Section 3: Framework for Analyzing the Market Environment

Competitive Environment Technological Environment Company Internal Environment Macroeconomic/Societal Environment

EngM 221: Introduction to Engineering Management Vanderbilt University School of Engineering

User/ Market Environment

Team Technology Strategy Checklist

1.
2. 3. 4. 5.

Who is the primary market for your technology? What is the size of your market? What are your technologys key benefits for this market? How much would customers pay for your technology? What are the triggers and barriers to adopting your technology?
In your response to each of the above questions, explore the strategic implications.

6.

Strategic implications
What emerges from the above analysis as the real opportunity; what aspects of the market environment are likely to pose the greatest challenges?

Reminder: Complete the attached ISF Score Sheet for the market ISF's, incorporate in your discussion.

1. Who is the primary market for your technology?

Market categories
Consumers

Demographics: age, sex, income, occupation, education, etc. (See some of the databases listed under Market Environment in the ENGM Research Resource Guide) Industry/sector: See Hoovers Online Industries * See FedWorld top government websites See Associations Unlimited*

Businesses

Government (agency)

Institutions (universities, nonprofit orgs)

* Via Vanderbilt Library e-databases

2. What is the size of your market?

Why is it important to know how big your market is? Is it big enough to justify entry? Is it rich enough (can or will consumers pay enough to allow us to make a profit)? Knowing when it will take off allows us to time our entry. Knowing the rate of growth allows us to plan our business.

2. What is the size of your market?

Estimating total market
Substitution

Compare with market size for current technology

Consumer

No. of consumers in demographic category X how many units they would need
No. of companies in the target market (see Hoovers Online) Average Business Size (Revenue) Total Demand per $1M in revenue

Business

2. What is the size of your market?

Data Sources*
Frost & Sullivan Business & Industry

Concept Term: Market Size

Business Source Premier Factiva Statistical Abstract of the United States Faulkners (IT, telecom)

*See Research Resource Guide (under Projects)

Market Modeling
Estimate total market Estimate penetration rate Estimate served market Estimate competitor shares Estimate product service life/replacement rate Firms annual unit sales Estimate price range Firms annual revenue

Example of a Market Model

Go to Week 3 Lecture Notes and Files and open the link to Finance Pro Forma P&L Statement.

Strategic Implications: Market Size

Low (business potential limited by size of potential market even if achieve 100% penetration)
Market lacks critical mass. Seek other applications or markets with similar needs.

High (market large enough that even a low penetration (e.g., 10%) could support the business)
Exploit. But prepare for intense competition. High entry scale, other advantages, may be needed to deter competitors.

The ideal market

One in which you can capture a strong or dominant position.

3. What are your technologys key benefits for this market?

What are markets requirements?

Quantify if possible With radically new technologies, market may not know its requirements! If cant quantify, rank or classify (acceptability).

What is the market willing to accept? Determine priorities among requirements

How does market trade off among objectives? Are you focused on the relevant parameters? (Does the market care?)

Always compare to the currently available solution.

Categories of Market Requirements

Improving Performance
e.g., speed, range, size/weight, efficiency

Improving Quality/Reliability Reducing Processing Time Increasing Productivity Improving Convenience

Ease of use Compatibility with existing operations

Managing uncertainty and risk

Reduction in variances, unpredictability, surprises

Reducing Cost

Market Requirements: Improving Quality/Reliability

Computer/communications Networks/Utilities Reduce service outages Software Development Reduce bugs Manufacturing Increase yield (e.g., DRAM chips) Improve tolerances (jet engines at high-temperatures)

Market Requirements: Improving Quality/Reliability (ctd)

Computer/communications Networks/Utilities Reduce service outages Software Development Reduce bugs Manufacturing Increase yield (e.g., DRAM chips) Improve tolerances (jet engines at high-temperatures)

Market Requirements: Reducing Processing Time

Health Care - Cut a day off hospital stay Airlines - Reduce turnaround time on ground Distribution/Retailing - Increase inventory turns Software Houses - Reduce development interval Manufacturing - Reduce set-up time Many industries - Reduce windshield time All industries - Reduce payment interval

Market Requirements: Increase Resource Productivity

Airlines Increase average load factor Capital-intensive industries Raise utilization rates for capital equipment Customers with long-lived assets Extend the service life of legacy systems, avoid disruption from change-outs

