1. Today’s Topic: Market and Customer Analysis Selecting and Designing for Target Markets and Target Customers

2. First Course Module Companies’ objectives; definition of product success Companies’ objectives; definition of product success Financial measures; income statement analysis and opportunities/challenges Financial measures; income statement analysis and opportunities/challenges How companies bring products to market (roles/process/compensation) How companies bring products to market (roles/process/compensation) Creating “winning” business plans; key success factors; differentiation Creating “winning” business plans; key success factors; differentiation

3. Second Course Module the next four weeks Market/customer analysis Market/customer analysis (DLJdirect case – online brokerage) (DLJdirect case – online brokerage) Competitive analysis Competitive analysis (Airborne Express case – package delivery) (Airborne Express case – package delivery) Making product decisions Making product decisions (THINK case – electric cars) (THINK case – electric cars) Midterm exam on making product decisions Midterm exam on making product decisions (Mathsoft case – engineering analysis software) (Mathsoft case – engineering analysis software)

4. Learning Outcomes: you will learn to … (before the midterm exam) analyze a company’s financial performance and assess its opportunities and challenges for future growth analyze a company’s financial performance and assess its opportunities and challenges for future growth assess the barriers to success in a particular market and select the appropriate target customers assess the barriers to success in a particular market and select the appropriate target customers identify a company’s competitive advantages by performing a comprehensive analysis of its direct and indirect competition identify a company’s competitive advantages by performing a comprehensive analysis of its direct and indirect competition define the “whole product” and decide on appropriate product differentiators define the “whole product” and decide on appropriate product differentiators

5. You will learn to… (after the midterm exam) select appropriate sales/distribution channels and promotional messages and methods select appropriate sales/distribution channels and promotional messages and methods identify best practices in new product development and the challenges in integrating the marketing, operations and product development functions identify best practices in new product development and the challenges in integrating the marketing, operations and product development functions understand how technical people interact with marketing, sales and operations personnel, and how they contribute to resolution of business issues understand how technical people interact with marketing, sales and operations personnel, and how they contribute to resolution of business issues understand how business issues impact technical work understand how business issues impact technical work

6. …because you’ll understand and apply these Concepts (13) Definition of product success Definition of product success Whole product Whole product Product plan: key success factors Product plan: key success factors Differentiation Differentiation Market attractiveness Market attractiveness Target customers Target customers Competitive advantage Competitive advantage Marketing mix (C+4P) Marketing mix (C+4P) Product positioning Product positioning Sales functions Sales functions Channel options Channel options Channel value-added Channel value-added Operations balance Operations balance

7. … and you’ll be able to use these Methods/Tools (13) Income statement analysis Income statement analysis Financial benchmarks Financial benchmarks Target customer description Target customer description Target customer selection Target customer selection 5 Forces analysis 5 Forces analysis Competitive analysis (10 dimensions) Competitive analysis (10 dimensions) Decision criteria Decision criteria Identifying competitive options Identifying competitive options Product decisions Product decisions Product competitive positioning Product competitive positioning Channel economics Channel economics Process dimensions Process dimensions Product development best practices Product development best practices

8. Business/Product Plan Learnings (last week) Content/scope of a business/product plan Content/scope of a business/product plan Critical aspects of a “winning” plan Critical aspects of a “winning” plan Differentiation: importance, definition, identification Differentiation: importance, definition, identification Start-ups: success factors, funding requirements, success profiles Start-ups: success factors, funding requirements, success profiles Interesting entrepreneurship info/course: http://professionalpractice.asme.org/Entrepreneurial/Startups/ Introduction.cfm

9. Differentiation from Competitors’ Products Whole product differentiation is the answer to: Whole product differentiation is the answer to: Why do customers choose your product Why do customers choose your product instead of somebody else’s ? instead of somebody else’s ? (or buying nothing at all?) (or buying nothing at all?) Product differentiators are the things that are unique or best about the whole product, compared to the customers’ other alternatives Product differentiators are the things that are unique or best about the whole product, compared to the customers’ other alternatives Potential areas for differentiation = dimensions of the whole product (product features, price, sales, marketing, customer service/support, brand, etc) Potential areas for differentiation = dimensions of the whole product (product features, price, sales, marketing, customer service/support, brand, etc)

10. What we’re learning…... (last week) Differentiation of the “whole product” from competitors is the key driver of success…… (last week) Differentiation of the “whole product” from competitors is the key driver of success…… (this week) …..which differentiators to choose depends on what the target customers value….. (this week) …..which differentiators to choose depends on what the target customers value….. (next week) ….and what competitors offer to those customers (next week) ….and what competitors offer to those customers

