Markets & Customers - Stevens Institute of Technology

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Today’s Topic:

Market and Customer

Analysis

Selecting and Designing for

Target Markets and

Target Customers

First Course Module

Companies’ objectives; definition of product success

Financial measures; income statement analysis and opportunities/challenges

How companies bring products to market

(roles/process/compensation)

Creating “winning” business plans; key success factors; differentiation

Second Course Module

the next four weeks

Market/customer analysis

(DLJdirect case – online brokerage)

Competitive analysis

(Airborne Express case – package delivery)

Making product decisions

(THINK case – electric cars)

Midterm exam on making product decisions

(Mathsoft case – engineering analysis software)

Learning Outcomes: you will learn to …

(before the midterm exam)

 analyze a company’s financial performance and assess its opportunities and challenges for future growth assess the barriers to success in a particular market and select the appropriate target customers identify a company’s competitive advantages by performing a comprehensive analysis of its direct and indirect competition define the “whole product” and decide on appropriate product differentiators

You will learn to…

(after the midterm exam)

 select appropriate sales/distribution channels and promotional messages and methods identify best practices in new product development and the challenges in integrating the marketing, operations and product development functions understand how technical people interact with marketing, sales and operations personnel, and how they contribute to resolution of business issues understand how business issues impact technical work

…because you’ll understand and apply these Concepts (13)

Definition of product success

Whole product

Product plan: key success factors

Differentiation

Market attractiveness

Target customers

Competitive advantage

Marketing mix (C+4P)

Product positioning

Sales functions

Channel options

Channel value-added

Operations balance

… and you’ll be able to use these Methods/Tools (13)

Income statement analysis

Financial benchmarks

Target customer description

Target customer selection

5 Forces analysis

Competitive analysis

(10 dimensions)

Decision criteria

Identifying competitive options

Product decisions

Product competitive positioning

Channel economics

Process dimensions

Product development best practices

Business/Product Plan Learnings

(last week)

Content/scope of a business/product plan

Critical aspects of a “winning” plan

Differentiation : importance, definition, identification

Start-ups : success factors, funding requirements, success profiles

Interesting entrepreneurship info/course: http://professionalpractice.asme.org/Entrepreneurial/Startups/

Introduction.cfm

Differentiation from Competitors’ Products

Whole product differentiation is the answer to:

Why do customers choose your product instead of somebody else’s ?

(or buying nothing at all?)

Product differentiators are the things that are unique or best about the whole product, compared to the customers’ other alternatives

Potential areas for differentiation = dimensions of the whole product (product features, price, sales, marketing, customer service/support, brand, etc)

What we’re learning…...

(last week)

Differentiation

of the “whole product” from competitors is the key driver of success……

(this week) …..

which differentiators

choose depends on what the value…..

to

target customers

(next week) ….and

what competitors offer

those customers to

Target Markets and

Target Customers

Today’s Key Learnings

Market attractiveness: the five forces model

The concept of target customers , and how to describe them

Target customer selection method /process

Designing for the Market

What is your

target market

?

Who are your

target customers

within that market?

How can you create/present a better

value minus price”

than competitors?

proposition

…..requires understanding/quantifying

“value” in the target customers’ eyes

…..requires understanding what competitors’ offerings will/may be

Definitions

Market

: an “ecosystem” including a product, its providers (competitors), its intermediaries

(channel partners), its input factors (suppliers) and its potential or existing buyers (users, customers)

Customers

: the entities (business, consumer, or government) who (potentially) buy and use the product; includes the end-customers

Why does it make sense to target only a specific subset of all of the customers in a market?

