Stanford University Dept.

of Engineering-Economic Systems & Operations Research

EES&OR483 Strategy and Marketing Primer (version 3.0)
This set of "crib notes" is a review of mareting and strategy too!s and concepts that yo" may find "sef"!
for yo"r pro#ect in EES&OR $%&. The intention is not to give yo" more wor or reading materia!' b"t
rather to provide yo" with an aid and reference in form"!ating and ana!y(ing yo"r prob!em.
)!! of the concepts covered in !ect"re and the assigned readings are reviewed here. *o" might find the
s"mmaries a he!pf"! reminder of what the concepts are and how they can be va!"ab!e in yo"r pro#ect. )!so'
some topics fo"nd here are not covered in !ect"res or assigned readings +specifica!!y' Sections ,.,' ,.$' and
-..--.-/. These are additiona! topics on concept"a! +i.e. 01)/ mareting and strategy. Since !ect"res in
this pro#ect co"rse are !imited and emphasi(e 2"antitative mode!s for strategy' we do not have the time to
cover a!! the topics in c!ass. 3owever' if yo" are not a!ready fami!iar with basic mareting and strategy
framewors' we want to offer yo" more e4pos"re to them. *o" may find this broader e4pos"re he!pf"! for
severa! reasons5
"nderstand the conte4t of what is covered in !ect"re
proper!y frame yo"r pro#ect
find !eads to other concepts that may be partic"!ar!y re!evant to yo"r pro#ect
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EES&OR $%& Strategy 6rimer &.C
1 Generic Strategy: Types of Competitive Advantage
1asica!!y' strategy is abo"t two things5 deciding where yo" want yo"r b"siness to go' and deciding how to
get there. ) more comp!ete definition is based on competitive advantage' the ob#ect of most corporate
strategy5
Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost
of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices
than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.
There are two basic types of competitive advantage: cost leadership and differentiation.
-- 0ichae! 6orter' Competitive dvantage' .H%-' p.&
The fig"re be!ow defines the choices of "generic strategy" a firm can fo!!ow. ) firm7s re!ative position
within an ind"stry is given by its choice of competitive advantage +cost !eadership vs. differentiation/ and
its choice of competitive scope. 9ompetitive scope disting"ishes between firms targeting broad ind"stry
segments and firms foc"sing on a narrow segment. Beneric strategies are "sef"! beca"se they characteri(e
strategic positions at the simplest and broadest level. 6orter maintains that achieving competitive
advantage re2"ires a firm to mae a choice abo"t the type and scope of its competitive advantage. There
are different riss inherent in each generic strategy' b"t being "a!! things to a!! peop!e" is a s"re recipe for
mediocrity - getting "st"c in the midd!e".
Treacy and ?iersema +.HH-/ offer another pop"!ar generic framewor for gaining competitive advantage.
:n their framewor' a firm typica!!y wi!! choose to emphasi(e one of three Iva!"e discip!ines!: product
leadership, operational excellence, and customer intimacy.
Porter2s "eneri3 Strategies +so"rce5 6orter' .H%-' p..,/
COMPE##(E $)($N$"E
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SCOPE
<ower 9ost Differentiation
1road
Target
;arrow
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&). 9ost 8oc"s &1. Differentiation
8oc"s
References5
6orter' 0ichae!' Competitive dvantage' The 8ree 6ress' ;*' .H%-.
6orter' 0ichae!' "?hat is strategyJ" "arvard #usiness $eview v@$' n= +;ov-Dec' .HH=/5=. +.%
pages/.
Treacy' 0.' 8. ?iersema' The %iscipline of &ar'et (eaders' )ddison-?es!ey' .HH-.
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EES&OR $%& Strategy 6rimer &.C
2 Conceptual Strategy Frameworks: How Competitive
Advantage is Created
8ramewors vs. 0ode!s
?e disting"ish here between strategy framewors and strategy mode!s. Strategy mode!s have been "sed in
theory b"i!ding in economics to "nderstand ind"stria! organi(ation. 3owever' the mode!s are diffic"!t to
app!y to specific company sit"ations. :nstead' 2"a!itative framewors have been deve!oped with the
specific goa! of better informing b"siness practice. :n another sense' we may a!so ta! abo"t IframeworsK
in this c!ass as referring to the g"iding ana!ytica! approach yo" tae to yo"r pro#ect +i.e. decision ana!ysis'
economics' finance' etc./.
Some 6erspective on Strategy 8ramewors5 :nterna! and E4terna! 8raming for Strategic Decisions
:t may be he!pf"! to thin of strategy framewors as having two components5 interna! and e4terna! ana!ysis.
The external ana!ysis b"i!ds on an economics perspective of ind"stry str"ct"re' and how a firm can mae
the most of competing in that str"ct"re. :t emphasi(es where a company sho"!d compete' and what7s
important when it does compete there. 6orter7s - 8orces and >a!"e 9hain concepts comprise the main
e4terna!!y-based framewor. The e4terna! view he!ps inform strategic investments and decisions. )nternal
ana!ysis' !ie core competence for e4amp!e' is !ess based on ind"stry str"ct"re and more in specific
b"siness operations and decisions. :t emphasi(es how a company sho"!d compete. The interna! view is
more appropriate for strategic organi(ation and goa! setting for the firm.
6orter7s foc"s on ind"stry str"ct"re is a powerf"! means of ana!y(ing competitive advantage in itse!f' b"t it
has been critici(ed for being too static in an increasing!y fast changing wor!d. The interna! ana!ysis
emphasi(es b"i!ding competencies' reso"rces' and decision-maing into a firm s"ch that it contin"es to
thrive in a changing environment. Tho"gh some framewors re!y more on one type of ana!ysis than
another' both are important. 3owever' neither framewor in itse!f is s"fficient to set the strategy of a firm.
The interna! and e4terna! views most!y frame and inform the prob!em. The act"a! firm strategy wi!! have to
tae into acco"nt the partic"!ar cha!!enges facing a company' and wo"!d address iss"es of financing'
prod"ct and maret' and peop!e and organi(ation. Some of these strategic decisions are event driven
+partic"!ar pro#ects or reorgs responding to the environment and opport"nity/' whi!e others are the s"b#ect
of periodic strategic reviews.
2.1 Porter's 5 Forces & Industry Structure
?hat is the basis for competitive advantageJ
)ndustry structure and positioning within the industry are the basis for mode!s of competitive strategy
promoted by 0ichae! 6orter. The I8ive 8orcesK diagram capt"res the main idea of 6orterEs theory of
competitive advantage. The 8ive 8orces define the r"!es of competition in any ind"stry. 9ompetitive
strategy m"st grow o"t of a sophisticated "nderstanding of the r"!es of competition that determine an
ind"stry7s attractiveness. 6orter c!aims' "The "!timate aim of competitive strategy is to cope with and'
idea!!y' to change those r"!es in the firm7s behavior." +.H%-' p. $/ The five forces determine ind"stry
profitabi!ity' and some ind"stries may be more attractive than others. The cr"cia! 2"estion in determining
profitabi!ity is how m"ch va!"e firms can create for their b"yers' and how m"ch of this va!"e wi!! be
capt"red or competed away. :nd"stry str"ct"re determines who wi!! capt"re the va!"e. 1"t a firm is not a
comp!ete prisoner of ind"stry str"ct"re - firms can inf!"ence the five forces thro"gh their own strategies.
The five-forces framewor high!ights what is important' and directs manager7s towards those aspects most
important to !ong-term advantage. #e careful in using this tool5 #"st composing a !ong !ist of forces in the
competitive environment wi!! not get yo" very far L itEs "p to yo" to do the ana!ysis and identify the few
driving factors that rea!!y define the ind"stry. Thin of the 8ive 8orces framewor as sort of a chec!ist for
getting started' and as a reminder of the many possib!e so"rces for what those few driving forces co"!d be.
