January 2005

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January 2005
Identifying markets Creating sustainable
competitive advantage
Douglas Abrams
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Identifying markets and creating SCA

• Choose the right market
• Create sustainable competitive advantage

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Choose the right market

• Create a value proposition
• Understand customer adoption

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Target an increasing returns business

• Up-front costs are high relative to marginal
  costs
• Network externalities
• Complementary technologies are important to use
• Producer learning is strong
• Switching costs are high

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What problem are you solving for customers?

• Start a business with a product that meet a real
  customer need
• Develop a solution to the customers problem
• Meet customer needs better than competitors
• Evaluate customer preferences traditional
  market research ineffective listen to customers

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Market research for start-ups

• Focus groups, market research limited value
• Observation-fueled insight makes innovation
  possible
• Watch people using products
• What comes naturally to them?
• Asking people is not enough Fine is a
  four-letter word
• Users cannot explain what is wrong or what is
  missing
• Its not the customers job to be visionaries

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Responding to customer preferences Kleenex

• Originally a cold cream remover
• Users started wiping their noses with it
• Kimberly-Clark started to market it as disposable
  handkerchief

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Talking to potential customers Igloo

• Asked college kids what they liked (more room for
  six-packs!)
• Created Space Mate.
• Could fit one and a half six packs more in the
  same fridge size.

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Case study not solving the right problem

• RCAs Videodisc
• Superior image quality, but lack of recording
  capability lost out to videotape. Loss 500
  million
• IBMs PC Jr
• The awkward Chiclet keyboard, slow
  microprocessor, unattractive price and a late
  launch cost IBM 40 million

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Case study not listening to customers

• Coca-Colas New Coke
• This answer to Pepsis new formula provoked a
  national uproar later led to Coke Light
• RJ Reynolds's Premier
• Smoke-less cigarette with a terrible taste cost
  to develop 800 million

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Focused observation a source of innovation

• Infer motivation and emotion
• What do people think and do?
• Why do they think and do?
• Integrate research, design, marketing and
  manufacturing

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The fist phenomenon

• Kids grip toothbrush with whole fist rather than
  fingers
• Kids toothbrushes should be fatter than adults

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Categorize customer needs in designing product

• Things that are necessary
• Things that are nice to have
• Things that are unnecessary

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Be realistic

• Start a business only if your new product is
  better than those of competitors.
• Be realistic about how your product or service
  stands against that of the competition.
• Consider new products or services that other
  entrepreneurs are about to introduce.

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Meet customer needs in an economic manner

• Figure out a way to create your product or
  service for less than you are going to sell it.
• Figure our how to make money on at least some
  transactions regardless of the quantity that you
  can sell.
• Note that new product will not sell itself, but
  will require personal selling
• Note that pricing is important

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Choose the right market

• Create a value proposition
• Understand customer adoption

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The Normal Distribution of Product Adoption
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Implications for entrepreneurs

• Different adopters have different preferences
• You must do different things to drive adoption
• Proportion of the market adopting at any point in
  time is not linear another S-curve

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Market adoption S-curve
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Crossing the chasm

• Change the way you sell your new product or
  service when you want to make the transition to
  the majority of the market.
• Focus on the customers with the most compelling
  need to buy your product or service before you
  transit to the mainstream market.
• Provide customers with evidence of value
• Offer a whole product solution

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Remember the S-shaped adoption curve

• Use dynamic estimates to evaluate the size of the
  market for your new product or service
• Include factors that influence diffusion and
  substitution in calculating the growth of the
  market for your new product or service
• Substitution is an important part of strategy for
  competing with established firms
• Effective when established firms have economies
  of scale, as substitution erodes their scale
  economies

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Factors influencing diffusion

• Discrete technologies diffuse faster than
  systemic
• Inexpensive diffuse faster than expensive
• Offering greater advantage diffuse faster
• Characteristics of target market, external
  environment, political and regulatory factors,
  events or obstacles
• Easier to understand technologies diffuse faster

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Simple products - simple as a Frisbee

• No moving parts, requires no instructions and
  delivers fun with very little practice with
  fifteen cents worth of molded plastic.
• People today want more integration and
  simplicity.
• Reality is that it takes time.
• Often cant achieve in the first version of the
  product.
• Version 2.0 may be the best bet

