Marketing of High-Technology Products and Innovations Chapter 1

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Marketing of High-Technology Products and Innovations Chapter 1: Introduction to the World of High-Technology Marketing

Opening vignette: Innovations in Automobiles and Transportation Jet Pack International Moller Sky. Car Aptera Tesla MIT Smart Cities City. Car Tata Nano See also: A Better Place (electric car company using an innovative business model)

Questions to Consider How is “high-tech” defined? What are the common characteristics found in high-tech environments? What is the importance of dominant design in high-tech markets? Why are standards important to marketers and customers? © 2010 Pearson Education, Inc. publishing as Prentice Hall

Questions to Consider What are the various types of innovations? Why (and how) does marketing for high-tech innovations differ from traditional marketing? © 2010 Pearson Education, Inc. publishing as Prentice Hall

Why Do So Many High-Tech Innovations Fail? Some high-tech companies believe that marketing is superfluous ◦ The role of marketing is downplayed or misunderstood Marketing for high-tech products is complicated and difficult ◦ Marketing is an after-thought to product development ◦ Cross-functional collaboration is difficult ◦ High-technology companies are not “market-driven” © 2010 Pearson Education, Inc. publishing as Prentice Hall

Importance of High-Tech Marketing Technological superiority alone does not ensure success for high-tech products Combination of technology superiority AND marketing competence maximizes the odds of success. ◦ Requires intimate understanding of customers © 2010 Pearson Education, Inc. publishing as Prentice Hall

Distinction Between “High-Tech Marketing” & “Marketing of High-Tech Products” “High-Tech Marketing” can mean: ◦ Use of technology for marketing purposes “New media, ” paid search, online advertising, Web 2. 0, etc. Covered primarily in Chapter 11 on Advertising and Promotion ◦ Marketing of high-tech products/innovations Primary focus of this book: how standard marketing strategies are adapted/modified for high-tech products © 2010 Pearson Education, Inc. publishing as Prentice Hall

Lexicon of Marketing ◦ Set of activities, processes, and decisions to create, communicate, and deliver products/services that offer value to customers and other stakeholders ◦ A philosophy of doing business that focuses on creating value for customers Uses market-based information to guide internal decisions Brings the voice of the customer into the firm © 2010 Pearson Education, Inc. publishing as Prentice Hall

Three Levels of Marketing Decisions: Strategic: Proactive decisions to chart the company’s efforts in the market Segmentation, targeting, positioning ◦ Which markets, which segments? ◦ What value proposition/competitive position? May include a company’s corporate social responsibility initiatives © 2010 Pearson Education, Inc. publishing as Prentice Hall

Three Levels of Marketing Decisions: Strategic (cont. ) When strategic decisions are not made, company’s efforts are diffused across market segments and product development projects ◦ Recipe for disaster Responsibility for strategic decisions must be vested with some department in the company Resources for research must be allocated © 2010 Pearson Education, Inc. publishing as Prentice Hall

Three Levels of Marketing Decisions: Functional Decisions regarding the 4 Ps of marketing: ◦ Product, Price, “Place” (distribution), Promotion ◦ Consistency across the marketing mix ◦ Requires effective cross-functional collaboration ◦ Common focus for all departments is delivery of superior customer value: “Moments of truth: ” every interaction a customer has with a company either cements or undermines that customer relationship © 2010 Pearson Education, Inc. publishing as Prentice Hall

4 Ps of Marketing Product: e. g. , new product development process; licensing; intellectual property rights; services; etc. ◦ Develop a stream of products with the right set of features to satisfy customer needs in a compelling yet simple fashion. Price: Establish prices for the company’s product ◦ Consider the cost to produce/manufacturer the goods; margins along the distribution channel; competitor’s prices; customer value; total cost of ownership; prices for product bundles; and profitability. © 2010 Pearson Education, Inc. publishing as Prentice Hall

4 Ps of Marketing (cont. ) Place: Distribution channels and supply chain management. Promotion: ◦ ◦ Advertising (both media and messaging decisions) Sales promotion (price deals, trade incentives, etc. ) Personal selling (recruiting, training, compensating sales people) Public relations/publicity (garnering favorable trade press attending trade shows, engaging in cause-related marketing, etc. ) ◦ The Internet and other new media ◦ Collateral materials © 2010 Pearson Education, Inc. publishing as Prentice Hall

