January 2005
Identifying markets
Creating sustainable competitive advantage
Douglas Abrams
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Identifying markets and creating SCA
• Choose the right market
• Create sustainable competitive advantage
Douglas Abrams
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Choose the right market
 Create a value proposition
 Understand customer adoption
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Target an increasing returns business
 Up-front costs are high relative to marginal costs
 Network externalities
 Complementary technologies are important to use
 Producer learning is strong
 Switching costs are high
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What problem are you solving for customers?
 Start a business with a product that meet a real customer need
 Develop a solution to the customers’ problem
 Meet customer needs better than competitors
 Evaluate customer preferences – traditional market research
ineffective – listen to customers
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Market research for start-ups
 Focus groups, market research limited value
 Observation-fueled insight makes innovation possible
 Watch people using products
 What comes naturally to them?
 Asking people is not enough – Fine is a four-letter word
 Users cannot explain what is wrong or what is missing
 It’s not the customer’s job to be visionaries
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Responding to customer preferences – Kleenex
 Originally a cold cream remover
 Users started wiping their noses
with it
 Kimberly-Clark started to market
it as disposable handkerchief
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Talking to potential customers: Igloo
 Asked college kids what they liked
(more room for six-packs!)
 Created Space Mate.
 Could fit one and a half six packs
more in the same fridge size.
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Case study – not solving the right problem
 RCA’s Videodisc
– Superior image quality, but lack
of recording capability lost out to
videotape. Loss: $500 million
 IBM’s PC Jr
– The awkward Chiclet keyboard,
slow microprocessor, unattractive
price and a late launch cost IBM
$40 million
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Case study – not listening to customers
 Coca-Cola’s New Coke
– This “answer” to Pepsi’s new
formula provoked a national
uproar; later led to Coke Light
 RJ Reynolds's Premier
– Smoke-less cigarette with a
terrible taste; cost to develop:
$800 million
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Focused observation a source of innovation
 Infer motivation and emotion
 What do people think and do?
 Why do they think and do?
 Integrate research, design, marketing and manufacturing
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The fist phenomenon
 Kids grip toothbrush with whole fist
rather than fingers
 Kid’s toothbrushes should be fatter
than adult’s
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Categorize customer needs in designing product
 Things that are necessary
 Things that are nice to have
 Things that are unnecessary
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Be realistic
 Start a business only if your new product is better than those of
competitors.
 Be realistic about how your product or service stands against that
of the competition.
 Consider new products or services that other entrepreneurs are
about to introduce.
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Meet customer needs in an economic manner
 Figure out a way to create your product or service for less than you
are going to sell it.
 Figure our how to make money on at least some transactions
regardless of the quantity that you can sell.
 Note that new product will not sell itself, but will require personal
selling
 Note that pricing is important
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Choose the right market
 Create a value proposition
 Understand customer adoption
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The Normal Distribution of Product Adoption
Number of Adopters in Time Period
Most customers
adopt new products
to the middle of the
product cycle
A small portion of
the market adopts
new products late
in the product cycle
In the beginning
there are relatively
few adopters
Innovators 16%
Majority of customers
68%
Laggards 16%
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Implications for entrepreneurs
 Different adopters have different preferences
 You must do different things to drive adoption
 Proportion of the market adopting at any point in time is not linear
– another S-curve
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Market adoption S-curve
Cumulative percent
of market adopting
100%
80%
60%
40%
20%
0
5
10
15
20
25
30
35
Time
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Crossing the chasm
 Change the way you sell your new product or service when you
want to make the transition to the majority of the market.
 Focus on the customers with the most compelling need to buy your
product or service before you transit to the mainstream market.
 Provide customers with evidence of value
 Offer a whole product solution
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Remember the S-shaped adoption curve
 Use dynamic estimates to evaluate the size of the market for your
new product or service
 Include factors that influence diffusion and substitution in
calculating the growth of the market for your new product or
service
 Substitution is an important part of strategy for competing with
established firms
 Effective when established firms have economies of scale, as
substitution erodes their scale economies
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Factors influencing diffusion
 Discrete technologies diffuse faster than systemic
 Inexpensive diffuse faster than expensive
 Offering greater advantage diffuse faster
 Characteristics of target market, external environment, political and
regulatory factors, events or obstacles
 Easier to understand technologies diffuse faster
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Simple products - simple as a Frisbee
 No moving parts, requires no
instructions and delivers fun
with very little practice with
fifteen cents worth of molded
plastic.
