market driven product development srategy

Market-Driven Product Development Strategy:

Achieving Alignment between Product Development and

Markets

Bruce B. Karr and

Jon T. Gabrielsen

August 2007

Market-Driven Product Development Strategy Bruce Karr and Jon T. Gabrielsen

2007 Blue Canyon Partners, Inc. 2

Introduction

Recently Blue Canyon met with the Vice President of Product Development at a large multi-product, multi-segment company. As we talked, he lamented that all day long he is bombarded with ideas and requests for products to be developed. He shared just a few examples of just the past couple of weeks, noting also the source of the request:

“I just got back from a meeting with our largest distribution customer in our industrial segment. They want us to develop this new feature on the primary product we sell to them. They are certain that it is the wave of the future and will be a huge hit for them and us.” [Industrial Segment Salesperson A]

“All that my distributors do is pound us on price, price, price. We need to put significant product development resources into developing lower cost products for this segment.” [Industrial Segment Salesperson B]

“Last week, I went along on a series of major contractor customer visits with our distributor in Dallas. Many of the customers we visited are clamoring for product changes that would ease installation. I think that they would be willing to pay a small premium for the significant labor savings that they would gain on installation.” [Industrial Segment Regional Sales Manager]

“All our sales people in the consumer segment want to do is sell the heck out of our current products and maximize their commissions. The operations folks love them because they keep the plants humming. But they haven’t a clue what the unmet or emerging needs are in their segment, nor do they care. They are of absolutely no use to us in terms of gaining market intelligence about future product development needs for their segment. How are we supposed to know what to tell product development to work on if those closest to the customers don’t even know?” [Product Marketing – Consumer Segment]

“I just returned from a trade show for our commercial segment where I benchmarked the product features of all of our competitors. We are way behind in new features. Here is a list of all of the features that they have that we don’t offer. We need to develop and offer all of them too.” [Product Marketing – Commercial Segment]

“I ran into a guy at a technical association meeting last week who has developed this incredibly fascinating technology that he is willing to license to us. I am absolutely convinced that we should buy the license. Not only could we incorporate it into our current products, but it also could potentially lead to a whole new product line for us. We need to buy this license immediately before one of our competitors snaps it up.” [Engineer]

“In the process of working on that application development for our top customer in the commercial segment, we inadvertently have uncovered a means to offer some


2007 Blue Canyon Partners, Inc 3.

new product capabilities to all of our customers. We need to put a team behind this and get these additional capabilities developed and brought to market right away.” [Product Development Engineer]

“I was out on my boat this weekend with my neighbor. While talking we came up with this new product idea that I am absolutely positive will be a sure-fire hit. We need to put a crack product development team on this immediately, before anyone else thinks of it.” [President of the Company]

This Vice President of Product Development went on to comment that “no product development organization, even one as large as ours, has enough resources to pursue all of these initiatives. Further, many of the ideas are in conflict with one another. For example, we are being told to cut costs by one person and increase features by another person in the same market segment. It ends up being an internal power struggle in terms of priorities. The person with the ‘most clout and loudest shouts’ wins, at least until the next uprising and then the priorities are all resorted again.”

This executive also voiced the view that his firm didn’t have a product development strategy. He felt that his department was involved in a list of random initiatives with constantly shifting priorities. From his perspective, the outcome wasn’t surprising. He commented that “It is a wonder that any of them ever emerge from the lab and reach the market. And sadly many of those that actually reach the market are not embraced and are never market successes.”

The challenge that emerged from this discussion – “What I desperately need is a means to sort though all of this and come up with a strategy that we can all stick to and that will be a winner for us in the marketplace” – is one that many organizations face.



The Traditional Approach to Product Development Strategy

In contemplating the challenge of developing a coherent product development strategy, it occurs to us that their situation is almost the opposite of that which the head of operations faces1. Blue Canyon finds that often operations strategies are developed with too little external input, while product development strategies are often whipsawed by too much external input.

A review of the external inputs included in the quotes at the start of this paper suggests that they fall into five traditional categories:

o Last Call Certainty – Ideas advanced that react to the most recent customer visit (often to be superseded by, added to, or in conflict with, the discoveries from the next customer visit).

o Nearsighted Incrementalism – Ideas focused on small-step improvements to the current product (often with no attention paid to what will be required for future success).

o Technology Enamored – Ideas surfaced by experts enamored with technology they have seen elsewhere, heard about, or personally developed.

o Copy-Cat Imitators – Ideas advanced because a competitor has gone in this direction (implicitly with the presumption that they must be right and therefore we should and must follow that direction as well).

o Brainstorms – Ideas advanced as a result of an inspiration (often by an individual with substantial formal organizational power who becomes convinced that a particular product idea that they have thought up themselves will be a hit).

It is not our intention to suggest that these traditional sources of product development ideas are flawed. In fact, we have seen dramatic examples of success that have been the result of companies carefully listening to messages from their customers, from benchmarking competitors and other best practice companies, and from studying emerging technologies. And many of the success stories we have heard about product development have involved some “brilliant brainstorm, one that was a stroke of genius”. Unfortunately, the problem is not these sources of ideas. Rather, it is the fact that these sources can be so bountiful, with the real challenge being that of identifying the gems among the rough.

