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Marketing of High-Technology Products and Innovations Chapter 5: Relationship Marketing: Partnerships and Alliances Marketing of High-Technology Products and Innovations Chapter 5: Relationship Marketing: Partnerships and Alliances

Questions to Consider What are the types of partnerships high-tech companies form? What are Questions to Consider What are the types of partnerships high-tech companies form? What are the reasons forming such partnerships? How can the risks of partnering arrangements be mitigated? What are the key risks of and benefits from outsourcing? What factors affect high-tech companies’ successful use of outsourcing?

 Why do some customers cost more than others to serve? Are loyal customers Why do some customers cost more than others to serve? Are loyal customers more profitable than others? What is the process companies use to manage customer relationships? © 2010 Pearson Education, Inc. publishing as Prentice Hall

Knowledge-Based Economy Intangible resources are the source of competitive advantage Information and knowledge can Knowledge-Based Economy Intangible resources are the source of competitive advantage Information and knowledge can be shared ◦ These resources grow through use and application Communication is fundamental to knowledge flows. ◦ Factors influencing social relations are of fundamental importance. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Knowledge-Based Economy The effect of geographic location varies: ◦ Diminished when using technology, say, Knowledge-Based Economy The effect of geographic location varies: ◦ Diminished when using technology, say, virtual marketplaces and virtual organizations ◦ Reinforced by the creation of industry clusters to achieve world-wide excellence. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Knowledge-Based Economy Knowledge and information Knowledge-Based Economy Knowledge and information "leak" to where demand is highest and the barriers are lowest. The value of knowledge is higher embedded in systems or processes ◦ Don’t let it "walk out of the door" in people's heads © 2010 Pearson Education, Inc. publishing as Prentice Hall

Knowledge-Based Economy Products/services with embedded knowledge command price premiums. Pricing and value depends heavily Knowledge-Based Economy Products/services with embedded knowledge command price premiums. Pricing and value depends heavily on context. ◦ The same information or knowledge can have vastly different value depending on the person and the time. Human capital (competencies) are a key component of value ◦ Yet downsizing is often seen as a positive "cost cutting" measure. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Globalization “Flattening” of the world ◦ ◦ Computer networking Communications technologies The Internet Enhanced Globalization “Flattening” of the world ◦ ◦ Computer networking Communications technologies The Internet Enhanced transportation Globalization + Knowledge based economy = COLLABORATION © 2010 Pearson Education, Inc. publishing as Prentice Hall

Partnering and Strategic Alliances 1. 2. 3. 4. 5. “Flatteners” with specific implications for Partnering and Strategic Alliances 1. 2. 3. 4. 5. “Flatteners” with specific implications for high-tech partnerships: Outsourcing Offshoring Global technology-enabled supply chains Insourcing Open source innovation Thomas Friedman © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Partnerships © 2010 Pearson Education, Inc. publishing as Prentice Hall Types of Partnerships © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Partnerships Vertical partnerships: formed between different levels of the supply chain ◦ Types of Partnerships Vertical partnerships: formed between different levels of the supply chain ◦ Buyer-supplier relationships ◦ Supplier – OEM customers Efficiencies in accessing materials Collaborate to innovate, differentiating end product ◦ Outsource service providers – business customers © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Partnerships Vertical Manufacturers – distribution channel members ◦ Access to downstream markets Types of Partnerships Vertical Manufacturers – distribution channel members ◦ Access to downstream markets ◦ Relay market information Companies – customers (end-users) ◦ Relationship marketing ◦ Long-term revenue stream ◦ Source of market information © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Partnerships – Horizontal partnerships formed between firms that operate at the same Types of Partnerships – Horizontal partnerships formed between firms that operate at the same level of the supply chain ◦ Complementors ◦ Competitors © 2010 Pearson Education, Inc. publishing as Prentice Hall

