Today’s Topic:

Today’s Topic:Today’s Topic:

Making Product DecisionsMaking Product Decisions(based on financial, market, and (based on financial, market, and

competitive considerations)competitive considerations)

oror

““Putting it all together”Putting it all together”

Second Course ModuleSecond Course Module

Market/customer analysis Market/customer analysis (DLJdirect case – online brokerage)(DLJdirect case – online brokerage)

Competitive analysisCompetitive analysis (Airborne Express case – package delivery)(Airborne Express case – package delivery)

Making product decisions Making product decisions --- today--- today (Techsonic case – depthsounders/fishfinders)(Techsonic case – depthsounders/fishfinders)

Midterm exam Midterm exam on making product decisionson making product decisions (THINK case – electric cars) Th, Oct 20th(THINK case – electric cars) Th, Oct 20th

Today’s AgendaToday’s Agenda

Review of what we’ve learnedReview of what we’ve learned

Midcourse feedback surveyMidcourse feedback survey

Making product decisions --- methodology, and Making product decisions --- methodology, and the Techsonic casethe Techsonic case

Preparation for midterm exam --- THINK casePreparation for midterm exam --- THINK case

What we’ve learned ……What we’ve learned ……

Companies try to maximize the wealth of their owners Companies try to maximize the wealth of their owners --- --- market cap (stock price) plus dividendsmarket cap (stock price) plus dividends

Stock price and the ability to pay dividends are driven Stock price and the ability to pay dividends are driven by by earnings, and beliefs about future earnings earnings, and beliefs about future earnings growthgrowth

Individual Individual products and services are expected to products and services are expected to contributecontribute targeted amountstargeted amounts to earnings/growth to earnings/growth

Earnings growth (ultimately) requires Earnings growth (ultimately) requires revenue growthrevenue growth

Firms use Firms use financial statementsfinancial statements to develop plans, and to develop plans, and measure/analyze/report on their performancemeasure/analyze/report on their performance

……..and, in terms of ..and, in terms of business objectives…..business objectives…..

A A company’scompany’s basic financial objective is to basic financial objective is to grow its earningsgrow its earnings quickly and sustainably, quickly and sustainably, in order to raise its stock price and have in order to raise its stock price and have the ability to pay its owners dividendsthe ability to pay its owners dividends

ProductsProducts are successful if and only if they are successful if and only if they attain their attain their targeted contribution to targeted contribution to corporate earningscorporate earnings

The Income StatementThe Income Statement

Revenues - Cost of Goods Sold (COGS) = Gross Margin (gross profit)

- M&S expense - R&D expense

- G&A expense = Operating income (EBIT)

- Interest - Taxes = Net income (earnings)

Key Financial ConceptsKey Financial Concepts Operations vs. total Operations vs. total (e.g., OI vs. NI) (e.g., OI vs. NI)

NormalizingNormalizing results: return measures (e.g., OI as results: return measures (e.g., OI as % of revenue; operating return on assets)% of revenue; operating return on assets)

Knowing what “good” results are: competitive Knowing what “good” results are: competitive (industry) analogs and/or general (industry) analogs and/or general benchmarksbenchmarks

Recognizing Recognizing cash vs. non-cashcash vs. non-cash - Measures (e.g., OI vs. NOCF)- Measures (e.g., OI vs. NOCF) - Capital goods: depreciation/amortization- Capital goods: depreciation/amortization - Working capital: inventory, accounts rec’bl.- Working capital: inventory, accounts rec’bl.

Method: How to analyze anMethod: How to analyze an

Income StatementIncome Statement

(First, compute “the percentages”)(First, compute “the percentages”) Operating income vs. net income Operating income vs. net income comparisoncomparison In-periodIn-period operating performance: costs and operating performance: costs and

expenses as a % of revenue; expenses as a % of revenue; compare to compare to benchmarksbenchmarks

Cross-periodCross-period performance (trends): relative performance (trends): relative change in rev, costs, expenses, earnings… change in rev, costs, expenses, earnings… improvements vs. deteriorations, and whyimprovements vs. deteriorations, and why

Going-forward Going-forward opportunities and challengesopportunities and challenges/ / risks for each line itemrisks for each line item

““Good” Operating ReturnsGood” Operating Returnsin the Business Marketin the Business Market