1 Jon T. Gabrielsen, Market-Driven Operations Strategy: Achieving Alignment between Operations and Markets, Blue Canyon Partners, Inc., Skokie, IL. © 2007



The Market-Driven Approach to Product Development Strategy

The product development pipeline is the future lifeblood of any company. Bringing the right new product developments to market can lead to tremendous rewards for shareholders. Unfortunately, unlike in the movie Field of Dreams2, just because you build it does not necessarily mean that they will come. The log of “developed, launched, and then failed” new products is filled with products that never should have been developed. Such initiatives not only waste funds and human resources, but, far worse, often leave a void in the company’s offering that result in a loss of momentum and share from which they are sometimes never able to recover.

In our experience, the companies that are repeatedly the most successful in the marketplace with their new product developments are those that proactively adhere to a three-step market-driven filtering process that asks the following questions:

What are the key unmet needs of the market segments and customers that our company is targeting? Can we validate that the need exists and that it is unmet?

If the need were met, would the target market segments be willing to reward us in the form of a higher price or more market share? Do the fundamental economics of the concept make sense?

Can our firm achieve a differentiated position through this initiative? Will we be able to distance our offerings from those of current and future competitors?

The needs assessment begins with the identification of the critical pathways to the ultimate end customer and discovery of the most critical customer stage or stages in the chain between the supplier and the ultimate end customer. Knowing which customer chain participants are the true drivers of the purchase decision is almost always a prerequisite to success. One of the most frequent product development missteps is to react only to the voices of the direct customer, only to discover later that the “dogs won’t eat the dog food”. Just because the direct customer is closest and shouts the loudest doesn’t always mean that their interests are aligned with those of the end customers. Following the definition of the customer chain and the roles of the participants along it, the needs assessment must involve intensive interactions and research focused on the critical purchase decision makers to determine what product characteristics drive their purchase decisions. Such insights enable the development of a prospective product development strategy to address the needs of those most critical purchase decision makers.

We find that this process typically involves important questions about market economics. What economic factors drive the key identified needs of the critical purchase decision makers in our target market segments? Does the economic case make sense in the context of the customer’s business model? At the price that the target markets are willing to pay for the product, with or without the scale advantages 2W.P. Kinsella (book), Phil Alden Robinson (screenplay/director), Field of Dreams, Gordon Company, April 21, 1989



that might accrue though share gain, would the new product concept be rewarding to shareholders? Is the market for the product large enough to earn a favorable return on investment, including the cost of product development?

The third set of questions involves the competitive dynamics associated with the product concept. What are the current and future competitive dynamics in our target markets? Who are the current and likely future competitors offering this product? How will our offering compare to those of these current and future competitors? Does the economic environment enable us to “sell into growth” or does it require that we displace sales currently taking place through competitors?

In our experience, those companies who are most successful at consistently developing market-winning products are those who have a very disciplined, proactive, market-driven strategy for their product development activities. They stick to this process despite all of the daily noise that they hear from the myriad of well-meaning stakeholders, such as those reflected in the anecdotal quotes at the beginning of this paper. This is not to suggest that those inputs should be completely ignored to the potential detriment of the firm. It is simply to say that such inputs should be combined with all other market-driven intelligence. And, unless it is clear that the current course is no longer valid, the product development organization should stay the course and harvest the future successes from its market-driven product development strategy.

In summary, we believe that the best approaches to product development involve a well-defined and clearly communicated product development strategy, not just a set of unrelated and often conflicting tactical initiatives. This product development strategy must be market-driven, reflecting the market structure and the customer chains through which sales will be made, consistent with logical economic decisions and sound business cases, and robust in terms of prospective competitive responses. To implement such a process, a comprehensive and rational framework is needed to filter market intelligence from all sources into a single cohesive product development roadmap.



A Framework for Business-to-Business Strategy

Blue Canyon has developed a framework to uncover the critical insights that are needed in order to develop winning strategies for business-to-business suppliers3. This framework not only addresses the basic questions about how to achieve profitable growth, but also incorporates market-based insights into decisions about the firm’s product development strategy. As a result, product development strategy decisions are not only in alignment with the overall growth strategy, but, even better, can become one of the advantages that enable the firm to achieve its growth goals.

The business-to-business customer chain provides the foundation for the framework. It allows these contributions to be realized and reflects those characteristics of the business-to-business environment that are at the root of developing an effective strategy. In all business-to-business markets, the supplier serves multiple customers, as suggested by Figure 1:

Supplier Direct Customer

End Customers

Figure 1: Business-to-Business Customer Chains

There are many types of business-to-business customer chains. Parts and components manufacturers, packaging manufacturers, chemical and feedstock suppliers, and other firms may sell to other manufacturers (their direct customers), who subsequently sell to end customers. Other suppliers like building products manufacturers, office equipment manufacturers, and tool and equipment companies may sell their products to sales channel partners (their direct customers), who in turn sell to the end customers, often in conjunction with other products and services.

There are typically many competing customer chains in a marketplace. Some extend for many stages, while others involve many different pathways. One automotive parts manufacturer with whom we worked could identify over 700 distinct customer chain segments (i.e., pathways into the market) across its global markets. A telecommunications service provider found that its customer chains rarely overlapped those of its most significant competitor, accounting for nearly all of the differences in market share across industry segments. An agricultural industry supplier faced six

3 See Atlee Valentine Pope and George F. Brown, Jr., A Blueprint for Success with Major Customers, Blue Canyon Partners, Inc., © 1999.



sequential customer chain stages (e.g., participants along the customer chain) before its product reached the eventual end customer.

