‘Bring in the voice of the customer’, ‘understand what your customer wants’ are now common sense. How though to find out what your customer wants when there is no customer yet, which is the case in highly entrepreneurial and innovative cases? Marketing Innovation The Innovation Challenge Michael Ehret Kostas Galanakis
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Key activities in the marketing analysis process are market segmentation,
target marketing and market positioning.
• Market segmentation: At the core of marketing strategies stands the
customer. In theory this would mean to focus on individual customers.
In reality this implies complexity and costs. In addition, costs affect
directly the potential of a company to offer competitive prices and
ultimately customer perceived value. As soon as groups of customers
show similar patterns of demand, marketing investments can be spread
and opportunities of scope can be reached. Therefore, the purpose of
market segmentation is: To identify groups of customers who respond
similarly to the company’s marketing program. The bigger a segment,
the more efficient a marketing budget can be applied. In general
marketing segmentation faces the trade-off to arrive at economic viable
segments vs. employing meaningful approaches of buyer segmentation.
• Target Marketing: Setting the market segments, marketers need to
think how to prioritize their marketing investments. Target marketing
implies prioritising on the most promising segments. In its extreme
form, target marketing addresses small niches within a huge market.
Germany’s ‘hidden champions’ have thrived by targeting extremely
specialized segments on a global level. These family businesses offer
highly specialised machines, industrial components or specialised
chemicals on a global scale at outstanding profits. Their focus on
business customers and their gained reputation helped them to quickly
recover from the economic crises and arrive at outstanding growth
figures.
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• Market Positioning: The crucial force determining marketing reality is
the mind-set of the customer. Thus, any marketing strategy runs on
empty if it does not capture attention in the customers mind. However,
this is only effective as it is grounded on a differentiated market offering
that stands out in customers minds compared to those of the
competition. Thus, would be buyers of automobiles might want to
choose between ‘das Auto’ signifying German engineering culture of
Volkswagen, ‘a lifetime of fresh air with every purchase’ by Toyota’s
hybrid cars, or French design savvy by the ‘createur d’automobile’
(Citroen).
2.2.2 Marketing Planning
Marketing planning translates the marketing strategy into an actionable
program. Developing the marketing mix is the art and science to arrive at a
coherent set of marketing actions for the set of the four core parameters of
marketing called the “4Ps” – product, price, place and promotion (Figure 9).
Product is the core offering consisting of bundles of goods, services and rights
that provides the basis of the company’s value proposition. Price is the
decisive parameter for both, customer value as well as the share of value
captured by the company. Place refers to the delivery and distribution of
value, whereas promotion relates to communication and customer
perceptions. Customers though, value products as solutions; perceived price
as a cost; gained convenience from a well performing delivery system; and,
communication with meaningful and customer relevant promotion campaign
(Figure 10).
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Figure 9. The Market Mix based on 4Ps concept Source: www.smartdraw.com
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Figure 10. The Market Mix based on 4Cs concept Source: www.smartdraw.com
2.2.3 Marketing Implementation
All good strategy intentions run into nowhere without execution. Marketing
takes a two-fold role in implementation:
• As the value proposition is the result of the joint effort of the different
members of a company, marketing plays the role in orchestrating and
controlling all relevant activities in the company in line with customer
expectations, perceptions and needs. On the company-wide level
marketing has the task to ensure the market orientation of the company
(Kohli and Jaworski, 1995).
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• In a more narrow sense, marketing implementation is concerned with
the organisation and control of the marketing function, like the structure
of the marketing unit, incentives for the marketing employees and the
support by external marketing services like market research
consultants, advertising agencies or franchising partners.
In firms with a manufacturing tradition, a core challenge derives from the
organising principle of functional specialisation that obstruct a market
orientation.
In functional specialisation, the firm aims to optimize an activity or operation
in order to reach economies of scale, ensure the adherence of standards and
maintain efficiency (Figure 11). While a functional specialised firm starts with
the definition of the output in order to optimise its activities, a customer
oriented firm aims to develop specifications from the perspective of customer
perception. From the moment that a firm aims to cater the needs of an
individual or diversified its offer according to an extended and differentiated
set of customers’ needs, functional orientation stands as a barrier.
Figure 11. Functional specialisation vs. customer orientation
The key task then of marketing is to create intelligence with regard to
customer requirements, disseminate this in the organisation and
Supply
Operations
Sales
Customer
Group 1
Customer
Group 2
Customer
Group 3
Organisation Principle of Functional Specialisation
Organisation Principle of Customer Integration
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systematically track the company’s performance from the perspective of the
customer (Kohli and Jaworski, 1990, Figure 12 and Figure 13).
Figure 12. Criteria for customer orientation Source: Kohli and Jaworski, 1990
Figure 13. The construct of market orientation Source: Kohli and Jaworski, 1990
TOP MANAGEMENT
• Emphasis • Risk Aversion
ORGANISATIONAL SYSTEMS
• Formalisation • Centralisation • Departmentalisation • Reward Systems
INTERDEPARTMENTAL DYNAMICS
• Conflict • Connectedness
MARKET ORIENTATION
• Intelligence Generation • Intelligence
Dissemination • Responsiveness
EMPLOYEES
• Organisational Commitment
• Esprit de Corps
ENVIRONMENT
• Market Turbulence • Competitive
Intensity • Technological
Turbulence
BUSINESS PERFORMANCE
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When a company is faced with a small set of powerful customers, it is advised
to adopt key-account-management. At the extreme, all employees are
organised within Autonomous Key-Account teams and take joint responsibility
on gathering intelligence of customer needs and the development and
implementation of customer driven programs (Figure 14).
These facts and the observation of how successful firms were organised
brought about the concept of ‘team organisation’ as early as the 1960s –
especially multi-functional teams – to create the right mix and increase the
performance of a entrepreneurial firm (see for example: Barczak and
Wilemon, 1989; Peters, 1988; Wheelwright and Clark, 1992; Clark and
Fujimoto, 1991; Galbraith, 1973).
Clark and Fujimoto (1991) identify the basic structure of four types of teams
used in the NPDD process (the authors summarises them in Table 2). Their
study took place in the automotive industry, but the basic idea applies to
industries in general (Figure 14).
Table 2. Team Structures
Team Structure Characteristics
Functional team structure
Functional organisation by disciplinary functions; Specialised function manager; Sequential mode of project running from one group to the other
Lightweight team structure
Functional organisation with one representative on a project co-ordinating committee; Lightweight project manager to co-ordinate the activities of different functions; No power to project manager on resources and people’s tasks
Heavyweight team structure
Usually senior managers or function managers act as project managers with direct access and control of resources and people; Dedication of the core people from each function to the project; Relocation of people around the heavyweight manager
Autonomous team structure
‘Tiger teams’; Dedicated people assigned from each function and co-located to complete the project; Heavyweight manager; Each team has its own rules, structure, project evaluation criteria and decision making responsibility
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Figure 14. Types of Team Organisation. Source: Hayes et al., 1988 p320 (with modifications)
In many cases, companies implement combinations of customer centric or
functional specialised organisations. For example they can install key-account-
managers as equivalent to staff-organisation, who advices the otherwise
functionally specialised departments on customer-specific issues. Matrix-
organisations would provide almost equal powers of key account and
functional managers, that may result in conflicts.
This need of customer centric organisations require a overall consideration of a
firm’s structure. Burnes’ and Stalker’s (1961) research developed a basis for
studying the structure of an organisation. They described two idealistic types
of organisation:
• Mechanistic, which is hierarchical, prescribed and demanding of
obedience; and,
• Organic, which avoids precise job descriptions, seeks flexibility and
initiative and encourages commitment to the overall goals of the
organisation.
They suggest that when the environment of an organisation changes rapidly
and a high degree of innovation is required to follow the changes, the organic
type of structure is the better choice.
Henry Mintzberg (1995) identifies seven possible types of organisational
structure that fit between the above two and the author summarises them in
Table 3. Mintzberg (1995) points out that the above types of organisational
structure are idealistic and they do not represent any real organisation even
though some firms come remarkably close. However, most organisations seem
to reflect combinations, with the first five being the most common forms of
organisational structure.
Table 3. Types of Organisational Structure
Type of Organisation Characteristics
1. The Entrepreneurial Organisation
Few top managers; Informal organisation; Minimum or absent middle managers and support staff; Small start-ups; Dependence on few Individuals and their decisions; Limited available capital and human resources
2. The Machine Organisation Large hierarchy with many middle managers; Highly specialised and standardised jobs; Stability but slow response to rapid environmental changes
Independent entities with their own internal structure and loose central administration; Spread in market segments and product diversity; Often competition between the different entities
5. The Innovative Organic type; Market based project teams with
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Organisation (or Adhocracy Organisation)
highly trained and specialised experts; Decentralised decisions to project teams; No formal rules and standards; No central control
6. The Missionary Organisation
An ideology unifies the whole structure by a common aim; Shared values; Freedom of decision making as long as it is within the values of the firm; continuous improvement
7. The Political Organisation Temporary organisation structure, usually between changes from one type of strategy or structure to another; Conflicts are not solved but transferred to the future type of organisation
Several studies have shown that a ‘loose-tight’ structure is necessary for
successful management of innovation (see for example: Tushman and
Anderson, 1997). The ‘loose-tight’ structure, although it is based on the
adhocracy organisation (Mintzberg, 1995) which supports the decentralisation
of decision making, is built on cross functional integration and initiates some
bureaucracy to gain a degree of control that provides both the freedom to
create and the discipline to turn creativity into real innovation. Additionally, it
introduces multifunctional project-teams that are responsible for the
development of the new projects (Fairtlough, 1994). The structure inside the
organisation is clear to everybody and each employee knows his/her role and
responsibilities inside the group and the whole firm and so conflicts and
meaningless debates are avoided. In addition, the innovative firms have a
dominant ideology (culture) that is spread throughout the whole organisation;
is supported by the top management’s vision, and is based on the belief in
continuous improvement and continuous change according to the new
business environment (Schoonhoven and Jelinek, 1997).
Cross-functional integration changes the nature of the different functions and,
when and how they get the work done (Wheelwright and Clark, 1992). Figure
16 shows an example of the role of the functions in the development stage of
the NPDD process. The figure shows three of the major functions, engineering,
marketing and manufacturing, and their major activities. The key milestones
and decisions that should be taken as the development proceeds are set in
advance.
In contrast to the sequential type of process, where engineering will complete
its work before passing it to marketing or manufacturing in each activity, in
the integrated type of process, the different functions work together in order
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to achieve the milestones and take the required decisions. This affects the
timing of when each activity takes place and in effect could reduce the whole
development time (Wheelwright and Clark, 1992).
Cross-functional integration rests on tight linkages in communication between
individuals and groups working on related problems. The type of linkage
however, is a choice that a firm makes either consciously or unconsciously
(Clark and Fujimoto, 1991). The interaction between a project group that
executes an early task (upstream group) and the project group that continues
at a later stage (downstream group) is distinguished according to richness,
frequency, direction and timing.
Wheelwright and Clark (1992) illustrate the extreme levels from a sparse,
infrequent, one way and late pattern of communication, to a rich, frequent,
reciprocal and early pattern (Figure 15).