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EES&OR $%& Strategy 6rimer &.C
Porter2s 1 'or3es 4 E5ements o6 #nd7stry Str73t7re +so"rce5 6orter' .H%-' p.=/
Ne8 Entrants
97yers
S7::5iers
S7;stit7tes
#nd7stry
Com:etitors
:ntensity
of Riva!ry
Threat of
S"bstit"tes
Threat of
;ew Entrants
1argaining 6ower
of S"pp!iers
1argaining 6ower
of 1"yers
)eterminants o6 97yer Po8er
9argaining ,everage
M 1"yer concentration vs.
firm concentration
M 1"yer vo!"me
M 1"yer switching costs
re!ative to firm
switching costs
M 1"yer information
M )bi!ity to bacward
integrate
M S"bstit"te prod"cts
M 6"!!-thro"gh
Pri3e Sensitivity
M 6riceNtota! p"rchases
M 6rod"ct differences
M 1rand identity
M :mpact on 2"a!ityN
performance
M 1"yer profits
M Decision maerEs
incentives
)eterminants o6 S7;stit7tion <reat
M Re!ative price performance of s"bstit"tes
M Switching costs
M 1"yer propensity to s"bstit"te
Riva5ry )eterminants
M :nd"stry growth
M 8i4ed +or storage/ costs N va!"e added
M :ntermittent overcapacity
M 6rod"ct differences
M 1rand identity
M Switching costs
M 9oncentration and ba!ance
M :nformationa! comp!e4ity
M Diversity of competitors
M 9orporate staes
M E4it barriers
Entry 9arriers
M Economies of sca!e
M 6roprietary prod"ct differences
M 1rand identity
M Switching costs
M 9apita! re2"irements
M )ccess to distrib"tion
M )bso!"te cost advantages
6roprietary !earning c"rve
)ccess to necessary inp"ts
6roprietary !ow-cost prod"ct design
M Bovernment po!icy
M E4pected reta!iation
)eterminants o6 S7::5ier Po8er
M Differentiation of inp"ts
M Switching costs of s"pp!iers and firms in the ind"stry
M 6resence of s"bstit"te inp"ts
M S"pp!ier concentration
M :mportance of vo!"me to s"pp!ier
M 9ost re!ative to tota! p"rchases in the ind"stry
M :mpact of inp"ts on cost or differentiation
M Threat of forward integration re!ative to threat of
bacward integration by firms in the ind"stry
3ow is competitive advantage createdJ
)t the most f"ndamenta! !eve!' firms create competitive advantage by perceiving or discovering new and
better ways to compete in an ind"stry and bringing them to maret' which is "!timate!y an act of
innovation. :nnovations shift competitive advantage when riva!s either fai! to perceive the new way of
competing or are "nwi!!ing or "nab!e to respond. There can be significant advantages to ear!y movers
responding to innovations' partic"!ar!y in ind"stries with significant economies of sca!e or when c"stomers
are more concerned abo"t switching s"pp!iers. The most typica! ca"ses of innovations that shift
competitive advantage are the fo!!owing5
new techno!ogies
new or shifting b"yer needs
the emergence of a new ind"stry segment
shifting inp"t costs or avai!abi!ity
changes in government reg"!ations
3ow is competitive advantage imp!ementedJ
1"t besides watching ind"stry trends' what can the firm doJ )t the !eve! of strategy imp!ementation'
competitive advantage grows o"t of the way firms perform discrete activities - conceiving new ways to
cond"ct activities' emp!oying new proced"res' new techno!ogies' or different inp"ts. The "fit" of different
strategic activities is a!so vita! to !oc o"t imitators. 6orters ">a!"e 9hain" and ")ctivity 0apping"
concepts he!p "s thin abo"t how activities b"i!d competitive advantage.
The value chain is a systematic way of e4amining a!! the activities a firm performs and how they interact.
:t scr"tini(es each of the activities of the firm +e.g. deve!opment' mareting' sa!es' operations' etc./ as a
potentia! so"rce of advantage. The va!"e chain maps a firm into its strategica!!y re!evant activities in order
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EES&OR $%& Strategy 6rimer &.C
to "nderstand the behavior of costs and the e4isting and potentia! so"rces of differentiation. Differentiation
res"!ts' f"ndamenta!!y' from the way a firm7s prod"ct' associated services' and other activities affect its
b"yer7s activities. )!! the activities in the va!"e chain contrib"te to b"yer va!"e' and the c"m"!ative costs in
the chain wi!! determine the difference between the b"yer va!"e and prod"cer cost.
) firm gains competitive advantage by performing these strategica!!y important activities more cheap!y or
better than its competitors. One of the reasons the va!"e chain framewor is he!pf"! is beca"se it
emphasi(es that competitive advantage can come not #"st from great prod"cts or services' b"t from
anywhere a!ong the va!"e chain. :t7s a!so important to "nderstand how a firm fits into the overa!! value
system' which inc!"des the va!"e chains of its s"pp!iers' channe!s' and b"yers.
?ith the idea of activity mapping' 6orter +.HH=/ b"i!ds on his ideas of generic strategy and the va!"e chain
to describe strategy imp!ementation in more detai!. 9ompetitive advantage re2"ires that the firm7s va!"e
chain be managed as a system rather than a co!!ection of separate parts. 6ositioning choices determine not
on!y which activities a company wi!! perform and how it wi!! config"re individ"a! activities' b"t a!so how
they re!ate to one another. This is cr"cia!' since the essence of imp!ementing strategy is in the activities -
choosing to perform activities different!y or to perform different activities than riva!s. ) firm is more than
the s"m of its activities. ) firm7s va!"e chain is an interdependent system or networ of activities'
connected by !inages. <inages occ"r when the way in which one activity is performed affects the cost or
effectiveness of other activities. <inages create tradeoffs re2"iring optimi(ation and coordination.
6orter describes three choices of strategic position that inf!"ence the config"ration of a firm7s activities5
variety*based positioning - based on prod"cing a s"bset of an ind"stry7s prod"cts or servicesO invo!ves
choice of prod"ct or service varieties rather than c"stomer segments. 0aes economic sense when a
company can prod"ce partic"!ar prod"cts or services "sing distinctive sets of activities. +i.e. Diffy <"be
for a"to !"bricants on!y/
needs*based positioning - simi!ar to traditiona! targeting of c"stomer segments. )rises when there are
gro"ps of c"stomers with differing needs' and when a tai!ored set of activities can serve those needs
best. +i.e. :ea to meet a!! the home f"rnishing needs of a certain segment of c"stomers/
access*based positioning - segmenting by c"stomers who have the same needs' b"t the best
config"ration of activities to reach them is different. +i.e. 9armie 9inemas for theaters in sma!!
towns/
6orter7s ma#or contrib"tion with "activity mapping" is to he!p e4p!ain how different strategies' or positions'
can be implemented in practice. The ey to s"ccessf"! imp!ementation of strategy' he says' is in combining
activities into a consistent fit with each other. ) company7s strategic position' then' is contained within a
set of tai!ored activities designed to de!iver it. The activities are tight!y !ined to each other' as shown by a
re!evance diagram of sorts. 8it !ocs o"t competitors by creating a "chain that is as strong as its strongest
!in." :f competitive advantage grows o"t of the entire system of activities' then competitors m"st match
each activity to get the benefit of the who!e system.
6orter defines three types of fit5
simp!e consistency - first order fit between each activity and the overa!! strategy
reinforcing - second order fit in which distinct activities reinforce each other
optimi(ation of effort - coordination and information e4change across activities to e!iminate
red"ndancy and wasted effort.
3ow is competitive advantage s"stainedJ
6orter +.HHC/ o"t!ines three conditions for the s"stainabi!ity of competitive advantage5
"ierarchy of source +durability and imitability, - !ower-order advantages s"ch as !ow !abor cost may
be easi!y imitated' whi!e higher order advantages !ie proprietary techno!ogy' brand rep"tation' or
c"stomer re!ationships re2"ire s"stained and c"m"!ative investment and are more diffic"!t to imitate.
-umber of distinct sources - many are harder to imitate than few.