 People today want more
integration and simplicity.
 Reality is that it takes time.
 Often can’t achieve in the first
version of the product.
 Version 2.0 may be the best
bet
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Jumping the barrier – fax machines
 Fax Machines
 In most countries
– Unreliable, expensive & few
advantages over telegraph
 In Japan
– Existing telegraph & text based
system couldn’t easily handle
ideographic Japanese language.
– Launched massive research efforts
& urged manufacturers to adopt
common communications standard
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Epidemic diffusion – Hush Puppies
 Stay in touch with the consumers
 Hush Puppies shoes - nearly discontinued
– Revived due to sudden grassroots consumer interest
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Jumping the barrier – Palm pilot
 Originally tried to integrate too many features
 Realized consumers wanted complement, not replacement for PC
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Jumping the barrier – answering machines
 Answering Machines
 Initially considered rude
 Within a few years, became rude if
didn’t own one.
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Jumping the barrier - biometrics
 Biometrics Access Device
(Digital Handprint)
– Rough outline of hand,
relative length of
fingers or spacing of
knuckles
– Handprints thought of
like fingerprints
– Seen as intrusive and
makes people feel like
criminals
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Jump the barrier – vacuum cleaners
 Vacuum Cleaners
 America
– Loud vacuums associated with
powerful motors & suction
 Japan
– Quieter, less powerful, smaller
motors, fuzzy logic, insulation
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Identifying markets and creating SCA
• Choose the right market
• Create sustainable competitive advantage
Douglas Abrams
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Create sustainable competitive advantage
 Competing with established companies
 Protect your intellectual property
 Create barriers to entry
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Advantages of established companies
 The learning curve
 Reputation effect
 Cash flow
 Economies of scale
 Complementary assets
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Established company weaknesses
 A focus on efficiency makes it difficult to introduce new products
 Effort to exploit existing capabilities makes it difficult to innovate
 They need to satisfy existing customers
 Existing organizational structure is appropriate to current tasks
 Employees generally not rewarded for innovation
 Difficult to innovate in a bureaucracy – low communication density
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Opportunities that favor new firms
 Discrete versus systemic technologies
 Opportunities that are based on human capital – difficult for
existing companies to protect
 General purpose rather than specific purpose technologies –
provide flexibility
 Uncertainty – existing firms’ advantages in market research are
neutralized
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Case study: E-Schwab
 Initially their brokers complained
about low on-line flat fee
 Spread same low web trade
commission to all of its customers
 Shot ahead of traditional high-end
firms like Merrill Lynch
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Case study - snowboarding
 Journalists & ski resorts called
it a fad; Time dubbed it
America’s “Worst New Sport”
 Ski resorts banned boarders
 Mainstream ski manufacturers
figured it was a passing fancy
 Now 90% of US resorts have
accepted snowboards and 5
MM Americans are boarding
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Case study – mountain biking
 Schwinn wrote off mountain
biking as a fad.
 Early mountain bikers
tackled rugged mountain
paths with souped-up
Schwinns.
 Today 70% of full-sized
cycles sold are mountain
bikes; Schwinn is irrelevant
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Case study – Dell computers
 Direct sales
 Easy configuration of memory,
peripherals
 Direct, reliable customization
experience
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Create sustainable competitive advantage
 Competing with established companies
 Protect your intellectual property
 Create barriers to entry
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Competitors will copy your product
 Reverse engineering
 Hire ex-employees
 Look at patent documents
 May be working on similar products
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Protecting your intellectual property - secrecy
 Few alternative sources of information
 Limited number of people who could make use of the information
 The necessary knowledge is tacit
 Process of creation is poorly understood
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Protecting your intellectual property - patents
 A government monopoly
 Only possible for a small number of products
 Patents must be strong to be useful
 Patents require disclosure
 Patenting is expensive
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Create sustainable competitive advantage
 Competing with established companies
 Protect your intellectual property
 Create barriers to entry
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Capturing the returns to innovation
 Control of resources – key sources of supply
 Building brand-name reputations
 Exploiting learning curves
 First mover advantages when market structure allows
 Control of complementary assets in manufacturing and marketing
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Sources and references
 Finding Fertile Ground by Scott Shane, Wharton School
Publishing
 The Art of Innovation by Tom Kelley with Jonathan Littman,
Doubleday
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Contact us
 Douglas Abrams
 dka@parallaxcapital.com
 necadk@nus.edu.sg
 65-9780-5381 (hp)
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