Today’s Topic: Market and Customer Analysis

1. Today’s Topic:Market and Customer Analysis Selecting and Designing for Target Markets and Target Customers

2. First Course Module • Companies’ objectives; definition of product success • Financial measures; income statement analysis and opportunities/challenges • How companies bring products to market (roles/process/compensation) • Creating “winning” business plans; key success factors; differentiation

3. Second Course Modulethe next four weeks • Market/customer analysis (DLJdirect case – online brokerage) • Competitive analysis (Airborne Express case – package delivery) • Making product decisions (THINK case – electric cars) • Midterm exam on making product decisions (Mathsoft case – engineering analysis software)

4. Learning Outcomes:you will learn to …(before the midterm exam) • analyze a company’s financial performance and assess its opportunities and challenges for future growth • assess the barriers to success in a particular market and select the appropriate target customers • identify a company’s competitive advantages by performing a comprehensive analysis of its direct and indirect competition • define the “whole product” and decide on appropriate product differentiators

5. You will learn to… (after the midterm exam) • select appropriate sales/distribution channels and promotional messages and methods • identify best practices in new product development and the challenges in integrating the marketing, operations and product development functions • understand how technical people interact with marketing, sales and operations personnel, and how they contribute to resolution of business issues • understand how business issues impact technical work

6. Definition of product success Whole product Product plan: key success factors Differentiation Market attractiveness Target customers Competitive advantage Marketing mix (C+4P) Product positioning Sales functions Channel options Channel value-added Operations balance …because you’ll understand and apply these Concepts (13)

7. Income statement analysis Financial benchmarks Target customer description Target customer selection 5 Forces analysis Competitive analysis (10 dimensions) Decision criteria Identifying competitive options Product decisions Product competitive positioning Channel economics Process dimensions Product development best practices … and you’ll be able to use these Methods/Tools (13)

8. Business/Product Plan Learnings(last week) • Content/scope of a business/product plan • Critical aspects of a “winning” plan • Differentiation: importance, definition, identification • Start-ups: success factors, funding requirements, success profiles Interesting entrepreneurship info/course: http://professionalpractice.asme.org/Entrepreneurial/Startups/Introduction.cfm

9. Differentiation from Competitors’ Products • Whole product differentiation is the answer to: Why do customers choose your product instead of somebody else’s ? (or buying nothing at all?) • Product differentiators are the things that are unique or best about the whole product, compared to the customers’ other alternatives • Potential areas for differentiation = dimensions of the whole product (product features, price, sales, marketing, customer service/support, brand, etc)

10. What we’re learning…... • (last week)Differentiationof the “whole product” from competitors is the key driver of success…… • (this week) …..whichdifferentiators to choose depends on what thetarget customersvalue….. • (next week) ….and what competitors offer to those customers

11. Target MarketsandTarget Customers

12. Today’s Key Learnings • Market attractiveness: the five forces model • The concept of target customers, and how to describe them • Target customer selectionmethod/process

13. Designing for the Market • What is your target market? • Who are your target customerswithin that market? • How can you create/present a better “value minus price” proposition than competitors? …..requires understanding/quantifying “value” in the target customers’ eyes …..requires understanding what competitors’ offerings will/may be

14. Definitions • Market: an “ecosystem” including a product, its providers (competitors), its intermediaries (channel partners), its input factors (suppliers) and its potential or existing buyers (users, customers) • Customers: the entities (business, consumer, or government) who (potentially) buy and use the product; includes the end-customers

15. Why does it make sense to target only a specific subsetof all of the customers in a market?(the alternative, of course, is to try to attract all of the customers)

16. The “Marketing Mix”( C + 4P ) • Customers (target) • Product • Price • Promotion • Place (sales/distribution) The 4Ps depend on the C

17. Design-for-Market Process Select target market (customer need, product category, industry) Product concept Select target customers (C) Value assessment, versus competition Define product & select price (2 P’s)

18. Selecting the Target Market:Inter-Industry DifferencesOperating Income/Assets (%) • High (15-30%) : Pharmaceuticals, Packaged software, Semiconductors • Medium (8-15%) : Restaurant chains, Petroleum/natural gas, Engineering services • Low (2-7%) : CATV service, Motor vehicles, Airlines

19. 1Q08 Industry Profitability measured by Net Return-on-Sales(Net Income/Revenues) Pharmaceuticals 25.9% Chemicals 15.7% Electrical equipment 12.1% Oil companies 7.4%

20. Market Attractiveness:Porter’s “Five Forces” Model “high” is bad for competitors in the market • Threat from substitute products • Ease of market entry (and exit) • Bargaining power of buyers (customers, channels and influencers) • Bargaining power of suppliers • Degree of competitive rivalry suppliers  competitors  buyers (incl. customers)

21. Designing for the Market • What is your target market? • Who are your target customerswithin that market? • How can you create/present a better “value minus price” proposition than competitors? …..requires understanding/quantifying “value” in the target customers’ eyes …..requires understanding what competitors’ offerings will/may be

22. Target Customers All possible customers Target Customers

23. Selecting Target Customers: some considerations • Segment size and revenue opportunity • Customer benefits • Customer interest (incl. current relationships) • Customer ability-to-pay and leverage • Competition/market coverage • Sales issues: sale time/complexity, cost, channel and associated profit margin • Cost to serve/support • Customer loyalty/lock-in • Strategic value

24. Method: Four Ways of Describing Target Customers • Name: customer (individual or group names), industry or occupation, affiliations,… • Demographics: revenues/income, size of firm/size of family, location, … • Psychographics: cost-conscious, prestige oriented, early adopter, risk adverse, … • Needs……throughout the buying/using experience (remember the whole product!)

