MKTG 640

Value Innovation

Consider 1998 Compaq vs IBM

What does this show?
Imitative not innovative approaches
to the market
These companies act REACTIVELY
A companys 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:

Size
Years of operation
Industry conditions
County 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?
Theirs was How can I hit the ball
easier?

Value Innovation Callaway Golf

They got the country club market
At a country club, people chose
either tennis or golf.
Golf was perceived as too hard. (How
can I hit that ball?)
Callaways 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 incremental
VI 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 firms 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 Atlantics
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

Starbucks? 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 patentable
Sooooduplicate the look and feel
and write new code..
It happened to Netscape (IE)

Whats the best way to maximize

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

Whats 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.

Quantit
y

 Rapid brand recognition built by VI

Plus simultaneous drive to lower costs
Makes competition nearly irrelevant
Comps must overcome economies of
scale, learning effects and increasing
returns.

To make value innovation happen

Ask five questions

Conventional 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?

Value Innovation Logic

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?