 Complementary Alliances ◦ Form with companies offering different components of the end-to-end solution Complementary Alliances ◦ Form with companies offering different components of the end-to-end solution ◦ Allows each to maintain focus on own core competencies ◦ Stimulates demand through greater customer value Competitive Alliances ◦ “Competitive collaboration; ” “co-opetition” ◦ Compete in some market domains, collaborate in others © 2010 Pearson Education, Inc. publishing as Prentice Hall

Horizontal Partnerships and Financial Performance Higher financial performance from competitive alliance activity when: ◦ Horizontal Partnerships and Financial Performance Higher financial performance from competitive alliance activity when: ◦ Moderate level of competitive alliance activity (versus low or high) ◦ More sophisticated competitor strategies/knowledge ◦ Win/win approach (versus win/lose) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Partnerships – Horizontal ◦ Industry consortium: industry-wide coalition typically comprised of competitors Types of Partnerships – Horizontal ◦ Industry consortium: industry-wide coalition typically comprised of competitors who have a shared interest Set industry standards Influence government regulations Pursue international markets Develop metrics for sustainability © 2010 Pearson Education, Inc. publishing as Prentice Hall

Reasons for Partnering Gain access to resources and skills in a timely, more cost-efficient Reasons for Partnering Gain access to resources and skills in a timely, more cost-efficient manner Reasons vary over the product life cycle (next slide) © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle, Innovation, and the Role of Alliances High Product Innovation Rate The Product Life Cycle, Innovation, and the Role of Alliances High Product Innovation Rate of Major Innovation Process Innovation Low Stage of Product Life Cycle Emergence Growth Maturity Decline Alliance Types Standards Licensing Technology Licensing R&D Marketing Manufacturing Marketing Process R&D Attacker Incumbent © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Emergence Stage Uncertainty surrounds product Purchasers are innovators and technology The Product Life Cycle- Emergence Stage Uncertainty surrounds product Purchasers are innovators and technology enthusiasts ◦ Willing to take risks ◦ Require accurate portrayal of benefits and liabilities of the innovation ◦ Require technically knowledgeable support ◦ Want new technology early and at a low cost © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Emergence Stage Why Partner? ◦ Alliances are valuable among potential The Product Life Cycle- Emergence Stage Why Partner? ◦ Alliances are valuable among potential competitors to establish industry standards with: Licensing agreements Strategic alliances Diversification into complementary products Aggressive product positioning (details on following slides) © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Partnering in the Emergence Stage Advantages of licensing strategy ◦ The Product Life Cycle- Partnering in the Emergence Stage Advantages of licensing strategy ◦ Ensures a wide supply base for the technology ◦ Limits the number of technologically incompatible product choices for customers Hastens market acceptance ◦ Signals the possibility of a larger installed base Provides incentives for suppliers of complementary products to pursue development © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Partnering in the Emergence Stage Drawbacks of licensing strategy ◦ The Product Life Cycle- Partnering in the Emergence Stage Drawbacks of licensing strategy ◦ May attempt to alter the technology to avoid paying licensing fees or royalties ◦ Original developer loses a possible monopoly position ◦ Competition may lead to lower prices in the market © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Partnering in the Emergence Stage Strategic Alliance: cooperative agreement with The Product Life Cycle- Partnering in the Emergence Stage Strategic Alliance: cooperative agreement with actual/potential competitor(s) to jointly sponsor development of a technological standard Advantages: ◦ ◦ ◦ Help ensure a wide supply base for the technology Build positive expectations for market demand Co-opt competitors Reduce confusion in marketplace Combined knowledge may produce superior product © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Partnering in the Emergence Stage Strategic Alliance Drawbacks: ◦ Partner The Product Life Cycle- Partnering in the Emergence Stage Strategic Alliance Drawbacks: ◦ Partner may appropriate the firm’s know-how in an opportunistic fashion © 2010 Pearson Education, Inc. publishing as Prentice Hall

