan– Quieter, less powerful, smaller

motors, fuzzy logic, insulation

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Douglas Abrams

Identifying markets and creating SCA

• Choose the right market

• Create sustainable competitive advantage

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Douglas Abrams

Create sustainable competitive advantage

Competing with established companies

Protect your intellectual property

Create barriers to entry

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Advantages of established companies

The learning curve

Reputation effect

Cash flow

Economies of scale

Complementary assets

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Established company weaknesses

A focus on efficiency makes it difficult to introduce new products

Effort to exploit existing capabilities makes it difficult to innovate

They need to satisfy existing customers

Existing organizational structure is appropriate to current tasks

Employees generally not rewarded for innovation

Difficult to innovate in a bureaucracy – low communication density

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Opportunities that favor new firms

Discrete versus systemic technologies

Opportunities that are based on human capital – difficult for existing companies to protect

General purpose rather than specific purpose technologies – provide flexibility

Uncertainty – existing firms’ advantages in market research are neutralized

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Case study: E-Schwab

Initially their brokers complained about low on-line flat fee

Spread same low web trade commission to all of its customers

Shot ahead of traditional high-end firms like Merrill Lynch

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Case study - snowboarding

Journalists & ski resorts called it a fad; Time dubbed it America’s “Worst New Sport”

Ski resorts banned boarders

Mainstream ski manufacturers figured it was a passing fancy

Now 90% of US resorts have accepted snowboards and 5 MM Americans are boarding

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Case study – mountain biking

Schwinn wrote off mountain biking as a fad.

Early mountain bikers tackled rugged mountain paths with souped-up Schwinns.

Today 70% of full-sized cycles sold are mountain bikes; Schwinn is irrelevant

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Case study – Dell computers

Direct sales

Easy configuration of memory, peripherals

Direct, reliable customization experience

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Competitors will copy your product

Reverse engineering

Hire ex-employees

Look at patent documents

May be working on similar products

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Protecting your intellectual property - secrecy

Few alternative sources of information

Limited number of people who could make use of the information

The necessary knowledge is tacit

Process of creation is poorly understood

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Protecting your intellectual property - patents

A government monopoly

Only possible for a small number of products

Patents must be strong to be useful

Patents require disclosure

Patenting is expensive

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Capturing the returns to innovation

Control of resources – key sources of supply

Building brand-name reputations

Exploiting learning curves

First mover advantages when market structure allows

Control of complementary assets in manufacturing and marketing

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Sources and references

Finding Fertile Ground by Scott Shane, Wharton School Publishing

The Art of Innovation by Tom Kelley with Jonathan Littman, Doubleday

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Contact us

Douglas Abrams

[email protected]

[email protected]

65-9780-5381 (hp)

january 2005

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