To move towards market-driven product development plans, it is necessary to carefully understand the factors that drive the purchase decisions of each participant in the customer chain. The supplier’s direct customers should be evaluated on what drives their decisions. Do they make purchase decisions strictly on the basis of price, or are they willing to pay higher prices in order to obtain particular product features and enhancements or particular services? Similarly, the end customers served through the customer chain can be evaluated on their purchasing criteria – along a spectrum ranging from decisions driven by price to ones where product and service considerations dominate.

Each customer chain segment, or individual pathway to the end customer in the market, can be mapped along these two dimensions. Figure 2 shows a simplified conceptual summary of the customer chain map:

Figure 2: Four Distinct Business Environments

In this example, each circle or bubble represents a customer chain segment. The sizes of the circles reflect the volume of business within that segment. The location of the circles reflects the relative importance of price and non-price considerations to the direct

End Customer Purchase DecisionsBased on Non-Price Factors Based Mostly on Price

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EmphasizeCost-Justifiable

Product Enhancementsand Surrounding

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EmphasizeCost

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Emphasize Long-TermRelationships involving Product Enhancements, Surrounding Services and Business Systems Interface and Services

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customer (on the vertical axis) and the end customer (on the horizontal axis). The vertical axis on Figure 2 reflects the supplier’s relationship to its direct customer. At the lower end of the vertical scale are customer chain segments where the purchase decisions of the direct customer are largely driven by factors other than price. At the upper end of the vertical scale are customer chain segments where price is the major determinant of the direct customer’s purchase decision. The horizontal axis on Figure 2 reflects the direct customer’s relationship to the end customer. At the left end of the horizontal scale are customer chain segments where factors other than price are most important to the end customer. At the right end of the horizontal scale are customer chain segments where price is the dominant factor in terms of end customer valuation.

A supplier can obtain clear insight about the needs and priorities of the direct customer and of the end customer from this systematic assessment of the messages that emerge from the customer chain. The methodology that leads to the summary assessment portrayed in Figure 2 begins with the identification of the customer chains that exist within the specific business-to-business market under study. It then progresses through stages involving various dimensions of economic research, market research, and profitability modeling. Each unique customer chain segment must be analyzed along various dimensions: the size and growth of the segment, the factors determining valuation and that drive purchase decisions by each buyer included within that segment, the economics of the transactions that occur along the customer chain, the supplier’s share of the direct customer’s product, the elasticity of demand, etc. Research and quantitative analysis of these factors can drive the relative rankings and assessments across these customer chain segments. Our research across many business-to-business industries has shown a multitude of customer chain maps scattered across the four quadrants of Figure 2, each with unique customer chain segments, sizes, and positions.

Direct customers and end customers have varying needs across customer chain segments, even within a market defined along traditional dimensions such as industry, size, or geography. Our research indicates that distinct business strategies apply across four common business-to-business environments, each with profoundly different implications for product development, as suggested by the overlays to the diagram in Figure 2. In the upper right quadrant, suppliers are advised to focus on achieving a low-cost position. In the lower right quadrant, the supplier can typically gain a share premium by combining market-based pricing with effective business systems integration with their direct customer (or sales channel partner). In the upper left quadrant, the supplier can often achieve a share premium (and occasionally even a price premium) by appealing to the product and service needs of the end customers. And, in the lower left quadrant, exceptional potential exists to create value on a consistent basis throughout the customer chain. It is within this environment that suppliers have the best opportunity to realize premium prices and long-term relationships. The foundations that emerge from this market assessment and its translation into the elements of strategy also provides a basis for developing a market-driven product development strategy.



Extensive Blue Canyon research has shown that there is a strong relationship between the location of a market segment across these four quadrants and the appropriate product development strategy. The overall strategic guidelines that apply in each of the four quadrants, as shown earlier in Figure 2, provide the foundation for decisions about product development. It is only after one knows where each of the market segments falls that one knows who to listen to most closely between the direct customer and the end customer. Listening to the right messages from the right customer chain participants, when setting product development strategy for a given market segment, can yield a home run. Listening instead to the wrong messages from the wrong messengers for a given segment can be a strike out. The classic example of this involves suppliers who listen only to their direct customer and thus completely miss the product development opportunities that they could only learn from the customers further along the customer chain.

We note that many situations occur in which product development concepts are associated with multiple quadrants. This is by definition a significant challenge, in that the defining difference among the quadrants involves the factors that drive purchase decision making. In fact, quite a few of the examples we have observed of failed product development strategies have involved situations where decisions were made on the basis of insights about the needs of one set of customers, with the adverse reactions involving another set of customers with different views. We therefore advocate that product development strategy first be considered on a segment by segment basis, with subsequent synthesis focusing on both the themes that are common across segments and on those that are unique to each market segment. Common themes can allow the firm to define a foundation that allows economies of scale and defines the technological foundation of the firm’s product lines. Distinct themes allow the creation of a product portfolio that includes appropriate offerings for each distinct segment. The following discussion of each of the four quadrants in Figure 2 translates the overall strategy guidelines that emerge from Blue Canyon’s methodology into ones relevant to product development strategy.