“Go it alone” strategies for standard-setting Diversification ◦ Company offers multiple elements of the “Go it alone” strategies for standard-setting Diversification ◦ Company offers multiple elements of the whole product solution ◦ Ex: i. Pod/i. Tunes Aggressive Product Positioning ◦ Company maximizes size of installed base by penetration pricing, wide distribution, and many models/versions of product Both strategies have pros/cons © 2010 Pearson Education, Inc. publishing as Prentice Hall

Which Strategy to Set Industry Standard? Barriers to Imitation Firm has Requisite Skills Existence Which Strategy to Set Industry Standard? Barriers to Imitation Firm has Requisite Skills Existence of Capable Competitors Aggressive Sole Provider High Yes No Passive Multiple Licensing Low No Yes Aggressive Positioning + Licensing Low Yes Selective Partnering High No Yes © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Growth Stage Dominant design becomes industry standard ◦ License to The Product Life Cycle- Growth Stage Dominant design becomes industry standard ◦ License to competitors ◦ Form R&D alliances to develop product extensions ◦ Form marketing alliances to access new markets Early adopters ◦ Needs increasingly clear ◦ Can envision the potential of the new technology Least price sensitive In a hurry to reap rewards Process technology replaces innovation in importance © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Maturity Stage High sales volume and revenue but slower growth The Product Life Cycle- Maturity Stage High sales volume and revenue but slower growth Mass-market adopters Process innovation dominates to achieve cost controls Outsourced relationships Marketing alliances © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Product Life Cycle- Decline Stage Product replaced by new technologies License disruptive technology The Product Life Cycle- Decline Stage Product replaced by new technologies License disruptive technology from a new competitor Cycle begins again © 2010 Pearson Education, Inc. publishing as Prentice Hall

Reasons to Partner Access resources and skills Gain cost efficiencies Speed time-to-market Access new Reasons to Partner Access resources and skills Gain cost efficiencies Speed time-to-market Access new markets Define industry standards © 2010 Pearson Education, Inc. publishing as Prentice Hall

Reasons to Partner (cont. ) Develop innovations and new products Develop complementary products Gain Reasons to Partner (cont. ) Develop innovations and new products Develop complementary products Gain market clout Maintain focus on core competencies Learn from partners © 2010 Pearson Education, Inc. publishing as Prentice Hall

Risks in Partnering Increase project complexity Loss of autonomy and control ◦ Decisions must Risks in Partnering Increase project complexity Loss of autonomy and control ◦ Decisions must be made jointly ◦ Success dependent on another’s efforts Loss of trade secrets ◦ Attempts to “disarm” competition Dilution of competitive advantage/ “de-skilling” © 2010 Pearson Education, Inc. publishing as Prentice Hall

Risks in Partnering Legal issues and antitrust concerns ◦ Collaboration is necessary to compete Risks in Partnering Legal issues and antitrust concerns ◦ Collaboration is necessary to compete globally Therefore, antitrust laws may encourage partnering ◦ Collaboration may decrease domestic competition Partnerships may come under scrutiny, Especially if they have an indirect impact on pricing © 2010 Pearson Education, Inc. publishing as Prentice Hall

Risks in Partnering Failure to achieve objectives ◦ Incompatible cultures ◦ Lack of attention/resources Risks in Partnering Failure to achieve objectives ◦ Incompatible cultures ◦ Lack of attention/resources in managing the relationship ◦ Trust issues © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Interdependence ◦ Shared mutual dependencies provide motivation for partnership Factors Contributing to Partnership Success Interdependence ◦ Shared mutual dependencies provide motivation for partnership success ◦ Asymmetrical dependence leads to vulnerability and possible exploitation Caution warranted with partners of unequal size ◦ Low levels of interdependence provide no motivation to relationship © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Governance Structure ◦ Terms, conditions, systems, and processes used Factors Contributing to Partnership Success Governance Structure ◦ Terms, conditions, systems, and processes used to manage the alliance Unilateral: one party has authority to make decisions Bilateral: governance based on mutual expectations regarding behaviors and activities Commitment Trust Communication ◦ Governance structure should match the partnership’s risk level © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Commitment ◦ Desire to continue the relationship ◦ Committed Factors Contributing to Partnership Success Commitment ◦ Desire to continue the relationship ◦ Committed members are less likely to take advantage make decisions that sabotage viability of relationship ◦ Demonstrated by Investments dedicated solely to the relationship © 2010 Pearson Education, Inc. publishing as Prentice Hall

