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Use strategic market models to predict customer behavior
60
J PROD INNOV MANAG
ABSTRACTS
1997; 14:56-66
Millson, Raj, and Wilemon examine cooperative arrangements for joint development and commercialization of new products (which they call NPD alliances), focusing on the process of NPD alliance formation and identifying issues that need attention during this process. Millson et al. argue that several NPD problems can be overcome through the use of NPD alliances. For example, a firm may attempt to overcome NPD deficiencies by acquiring another firm that is active in NPD, only to be faced with personnel and financial burdens. Additionally, products may be insufficiently developed because information possessed by customers or suppliers (potential NPD alliance partners) had not been sought out. The authors note that NPD partnering is a process, not an isolated event, and propose a model of the NPD alliance formation process consisting of (1) awareness, (2) exploration, (3) commitment, and (4) dissolution. In the awareness stage, the originating finn scrutinizes its own capabilities and weaknesses, and identifies potential alliance partners that can include customers, financial institutions, producers of complementary products, universities, suppliers, investors, the government, and competitors. In the exploration stage, issues such as power, control, and trust are addressed. Each prospective parmer must identify whether the partnership is potentially a "win-win" proposition. Clearly, this requires an understanding of each partner's needs, and the authors suggest slow movement through this stage, sharing ideas and building trust. The third stage is commitment. The initial uncertainties are lessened, trust and confidence are high, each partner has a good understanding of the other's technical competence, and a contract is entered. At this point, NPD can accelerate quickly and greater risktaking may occur. Plus, once the contract is signed, it becomes costly to switch partners, so each partner is motivated to make the relationship work. Finally, dissolution of the partnership may occur. A partnership may not work out, due to opportunism, poor communication, moving too fast into a partner's market, or any other reason that erodes trust. Dissolution may even be planned, though that may not lessen the impact on the partner firms. The authors suggest that careful attention early in NPD can help firms avoid the problems that can lead to lessened trust and partnership dissolution. Early in the NPD process, prospective partners should agree on a plan that includes each partner's goals, methods for mutual NPD, and a statement of how the plan will be renewed. Such a plan can
include a statement of conditions and process for dissolution. In the worst of all worlds, a parmership dissolution can be a "lose-lose" situation, even for the partner that initiates the breakup, because it may mark that firm as an undesirable partner in the future. Millson et al. identify a set of questions that need to be asked by a firm contemplating an NPD alliance. These include: What benefits will be gained by partnering? What are the needs of our prospective NPD alliance partners? What are the benefits and costs of an alliance in terms of technology or market access? What types of alliance provides the right amount of flexibility and control? What will be the relative size (or power) of the partner firms? The authors conclude with a continuum of alliance structures to choose from, ranging from no-equityinvolvement alliances (contractual agreements, R&D partnerships), through joint ventures, to full-equityinvolvement structures (mergers and acquisitions). They also provide useful examples of each structure type. In general, the lower the equity involvement, the more limited the alliance control, but the greater the structural (organizational) flexibility.
Use Strategic Market Models to Predict Customer Behavior, David E. Schnedler, Sloan Management Review (Spring 1996), pp. 85-92. This article describes Hewlett Packard's successful use of an approach called strategic market models (SMM) to make decisions on their two competing business lines, HP 3000 and HP 9000. HP was having difficulty resolving the internal situation and particularly the conflict between the two business lines. Among other concerns, HP 3000 managers were worried that HP 9000 sales would cannibalize their sales; also, the two divisions usually looked at the markets independently and chose the same segments to target. The company had two stated objectives: to identify alternative strategies that would maximize total company profitability across the two lines and to get agreement across the two lines on relative market positions. The technique they used, SMM, relies on survey techniques to obtain demographic, user needs, and competitive perception data from its customer base. SMM allowed HP to get not only the current perceptual positions and stated user needs, but also to evalu-
ABSTRACTS
ate the likely market share effects of improvements of either line on any combination of product attributes. In the SMM application, HP discovered four userneed segments, each making up 20%-30% of the market: availability/performance, transparent access, value, and solution. For each of these, specific customer needs were rated from most to least important, and associations between segments and classification and demographic information were found. For example, the value segment was composed primarily of price-sensitive, smaller companies who rated performance, administration ease, cost, interoperability, and availability as very important needs. The results of SMM were used to help HP develop strategies for both lines. The HP 9000 division concentrated on new products focused on the PC server market and Novell Netware. The HP 3000 business capitalized on its ease-of-use advantages and introduced diskless PCs bundled with servers. Furthermore, once in place, SMM was available to dozens of other computer and support systems groups at HP; thus it really was an investment in company infrastructure. The author lists issues and concerns related to the use of SMM: 1. Address all the decision-making issues up front. 2. Use SMM only for big problems. It's powerful, but very time consuming and expensive. 3. Carefully evaluate the market research vendor you select. 4. Manage your expectations. Recognize what SMM will not do. 5. Allow for side trips. Several surprises are likely to crop up. 6. Recognize that needs segmentation and SMM are very useful, but not everything. The company must address questions of " w h o the customer is," "what the customer needs," but also " w h y the customer needs it."