(the alternative, of course, is to try to attract all of the customers)

The “Marketing Mix”

(

C + 4P

)

C

ustomers (target)

P

roduct

P

rice

P

romotion

P

lace (sales/distribution)

The 4Ps depend on the C

Design-for-Market Process

Select target market

(customer need, product category, industry)

Product concept

Select target customers (C)

Value assessment, versus competition

Define product & select price (2 P’s)

Selecting the Target Market :

Inter-Industry Differences

Operating Income/Assets (%)

High (15-30%) : Pharmaceuticals, Packaged software, Semiconductors

Medium (8-15%) : Restaurant chains,

Petroleum/natural gas, Engineering services

Low (2-7%) : CATV service, Motor vehicles,

Airlines

1Q08 Industry Profitability measured by Net Return-on-Sales

(Net Income/Revenues)

Pharmaceuticals 25.9%

Chemicals 15.7%

Electrical equipment 12.1%

Oil companies 7.4%

Market Attractiveness:

Porter’s “Five Forces” Model

“high” is bad for competitors in the market

Threat from substitute products

Ease of market entry

(and exit)

Bargaining power of buyers

(customers, channels and influencers)

Bargaining power of suppliers

Degree of competitive rivalry

suppliers

competitors

buyers (incl. customers)

Designing for the Market

What is your

target market

?

Who are your

target customers

within that market?

How can you create/present a better

value minus price”

than competitors?

proposition

…..requires understanding/quantifying

“value” in the target customers’ eyes

…..requires understanding what competitors’ offerings will/may be

All possible customers

Target Customers

Target

Customers

Selecting Target Customers: some considerations

Segment size and revenue opportunity

Customer benefits

Customer interest

(incl. current relationships)

Customer ability-to-pay and leverage

Competition/market coverage

Sales issues: sale time/complexity, cost, channel and associated profit margin

Cost to serve/support

Customer loyalty/lock-in

Strategic value

Method: Four Ways of

Describing Target Customers

Name : customer (individual or group names), industry or occupation, affiliations,…

Demographics : revenues/income, size of firm/size of family, location, …

Psychographics : cost-conscious, prestige oriented, early adopter, risk adverse, …

Needs …… throughout the buying/using experience (remember the whole product!)

Describe the (Core) Target

Customers of…...?

Walmart

Southwest Airlines

National Broadcasting Corp (NBC)

Objective for Whole Product:

Superior “Value minus Price”

Who are the targeted customers ?

What are their unmet needs ?

What value would they place on a particular

“satisfaction” of those needs? (i.e., what is their willingness to pay for a particular product)

Preferably, quantify that value….or at least be confident that (value - price) is greater than competitors can/will deliver

The “Whole” Product

The

Product

The “Whole” Product:

What Customers Really Care About

The product itself

Auxiliary or related products

Price and cost-in-service

Awareness and information

Where it is sold

Ease of choice, purchase, ordering

Delivery

Installation

Payment method

Storage/movement

Aesthetics/style

Advice on use

Help in use (e.g., hotline)

Returns/exchanges

Service/repair

Disposal

Differentiation is usually achieved by choosing to meet some target customer needs

better than all competitors

…..

while meeting

most

at an needs (requirements) acceptable level, and not meeting

other

needs at all

(“minor” needs, or needs of non-targeted segments)

Identifying Customer Needs

Primary customer research :

doing endcustomer surveys, interviews, focus groups

Secondary customer research :

reading or commissioning market studies by analysts

Benefit studies :

cost savings, value-in-use, revenue-generation impacts

Revealed preference :

for (partial) equivalents

Extrapolation

what customers pay from technical possibilities

From Needs to Designs….

Customer Needs (and relative importance)

Engineering characteristics impacting needs

Competitive position (in customers’ eyes, technical terms) and

Difficulty/importance/cost of features

Leads to…..engineering targets

There are many methodologies to implement the above, e.g. House of Quality

DLJdirect Case Summary

DLJdirect has a successful online brokerage business

targeting “aggressively affluent” customers

Other segments are

growing faster

DLJdirect has to decide whether to

additional customer segments

to

address

and whether

significantly increase its advertising

capture customers in those segments to

Online Stock Trading

Customer

(trader)

Marketmaker

Online

Broker customer’s account

Clearinghouse

Stock

Exchange

Hint: 6 Sources of Revenue

From End-customers

Trading commissions

Account management fees

Interest on margin purchases

From partners

Order flow rebates

Mutual fund and money market fees iNautix revenues

Assignment Questions

Are DLJdirect’s current

What is their trend?

financial results “good”

?

Does DLJdirect have the financial capability to address new segments, e.g. to modify it’s whole product, or to do more advertising to attract new kinds of customers? How much money might be available in 2000?