Figure 15. Dimensions of Communication Between Upstream and
Downstream Groups. Source: Wheelwright and Clark, 1992 p177
Richness of Media
Frequency
Direction
Timing
Dimensions of Communication Range of Choice
Sparse: documents, computer network
Low: one-shot, batch
Late: completed work, ends the process
One-way: monologue
Rich: face-to-face,
models
High: piece-by-piece,
on-line, intensive
Early: preliminary, begins the process
Two-way: dialogue
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Functional Activities
Phases of Development
Concept Development
Product Planning Detailed Design and Development Commercial Preparation
Choose components and interact with suppliers; build early systems prototypes; define product architecture
Do detail design of product and interact with process; build full-scale prototypes; conduct prototype testing
Refine details of product design; participate in building second-phase prototypes
Evaluate and test pilot units; solve problems
Evaluate field experience with product
Marketing
Provide market-based input; propose and investigate product concepts
Define targets customer’s parameters; develop estimates of sales and margins; conduct early interaction with customers
Conduct customer tests of prototypes; participate in prototyping evaluation
Conduct second-phase customer tests; evaluate prototypes; plan marketing rollouts; establish distribution plan
Prepare for market rollout; train sales force and field service personnel; prepare order entry/process system
Fill distribution channels; sell and promote; interact with key customers
Manufacturing Propose and investigate process concepts
Develop cost estimates; define process architecture; conduct process simulation; validate suppliers
Do detailed design of process; design and develop tooling and equipment; participate in building full-scale prototypes
Test and try out tooling and equipment; built second-phase prototypes; install equipment and bring up new procedures
Build pilot units in commercial process; refine process based on pilot experience; train personnel and verify supply channel
Ramp up plant to volume targets; meet targets for quality, yield and cost.
Figure 16. Activities under Cross-Functional Integration. Source: Wheelwright and Clark, 1992 p173
• Concept for product and process defined
• Establish product and process architecture • Define program parameters
• Build and test complete prototype • Verify product design
• Build and refine 2nd phase prototype • Verify process tools and design
• Product pilot units • Operate and test complete commercial system
• Ramp up to volume production • Meet initial commercial objectives
CONCEPT APROVAL
PROGRAM
APROVAL
DETAILED
DESIGN APROVAL
JOINT
PRODUCT
AND
PROCESS
APROVAL
APROVAL
FOR FIRST
COMMERCIAL
SALES
FULL
COMMERCIAL
APROVAL
Key Milestones
Key Decisions
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2.2.4 Marketing Control
The marketing management controls the implementation process on the basis
of its objectives and management needs indicators that are able to show if the
company is on the right track. From a business perspective the crucial
indicator of marketing performance is customer equity. Customer equity is the
net present value of all future cash-flows of the firm generated with its total
customer base (Rust et al. 1995)
The core figure of marketing performance is customer equity. From a financial
perspective, customer specific cash-flow is one core variable. However, many
marketing objectives might be of a non-financial nature like customer
satisfaction, market share or brand value. The marketing controlling process is
built around a set of key indicators that signify performance of marketing
programs. In the controlling process, management evaluates if marketing is
on track and explores corrective measures as needed.
Figure 17. The marketing control process
Marketing Objectives
Performance
Standards
Compare results
against standards
Corrections and
alterations
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While the ultimate goal of marketing is rooted in customer equity, this is not
easy to operationalize. Depending on the outcome of customer intelligence,
market research or customer satisfaction, other marketing goals become more
important and need other controlling measures. For example, the customer
value of a new transmission system for mobile-telecommunications increases
exponentially with the communication options. Thus, in the early stage of the
product life-cycle, reaching a dominant market share is a precondition for an
eventual generation of cash-flows.
Table 4. Marketing objectives and control indicators (Examples)
Marketing objective Control indicator
Establish Market Standard Market Share
Increase Brand Awareness Brand Recall
Increase overall customer profitability Average cash-flow per customer
Customer satisfaction with services Service Quality
These indicators are useful to identify if performance is in line with the
strategy and to what extent programs or their implementation need to be
adapted (Figure 17).
2.3 Marketing Instruments
As all other activities of a company, the marketing instruments are exposed to
‘marketing myopia’ in the sense that even well-intended marketing planning
potentially falls short of capturing the customer dimension of marketing
activities. A helpful reminder is to realise that all instruments relate to a
meaningful customer dimension (Table 5).
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Table 5. Marketing Instruments vs. Customer Perception
4 Ps
Source: www.learnmarketing.net
4 Cs
Source: grey-matter.org
Product
How will you design, package and add value to the product. When an organisation introduces a product into a market they must ask themselves a number of questions.
1. Who is the product aimed at? 2. What benefit will customers
expect? 3. How does the firm plan
to position the product within the market?
4. What differential advantage will the product offer over their competitors?
Customer Solution/Value
You can't develop products and then try to sell them to a mass market. You have to study consumer wants and needs and then attract consumers one by one with something each one wants.
Price
What pricing strategy is appropriate to use. Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a turnover for the organisation. The remaining 3p’s are the variable cost for the organisation.
Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean a loss of sales for the organisation. Pricing should take into account the following factors:
1. Fixed and variable costs.
2. Competition
3. Company objectives
4. Proposed positioning strategies.
5. Target group and willingness to
pay.
At the end of the day you should ask: What my customer is prepared to pay?
Customer Cost to satisfy
You have to realise that price - what you sell the product for - is only one part of the cost to satisfy. If you sell meals, for example, you have to consider the cost of driving to your restaurant - what if you provided a delivery service? Pricing is one of the most difficult decisions to make - selling at the lowest price is not always the best option. If you rely strictly on price to compete you are more vulnerable to competition.
Place
Where will the firm locate? This refers to how an organisation will distribute the product or service they are offering to the
Convenience to buy
You must think of convenience to buy instead of place. You have to know how each subset of the market prefers to buy
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end user at the right place at the right time.
Two types of channel of distribution methods are available. Indirect distribution involves distributing your product by the use of an intermediary for example a manufacturer selling to a wholesaler and then on to the retailer.. Direct distribution involves distributing direct from a manufacturer to the consumer
Common distribution strategies are:
1. Intensive distribution: Used commonly to distribute low priced or impulse purchase products e.g. chocolates, soft drinks.
2. Exclusive distribution: Involves limiting distribution to a single outlet. The product is usually highly priced, and requires the intermediary to place much detail in its sell.
3. Selective Distribution: A small number of retail outlets are chosen to distribute the product. Selective distribution is common with products such as computers, televisions household appliances, where consumers are willing to shop around and where manufacturers want a large geographical spread.
- on the Internet, from a catalogue, on the phone, using credit cards, etc. Amazon Books and Dell Computers are just a few businesses who do very well over the Internet.
Promotion
How will the firm promote its product? A successful product or service means nothing unless the benefit of such a service can be communicated clearly to the target market.
Communication
You have to consider communication instead of promotion. Promotion is manipulative - it’s a statement from the seller. Communication requires a give and take between the buyer and seller - This is much more subtle. Be creative and you can make any advertising "interactive". Use phone numbers, your web site address, etc. to help here. And listen to your customers when they are "with" you.
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2.3.1 Product – Customer Solution
The differences that make one product succeed and another fail have been
studied in several surveys, which targeted different industries and countries as
early as the 1970s (see for example: Rothwell et al., 1974; Rothwell, 1992;
Calatone and Cooper, 1979; Cooper, 1980; Maidique and Zirger, 1984; Link,
1987; Booz-Allen and Hamilton, 1982). Most of these studies turn the
attention of the industrialists to the study of market needs and customer
wants, as well as the importance of offering a unique benefit to the customer.
In Cooper’s survey 203 projects that were launched on the market from 125
industries and either succeeded or failed, have been studied. Eight key factors
that separate success from failure were identified and listed in order of
importance (Cooper, 1999):
1. A superior product that delivered unique benefits to the user and was
innovative.
2. A well-defined and justified product prior to the development
phase.
3. High quality of execution of technological activities.
4. Strong technological synergy between the technological strategy of
the firm, its technology competencies and its production resources and
skills.
5. High quality of execution of predevelopment activities.
6. Strong marketing synergy between the needs of the project and the
firm’s sales force and distribution system, its advertising resources and
skills, its marketing research and its customer service capabilities.
7. High quality of execution of marketing activities.
8. Market attractiveness determined by the size and growth rate.
Two more factors, the competitive situation and the top management support,
although they were originally believed to be important were found to make
little difference between success and failure. The message was that top
management often supports the wrong projects and that products that offer
high value and unique benefits to the customer are not significantly affected
by competition. The creative factory model uses the above list of success
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factors to identify how close the new products that a firm develops come to
these requirements and thus what are their prospects of success.
The unique benefits that a new product may offer to customers, which is the
most important factor of success, may be eliminated because, during the
months or years that are required to develop a product and launch it on the
market, the customers and their needs may change or a rival product may
appear providing these benefits (Stalk and Hout, 1990). Several suggestions,
which have been presented in the literature, can be used in the whole NPDD
process in order to reduce the development time. A summary of them is
presented in Table 6.
Table 6. Actions to be taken in order to Accelerate the NPDD Process
Suggested Actions Characteristic Literature
� Do it right the first time Cooper, 1993; Cooper, 1999
� Homework and definition, or in
other words, control the ‘fuzzy front
end’ of the design process
Smith and Reinertsen, 1997
� Build in the voice of the customer
as early in the process as possible
Patterson, 1993; Smith and Reinertsen,
1997
� Organise around a multifunctional
team with empowerment and
parallel processing of different
stages
Stalk and Hout, 1990; Patterson, 1993;
Cooper, 1999; Wheelwright and Clark,
1992
� Prioritise and focus to the most
important projects
Cooper, 1993; Cooper, 1999
The product, from a firm’s perspective, is the core offering providing the key
benefits sought after by the customer. From a customer perspective, on the
other hand, it provides a solution. In early stages of industrial societies
products used to be almost exclusively standardised material goods, mass
produced and delivered to consumers. In developed societies, customers have
become more demanding and companies have to offer more in order to
capture demand. This has given rise to the mandate for services. In reality,
almost every good is offered with a sort of guarantee, return policy,
maintenance offerings, which are in fact services.
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Services however, have become a category of offerings on their own, with a
share of 60-80% of the total value of the gross domestic product in developed
economies. More sophisticated needs though are hardly addressed with the
delivery of a material good or a simple service. Food can be delivered as a
standardised mass product to be processed in the microwave or as part of a
unique experience in a three Michelin stars restaurant (Chesbrough 2011). As
a tendency contemporary offerings need to be goods-service bundle
propositions to fulfil a customer need.
Figure 18. Product Strategy and Marketing-Mix Source: Kotler and Armstrong, p.234
A useful way to identify and design valuable goods-service bundle
propositions, is to think in three different levels:
• The core benefit: this can be a pure tangible good, like chocolate bar,
cereal or sugar, or a pure service like consultancy report or music
event.
• The actual product: The more goods and services have been
commoditized, the more companies try to attract customers with
additional features and services. For example, the camcorder of Sony
Augmented Product
Warranty
After sale
service
Installation
Delivery
Actual Product
Brand name
Quality level
Design
Features
Packaging
Core
benefit
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comprises a brand name, styling, features and components, packaging
and other attributes that makes it a coherent offering.