 Types of Commitment ◦ Economic need (“have to be committed”) Does not lead Types of Commitment ◦ Economic need (“have to be committed”) Does not lead to partnership success ◦ Voluntary desire (“want to be committed”) Based on positive feeling and regard for partner’s contributions Associated with partnership success ◦ Moral obligation (“ought to be committed”) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Trust ◦ Belief that partner’s decisions will serve best Factors Contributing to Partnership Success Trust ◦ Belief that partner’s decisions will serve best interest of the partnership ◦ Partner will act honestly and benevolently ◦ Trust in the partner’s motives and intents Trust contributes to ◦ Effective information sharing ◦ Willingness to share scarce/sensitive resources ◦ Sense of mutual benefit © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Effective Communication ◦ ◦ ◦ Frequent sharing Includes proprietary Factors Contributing to Partnership Success Effective Communication ◦ ◦ ◦ Frequent sharing Includes proprietary information Bidirectional (two-way) communication Credible and reliable Both structured and ad hoc communication © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Perceived relationship fairness 3 Types of fairness ◦ Distributive: Factors Contributing to Partnership Success Perceived relationship fairness 3 Types of fairness ◦ Distributive: fairness in the distribution of awards ◦ Procedural: fairness of the process to determine distribution of rewards ◦ Interactional: fairness of the nuances of interpersonal treatment Procedural fairness more important than distributive fairness for long-term relationship success. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Compatible Corporate Cultures ◦ Different values and beliefs about Factors Contributing to Partnership Success Compatible Corporate Cultures ◦ Different values and beliefs about how things are done ◦ Some companies have reputations as being hard to partner with ◦ If corporate cultures clash, hard to realize partnership benefits. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Integrative conflict resolution and negotiation techniques ◦ Conflict resolution Factors Contributing to Partnership Success Integrative conflict resolution and negotiation techniques ◦ Conflict resolution technique more important than the level of conflict per se. ◦ Integrative resolution based on: Both parties have a shared stake in the outcome Addressing needs of both parties Identifying mutually beneficial solution (win/win) ◦ Escalate conflict beyond the operational level to senior level ◦ Negotiation is cheaper than legal recourse © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factors Contributing to Partnership Success Judicious Use of Legal Contracts ◦ Contracts may violate Factors Contributing to Partnership Success Judicious Use of Legal Contracts ◦ Contracts may violate the spirit of cooperation, but ◦ Contracts may also clarify obligations and expectations ◦ Contracts should be used in combination with bilateral governance © 2010 Pearson Education, Inc. publishing as Prentice Hall

 “Spirit of cooperation” is key Develop competency in partnering ◦ “cooperative competency; ” “Spirit of cooperation” is key Develop competency in partnering ◦ “cooperative competency; ” “alliance competence; ” “partnering orientation” © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing High Risk/High Opportunity Vertical Partnerships Transfer an entire business function to a partner Outsourcing High Risk/High Opportunity Vertical Partnerships Transfer an entire business function to a partner Types of Outsourcing ◦ Contract manufacturing ◦ BPO: Business Process Outsourcing ◦ ITO: Information Technology Outsourcing ◦ Innovation Outsourcing R&D, Product development, Design ODM Model: Original design manufacturer © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing Benefits: Gain access to expert performance ◦ Provider has refined knowledge in a Outsourcing Benefits: Gain access to expert performance ◦ Provider has refined knowledge in a specific function Scale economies ◦ Cost efficiencies Maintain focus on true core competencies © 2010 Pearson Education, Inc. publishing as Prentice Hall

