MKTG 640

Value Innovation

Consider 1998 Compaq vs IBM

What does this show?

Imitative – not innovative approaches to the market

These companies act REACTIVELYA company’s understanding of

emerging mass markets and changing customer demands becomes hazy

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

Companies with sustained high growth and profits practice value innovation

Value Innovation not dependent on:

SizeYears of operationIndustry conditionsCounty of origin

Value Innovation

Offers fundamentally new and superior buyer value

Makes competition irrelevant

Example: Callaway Golf

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?

Value Innovation – Callaway Golf

They got the country club marketAt 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.

Value Innovation

Places the buyer – not the competition at the center of strategic thinking.

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

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.

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.

Companies that pursue innovation systematically

….can create new demand.

Value and Innovation

Value innovation – anchors innovation with buyer value.

Value innovation is not the same as value creation

VC is incrementalVI is breakthrough

Value and Innovation

Value innovation – links innovation to what the MASS of buyers want.

Questions:1. Are we offering customers radically

superior value?2. Is our price level accessible to the

mass of buyers in our target audience?

Technological versus Value Innovation

Tech innovation focuses on finding solutions for problems

Value innovation focuses on redefining the problems themselves

Value creation

Value Innovation - Schumpeter

‘creative destruction’ – new stuff kills or makes irrelevant – old stuff

Schumpeter => entrepreneurs do creative destruction

Value Innovation

Schumpeter => entrepreneurs do creative destruction

Not really, anyone in an organization can come up with a creative innovation

Market Dynamics of Value Innovation

Offering buyers fundamentally new and superior value in traditional businesses through innovative ideas and knowledge…..

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.’

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

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

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)

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

Even software is subject to free riding

Code is patentable – or at least can be protected

The look and feel is not patentableSoooo…duplicate the look and feel

and write new code..It happened to Netscape (IE)

What’s the best way to maximize profits?

Should value innovators follow the tech strategy (price skimming, restrict supply)?

What’s the best way to maximize profits?

Successful value innovators use a distinctly different market approach from that of conventional monopolists.

Value innovators market approach

Strategic pricing for demand creation.

Target costing for profit creation.

Strategic pricing for demand creation

Strategic pricing leads to high volume and rapidly establishes a powerful brand reputation.

Target costing for profit creation

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

Quantity

Rapid brand recognition built by VIPlus simultaneous drive to lower costs

Makes competition nearly irrelevantComps must overcome economies of

scale, learning effects and increasing returns.

To make value innovation happen

Ask five questions…

Conventional Logic Value Innovation Logic

Question 1 Does your company allow industry conditions to dictate the realm of what is possible, probable, and profitable?

Question 2 Does your company focus on outpacing the competition?

Question 3 Does management start by considering current assets and capabilities?

Question 4 Does your company focus on customer segmentation, customization, and retention?

Question 5 Does your company strive to improve the products and services of your industry?

Conventional Logic Value Innovation Logic

Question 1 Does your company allow industry conditions to dictate the realm of what is possible, probable, and profitable?

Does your company challenge the inevitability of industry conditions?

Question 2 Does your company focus on outpacing the competition?

Does your company focus on dominating the market by introducing a major advance in buyer value?

Question 3 Does management start by considering current assets and capabilities?

Does management consider starting anew?

Question 4 Does your company focus on customer segmentation, customization, and retention?

Does your company search for key value commodities that can unlock the mass market even if some existing customers will be lost?

Question 5 Does your company strive to improve the products and services of your industry?

Does your company think in terms of a total customer solution even if this pushes beyond the industry's traditional offerings?