11. Target Markets and Target Customers

12. Today’s Key Learnings Market attractiveness: the five forces model Market attractiveness: the five forces model The concept of target customers, and how to describe them The concept of target customers, and how to describe them Target customer selection method/process Target customer selection method/process

13. Designing for the Market What is your target market? What is your target market? Who are your target customers within that market? Who are your target customers within that market? How can you create/present a better “value minus price” proposition than competitors? How can you create/present a better “value minus price” proposition than competitors? …..requires understanding/quantifying …..requires understanding/quantifying “value” in the target customers’ eyes “value” in the target customers’ eyes …..requires understanding what …..requires understanding what competitors’ offerings will/may be competitors’ offerings will/may be

14. Definitions Market: an “ecosystem” including a product, its providers (competitors), its intermediaries (channel partners), its input factors (suppliers) and its potential or existing buyers (users, customers) Market: an “ecosystem” including a product, its providers (competitors), its intermediaries (channel partners), its input factors (suppliers) and its potential or existing buyers (users, customers) Customers: the entities (business, consumer, or government) who (potentially) buy and use the product; includes the end-customers Customers: the entities (business, consumer, or government) who (potentially) buy and use the product; includes the end-customers

15. Why does it make sense to target only a specific subset of all of the customers in a market? (the alternative, of course, is to try to attract all of the customers)

16. The “Marketing Mix” ( C + 4P ) Customers (target) Customers (target) Product Product Price Price Promotion Promotion Place (sales/distribution) Place (sales/distribution) The 4Ps depend on the C

17. Design-for-Market Process Select target market (customer need, product category, industry) Product concept Select target customers (C) Value assessment, versus competition Define product & select price (2 P’s)

18. Selecting the Target Market: Inter-Industry Differences Operating Income/Assets (%) High (15-30%) : Pharmaceuticals, Packaged software, Semiconductors High (15-30%) : Pharmaceuticals, Packaged software, Semiconductors Medium (8-15%) : Restaurant chains, Petroleum/natural gas, Engineering services Medium (8-15%) : Restaurant chains, Petroleum/natural gas, Engineering services Low (2-7%) : CATV service, Motor vehicles, Airlines Low (2-7%) : CATV service, Motor vehicles, Airlines

19. 1Q08 Industry Profitability measured by Net Return-on-Sales (Net Income/Revenues) Pharmaceuticals 25.9% Chemicals 15.7% Electrical equipment 12.1% Oil companies 7.4%

20. Market Attractiveness: Porter’s “Five Forces” Model “high” is bad for competitors in the market “high” is bad for competitors in the market Threat from substitute products Threat from substitute products Ease of market entry (and exit) Ease of market entry (and exit) Bargaining power of buyers Bargaining power of buyers (customers, channels and influencers) (customers, channels and influencers) Bargaining power of suppliers Bargaining power of suppliers Degree of competitive rivalry Degree of competitive rivalry suppliers  competitors  buyers (incl. customers)

21. Designing for the Market What is your target market? What is your target market? Who are your target customers within that market? Who are your target customers within that market? How can you create/present a better “value minus price” proposition than competitors? How can you create/present a better “value minus price” proposition than competitors? …..requires understanding/quantifying …..requires understanding/quantifying “value” in the target customers’ eyes “value” in the target customers’ eyes …..requires understanding what …..requires understanding what competitors’ offerings will/may be competitors’ offerings will/may be

22. Target Customers All possible customers Target Customers

23. Selecting Target Customers: some considerations Segment size and revenue opportunity Segment size and revenue opportunity Customer benefits Customer benefits Customer interest (incl. current relationships) Customer interest (incl. current relationships) Customer ability-to-pay and leverage Customer ability-to-pay and leverage Competition/market coverage Competition/market coverage Sales issues: sale time/complexity, cost, channel and associated profit margin Sales issues: sale time/complexity, cost, channel and associated profit margin Cost to serve/support Cost to serve/support Customer loyalty/lock-in Customer loyalty/lock-in Strategic value Strategic value

24. Method: Four Ways of Describing Target Customers Name: customer (individual or group names), industry or occupation, affiliations,… Name: customer (individual or group names), industry or occupation, affiliations,… Demographics: revenues/income, size of firm/size of family, location, … Demographics: revenues/income, size of firm/size of family, location, … Psychographics: cost-conscious, prestige oriented, early adopter, risk adverse, … Psychographics: cost-conscious, prestige oriented, early adopter, risk adverse, … Needs…… throughout the buying/using experience (remember the whole product!) Needs…… throughout the buying/using experience (remember the whole product!)