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EES&OR $%& Strategy 6rimer &.C
Constant improvement and upgrading - a firm m"st be "r"nning scared'" creating new advantages at
!east as fast as competitors rep!icate o!d ones.
References5
6orter' 0ichae!' Competitive dvantage' The 8ree 6ress' ;*' .H%-.
6orter' 0ichae!' The Competitive dvantage of -ations' The 8ree 6ress' ;*' .HHC.
6orter' 0ichae!' "?hat is strategyJ" "arvard #usiness $eview v@$' n= +;ov-Dec' .HH=/5=. +.%
pages/.
2.2 Core Competence and Capabilities
6roponents of this framewor emphasi(e the importance of a dynamic strategy in today7s more dynamic
b"siness environment. They arg"e that a strategy based on a "war of position" in ind"stry str"ct"re wors
on!y when marets' regions' prod"cts' and c"stomer needs are we!! defined and d"rab!e. )s marets
fragment and pro!iferate' and prod"ct !ife cyc!es acce!erate' "owning" any partic"!ar maret segment
becomes more diffic"!t and !ess va!"ab!e. :n s"ch an environment' the essence of strategy is not the
str"ct"re of a company7s prod"cts and marets b"t the dynamics of its behavior. ) s"ccessf"! company
wi!! move 2"ic!y in and o"t of prod"cts' marets' and sometimes even b"siness segments. Under!ying it
a!!' tho"gh' is a set of core competencies or capabi!ities that are hard to imitate and disting"ish the company
from competition. These core competencies' and a contin"o"s strategic investment in them' govern the
!ong term dynamics and potentia! of the company.
?hat are core competencies and capabi!itiesJ
6raha!ad and 3ame! +.HHC/ spea of core competencies as the co!!ective !earning in the organi(ation'
especia!!y how to coordinate diverse prod"ction si!!s and integrate m"!tip!e streams of techno!ogy.
These si!!s "nder!ie a company7s vario"s prod"ct !ines' and e4p!ain the ease with which s"ccessf"!
competitors are ab!e to enter new and seeming!y "nre!ated b"sinesses. Three tests can be app!ied to
identify core competencies5 +./ provides potentia! access to wide variety of marets' +,/ maes
significant contrib"tion to end "ser va!"e' and +&/ diffic"!t for competitors to imitate.
.xamples of core competence5 Sony in miniat"ri(ation' a!!owing it to mae everything from ?a!mans
to video cameras to noteboo comp"ters. 9anon7s core competence in optics' imaging' and
microprocessor contro!s have enab!ed it to enter marets as seeming!y diverse as copiers' !aser printers'
cameras' and image scanners.
Sta!' Evans' and Sch"!man +.HH,/ spea of capabilities simi!ar!y' b"t defined more broad!y to
encompass the entire va!"e chain rather than #"st specific technica! and prod"ction e4pertise.
.xamples of capabilities5 ?a!-mart in inventory management' 3onda in dea!er management and
prod"ct rea!i(ation.
:mp!ications for strategyJ
/ortfolio of competencies. )n essentia! !esson of this framewor is that competencies are the roots of
competitive advantage' and therefore b"sinesses sho"!d be organi(ed as a portfo!io of competencies +or
capabi!ities/ rather than a portfo!io of b"sinesses. Organi(ation of a company into a"tonomo"s
strategic b"siness "nits' based on marets or prod"cts' can cripp!e the abi!ity to e4p!oit and deve!op
competencies - it "nnecessari!y restricts the ret"rns to sca!e across the organi(ation. 9ore competence
is comm"nication' invo!vement' and a deep commitment to woring across organi(ationa! bo"ndaries.
/roducts based on competencies. 6rod"ct portfo!ios +at !east in techno!ogy-based companies/ sho"!d
be based on core competencies' with core prod"cts being the physica! embodiment of one or more core
competencies. Th"s' core competence a!!ows both foc"s +on a few competencies/ and diversification
+to whichever marets firm7s capabi!ities can add va!"e/. To s"stain !eadership in their chosen core
competence areas' companies sho"!d see' to maximi0e their world manufacturing share in core
products. This part!y determines the pace at which competencies can be enhanced and e4tended
+thro"gh a !earning-by-doing sort of improvement/.
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EES&OR $%& Strategy 6rimer &.C
Continuous investment in core competencies or capabilities. The costs of !osing a core competence
can be on!y part!y ca!c"!ated in advance - since the embedded si!!s are b"i!t thro"gh a process of
contin"o"s improvement' it is not something that can be simp!y bo"ght bac or "rented in" by
o"tso"rcing. ?a!-mart' for e4amp!e' has invested heavi!y in its !ogistics infrastr"ct"re' even if the
individ"a! investments co"!d not be #"stified by ROR ana!ysis. They were strategic investments that
enab!ed the company7s re!ent!ess foc"s on c"stomer needs. ?hi!e ?a!-mart was b"i!ding "p its
competencies' A-mart was o"tso"rcing whenever it was cheapest.
Caution: core competencies as core rigidities. 1owen et a!. ta! abo"t the !imitations to restricting
prod"ct deve!opment to areas in which core competencies a!ready e4ist' or core rigidities. Bood
companies may try to incrementa!!y improve their competencies by bringing in one or two new core
competencies with each new ma#or deve!opment pro#ect they p"rs"e.
References5
1owen' 9!ar' 3o!!oway' ?hee!right' 6erpet"a! Enterprise 0achine' O4ford 6ress' .HH$.
6raha!ad' 9.A. and Bary 3ame!' "The 9ore 9ompetence of the 9orporation'" "arvard #usiness
$eview' v=%' n& +0ay-D"ne' .HHC/5@H +.& pages/.
Sta!' B.' Evans' 6.' and <. Sch"!man' "9ompeting on 9apabi!ities5 the ;ew R"!es of 9orporate
Strategy'" v@C' n, +0arch-)pri!' .HH,/5-@ +.& pages/.
2.3 Resource-ased !ie" o# t$e Firm %R!&
?hat is R1>J
The R1> framewor combines the interna! +core competence/ and e4terna! +ind"stry str"ct"re/
perspectives on strategy. <ie the framewors of core competence and capabi!ities' firms have very
different co!!ections of physica! and intangib!e assets and capabi!ities' which R1> ca!!s reso"rces.
9ompetitive advantage is "!timate!y attrib"ted to the ownership of a va!"ab!e reso"rce. Reso"rces are more
broad!y defined to be physica! +e.g. property rights' capita!/' intangib!e +e.g. brand names' techno!ogica!
now how/' or organi(ationa! +e.g. ro"tines or processes !ie !ean man"fact"ring/. ;o two companies have
the same reso"rces beca"se no two companies have had the same set of e4perience' ac2"ired the same
assets and si!!s' or b"i!t the same organi(ationa! c"!t"re. )nd "n!ie the core competence and capabi!ities
framewors' tho"gh' the va!"e of the broad!y-defined reso"rces is determined in the interp!ay with maret
forces. Enter 6orter7s - 8orces. 8or a reso"rce to be the basis of an effective strategy' it m"st pass a
n"mber of external maret tests of its va!"e.
9o!!ins and 0ontgomery +.HH-/ offer a series of five tests for a va!"ab!e reso"rce5
.. )nimitability - how hard is it for competitors to copy the reso"rceJ ) company can sta!! imitation if the
reso"rce is +./ physically unique' +,/ a conse2"ence of path dependent deve!opment activities' +&/
causally ambiguous +competitors don7t now what to imitate/' or +$/ a cost!y asset investment for a
!imited maret' res"!ting in economic deterrence.