The Lower Left Quadrant: Customer Chains Driven by Factors other than Price

To examine this business environment, consider a case study involving a specialty vehicle OEM in the municipal maintenance market. This firm sought to develop new products for the portion of its business that provided maintenance equipment to contractors who in turn provided maintenance services on the municipal infrastructure. Blue Canyon teamed with the supplier and performed comprehensive marketplace interviews and analyses, both within the supplier’s organization and across the full breadth of its customer base.

OEM Contractors Municipalities

Figure 3: Commercial Vehicle Customer Chain

A careful assessment of the customer chain structure and interviews with a number of the participants from each stage of the customer chain, as shown in Figure 3, uncovered a number of product development opportunities that could create a real win for this OEM in the marketplace.

The contractors were faced with two major challenges. They needed highly reliable equipment in terms of uptime and minimal maintenance to enable them to operate as much as 24 hours a day, 365 days a year. Along with responding to the needs of their municipal customers, they wanted to maximize their utilization of this relatively expensive capital equipment. They also needed extremely user friendly operator interfaces because, as they were fond of saying, “If our drivers had engineering degrees, they wouldn’t be driving our vehicles for a living”. Also, the long hours and weekend work created very high turnover, so operator interfaces that were simple and intuitive, requiring the least training, were highly desirable. The cost to increase the reliability of the equipment as well as to improve the user friendliness of the operator interface was relatively negligible in relation to the total cost of the vehicle and the contractors were more than willing to pay the slight premium for the substantial benefit they would receive.

At the same time, the municipal end customers had very high standards that they held the contractors to, both in terms of the quality of the work performed and with respect to strict adherence to the predetermined schedules at which maintenance was to be performed, often down to the half hour time window. Failure to adhere to these



contractual standards constituted breach of contract and possible termination of a contractor if such problems were frequent. Conversely, these municipalities were willing to pay a premium to the contractors that were able to meet their high standards.

This business environment represents a classic example of the lower left quadrant. The product characteristics that meet the contractor’s needs of increased reliability and uptime and more intuitive and user friendly operator interfaces are the same ones that enable the satisfaction of the needs of the municipality end customers. Blue Canyon worked closely with a team of the supplier’s product development organization, armed with feedback from contractor and municipal customers, to identify those product enhancements that would enable the needed increases in reliability and operator user interface friendliness. Substantial discipline was maintained to insure that only those changes that would create a substantial benefit for all concerned remained on the list when the final product plan was completed. Throughout the process, the development team emphasized the messages as to what the market viewed as important. The research done with contractors and municipal customers also uncovered equally clear messages about what they didn’t want and about what features were viewed as unnecessary or of low economic value. As a result, numerous concepts that had no relationship to either reliability or user friendliness were left on the drawing board, as they didn’t connect to the messages from the customers as to what was important. The messages about what to leave out are often as compelling as those about what to include in the next generation product.

It was absolutely fascinating to observe how different the final list of product enhancements was from the list that this supplier had compiled at a recent trade show. It became clear that the competitors were all in a “features race”, even though the market was seeking robust reliability and user simplification. As the product development team progressed through its analysis, it reached the happy conclusion that it could deliver the targeted improvements and still go to market at a price point just below that of its major competitors, with a product that was expected to better respond to the market’s messages about what it wanted (and what it didn’t want).

By incorporating market-based insights about the critical success factors for the customer chains that it was serving, this supplier was able to align its product development strategy with the market, placing it into a position to succeed with municipal contractor customers and transform them into a solid source of profitable growth. The firm’s ability to align its product development strategy with the needs of its customers was a major factor in its ability to achieve the growth available in the municipal infrastructure maintenance market.



The Upper Right Quadrant: Customer Chains Focused on Price

A case study involving a supplier of tools who already held a strong position in the lower left quadrant in the professional end customer market provides insights into the business environment of the upper right quadrant. This tool manufacturer was comfortable with its growth prospects with professional customers in the market segment that was in the lower left quadrant, and wondered if it might be possible to grow with the same product types in the Do-It-Yourself consumer market. The tools for the Do-It-Yourself market are predominately sold though Big Box retailers and other department stores, as shown in Figure 4.

Tool Supplier

Big Box and Department

Stores

Do-it-Yourself End

Customers

Figure 4: Do-It-Yourself Consumer Tool Customer Chain

Working closely with the supplier’s internal team, Blue Canyon interviewed key stakeholders in the marketplace, including key constituencies at each of the stages of the customer chain for each of the target segments. It was clear from the interviews that the purchase decisions of the Big Box and department store customers and the Do-It-Yourself end customers were heavily driven by price. The vast majority of the products bought by customers in these segments were considered commodities, with numerous suppliers able to provide some or all of their offerings, and buying decisions were heavily dominated by price. Many of the retail outlets carried products from multiple tool suppliers, frequently substituting from among these suppliers in order to fill out their offering and take advantage of situations in which they could cut prices.