Sold directSold direct Sold indirectSold indirect

SoftwareSoftware 27%27% 23%23%

HardwareHardware 18%18% 12%12%

ServiceService 15%15% --

Lower GM %Lower M&S %

Higher GM %Higher R&D %

““Good” Operating ReturnsGood” Operating Returnsin the Consumer Marketin the Consumer Market

Sold directSold direct Sold indirectSold indirect

SoftwareSoftware 20%20% 16%16%

HardwareHardware 11%11% 7%7%

ServiceService 9%9% --

Lower GM %Lower M&S %

Higher GM %Higher R&D %

Business/Product Plan LearningsBusiness/Product Plan Learnings

Content/scopeContent/scope of a business/product planof a business/product plan

Critical aspectsCritical aspects of a “winning” plan of a “winning” plan

DifferentiationDifferentiation: importance, definition, : importance, definition, identificationidentification

Start-upsStart-ups: success factors, funding requirements, : success factors, funding requirements, success profilessuccess profiles

Business Plan: Business Plan: KeyKey ContentsContents

Company: Company: people, skills, resourcespeople, skills, resources Product: Product: “whole” product & its benefits“whole” product & its benefits Market: Market: attractiveness & target customersattractiveness & target customers Competition: Competition: differentiation !!differentiation !! Sales and marketing plan: Sales and marketing plan: channelschannels Operations plan: Operations plan: mfg, logistics, mfg, logistics, serviceservice Financials: Financials: investor liquidity investor liquidity

Markets/CustomersMarkets/Customers Key Learnings Key Learnings

Market attractiveness: the Market attractiveness: the five forces five forces modelmodel

The concept of The concept of target customerstarget customers, and how , and how to describe themto describe them

Target customer Target customer selectionselection methodmethod/process/process

Market Attractiveness:Market Attractiveness:Porter’s “Five Forces” ModelPorter’s “Five Forces” Model

Threat from substitute Threat from substitute productsproducts

Ease of market entry and exitEase of market entry and exit Bargaining power of buyersBargaining power of buyers Bargaining power of suppliersBargaining power of suppliers Degree of competitive rivalryDegree of competitive rivalry

Four Ways of Four Ways of Describing Target CustomersDescribing Target Customers

NameName: customer (individual or group : customer (individual or group names), industry or occupation, affiliations,names), industry or occupation, affiliations,……

DemographicsDemographics: revenues/income, size of : revenues/income, size of firm/size of family, location, …firm/size of family, location, …

PsychographicsPsychographics: cost-conscious, prestige : cost-conscious, prestige oriented, early adopter, risk adverse, …oriented, early adopter, risk adverse, …

NeedsNeeds……throughout the buying/using ……throughout the buying/using experience (remember the whole product!)experience (remember the whole product!)

Target Customer Target Customer Selection MethodSelection Method

Assess Assess financial situationfinancial situation

Determine Determine financial capabilityfinancial capability to address new to address new segmentssegments

Identify Identify differentiationdifferentiation from competitors from competitors

Assess customer segments’ Assess customer segments’ needs and their fit needs and their fit to current and potential differentiationto current and potential differentiation

Rank the customer segments according to the Rank the customer segments according to the profit potentialprofit potential in serving them in serving them

Competition Key LearningsCompetition Key Learnings

Competitive advantageCompetitive advantage, and its , and its relationship to relationship to differentiationdifferentiation

Performing a Performing a competitive analysiscompetitive analysis

Making Making business decisionsbusiness decisions based on based on competitive analysis resultscompetitive analysis results

How the concepts relate…...How the concepts relate…...

CompetitiveAdvantage(s) Differentiators Success

(earnings)

DefinitionsDefinitions

DifferentiatorDifferentiator = a = a dimension dimension of the “whole of the “whole product”product” that is that is unique or bestunique or best compared to compared to competitive offerings (whole product competitive offerings (whole product differentiation; as measured by the value differentiation; as measured by the value assessed by the targeted end-customers) assessed by the targeted end-customers)

Competitive advantage Competitive advantage = a = a capability, capability, competency, process, skill or position competency, process, skill or position of a of a companycompany that enables creation of one or more that enables creation of one or more differentiatorsdifferentiators