,. %urability - how 2"ic!y does the reso"rce depreciateJ
&. ppropriability - who capt"res the va!"e that the reso"rce creates5 company' c"stomers' distrib"tors'
s"pp!iers' or emp!oyeesJ
$. 1ubstitutability - can a "ni2"e reso"rce be tr"mped by a different reso"rceJ
-. Competitive 1uperiority - is the reso"rce rea!!y better relative to competitorsJ
Simi!ar!y' b"t from a more e4terna!' economics perspective' 6eteraf +.HH&/ proposes fo"r theoretica!
conditions for competitive advantage to e4ist in an ind"stry5
.. "eterogeneity of resources PQ rents e4ist
) basic ass"mption is that reso"rce b"nd!es and capabi!ities are heterogeneo"s across firms. This
difference is manifested in two ways. 8irst' firms with s"perior reso"rces can earn Ricardian rents
+profits/ in competitive marets beca"se they prod"ce more efficient!y than others. ?hat is ey is that
the s"perior reso"rce remains in !imited s"pp!y. Second' firms with maret power can earn monopo!y
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profits from their reso"rces by de!iberate!y restricting o"tp"t. 3eterogeneity in monopo!y mode!s may
res"!t from differentiated prod"cts' intra-ind"stry mobi!ity barriers' or first-mover advantages' for
e4amp!e.
,. .x*post limits to competition PQ rents s"stained
S"bse2"ent to a firm gaining a s"perior position and earning rents' there m"st be forces that !imit
competition for those rents +imitabi!ity and s"bstit"tabi!ity/.
&. )mperfect mobility PQ rents s"stained within the firm
Reso"rces are imperfect!y mobi!e if they cannot be traded' so they cannot be bid away from their
emp!oyerO competitive advantage is s"stained.
$. .x*ante limits to competition PQ rents not offset by costs
6rior to the firm estab!ishing its s"perior position' there m"st be !imited competition for that position.
Otherwise' the cost of getting there wo"!d offset the benefit of the reso"rce or asset.
:mp!ications for strategyJ
0anagers sho"!d b"i!d their strategies on reso"rces that pass the above tests. :n determining what are
va!"ab!e reso"rces' firms sho"!d !oo both at e4terna! ind"stry conditions and at their interna!
capabi!ities. Reso"rces can come from anywhere in the va!"e chain and can be physica! assets'
intangib!es' or ro"tines.
9ontin"o"s improvement and "pgrading of the reso"rces is essentia! to prospering in a constant!y
changing environment. 8irms sho"!d consider ind"stry str"ct"re and dynamics when deciding which
reso"rces to invest in.
:n corporations with a divisiona! str"ct"re' it7s easy to mae the mistae of optimi(ing divisiona! profits
and !etting investment in reso"rces tae a bac seat.
Bood strategy re2"ires contin"a! rethining of the company7s scope' to mae s"re it7s maing the most
of its reso"rces and not getting into marets where it does not have a reso"rce advantage. R1> can
inform abo"t the riss and benefits of diversification strategies.
References5
9o!!is' David D.O 0ontgomery' 9ynthia ). "9ompeting on reso"rces5 strategy in the .HHCs"' "arvard
#usiness $eview' v@&' n$ +D"!y-)"g"st' .HH-/5..% +.. pages/.
0.). 6eteraf' "The 9ornerstones of 9ompetitive )dvantage5 ) Reso"rce-1ased >iew'" in 1trategic
&anagement 2ournal .HH&' >o!. .$' pp. .@H-.H..
2.' (lternati)e Frame"or*s+ ,)olutionary C$an-e and .ypercompetition
Recent!y' strategy !iterat"re has foc"sed on managing change as the centra! strategic cha!!enge. 9hange'
the story goes' is the striing feat"re of contemporary b"siness' and s"ccessf"! firms wi!! be the ones that
dea! most effective!y with change' not simp!y those that are good at p!anning ahead. ?hen the direction of
change is too "ncertain' managers simp!y cannot p!an effective!y. ?hen ind"stries are rapid!y and
"npredictab!y changing' strategy based on ind"stry ana!ysis' core capabi!ities' and p!anning may be
inade2"ate by themse!ves' and wo"!d be we!! comp!emented by an orientation towards dea!ing with change
effective!y and contin"o"s!y.
Evo!"tionary 9hange
Theories that draw ana!ogies between bio!ogica! evo!"tion and economics or b"siness can very satisfying5
they e4p!ain the way things wor in the rea! wor!d' where ana!ysis and p!anning is often a rarity.
0oreover' they s"ggest that strategies based on f!e4ibi!ity' e4perimentation and contin"o"s change and
!earning can be even more important than rigoro"s ana!ysis and p!anning. :ndeed' overp!anning is a danger
to be avoided.
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:n Competing on the .dge' Eisenhardt +.HH%/ advocates a strategy based on what she ca!!s "competing on
the edge'" combining e!ements of comp!e4ity theory with evo!"tionary theory. :n s"ch a framewor' firms
deve!op a "semi-coherent strategic direction" of where they want to go. They do this by having the right
ba!ance between order and chaos - firms can then s"ccessf"!!y evo!ve and adapt to their "npredictab!e
environment. 1y competing at the "edge of chaos'" a firm creates an organi(ation that can change and
prod"ce a contin"o"s f!ow of competitive advantages that form the "semi-coherent" direction. 8irms are
not hindered by too m"ch p!anning or centra!i(ed contro!' b"t they have eno"gh str"ct"re so that change
can be organi(ed to happen. They s"ccessf"!!y evo!ve' beca"se they p"rs"e a variety of moves' and in
doing so mae some mistaes b"t a!so re!ent!ess!y reinvent the b"siness by discovering new growth
opport"nities. This strategy is characteri(ed by being "npredictab!e' "ncontro!!ed' and inefficient' b"t it
wors. :t7s important to note that firms sho"!d not #"st react we!! to change' b"t m"st a!so do a good #ob of
anticipating and !eading change. :n s"ccessf"! b"sinesses' change is time*paced' or triggered by the
passage of time rather than events.
:n #uilt to (ast' 9o!!ins and 6orras +.HH$/ o"t!ine habits of !ong-s"ccessf"!' visionary companies.
Under!ying the habits is an orientation towards evo!"tionary change5 try a !ot of st"ff and eep what wors.
Evo!"tionary processes can be a powerf"! way to stim"!ate progress. :mportant!y' tho"gh' 9o!!ins and
6orras a!so find that s"ccessf"! companies each have a core ideo!ogy that m"st be preserved thro"gho"t the
progress. There is no one form"!a for the "right" set of core va!"es' b"t it is important to have them. :n
strategy-spea' it is this core ideo!ogy that most f"ndamenta!!y differentiates the firm from competitors'
regard!ess of which maret segments they get into. They are deep!y he!d va!"es that go beyond "vision
statements" - they are mechanisms and systems that are b"i!t into the system over time. )ttention to the
core be!iefs may sometimes defy short-term profit incentives or conventiona! b"siness wisdom' b"t it is
important to maintain them. E4amp!es of core ideo!ogies are5 367s commitment to maing an "origina!
technica! contrib"tion" in every maret they enter' ?a!-mart7s "e4ceed c"stomer e4pectations'" 1oeing7s
"being on the !eading edge of aviation'" and &07s "respect for individ"a! initiative." ;otice the "ma4imi(e
shareho!der wea!th" is not an ade2"ate core ideo!ogy - it does not inspire peop!e at a!! !eve!s and provides
!itt!e g"idance.
:n the conte4t of strategy and p!anning' this boo offers a co"p!e of important !essons5
Unp!anned' evo!"tionary change can be an important component to s"ccess. Strategy and p!anning
sho"!d foster and comp!ement s"ch change' not s"ffocate it.
9ertain core be!iefs are f"ndamenta! to organi(ations' and sho"!d be preserved at a!! costs. ;ot
everything abo"t an organi(ation is a candidate for change in considering a!ternative strategies.
3ypercompetition
Traditiona! approaches to strategy stress the creation of advantage' b"t the concept of hypercompetition
teaches that strategy is a!so the creative destr"ction of an opponent advantage. This is beca"se in today7s
environment' traditiona! so"rces of competitive advantage erode rapid!y' and s"staining advantages can be
a distraction from deve!oping new ones. 9ompetition has intensified to mae each of the traditiona!
so"rces of advantage more v"!nerab!eO the traditiona! so"rces are5 price & 2"a!ity' timing and now-how'
creation of strongho!ds +entry barriers have fa!!en/' and deep pocets. The primary goa! of this new
approach to strategy is disr"ption of the stat"s 2"o' to sei(e the initiative thro"gh creating a series of
temporary advantages. :t is the speed and intensity of movement that characteri(es hypercompetition.