• The augmented product: In order to attract customers, Sony might
even offer additional services to its camcorders, like a warranty,
financing, delivery and after-sales service.
• The rise of services is partly caused by the increased interactivity of
modern business life. As businesses try harder to cater to customer’s
needs they are more eager to enter a dialogue and give customers a
say in the value creation process.
Industrial goods are more and more becoming platforms for service-delivery.
For example, if you enter an airplane these days, chances are high that the
airline does not own the airplane engine you are flying with. Engine
manufacturers like Rolls-Royce have introduced “power-by-the-hour”
offerings, where they remain owners of the engine and only earn revenues on
the hours the airplane is effectively in operation. This provides an incentive for
Rolls-Royce to excel in maintenance services, with real-time monitoring of the
engine performance and eventual contingencies like bird crashes. What used
to be a goods-business has been transformed into service business (Wirtz and
Ehret, 2009).
A crucial element of an offering is the brand. The brand refers to the customer
perception of a product/service. The purpose of product policy is to occupy the
centre-stage of the ‘evoked-set’ of a customer when looking for a solution.
Brands contain crucial information for customers, like price or quality range,
personality and relation to a social status or brand community. A good brand
has the following qualities (Crane, 2010):
1. Effectively communicates the distinctive value you wish to offer the
customer;
2. Is ‘relevant’ to the customer;
3. ‘Resonates’ with the customer;
4. Reinforces the company’s intended positioning in the marketplace;
5. Is consistent and unifying;
6. Serves as an umbrella for current/future brands in the company’s
portfolio;
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7. Allows for the building of strong brand equity (i.e. the value added to
the product by the brand);
8. Enables you to command premium pricing;
9. Is easily understood by your customers and your employees;
10.Can be sustained over time.
Figure 19. The Brand Prism Source: Kapferer, 1997
Building brand equity is not automatic. A firms should consider the offering as
a personality further to its physical aspects (Kapferer, 1997), crafting the
brand prism (Figure 19):
• Physique: The key physical qualities, product and brand attributes that
make the brand recognisable;
• Personality: The way in which the brand speaks of its products. The
kind of person it would be if it were human;
• Culture: A brand has its own set of values;
• Relationship: A brand is often at the heart of transactions and
exchanges between people;
Relationship
Culture
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• Reflection: The desired image of the brand user, the consumer’s
outward mirror;
• Self-image: The consumer’s internal mirror, how people see
themselves when consuming the brand.
Forging a strong emotional connection between the brand and the consumer
can lead to brand differentiation, strong customer loyalty and evangelical
promotion of the brand.
2.3.2 Price – Customer Cost
From the firm’s perspective price is the key-determinant of the firm’s
revenues. From the customer perspective it has a direct effect on the
customer’s cots. The price effectively determines the value created is shared
between customer and company.
A crucial determinant of the price is the positioning strategy. For example a
high price is an important element of the credibility of luxury brands, whereas
cost leaders need to support their credibility with low-band prices.
Prices are also a competitive weapon. Cost leaders can raise barriers of market
entry by setting low prices. By the same token, high prices may enable re-
investments in augmenting offerings strengthening the company’s competitive
position. In addition, prices are affected by additional factors like taxes or
third-party service charges.
In the long run, the cost of a firm’s operations are the low boundary to
determine prices – as permanently loss-making companies are likely to go out
of business. Therefore, the simplest approach to pricing strategy is cost-plus
pricing. It rests on the projection and calculation of costs that identifies the
lower limit of the price-band. Managers set a mark-up for example reflecting
the minimal internal interest on company capital in order to arrive at the final
price.
This method has two major drawbacks:
• It may deter effective demand of customers with a lower willingness-to-
pay and price the company out of the market;
• A company might miss on profit potential when the willingness to pay is
higher than the actual cost-plus-price.
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The alternative is to apply value-based pricing. In this case, customer-
perceived value marks the upper limit of any price customers might
reasonably accept, as otherwise they are losing by trading with the company
(Figure 20). Therefore, the question is what the customer is prepared to pay
for the offering. Under this perspective the firm should adopt its operations to
deliver the product/services efficiently in order to achieve an adequate profit
margin.
Figure 20. Pricing approaches Source: Kotler and Armstrong, 2004, p. 322
Hence, the pricing strategy should consider both sides – internal and external
– in parallel (Figure 21).
Figure 21. Pricing decisions Source: Kotler and Armstrong, 2004, p. 309
Internal Factors
•Marketing Objectives
•Marketing mix strategy
•Costs
•Organisational
considerations
External Factors
•Nature of the market
and demand
•Competition
•Other environmental
factors (economy,
resellers, government)
Cost-plus pricing
Value based pricing
Pricing Decisions
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2.3.3 Place – Customer Convenience
The evolution of marketing channels is one of the signature developments of
the marketing system. Marketing intermediaries play an important role in
orchestrating supply and demand in a market system. One of the key-role of
intermediaries, like wholesalers or retailers, is to transform supplier
assortments into those wanted by buyers.
Marketing channel providers perform many additional crucial services that add
value (Kotler and Armstrong, p. 364):
• Information: Gathering and distributing marketing research and
intelligence information about actors and forces in the marketing
environment needed for planning and aiding exchange.
• Promotion: Developing and spreading persuasive communications about
an offer.
• Contact: Finding and communicating with prospective buyers.
• Matching: Shaping and fitting the offer to the buyer’s needs, including
activities such as manufacturing, grading, assembling and packaging.
• Negotiation: Reaching an agreement on price and other terms of the
offer so that ownership or possession can be transferred.
• Physical distribution: transporting and storing goods.
• Financing: Acquiring and using funds to cover the costs of the channel
operations.
• Risk taking: Assuming the risks of carrying out the channel operations.
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Figure 22. Multichannel distribution system Source: Kotler and Armstrong (2004), p. 369
Crucial decisions of channel design are to identify who is in the best position to
perform these activities and which channels are most appropriate for each
customer type – convenience from the customer’s perspective.
Table 7. Key intermediaries or channel members
Channel members/
Intermediaries
Characteristics
Agent Intermediary or channel member who markets a product/service for a fee. Sometimes called manufacturer’s agents or selling agents depending on the industry
Broker Intermediary or channel member who brings buyers and sellers together to negotiate purchases. Does not take title to or possession of products and has limited authority regarding prices and terms of sales. Often used on a onetime or as-needed basis.
Dealer Not a precise term; can mean the same as a distributor, wholesaler, or retailer.
Distributor Usually used to describe an intermediary or channel member who performs a variety of distribution functions, including maintaining inventory, marketing, etc.
Wholesaler Intermediary or channel member who sells to other
Producer
Direct to
Concumer
Consumer
segment 1
Retailers
Consumer
segment 2
Distributors
Dealers
Business
segment 1
Direct to
Business
Business
segment 2
Sales
Force Catalogues,
telephone,
Internet
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intermediaries or channel members, usually retailers. Takes possession of products and then markets them. Common in consumer markets.
Retailer An intermediary or channel member that sells directly to customers, ultimate consumers and business customers.
Source: Crane, 2010
The different routes to your target customer should consider the following:
1. Effectiveness. How well does the channel strategy meet customer’s
needs/requirements?
2. Market coverage. Can the customer find and appreciate the value of
your venture’s offerings?
3. Cost-efficiency/profitability. Can the venture gain access to customers in
a cost-efficient way and achieve profitability?
4. Adaptability. Can the channel handle new product/services and
incorporate emergent channel forms?
2.3.4 Promotion – Customer Communication
The customer perception is the crucial determinant of the value of the
company’s marketing offering. Thus, any good intentions of managers in
offering, pricing delivering are lost, if customers do not perceive them
favourably. Marketing managers try to address this by conveying consistent
marketing messages.
Marketing communications employs a set of tools, like (Kotler and Armstrong,
p. 427):
• Advertising: any paid form of non-personal presentation and promotion
of ideas, goods or services by an identified sponsor.
• Sales promotion: Short-term incentives to encourage purchase or sale
of a product or service.
• Public relations: Building good relations with the company’s various
communities and stakeholders, by obtaining favourable publicity,
building up a good corporate image, and handling or heading off
unfavourable rumours, stories and events.
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• Personal selling: Personal presentation by the firm’s sales force for the
purpose of making sales and building customer relationships.
• Direct marketing: Direct communication with carefully targeted
individual consumers to both obtain an immediate response and
cultivate lasting customer relationships – the use of telephone, mail,
fax, e-mail, the Internet, and other tools to communicate directly with
specific consumers.
A crucial development of today’s marketing system is that communication
channels have been multiplying. In addition to the already complex system of
mass media like radio, television, newspaper or magazines, a myriad of
channels evolved like data-base-mailings, telemarketing, e-mails or the use of
virtual social networks. Thus a key challenge for marketing managers is to
select and orchestrate communication channels in line with the desired market
positioning. This has resonated in the rise of Integrated Marketing
Communications.
Figure 23. Communication process Source: Kotler and Armstrong (2004), p. 431
The Laswell-formula (Figure 24) describes the communication process from a
mass-media perspective: Who says what in which channel to whom with
what effect?
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Figure 24. The Laswell communication formula
According to this model, key activities of integrated marketing
communications are:
• Creating the message: At the core of the message is its content, related
to the core benefits of an offering or the desired market position of a
marketer. It conveys a rhetoric structure, for example providing a
question for the audience. Not least, the message is delivered in a
format of texts, pictures, graphical design, audio or video that provides
an aesthetic appeal.
• Communication channels: Crucial criteria for channel choice are their
costs and their specific capabilities. Personal selling is a comparatively
high-cost channel predominantly used for key accounts, while mass-
media allow to spread budgets over big audiences.
• Feedback: Marketers must collect feedback and research effect of its
communication on audiences. Ideally marketers would like to know the
effect of a campaign on actual sales. However, as many other factors
like logistics performance, weather or budgeting affect actual sales,
they might use qualitative measures of communication indicators like
brand perception, attitudes or images.
2.4 The Marketing Plan
The marketing plan specifies the marketing strategy and action plan of a
company. It is part of the strategic planning process. It is built upon a review
of the current marketing situation and an estimation of current opportunities
Who?
Communicator
Control Research
Says what?
Message
Content Research
In which channel?
Channel
Medium Research
To whom?
Receiver
Audience Research
With what effect?
Effect
Effects Research
The Laswell formula
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and threats. It expresses the marketing strategy the company aims to pursue
over the mid-range future. It provides a clear action plan, that translates the
strategy into actionable program, like the design of the marketing instruments
or investments into customer relationships. It specifies responsibilities and the
budget allocated for the implementation of the marketing activities.
The most critical questions the marketing plan must address are (Crane,
2010):
1. Is there a viable marketing opportunity?
2. Is there something unique and different about the opportunity that
differentiates the venture from the competitors?
3. Is there a well-defined target market that has expressed an interest in
what you intend to market?
4. Are the revenue/sales and expenses realistic, and is there a healthy
profit picture?
5. Is there a management team with the capabilities and experience to
execute the plan?
6. Does the plan show how those investing in the venture will get their
money back and make a return on their investment?