Identifying Competitive OptionsIdentifying Competitive Options

Products

Customers

Current

Position

Currentproducts

Current target customers

Competitive OptionsCompetitive Options

Protect & defend current customer/product Protect & defend current customer/product segmentsegment

Increase market share in current segmentIncrease market share in current segment

Selectively extend (whole) product offerings Selectively extend (whole) product offerings to current target customersto current target customers

Selectively extend target customer setSelectively extend target customer set- current products- current products- new products- new products

Become a broad-line supplierBecome a broad-line supplier

Making Product DecisionsMaking Product Decisions

FinancialAnalysis (health,

challenges)

Market Analysis(customers, needs,

market trends)

Competitive Adv Decision (SCA)

Target Customer Decision (C)

Product Decisions(4P’s)

CompetitiveAnalysis

(strengths,weaknesses)

Objectives and Constraints (mkt, finc’l)

“decision criteria”

Decision Criteria Decision Criteria are are desired outcomes for……desired outcomes for……

RevenuesRevenues Market shareMarket share Gross margins or cost positionGross margins or cost position Expenses (by category)Expenses (by category) Operating income (or cash)Operating income (or cash) Timeframes for these outcomesTimeframes for these outcomes Level of risk toleranceLevel of risk tolerance

Making Product Making Product DecisionsDecisions

Using the things we’ve learned so Using the things we’ve learned so farfar to make decisions about product to make decisions about product definition and product prioritiesdefinition and product priorities…………

this is also the core topic for the this is also the core topic for the

mid-term exammid-term exam

What are we “pulling together”?What are we “pulling together”? FinancialFinancial: income statement analysis, : income statement analysis,

financial objectives and constraints, growth financial objectives and constraints, growth opportunities & challenges; decision criteriaopportunities & challenges; decision criteria

MarketMarket: market attractiveness (5 forces), : market attractiveness (5 forces), target customer selection, value/needs target customer selection, value/needs analysisanalysis

CompetitiveCompetitive: competitive analysis, : competitive analysis, strengths/weaknesses, competitive strengths/weaknesses, competitive advantage, differentiationadvantage, differentiation

Product decisionsProduct decisions: whole product : whole product concept, opportunity assessment, concept, opportunity assessment, objectives and prioritiesobjectives and priorities

Making Product DecisionsMaking Product Decisions

FinancialAnalysis (health,

challenges)

Market Analysis(customers, needs,

market trends)

Competitive Adv Decision (SCA)

Target Customer Decision (C)

Product Decisions(4P’s)

CompetitiveAnalysis

(strengths,weaknesses)

Objectives and Constraints (mkt, finc’l)

1 - Financial Analysis:1 - Financial Analysis:“what to look for on the“what to look for on the

income statement”income statement” Operating income vs. net incomeOperating income vs. net income In-period operating performance: costs In-period operating performance: costs

and expenses as a % of revenueand expenses as a % of revenue Cross-period performance (trends): Cross-period performance (trends):

relative change in rev, costs, earnings relative change in rev, costs, earnings ……. improvements vs. deteriorations, ……. improvements vs. deteriorations, and whyand why

Going-forward: opportunities and Going-forward: opportunities and challenges for each item; constraintschallenges for each item; constraints

2 - Market Analysis2 - Market Analysis

Market attractiveness --- size? Market attractiveness --- size? growth? profitability? “five forces”?growth? profitability? “five forces”?

Customer segments? possible Customer segments? possible targets?targets?

Customer needs, especially unmet?Customer needs, especially unmet?

Market trends?Market trends?

3 - Competitive Analysis 3 - Competitive Analysis DimensionsDimensions

Products offeredProducts offered

Target customersTarget customers

Competitive positioning Competitive positioning (incl. price & cost)(incl. price & cost)

Financial performanceFinancial performance

Culture & human Culture & human resource managementresource management

Operations: Operations: manufacturing & logisticsmanufacturing & logistics

Marketing & salesMarketing & sales

R&D: key competenciesR&D: key competencies

Customer serviceCustomer service

Other relevant Other relevant dimensions: e.g. dimensions: e.g. information technology information technology in Airborne Express casein Airborne Express case

4 - Objectives (Decision Criteria) 4 - Objectives (Decision Criteria) and Constraintsand Constraints

Market objectives? Market objectives?