There is no e2"i!ibri"m as in perfect competition' and on!y temporary profits are possib!e in s"ch marets.
S"ccessf"! strategy in hypercompetitive marets is based on three e!ements5
>ision for how to disr"pt a maret +setting goa!s' b"i!ding core competencies necessary to create
specific disr"ptions/
Aey capabi!ities enab!ing speed and s"rprise in a wide range of actions
Disr"ptive tactics i!!"minated by game theory +shifting the r"!es of the game' signa!ing' sim"!taneo"s
and strategic thr"sts/
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Additional Tools for Strategic T!inking and Analysis
3.1 /ame 0$eory
Bame Theory in Strategy
Bame theory he!ps ana!y(e dynamic and se2"entia! decisions at the tactica! !eve!. The main va!"e of game
theory in strategy is to emphasi(e the importance of thining ahead' thining of the a!ternatives' and
anticipating the reactions of other p!ayers in yo"r "game." Aey concepts re!evant to strategy are the payoff
matri4' e4tensive form games' and the core of a game. )pp!ication areas in strategy are5
new prod"ct introd"ction
!icensing vers"s prod"ction
pricing
R&D
advertising
reg"!ation
The :mportance of Understanding "The Bame"
S"ccessf"! strategy cannot depend #"st on one firm7s position in ind"stry' capabi!ities' activities' or what
have yo". :t depends on how others react to yo"r moves' and how others thin yo" wi!! react to theirs. 1y
f"!!y "nderstanding the dynamic with others' yo" can recogni(e win-win strategies that mae yo" better off
in the !ong term' and signa!ing tactics that avoid !ose-!ose o"tcomes. 0oreover' if yo" "nderstand the
game' yo" can tae actions to change the r"!es or p!ayers of the game in yo"r favor. 1randenb"rger and
;a!eb"ff +.HH-/ give some good e4amp!es of this. One way a company can change the game and capt"re
more va!"e is by changing the va!"e other p!ayers can bring to it' as the ;intendo e4amp!e i!!"strated. :n
s"mmary' companies can change their game of b"siness in their favor by changing5
players +">a!"e ;et"/ - c"stomers' s"pp!iers' s"bstit"tors' and comp!ementors +not #"st the
competitors/
added values - the va!"e that each p!ayer brings to the co!!ective game
rules - !aws' c"stoms' contracts' etc. that give a game its str"ct"re
tactics - moves "sed to shape the way p!ayers perceive the game and hence how they p!ay
scope - bo"ndaries of the game.
Bame theory has been a b"rgeoning branch of economics in recent years. :t is a comp!e4 s"b#ect that spans
games of static +one-time/ and dynamic +repeated/ nat"re "nder perfect or imperfect information. The
references be!ow wi!! be he!pf"! for those wishing to e4p!ore the theory and mode!ing of game theory in
more detai!. 8or strategy' tho"gh' it can often be a ma#or step #"st to recogni(e certain sit"ations as games'
and thining abo"t how a p!ayer can set o"t to change the game.
References5
:ntrod"ction to game theory in corporate strategy
Oster' S.0.' &odern Competitive nalysis' 9hapter' .&' O4ford 6ress' .HH$' pp.,&@-,-C.
1randenb"rger' )dam 0.O ;a!eb"ff' 1arry D. "The right game5 "se game theory to shape strategy"
"arvard #usiness $eview v@&' n$ +D"!y-)"g"st' .HH-/5-@.
1asic introd"ction to game theory concepts
).A. Di4it and 1. D. ;a!eb"ff' Thin'ing 1trategically: The Competitive .dge in #usiness, /olitics, and
.veryday (ife' ?.?. ;orton & 9ompany' pp. &$@-&=@
Bibbons' R.' 3ame Theory for pplied .conomists' 6rinceton5 6rinceton University 6ress' .HH,.
1inmore' A.' 4un and 3ames: Text on 3ame Theory' <e4ington5 D.9. 3eath & 9o.' .HH,.
0ore advanced economics te4ts on game theory
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8"denberg' D. and D. Tiro!e' 3ame Theory' 9ambridge5 0:T 6ress' .HH..
0yerson' R.' 3ame Theory: n nalysis of Conflict' 9ambridge5 3arvard University 6ress' .HH..
3.2 1ptions
Options theory has inf!"enced corporate strategy "n!ie any other paradigm coming from ?a!! Street. The
Irea! optionK is ana!ogo"s to the financia! option in that a company with an investment opport"nity ho!ds
the right b"t not the ob!igation to p"rchase an asset at some time in the f"t"re. 1"siness schoo!s have
ta"ght managers to ana!y(eNeva!"ate investment decisions "sing net present va!"e +;6>/' which ass"mes
one of two things5 ./ the investment is reversib!e or ,/ if not' it is a now-or-never proposition. :n fact'
most investment decisions are irrevocab!e a!!ocations of reso"rces and capab!e of being de!ayed. Di4it and
6indyc +.HH-/ disc"ss how the options approach to capita! investment provides a richer framewor that
a!!ows managers to address the iss"es of irreversibi!ity' "ncertainty' and timing more direct!y.
The options framewor p!aces va!"e on f!e4ibi!ity +eeping the investment option a!ive/ and mod"!arity
+creating options/5
4lexibility examples: ./ :nvestments in R&D can create options that a!!ow the company to "ndertae other
investments in the f"t"re sho"!d maret conditions be favorab!e. ,/ ) mining faci!ity operating at a !oss
given c"rrent prices may be de!iberate!y ept open beca"se c!os"re wo"!d inc"r the opport"nity cost of
giving "p the option to wait for higher f"t"re prices.
&odularity examples: ./ ) !and p"rchase co"!d !ead to deve!opment of minera! reserves. ,/ )n e!ectric
"ti!ity co"!d invest in sma!! additions to capacity as needed to meet "ncertain demand instead of b"i!ding
e4pensive' !arge-sca!e p!ants.
The option is str"ct"red s"ch that the company can e4ercise it when profitab!e and !et it e4pire when it is
not' depending on how "ncertainty is reso!ved. )s !ong as there are some contingencies "nder which the
company wo"!d choose not to invest' the option has value. Th"s' options theory capt"res the fact that the
greater the "ncertainty' the greater the va!"e of the opport"nity and the greater the incentive to wait and
eep the option a!ive rather than e4ercise it.
:mp!ications for strategyJ
The options approach is partic"!ar!y appropriate for companies in very vo!ati!e and "npredictab!e
ind"stries' s"ch as e!ectronics' te!ecomm"nications' biotech' and pharmace"tica! ind"stries.
?hen raising capita!' greater va!"e sho"!d be p!aced on investments that create options' compared to
those that exercise options.
Options are especia!!y appropriate for ana!y(ing a series of phased investments.
Options theory he!ps "s "nderstand how traditiona! disco"nted cash f!ow ana!ysis systematica!!y
"nderestimates the benefits of waiting.
Rea! options a!so provide a means for eva!"ating disinvestment' an often over!ooed opport"nity to
avoid f"t"re !osses +e.g.' c!osing a faci!ity in response to a maret downt"rn/.
9onsider whether the c!ient wo"!d be in a better position after some "ncertainty is reso!ved. :n
framing a!ternatives' consider strategies that inc!"de downstream decisions. Options might be the idea!
way to mode! s"ch decision opport"nities.
#ntrod73tory 9ooks on Rea5 O:tions
)mram' 0. and ;. A"!ati!aa' Rea! Options 5 0anaging Strategic :nvestment in an Uncertain ?or!d'
3arvard 1"siness Schoo! 6ress' .HH%.
- ta'es the finance approach to real options, much li'e the (uenberger text. 4ocus is on problems in
which ris's are priced by exchange traded securities +mar'et ris's,.
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Rea! Options in 9apita! :nvestment' Trigeorgis' <' editor' .HH-.