New Entrants in a Mature Market: An Empirical Study of the Detergent Market, Wendy Lomax, Kathy Hammond, Maria Clemente, and Robert East,
Journal of Marketing Management (May 1996), pp. 281-296. This study examines the effect on market shares of existing brands when a brand extension enters the marketplace. Lomax et al. begin by noting that the majority of new product launches are line extensions and by clarifying some definitions in the literature. They con-
J PROD INNOV MANAG 1997; 14:56~66
61
sider a line extension to mean extending a brand to a product within the same product class and a franchise extension to mean extending the brand into a new product category (such as Virgin Records getting into the airline business). Brand extensions cover both line and franchise extensions. A brand extension strategy carries some risk. The new product can suffer from inappropriate assocations, the creation of customer confusion, inadequate or inappropriate support, or no significant point of difference. The parent brand may have to withstand negative effects on its image, spillover effects, and cannibalization. Finally, the company faces potential risks of opportunity cost and a possible stifling of product innovation (a focus on incremental product or communication changes at the expense of truly innovative products). Probably the most critical of these risks is the risk of cannibalization of the parent brand. There are ways in which the company can minimize the chances of cannibalization. A line extension in which the new product is clearly a substitute for the parent brand is likely to lead to cannibalization, as was the case when Alka Seltzer Plus stole sales away from Alka Seltzer. With franchise extensions, cannibalization is a lower risk, because the product category and/ or the usage situation is likely to be different. For example, Aquafresh Flex toothbrushes did not cannibalize sales of Aquafresh toothpaste. This suggests that there are "cannibalization barriers" that can be used to minimize possible negative effects. The authors cite Buday's 1989 Journal of Consumer Marketing article, in which two types of cannibalization barriers were identified: boundaries separating user groups (such as powdered versus liquid detergent) and boundaries separating usage occasions (such as soap, detergent, and dishwashing liquid). Lomax et al. test the usefulness of the share order effect (SOE) model of market share adjustments due to the launch of a new brand. The SOE model is based on Luce's axiom of the independence of irrelevant alternatives (the IIA assumption). Under this assumption, if a new brand gains, say, 10% market share, the incumbent brands will all lose share to the new brand proportionally to their share before the launch. The authors contend that a SOE model "is not intuitive when considering line extensions" and set out to evaluate line extensions by using an SOE model and to explore empirically under what conditions the model does not hold. Three U.K. detergent product launches in the late 1980s were tracked, as was one German launch. One
J PROD INNOV MANAG
ABSTRACTS
1997; 14:56-66
Millson, Raj, and Wilemon examine cooperative arrangements for joint development and commercialization of new products (which they call NPD alliances), focusing on the process of NPD alliance formation and identifying issues that need attention during this process. Millson et al. argue that several NPD problems can be overcome through the use of NPD alliances. For example, a firm may attempt to overcome NPD deficiencies by acquiring another firm that is active in NPD, only to be faced with personnel and financial burdens. Additionally, products may be insufficiently developed because information possessed by customers or suppliers (potential NPD alliance partners) had not been sought out. The authors note that NPD partnering is a process, not an isolated event, and propose a model of the NPD alliance formation process consisting of (1) awareness, (2) exploration, (3) commitment, and (4) dissolution. In the awareness stage, the originating finn scrutinizes its own capabilities and weaknesses, and identifies potential alliance partners that can include customers, financial institutions, producers of complementary products, universities, suppliers, investors, the government, and competitors. In the exploration stage, issues such as power, control, and trust are addressed. Each prospective parmer must identify whether the partnership is potentially a "win-win" proposition. Clearly, this requires an understanding of each partner's needs, and the authors suggest slow movement through this stage, sharing ideas and building trust. The third stage is commitment. The initial uncertainties are lessened, trust and confidence are high, each partner has a good understanding of the other's technical competence, and a contract is entered. At this point, NPD can accelerate quickly and greater risktaking may occur. Plus, once the contract is signed, it becomes costly to switch partners, so each partner is motivated to make the relationship work. Finally, dissolution of the partnership may occur. A partnership may not work out, due to opportunism, poor communication, moving too fast into a partner's market, or any other reason that erodes trust. Dissolution may even be planned, though that may not lessen the impact on the partner firms. The authors suggest that careful attention early in NPD can help firms avoid the problems that can lead to lessened trust and partnership dissolution. Early in the NPD process, prospective partners should agree on a plan that includes each partner's goals, methods for mutual NPD, and a statement of how the plan will be renewed. Such a plan can
include a statement of conditions and process for dissolution. In the worst of all worlds, a parmership dissolution can be a "lose-lose" situation, even for the partner that initiates the breakup, because it may mark that firm as an undesirable partner in the future. Millson et al. identify a set of questions that need to be asked by a firm contemplating an NPD alliance. These include: What benefits will be gained by partnering? What are the needs of our prospective NPD alliance partners? What are the benefits and costs of an alliance in terms of technology or market access? What types of alliance provides the right amount of flexibility and control? What will be the relative size (or power) of the partner firms? The authors conclude with a continuum of alliance structures to choose from, ranging from no-equityinvolvement alliances (contractual agreements, R&D partnerships), through joint ventures, to full-equityinvolvement structures (mergers and acquisitions). They also provide useful examples of each structure type. In general, the lower the equity involvement, the more limited the alliance control, but the greater the structural (organizational) flexibility.