Global spending on outsourcing for various business functions (2005) © 2010 Pearson Education, Inc. Global spending on outsourcing for various business functions (2005) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Business Services Outsourcing by Region © 2010 Pearson Education, Inc. publishing as Prentice Hall Business Services Outsourcing by Region © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing Offshoring ◦ Performing functions outside of client’s home country Captive Offshoring ◦ Company-owned Outsourcing Offshoring ◦ Performing functions outside of client’s home country Captive Offshoring ◦ Company-owned facilities in another country Reverse outsourcing ◦ An outsourced company opens an office in original country © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing Nearshore outsourcing ◦ Outsource provider is near company’s own boundaries, same time zone Outsourcing Nearshore outsourcing ◦ Outsource provider is near company’s own boundaries, same time zone Home shoring ◦ Domestic outsourcing, or ◦ Hiring domestic workers in their own home Farm Shoring ◦ Outsourcing to domestic, rural areas © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Reasons and Risks © 2010 Pearson Education, Inc. publishing as Prentice Hall Outsourcing: Reasons and Risks © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Reasons Cost Savings ◦ ◦ Contract manufacturing in particular Driven by economies of Outsourcing: Reasons Cost Savings ◦ ◦ Contract manufacturing in particular Driven by economies of scale Volume discounts Supply chain efficiency Hone core competencies ◦ Outsource non-essential tasks © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Reasons Capabilities of Outsource Providers ◦ Skilled, low-cost talent pool Technology Developments ◦ Outsourcing: Reasons Capabilities of Outsource Providers ◦ Skilled, low-cost talent pool Technology Developments ◦ Easier for companies to communicate with remote outsource providers Mitigate HR Management Issues ◦ Overhead- pension plans, insurance, etc. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Reasons Other general trends ◦ Globalization ◦ Competitive intensity ◦ Time/Cost pressures © Outsourcing: Reasons Other general trends ◦ Globalization ◦ Competitive intensity ◦ Time/Cost pressures © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Risks Cost Savings Don’t Materialize ◦ Difficult to calculate true cost in advance Outsourcing: Risks Cost Savings Don’t Materialize ◦ Difficult to calculate true cost in advance Quality Concerns ◦ 1 -800 numbers: endless transfers, confusion ◦ Suppliers don’t understand customer’s business Dependence on Vendor ◦ “Switching costs” © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Risks Dilution of Competitive Advantage ◦ Less differentiation from competitor ◦ “hollowed out” Outsourcing: Risks Dilution of Competitive Advantage ◦ Less differentiation from competitor ◦ “hollowed out” Risk of Fostering New Competition ◦ Sharing trade secrets Public Backlash ◦ Political issue © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Contingency Approach Outsourcing: - Whether to outsource - The degree of outsourcing - Outsourcing: Contingency Approach Outsourcing: - Whether to outsource - The degree of outsourcing - Type of outsourcing Success of Outsourcing: - Cost savings - New insights Contingency Factors: - Criticality of business function - Nature of business process/ Degree of customization - Task Characteristics - Vendor capabilities - Governance © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Criticality of the Business Function Define mission-critical business processes; break-through innovations ◦ Core Outsourcing: Criticality of the Business Function Define mission-critical business processes; break-through innovations ◦ Core intellectual property and skills ◦ Keep in-house For incremental innovation and non-critical processes ◦ Commodity knowledge and skills ◦ Outsource © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Nature of Business Process PROCESS COMPLEXITY Simple Standardized Process Outsource Customized Process Selective Outsourcing: Nature of Business Process PROCESS COMPLEXITY Simple Standardized Process Outsource Customized Process Selective Outsourcing, Automation Complex Captive offshoring, selective outsourcing In-house, selectively outsource some components © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Task Characteristics Economies of scale ◦ Can the function be aggregated across customer/OEM Outsourcing: Task Characteristics Economies of scale ◦ Can the function be aggregated across customer/OEM businesses? ◦ If not: don’t outsource Transfer of explicit, codified knowledge ◦ Can the function be clearly mapped and communicated to outsource provider? ◦ If not: don’t outsource Clearly specified ownership of intellectual property rights/risks ◦ Can intellectual rights/responsibilities be clearly articulated? ◦ If not: don’t outsource © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Task Characteristics Vendor Capabilities ◦ What are the specific capabilities to perform the Outsourcing: Task Characteristics Vendor Capabilities ◦ What are the specific capabilities to perform the task? ◦ Does the provider have the requisite capabilities to perform them? Governance ◦ Particularly important for R&D alliances ◦ Controls can limit innovation but are necessary ◦ Controls should be “ex ante” (before the work) rather than “ex post” (during the work) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Best Practices Have clear reasons to outsource ◦ Not: “my competitors are” Don’t Outsourcing: Best Practices Have clear reasons to outsource ◦ Not: “my competitors are” Don’t outsource a mess ◦ Map workflow/process carefully Set up the right type of outsource relationship ◦ Maybe captive offshoring, etc. Be ready for possible backlash Invest time and effort to make it work Treat partners as equals © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outsourcing: Future Outlook Continued evolution ◦ Globally Migration to low-cost areas ◦ Politically Rhetoric Outsourcing: Future Outlook Continued evolution ◦ Globally Migration to low-cost areas ◦ Politically Rhetoric of lost jobs Mitigate with educated work force ◦ Managerially Balance in-house, strategic alliances, outsourcing © 2010 Pearson Education, Inc. publishing as Prentice Hall