But, while purchase decisions were driven by price, a comprehensive analysis of the Do-It-Yourself market economics for the supplier’s types of tools showed that the volume of sales could be substantial. As a result of this scale potential, the analysis suggested that a decontented product offering – one that could be sold profitably at the price points necessary for success in this market segment – could generate significant rewards to shareholders. This profit potential was materially enhanced by the opportunity to leverage manufacturing processes and expertise. The competitor assessment showed that although there were numerous competitors in these market segments, there was sufficient room for the supplier to enter.

As a result of these very favorable market-driven findings, the supplier undertook a focused product development strategy to create a separate decontented tool product



offering. This strategy focus was to develop the appropriate products to offer a sufficiently lower price point for success in the upper right quadrant Do-It-Yourself segment without causing defections from the current professional customers in the lower left quadrant. Extreme care was taken at every step of the strategy to avoid the mistake of just lowering prices on a product too similar or identical to that sold in the professional market segments, because to do so would simply cannibalize its already strong business. The Do-It-Yourself segment did not require the robustness of tools required by the professional segment and had less demanding requirements along other dimensions, nor were they willing to pay for such robustness or advanced features. The key to this strategy was to insure that the products were clearly not comparable, but very applicable to their individual uses.

As is frequently the case in upper right hand quadrant business environments, because decisions in that environment are driven by the customers’ concerns about the price of the products, all of the product development emphasis fell directly upon cost reduction initiatives. These initiatives did not make price pressures disappear. Instead, they ensured that the supplier was positioned correctly in terms of not only its product prices, but also on the other factors viewed as important by its customers. The outcome for this supplier was a positive one, in that it was able to enter this new segment to gain share, establishing a preferred supplier position with many of its new customers, and as a result, has been able to translate wins in a highly-competitive market into victories for its own shareholders.

Upper Left Quadrant: Opportunities for Positioning with End Customers

In this business environment, the supplier’s direct customer makes decisions primarily on the basis of price, but the end customer considers other factors in the decision making process. A case study relevant to this complex business environment involved a dominant commercial vehicle systems supplier to the OEM market. This supplier was facing increased pressure in the market from OEM in-house captive systems. The OEM direct customers in the market were looking to replace a significant share of the supplier’s systems with their own in-house captive offerings. This was potentially a significant change to the long-standing industry practice of allowing end customers to choose from a number of supplier branded systems to be incorporated into their vehicles. More importantly, it was a threat to this supplier involving competition from its direct customer. The supplier sought to stem this incursion into their market space, sustain its relationships with key end customers, and retain its leadership position in this highly-attractive branded premium systems business.



Blue Canyon teamed with the supplier and completed an in-depth assessment of this complex market environment. The relevant customer chain structures are reflected in Figure 5.

Supplier OEMs Fleets and Operators

Figure 5: Commercial Vehicle Customer Chain

Interviews in the marketplace at all stages of the customer chain depicted in Figure 5 uncovered significant needs on the part of end customers that were unrelated to price, despite the price focus of the OEMs who were this firm’s direct customers. These end customer needs were not being met very well by the OEM’s captive in-house offering, suggesting competitive opportunities for the supplier.

The major end customers involved in this market were large fleet operators who would do almost anything to keep their equipment running reliably. There was a huge cost to them in terms of downtime, both in their ability to satisfy their freight customers and in terms of the costs associated with equipment and operators sitting idle. Thus they were keenly interested in any product capability in the supplier’s systems that would raise reliability and avoid downtime altogether. A significant segment of these major fleet end customers maintained data collection and analysis systems that gave them tremendous insight into their total lifecycle cost of ownership. They were quite willing to pay a higher initial price for premium branded systems when it could be substantiated that they led to higher reliability, lower downtime, and lower total cost of ownership.

The OEMs, however, tended to be largely focused on price in their negotiations with suppliers, and put tremendous competitive pressures on the manufacturers. This was partly in the belief that it would improve their own margins and partly because their own profits were heavily based on aftermarket repair parts and systems rather than the markups on new vehicles. Thus they sought to place pressure on supplier prices in order to keep vehicle prices low and to bolster their margins on new vehicles. As a result, while the major fleet end customers in this environment focused heavily on factors other than price, the direct OEM customers were far more focused on price and tended to discard other considerations, often rejecting supplier arguments as to the value of new technologies that they could include in their systems. The distinction between the focus on price of direct customers and the focus on non-price factors of end customers is the key characteristic of the upper left quadrant business environment.



Blue Canyon worked closely with the supplier’s product development organization and a number of major fleet end customers to identify very specific systems enhancements that would contribute the most to higher reliability, lower downtime, and lower total cost of ownership. Substantial attention was paid to ensure that only those initiatives that would yield the best combined return for both the end customer and the supplier were pursued. Not surprisingly many “nice to have” features had been included on the roster of possible development strategies. And, more importantly, as the teams involved focused on reliability and downtime avoidance, there were some ideas for product enhancements that surfaced that had not been contemplated by anyone previously.

Once the true needs had been identified and the proposed product development strategy had been formulated, it was still critical to ascertain that the market economics would yield a favorable return for shareholders and that the supplier would be able to garner the necessary competitive share to be successful. A rigorous assessment of the commercial vehicle market volume forecasts was linked to the market messages collected by a broad swath of interviews with fleet end customers. This allowed Blue Canyon to determine that the segment of end customers who would be willing to pay a premium for the supplier’s systems was more than adequate in terms of scale, as long as the next generation of products performed in the manner that the product development strategy projected.