Three Levels of Marketing Decisions: Tactical Actual implementation of specific marketing tools ◦ Development of marketing brochures and collateral ◦ Website development ◦ Decisions about which trade shows to attend ◦ Where to place ads © 2010 Pearson Education, Inc. publishing as Prentice Hall

Definitions of High-Technology High-technology: ◦ Cutting edge, “advanced” products/processes that rely on scientific/engineering knowledge Innovations: ◦ Things that are new—some of which are high-tech © 2010 Pearson Education, Inc. publishing as Prentice Hall

Government-Based Classifications of “High-Tech” Input-based definitions: ◦ Based on criteria such as the number of technical employees, $ spent on R&D, # of patents filed in industry ◦ Used by the Bureau of Labor Statistics, Organization for Economic Cooperation and Development, and the National Science Foundation See Appendix A for a list of industries classified as high-tech © 2010 Pearson Education, Inc. publishing as Prentice Hall

Government-Based Classifications of “High-Tech” (cont. ) Output-based definitions: ◦ Based on whether products embody new/leadingedge technologies ◦ U. S. Census Bureau’s classification (next slide) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Government-Based Classifications of “High-Tech” (cont. ) U. S. Census Bureau Output-based Definition Biotechnology Life sciences technology Optoelectronics Information and communications technology (ICT) Electronics Flexible manufacturing Advanced materials (semiconductors, fiber optics) Aerospace Weapons Nuclear technology © 2010 Pearson Education, Inc. publishing as Prentice Hall

Strengths/Weaknesses of Government Approaches to Defining High Technology Input-Based Approaches Strengths Data easily obtainable Objective Effective for Level industries I* Includes focus on high-tech service sector *See text for definitions of Level I, II, and III industries Weaknesses Classifications may be deemed arbitrary May include industries with products not commonly thought of as high tech May omit very new industries Different input-based measures will result in different classifications © 2010 Pearson Education, Inc. publishing as Prentice Hall

Strengths/Weaknesses of Government Approaches to Defining High Technology (cont. ) Output-Based Approaches Strengths Weaknesses Classification tends to have face value Somewhat post-hoc: judgments somewhat subjective Relatively good correlation between input and output methods for Level I industries Generally not as comprehensive as input-based approaches Relatively low correlation between input and output methods for Level II and Level IIII industries © 2010 Pearson Education, Inc. publishing as Prentice Hall

Common Characteristics of the High-Tech Environment: Market Uncertainty: Ambiguity about the type and extent of customer needs that can be satisfied by a particular technology ◦ Consumer fear, uncertainty and doubt (FUD) ◦ Customer needs change rapidly and unpredictably ◦ Customer anxiety over the lack of standards and dominant design ◦ Uncertainty over the pace of adoption ◦ Uncertainty over/inability to forecast market size © 2010 Pearson Education, Inc. publishing as Prentice Hall

Common Characteristics of the High-Tech Environment: Technology Uncertainty: Not knowing whether the technology or the company can deliver on its promise ◦ Uncertainty over whether the new innovation will function as promised ◦ Uncertainty over timetable for new product development ◦ Ambiguity over whether the supplier will be able to fix customer problems with the technology ◦ Concerns over unanticipated/unintended consequences ◦ Concerns over obsolescence © 2010 Pearson Education, Inc. publishing as Prentice Hall

Common Characteristics of the High-Tech Environment: Competitive Volatility: Changes in competitors, offerings, strategies ◦ Uncertainty over who will be future competitors ◦ Uncertainty over “the rules of the game” (i. e. , competitive strategies and tactics) ◦ Uncertainty over “product form” competition Competition between product classes vs. between different brands of the same product “Convergence” © 2010 Pearson Education, Inc. publishing as Prentice Hall

Common Characteristics of the High-Tech Environment: Competitive Volatility: (cont. ) Implications: ◦ Avoid myopia ◦ Engage in creative destruction © 2010 Pearson Education, Inc. publishing as Prentice Hall