* collection of articles intended for both academic and professional audience.
Trigeorgis' <.' Rea! Options 5 0anageria! 8!e4ibi!ity and Strategy in Reso"rce )!!ocation' 0:T 6ress'
.HH=.
* /erhaps the best overall general introduction to real options, without ta'ing a strictly finance or strictly
decision analytic approach. 4eatures a good comparison of various approaches to valuing ris'y
investments. practical approach that is not as academic as %ixit and /indyc'.
$3ademi3 Re6eren3es
Di4it' )vinash A. and Robert S. 6indyc' :nvestment Under Uncertainty, 6rinceton' .HH$.
The boo' to read if you are interested in mathematical formulations of real options problems +i.e. dynamic
programming and stochastic differential equations,
<"enberger' D.' :nvestment Science' O4ford Univ. 6ress' .HH@
(uenberger5s binomial lattice approach is a useful simplification of dynamic programming approaches to
real options. The boo' also includes some powerful finance tools for pricing mar'et ris'.
Smith' Dames E.' IOptions in the rea! wor!d5 <essons !earned in eva!"ating oi! and gas investments'K
Operations Research' DanN8eb .HHH.
Smith' Dames E. and Robert ;a"' I>a!"ing Risy 6ro#ects5 Option 6ricing Theory and Decision
)na!ysis'K 0anagement Science' >o!. $.' ;o. -' 0ay .HH-.
Smith' Dames E.' I>a!"ing Oi! 6roperties5 :ntegrating Option 6ricing and Decision )na!ysis
)pproaches'K Operations Research' 0arN)pr .HH%.
* 2im 1mith5s wor' has been instrumental in integrating the decision analysis and finance approaches to
ris'y investments. 4ocuses mainly on problems that are at least partly influenced by mar'et*spanning ris's
+i.e. ris's that are priced by exchange traded derivatives, such as oil and gas futures,
Po:75ar 97siness Re6eren3es
) n"mber of recent artic!es have promoted rea! options to the genera! management a"dience5
)mram' 0.' ;. A"!ati!aa' IDiscip!ined decisions5 )!igning strategy with the financia! marets'K "arvard
#usiness $eview' DanN8eb .HHH.
* a concise summary of the concepts in their boo' +see above,.
Di4it' )vinash A. and Robert S. 6indyc' IThe Options )pproach to 9apita! :nvestment'K 3arvard
1"siness Review' 0ay .HH-.
* a good overview of why flexibility in decision ma'ing is important. 6ritten by the authors who are also
experts in the academic real options literaure. ) good starting point for those who are a!ready fami!iar
with decision ana!ysis.
<es!ie' A. and 0ichae!s' 0. IThe Rea! 6ower of Rea! Options'K 0cAinsey R"arter!y' .HH@ ;o &.
* promotes the intuition from analysis of real options as a framewor' for strategic thin'ing.
9ope!and' T. and 6. Aeenan' I3ow m"ch is f!e4ibi!ity worth'K 0cAinsey R"arter!y' .HH% ;o ,
* general introduction to real options as a means to price mar'et ris', focusing more on the finance
tradition of real options +no arbitrage pricing, than the decision analysis tradition. 7seful if you are
dealing with uncertainties that are trac'ed well by the mar'et +i.e. oil and gas prices, etc.,
<"ehrman' T.' I:nvestment Opport"nities as Rea! Options5 Betting Started on the ;"mbers'K 3arvard
1"siness Review' D"!y .HH%.
<"ehrman' T.' IStrategy as a 6ortfo!io of Rea! Options'K 3arvard 1"siness Review' September .HH%.
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* try to generali0e the #lac'*1choles basis for real options thin'ing to a genera! a"dience. ) bit hoy and
simplistic.
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3.3 Strate-ic Scenarios
Scenarios are powerf"! vehic!es for cha!!enging o"r menta! mode!s of the wor!d. The va!"e is not in
predicting the f"t"re' b"t in maing better decisions today. The decision maers co"!d be individ"a!s'
b"sinesses' or po!icy maers. Scenarios are a nice comp!ement to the princip!es of decision ana!ysis5 the
D) cyc!e ends in decisions and insights' whi!e the scenario process ends in a scenario.
?hy Deve!op ScenariosJ - Uncovering the Decision
1esides predicting the f"t"re' scenarios aid in strategic decision maing5
&a'e the decision conscious. The first step in the scenario process is maing the decision conscio"s.
6eop!e7s decision agenda is often "nconscio"s' and peop!e sho"!d not avoid a decision #"st beca"se
they fee! power!ess.
rticulate current mindsets. Scenarios are !ie stories we can te!! o"rse!ves - they are a powerf"! way
of s"spending disbe!ief and avoiding the dangers of denia!. Often' peop!e may ref"se to thin abo"t
possibi!ities that are "nappea!ing to them. The process of scenario b"i!ding' considering both
optimistic and pessimistic and #"st p!ain different f"t"res' over!y e4poses "menta! mode!s" and
ass"mptions that may be inbred in the organi(ation.
%evelop insights and solid instincts. :nsights come from asing the right 2"estions - from having to
consider more than one scenario. )!so' scenario b"i!ding he!ps deve!op a g"t fee!ing for a sit"ation'
and ass"res "s that we7ve been comprehensive in covering the bases re!evant to o"r decision.
3ow to Deve!op ScenariosJ
Deve!oping scenarios is simi!ar to deve!oping and pr"ning inf!"ence diagrams in D)' b"t the scope of
consideration is a !itt!e broader with scenarios. Sti!!' scenario b"i!ders sho"!d consider both narrow
+sit"ation specific/ and broad 2"estions. Typica!!y' the scenario b"i!ding e4ercise wi!! res"!t in no more
than fo"r scenarios - any more is too comp!e4 to draw insights. The set of scenarios sho"!d span a range of
o"tcomesO typica!!y something !ie "same b"t better'" "worse'" and "different b"t better."
Steps to deve!oping scenarios are as fo!!ows5
.. :dentify the foca! iss"e or decision. +D) ana!og"e5 frame the decision/
,. :dentify the basic driving forces inf!"encing the o"tcome5 socia!' techno!ogica!' economic' po!itica!'
environmenta!. +D) ana!og"eJ/
&. :dentify the ey forces in the !oca! environment5 determining the predetermined e!ements and critica!
"ncertainties. +D) ana!og"e5 identify the "ncertainties/
$. Ran the "ncertainties in order of importance. +D) ana!og"e5 tornado diagram/
-. Se!ecting scenario p!ots +!ogics/. Scenario p!ots typica!!y r"n according to certain !ogics' !ie5
winners & !osers' cha!!enge & response' evo!"tion' revo!"tion' cyc!es' etc.
=. 8!esh o"t scenarios. Each p!ot wi!! !ead to a different decision today. 8rom the different p!ots' narrow
and combine them to form two or three coherent scenarios.
@. )ssess imp!ications of scenarios on decision.
%. :dentify !eading indicators and signposts. <earn to notice symptoms' c"es' and warning signa!s of
certain p!ots "nrave!ing before yo".
References5
Schwar(' 6eter' The rt of the (ong View: /lanning for the 4uture in an 7ncertain 6orld' Do"b!eday'
;ew *or' .HH..
Schwart(' 6eter' "9omposing a 6!ot for *o"r Scenario'" /lannning $eview ,C' no. & +.HH,/5$.-$=.
0ason' David 3. "Scenario-based 6!anning5 Decison 0ode! for the <earning Organi(ation,8 /lanning
$eview ,,' no. , +.HH$/5=-... +This a!so introd"ces the idea of organi(ationa! !earning/.
Simpson' Danie! B.' "Aey <essons for )dopting Scenario 6!anning in Diversified 9ompanies'"
/lanning $eview ,C' no. & +.HH,/5 .C-.@' $@-$%.