Lower Right Quadrant: Opportunities for Contributions to Direct Customers

The lower right quadrant involves situations in which direct customers are open to contributions along dimensions other than price, even though their own customers further along the customer chain are much more focused on price. A case study in this environment involves a supplier of decorative plumbing fixtures to contractors who perform the installation for the end customers. This firm was initially under continual price pressure from their end customers. They sought a strategy that would allow them to overcome these hurdles. The customer chains involved in this business environment included the supplier, the contractors involved in installation of the product, and end customers in the markets for which these products were designed.

Blue Canyon interviews at all stages of the customer chain, as depicted in Figure 6, uncovered a set of important needs and opportunities at each stage, particularly with contractors.



Decorative Plumbing

Fixture Supplier

Contractor Installers

Builders

Figure 6: Premium branded Plumbing Fixture Customer Chain

These contractors found that installation of the supplier’s (and their competitors’) plumbing fixtures required a significant amount of time. They expressed a belief that there must be relatively simple changes that could be made to product designs to dramatically shorten the installation time. They were willing to pay a premium for premium branded plumbing fixtures that would reduce installation time because, as they expressed, the total installed cost to the end customer would still be lower than it was currently as the increased price of the fixtures would be more than offset by the reduction in labor cost. Equally important to the contractors and builders was the time saved by their scarce subcontractor installers on each job that could be spent on the next job. Further, they indicated that they would preferentially select the supplier’s products over the competitors’ products if the supplier’s products were easier, faster, and cheaper to install.

Blue Canyon worked closely with the supplier’s product development team and a select group of insightful contractor installers to identify product development solutions to simplify and reduce the time consumed in installing the premium branded plumbing fixtures. Competitors’ offerings were also benchmarked for best-in-class examples that enhanced installation simplicity and time. Extreme care was taken in the process of benchmarking not to get caught up in any features of the competitors’ products that were technologically enticing, but did not simplify installation.

The changes that emerged from the contractor installer input and competitor benchmarking ranged from ideas as simple as making whole lines of the offering possible to install with just two tools, reengineering several particularly cumbersome fasteners, and strengthening some key portions of certain products that were particularly prone to damage or breakage during the installation process.

The market economic opportunities for the supplier in these market segments were closely analyzed and determined to be more than sufficient to justify the product development investment required for this strategy. The competitive environment in this market segments was closely evaluated. The supplier was perceived as more prestigious than the other competitors in these segments, while offering competitive prices and recognized quality. Thus it became clear that with the added benefit of the simplest and quickest installation, they would be very formidable indeed.



Examples of ‘No-Go’ Cases

In the preceding pages, we have very deliberately laid out one successful case for each quadrant for the purposes of demonstrating the framework. However, it is every bit as important to know when not to embark on a set of product development strategic initiatives as when to do so. Over the years, we have encountered many examples of product development failures that resulted from inattention to the signals that were available from the marketplace, either in terms of economic considerations or in terms of messages about the factors that were critical to success.

Our belief is that a systematic approach to product development decisions that incorporates market economics and addresses the key messages with respect to the determinants of purchase decisions can often yield value by allowing such mistakes to be avoided. The following examples involve firms that undertook the right form of systematic analysis, but found that the initial promise of success was unwarranted. While these examples don’t illustrate “product development success stories” per se, they do illustrate the value that can accrue to shareholders from a systematic approach to product development decisions.

The first such example involves specialty lighting for ‘”Tuner” cars. A very senior executive at a supplier of automotive components and systems saw The Fast and the Furious4 movie along with his teenaged kids. He became enamored with the flash and excitement of the segment and became convinced it would make a good market for many of his company’s technology and products, including recent product developments in their lighting product line. Blue Canyon worked closely with the supplier and key players in the marketplace to uncover the data and messages to answer the questions in the three step market-driven filtering process.

First, in looking at the key needs of the participants in this market, we learned that “wants” would surely be a better word in this instance than “needs”. Nonetheless, there was clearly a strong interest among this market segment for the type of lighting product the supplier could develop and offer.

Unfortunately, despite the extremely highly visibly profile of this segment both on the streets and in the movies and other media, it was discovered that this is actually a very small market, and, due to the relative youth of the purchase decision makers, it was highly price sensitive. The market economics investigation was very discouraging along both dimensions.

The assessment of the competitive environment further discouraged thoughts of success. Although it took substantial digging and triangulation, it was discovered that there were a number of competitors already serving this segment, many of which were 4 Gary Scott Thompson (screen story), The Fast and the Furious, Mediastream Film GmbH & Co. Productions KG, 2001



manufacturing abroad with very low labor costs and almost no overhead. These firms were nonetheless able to quickly copy new technology and could sometimes bring a technology to market as fast as could its developer. Issues like Department of Transportation certification and attention to the quality processes that were required for success in the new vehicle environment were largely dismissed in the aftermarket environment of the “Tuner” car.

A second example involved a situation in which a group of sales people and engineers in the supplier organization became aware that a number of customers were installing the supplier’s wood-cutting products on small utility vehicles and creating a mobile vehicle that they were using in site clearing operations. These products were not “Rube Goldberg devices”, but were well designed by contractors who cleared heavily-wooded sites for commercial and industrial facility construction. The awareness of this new application of one of the company’s core products generated a significant interest internally in the supplier’s organization, as they contemplated developing their own offering of such mobile tools.