Identify the ways DLJdirect’s service is competitors’ offerings differentiated from

What are the key n eed segments? Which are s of each of the four customer well-matched to DLJdirect’s differentiators and other capabilities?

Use your judgment to rank the customer segments according to the profit potential in serving them

(hint: consider both size of the segment and the average profit/customer in that segment)

DLJdirect’s Financial Situation

(partial income statement)

$M

Revenues

-commissions

-fees

-interest

Total cost & exp

-advertising

Income before tax

1-3Q98

%rev %growth

1-3Q99

%rev

82.5

54.3

18.4

9.8

83.1

19.9

-0.5

65.8

22.3

11.9

100.7

24.1

-0.6

96.1

81.2

108.2

155.1

72.1

88.4

NA

161.8

98.4

38.3

25

143

37.5

18.7

60.8

23.7

15.5

88.4

23.2

11.6

Profit potential of segment

=

# of customers in segment x probability of attracting and retaining them x profit potential per customer

AA

GRF

PCC

RBB

Size of Customer Segments

(estimated from Exhibits 5 & 10)

# in

1999

1.43

1.38

0.88

1.82

%total

26

25

16

33

%growth

10

-43

461

214

# in

2002

1.56

0.78

4.94

5.72

%total

12

6

38

44

Total # 5.5M

13.0M

Assignment Questions

(continued)

Assuming that DLJdirect continues to target the aggressively affluent segment:

Should DLJdirect also target the trader) segment? Why?

Get Rich Fast

(day

In your opinion, is there an other

DLJdirect should target? Why?

customer segment that

Selecting Target Customers: some considerations

Segment size and revenue opportunity

Customer benefits

Customer interest

(incl. current relationships)

Customer ability-to-pay and leverage

Competition/market coverage

Sales issues: sale time/complexity, cost, channel and associated profit margin

Cost to serve/support

Customer loyalty/lock-in

Strategic value

Selecting Customer Segments

Hint: identify the positives-and-negatives of each of other three segments (use the

AA pos-neg provided as a guide)

Positives-and-negatives of focusing on the AA segment

Positives

- large segment; currently 26% of the market

- wealthy; high ability to pay

- likely to buy all 3 products

(trades, acct mgmt, margin)

- attracted by DLJd brand image and differentiators

- most profitable?

Negatives

- slow growing segment; declines to 12% of market

- desirable: competitive rivalry

- “aggressive”

 modest customer loyalty?

Today’s Key Learnings

Market attractiveness: the five forces model

The concept of target customers , and how to describe them

Target customer selection method /process

Next Week’s Topic:

(Analyzing and)

Beating the

Competition

Reading for Next Week

Airborne Express

(a case focused on competitive analysis and subsequent market/product decisions)

What we’re learning…...

(last week)

Differentiation

of the “whole product” from competitors is the key driver of success……

(this week) …..

which differentiators

choose depends on what the value…..

to

target customers

(next week) ….and

what competitors offer

those customers to

Airborne Express: Case Summary

The timeframe is 1997

The market is the $16-17B U.S. express mail delivery

(letter, package) market

Airborne is the smallest of the three major competitors with 16% market share (FedEx 45%; UPS 25%)

It is recently the fastest growing, but historically the least profitable, of the Big 3

The US Postal Service is threatening to enter the market

Case Note

In 2003, Airborne Express was acquired by DHL for $1.2B

Assignment for Next Week

Perform a Five Forces analysis industry of the US express delivery

Perform a competitive analysis of FedEx, UPS and

Airborne in the 10 dimensions shown on the next slide

(display as a 3 x 10 matrix)

Based on the competitive analysis, what are Airborne’s competitive strengths and weaknesses vis-à-vis FedEx and UPS?

How is Airborne’s (whole) product differentiated ?

What does Airborne need to do to assure that it survives and thrives in the future? (hint: start by identifying its opportunities and challenges)

Competitive Analysis

Dimensions (10)

Products offered

Operations: pickup & delivery

Target customers

Operations: air & hub operations

Competitive positioning

(incl. price & cost)

Marketing & sales

Customer service

Financial performance

Information technology

Culture & human resource management

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