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Table 8. Contents of a Marketing Plan
Section Purpose
Executive Summary
Presents a brief summary of the main goals and recommendations of the plan for management review, helping top management to find the plan's major points quickly
Current Marketing Situation
Describes the target market and the company's situation in it, including information about the market, product performance, competition and distribution. The section includes:
• A market description that defines the market and its major segments, then reviews customer needs and factors in the marketing environment that may affect customer purchasing.
• A product review, that shows sales, prices, and gross margins of the major products in the product line.
• A reassessed view of competition, which identifies major competitors and assesses their market positions and strategies for product quality, pricing, distribution and promotion.
A review of distribution, which evaluates recent sales trends and other developments in major distribution channels.
Threats and Opportunities Analysis
Assesses major threats and opportunities the product might face.
Action Programs Spells out how marketing strategies will be turned into specific action programs that answer the following questions: What will be done? When will it be done? Where will it be done? How much will it cost?
Marketing Budget/Financials
Details a supporting marketing budget that is essentially a projected profit-and-loss-statement. It shows expected revenues and expected costs.
Marketing team Who is responsible for doing it?
Evaluation and Controls
Outlines the controls that will be used to monitor progress and allow higher management to review implementation results and spot products that are meeting their goals.
Source Kotler and Armstrong (2004), p. 52
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3 Innovation-Marketing Challenge
The task for marketing is to ensure the market orientation of a company, to
strengthen the position of its businesses in product markets and to apply
effective programs for the creation of revenues. So, marketing appears like
the first point of call to ensure the market performance of an innovation. But
the relationship between innovation and marketing is more complex than
initial intuition suggests.
Innovation is concerned with new ideas, concepts or technologies with the
potential to enhance value creation. In market economies all value is derived
from the customers perception. On that grounds, meeting customer
requirements is an imperative for effective innovation activities. In this
perspective, marketing has the role to amplify the voice of the customer in
order to direct effective innovation activities.
Furthermore, a common experience is that even valuable technology does not
sell itself. Since the start of the 19th century companies have started to
systematically drive innovation processes by investing in Research &
Development (R&D).
Take the example of Xerox, that first developed and commercialized the
photo-copy machine (Chesbrough and Rosenbloom, 2002). The photocopy
machine held substantial advantages over the then dominant wet photography
or low quality dry-thermal processes. From a business perspective, it had a
main disadvantage compared to established technologies: it imposed a
substantial higher upfront-investment on companies who want to use it
compared to established copy techniques used .
The path-breaking solution conceived by Xerox was to install the machines at
offices free of charge and earn revenues exclusively based on copies made by
office workers. This took the initial risk from customers. It also directed
subsequent product development by Xerox into improved usability and
efficiency of copying, as higher copy volumes directly translated into additional
revenues (Chesbrough and Rosenbloom, 2002).
The case of Xerox highlights a core challenge for technology-based innovation
management: technological potential needs to be translated into a value
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proposition for potential customers and a profitable revenue stream for the
company. This is the function of a business model, that describes a value
proposition for the customer, a value capturing mechanism for the supplying
firms and a configuration of the organisational network (Amit and Zott, 2007,
Chesbrough, 2006).
Marketing plays a vital role in the design of effective business models.
Identifying value propositions and translating them into revenues, eventually
with the support of communication or distribution networks, seems like the
generic core of marketing activity. Not surprisingly, market driven activities
are key elements of every innovation strategies. Innovation managers are
embracing market-driven concepts like that of lead user innovation (Von
Hippel, 1986). However, under certain conditions, customer orientation can
stand in the way of innovation and market-based approaches may lead to
spectacular innovation failures.
In this chapter we will first explore the complex relationship between
marketing and innovation, use entrepreneurship theory to elucidate their
relation, and will introduce the concept of business models as an approach for
aligning marketing and innovation activities.
3.1 Disruptive innovation and marketing’s innovation failure
In market economies, the performance of an innovation is driven by its
customer perceived value. The imminent intuition is to start the innovation
process with customer valuation, analysis and market research. Counter to the
expectation, customer orientation can severely impede the effectiveness of
innovation programs of a company.
Clayton Christensen was one of the first researchers to identify customers as a
potential impediment of effective innovation management of a firm
(Christensen 1997; Christensen and Bower, 1996). Christensen identified this
phenomenon first when he studied the solid-state disk drive industry. In the
hard-disk-drive industry, every new product generation bread a new market
leader. Why where incumbents not successful introducing new product
generations? You would assume that they did under-invest in R&D, had
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incompetent product managers or were simply over-confident to rely on their
cash-cow products. However, all incumbents had technically feasible designs
of next product generations in their development pipeline. Their main problem
was to identify a sustainable customer base to make establish the business
case for their innovation. Being close to the market actually prevented leading
firms to thrive in innovation. Christensen named this phenomenon “the
tyranny of the served market” (Christensen, 1997).
As Christensen showed, this phenomenon prevails most likely under conditions
of disruptive innovation, where new product architectures emerge in initially
unattractive market niches. In the case of hard disks, the Personal Computer
fundamentally changed design parameters for hard disks. Catering to the then
dominant mainframe computer architecture, companies prioritized on storage
space and performance, but did not have to care for disk-size. In contrast,
disk-Suppliers for Personal Computers had to compromise on performance and
storage capacity simply in order to be able to fit disks into desktop computers.
The Personal Computer initially appeared as a negligible niche market.
However, the explosive growth of the PC market increased profits of the
innovators, allowing them to re-invest into R&D and subsequently enhance
performance to levels on former mainstream markets.
In the case of the hard-disk industry, listening to the customer prevented
leading suppliers to mainframe-computer manufacturer prevent from
allocating resources for keeping a foothold in the emerging PC market.
Eventually, start-up companies, often times founded by employees of the
leading firms, filled the gap. Innovators were able to enter the learning curve
and soon could offer hard-disks that beat the critical performance threshold of
mainframe-hard disks and thereby even break into the incumbent market.
This pattern of disruption can be found in many markets. Initially a new
technology underperforms on parameters that are crucial in the established
mainstream market, provides valuable in a seemingly negligible niche. The
niche develops unexpected growth potential. Scale economies in the growing
mass market generate profits that are re-invested in improved performance.
Eventually the innovation can beat established technologies in the mainstream
market. For example CD’s have replaced Floppy Disks, Flash-storage is
replacing CD’s.
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The mobile-phone market provides a recent intriguing example: Nokia used to
be the dominating company in terms of volumes and sales and for a long time
held a leading position in many segments as well as quality leadership for
many functions, for example mobile photography. Its strategy is based on a
wide range of affordable, high-quality products covering almost any market
segment, from simple user to advanced professional. Its emphasis was on the
design of handsets were it succeeded to integrate an ever growing range of
technical functionality, including USB-connections, FM radio and high-quality
cameras.
For a long time the smart-phone market appeared to be a small high-end
niche for technology-savvy and sophisticated business users. The entrance of
Apple re-defined the smartphone, by moving the focus from handset-features
to the user-interface. While Apple started to cater to the smartphone niche, it
improved usability by simplifying user interfaces, attracting software
developers eventually driving the growth of the application. The focus on
usability, intuitive design-interface as well as the omission of features in
favour of simplicity helped to transform the smartphone from a niche to a
mass-consumer product that now is re-defining the mobile phone industry.
Curiously, Apple can pocket-in more than 50% of the industry’s profits with
the tiny share of sales of around 2% (Figure 19). This follows the classic
pattern of disruption, where innovation starts in a seemingly negligible niche
that eventually transforms the mainstream market.
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Figure 25. Mobile phone market share and profit distribution over time
Disruptive innovations follow a common, general pattern (Figure 20):
• The market leaders have a broad range of innovation projects in the
pipeline but are forced to prioritize on innovations that appeal to their
present customers.
• Their pressure to serve their existing customer base forces incumbents
to move attention from emerging market niches, even in cases where
they perceive an emerging opportunity.
• New entrants focus on the niche and realise its growth potential. Fast
growing markets allow for re-investment and a fast running through the
learning curve.
• Ultimately, new entrants are able to provide performance that matches
the requirements of established markets. They are able to break into
the domain of existing market leaders and disrupt their existing
business.
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Figure 26. Disruptive vs. Sustaining innovations Source: Christensen et al, 2005
Thus companies need to understand if they operate under the condition of a
sustaining or a disruptive innovation. Sustaining innovations are rather
incremental and refer to the established pattern of demand. Under such
conditions, the existing customer base is a valuable source of ideas for product
improvements, additional features or small clever tweaks.
In the context of disruptive innovations, customer information can be
misleading. Most importantly, disruptive innovations cater to market niches
that are not representative for the mainstream market, like for example
personal computers or smart-phones in their nascent stages. Disruptive
innovations under-perform on many criteria that are highly valued in the
mainstream market. As a consequence, mainstream customers do perceive
disruptive innovations rather as a backward step.
Under the conditions of sustaining innovation, present customers are a
valuable source of intelligence. Ultimately the introduction of a new feature
needs to stand the test of the existing customer base. In disruptive innovation
though, future customers are substantially different from present customers of
an incumbent. Thus, the existing customer base can prove misleading under
conditions of disruptive innovation (Table 9). Therefore, firms should use their
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customers and at the same time be proactive and brave, disturbing their
beliefs and habits (Figure 27).
Table 9. Differences of Sustaining and Disruptive Innovations
Figure 27. Market pro-activeness and reactiveness Source: Sandberg, 2008
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3.2 The Marketing Process and Innovation – Insights from Entrepreneurship Theory
How can customers provide a dysfunctional role in the market environment?
How can companies lose track by following customer preferences?
Entrepreneurship theory of the Austrian School of Economics provides a viable
explanation of this curious phenomenon (Shane and Venkataraman, 2000;
Kirzner, 1973, 1997). Hayek (1945) and Von Mises (2006) argue, that the
main contribution of markets in society is to signal the present opportunity
costs of resources (Keizer, 1989). Opportunity costs reflect the next best
valued use of a resource (Rothbard, 2006). Thus, Austrian economists present
a picture of the market that differs fundamentally from the mainstream. In
mainstream economics the market price is the result of given preferences and
production conditions. Under certain conditions, a market clearing equilibrium
arises. In contrast, for Austrian economists, the market is an entrepreneurial
bargaining process, where entrepreneurs speculate about the highest valued
use of a resource (Shane and Venkataraman, 2000; Kirzner, 1997; Von Mises,
2007; Lachmann, 1956). More importantly, entrepreneurs bid for resources
with the expectation of future profit potential for example as part of an
innovation process (Lachmann, 1956). The market price of a resource
indicates what entrepreneurs have to offer to resource owners in order to
unlock resources from their present uses and use them for higher valued
business projects (Foss et al. 2007; Lewin, 1999; Lachmann, 1956).
Von Mises and Hayek argue that this entrepreneurial market process enables
societies to put resources to their highest valued use and enter growth paths
driving innovation and prosperity (Von Mises, 2007; Hayek, 1945; Keizer,
1989). Socialist calculation by a centralised bureaucracy is dysfunctional in
that regard, as it does not allow for entrepreneurial valuation of resources.