(market share, revenue growth, …)(market share, revenue growth, …)

Financial objectives?Financial objectives?

Financial constraints?Financial constraints?

5 - Competitive Advantage Decision5 - Competitive Advantage Decision

Current product differentiators?Current product differentiators?

Competitor strengths/weaknesses?Competitor strengths/weaknesses?

Current competitive advantage(s)?Current competitive advantage(s)?

Possibilities for enhanced advantage?Possibilities for enhanced advantage?

6 - Target Market Selection:6 - Target Market Selection:“process used for DLJdirect”“process used for DLJdirect”

Financial situationFinancial situation Capability to address new segmentsCapability to address new segments Differentiators (and competitive Differentiators (and competitive

advantages)advantages) (Unmet) Needs of each segment(Unmet) Needs of each segment Fit to current and potential Fit to current and potential

differentiatorsdifferentiators Profit potential of each segmentProfit potential of each segment Choose target customer segmentsChoose target customer segments

7 - Product Decisions:7 - Product Decisions:the rest of the “marketing mix”the rest of the “marketing mix”

ProductProduct

PricePrice

PromotionPromotion

PlacePlace

7a - Key Concepts to Remember 7a - Key Concepts to Remember for product decisionsfor product decisions

Definition of success: earningsDefinition of success: earnings The business equation: (value-price)…etcThe business equation: (value-price)…etc Customer segmentation possibilitiesCustomer segmentation possibilities Identifying needs: 5 techniquesIdentifying needs: 5 techniques Importance of differentiationImportance of differentiation Whole product: opportunities for diff’nWhole product: opportunities for diff’n Competitive advantage: the source of Competitive advantage: the source of

differentiatorsdifferentiators Opportunity assessment apertureOpportunity assessment aperture Being clear on objectives and prioritiesBeing clear on objectives and priorities

Course Concepts (13)Course Concepts (13)

Definition of Definition of product successproduct success

Whole productWhole product Product plan: key Product plan: key

success factorssuccess factors DifferentiationDifferentiation Market Market

attractivenessattractiveness Target customersTarget customers

Competitive Competitive advantageadvantage

Marketing mix Marketing mix (C+4P)(C+4P)

Product positioningProduct positioning Sales functionsSales functions Channel optionsChannel options Channel value-Channel value-

addedadded Operations balanceOperations balance

Course Methods/Tools (13)Course Methods/Tools (13)

Income statement Income statement analysisanalysis

Financial Financial benchmarksbenchmarks

Target customer Target customer descriptiondescription

Target customer Target customer selectionselection

5 Forces analysis5 Forces analysis Competitive analysis Competitive analysis

(10 dimensions)(10 dimensions)

Identifying Identifying competitive optionscompetitive options

Decision criteriaDecision criteria Product decisionsProduct decisions Product competitive Product competitive

positioningpositioning Channel economicsChannel economics Process dimensionsProcess dimensions Product Product

development best development best practicespractices

Techsonic: case summaryTechsonic: case summary Private company in 1989Private company in 1989 Market leader in depth sounders/fish Market leader in depth sounders/fish

finders under the Humminbird brandfinders under the Humminbird brand Growing and profitable until…..Growing and profitable until….. Recent industry-wide downturn in new Recent industry-wide downturn in new

boat salesboat sales Three new products at various stages of Three new products at various stages of

development: development:

next-gen depth sounder (901), next-gen depth sounder (901),

VHF marine radio, and VHF marine radio, and

navigation product (“GPS”)navigation product (“GPS”) Which one(s) to pursue…..?Which one(s) to pursue…..?

Homework Questions - 1Homework Questions - 1

Calculate Techsonic’s absolute and relative Calculate Techsonic’s absolute and relative operating income for 1987, 1988, and 1989; are operating income for 1987, 1988, and 1989; are these operating results “good”? Why did these operating results “good”? Why did operating income fall between 1988 and 1989? operating income fall between 1988 and 1989? Identify Identify bothboth financial and market reasons. financial and market reasons.

What are the What are the decision criteria decision criteria Techsonic should Techsonic should use in making decisions at this pointuse in making decisions at this point? ? (I.e., what are (I.e., what are the outcomes a “good” decision would achieve?)the outcomes a “good” decision would achieve?)