Market Requirements: Manage Uncertainty and Risk

Oil & gas exploration Increase hit rate (fewer dry holes) Services Increasing bid accuracy

Market Requirements : Reduce Overhead/Fixed Cost

All industries
Reduce overhead

Cyclical industries
Shift fixed costs to variable costs

How Technology can Change User Economics An Example

(vs. current technology, competitors, substitutes)

Reduced purchase cost Reduced life cycle cost Lowers users overall cost Impact on users overall business

revenue markets served product portfolio

Breakdown of Annual Telecom Expenditures in a Medium Size Establishment ($M)

0.18 0.24

0.30

0.81

$3M

0.24 0.45 0.45 0.33

Capital Salaries Local Service Long Distance Leases Purchases Maintenance Travel, training, etc.

Equipment cost is only 27% of total telecom expenditures

Cost savings due to 10% $81k reduction in purchase price?

Telecom Expenditures in Medium Size Establishment...

10% 6% 8%

27%

$3M

8% 15% 15% 11%

Capital Salaries Local Service Long Distance Leases Purchases Maintenance Travel, training, etc.

But Salaries, Long Distance, and Maintenance are another 36%.

Impact of New Technology on Telecommunications Cost ...

0.18 0.24 0.30 0.81

Capital Salaries Local Service Long Distance Leases Purchases Maintenance Travel, training, etc.

$3M
0.24 0.45 0.45 0.33

Capital cost increases 10% but ... IVR displaces operator (25% of Salaries) LCR cuts long distance bill by 30% Fault-tolerant, self-healing networking technology cuts maintenance cost by 30%

How much have you reduced the users overall telecom budget? (Click on spreadsheet and calculate)
Telecom Budget ($M): Base Case Expenditure Category Capital Salaries Local Service Long Distance Leases Purchases Maintenance Travel, training, etc. total % of Telecom Budget 27% 15% 11% 15% 8% 8% 6% 10% 100% $3 Base Case With New Technology $M $M 0.81 0.45 0.33 0.45 0.24 0.24 0.18 0.30 3.00 0.00 Savings: 3.00

New Telecom Technology New telecom system Interactive voice response system Least-cost-routing algorithm Fault-tolerant, self-healing networking architecture

Operational Impact

Financial Impact Increases capital budget by 10% Eliminates the need for an Reduces telecom switchboard operator salaries by 25% Automatically selects the lowest Saves 30% on longcost provider for every long distance charges distance call Cuts maintenance costs by 30%

But Telecom Expenditures are only 3% of Total Operating Expenditures

Telecom
$3M
Profit Other IT

$10M

$7M
Sales & Distribution $20M

$110M

All Other Costs $70M

Introduction of E-Commerce Technology ...

Double telecom and Other IT costs Reduces sales & distribution costs by 25% Revenues increase 25%

direct from Internet new international sales

All other costs increase 10%

since shipping more product

What is the impact on the users overall profit?

(Click on spreadsheet and calculate)
Operating Budget Base Case Financial Statement Line Revenue Telecommunications Other IT Sales & Distribution All Other Costs Profit % of Overall Budget Base Case ($M) 110 3 7 20 70 10 Change in Profit % Change in Profit New E-Commerce Technology System installation Operational Impact Financial Impact Double Telecom Budget Double IT Budget Reduce sales/distribution costs by 25% Increase sales revenue by 25% With New Technology $M

0 -10 -100%

Ship direct from factory to customers Allows world-wide online purchasing

Reduce sales force

25% more orders

Reaches on-line customers Reaches international customers Raises manufacturing costs

Increase "All Other Costs" 10%*

4. How much would customers pay for your technology? Three factors guiding pricing strategies
Presence of Competition
If so, price to meet or beat the competition

Presence of Direct or Indirect Substitutes

price to value (what customers believe the technology is worth to them usually a relatively high price)

Importance of Market Leadership vs. Profit

If market leadership is more important, price to penetrate or force open the market (very low)

Sources of Pricing Information

Vendor websites/on-line catalogs Retailers/Etailers websites
e.g., PriceWatch.com (IT products)

Business-to-Business Exchanges
e.g., Thomas Register (links to manufacturers websites)

Electronic Databases
Google Product Search

Health Care
Agency for Healthcare Research and Quality - HCUPnet
* Via Vanderbilt Library e-databases

5. What are the triggers and barriers to adopting your technology?

1. Relative advantage
vs. the technology currently in use

2. Compatibility
with the user's organization, culture, experience, etc.

3. Trialability
ability to adopt on a limited basis

4. Service Intensity
Amount of service/support required to adopt the product

Relative Advantage How much is enough?

