Basics of Software Business ITK260 Fall 2003, Rauli Käppi In cooperation with Oulu and Helsinki SB-programs Special thanks to Oulu SB-line, who has been the major contributor for this material

Lecture focus Concept of Innovation in product terms – market acceptance Geoffrey Moore (Crossing the Chasm, Inside the Tornado) High-tech market segmentation and segment behaviour

High Tech Marketing Specializes in Discontinuous Innovations Discontinuous vs. Continuous Innovations High Tech Marketing Specializes in Discontinuous Innovations Discontinuous Electric (hydrogen) car Multimedia Set-Tops Video Conferencing Continuous Better mileage cars Remote-control tuning Voice Mail Diesel cars Programmable VCRs Conference Calling Paradigm shift

The High-Tech Value Chain Product Providers Service Providers Customers Technology Products Systems Technical Buyers End Users Economic Sales Channels S A L E $$ Discontinuous innovations must create new value chains to survive. Continuous innovations leverage existing value chains.

Two views on Product Concept development and focus A well known view in the academic world by Theodore Levitt – Augmented product view Education, installation, maintenance, support, consulting can be provided by partners to produce a more “Whole Product offering A more simplistic, business-oriented view by Geoffrey Moore

Please think about the company focus at each stage Whole Product model This model illustrates the product focus in different stages Generic product – first implementation – basic functionality Expected product – different user groups’ needs are catered for Augmented product – with partners’ add-ons Potential = Redefined product which includes all the functionality showing market interest By Theodore Levitt Please think about the company focus at each stage

Whole Product cont. Moore’s Whole Product dilemma A SW product company is already doing business and has several different kind of customers within their customer base, there comes a time to start the development process for a new release What should the product management do? A common answer - Collect requirements from all the customers and select the most important ones from each  that will give you the next product release requirements specification Something for everybody Dilemma – which customer segment will be really satisfied?

Software company’s internal product process – aiming to Whole Product Käppi, R. 2002

Whole Product cont. Moore’s view: none of the product’s segments will be satisfied, especially the pragmatist customers, this will lead to mediocre sales in most / all segments Everything for nobody Instead: the management needs to focus on the selected customer segment(s) and fulfill their product requirements to level they require (to reach sales in a particular segment) Moore’s definition (Moore 1995, 21) of the Whole Product is more simplistic: “The minimum set of products and services necessary to ensure that the target customer will achieve his or her compelling reason to buy”.

Advancing in the selected customer segment One vertical / horizontal SW product segment is divided into subsegments based on the customer behaviour Innovators, Early adopters, Pragmatists, Conservatives and Skeptics Moore suggests that a company should advance through these subsegments in consecutive order According to the theory the Pramatists and Conservatives offer most of the revenue The Chasm before the Pragmatists kills most of the SW companies

Geoffrey Moore Please compare these thougts to Theodore Levitt’s model

The beginning

Innovators - Technology Enthusiasts Primary Motivation: Learn about new technologies for their own sake Key Characteristics: Strong aptitude for technical information Still emphasis on project, instead of product qualities Like to alpha test new products Can ignore the missing elements Do whatever they can to help Challenges: Want unrestricted access to top technical people Want no-profit pricing (preferably free)

Working with the Visionaries

Early Adopters - The Visionaries Primary Motivation: Gain dramatic competitive advantage via revolutionary breakthrough For the SW company there is the need to create different versions for each selected segment to be compelling enough Key Characteristics: Great imaginations for strategic applications Attracted by high-risk, high-reward propositions Will commit to supply the missing elements Perceive order-of-magnitude gains — so not price-sensitive Challenges: Want rapid time-to-market Demand high degree of customization and support

The Chasm Visionaries Pragmatists Real problems The transition from the Visionaries to Pragmatists is difficult for any organisation Values of these customer groups are completely different ”I see”. Visionaries don’t see enough of a head start Too late to be the first one Too easy for “fast-followers” to catch up Pragmatists see no reason to start yet Too early for anything to be “in production” No herd of references has yet formed Visionaries Pragmatists Intuitive Analytic Support revolution Support evolution Break away from the pack Stay with the herd Take risks Manage risks See what is possible Pursue what is probable

Model Breaks Down at Key Transition Visionaries vs. Pragmatists Adventurous Early buy-in attitude Think Big Go it alone relationships Spend big First strike capability Think Pragmatists are pedestrian Prudent Wait-and-see Manage expectations Maintain Spend to budget Staying power Think Visionaries are dangerous Pragmatists don't trust visionaries as references.

Working with the pragmatists

Early Majority - Pragmatists Primary Motivation: Gain productivity improvements via evolutionary change Streamlined one-size-fits-all whole product Key Characteristics: Astute managers of mission-critical applications Understand real-world issues and tradeoffs Focus on proven applications and buy Whole Products only Like to go with the market leader Challenges: Insist on good references from trusted colleagues Want to see the solution in production at the reference site

The conservatives

Late Majority - Conservatives Primary Motivation: Just stay even with the competition. SW-Company: Mass customisation-Standard core for price-sensitive sales, Customizable for differentiated offers (MS Word – end user experience as important as the Product) Key Characteristics: Better with people than technology Risk averse, Price-sensitive Highly reliant on a single, trusted advisor Challenges: Need completely pre-assembled solutions Would benefit from value-added services but do not want to pay for them

End of the product’s life cycle

Laggards - Skeptics Primary Motivation: Maintain status quo. Key Characteristics: Good at debunking marketing hype Disbelieve productivity-improvement arguments Believe in the law of unintended consequences Seek to block purchases of new technology Challenges: Not a customer Can be formidable opposition to early adoption

Summary - Product and Tailoring business…

Summary - Discussion of Moore’s thinking Many markets never reach all the stages Moore suggests The organisational changes that would enable the company to enact the model are discussed very little The model may be critisized whether it always holds One clear contibution the model offers is the required shift in company / marketing focus as the company and its products grow more mature Theodore Levitt and Geoffrey Moore share similar, supportive thought and together offer good understanding of the phenomenon