Perform a Perform a 5 forces analysis 5 forces analysis of the of the U.S. market for U.S. market for depthsounders/fishfindersdepthsounders/fishfinders

Homework Questions - 2Homework Questions - 2

What are Techsonic’s What are Techsonic’s competitive advantagescompetitive advantages? ? What are the 901’s What are the 901’s differentiatorsdifferentiators? What are the ? What are the potential differentiators of the navigation potential differentiators of the navigation product?product?

Who are Techsonic’s Who are Techsonic’s currentcurrent target customers target customers (provide at least eight descriptors) (provide at least eight descriptors) ??

Separately, identify the Separately, identify the positives-and-negativespositives-and-negatives of focusing primarily on: (1) 901, (2) VHF marine of focusing primarily on: (1) 901, (2) VHF marine radio, (3) GPS-based navigation product.radio, (3) GPS-based navigation product.

Process for MidtermProcess for Midterm Case is available in casebookCase is available in casebook

Analyze the case (individually and/or in groups) over Analyze the case (individually and/or in groups) over the next weekthe next week

During exam, several questions will be posed and you During exam, several questions will be posed and you will write your answers (individually, on paper)will write your answers (individually, on paper)

Exam is “open book” -- you may bring any information Exam is “open book” -- you may bring any information resources you wish to; no electronic devices or resources you wish to; no electronic devices or communication during examcommunication during exam

<2 hrs for exam; 30 min to discuss answers <2 hrs for exam; 30 min to discuss answers

( ( this will be the this will be the onlyonly exam review exam review ) )

Typical Grade DistributionTypical Grade Distributionindividual semesters vary individual semesters vary considerablyconsiderably

D/F C B A

homework 0+ 10% 10% 80+%

class participation 0+ 30% 45% 25%

mid-term exam 5% 35% 40% 20% out of 26 students 1 9 11 5

final exam 0+ 25% 50% 25%

course grade 0+ 15% 60% 25%

out of 36 students 0+ 5 22 9

Case for Mid-term examCase for Mid-term exam

Re-THINK-ing THINK:Re-THINK-ing THINK:

The Electric Car CompanyThe Electric Car Company

THINK Case SummaryTHINK Case Summary

Case timeframe: 2010Case timeframe: 2010 Norway-based company; turbulent historyNorway-based company; turbulent history ““Re-started” in 2008Re-started” in 2008 1,700 cars sold, mostly in Europe1,700 cars sold, mostly in Europe Planning to sell and manufacture in the USPlanning to sell and manufacture in the US Considering targeting fleets and consumersConsidering targeting fleets and consumers Profits highly sensitive to volume and priceProfits highly sensitive to volume and price

Exam Questions will derive Exam Questions will derive from course topics to date…..from course topics to date…..

Financial analysis, opportunities, challengesFinancial analysis, opportunities, challenges Identifying decision criteria (objectives)Identifying decision criteria (objectives) Market assessment/attractivenessMarket assessment/attractiveness Target markets and target customersTarget markets and target customers Customer needs and product benefitsCustomer needs and product benefits Differentiation: whole product and companyDifferentiation: whole product and company Competitive analysisCompetitive analysis Competitive advantageCompetitive advantage Making product decisionsMaking product decisions

Course Concepts (13)Course Concepts (13)

Definition of Definition of product successproduct success

Whole productWhole product Product plan: key Product plan: key

success factorssuccess factors DifferentiationDifferentiation Market Market

attractivenessattractiveness Target customersTarget customers

Competitive Competitive advantageadvantage

Marketing mix Marketing mix (C+4P)(C+4P)

Product positioningProduct positioning Sales functionsSales functions Channel optionsChannel options Channel value-Channel value-

addedadded Operations balanceOperations balance

Course Methods/Tools (13)Course Methods/Tools (13)

Income statement Income statement analysisanalysis

Financial Financial benchmarksbenchmarks

Target customer Target customer descriptiondescription

Target customer Target customer selectionselection

5 Forces analysis5 Forces analysis Competitive analysis Competitive analysis

(10 dimensions)(10 dimensions)

Identifying Identifying competitive optionscompetitive options

Decision criteriaDecision criteria Product decisionsProduct decisions Product competitive Product competitive

positioningpositioning Channel economicsChannel economics Process dimensionsProcess dimensions Product Product

development best development best practicespractices