Blue Canyon conducted interviews across a broad cross section of prospective contractors and end customers, determining that there are a number of advantages to the use of this mobile cutting technology for site clearing. We also learned that the customers were willing to pay a premium for a product that worked, since contractors’ earnings were determined by the speed at which they could clear a site and the end customers’ costs were essentially measured by the number of days from the start to the completion of a facilities construction project.

An extensive set of market economic models were developed, revealing that the market was quite small. A variety of factors limited the number of markets in which the technology would make sense, and it was in these markets that the contractors had already put together then own version of the device. Furthermore, even the contractors that had developed the product were only using the equipment about 20% of the time, with it sitting idle most of the time. If a rental market were to emerge, the number of units that would be required would probably be cut by about one third. We concluded that the annual unit sales that would likely take place was on the order of about one tenth of what which would be necessary for the supplier to get a return on its investment, should they develop and offer this product.



Summary

Within the context of the four case studies associated with the four distinct business environments that characterize business-to-business markets, we have reviewed the product development strategy elements appropriate to each specific market situation.While it might be tempting to extract from these cases some general conclusions, we emphasize that each situation is unique and must be examined based upon the specific characteristics of the business environment under study. There are, however, several themes that remain consistent across business environments in each quadrant.

In the lower left quadrant, the recurring theme involves emphasizing product enhancements that relate to the specific factors that drive purchase decisions. Minimization of unit cost is not the primary focus or the objective in this environment. In fact, it is frequently the case that efforts focused on cost reduction will run afoul of other factors considered to be of much greater priority to customers. The key here is to separate the few critical product characteristics and features that are truly valued by different participants in the market under consideration from the much longer list of “nice to have” characteristics and features that the market does not want and will not reward.

In the upper left quadrant, every product development decision should be focused on the cost justifiable product enhancements that a supplier can provide that the end customers recognize and value, even though the direct customer may not or does not recognize or reward. In this environment, the ability of the supplier to “gain the attention” of the end customer is of critical importance. If the supplier’s ingredient is invisible to the end customers, it is likely that the price pressures imposed by the direct customer will in the end dominate. Thus, in this environment, the supplier must work to achieve pull-through demand, via messages from end customers that communicate the importance of these product enhancements to their direct customer.

The upper right quadrant concentrates its attention primarily on low-cost products, typically ones that meet customer specifications without additional features or enhancements. The supplier must manage the costs borne by its customers, and must make product development decisions that ensure it can sustain a competitive cost position. However, even here a supplier must not seek such a low cost that it fails to serve the market at its minimum required specifications, and thus finds itself edged out by competitors also able to deliver low prices without compromise along these other dimensions.

In the lower right quadrant, the key to success often involves product development improvements that can assist the direct customer in improving its bottom line without compromising their ability to deal with the fact that their end customer is highly price sensitive. The best strategy in this regard often involves initiatives to reduce total lifecycle costs that enable the direct customer to lower their total cost of supporting the end customer.


2007 Blue Canyon Partners, Inc 21.

The discussion can be summarized in Figure 7 below, which captures some of the differences in product development strategies that originate from an understanding of the pathways to market.

Figure 7: Four Distinct Product Development Implications

The analytic framework described in this paper for developing market-driven product development strategies thus yields tremendous payoffs by enabling achievement of superior alignment between markets and product development management. Our experience clearly illustrates that when each of the dimensions of major product development strategy are addressed in accordance with the factors that are critical to success in the corresponding business environment, superior growth and profitability will result. The process is not easy however, and it requires that internal functional areas shift their thinking from reacting to all of the mixed signals like those at the beginning of this paper and shifting to a market-driven product development strategy framework. Once that shift in perspective is made, it can enable decisions that contribute to profitable growth and that create an ongoing rapport between the parts of the organization that are focused on product development and those that are focused on customers.

End Customer Purchase DecisionsBased on Non-Price Factors Based Mostly on Price

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Market Driven Product Development Strategy Bruce Karr & Jon T. Gabrielsen


Bruce B. Karr

Bruce Karr is a Senor Consultant at Blue Canyon who brings extensive experience in industrial marketing, product development and strategy development to his assignments. He draws on his extensive experience leading business-to-business marketing in $500+ million divisions of major Fortune 500 Companies as well as successful small privately-held firms.

Bruce has helped companies with growth initiatives focused on new products for current and new markets. Implementation strategies included both internal product development as well as acquisitions. Other assignments involved understanding the intersection of customer preferences and competitive positioning in order to properly assess the threat presented by competitive actions. He also co-authored Market Driven Product Development: Achieving Alignment between Product Development and Markets.

Prior to joining Blue Canyon, Bruce’s career spanned marketing leadership roles in the small engine, material handling, and controls industries. As Director of Marketing for Tecumseh Products Company’s Engine and Transmission Group, Bruce led the marketing group in a $750 million division that placed new engines on products at The Home Depot through Murray and Toro. Much of this work was the direct result of analyzing customer chains and competitive position. At Menasha Corporation and Schaefer System International, both privately held $1+ billion companies in the material handling industry, his teams introduced a new innovative straight-walled container systems to Toyota that ultimately became the standard, and which is still employed today in the North American automotive industry.

