MKTG 640

1. MKTG 640 ValueInnovation

2. Consider 1998 Compaq vs IBM • What does this show? • Imitative – not innovative approaches to the market • These companies act REACTIVELY • A company’s understanding of emerging mass markets and changing customer demands becomes hazy

3. 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

4. Companies with sustained high growth and profits practice value innovation

5. Value Innovation not dependent on: • Size • Years of operation • Industry conditions • County of origin

6. Value Innovation • Offers fundamentally new and superior buyer value • Makes competition irrelevant • Example: Callaway Golf

7. Value Innovation – Callaway Golf • Callaway Golf – changed the question • It used to be – How can I hit the ball farther? • Their’s was – How can I hit the ball easier?

8. 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?) • Callaway’s golf club (Big Bertha) made it easier to hit. • Viola – access to a new segment.

9. Value Innovation • Places the buyer – not the competition at the center of strategic thinking.

10. 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

11. 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.

12. 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.

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

14. 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

15. 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?

16. Technological versus Value Innovation • Tech innovation focuses on finding solutions for problems • Value innovation focuses on redefining the problems themselves

17. Value creation

18. Value Innovation - Schumpeter • ‘creative destruction’ – new stuff kills or makes irrelevant – old stuff • Schumpeter => entrepreneurs do creative destruction

19. Value Innovation • Schumpeter => entrepreneurs do creative destruction • Not really, anyone in an organization can come up with a creative innovation

20. Market Dynamics of Value Innovation • Offering buyers fundamentally new and superior value in traditional businesses through innovative ideas and knowledge…..

21. 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.’

22. Market Dynamics of Value Innovation – product to knowledge economy • In the old economy – one firm’s 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

23. Example: • Virgin Atlantic’s Upper Class – (First Class at Business Class prices) • The idea is a nonrival good. • Why – anyone can copy it (more easily)- free riders

24. 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 • Starbuck’s? The highest value item in its product is not excludable (the idea of a chic coffee bar)

25. The ideas that contain the real value are usually not excludable or only partially so.

26. Even software is subject to free riding • Code is patentable – or at least can be protected • The look and feel is not patentable • Soooo…duplicate the look and feel and write new code.. • It happened to Netscape (IE)

27. What’s the best way to maximize profits? • Should value innovators follow the tech strategy (price skimming, restrict supply)?

28. What’s the best way to maximize profits? • Successful value innovators use a distinctly different market approach from that of conventional monopolists.

29. Value innovators market approach • Strategic pricing for demand creation. • Target costing for profit creation.

30. Strategic pricing for demand creation • Strategic pricing leads to high volume and rapidly establishes a powerful brand reputation.

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

33. 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.

34. To make value innovation happen • Ask five questions…