Use Strategic Market Models to Predict Customer Behavior, David E. Schnedler, Sloan Management Review (Spring 1996), pp. 85-92. This article describes Hewlett Packard's successful use of an approach called strategic market models (SMM) to make decisions on their two competing business lines, HP 3000 and HP 9000. HP was having difficulty resolving the internal situation and particularly the conflict between the two business lines. Among other concerns, HP 3000 managers were worried that HP 9000 sales would cannibalize their sales; also, the two divisions usually looked at the markets independently and chose the same segments to target. The company had two stated objectives: to identify alternative strategies that would maximize total company profitability across the two lines and to get agreement across the two lines on relative market positions. The technique they used, SMM, relies on survey techniques to obtain demographic, user needs, and competitive perception data from its customer base. SMM allowed HP to get not only the current perceptual positions and stated user needs, but also to evalu-
ABSTRACTS
ate the likely market share effects of improvements of either line on any combination of product attributes. In the SMM application, HP discovered four userneed segments, each making up 20%-30% of the market: availability/performance, transparent access, value, and solution. For each of these, specific customer needs were rated from most to least important, and associations between segments and classification and demographic information were found. For example, the value segment was composed primarily of price-sensitive, smaller companies who rated performance, administration ease, cost, interoperability, and availability as very important needs. The results of SMM were used to help HP develop strategies for both lines. The HP 9000 division concentrated on new products focused on the PC server market and Novell Netware. The HP 3000 business capitalized on its ease-of-use advantages and introduced diskless PCs bundled with servers. Furthermore, once in place, SMM was available to dozens of other computer and support systems groups at HP; thus it really was an investment in company infrastructure. The author lists issues and concerns related to the use of SMM: 1. Address all the decision-making issues up front. 2. Use SMM only for big problems. It's powerful, but very time consuming and expensive. 3. Carefully evaluate the market research vendor you select. 4. Manage your expectations. Recognize what SMM will not do. 5. Allow for side trips. Several surprises are likely to crop up. 6. Recognize that needs segmentation and SMM are very useful, but not everything. The company must address questions of " w h o the customer is," "what the customer needs," but also " w h y the customer needs it."
New Entrants in a Mature Market: An Empirical Study of the Detergent Market, Wendy Lomax, Kathy Hammond, Maria Clemente, and Robert East,
Journal of Marketing Management (May 1996), pp. 281-296. This study examines the effect on market shares of existing brands when a brand extension enters the marketplace. Lomax et al. begin by noting that the majority of new product launches are line extensions and by clarifying some definitions in the literature. They con-
J PROD INNOV MANAG 1997; 14:56~66
61
sider a line extension to mean extending a brand to a product within the same product class and a franchise extension to mean extending the brand into a new product category (such as Virgin Records getting into the airline business). Brand extensions cover both line and franchise extensions. A brand extension strategy carries some risk. The new product can suffer from inappropriate assocations, the creation of customer confusion, inadequate or inappropriate support, or no significant point of difference. The parent brand may have to withstand negative effects on its image, spillover effects, and cannibalization. Finally, the company faces potential risks of opportunity cost and a possible stifling of product innovation (a focus on incremental product or communication changes at the expense of truly innovative products). Probably the most critical of these risks is the risk of cannibalization of the parent brand. There are ways in which the company can minimize the chances of cannibalization. A line extension in which the new product is clearly a substitute for the parent brand is likely to lead to cannibalization, as was the case when Alka Seltzer Plus stole sales away from Alka Seltzer. With franchise extensions, cannibalization is a lower risk, because the product category and/ or the usage situation is likely to be different. For example, Aquafresh Flex toothbrushes did not cannibalize sales of Aquafresh toothpaste. This suggests that there are "cannibalization barriers" that can be used to minimize possible negative effects. The authors cite Buday's 1989 Journal of Consumer Marketing article, in which two types of cannibalization barriers were identified: boundaries separating user groups (such as powdered versus liquid detergent) and boundaries separating usage occasions (such as soap, detergent, and dishwashing liquid). Lomax et al. test the usefulness of the share order effect (SOE) model of market share adjustments due to the launch of a new brand. The SOE model is based on Luce's axiom of the independence of irrelevant alternatives (the IIA assumption). Under this assumption, if a new brand gains, say, 10% market share, the incumbent brands will all lose share to the new brand proportionally to their share before the launch. The authors contend that a SOE model "is not intuitive when considering line extensions" and set out to evaluate line extensions by using an SOE model and to explore empirically under what conditions the model does not hold. Three U.K. detergent product launches in the late 1980s were tracked, as was one German launch. One