Three Sources of Marketing Myopia in High-Tech Markets “Our technology is so new we have no competitors. ” But: customer needs are already being solved; entrenched customer habits harder to address than “real” competition. “The new technology being commercialized by new competitors will not pose a large threat. ” But: “You’ve been ‘amazoned!’ That competitor is in a different industry, and its strategies don’t/won’t affect my business. But: customer needs can be solved using different underlying technology platforms. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Technology Life Cycles Evolution in new generations of technology ◦ Moore’s Law: Performance of an existing technology doubles every 18 months with no increase in price; Predicts upper limits of a particular generation of technology Typically embodied in new “product forms” Often S-shaped curves (see next slide) ◦ May also be irregular step functions and may not be overlapping in terms of performance levels © 2010 Pearson Education, Inc. publishing as Prentice Hall

Some Implications of Technology Life Cycles New technologies often come from companies not selling current generation of technology At its initial introduction a new discontinuous technology often underperforms the legacy technology Incumbents often underestimate viability of new developments Therefore, new technologies can catch established firms by surprise © 2010 Pearson Education, Inc. publishing as Prentice Hall

Some Implications of Technology Life Cycles (cont. ) Flurry of new companies ultimately shakes out and industry coalesces around “dominant design” Performance of new technology takes off and overcomes capability of legacy technology Creative destruction: new technologies obsolete old technologies creating new winners/losers in the industry © 2010 Pearson Education, Inc. publishing as Prentice Hall

Other Characteristics of High-Tech Industries Unit One Costs ◦ When the cost of producing the first unit is very high relative to the variable costs of reproduction of subsequent units ◦ The ratio of variable costs to fixed costs is very low. Tradeability problems ◦ The difficulty in selling “know-how” because of uncertainty in how to value the knowledge-- especially when it is tacit and resides in people and organizational routines. Knowledge spillovers ◦ Synergies in the creation of know-how further enrich a related stock of knowledge. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Network Externalities When the value of the product increases as more people adopt it ◦ Also called: Demand-side increasing returns Bandwagon effects or ◦ Ex: portals on the Internet; social network sites ◦ Based on (driven by) communications and connectivity among users © 2010 Pearson Education, Inc. publishing as Prentice Hall

Two Sources of Network Effects Direct network effects ◦ Based on the size of the installed base, and communications/connectivity among users ◦ Metcalf’s Law: Value of the network = n 2 (where n=# of users) Indirect network effects ◦ Based on the incentive to develop and availability of “complementary” products Games played on consoles; DVD/films played on DVD players © 2010 Pearson Education, Inc. publishing as Prentice Hall

Indirect Network Effects Which comes first, the chicken or the egg? ◦ Does the device/hardware lead the availability of software/applications, or vice versa? ◦ Research suggests hardware sales drive availability of software (in some markets) while in others, hardware and software together are necessary. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Critical Success Factors in Industries Characterized by Network Externalities 1. Quickly grow the installed base of customers 2. Establish industry standards for compatibility/ interoperability Industry Standards: agreed-upon specifications to ensure technical compatibility for products across different firms ◦ Allow customers to gain compatibility across various components of a product Fear, uncertainty, and doubt is lessened © 2010 Pearson Education, Inc. publishing as Prentice Hall

When Competing Platforms Exist: Customers and developers of complementary products take a wait-and-see attitude: ◦ Which platform will “win? ” ◦ Examples: Telecommunications HDTV © 2010 Pearson Education, Inc. publishing as Prentice Hall

Will a Dominant Design Emerge? How Long? Dominant design emerges when: ◦ Company/industry follows open business model ◦ Innovation is less radical ◦ R&D intensity is high (creates pressure to select dominant design) Dominant design emerges sooner when: ◦ Value network has large number of firms (creates pressure to know what dominant design will be) ◦ De facto process guides development of industry standards (versus imposed by some “body”) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Other Strategies to Become Industry Standard “Get Big Fast” Strategies ◦ Free offerings ◦ License technology to other industry players ◦ Create customer lock-in based on switching costs to a competitive offering Caveats: Best technology may not win the standards war Companies that are the de facto industry standard are carefully scrutinized for monopolistic behavior Superior technology may not unseat established standards © 2010 Pearson Education, Inc. publishing as Prentice Hall