Open Innovation Breakthrough innovations developed by an “innovation ecosystem” ◦ A global network of Open Innovation Breakthrough innovations developed by an “innovation ecosystem” ◦ A global network of partners – suppliers, customers, competitors ◦ Innovation based on collaboration and sharing of expertise and knowledge between partners ◦ Innovation processes transcend local industry clusters and national boundaries Driving Factors ◦ ◦ Complexity and uncertainty of R&D Globalization of industries Convergence of technologies Resource constraints © 2010 Pearson Education, Inc. publishing as Prentice Hall

New Productstrategic alliance to generate Alliances Unique form of innovation Paradox: ◦ “Logic of New Productstrategic alliance to generate Alliances Unique form of innovation Paradox: ◦ “Logic of innovation” Spontaneous, serendipitous insights ◦ “Logic of alliances” Detail roles and responsibilities Formalized collaborative arrangements Sharing of knowledge and expertise requires trust, but: ◦ Many strategic alliances lack trust © 2010 Pearson Education, Inc. publishing as Prentice Hall

New Product Alliances Success: ◦ Spirit of cooperation ◦ Governance Horizontal (competitive) partners reluctant New Product Alliances Success: ◦ Spirit of cooperation ◦ Governance Horizontal (competitive) partners reluctant to share knowledge, but their innovations exhibit: ◦ High levels of product creativity ◦ Fast development speed Geographic proximity does not inhibit information sharing as long as: ◦ Partners have close, relational ties © 2010 Pearson Education, Inc. publishing as Prentice Hall

Industry Clusters Geographic concentrations of companies in a particular industry ◦ Silicon Valley in Industry Clusters Geographic concentrations of companies in a particular industry ◦ Silicon Valley in California ◦ Often highly innovative, due to: Enhanced knowledge sharing Economies in infrastructure, talent, and social relationships © 2010 Pearson Education, Inc. publishing as Prentice Hall

Learning from Partners Knowledge sharing key to success of open innovation model Learning can Learning from Partners Knowledge sharing key to success of open innovation model Learning can contribute to positive relationship outcomes, but: ◦ Can also result in “de-skilling” of partner with loss of proprietary information. To learn “tacit knowledge, ” firms must have close partnering relationships— ◦ Which increases the risk of those partnerships Use caution and appropriate governance structures. © 2010 Pearson Education, Inc. publishing as Prentice Hall