This explanation of market-based valuation bears a crucial implication for the
valuation of an innovation. Market prices indicate the valuation of resources in
their present uses, the value that any innovative use has to beat (Foss et al.,
2007; Von Mises, 2007; Lachmann, 1956). But it provides no valid information
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on the future value of resources, beyond the fact that a bidder shows an
expectation for a higher value potential.
As a managerial implication, real market prices are good indicators for the
present value of resources, but do not express future value of products.
Kirzner (1973 and 1997) highlights that entrepreneurs are systematically
challenging market conditions by spotting and exploiting opportunities that
buyers and sellers have missed (Shane and Venkataraman, 2000).
Entrepreneurs are agile actors who are eager to spot opportunities that others
missed and direct business ventures for their exploitation.
More importantly, levels of business opportunities can differ. The simplest
form of business opportunity is arbitrage, where some buyers are offering too
high prices, some sellers charging to low prices, so that entrepreneurs can
simply profit by buying low and selling dear. However, these low-hanging
fruits of “innovation” are easily competed away. Higher profit opportunities lie
in more complex forms of innovation, for example the integration of hitherto
disconnected markets, the implementation of new manufacturing methods or
the exploitation of valuable knowledge revealed by Research and Development
(R&D) activities.
Figure 28. The value of the firm during the innovation process
According to entrepreneurship theory, this is the essence of business – the
systematic attempt to identify, explore and exploit opportunities for higher
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valued use of resources (Shane and Venkataraman, 2000; Kirzner, 1973,
1997). In an early stage this is likely to be speculative in nature. If successful,
products of entrepreneurship will be higher valued than resources in their
present uses.
This has important implications for marketing in an innovative environment.
As part of the innovation process, the relevant question of marketing is related
to future potential for value creation and the valuation of future products. This
implies a pro-active market approach, directed towards future needs, latent
needs and unrealised potential. In contrast, once the potential of an
innovation has become apparent and well understood, marketing focus is on
exploitation of the known opportunities with a re-active approach (Sandberg,
2008).
3.3 The rise of business models as a response to the innovation challenge
Following the entrepreneurship theory and the Austrian School of Economics,
the major function of business organisation is the systematic exploration and
exploitation of business opportunities (Shane and Venkatarman, 2000).
In principle, there is no limitation of potential sources of business
opportunities. However, one result of the continuous quest for opportunities
has been the systematic investment by businesses into R&D (Box 1).
Industries like pharmaceuticals, chemical or electronics have thrived by
investing in the acquisition of new knowledge as a basis for new differentiated
products, that provide added value to customers and profits to companies
(Chesbrough, 2006, Arora et al. 2000). Pioneers of R&D-based businesses
have been enjoying differentiated positions and juicy profits from monopoly-
like positions – in cases of valid patents even legally protected.
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Figure 29. Development Funnel Model Source: Wheelwright and Clark, 1992 p124
Box 1. Traditional sources of New Ideas
New ideas for industrial research may be derived from the correct use of the
information available to a firm. The information and the sources for new
opportunities, theoretically, are available to any firm. Differences between
firms occur because of different levels of preparedness of the firm to interpret
this information (Wheelwright and Clark, 1992). Information may be available
from a firm’s internal or external sources. Tidd, et al. (1997), Cooper (1993)
and Himmelfarb (1992) identify several sources of information that are
summarised by the author in Table 10.
The search for new opportunities that appear in the marketplace is one more
source of product ideas. Robert (1995) and Afuah (1998) refer to several
indicators of opportunities that major innovative firms monitor in order to
identify them and transform them to new products. These sources are
summarised by the author in Table 11.
Screen 1 Screen 2
Ship
Phase One Product/Process idea
generation and concept development
Phase Two Detailing of proposed project bounds and required knowledge
Phase Three Rapid, focused
development projects of multiple types
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Table 10. Sources of Information for new Ideas
Source of Information Characteristics
Managers Entrepreneurs; Start-up firms
Customers Needs and Wants
Suppliers Own research; Co-operation
Production, Engineering & Quality
Departments
Problems; Bottlenecks; Quality
problems
Individual Inventors Inventions; Idea Brokers
Patents & Other Publications New Developments in the market
Rival Products Learn from the rival’s successes and
failures
Ideas held in an Idea Tank Old ideas; Matured markets and
technology
Outsiders Different sector; Converging
technologies
Table 11. Sources of Opportunities for new Ideas
Source of Opportunities Characteristics
Unexpected Successes Changing patterns of customer behaviour
Unexpected Failures End of life cycle; New Strategies are required
Unexpected External Events Social life of people, health, security or
environmental disasters
Process Weaknesses Bottlenecks; Production Process problems; Supply
Chain
Industry/Market Structure
Change
New Regulation/Standards
High-Growth Areas Gross Domestic Product or Population increases
Converging Technologies New technologies and markets
Demographic Change Income, age, education and mix
Perception Change New customer needs and wants; directions from
Advertisement
New Knowledge Research activity
Selection criteria have been proposed in order to standardise the process of
selecting an idea and proceed with its development (Cooper, 1993;
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Himmelfarb, 1992; Roussel et al., 1991):
� The unique benefit that the new product will offer to the
customers. The new features that the product will include, i.e. the value-
for-money, or the customer needs that have been identified and covered
by this product, should be clear and compared with the competition. This
element has been identified as the number one factor for the success of a
new product (see Section 4.2) and should be reflected in the evaluation
criteria.
� The fundamental fit of the idea with the strategy of the firm.
Additionally, the level of risk that a new idea involves should be compatible
with the risk policy of a firm.
� The feasibility of the ideas against the technical, marketing and
production capabilities of the firm. Shortage of capabilities that have not
been considered will become apparent during the development or the
production phases where capital and resources have already been spent
and wasted.
� Market attractiveness. The market target, market size and target price
need to be identified. This creates a framework for identifying the payback
period and whether the project is economically worthwhile for the firm’s
investment. This information will be tracked in more detail in the next
stages, but a first evaluation often identifies the non-feasible ideas.
� Legal, health, environmental and ethical standards. Potential changes
in legislation or even new technologies that emerge and may be dominant
at the time that the product will be launched on the market need to be
considered.
A low score on any of these criteria should be considered as a ‘kill’ sign for the
project. The easiest points of the NPDD process at which to kill a project are
the early stages of conceptualisation and design, where resources have not
yet been committed and people do not yet feel a strong ownership for the
particular project (Cooper, 1993). The ability of the firm to kill a project is
influenced by factors that attempt to overtake the firm’s official policy.
While R&D based business appeared as a comparatively sure bet on profit
opportunities, its blueprint process (Figure 29) is coming under pressure.
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Initially, businesses like IBM, Pfizer or Xerox, invested in laboratories, that
directed research with the aim to use finding for the development and
commercialisation of differentiated products.
One consequence of the profitability of R&D, was the attraction of imitators
and increased competition that now has been almost routinizing innovation
activity (Baumol, 2010, 2002). Upstream, competitive investment into R&D
raises the bar for valuable findings in R&D. A prominent example is the
struggle of the pharmaceutical industry to refill its research pipeline.
Downstream, the growing range and speed of innovation activities reduces the
time a company is able to recoup its R&D investments (Chesbrough, 2006).
Rising costs and pressure on revenues are forcing companies to open up their
innovation process. The imminent response is to broaden the revenue base for
exploiting the innovation and while drawing on a broader stream of ideas in
the exploitation phase (Figure 30).
Figure 30. Innovation based competition and the rise of open innovation
models Sources: Chesbrough 2006
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This acceleration of innovation based competition forces companies to re-think
their approach to organisation. Traditionally innovation theory regarded
organisation as devices for “creative destruction” (Schumpeter, 1934) and
therefore as the primary tool for an entrepreneur to implement an innovation
and exploit its value.
Rising costs and decreasing revenues enforce a response, increasing the share
of external sources of innovation. Collaboration with external suppliers,
inventors, universities and research labs shows the potential of decreasing
costs and leverage internal innovation activities. Companies in industries as
diverse as consumer goods (for example Procter & Gamble, Box 2) or
microprocessors (Intel, see Chesbrough, 2006) are using external
collaborators in order to drive down costs and increase performance of
innovation activities.
Figure 31. Open Innovation Process Source: adapted from Chesbrough, 2003
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Box 2. Procter & Gamble – connect and develop for improved innovation
performance
At the end of millennium, Procter&Gamble started to experience a familiar
pressure of “commoditization” of its product portfolio. Market power of
retailers like Wal-Mart drove down margins and forced redundancies. P&G
managers realized that simply innovating was not enough to match the
bargaining power residing in distribution channels. Its management came with
its “connect & develop” program as a result. At the heart was the aim to
attract a broad range of around 2000 external suppliers and 7000 inventing
partners for increasing the product and brand-portfolio. Collaborators were
established companies, like German chemical giant BASF, but also Italian pizza
bakers and individual inventors. This open innovation initiative led P&G back
on the path to profitability.
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Source: Houston and Bakkab, 2006
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Opening-up the organisation can also unlock potential on the revenue-side.
When a company struggles to develop its idea into a product or service, it
might support others that do not have the relevant knowledge and insights but
have the resources and capabilities to implement the innovation. Thus, instead
of selling products and services to consumers, companies can offer their
innovations to collaborating firms and recoup their innovation investments
through licenses or profits from joint ventures with partnering firms.
IBM has created an additional annual revenue of US$ 1bn simply by installing
a department that systematically filed IP and looked for ways to commercialise
ideas that laid idle in the firm and were not used for anything. Another
remarkable example is Qualcomm that succeeded using an IP-licensing for
establishing its CDMA standard for mobile-networks that proved extremely
profitable (Box 3).
Box 3. Qualcomm - using networks for speed and profits
Qualcomms core technology is around mobile signal transmission. When its
engineers invented a standard for digital mobile communication, management
realised that time is almost up, as the competing GSM standard was close to
worldwide market dominance. Initially Qualcomm built all elements of a
mobile-network, antennas, network computers and even handsets. However,
time pressure demanded that Qualcomm needed to find a quick way to the
market in order not to be driven out by competing mobile systems. The
response was to license out the technology to manufacturers of networks and
handsets. Open innovation helped not only Qualcomm to speed up its access
to markets like South Korea and the USA, but also rendered it into one of the
most profitable technology businesses with margins at around 30% and
revenues of US$ 7.5bn.
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Source: Mock, 2005
This opening up of the innovation has transformed the way technology
managers think about organisation. As a consequence, researchers and
managers are broadening their view from the focal organisation towards its
network of suppliers, distribution partners, inventors, partners and other
stakeholders. This open approach to organisation is behind the evolving
concept of the business models. Coming from a technology management
perspective Chesbrough and Rosenbloom define the function of a business
model as (Chesbrough and Rosenbloom, 2002, p. 533):
• to articulate the value proposition, i.e. the value created for users by
the offering based on the technology;
• to identify a market segment, i.e. the users to whom the technology is
useful and for what purpose, and specify the revenue generation
mechanism(s) for the firm;
• to define the structure of the value chain within the firm required to
create and distribute the offering, and determine the complementary
assets needed to support the firm’s position in this chain;
• to estimate the cost structure and profit potential of producing the
offering, given the value proposition and value chain structure chosen.