Why Can’t Companies Agree on Standards? “It’s my way or the high-way. ” ◦ Company believes its technology is superior and will prevail in the marketplace; willing to “go it alone” “We shall overcome!” ◦ Through sheer power, effort, and resources, company believes its technology will become the dominant design. “But it’s mine!” ◦ Company is unwilling to share knowledge with other industry players, which is oftentimes required for using a common industry platform. “I deserve more!” ◦ Partners cannot come to terms regarding licensing fees, royalties, or revenue sharing. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Innovations 1. Incremental versus breakthrough 2. Product versus process versus organizational 3. Architectural versus modular (component) 4. Sustaining versus disruptive © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Innovations: Incremental vs. Breakthrough Incremental Innovations Continuations of existing products, methods or practices ◦ Minor improvements made with existing methods and technology ◦ Evolutionary as opposed to revolutionary Breakthrough Innovations Totally new products ◦ Considerable change in basic technologies and methods ◦ Revolutionary ideas that can create new markets © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Innovations: Product vs. Process Product Innovations New products offering improvements in functional characteristics, technical abilities, ease of use, or other dimensions(incremental or breakthrough) Process Innovations New techniques of producing goods or services ◦ Improve the effectiveness or efficiency of production processes ◦ Facilitate the discovery of underlying scientific properties of technological domains Product innovations of one firm may be used as a process innovation by another and vice versa © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Innovations: Architectural vs. Modular Architectural Innovations New foundations or fundamentals of how the various components of a system work together to function ◦ Based on scientific principles ◦ Different from existing technological platforms ◦ May be considered radical. Modular Innovations New parts or materials within the same technological platform ◦ Example: Magnetic tape, floppy disk, and zip disk differ by components or materials, all three based on the platform of magnetic recording © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Innovations: Sustaining vs. Disruptive Sustaining Innovations Target demanding, high-end customers with improved performance ◦ Typically through incremental innovations Disruptive Innovations New, simpler, more convenient, less sophisticated and/or less expensive than existing products or services ◦ Appeal to customers at the lower end of the market ◦ Low-end disruption: attracts low-end customers initially, moves into more upscale markets over time as the technology improves ◦ New-market disruption: converts previous non-customers into new customers, thereby creating a new market © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Innovations: Organizational Innovations Create or alter business structures, practices, and models Business model (strategy) innovations ◦ Change in the way business is done in terms of capturing value New methods of financial management Innovations aimed at social needs and issues Innovations in marketing © 2010 Pearson Education, Inc. publishing as Prentice Hall

Radical vs. Disruptive Innovation Radical Innovation ◦ Substantially new technology relative to what already exists in the industry Disruptive Innovation ◦ Increased sophistication of the feature set in product offerings at a faster rate than customers can keep up may lead to a gap in the marketplace. Gap = Opportunities ◦ New companies may enter the market with lower-end products, selling to lower-end customers first © 2010 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain for Auto Industry Suppliers Car Manufacturers -raw materials -components -production equipment -services Car Dealers Customers -personal consumption -business use (fleets, etc. ) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Critical ideas on a Supply Chain Perspective on Technology Often, technological innovations occur at upstream (i. e. , supplier) levels in the supply chain ◦ Such innovations may radically affect the manufacturing process or the inner workings of a product, but ◦ End-user behavior may not be significantly affected Examples: food, fashion, apparel © 2010 Pearson Education, Inc. publishing as Prentice Hall

Differential Strategies: Breakthrough vs. Incremental Innovations Companies must be ambidextrous and manage both types of innovation processes Incremental innovations require: ◦ Attention to cost competitiveness, manufacturing, understanding the market Breakthrough innovations require: ◦ More long term thinking; risk tolerance; ambiguous market information © 2010 Pearson Education, Inc. publishing as Prentice Hall

Implications of Contingency Theory: Examples Breakthrough R&D/Marketing R&D leads; Interaction “technology push” Type of Marketing Research Lead users; empathic design Incremental Marketing leads; “customer pull” Surveys; focus groups Role of Primary demand; Advertising customer education Selective demand; build image Pricing May be premium More competitive © 2010 Pearson Education, Inc. publishing as Prentice Hall

High-Tech Marketing Decisions: Framework Marketing – 4 Ps (Ch. 8 -12) } High-Tech Firm (Ch. 2 -5) Strategic Planning Process Core Competencies Organizational Culture and Climate Core Rigidities Market Orientation Cross-Functional Teams R&D/Marketing Interactions Partnerships and Alliances Customer Relationship Marketing Understanding Customers (Ch 6, 7) High-tech Research Forecasting Customer Decision-Making Adoption/Diffusion of Innovations Market Segmentation, Targeting, Positioning Societal and Ethical Concerns (Chapter 13) © 2010 Pearson Education, Inc. publishing as Prentice Hall

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