Customer Relationship Management (CRM) Marketing is used to develop close, long-term relationships with customers Customer Relationship Management (CRM) Marketing is used to develop close, long-term relationships with customers Win-win solutions Customers as investments ◦ Acquisition cost/customer= (total cost of marketing campaign) / (# of prospects who become customers) © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM Customer equity: ◦ net present value of the cash flows associated with a CRM Customer equity: ◦ net present value of the cash flows associated with a customer Lifetime value = customer equity Net present value cash inflows > present value of cash outflows (illustration on following slide) © 2010 Pearson Education, Inc. publishing as Prentice Hall

Computing Customer Equity © 2010 Pearson Education, Inc. publishing as Prentice Hall Computing Customer Equity © 2010 Pearson Education, Inc. publishing as Prentice Hall

Data to Quantify CRM 1. Total marketing cost to acquire new customers 2. Number Data to Quantify CRM 1. Total marketing cost to acquire new customers 2. Number of prospects reached during the campaign 3. Number of prospects who became customers 4. Revenue from a new customer’s initial purchase © 2010 Pearson Education, Inc. publishing as Prentice Hall

Data to Quantify CRM 5. Expected retention duration for a customer 6. Annual revenues Data to Quantify CRM 5. Expected retention duration for a customer 6. Annual revenues expected from the customer 7. Costs to serve a customer 8. Firm’s cost of capital 9. Present value chart © 2010 Pearson Education, Inc. publishing as Prentice Hall

Customer Equity Management Process © 2010 Pearson Education, Inc. publishing as Prentice Hall Customer Equity Management Process © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 1 Identify “high potential” customers Generate profitable revenue stream over time, NPV CRM: Step 1 Identify “high potential” customers Generate profitable revenue stream over time, NPV > 0 Identify the key characteristics among loyal, profitable customers ◦ Target others who share similar characteristics © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 1 Identify “high potential” customers Predictors of Potential: ◦ Customer share of CRM: Step 1 Identify “high potential” customers Predictors of Potential: ◦ Customer share of wallet: % of business in a specific category that a customer does with a particular vendor Large share of wallet = prospect ◦ Cross-buying: purchasing products from multiple categories © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 2 Develop a Customer Acquisition Strategy How much money should be spent CRM: Step 2 Develop a Customer Acquisition Strategy How much money should be spent pursuing a customer? ◦ Depends on likelihood of realizing cash flows ◦ Balance time horizon to recoup customer acquisition costs against lifetime value Four generic strategies (see next slide) © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 2 Develop a Customer Acquisition Strategy Retention Profitability (LTV) Time Horizon to CRM: Step 2 Develop a Customer Acquisition Strategy Retention Profitability (LTV) Time Horizon to Recoup Customer Acquisition Costs Short Long Low Pay as You Go Divest/ Restructure High Full Throttle Slingshot These strategies are also affected by differentiation and pricing. © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 2 Develop a Customer Acquisition Strategy Differentiation ◦ Service support, personal interaction, CRM: Step 2 Develop a Customer Acquisition Strategy Differentiation ◦ Service support, personal interaction, expertise, efficiency More important than quality and delivery performance in B 2 B settings. Price ◦ Pricing tactics a double-edged sword in customer acquisition ◦ Risk of acquiring bargain hunters © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 2 Develop a Customer Acquisition Strategy Clearly articulate superiority of non-price elements CRM: Step 2 Develop a Customer Acquisition Strategy Clearly articulate superiority of non-price elements in value proposition Offer modest price inducement ◦ Encourages trial and switching © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 3 Develop the Customer Portfolio Management Strategy Assess customer profitability & projected CRM: Step 3 Develop the Customer Portfolio Management Strategy Assess customer profitability & projected duration of relationship ◦ Not all customers are equally valuable ◦ Some loyal customers may be more costly to serve See loyalty strategies on following slide © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 3 Loyalty Strategies Transaction High Profit Low Profit Butterflies: Good fit High CRM: Step 3 Loyalty Strategies Transaction High Profit Low Profit Butterflies: Good fit High profit potential Transaction satisfaction Milk active accounts Cease investing Strangers: Little fit Lowest profit potential Make no investment Max transaction profit Relationship True Friends: Good fit Best profit potential Consistent communication Attitudinal & behavioral loyalty Delight customers Barnacles: Limited fit Low profit potential Measure size and share of wallet Low share, up- and cross-sell Small wallet, strict cost control © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 3 Develop the Customer Portfolio Management Strategy TRUE FRIENDS The most valuable CRM: Step 3 Develop the Customer Portfolio Management Strategy TRUE FRIENDS The most valuable customer group Highly profitable and loyal Relationship-oriented ◦ Seek social, economic, and technical ties Risk: Overkill Keep relationship fresh with open, frequent communication © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 3 Develop the Customer Portfolio Management Strategy BUTTERFLIES 2 nd most valuable CRM: Step 3 Develop the Customer Portfolio Management Strategy BUTTERFLIES 2 nd most valuable customer group Transient, and highly profitable Shoppers ◦ Seek the best value Risk: continued investment after they’ve “flown” Capture as much of their business as possible in the short time. © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 3 Develop the Customer Portfolio Management Strategy BARNACLES Loyal, desire long-term relationship CRM: Step 3 Develop the Customer Portfolio Management Strategy BARNACLES Loyal, desire long-term relationship Not very profitable ◦ Low size/volume of transactions ◦ Cost to serve them may be high Risk: create drag Renegotiation may be required © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM: Step 3 Develop the Customer Portfolio Management Strategy STRANGERS Lowest Profit Potential Transaction-oriented CRM: Step 3 Develop the Customer Portfolio Management Strategy STRANGERS Lowest Profit Potential Transaction-oriented ◦ Focus on price instead of value Limited buyer-seller communication Risk: wasted resources ◦ company should not invest by marketing to strangers Ever transaction must produce a profit © 2010 Pearson Education, Inc. publishing as Prentice Hall