25. Describe the (Core) Target Customers of…...? • Walmart • Southwest Airlines • National Broadcasting Corp (NBC)

26. Objective for Whole Product:Superior “Value minus Price” • Who are the targeted customers? • What are their unmet needs? • Whatvalue would they place on a particular “satisfaction” of those needs? (i.e., what is their willingness to pay for a particular product) • Preferably, quantify that value….or at least be confident that (value - price) is greater than competitors can/will deliver

27. The “Whole” Product The Product

28. The product itself Auxiliary or related products Price and cost-in-service Awareness and information Where it is sold Ease of choice, purchase, ordering Delivery Installation Payment method Storage/movement Aesthetics/style Advice on use Help in use (e.g., hotline) Returns/exchanges Service/repair Disposal The “Whole” Product:What Customers Really Care About

29. Differentiation is usually achieved by choosing to meet some target customer needs better than all competitors….. while meeting mostneeds (requirements) at an acceptable level, and not meetingotherneeds at all (“minor” needs, or needs of non-targeted segments)

30. Identifying Customer Needs • Primary customer research: doing end-customer surveys, interviews, focus groups • Secondary customer research: reading or commissioning market studies by analysts • Benefit studies: cost savings, value-in-use, revenue-generation impacts • Revealed preference: what customers pay for (partial) equivalents • Extrapolationfrom technical possibilities

31. From Needs to Designs…. • Customer Needs (and relative importance) • Engineering characteristics impacting needs • Competitive position (in customers’ eyes, and technical terms) • Difficulty/importance/cost of features • Leads to…..engineering targets There are many methodologies to implement the above, e.g. House of Quality

32. DLJdirect Case Summary • DLJdirect has a successful online brokerage business targeting “aggressively affluent” customers • Other segments are growing faster • DLJdirect has to decide whether to address additional customer segments and whether to significantly increase its advertisingto capture customers in those segments

33. Online Stock Trading Market- maker Online Broker Stock Exchange Customer (trader) customer’s account Clearing- house

34. Hint: 6 Sources of Revenue • From End-customers • Trading commissions • Account management fees • Interest on margin purchases • From partners • Order flow rebates • Mutual fund and money market fees • iNautix revenues

35. Assignment Questions • Are DLJdirect’s current financial results “good”? What is their trend? • Does DLJdirect have the financial capabilityto address new segments, e.g. to modify it’s whole product, or to do more advertising to attract new kinds of customers? How much money might be available in 2000? • Identify the ways DLJdirect’s service is differentiated from competitors’ offerings • What are the key needsof each of the four customer segments? Which are well-matched to DLJdirect’s differentiators and other capabilities? • Use your judgment to rank the customer segments according to the profit potential in serving them (hint: consider both size of the segment and the average profit/customer in that segment)

36. DLJdirect’s Financial Situation(partial income statement)

37. Profit potential of segment=# of customers in segmentxprobability of attracting and retaining themx profit potential per customer

38. Size of Customer Segments(estimated from Exhibits 5 & 10)

39. Assignment Questions (continued) Assuming that DLJdirect continues to target the aggressively affluent segment: • Should DLJdirect also target the Get Rich Fast (day trader) segment? Why? • In your opinion, is there another customer segment that DLJdirect should target? Why?

40. Selecting Target Customers: some considerations • Segment size and revenue opportunity • Customer benefits • Customer interest (incl. current relationships) • Customer ability-to-pay and leverage • Competition/market coverage • Sales issues: sale time/complexity, cost, channel and associated profit margin • Cost to serve/support • Customer loyalty/lock-in • Strategic value

41. Selecting Customer Segments Hint: identify the positives-and-negatives of each of other three segments (use the AA pos-neg provided as a guide)

42. Positives-and-negatives of focusing on the AA segment • Positives - large segment; currently 26% of the market - wealthy; high ability to pay - likely to buy all 3 products (trades, acct mgmt, margin) - attracted by DLJd brand image and differentiators - most profitable? • Negatives - slow growing segment; declines to 12% of market - desirable: competitive rivalry - “aggressive”  modest customer loyalty?

43. Today’s Key Learnings • Market attractiveness: the five forces model • The concept of target customers, and how to describe them • Target customer selectionmethod/process

44. Next Week’s Topic: (Analyzing and) Beating the Competition

45. Reading for Next Week • Airborne Express (a case focused on competitive analysis and subsequent market/product decisions)

46. What we’re learning…... • (last week)Differentiationof the “whole product” from competitors is the key driver of success…… • (this week) …..whichdifferentiators to choose depends on what thetarget customersvalue….. • (next week) ….and what competitors offerto those customers

47. Airborne Express: Case Summary • The timeframe is 1997 • The market is the $16-17B U.S. express mail delivery (letter, package) market • Airborne is the smallest of the three major competitors with 16% market share (FedEx 45%; UPS 25%) • It is recently the fastest growing, but historically the least profitable, of the Big 3 • The US Postal Service is threatening to enter the market

48. Case Note In 2003, Airborne Express was acquired by DHL for $1.2B

49. Assignment for Next Week • Perform a Five Forces analysis of the US express delivery industry • Perform a competitive analysis of FedEx, UPS and Airborne in the 10 dimensions shown on the next slide (display as a 3 x 10 matrix) • Based on the competitive analysis, what are Airborne’s competitive strengths and weaknesses vis-à-vis FedEx and UPS? • How is Airborne’s (whole) product differentiated ? • What does Airborne need to do to assure that it survives and thrives in the future? (hint: start by identifying its opportunities and challenges)

50. Products offered Target customers Competitive positioning (incl. price & cost) Financial performance Culture & human resource management Operations: pickup & delivery Operations: air & hub operations Marketing & sales Customer service Information technology Competitive Analysis Dimensions (10)