Business models are also a response to the increased options for connecting
different legally independent organisations, by the means of information
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technology and new types of contracts. Virtualisation enabled decoupling
information from physical activities, thereby enabling new connections
between activities, resources and management-governance (Zott and Amit,
2002). A crucial element of e-Business is the re-configuration of business
activities with the help of information infrastructure. In that regard, the
business model provided a conceptual focus that captured the re-configuration
of factor- and product markets with stakeholder activities, as reflected in Amit
and Zott’s definition:
“A business model depicts the content, structure, and governance of
transactions designed so as to create value through the exploitation of
business opportunities. This provided opportunities for new entrants. For
example online shops are able dis-intermediate stages in the physical
distribution network, by collecting orders online and use them to direct supply,
manufacturing and distribution operations” (Amit and Zott, 2001, p. 511).
Ultimately, e-business is just an indicator of an increased flexible approach to
organisation, with the aim to synchronize organisational structures with
emerging business opportunities. Ultimately, business models are at the heart
of strategies aiming to succeed with a focus on emerging potential for value
creation and furnished by a flexible approach to organisation (2010, p. 3):
“The business model is a structural template of how a focal firm transacts with
customers, partners, and vendors; that is, how it chooses to connect with
factor and product markets. It refers to the overall gestalt of these possibly
interlinked boundary-spanning transactions”.
Thus business models are a strategic response to the challenge to align
structures and strategies in innovation process.
Or in other words they are “the design of organisational structures to enact a
commercial opportunity” (George and Bock, 2011). Business models are
devices to navigate a company towards its most promising business
opportunities.
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3.4 Marketing and business models
Marketing seems a natural ally of business model thinking. Customer value is
its ultimate ratio, value chain thinking is at the heart of marketing-channel
design and pricing policy is related to the core question of value capturing by
the firm. However, experience of disruptive innovation show, that marketing
and business models can be out of synch. A first step to resolve this paradox
is to understand that business modelling and marketing refer to different
audience.
At the core of marketing is the positioning of the company’s offering on the
product markets (‘product’ understood here in the broader sense as demand
for goods, services and solutions). The focus of product market strategy is the
uniqueness of the firm’s offering, i.e. providing unique benefits, low costs or
serving needs of niche segments. The ultimate purpose of business modelling
is the same – provide the firm with a unique value proposition. While the
product market strategy however, focuses on the design of marketing
programs that in turn need to be implemented by the organisation, the
business model approach builds upon the orchestration of its activities within
the larger network of the firm (Table 12). In contrast a product market
strategy targets the position in the market.
Table 12. Business model vs. product market strategy
Business Model Product market strategy
Definition A structural template of how a focal firm transacts with customers, partners, and vendors. It captures the pattern of the firm’s boundary spanning connections with factor and product markets.
Pattern of managerial actions that explains how a firm achieves and maintains competitive advantage through positioning in product markets
Main questions addressed
• How to connect with factor and product markets
• Which parties to bring together to exploit a business opportunity, and
• how to link them to the focal firm to enable transactions (i.e., what exchange mechanisms to adopt?)
• What information or goods to exchange among the parties, and what resources and capabilities to deploy to enable
• How to control the transactions
• What positioning to adopt against rivals
• What kind of generic strategy to adopt (i.e. cost leadership and/or differentiation)?
• the exchanges? • When to enter the market? • What products to sell? • What customers to serve? • Which geographic markets to address?
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Source: Amit and Zott (2008), p. 5
Product marketing strategies are closely related to a phenomenon that Day
diagnosed as the “Marketing Capabilities Gap” (Day, 2011). Marketing is
experiencing the pressure of similar forces at work in technology management
and e-business. Marketers experience the rapidly explosive environment with
an exploding information overload, a fragmentation of markets, the
proliferation of micro-segments as well as an explosive growth of
communication and distribution channels (Day, 2011; Hagel et al. 2008).
This increasing complexity forces marketers rethink their role in organisations.
Micro-segments, fragmentation and marketing programs aiming at product
market position are becoming increasingly obsolete. A viable response points
towards the same direction as the evolution of business modelling towards
adaptive capabilities of the firm (Figure 32).
Figure 32. Implementing adaptive marketing capabilities Source: Day (2011), p. 191
between the parties, and what incentives to adopt for the parties?
Unit of analysis
Focal firm and its exchange partners Firm
Focus Externally oriented: focus on firm’s exchanges with others
Internally/externally oriented: focus on firm’s activities and actions in light of competition
In the strategic perspective, marketing needs to develop adaptive marketing
capabilities that support the company in its pursuit of creating open business
models (Day, 2011). Important elements are:
• Vigilant market learning: Elements are a strategic focus with a
perspective beyond the immediate. In that regards, managers need to
be more open, search for diverse inputs and foster wide-ranging
professional and social networks.
• Strategic foresight: This entails a longer time horizon and a more
flexible approach to strategy formulation.
• Adaptive market experimentation: This requires a culture of
exploration and experimentation. Important elements are supporting
employees with providing unstructured time for exploration activities,
support a culture of risk-taking, curiosity and exploration.
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4 Marketing in the Entrepreneurship Process
Marketing has a vital role to play in the entrepreneurship process. Ultimately,
the value of products offered on customer markets needs to exceed the value
of resources needed for their offering. So marketing looks like the first point of
call, when managers need an idea of customer valuation.
Why then incumbent firms failing so often to provide appropriate valuations of
innovations?
As Day (2011) points out, marketing is facing a capabilities gap in the face of
increased innovation based competition. The explosive dynamics and
complexity has undermined the viability of the strategic marketing planning
process. A crucial step for marketing is to embrace the increasing
interconnectivity of businesses channels and build capabilities and structures
that support the design of adaptive business models (Figure 33).
Figure 33. Marketing in an open network Source: Day, 2011, p. 190
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Figure 34. Marketing Roles in the innovation process
Furthermore, firms should identify the role of marketing and its distinctive
tasks in the different stages of the innovation process (Figure 34):
• Marketing in the exploration phase: The exploration phase is
concerned with new opportunities. Here marketing is concerned with
un-addressed needs of users, user-based value of an innovation as well
as perception of an innovation. A potential challenge of established
companies is that relevant users of an innovation are not necessarily its
present customers. A challenge of customer valuation and prioritization
is to identify customers or users with potential future value.
• Formulation of business models: The formulation of a business
model is a vital step to make an innovation strategy operational. A
business model aims to direct the introduction and capitalization of a
value proposition. Thus a business model comprises: the formulation of
a value proposition; the revenue-generation mechanism that a company
intends to apply; and, the definition of the relevant resources and the
value network needed for the realization.
• The exploitation phase: Here the role of marketing is focused on
generating the revenue stream. Communicating with prospective
customers, orchestrating the value network, i.e. the distribution
channel.
Marketing in the
Exploration Phase
•Identifying Sources of
Innvoation
•Connecting with Innovative
Users
•Building Value-in- Use Models
Marketing Strategy and
Business Model Design
•Define the Value Proposition
•Define the Revenue Generating
Mechanism
•Design Resource Base and
Value Network
Marketing in the
Exploitation Phase
•Understanding Diffusion of
Innovations
•Communication in the Diffusion
Process
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From the perspective of this model it becomes clear, why incumbents tend to
struggle with disruptive innovations. While almost every company is involved
in some sort of innovation process, incumbents are primarily focusing on the
exploitation phase of that process. They relate to their most profitable
customers and cater to their highest valued needs. When the most promising
future business ideas emerge in domains that are distant from the present
customer base of company, customer-centric approaches are likely to
disconnect the company from future markets. Therefore, the exploration
phase can rely only partly on existing market information. Thus, this phase is
dominated by the search of new dimensions of ‘Value-in-Use’ that are
currently not served by the current market supply.
A first observation is that marketers of established companies are rather
concerned with exploitation activities – realising sales of products and services
where both customers and companies have gained a good understanding of
their valuation. Once the ‘dominant design’ of a product category is
established, marketers can rely on macro-data to direct their market activities.
The position of the offering in the market place entails information for pricing,
indicators for segmentation like demographics have become apparent, efficient
channels have been identified and established. In such environments,
marketers can use a set of market indicators for the efficient management of
their activities. Furthermore, marketing is related to resource allocation. In
market based economies, companies need to allocate resources to generate
sales. This nurtures innovations that fit into the pattern of demand by present
customers.
In the nascent stages of an innovation, the situation is fundamentally
different. Radical innovations, that draw on new types of users, new
paradigms, usage patterns and different evaluation frameworks, present a
deviation from existing customer-company relationships. To start with, there is
no valid market information about customer valuation of the innovation. How
much the customers are willing to pay will be revealed in the market process.
Current market data might provide some benchmarks or orientation points for
innovations, but they provide no direct valuation. But innovators have an
alternative. Instead of relying on market data, they can rely on the value-in-
use of an innovation. A value-in-use analysis reveals the cost and benefit
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implications of an innovation for its users. Value-in-use expresses the value of
an innovation from the perspective of the user. All benefits of an innovation,
like improved quality, enabling of more efficient processes, ethical values or
social status, as well as user-cost reductions, are potential sources of value-in-
use.
4.1 Transforming Business Models to Marketing Strategy
From a business perspective the vital task of strategy is to translate
opportunities into actionable project that ultimately converts into profits. At
the core of the strategy stands the business model, where a company defines
its value proposition (the innovative offering), the mechanism for revenue
generation and the architecture of its value creation network.
As discussed in Section 3.3, the business model approach differs substantially
from product oriented marketing strategy. Product oriented strategy starts
with an analysis of the company, its specific strengths and weaknesses and
continues with its position within an industry in order to identify generic
strategies. Like product differentiation, cost leadership or the focus on a
profitable niche-segment.
Business model philosophy starts with the identification of the business
opportunity, and seeks the formulation of value propositions, revenue
mechanisms and the design of the value network.
The value proposition describes a value generating offering. The revenue
mechanism describes how the innovating company intends to recover its
investments in innovation. The design of the value network describes what
organization design the company implies for the exploitation of the
opportunity and how potential partner, complementors and suppliers are
involved in the exploitation of the innovation.
4.1.1 Defining the Value Proposition (Product Policy in an innovative
environment)
Business model thinking starts with the identification of an opportunity as
starting point for the definition of value propositions. While value propositions
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are the basis for the definitions of innovative products, they precede the
definition of innovative products or service offerings.
The starting point is a rather general idea, like a new technology, a more
efficient process or a new design. The crucial step towards a value proposition
is to identify the relevant customers for its markets. A successful innovation
should either offer more value for end-consumers or reduce the costs for value
creation. However, in a complex 'networked” economy, many individuals and
organizations are involved in the value creation process. Innovators need to
understand, how their invention is implemented in the value-stream from idea
creation towards the end-consumer. In many cases, the end-consumer is not
necessarily the crucial client, but firms within the value network. Take a look
at the case of Qualcomm, described in chapter 3.3. Qualcomm had developed
a potential valuable technology for digital mobile telecommunication.
