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Marketing Strategy in High-Tech Markets I. Characteristics Common to High-Tech Markets: Supply Side. “Unit-one” costs: when the cost of producing the first unit is very high relative to the costs of reproduction Ex: development vs. reproduction of software
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Characteristics Common to High-Tech Markets: Supply Side • “Unit-one” costs: when the cost of producing the first unit is very high relative to the costs of reproduction • Ex: development vs. reproduction of software • Demand-side increasing returns: When the value of the product increases as more people adopt it • Also called network externalities and bandwagon effects • Ex: telephone, fax, MS Word • Implications: may give away products for free (IM)
Characteristics Common to High-Tech Markets: Supply Side • Tradeability problems arise because it is difficult to value the know-how which forms the basis of the underlying technology • Ex: How much to charge for licensing the rights to a waste-eating microbe? • Knowledge spillover: Another type of externality that arises from the fact that technological developments in one domain spur new developments and innovations in other areas. • Ex: Human Genome Project
Common, Underlying Characteristics of High-Tech Markets: Demand Side Perspective • Market Uncertainty • Technological Uncertainty • Competitive Volatility
Market Uncertainty: • Consumer fear, uncertainty and doubt (FUD) • Customer needs (sometimes rather tastes) change rapidly and unpredictably (recorded books, e-books?) • Customer anxiety over the lack of standards and dominant design (Laserdisc, DVD, DivX) • Uncertainty over the pace of adoption • Uncertainty over/inability to forecast market size
Technology Uncertainty: • Will the new innovation function as promised? • What is the timetable for new product development? • Will the supplier be able to fix customer problems with the technology? • What are unanticipated/unintended consequences? • (When) Will our technology be obsolete?
Competitive Uncertainty: • Who will be future competitors? • What will be “the rules of the game” (i.e., competitive strategies and tactics)? • What will “product form” competition be like? • competition between product classes vs. between different brands of the same product • Implication: Creative destruction?
Effects of Uncertainty? • Adoption rate! • There are five variables that have been cited as responsible for speed of technology adoption: • Relative Advantage: the degree to which an innovation is perceived as better than the idea it supersedes • Compatibility: the degree to which an innovation is perceived as consistent with existing values, technologies, past experiences, and needs of potential users • Complexity: the degree to which an innovation is perceived as relatively difficult to use and understand • Trialability: the degree to which an innovation may be experimented with on a limited basis • Observability: the degree to which the results of an innovation are visible to others (Wow-factor). • Rogers, “Diffusion of Innovation.”
Think Telephone • Introduced in 1877, people had to be convinced that it was useful. • Despite its simple design and seemingly obvious value, it took 75 years for the telephone to reach 50 million users • It wasn't until the 1960s that users saw a residential phone as a necessity.
Diffusion Rates • The printing press (~1440): • 400 years (1833, NY Sun). • The automobile (1885): • 75 years (market saturation in US around 1960) • The telephone (1876): • 85 years (full saturation in the 1960s) • The fax machine (1843): • 140 years (late 1980s) • The Internet (1968) • 35 years
Value: Perceived Need-Perceived Price • Variables essential to the successful uptake of technology: • Providing an infrastructure • Providing a function • Providing the right price point • Providing a compelling need to buy (make it a necessity).
Telegraph! Faster than Phone…Why? • Morse presented prototype of the electric telegraph to the US Congress in 1838 • by 1873 Western Union had carried more than twelve million messages • creation of the infrastructure which supported it. • cheap and predictable rates. • a shared language (global communication).
What is a disruptive technology? • Disruptive technologies typically have worse performance, at least in the near term. • But: They have features that a few fringe and generally new customers value and which represent a key source of competitive value in the future. • Products based on them are typically cheaper, simpler, smaller and frequently more convenient to use - often representing a new product architecture, design, and even market (category). • They often bring a new and different value proposition. • See Christensen: “The Innovator's Dilemma”
Examples: • Muskets • Steam ships • Automobiles • PCs • Digital photography
Continuum of Innovations Incremental Radical • Extension of existing product or process • Product characteristics well-defined • Competitive advantage on low cost production • Often developed in response to specific market need • "Demand-side" market • New technology creates new market • R&D invention in the lab • Superior functional performance over "old" technology • Specific market opportunity or need of only secondary concern • "Supply-side" market
Contingency Theory Type of marketing strategy is contingent upon the nature of the innovation.
Examples of Implications of Contingency Theory: Breakthrough Incremental