Theoretical Performance Limit

Performance Level

Satisfaction of Market Need

Performance Oversupply

Effort (input)

Example of Performance Oversupply: Insulin

100% Purity

0 ppm

Purity (ppm)

Satisfaction of Market Need

10 ppm 10,000 ppm 50,000 ppm Effort (input)

Genetically Engineered Insulin

Animal Insulin

Shift from Performance to Convenience

Purity (ppm) Convenience (sec./application)
Genetically Engineered Insulin

Satisfaction of Market Need

Animal Insulin

Eli Lilly

Novo

Strategic Implications: Relative Performance/Cost Advantage

Low (performance/value advantage cannot be shown or measured)

Seek design and operational improvement, cost reduction, etc. Seek other applications. Find nonproduct differentiators.

High (significant performance/value advantage can be proved or measured )

Exploit. Build market share rapidly to gain first mover advantages. avoid complacency - technical superiority does not assure competitive success. Expect imitators to follow fast. Avoid excessive investment that leads to performance oversupply.

Compatibility
Amount of organizational change required to adopt User Perspective
What organizational changes are required to adopt the technology? How much scrapping and rebuilding of skill sets and processes is involved?

Examples
Highly compatible

word processing for preparing correspondence (same keyboard) microwave ovens for preparing meals (doesnt disrupt mealtime routines) Shifting from mainframe computer to client-server network (may need to rewrite the applications while youre running a business) Changes economics of users industry; may render industry obsolete. Example: Blood-eluting Stents

Relatively incompatible

Disruptive/transformational

Strategic Implications: Compatibility

Low (major disruptions; threatens critical functions)

Learn user's industry so you can address sources of incompatibility. Consider other markets/applications (e.g., low-risk/low-criticality applications) that are more compatible with the technology, or where advantages are so overwhelming as to offset the disruption.

High (minimal disruption of existing operations)

Exploit. But before launching, use customer trials to verify the compatibility in as wide a range of applications and organizational settings as possible.

Trialability
Ability to adopt on a limited basis User Perspective
Can my organization adopt this technology in stages? Can I try it out in minor or peripheral applications first? Do I have to implement this technology across the entire organization before I get any benefits at all? Can I limit the damage if it fails? (e.g., if I select the wrong standard)?

Examples
High: Digital Radio (can add one city at a time) Low: 4G Wireless (has little value until widely deployed)

Strategic Implications: Trialability

Low (technology must be adopted all at once ("lumpy") before any benefits can be realized )
Find less demanding, small-scale applications where failure can be tolerated (e.g., non-time-sensitive applications). Reduce adoption risk by allowing customers to observe the technology in use in similar settings, or by offering customer satisfaction guarantees. Provide backup systems, extensive user training, heavy service/support.

High (technology can be adopted in stages)

To minimize adoption risk, start with a low-level trial in a non-critical application. Gradually extend to other, more critical applications.

Service Intensity
Amount of service/support (handholding) required to adopt the product

User Perspective
Is this a technology I can buy as a product and insert into my organization or daily life, or Is this a technology that I can use only by customizing or reconfiguring it for my application, or Is this technology really a service that the innovator (or intermediary) provides (rebuilds for each user)?

Examples
Low: shrink-wrapped software (TurboTax) High: business process reengineering

Strategic Implications: Service Intensity

Low (can be purchased as a product with no service/support)

Safe to focus on other ISFs.

High (requires extensive application support/"hand-holding" )

Seek adopters who are technically sophisticated enough to provide own service (e.g., large, established companies, military) Seek, support partners or intermediaries who specialize in service Rework (productize) the technology to be less service-intensive.

Information Sources
Websites of technology suppliers
Check news or press releases e.g., Qualcomm

Trade journals
e.g. Wireless Data News Search ProQuest under search method publication Look for testimonial articles
(case studies)

Primary research
To be covered in Section 6

References
(complete citation in slide note)

Arthur 1996 Christensen 1997, Chapter 8 Christensen 2007 Moore 1995 Narayanan, Chapters 4, 6 (pp. 158-175; skim the rest) Rogers 2003