Initially, Qualcomm produced all elements that are needed for such a network,
like the network infrastructure, antennas and the mobile phones. The crucial
decision for Qualcomm’s success was to refrain from offering the complete
system. Instead they exclusively rely on licensing the technology to company’s
producing telecommunication equipment or consumer handsets. Instead of
focusing on the consumer market, Qualcomm focused on the business market,
offering companies in the telecommunication business opportunities for
differentiation by digital mobile communication, or cost reductions in the
operation of a mobile communication network. This step provided the following
crucial advantages:
1. Time advantage: As licensor of its technology, Qualcomm did not need
to take heavy investments into transmission equipment, network
infrastructure or handset development. This time advantage helped its
CDMA standard to be considered as an alternative to the GSM status.
2. Differentiation advantage: As an engineering company, Qualcomm
lacked the crucial competencies for differentiation on consumer
markets, like product design, branding or the offering of value added
services. Offering its technology to handset-manufacturers provided
them with a valuable opportunity for the differentiation or their product
portfolio.
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3. Profitability: focusing on business rather than consumer markets helped
Qualcomm to leverage on complementary investments by industry
players. This translated into an extremely profitable business
proposition.
Identifying value propositions have substantial implications for eventual
product and service-design. In the case of Qualcomm, its first definition to
provide an integrated network for the network operator, required the design of
a systems architecture and the production of a wide set of at times complex
component. In contrast, as a licensor, Qualcomm has almost completely
refrained from product design. Handsets using Qualcomm standards get a the
computer processor that directs connection and communication.
In short, the crucial redefinition of the value proposition, was to substitute
consumers with equipment and handset manufacturers as the main
addressees of the value proposition.
Figure 35. Elements of a Value Proposition
Identification
of Value
Potential
Determining
key Addresses
of Value
Proposition
Implications
for Product
and Service
Design
Value Proposition
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Box 4.Better Place: Value propositions for electric cars
The electric car holds many promises, like reducing gas and noise emission,
enhancing driving comfort and performance. To date all these benefits come at
the trade-offs of short mileages per full battery charge and long recharging
times. Better Place develops a value proposition to deal with this problem:
Offering the switching of charged for empty batteries as a service.
Car drivers do not get the battery as part of the car, but just rent one fully
charged battery. As soon as they run out of power they drive to a battery
switch station and switch a battery for a fully charged one. While technically
the battery charging process takes intolerable time for long-range journeys,
switching batteries is only marginally different from gas-refuelling.
From a business perspective, value propositions need to be quantified for
designing and directing business projects. A starting point for quantifying the
value proposition is to identify the net value of its implementation, balancing
all benefits and costs and contrasting with the next best alternative in the
market. This is the basis for the following formula (see Anderson et al. 2006):
Vs-Ps>Va-Pa
Where Vs is the value of the supplier’s offering, Ps its price, Va the value of
the best alternative and Pa the price of the next best alternative.
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This simple formula gives the first insights that are useful for the
determination of value propositions. Basically it indicates that the net-value of
an innovation must exceed the net value of the next best alternative.
Two sources of value propositions strike at first sight:
• Innovators can arrive at a superior overall proposition by providing
higher value for the same price as the next best alternative. The crucial
information for these types of value proposition are insights from the
value-in-use study of users. All sorts of benefits are potential elements
of this value, for example: better performance, reduction of costs,
simpler operation, higher quality, higher level of reliability, increase of
revenues, enlarging of brand value or strengthening of reputation.
• Innovators can arrive at superior overall propositions by introducing
innovations that allow the provision of equal value at lower prices. This
type of innovations has gained ground by the rise of emerging
economies, that grow by ‘frugal innovations’ that are driven by lower
cost. Fast growing developing economies call for innovations that cater
to the bottom of the pyramid. There, the main challenge is not for
performance barriers, but to provide affordable solutions that work in
the context of underdeveloped infrastructures. One major success, for
example, of General Electrics was the development of a mobile cardio-
meter, that is mobile enough for physicians caring for huge rural areas
and affordable at the same time.
Furthermore the value proposition should look at the types of alternatives,
which may not confined to products and services available on the market, but
self-production and self-service of potential customers. For example
alternative value proposition may be gained not by offering a product or
service but by convincing the customer to ‘produce’ the product/service and
consume it directly. The firm on such cases gains by saving the operational
costs of delivering such products/services. Such examples are the internet
banking services, the ATM based services or the booking and self-check in
services by the airlines.
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4.1.2 Designing and quantifying revenue generation mechanisms
Even if a start-up company may incur losses over years with the support of
external investors, the ultimate business test of an innovation is if it can
recoup its investments. Thus, determined innovators need to care about
revenue generating mechanisms.
The challenge rises from the need to balance customer risk with the need of
the supplier for a basis for value capturing. In the pioneering days of Internet-
business, most business plans prioritised on maximising the user base of a
service, mostly by offering internet-services for free. While this most probably
drove the tremendous speed of Internet-adoption, still today profit-searching
companies try to use mobile-services where payment mechanisms are
established and accepted in favour of the free-wheeling web-culture.
From a customer perspective, innovation revenue is one substantial element of
the costs of innovation, in addition to costs related to implementation, the life-
cycle costs and effects on the cost structure of the users process.
Business models help to share risks between suppliers and customers. From a
business model perspective, products and services are alternative means for
exchange of value for revenues. Take the case of Rolls Royce Airplane
engines. Airlines can buy an aircraft, including its engine. In that case they are
responsible for all costs, recurring to maintenance and repairs over the life-
cycle of the airplane. Alternatively, Rolls-Royce offers maintenance and repair-
services for a service fee. In that case, Rolls-Royce takes responsibility for a
basic functionality of the airplane engine. The most extreme form is a
performance contract. In its “power-by-the-hour” contracts, Rolls-Royce is
only compensated for the hours the airplane is effectively in operation. This
makes Rolls-Royce effectively part of the flight operation, and incurs
substantial business risks of flight operations. From the perspective of the
airline, this shifts part of the risk of flight operation to the engine
manufacturer (See Wirtz and Ehret 2009; Ehret and Wirtz 2010).
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Figure 36. Business model and risk sharing
Box 5. Examples of funding mechanisms
Charge the customer in a palatable
way. The classic approach to funding
something of value is simply to have the
customer pay for it, but often it is
possible to make the form that payment
takes less objectionable to customers.
Rarely is that done with à la carte
pricing for the niceties. A large part of
Starbucks’s appeal is that a customer
can linger almost indefinitely in a
coffeehouse setting. It’s unthinkable
that Starbucks would place meters next
to its overstuffed chairs; a better way to
fund the atmosphere is to charge more
for the coffee. Commerce Bank is open
late and on weekends – earning it high
marks on extended hours – and it pays
for that service by giving a half
percentage point less in interest on
deposits. Could it fund the extra labor
hours by charging for evening and
weekend visits? Perhaps, but a slightly
lower interest rate is more palatable.
Management in any setting would do
well to creatively consider what feels
Have the customer do the work. One
other type of funding mechanism for
enhanced service puts the cost back in
the customer’s court, but in the form of
labor. Offering self-service, from pump-
your-own gas to self-managed
brokerage accounts, is a well-
established way to keep costs low. If
the goal is service excellence, though,
you must create a situation in which the
customer will prefer the do-it-yourself
capability over a readily available full-
service alternative. Airlines have
achieved this, at last, with flight check-
in kiosks, although the value proposition
they initially presented was dubious. At
first, passengers felt compelled to use
the relatively unappealing kiosks only
because carriers had allowed the lines in
front of manned desks to become
intolerable.
Today, however, frequent fliers prefer
the kiosks because they provide readier
access to useful tools like seat maps.
Businesses looking to achieve service
Supplier
Performance
based Business
Models (Supplier takes Risk)
Service based
Business Models
(Supplier and Customer share
Risks)
Customer
Product based
Business Models
(Customer takes Risks)
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fair to its customers. Often, the least
creative solution is to charge more for
the particular service feature you are
funding.
excellence in other settings should not
take such an indirect route. They should
set themselves the challenge of creating
self-service capabilities that customers
will welcome. Indeed, if a self-service
option is truly preferable, customers
should be willing to take on the work for
nothing or even pay for the privilege.
When managers designing self-service
solutions are not permitted to add the
inducement of price discounts, they are
forced to focus on improving the
customer experience.
Whatever funding mechanism is used to cover the costs of excellence, it is best
thought out as thoroughly as possible prior to the launch of a new service, rather than
amended in light of experience afterward. When a service that’s been perceived as
free suddenly has fees associated with it, customers tend to react with
disproportionate displeasure. And since companies cannot thrive by offering service
gratis, it is vital that they not set expectations that can’t be sustained. With careful
analysis and design, a company can offer and fund a better service experience than its
customers would enjoy elsewhere.
Source: Frei, 2008
The supplier challenge in revenue generation is mostly incurred into a
mechanism for capturing value of an innovation. This resides with the
challenge of entrepreneurial imitation (Kirzner, 1997). Profit indicates
opportunities and attracts imitators who want to capture a share of the pie,
including the customers using an innovation.
The core condition of an innovation is its appropriation regime, that is the way
a regime is protecting an innovator from imitation (Teece and Pisano, 2007).
According to Teece and Pisano (2007) strong appropriability regime is one
where the innovation is hard to imitate, either because of strong legal
protection, for example by patents, copyrights or trademarks, or, because a
technology is difficult to imitate. For example, standards of international
telecommunication are worldwide codified and enforced. This provides a strong
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appropriability regime for Qualcomm. In contrast, despite music distribution is
in theory partly protected by copyrights, it is hard to enforce in internet
services (Chesbrough, 2006). Thus, the music industry has started lately to
move into mobile platforms, like itunes; to alternative revenue streams
including subscription services like Spotify; or, the value capturing of live
events.
The case of live events is just one example of how services can provide strong
appropriation regimes. A crucial element of services is customer interaction.
To the extent that services entail specific elements for a customer, like
personal training, or to a group, like an event, they provide a strong
appropriation regime. Bhide (2008) goes as far to state, that complex services
provide developed economies with a strong competitive advantage over
emerging economies trying to compete by the means of imitative competition.
Many innovators combine customer risk and appropriation regimes when
designing their revenue stream mechanisms. Take the example of open
software, like the Linux operating system. This takes part of the customer risk,
as customers do not need to invest financially into the operating system.
However, open-source software providers use value added services in order to
re-coup software development costs. IBM backs up the Linux system with a
range of software patents for free use, and therefore can use a platform for
IT-services that is independent from competitors like Microsoft. IBM recoups
by the means of its service offerings (Chesbrough, 2006).
4.1.3 Design of the Resource base and Value network
A crucial question of a business is the definition of its scope. Management fads
of recent decades have approached this with “outsourcing” or “make-or-buy”
decisions. But in fact, every business needs an idea of what activities are part
of its operations and which are not. Thus, traditional manufacturers used to
“outsource” downstream activities to distribution channels. But decisions of
scope refer to insourcing as well. Take Nike for example, which has a
reputation for a low-level of vertical integration. While this is true in a general
sense, Nike controls activities on every stage of the value creation process.
Upstream, it holds firms that develop and manufacture special high-value
materials. Downstream it operates Nike town-shops, where its products are
presented in an exclusive appealing environment.
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The philosophy behind this is to orchestrate a value network, that converts
into a premium experience for the customer.
Companies play different roles within value networks. At the core, operation-
network-architects provide a core entrepreneurial vision for the network, own
the brand, signifying its identity, and are in the position of an orchestrator.
