Strategic Options Analysis Applying the Value Function Ken Homa

PRODUCT VALUATION MODEL Value Fcns / Perceptual Maps PRODUCT VALUATION MODEL V = V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit P = Price of product KEH 1999

Value Fcns / Perceptual Maps V = Value of Product i = Product attribute MARKSTRAT WORLD There are 5 given product attributes (n=5): power, design, volume, weight, frequency KEH 1999

V = Add an attribnute Incorporate a highly weighted attribute (i) that is not currently in the product design. Add a CD-ROM or modem as standard features in mobile PCs

Not an option since all brands have the 5 fixed product attributes Add an attribnute Incorporate a highly weighted attribute (i) that is not currently in the product design. MARKSTRAT WORLD Not an option since all brands have the 5 fixed product attributes

V = Add a new attribute Introduce a new attribute (i = n +1) that was previously not available, but satisfies a salient or latent need iMac’s radical ‘space age’ industrial design ‘Bags and brakes’: air bags & ABS in cars

V = Add a new attribute Introduce a new attribute (i = n +1) that was previously not available, but satisfies a salient or latent need MARKSTRAT WORLD Not an option: all brands constrained to the 5 fixed product attributes

Value Fcns / Perceptual Maps V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) KEH 1999

Ideal Points Perceptions (vs. actual) Aggregate of individuals Distribution around points Segment variations Evolutionary progression Nice to have => must have Different ‘shapes’ Optimal point, vectors

Value Fcns / Perceptual Maps Ideal Points Attribute Preference Point Preference Vector Preference Ideal Point Increasing Preference Decreasing Preference (eg, sweetness) (eg, service speed) KEH 1999 21

Ideal Point Strategies What is the ideal point? Specific ‘going in’ criteria Does a product satisfy the ideal point? Objective criteria vs. perceptions Do customers think that a product satisfies the ideal point (better than competitive products)? Relative perception Can the ideal point be ‘shaped’?

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

V = Communicate proximity to ideal points (b) “Pepsi Challenge”: highly publicized blind test tastes demonstrate that Pepsi is preferred to Coke on a heavily weighted (dominant) product attribute : taste

V = Communicate proximity to ideal points (b) If perceptions are accurate and awareness is low, advertise to build awareness (intensity) If perceptions are inaccurate and awareness is low, reposition the brand by specifying ‘perceptual objectives’ while building awareness (message). If perceptions are inaccurate and awareness is high, either reposition - a potentially very high cost option - or launch a new brand with similar specs (relaunch).

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

V = Design closer to ideal point Redefine product specifications to match current or projected ideal points (b’s) Customers want increasing CPU speed in PCs. Existing units are 700 Mhz, competitors have intro’d 900 Mhz units Redesign for speeds in excess of 700 Mhz to hit projected ideal point

V = Design closer to ideal point Redefine product specifications to match current or projected ideal points (b’s) MARKSTRAT WORLD Each market segment (Hi-earners, Buffs, etc.) has an ideal combination of specific product attributes (that may change over time). Design (or redesign) products to hit projected ideal points of attractive market segments.

Value Fcns / Perceptual Maps V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit KEH 1999

V = Target a segment with importance weights (a) and ideal points (b) matched to product British Air promotes “business class” amenities including preferred check-in, enroute services, arrival shower facilities, etc.

V = Change importance weights (a) via promotion Federal Express promotes “absolutely, positively” next day delivery service for packages Shifts focus to an advantaged attribute (e.g. speed versus economy)

V = ‘Reshape’ the ideal point Persuade target customers that more (or less) of an attribute is more desirable. Higher horsepower uses more fuel High fat content tastes good but raises cholesterol levels.

V = Communicate proximity to ideal points (anyway) Obvious ethical issue Caveat emptor Short-term fix at best Perceptions eventually catch up to reality Common rationalization: “no harm, no foul” Unjustifiable desperate act

V = Communicate proximity to ideal points (anyway) Obvious ethical issue Caveat emptor Short-term fix at best Perceptions eventually catch up to reality Common rationalization: “no harm, no foul” Unjustifiable desperate act … in real life, but not in MARKSTRAT

Value Fcns / Perceptual Maps V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit P = Price of product KEH 1999

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

Core NPD Question How to translate the ideal point point into product specifications?

Value Fcns / Perceptual Maps Customer Requirements Importance to Cust. Easy to close Stays open on a hill Easy to open Doesn’t leak in rain No road noise Importance weighting Engineering Characteristics Energy needed to close door Check force on level ground to open door Water resistance 10 6 9 2 3 7 5 X Correlation: Strong positive Positive Negative Strong negative * Competitive evaluation X = Us A = Comp. A B = Comp. B (5 is best) 1 2 3 4 5 AB X AB XAB A X B X A B Relationships: Strong = 9 Medium = 3 Small = 1 Target values Reduce energy level to 7.5 ft/lb Reduce force to 9 lb. to 7.5 ft/lb. current level Maintain Technical evaluation 4 1 A BA BXA Door seal resistance Accoust. Trans. Window QFD The matrix helps the team to translate customer attribute information into concrete operating or engineering goals. The important product characteristics and goals for improvement are jointly agreed on and detailed in the house. This process encourages the different departments to work closely together and results in a better understanding of one anothers goals and issues. KEH 1999

Value Function Real World Implications Must be at least parity on all heavily weighted attributes to be competitive Must win on some differentiating attribute Little leverage from low weighted variables Best case : introduce a new (proprietary) attribute and drive weighting up Cost reduction both an on-going necessity and a last resort

Strategic Options Analysis Applying the Value Function