25. Describe the (Core) Target Customers of…...? Walmart Walmart Southwest Airlines Southwest Airlines National Broadcasting Corp (NBC) National Broadcasting Corp (NBC)

26. Objective for Whole Product: Superior “Value minus Price” Who are the targeted customers? Who are the targeted customers? What are their unmet needs? What are their unmet needs? What value would they place on a particular “satisfaction” of those needs? (i.e., what is their willingness to pay for a particular product) What value would they place on a particular “satisfaction” of those needs? (i.e., what is their willingness to pay for a particular product) Preferably, quantify that value….or at least be confident that (value - price) is greater than competitors can/will deliver Preferably, quantify that value….or at least be confident that (value - price) is greater than competitors can/will deliver

27. The “Whole” Product The Product

28. The “Whole” Product: What Customers Really Care About The product itself Auxiliary or related products Price and cost-in-service Awareness and information Where it is sold Ease of choice, purchase, ordering Delivery Installation Payment method Storage/movement Aesthetics/style Advice on use Help in use (e.g., hotline) Returns/exchanges Service/repair Disposal

29. Differentiation is usually achieved by choosing to meet some target customer needs better than all competitors….. while meeting most needs (requirements) at an acceptable level, and not meeting other needs at all (“minor” needs, or needs of non-targeted segments)

30. Identifying Customer Needs Primary customer research: doing end- customer surveys, interviews, focus groups Primary customer research: doing end- customer surveys, interviews, focus groups Secondary customer research: reading or Secondary customer research: reading or commissioning market studies by analysts commissioning market studies by analysts Benefit studies: cost savings, value-in-use, Benefit studies: cost savings, value-in-use, revenue-generation impacts revenue-generation impacts Revealed preference: what customers pay for (partial) equivalents Revealed preference: what customers pay for (partial) equivalents Extrapolation from technical possibilities Extrapolation from technical possibilities

31. From Needs to Designs…. Customer Needs (and relative importance) Customer Needs (and relative importance) Engineering characteristics impacting needs Engineering characteristics impacting needs Competitive position (in customers’ eyes, and technical terms) Competitive position (in customers’ eyes, and technical terms) Difficulty/importance/cost of features Difficulty/importance/cost of features Leads to…..engineering targets Leads to…..engineering targets There are many methodologies to implement the above, e.g. House of Quality

32. DLJdirect Case Summary DLJdirect has a successful online brokerage business targeting “aggressively affluent” customers DLJdirect has a successful online brokerage business targeting “aggressively affluent” customers Other segments are growing faster Other segments are growing faster DLJdirect has to decide whether to address additional customer segments and whether to significantly increase its advertising to capture customers in those segments DLJdirect has to decide whether to address additional customer segments and whether to significantly increase its advertising to capture customers in those segments

33. Online Stock Trading Customer (trader) Online Broker Market- maker Clearing- house Stock Exchange customer’s account

34. Hint: 6 Sources of Revenue From End-customers From End-customers Trading commissions Trading commissions Account management fees Account management fees Interest on margin purchases Interest on margin purchases From partners From partners Order flow rebates Order flow rebates Mutual fund and money market fees Mutual fund and money market fees iNautix revenues iNautix revenues

35. Assignment Questions Are DLJdirect’s current financial results “good”? Are DLJdirect’s current financial results “good”? What is their trend? What is their trend? Does DLJdirect have the financial capability to address new segments, e.g. to modify it’s whole product, or to do more advertising to attract new kinds of customers? How much money might be available in 2000? Does DLJdirect have the financial capability to address new segments, e.g. to modify it’s whole product, or to do more advertising to attract new kinds of customers? How much money might be available in 2000? Identify the ways DLJdirect’s service is differentiated from competitors’ offerings Identify the ways DLJdirect’s service is differentiated from competitors’ offerings What are the key needs of each of the four customer segments? Which are well-matched to DLJdirect’s differentiators and other capabilities? What are the key needs of each of the four customer segments? Which are well-matched to DLJdirect’s differentiators and other capabilities? Use your judgment to rank the customer segments according to the profit potential in serving them (hint: consider both size of the segment and the average profit/customer in that segment) Use your judgment to rank the customer segments according to the profit potential in serving them (hint: consider both size of the segment and the average profit/customer in that segment)

36. DLJdirect’s Financial Situation (partial income statement) $M1-3Q98%rev%growth1-3Q99%rev Revenues82.596.1161.8 -commissions54.365.881.298.460.8 -fees18.422.3108.238.323.7 -interest9.811.9155.12515.5 Total cost & exp83.1100.772.114388.4 -advertising19.924.188.437.523.2 Income before tax-0.5-0.6NA18.711.6

37. Profit potential of segment = # of customers in segment x probability of attracting and retaining them x profit potential per customer

38. Size of Customer Segments (estimated from Exhibits 5 & 10) # in 1999%total%growth # in 2002%total AA1.4326101.5612 GRF1.3825-430.786 PCC0.88164614.9438 RBB1.82332145.7244 Total #5.5M13.0M

39. Assignment Questions (continued) Assuming that DLJdirect continues to target the aggressively affluent segment: Should DLJdirect also target the Get Rich Fast (day trader) segment? Why? Should DLJdirect also target the Get Rich Fast (day trader) segment? Why? In your opinion, is there another customer segment that DLJdirect should target? Why? In your opinion, is there another customer segment that DLJdirect should target? Why?

