MKTG 640 Value Innovation

Consider 1998 Compaq vs IBM zWhat does this show? zImitative – not innovative approaches to the market zThese companies act REACTIVELY zA company’s understanding of emerging mass markets and changing customer demands becomes hazy

What is the key to sustained high growth vs competitors? zValue innovation zThat is…..focus on the customer and new ways of satisfying him or her

Companies with sustained high growth and profits practice value innovation

Value Innovation not dependent on: zSize zYears of operation zIndustry conditions zCounty of origin

Value Innovation zOffers fundamentally new and superior buyer value zMakes competition irrelevant zExample: Callaway Golf

Value Innovation – Callaway Golf zCallaway Golf – changed the question zIt used to be – How can I hit the ball farther? zTheir’s was – How can I hit the ball easier?

Value Innovation – Callaway Golf zThey got the country club market zAt a country club, people chose either tennis or golf. zGolf was perceived as too hard. (How can I hit that ball?) zCallaway’s golf club (Big Bertha) made it easier to hit. zViola – access to a new segment.

Value Innovation zPlaces the buyer – not the competition at the center of strategic thinking.

Shifting the Basis of Strategy zAfter WWII global competition ballooned. zUS companies responded – with a focus on beating competition zMarket conditions are assumed NOT to be under firm control zSo – firms trade-off between price and product performance

Shifting the Basis of Strategy zCompeting for a share of a contracting market is a ‘second best’ strategy zStimulating the demand side is a ‘first best strategy.’ zCompanies pursuing a first best strategy FAR outperform those with a second best strat.

Shifting the Basis of Strategy zLand, labor and capital – finite factors of production zBUT --- Knowledge and ideas are infinite economic goods that can generate increasing returns through their systematic use.

zCompanies that pursue innovation systematically z….can create new demand.

Value and Innovation zValue innovation – anchors innovation with buyer value. zValue innovation is not the same as value creation zVC is incremental zVI is breakthrough

Value and Innovation zValue innovation – links innovation to what the MASS of buyers want. zQuestions: 1.Are we offering customers radically superior value? 2.Is our price level accessible to the mass of buyers in our target audience?

Technological versus Value Innovation zTech innovation focuses on finding solutions for problems zValue innovation focuses on redefining the problems themselves

Value creation

Value Innovation - Schumpeter z‘creative destruction’ – new stuff kills or makes irrelevant – old stuff zSchumpeter => entrepreneurs do creative destruction

Value Innovation zSchumpeter => entrepreneurs do creative destruction zNot really, anyone in an organization can come up with a creative innovation

Market Dynamics of Value Innovation zOffering buyers fundamentally new and superior value in traditional businesses through innovative ideas and knowledge…..

Market Dynamics of Value Innovation – product to knowledge economy zTwo consequences: yFirst – it creates the potential for increasing returns ySecond - it creates the potential for ‘free riders.’

Market Dynamics of Value Innovation – product to knowledge economy zIn the old economy – one firm’s use of a rival good – precludes its use by others (the one Nobel laureate who knows about financial markets) zUse of a nonrival good – can be used by others

Example: zVirgin Atlantic’s Upper Class – (First Class at Business Class prices) zThe idea is a nonrival good. zWhy – anyone can copy it (more easily)- free riders

How to protect your nonrival good? zNotion of EXCLUDABILITY zExcludability a function of: yThe Legal System (patents) xIntel can exclude rival chipmakers from using their plant – property laws yThe Nature of the Good yStarbuck’s? The highest value item in its product is not excludable (the idea of a chic coffee bar)

The ideas that contain the real value are usually not excludable or only partially so.

Even software is subject to free riding zCode is patentable – or at least can be protected zThe look and feel is not patentable zSoooo…duplicate the look and feel and write new code.. zIt happened to Netscape (IE)

What’s the best way to maximize profits? zShould value innovators follow the tech strategy (price skimming, restrict supply)?

What’s the best way to maximize profits? zSuccessful value innovators use a distinctly different market approach from that of conventional monopolists.

Value innovators market approach zStrategic pricing for demand creation. zTarget costing for profit creation.

Strategic pricing for demand creation zStrategic pricing leads to high volume and rapidly establishes a powerful brand reputation.

Target costing for profit creation zTarget costing leads to attractive profit margins and a cost structure that is hard for potential followers to match.

Quantity

zRapid brand recognition built by VI zPlus simultaneous drive to lower costs zMakes competition nearly irrelevant zComps must overcome economies of scale, learning effects and increasing returns.

To make value innovation happen zAsk five questions…

Conventional LogicValue Innovation Logic Question 1 Does your company allow industry conditions to dictate the realm of what is possible, probable, and profitable? Question 2 Does your company focus on outpacing the competition? Question 3 Does management start by considering current assets and capabilities? Question 4 Does your company focus on customer segmentation, customization, and retention? Question 5 Does your company strive to improve the products and services of your industry?

Conventional LogicValue Innovation Logic Question 1 Does your company allow industry conditions to dictate the realm of what is possible, probable, and profitable? Does your company challenge the inevitability of industry conditions? Question 2 Does your company focus on outpacing the competition? Does your company focus on dominating the market by introducing a major advance in buyer value? Question 3 Does management start by considering current assets and capabilities? Does management consider starting anew? Question 4 Does your company focus on customer segmentation, customization, and retention? Does your company search for key value commodities that can unlock the mass market even if some existing customers will be lost? Question 5 Does your company strive to improve the products and services of your industry? Does your company think in terms of a total customer solution even if this pushes beyond the industry's traditional offerings?