Famous network orchestrators are companies like Nike in sports, Apple in
electronics or big automotive companies like Toyota, Ford or Volkswagen.
Frequently these architects find themselves in favourable positions, as they
control access to the network, contribute the basic philosophy and govern the
critical rules of the network. This puts network architects in the position to
shape core activities, philosophy and rules and thereby also get a substantial
share of profits generated from innovation.
Complementing firms however, operate around the core, have opportunities
too. With such a network they find the infrastructure that may provide a fast
avenue for their innovations. Consider for example the Apple application store,
where Apple acts as the network architect for an ecosystem of small to
medium software engineering companies and mobile service providers. Apple
finds itself in a favourable position, enabling it to claim 30% of all revenues
generated on its app-store for videos, music, books and apps. But it can be
profitable for complementing firms too. Roxio for example, a small gaming
studio that used to make its living with programming jobs for big gaming
studios. The company was close to bankruptcy when it developed “Angry
birds” an addictive game that proved as the most popular application on the
Apple app-store. The Apple application store worked for Roxio as the fast lane
to success and a valuable alternative to other congested channels. Ultimately,
it saved the company and paved the wave for an astonishing growth story.
As a conclusion, value network design entails the following crucial steps:
• Based on the value proposition, the description of all critical
components and activities that are crucial for value delivering and
revenue generation.
• An account of organizations and persons who are capable to offer the
critical elements.
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• An analysis of the competencies, strengths and limitations of the
customer.
• Framework of risk-sharing in the value network, that allocates
entrepreneurial responsibilities in line with profit incentives and
customer value.
4.2 Marketing in the Exploration Phase
Where do innovations come from? In a market context, by definition they
might come from almost anywhere. An efficient market is built upon the free
flow of information about available products and services as well as their
prices. Thus innovation policies of companies have to target opportunities that
have not yet been reflected in market prices.
A prominent case is the consumer goods company Procter & Gamble that
found itself squeezed by powerful retailers. In the face of massive losses and
the prospect of redundancies the company decided to open up its innovation
process with its “connect and develop” initiative. The program initiated 2000
innovation projects with suppliers and other external companies. It proved a
massive success, re-strengthening the brand equity of Procter & Gamble and
reinforcing its clout in negotiating with retailers .
A lesson that many companies have learned through the recent decades is
that there are many more valuable sources of innovation further to the R&D
department. These can be suppliers working on improvements of components,
external Research organisations like university-labs, partnering companies or
customers.
Marketing plays a key role in this process, as customers are a potential viable
source of innovation and have the decisive say in the verdict over an
innovation.
One surprising outcome of innovation activities often is that users have
already developed the next successful innovation. Eric von Hippel (1988) first
spotted the phenomenon in the market for medical instruments. Leading
laboratories are actively tweaking, crafting and adapting their instruments.
Medical systems companies learned soon that these clients are a valuable
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source of innovation. In these cases the crucial step was to translate these
innovations into mass-market designs. The bulk of the R&D had already been
provided by the users.
For many reasons users are a valuable source of innovation. First, they are
perceiving challenges first hand. To the extent that they actively deal with
these challenges, often they are pioneers in that field. In many instances their
user-based-knowledge, which is an implicit type of knowledge that is not easy
to communicate, provides them with relevant expertise for developing an
innovative product or services.
Therefore, an important task of marketing in the exploration phase is to
connect with users and attract them as co-designers for a company. For
examples, Nike was successful by attracting a community of basketball-
players as co-designers of a basketball sneaker. The players were well aware
of major requirements, e.g. reducing pressure on knees and bones. This
awareness in combination with an advanced virtual design package enabled
them to transform implicit knowledge in a productive way.
In several cases however the user is not necessarily identical with the buyer.
For example, business companies have established large procurement
departments that direct the buying process. While they control the spending
budget, users may have a substantial influence through their valuation and
initiative in the buying process. Similarly on consumer markets, users are not
necessarily identical with buyers, e.g. toys for kids are often bought by their
parents. At any case in order for the users to play this crucial role in
innovation, or to press their procurement actors to such direction, is to
perceive the new offer as a considerable added value.
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Figure 37. User Base community: the case of Nike sneakers Source: Füller et al, 2007
4.3 Marketing in the Exploitation Phase
A crucial element of branding innovations is to communicate their value in use.
The most convincing position of a brand is when it is associated with a
valuable everyday activity, i.e. becoming a ‘verb’. Google as one of the most
valuable brands has reached that status, as ‘to Google’ is the equivalent word
for internet search, or in UK ‘to hoover’ is the equivalent of vacuum cleaning.
Many service companies have been successful in establishing purpose brands.
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In the US, office worker use to Xerox, if they need copies of documents, or to
Fedex, if they want to send them from coast to coast.
Figure 38. Purpose Brands vs. Endorser Brands Source: Christensen et al., 2005
Moreover for an innovation to raise to its full potential it is necessary to
capture a promising market position. At this point communicating the value
proposition and convincing customers is the crucial task. Demographic
segmentation, practiced in traditional marketing, is almost useless in that
regard. Innovation research reveals that users show specific behaviour
towards innovation. While innovative users are appreciating innovations for
the sake of newness, conservatives need to be coerced in order to accept new
products or services.
Rogers (1995) provided a series of studies on the diffusion of innovations. He
was able to identify significantly different innovation behaviour of users. He
claims that, users can be segmented along a normal distribution over time
(Figure 39).
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Figure 39. Adopter Categories within the Diffusion Process Source: Rogers, 1995
Depending on the variance of their time of adoption, he claims five categories
of adopters:
• Innovators are risk taking users, that experience benefits simply by
experimenting with new products and services. For them, tangible value
is not relevant. Simply trying out new things is part of their life driven
by curiosity and experimentation.
• Early adopters are rather innovation agents of a social systems. They
try to spot promising innovations and gain from acting as pioneers.
• The early majority are taking a rational approach towards innovation
and tend to adopt them as soon as it has proven its value propositions.
Often times they act as opinion leaders who influence more
conservative adopters.
• Around the average point of adoption are the late majority. They
represent moderate risk-taking or risk-aversion attitudes towards an
innovation.
• Laggards are conservatives who show a negative attitude towards
innovation. They will only adopt it when it has been proved risk free and
has become a commodity.
The major implication for innovating companies is to address and convince the
innovative segments of user, like the innovators, early adopters and early
majority. These are likely to take risk and work as multipliers in the course of
the innovation process. They are also valuable targets of “viral marketing”
strategies, that predominantly try to stimulate communication within the
market place, than overwhelming the market with advertising messages.
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Viral marketing is a rather recent marketing approach. It bases on the insight
that users demonstrate different adoption behaviour, from experimental
innovation, towards stubborn conservatism. In addition, users seek
experiences of peer users as a credible information about the benefits and
risks of an innovation. The core idea of viral marketing is to tap into the
communication process among users, rather than spreading messages to an
anonymous audience. Crucial elements of a viral marketing strategy are:
• Identification of the social network relevant for the adoption of an
innovation. For many product and service categories there are easily
identifiable self-organising user groups, like biker clubs for motor cycles,
user groups for software and games or self-help groups for specific
health topics.
• Identification of communication relationships and key influencers in the
network. At this point it is crucial to address the key influencers within
the network.
• Identification of viral instruments. Early attempts of viral strategies
where the automated or personalised recommendation systems, as the
one still used by amazon.com. More active strategies are blogs, where
innovation prone users generate content and initiate debate of
innovation. In consumer electronics, blogs like engadget or gizmodo
have recently become influential. A more active approach is to make the
product itself viral, by making it part of a communication network, as
part of virtual social networks like facebook. A crucial part is a network
presence including a “share” button. In categories like movies, adoption
rates could be boosted by the factor 400 (Zsolt et al. 2011).
To conclude, the diffusion of innovations is driven by communication among
users. Viral marketing strategies try to stimulate such communication
processes, by tapping into social networks and nurturing communication.
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Box 6. The 4 things a service business must get right
Diagnosing Service Design
The success or failure of a service business comes down to whether it gets four
things right or wrong – and whether it balances them effectively. Here are some
questions that will sharpen managers’ thinking along each dimension and help
companies gauge how well their service models are integrated.
1. The Offering • Which service attributes (convenience? friendliness?) does the firm target
for excellence? • Which ones does it compromise in order to achieve excellence in other
areas? • How do its service attributes match up with targeted customers’ priorities?
2. The Funding Mechanism • Are customers paying as palatably as possible? • Can operational benefits be reaped from service features? • Are there longer-term benefits to current service features? • Are customers happily choosing to perform work (without the lure of a
discount) or just trying to avoid more-miserable alternatives? 3. The Employee Management System
• What makes employees reasonably able to produce excellence? • What makes them reasonably motivated to produce excellence? • Have jobs been designed realistically, given employee selection, training,
and motivation challenges? 4. The Customer Management System
• Which customers are you incorporating into your operations? • What is their job design? • What have you done to ensure they have the skills to do the job? • What have you done to ensure they want to do the job? • How will you manage any gaps in their performance?
The Whole Service Model
Are the decisions you make in one dimension supported by those you’ve made in the
others?
Does the service model create long-term value for customers, employees, and
shareholders?
How well do extensions to your core business fit with your existing service model?
Are you trying to be all things to all people – or specific things to specific people?
Source: Frei, 2008
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5 Marketing Innovation Plan
The automobiles market is currently experiencing a boom of new
opportunities, like new power sources, materials and approaches to design.
Your task is, using the info from Appendix A and B, to set-up an exploration
project for spotting valuable ideas for innovating the automobile industry.
Provide an overview of potential sources of innovation. Develop an idea to
bring in the user perspective and design contributions to market that project!
Task 1. The New Offering
Try to identify and characterise customer types: innovators, early adopters
and laggards of the product.
Using the Marketing Instruments (section 2.3) identify your Value Offering
from your firm’s point of view and the customer’s point of view (4Ps/4Cs).
Task 2. Market/Offer Organisation
Briefly review of key concepts of marketing in innovative environments (Figure
34) with reference to the new offering.
Map out how you think your potential customer goes about making a potential
purchase decision for the product. What are the key internal influences (e.g.
motivation) and external influences (e.g. personal influences) that affect their
decision to buy?
Point out how you might be able to influence their decision with your
marketing programme.
Which are the implications into your business model, e.g. transactions with
customers, partners, and vendors.
Task 3. Market Exploration
Using the concept from the previous task, translate this into a value
proposition. Identify the most direct competitors and record the prices they
charge. Apply the value-proposition formula and explain and validate your
proposition (section 4.1).
Identify the revenue stream for your innovation.
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Design the value network for your innovation. Do you aim for the role of the
architect or of that of the complementor?
Task 4. Diffusion (communication)
Design a communication strategy (Messages, segments, channels) for the
introduction to the product in the market using the Laswell communication
formula (Figure 24).
Develop a purpose brand for the product.
Task 5. Strategic Implementation and Control
What are the most important tasks that you must complete to exploit this
opportunity?
An outline of key indicators for controlling the marketing innovation process.
Task 6. Conclusion
Using the information from the above tasks create a comprehensive Marketing
Plan.
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