40. Selecting Target Customers: some considerations Segment size and revenue opportunity Segment size and revenue opportunity Customer benefits Customer benefits Customer interest (incl. current relationships) Customer interest (incl. current relationships) Customer ability-to-pay and leverage Customer ability-to-pay and leverage Competition/market coverage Competition/market coverage Sales issues: sale time/complexity, cost, channel and associated profit margin Sales issues: sale time/complexity, cost, channel and associated profit margin Cost to serve/support Cost to serve/support Customer loyalty/lock-in Customer loyalty/lock-in Strategic value Strategic value

41. Selecting Customer Segments Hint: identify the positives-and-negatives of each of other three segments (use the AA pos-neg provided as a guide)

42. Positives-and-negatives of focusing on the AA segment Positives Positives - large segment; currently 26% of the market - wealthy; high ability to pay - likely to buy all 3 products (trades, acct mgmt, margin) - attracted by DLJd brand image and differentiators - most profitable? - most profitable? Negatives Negatives - slow growing segment; declines to 12% of market - desirable: competitive rivalry - desirable: competitive rivalry - “aggressive”  modest customer loyalty?

43. Today’s Key Learnings Market attractiveness: the five forces model Market attractiveness: the five forces model The concept of target customers, and how to describe them The concept of target customers, and how to describe them Target customer selection method/process Target customer selection method/process

44. Next Week’s Topic: (Analyzing and) Beating the Competition

45. Reading for Next Week Airborne Express Airborne Express (a case focused on competitive analysis and subsequent market/product decisions) (a case focused on competitive analysis and subsequent market/product decisions)

46. What we’re learning…... (last week) Differentiation of the “whole product” from competitors is the key driver of success…… (last week) Differentiation of the “whole product” from competitors is the key driver of success…… (this week) …..which differentiators to choose depends on what the target customers value….. (this week) …..which differentiators to choose depends on what the target customers value….. (next week) ….and what competitors offer to those customers (next week) ….and what competitors offer to those customers

47. Airborne Express: Case Summary The timeframe is 1997 The timeframe is 1997 The market is the $16-17B U.S. express mail delivery (letter, package) market The market is the $16-17B U.S. express mail delivery (letter, package) market Airborne is the smallest of the three major competitors with 16% market share (FedEx 45%; UPS 25%) Airborne is the smallest of the three major competitors with 16% market share (FedEx 45%; UPS 25%) It is recently the fastest growing, but historically the least profitable, of the Big 3 It is recently the fastest growing, but historically the least profitable, of the Big 3 The US Postal Service is threatening to enter the market The US Postal Service is threatening to enter the market

48. Case Note In 2003, Airborne Express was acquired by DHL for $1.2B

49. Assignment for Next Week Perform a Five Forces analysis of the US express delivery industry Perform a Five Forces analysis of the US express delivery industry Perform a competitive analysis of FedEx, UPS and Airborne in the 10 dimensions shown on the next slide Perform a competitive analysis of FedEx, UPS and Airborne in the 10 dimensions shown on the next slide (display as a 3 x 10 matrix) (display as a 3 x 10 matrix) Based on the competitive analysis, what are Airborne’s competitive strengths and weaknesses vis-à-vis FedEx and UPS? Based on the competitive analysis, what are Airborne’s competitive strengths and weaknesses vis-à-vis FedEx and UPS? How is Airborne’s (whole) product differentiated ? How is Airborne’s (whole) product differentiated ? What does Airborne need to do to assure that it survives and thrives in the future? (hint: start by identifying its opportunities and challenges) What does Airborne need to do to assure that it survives and thrives in the future? (hint: start by identifying its opportunities and challenges)

50. Competitive Analysis Dimensions (10) Products offered Products offered Target customers Target customers Competitive positioning (incl. price & cost) Competitive positioning (incl. price & cost) Financial performance Financial performance Culture & human resource management Culture & human resource management Operations: pickup & delivery Operations: pickup & delivery Operations: air & hub operations Operations: air & hub operations Marketing & sales Marketing & sales Customer service Customer service Information technology Information technology