Which Customers Are Really Profitable? Transaction High Profit Low Profit Relationship Service provider Grocery Which Customers Are Really Profitable? Transaction High Profit Low Profit Relationship Service provider Grocery retail Mail-order Brokerage 20% 15% 19% 18% Service provider Grocery retail Mail-order Brokerage 30% 36% 31% 32% Service provider Grocery retail Mail-order Brokerage 29% 34% 29% 33% Service provider Grocery retail Mail-order Brokerage 21% 15% 21% 17% © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM Software Used to capture data about customers from any contact within the enterprise CRM Software Used to capture data about customers from any contact within the enterprise Provide the ability to: ◦ Track profitability ◦ Detect dissatisfaction before customer is lost ◦ Improve Product selling Retention Loyalty Revenue © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM Software includes ◦ ◦ ◦ Sales force automation Call-center automation Marketing automation Web CRM Software includes ◦ ◦ ◦ Sales force automation Call-center automation Marketing automation Web sales Web configurators Web analysis and marketing CRM software revenue is projected to surpass $7. 8 billion worldwide in 2008. © 2010 Pearson Education, Inc. publishing as Prentice Hall

CRM Software Despite all that… Nearly 1/3 of CRM deployments fail* Sale representatives may CRM Software Despite all that… Nearly 1/3 of CRM deployments fail* Sale representatives may reject CRM ◦ Lack of training and understanding Top management goals must be aligned with CRM goals Relationship marketing philosophy must come before CRM system *according to AMR Research © 2010 Pearson Education, Inc. publishing as Prentice Hall

Chapter Features Opening Vignette: Apple i. Phone Technology Expert: REI (Developing Industry. Wide Eco Chapter Features Opening Vignette: Apple i. Phone Technology Expert: REI (Developing Industry. Wide Eco Metrics) Technology Tidbit: Slingshot water purifier End-of-Book Case: Xerox; Boeing © 2010 Pearson Education, Inc. publishing as Prentice Hall

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