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3.' 1t$er Particularly Rele)ant ,,S&1R Core Concepts
St"dents in EES&OR have a host of ana!ytica! too!s avai!ab!e to add insight to strategic thining and
ana!ysis. Some of the more direct!y re!evant topics inc!"de5
Decision )na!ysis
- decision hierarchy and framing
- strategy tab!es
- tornado diagrams
- ana!ysis of decisions "nder "ncertainty
- va!"e of information
- options in decisions
8inance
- investment ana!ysis
- rea! options
Economics
- demand-oriented pricing +dynamic' monopo!istic pricing/
- game theory
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" #arketing #odels for $roduct Strategy
EES&OR $%& teaches two prod"ct p!anning methodo!ogies that may be "sed independent!y or as
comp!ements to each other. They add rigor to strategy at the !eve! of prod"ct p!anning and imp!ementation.
)n e4ce!!ent reference for these and other mareting mode!s is <i!ien and Rangasaway +.HH%/.
'.1 2e" Product 3i##usion 4odels
The diffusion process is the spread of an idea or the penetration of a maret by a new prod"ct from its
so"rce of creation to its "!timate "sers or adopters. ;ote that adoption refers to the decision to "se an
innovation reg"!ar!y' whereas diffusion is on!y concerned with initia! tria! of the prod"ct. +So"rce5 <i!ien'
Aot!er and 0oorthy' .HH,' p. $=./
There are two types of diff"sion effects5
)nnovation5 tria! of prod"ct ca"sed by advertising and promotions
)mitation5 tria! of prod"ct ca"sed by word-of-mo"th recommendations and rep"tation
6rior to 1ass +.H=H/' diff"sion mode!s were either p"re innovative +ass"me diff"sion on!y ca"sed by
e4terna! forces/ or p"re imitative +ass"me diff"sion on!y ca"sed by imitation N word of mo"th/. The 1ass
mode! combines innovative and imitative behavior into one mode!5
// + /+ + // + + / + / + t - m t -
m
q
t - m p t - t n + = =

innovation
effect
or
e4terna!
inf!"ence
imitation
effect
or
interna!
inf!"ence
where5
/ + / + t - t n

= P 0agnit"de of tria! demand +P the n"mber of adopters at time t P derivative of - with
respect to t/
/ +t -
P 9"m"!ative n"mber of adopters
m P 6otentia! n"mber of "!timate adopters
p
P :nf!"ence parameter for innovation
q
P :nf!"ence parameter for imitation
This e4pression can be rewritten for additiona! int"itive "nderstanding "sing the e2"iva!ent representation5
/S + /ST + T / + t 9
m
q
p t - m t - + =

"npenetrated
maret si(e
adoptive press"re
pPinnovative
qPimitative
Terms can be interpreted as representing one gro"p of innovators and one gro"p of imitators' or as
representing both the interna! and e4terna! inf!"ences on a!! adopters.
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EES&OR $%& Strategy 6rimer &.C
:mportant B"ide!ines for 0aret 8orecasting
The mode! forecasts total maret potentia! for a prod"ct' not sa!es for a partic"!ar company. 9ompany
sa!es wo"!d depend on maret share of the tota!' which depends on partic"!ar prod"ct variab!es !ie
2"a!ity' cost' and promotion' and distrib"tion. Diff"sion mode!s on!y he!p with the big pict"reO "se
con#oint ana!ysis or other methods to forecast maret share.
:n practice the act"a! coefficients are "s"a!!y estimated by ana!ogy to past prod"cts. 9oefficients for
past prod"cts are genera!!y avai!ab!e in tab!es' or may be estimated by regression.
Remember that diff"sion mode!s on!y represent demand associated with the tria! of a prod"ct.
)dditiona! terms need to be added to acco"nt for repeat p"rchase. ) mode! that taes into
consideration both tria! and repeat p"rchase demand wo"!d be a comp!ete sa!es forecast.
The 1ass mode! is a predictive mode! that is most appropriate for forecasting sa!es of a discontinuous
new techno!ogy or d"rab!e prod"ct that has no competitors. :n s"ch sit"ations' the s"ccess of the
prod"ct may be partic"!ar!y "ncertain' and the 1ass mode! forecast may on!y depict one possib!e
o"tcome.
?here yo" are in the prod"ct !ife cyc!e dictates the mareting and c"stomer segmentation strategy.
?ith discontin"o"s innovations different mareting strategies are ca!!ed for at different stages of the
techno!ogy !ife cyc!e to ens"re that the prod"ct reaches a mass maret +see Section -.-/.
0ore recent research has foc"sed on re!a4ing the ass"mptions of the 1ass mode!5
)!!owing maret potentia! to vary over time
;ot restricting that diff"sion of an innovation be independent of a!! other innovations
)!!owing geographica! bo"ndaries of the system in which diff"sion taes p!ace to vary over time
:ncorporating the effect of mareting actions s"ch as pricing' advertising' etc. on the diff"sion process
9onsidering s"pp!y restrictions
9onsideration of "ncertainty
9onsider variations in diff"sion rates in different co"ntries
)!!ow word of mo"th effects to vary over time
The area of mareting p!anning mode!ing inc!"des the incorporation of feedbac effects into diff"sion
mode!s to t"rn advertising and pricing decisions over time into optima! contro! prob!ems.
References
<i!ien' Bary <.' 6hi!ip Aot!er' and A. Sridhar 0oorthy' &ar'eting &odels +.HH,/5$-@ +$$ pages/
<i!ien' Bary' and ). Rangasaway' &ar'eting .ngineering' )ddison-?es!ey' .HH%' pp..H--,C$.
0aha#an'>i#ay' Eitan 0"!!er' and 8ran 0. 1ass' I;ew-6rod"ct Diff"sion 0ode!s'K "andboo's in
:$ ; &1, v. - +.HH&/5 &$H +,& pages/.
'.2 Con5oint (nalysis
9on#oint ana!ysis is maret research methodo!ogy for mode!ing the maret. ) 2"antitative' grass-roots
approach' con#oint ana!ysis is "sed to predict cons"mer preferences for m"!tiattrib"te a!ternatives. :t is
based on economic and psycho!ogica! research on cons"mer behavior' especia!!y at the individ"a! !eve!'
which is considered ey to maing acc"rate predictions of the tota! maret. The s"b#ect of a con#oint st"dy
can be either a physica! prod"ct or a service' and the maret can inc!"de both new and e4isting
prod"ctsNservices.
?hat is con#oint ana!ysisJ
Thin of the decision process that cons"mers go thro"gh when choosing between comp!e4 a!ternatives.
6rod"cts vary in terms of their feat"res' performance' and 2"a!ity and th"s are offered at vario"s prices.
9on#oint ana!ysis considers a prod"ct in terms of a b"nd!e of attributes' or characteristics. Thro"gh an
interview' data are co!!ected from respondents to capt"re the tradeoffs they mae between attrib"tes. These
data are processed to estimate a utility f"nction that e4presses each respondentEs va!"e for prod"ct
attrib"tes. These "ti!ity va!"es are then "sed in a maret mode! or sim"!ator to mae predictions abo"t how
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EES&OR $%& Strategy 6rimer &.C
cons"mers wo"!d choose among new' modified' and e4isting prod"cts. 9on#oint ana!ysis a!!ows "s to
ana!y(e f"t"re maret scenarios based on primary maret research. Other techni2"es' s"ch as historica!
ana!ysis' wo"!d be ins"fficient to forecast the maret for new prod"cts' whereas con#oint ana!ysis can
mode! cons"mersE reaction to hypothetica! prod"cts that may not yet e4ist.
