Marketing of High-Technology Products and Innovations Jakki J. Mohr Chapter 3: Relationship Marketing: Partnerships and Alliances

© Jakki Mohr Relationship Marketing “The formation of long-term relationships with customers and other business partners, which yield mutually-satisfying, win/win results.” Why relied upon so heavily? Time to market cycle is short Development costs/risks are high Faster and more cost efficient to pursue projects jointly than alone Synergy!

© Jakki Mohr Reasons to Partner Access resources and skills Gain cost efficiencies Speed time-to-market Develop innovations and new products Develop complementary products Define industry standards Gain market clout

© Jakki Mohr Types of Partnerships

© Jakki Mohr Types of Partnerships (cont.) Vertical partnerships: with members at other levels of the supply chain Suppliers Distribution channel members Customers Horizontal partnerships: with members at the same level of the supply chain “Complementors:” makers of jointly-used products Competitors—”coopetition”

© Jakki Mohr Antitrust Laws Related to Competitive Collaboration National Cooperative Research Act (1984) Eased traditional antitrust laws to allow competitors to form relationships to jointly pursue research and development projects. National Cooperative Production Amendment (1993) Expanded the 1984 Act to allow joint production

© Jakki Mohr Example of Competitive Collaboration: Sematech The semiconductor manufacturing technology consortium of US semiconductor manufacturers and the US government

© Jakki Mohr Risks in Partnering Outright failure of relationships Loss of autonomy and control Loss of proprietary information to partner Potential legal issues and antitrust problems Failure to achieve alliance objectives

© Jakki Mohr Factors Contributing to Partnership Success Joint (bilateral) interdependence Caution warranted with partners of unequal size Joint Commitment Trust in the partner’s motives and intents Effective Communication Compatible Corporate Cultures Integrative conflict resolution and negotiation (vs. “hard,” win/lose bargaining)

© Jakki Mohr Factors Contributing to Partnership Success (Cont.) Effective structure to govern the alliance Unilateral: one party has authority to make decisions Bilateral: governance based on mutual expectations regarding behaviors and activities

© Jakki Mohr More on Governance Match type of governance to degree of risk: High risk (arising from uncertainty or investments dedicated to the relationship) warrants either: “ Credible commitments” and safeguards that create mutual dependence –or- Narrow terms and conditions that keep the firms only loosely-coupled Bilateral governance based on commitment, trust, and communication

© Jakki Mohr Collaborating to Set Technical Standards Standards create a common, underlying architecture for products offered by different firms in the market.

© Jakki Mohr Why are industry standards important? Customers gain compatibility Lowers their perceived risk (FUD factor—fear, uncertainty, and doubt) Allows for seamless interface of product components. Due to network externalities (Ch. 1), standards can increase the value a customer receives (when more customers adopt/use products sharing a common standard).

© Jakki Mohr Why are industry standards important? (cont.) Availability of complementary products determined by the size of the “installed base” of a given product. Therefore, standards help ensure greater availability of complementary products by helping to ensure a larger size of the installed base. Customers get more value from the base product as more complementary products are available.

© Jakki Mohr Self-reinforcing Nature of Standards

© Jakki Mohr Implications from Standards Originator of new technology can set standards— Even when technology standard may be inferior Ex: QWERTY keyboards Critical success factor: Grow installed base quickly Antitrust implications when de facto standards become near monopolies

© Jakki Mohr Strategies to Set Industry Standards (1) Licensing/OEM Agreements Pros: Can ensure initial wide distribution Can co-ops competitors from developing competing technology Limits customer confusion over competing standards Sends signal to complementors that installed base may be significant, stimulating development of ancillary products Cons: Licensees may attempt minor technological alterations to bypass need to pay licensing fees Original developer “creates” competitors

© Jakki Mohr Strategies to Set Industry Standards (Cont.) (2) Strategic Alliances to jointly sponsor development of a particular technological standard Pros: Same four “pros” as the prior strategy, plus: By combining skills, alliances may produce superior technologies than a single company could. Cons: Partner might access and mis-use other firm’s proprietary information Need for close attention to structure and management of the alliance

© Jakki Mohr Strategies to Set Industry Standards (Cont.) (3) Product Diversification: Create a standard by developing the necessary complementary products to create more value for customers. Pros: Can “jump-start” the market when no installed base of customers exists and complementors have no incentive to develop products Diversifies revenue base of the firm Cons: Commitment of resources Potential incompatibility with core competencies

© Jakki Mohr Strategies to Set Industry Standards (Cont.) (4) Aggressive Product Positioning via penetration pricing, product proliferation, and wide distribution. Requires investments in production capacity, product development, and building market share Costs of failure are very high

© Jakki Mohr Conditions That Affect the Choice of Standards-Setting Strategy: Barriers to imitation Via patents or copyrights, for example Skills and resources in technology, manufacturing, marketing, finances, and firm reputation Existence of capable competitors Potential suppliers of complementary products

© Jakki Mohr Which Strategy Under Which Conditions? Aggressive Sole Provider when: Barriers to imitation are high Firm possesses required skills and resources Suppliers of complementary products exist Apparent absence of capable competitors Passive Multiple Licensing when: Barriers to imitation are low Firms lacks required skills and resources Presence of many capable competitors

© Jakki Mohr Which Strategy Under Which Conditions? (Cont) Aggressive Multiple Licensing (combines licensing with aggressive positioning) when: Firm possesses needed skills and resources Barriers to imitation are low Presence of many capable competitors Selective Partnering when: High barriers to imitation Firm lacks needed skills and resources Presence of capable competitors

© Jakki Mohr Customer Relationship Marketing Forming long-term relationships with customers that provide mutually- beneficial solutions Cheaper to keep current customers coming back than to prospect for new ones. May require sacrificing short-term profits for long-term gains.

© Jakki Mohr When is customer relationship marketing appropriate? Continuum of customer accounts anchored by: Lost for Good: Face switching costs in changing vendors Therefore, warrant relationship marketing Always a Share Face low switching costs in changing vendors Therefore, do not warrant relationship marketing

© Jakki Mohr Switching Costs From investments in equipment, procedures, or people that make it costly or risky for a customer to switch to another firm’s products. From perceived risk of making a bad choice Other factors related to switching costs: Higher costs for customer’s products that form an integrated solution (vs. modular products (“plug and play”) that allow inter- changeability) Higher costs for customers whose focus is on a particular technology or vendor Vs. a particular product, or even person in the vendor’s organization (i.e., a sales rep)

© Jakki Mohr Match Marketing Tools to Nature of the Customer Account Relationship Marketing: Lost-for Good customers Higher switching costs Focus on product, technology, and distribution Transaction Marketing: Always a Share customers Lower switching costs Focus on short-term marketing tools, such as price, advertising. Try to move customers to lost-for-good side of continuum via superior customer knowledge

© Jakki Mohr Appendix: Inter-firm Learning Issue: Must learn to have effective partnership, but too much information sharing can dilute source of competitive advantage Types of knowledge: Explicit (migratory) Tacit (embedded)

© Jakki Mohr Managing the Paradox Want closest partnership possible to enhance learning Want loosely-coupled partnership to prevent unintended transfers of information Use caution!