Earlier in his career, Bruce held marketing and planning roles at Rockwell Automation and General Electric. At Rockwell Automation, he pioneered industry marketing within the programmable controller division and had product marketing responsibility for the PLC-5 controller. His action resulted in opening new process-oriented markets with products that spoke to new customer requirements. In global marketing roles, he supported Rockwell Automation’s shift to global product management away from a U.S. focus on the North American automotive OEMs. As a key member of business development teams, he has evaluated joint venture partnerships with Nippon Denso in Japan and performed non-financial due diligence assignments in North America, India, and Russia. At GE, Bruce had significant business development and technology acquisition responsibility within the robot and vision system operation. The business development team acquired 3 major technologies within 12 months from VW, Hitachi, and DEA.

Graduating from the Wharton School with an MBA in international business and strategic management, Bruce went to work for Braxton Associates in Boston. Performing typical competitive and forecast analysis, he supported significant strategy audits for DuPont, General Electric’s house wares and audio business divisions, and Chicago Pneumatic. He led pricing studies for the GE capacitor products department’s introduction of aluminum electrolytic capacitors.

Bruce has an AB magna cum laude from Washington University in St. Louis with a concentration in history and mathematics. He holds a master’s degree in Soviet Area Studies from Harvard and has traveled widely in Europe and Asia for business and education.

Market-Driven Product Development StrategyBruce Karr and Jon T. Gabrielsen


Jon T. GabrielsenJon Gabrielsen draws upon a distinguished career within manufacturing firms and as a consultant in helping Blue Canyon’s clients address challenges with respect to business strategy, product development, and manufacturing operations. His responsibilities have included significant project management assignments and process development assignments.

Since joining Blue Canyon Partners, Jon has worked on a variety of growth strategy projects. He has contributed to the development of strategies for a number of major Tier 1 suppliers and several of the OEMs in the automotive, commercial, and agricultural vehicle industries in both the original equipment and aftermarket channels, developed customer-driven strategies for manufacturing operations, and helped to design a long-term approach to growth in the industrial controls market. His involvement in these projects has included project management as well as contributions as a senior member of the Blue Canyon team. He has also authored Market-Driven Operations Strategy: Achieving Alignment between Operations and Markets and co-authored Strategically Driven Acquisitions: Target Identification and Assessment, Market-DrivenProduct Development: Achieving Alignment between Product Development and Markets and Win the Day: Managing Price Pressures in the Automotive Industry.

Prior to joining Blue Canyon, Jon’s career within the automotive industry included senior positions with Simpson Industries (now part of Asahi Tec / Metaldyne companies) and Federal-Mogul Corporation. While at Simpson Industries, he established and institutionalized their business strategy planning function, reporting to the company’s President and COO. Jon and his team were challenged to evaluate markets, products, processes, and systems and to evaluate competitors and suppliers in search for alliances, partnerships, and acquisitions.

While at Federal-Mogul, Jon served as manager of corporate development, with responsibilities for evaluating the strategic mix of businesses within the company’s portfolio and as manager of financial planning and analysis, with responsibility for financial planning and forecasting for the $1.8 billion global corporation. Earlier, Jon held a variety of positions, including metallurgical and manufacturing engineering positions, financial planning positions, and operations management responsibility for the start-up of a new manufacturing facility.

As a senior consultant with Questone Decision Sciences (a Safeguard Scientifics Partner Company), Jon served as program director with responsibilities for consulting and software development focused on product life-cycle management, process improvement, and logistics. His clients included leading firms within the automotive, pharmaceutical, and high technology industries, including General Motors, Johnson & Johnson, and Ivax. His assignments included software applications development and testing as well as leadership of project teams.

Earlier, Jon served as Director of the Automotive Practice at Baker & Company, with responsibilities for that firm’s strategy development projects, business-to-business customer satisfaction survey assessments, and organizational change projects for clients within the automotive industry. In that position, Jon worked with major OEMs and Tier 1 suppliers on a variety of project assignments.

Jon Gabrielsen has a B.S. in Manufacturing Industrial Technology from Eastern Michigan University and an M.B.A. from The University of Michigan.

Market Driven Product Development Strategy Bruce Karr & Jon T. Gabrielsen


About Blue Canyon Partners

Founded in 1998, Blue Canyon Partners, Inc. (www.bluecanyonpartners.com) is a business-to-business growth strategy consulting firm. Our engagements center on customer-driven strategies that foster profitable growth, nurture leadership, and leapfrog the competition. Our approach to business-to-business strategy drives actionable answers to critical decisions about products, services, pricing, channels, global markets, brands, business systems, and innovation.

Our clients are industry-leading Fortune 1000 business-to-business corporations that are faced with a variety of growth challenges. Our senior level professionals bring unique qualifications, extensive experience, and an extraordinary commitment to each growth engagement. Collectively, we offer many years of practical know-how that enables us to deliver creative, innovative insights as well as an actionable game plan. Using solid concepts and facts, we distill the key strategic issues to build consensus and alignment across the various relevant organizational units in order to position your company for sustained profitable growth.

Regardless of which challenge is brought to Blue Canyon Partners, Inc., our focus is to define the right strategy, translate it into action, and reward shareholders with growth.

www.bluecanyonpartners.com

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