MKTG 640

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MKTG 640

• Value Innovation

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Consider 1998 Compaq vs IBM

• What does this show?
• Imitative not innovative approaches to the
  market
• These companies act REACTIVELY
• A companys understanding of emerging mass
  markets and changing customer demands becomes hazy

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What is the key to sustained high growth vs
competitors?

• Value innovation
• That is..focus on the customer and new ways of
  satisfying him or her

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Companies with sustained high growth and profits
practice value innovation
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Value Innovation not dependent on

• Size
• Years of operation
• Industry conditions
• County of origin

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Value Innovation

• Offers fundamentally new and superior buyer value
• Makes competition irrelevant
• Example Callaway Golf

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Value Innovation Callaway Golf

• Callaway Golf changed the question
• It used to be How can I hit the ball farther?
• Theirs was How can I hit the ball easier?

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Value Innovation Callaway Golf

• They got the country club market
• At a country club, people chose either tennis or
  golf.
• Golf was perceived as too hard. (How can I hit
  that ball?)
• Callaways golf club (Big Bertha) made it easier
  to hit.
• Viola access to a new segment.

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Value Innovation

• Places the buyer not the competition at the
  center of strategic thinking.

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Shifting the Basis of Strategy

• After WWII global competition ballooned.
• US companies responded with a focus on beating
  competition
• Market conditions are assumed NOT to be under
  firm control
• So firms trade-off between price and product
  performance

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Shifting the Basis of Strategy

• Competing for a share of a contracting market is
  a second best strategy
• Stimulating the demand side is a first best
  strategy.
• Companies pursuing a first best strategy FAR
  outperform those with a second best strat.

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Shifting the Basis of Strategy

• Land, labor and capital finite factors of
  production
• BUT --- Knowledge and ideas are infinite economic
  goods that can generate increasing returns
  through their systematic use.

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• Companies that pursue innovation systematically
• .can create new demand.

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Value and Innovation

• Value innovation anchors innovation with buyer
  value.
• Value innovation is not the same as value
  creation
• VC is incremental
• VI is breakthrough

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Value and Innovation

• Value innovation links innovation to what the
  MASS of buyers want.
• Questions
• Are we offering customers radically superior
  value?
• Is our price level accessible to the mass of
  buyers in our target audience?

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Technological versus Value Innovation

• Tech innovation focuses on finding solutions for
  problems
• Value innovation focuses on redefining the
  problems themselves

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Value creation
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Value Innovation - Schumpeter

• creative destruction new stuff kills or makes
  irrelevant old stuff
• Schumpeter gt entrepreneurs do creative
  destruction

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Value Innovation

• Schumpeter gt entrepreneurs do creative
  destruction
• Not really, anyone in an organization can come up
  with a creative innovation

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Market Dynamics of Value Innovation

• Offering buyers fundamentally new and superior
  value in traditional businesses through
  innovative ideas and knowledge..

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Market Dynamics of Value Innovation product to
knowledge economy

• Two consequences
• First it creates the potential for increasing
  returns
• Second - it creates the potential for free
  riders.

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Market Dynamics of Value Innovation product to
knowledge economy

• In the old economy one firms use of a rival
  good precludes its use by others (the one Nobel
  laureate who knows about financial markets)
• Use of a nonrival good can be used by others

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Example

• Virgin Atlantics Upper Class (First Class at
  Business Class prices)
• The idea is a nonrival good.
• Why anyone can copy it (more easily)- free
  riders

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How to protect your nonrival good?

• Notion of EXCLUDABILITY
• Excludability a function of
• The Legal System (patents)
• Intel can exclude rival chipmakers from using
  their plant property laws
• The Nature of the Good
• Starbucks? The highest value item in its
  product is not excludable (the idea of a chic
  coffee bar)

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The ideas that contain the real value are usually
not excludable or only partially so.
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Even software is subject to free riding

• Code is patentable or at least can be
  protected
• The look and feel is not patentable
• Sooooduplicate the look and feel and write new
  code..
• It happened to Netscape (IE)

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Whats the best way to maximize profits?

• Should value innovators follow the tech strategy
  (price skimming, restrict supply)?

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Whats the best way to maximize profits?

• Successful value innovators use a distinctly
  different market approach from that of
  conventional monopolists.

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Value innovators market approach

• Strategic pricing for demand creation.
• Target costing for profit creation.

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Strategic pricing for demand creation

• Strategic pricing leads to high volume and
  rapidly establishes a powerful brand reputation.

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Target costing for profit creation

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

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Quantity
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• Rapid brand recognition built by VI
• Plus simultaneous drive to lower costs
• Makes competition nearly irrelevant
• Comps must overcome economies of scale, learning
  effects and increasing returns.

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To make value innovation happen

• Ask five questions

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