1. 1 Product Innovation and Marketing Strategy l Adoption of innovations: l Demand Side Perspectives l Strategic or Firm Side Perspectives l Product Lifecycle And Some Implications

2. 2 Innovations: Demand Side Bass Diffusion Model l Describes the first purchase and diffusion of innovative new durables. l Postulates two distinct types of influences on potential consumers l The intrinsic desire to adopt an innovation: the innovation effect. »Consumer characteristics. »Marketing-mix activities. l The influence of social interactions (e.g., through word-of-mouth WOM) with consumers who have already bought: the imitation effect.

3. 3 The Model Let the potential market for a new innovation such as HDTV be Q and the number of consumers who have already bought the product at any time t be q t. At any time t and for any given consumer in the population, let the probability of purchase be: When q t consumers have already bought the product, then ( Q - q t ) have not yet purchased (i.e., this is the untapped market).

4. 4 The Model The expected sales at any time t are In this i is the coefficient of innovation: »people who are not affected by how many others have adopted. »This effect is highest in the initial periods. »Captures the fact that early buyers are less affected by word-of-mouth (i.e., WOM). c/Q measures the coefficient of imitation. »This effect increases with the number of people who have already adopted. »Later buyers are more influenced by WOM.

5. 5 Sales Patterns 0 500000 1000000 1500000 2000000 2500000 3000000 0 Case 1: Innovation with strong innovation but weak imitation effect ( i >> c/Q) 0 500000 1000000 1500000 2000000 2500000 3000000 0 Case 2: Innovation with weak innovation but strong imitation effect ( c/Q >> i)

6. 6 Summary l The original model fits data quite well at the category level in numerous new product markets. l Given initial sales data it is a good tool to estimate »total market potential »peak of the innovation l Although it does not include marketing-mix variables, it can be used to provide input to marketers: »How to turn a case 1 situation to case 2. l Ignores the strategic effect of firm competition in shaping the product diffusion of innovations.

7. 7 The Product Lifecycle Time Product Development Stage Introduction Profits Sales GrowthMaturityDecline Losses/ Investments ($) Sales and Profits ($)

8. 8 What Happens At Decline? l Four Strategies: The case of Nylon l Original Uses »Military parachutes, Ropes, Circular Knit conventional hosiery. l Usage Frequency »Hosiery: Pantyhose as a “social necessity.” l Varied Usage »Fashion Smartness and Variety »Tinted Hosiery, Patterned Hosiery l New Uses »Rugs and tire cords

9. 9 Innovations in Technology Markets l Windows vs. Apple l VHS vs. Beta Formats l QWERTY vs. DVORAK l Does the superior technology have greater market share? l Why? l Network Externality

10. 10 Network Externalities and Innovations Demand side problems l Suppose two competing technologies are launched. »One is established incumbent, there is a new technology. »existing consumers of the old technology (installed base) »new consumers who arrive over time. l Consumers have to anticipate which technology will be widely used by the competitors. l Leads to problems »excess inertia (users wait to adopt ). »excess momentum (consumers rush to an inferior technology in the fear of getting stranded). l How do you solve these problems?

11. 11 Possible Solutions Inertia »communication between users (WOM) »time bound discounts to early users »offering converters »“targeting” the flow of new users. These users exert an externality on the old technology users. Excess momentum »preannouncing the new product to make consumers who are just about to buy wait. (Windows 95) »Introduce earlier regardless of some “bugs” but offer quality upgrades and high quality after sales support (Apple Newton, Pentium)

12. 12 Supply-Side Problems l Two firms with incompatible products but which are substitutes »Lotus vs. Excel. l Consumer market has network effect. l Will any firm want to be compatible? »Which firm will initiate compatibility? »What kind of situations will make firms cooperate to be compatible? »How should compatibility be achieved?

13. 13 Possible Answers l Smaller firm often has the greater incentive to be compatible. l The threat of new entry l More equal market shares implies greater cooperation