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Jumping the barrier fax machines

• Fax Machines
• In most countries
• Unreliable, expensive few advantages over
  telegraph
• In Japan
• Existing telegraph text based system couldnt
  easily handle ideographic Japanese language.
• Launched massive research efforts urged
  manufacturers to adopt common communications
  standard

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Epidemic diffusion Hush Puppies

• Stay in touch with the consumers
• Hush Puppies shoes - nearly discontinued
• Revived due to sudden grassroots consumer
  interest

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Jumping the barrier Palm pilot

• Originally tried to integrate too many features
• Realized consumers wanted complement, not
  replacement for PC

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Jumping the barrier answering machines

• Answering Machines
• Initially considered rude
• Within a few years, became rude if didnt own one.

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Jumping the barrier - biometrics

• Biometrics Access Device (Digital Handprint)
• Rough outline of hand, relative length of fingers
  or spacing of knuckles
• Handprints thought of like fingerprints
• Seen as intrusive and makes people feel like
  criminals

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Jump the barrier vacuum cleaners

• Vacuum Cleaners
• America
• Loud vacuums associated with powerful motors
  suction
• Japan
• Quieter, less powerful, smaller motors, fuzzy
  logic, insulation

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Identifying markets and creating SCA

• Choose the right market
• Create sustainable competitive advantage

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Create sustainable competitive advantage

• Competing with established companies
• Protect your intellectual property
• Create barriers to entry

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Advantages of established companies

• The learning curve
• Reputation effect
• Cash flow
• Economies of scale
• Complementary assets

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Established company weaknesses

• A focus on efficiency makes it difficult to
  introduce new products
• Effort to exploit existing capabilities makes it
  difficult to innovate
• They need to satisfy existing customers
• Existing organizational structure is appropriate
  to current tasks
• Employees generally not rewarded for innovation
• Difficult to innovate in a bureaucracy low
  communication density

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Opportunities that favor new firms

• Discrete versus systemic technologies
• Opportunities that are based on human capital
  difficult for existing companies to protect
• General purpose rather than specific purpose
  technologies provide flexibility
• Uncertainty existing firms advantages in
  market research are neutralized

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Case study E-Schwab

• Initially their brokers complained about low
  on-line flat fee
• Spread same low web trade commission to all of
  its customers
• Shot ahead of traditional high-end firms like
  Merrill Lynch

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Case study - snowboarding

• Journalists ski resorts called it a fad Time
  dubbed it Americas Worst New Sport
• Ski resorts banned boarders
• Mainstream ski manufacturers figured it was a
  passing fancy
• Now 90 of US resorts have accepted snowboards
  and 5 MM Americans are boarding

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Case study mountain biking

• Schwinn wrote off mountain biking as a fad.
• Early mountain bikers tackled rugged mountain
  paths with souped-up Schwinns.
• Today 70 of full-sized cycles sold are mountain
  bikes Schwinn is irrelevant

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Case study Dell computers

• Direct sales
• Easy configuration of memory, peripherals
• Direct, reliable customization experience

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Create sustainable competitive advantage

• Competing with established companies
• Protect your intellectual property
• Create barriers to entry

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Competitors will copy your product

• Reverse engineering
• Hire ex-employees
• Look at patent documents
• May be working on similar products

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Protecting your intellectual property - secrecy

• Few alternative sources of information
• Limited number of people who could make use of
  the information
• The necessary knowledge is tacit
• Process of creation is poorly understood

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Protecting your intellectual property - patents

• A government monopoly
• Only possible for a small number of products
• Patents must be strong to be useful
• Patents require disclosure
• Patenting is expensive

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Create sustainable competitive advantage

• Competing with established companies
• Protect your intellectual property
• Create barriers to entry

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Capturing the returns to innovation

• Control of resources key sources of supply
• Building brand-name reputations
• Exploiting learning curves
• First mover advantages when market structure
  allows
• Control of complementary assets in manufacturing
  and marketing

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Sources and references

• Finding Fertile Ground by Scott Shane, Wharton
  School Publishing
• The Art of Innovation by Tom Kelley with Jonathan
  Littman, Doubleday

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Contact us

• Douglas Abrams
• dka_at_parallaxcapital.com
• necadk_at_nus.edu.sg
• 65-9780-5381 (hp)