9on#oint ana!ysis is a decompositional mode! in that va!"es are derived from cons"mersE responses to
interview 2"estions' as compared to asing cons"mers to direct!y estimate mode! parameters. :n direct
assessment' respondents are ased how !ie!y they are to b"y a certain prod"ct or how m"ch they wo"!d be
wi!!ing to pay for a prod"ct with an attrib"te improvement. This techni2"e is !imited in that prod"cts are
not shown in a competitive conte4t and these 2"estions do not genera!!y represent rea!istic p"rchase
decisions. )!ternative!y' con#oint ana!ysis "ses inference' which provides a more acc"rate pict"re of
cons"mersE b"ying behavior. :n the ana!ysis of responses to 2"estions abo"t hypothetica! prod"ct
concepts' we can infer the va!"e to each respondent of having each attrib"te !eve!. Rather than e4pecting
respondents to provide direct assessments' they are ased to mae a n"mber of decisions that are more
rea!istic and nat"ra!. :n a typica! pairwise comparison' two prod"ct concepts are considered <oint!y. 8or
instance5
-<i3< dr7g treatment 8o75d yo7 :re6er=
0a#or side effects
3igh efficacy
0inor side effects
0oderate efficacy
) 1
:mp!ications for strategyJ
The scope of prod"ct p!anning iss"es addressed with con#oint ana!ysis ranges from the tactica! !eve! to the
strategic !eve!. The fo!!owing is a !ist of some of the prod"ct p!anning decisions for which con#oint
ana!ysis is c"rrent!y "sed wor!dwide5
6ricing
;ew prod"ct design
6rod"ct positioning
9ompetitive strategy
0areting strategies
0aret segmentation
:nvestment decisions
Sa!es forecasting
9apacity p!anning
Distrib"tion p!anning
9on#oint ana!ysis is a widespread' time-proven strategic too!. To ens"re s"ccess' practitioners m"st
caref"!!y set c!ient e4pectations regarding what con#oint can and cannot do. 9on#oint sim"!ators are
directiona! indicators that can provide significant insight into the re!ative importance of prod"ct feat"res
and preferences for prod"ct config"rations. These maret sim"!ators predict preference share' that is
maret share potential. 0any interna! and e4terna! inf!"ences s"ch as awareness' mareting' sa!es force
effectiveness' and distrib"tion drive maret share in the rea! wor!d. Un!ess these effects are e4p!icit!y
mode!ed in' care sho"!d be taen to regard the mode! res"!ts as preference shares that ass"me perfect
maret penetration.
9on#oint ana!ysis is imp!emented "sing commercia!!y avai!ab!e software and c"stom-programmed
app!ications. Descriptions of pacages avai!ab!e from one of the !eading deve!opers' Sawtooth Software'
are !isted in the references be!ow.
.%
EES&OR $%& Strategy 6rimer &.C

Re6eren3es +organi(ed by needsNinterest and ordered by "sef"!ness/5
) host of references and g"ides to choosing software are avai!ab!e at http5NNwww.sawtoothsoftware.comN

Betting Started with 9on#oint on *o"r 6ro#ect
9"rry' Doseph' I9on#oint )na!ysis5 )fter the 1asicsK
Orme' 1ryan' I?hich 9on#oint 0ethod Sho"!d : UseK +.HH@/
9!ient :nteraction
9"rry' Doseph' IUnderstanding 9on#oint )na!ysis in .- 0in"tesK
Orme' 1ryan' I3e!ping 0anagers Understand the >a!"e of 9on#ointK
Sawtooth Software' IUsing 9hoice-1ased 9on#oint to )ssess 1rand Strength and 6rice SensitivityK
+.HH=/
9hoosing the )ppropriate Software
Sawtooth Software' I)9) System L )daptive 9on#oint )na!ysis' >ersion $.CK +.HH.-.HH=/
Sawtooth Software' I9>) L ) 8"!!-6rofi!e 9on#oint System from Sawtooth Software' >ersion ,.CK
Sawtooth Software' IThe 919 System for 9hoice-1ased 9on#oint )na!ysisK +Dan .HH-/
Str"h!' Steven' IDiscrete 9hoice 0ode!ing5 Understanding a I1etter 9on#oint than 9on#ointK
9on#oint 0ethodo!ogy Design and Research
Breen' 6a"! E. and )bba 0. Arieger' I9on#oint )na!ysis with 6rod"ct-6ositioning )pp!ications'K
"andboo's in :$ ; &1, v. - +.HH&/5$=@ +&- pages/
<i!ien' Bary' and ). Rangasaway' &ar'eting .ngineering' )ddison-?es!ey' .HH%' pp.%$-.H$.
3"ber' Doe!' I?hat ?e 3ave <earned from ,C *ears of 9on#oint Research5 ?hen to Use Se!f-
E4p!icated' Braded 6airs' 8"!! 6rofi!es or 9hoice E4perimentsK
0c8adden' Danie! 8.' I9onditiona! <ogit )na!ysis of R"a!itative 9hoice 1ehavior'K 4rontiers of
.conometrics +.H@&/
Breen' 6a"! and )bba Arieger' I:ndivid"a!i(ed 3ybrid 0ode!s for 9on#oint )na!ysisK' &anagement
1cience=Vol.>?, -o.@ +D"ne .HH=/
3"ber' Doe!' Dan )rie!y' and Bregory 8ischer' IThe )bi!ity of 6eop!e to E4press >a!"es with
9hoices' 0atching and RatingsK +.HH%/
Orme' 1ryan' 0ar )!pert' and Ethan 9hristensen' I)ssessing the >a!idity of 9on#oint )na!ysis-
9ontin"edK
3"ber' Doe!' Dic ?ittin' and Richard Dohnson' I<earning Effects in 6reference Tass5 9hoice-
1ased >ers"s Standard 9on#ointK +.HH,/
?ittin' Dic' and Doe! 3"ber' Dohn 8ied!er' and Richard 0i!!er' IThe 0agnit"de of and an
E4p!anationNSo!"tion for the ;"mber of <eve!s Effect in 9on#oint )na!ysisK +.HH./
9ase St"dies
6age' )!bert and 3aro!d Rosenba"m' IRedesigning 6rod"ct <ines with 9on#oint )na!ysis5 3ow
S"nbeam Does :tK +.H%@/
?ind' Derry' 6a"! Breen' Do"g!as Shiff!et' and 0arsha Scarbro"gh' I9o"rtyard by 0arriott5
Designing a 3ote! 8aci!ity with 9ons"mer-1ased 0areting 0ode!sK +.H%H/
9on#oint 3istory
Breen' 6a"! and >. Srinivasan ' I9on#oint )na!ysis in 0areting5 ;ew Deve!opments with
:mp!ications for Research and 6racticeK +post-.H@%/
Breen' 6a"! and >. Srinivasan ' I9on#oint )na!ysis in 9ons"mer Research5 :ss"es and O"t!oo'K
2ournal of Consumer $esearch, Vol. A +.H@%/
.H
EES&OR $%& Strategy 6rimer &.C
<i!ien' Bary' 6hi!ip Aot!er' and A. Sridhar 0oorthy' IDecision 0ode!s for 6rod"ct Design'K
&ar'eting &odels +.HH,/5,&%
% Conceptual #arketing Frameworks
0"ch of the 01) !eve! mareting materia! is not concerned with #"st sa!es and services' b"t rather with
iss"es of strategic importance. ?hi!e this materia! is not ta"ght in EES&OR$%&' it may be he!pf"! to be
aware of some ey themes in mareting. The fo!!owing !ists and descriptions provide an overview of
important mareting concepts. *o"7!! notice that some of the concepts over!ap with strategy framewors.
)n e4ce!!ent reference te4tboo for mareting framewors5
Aot!er' 6hi!ip. &ar'eting &anagement : nalysis, /lanning, )mplementation, and Control ' Hth ed. Upper
Sadd!e River' ;D 5 6rentice 3a!!' .HH@.
5.1 0$e Four P6s o# t$e 4ar*etin- 4i7
The phrase Ithe fo"r pEsK is an easy way to remember and characteri(e the fo"r most important mareting
decision variab!es. The fo"r 6Es are price' prod"ct' promotion' and p!ace5
I6riceK variab!es5
)!!owances and dea!s
Distrib"tion and retai!er mar"ps
Disco"nt str"ct"re
I6rod"ctKvariab!es5
R"a!ity
0ode!s and si(es
6acaging
1rands
Service
I6romotionK variab!es5
)dvertising
Sa!es promotion
6ersona! se!!ing
6"b!icity
I6!aceK variab!es5
9hanne!s of distrib"tion
O"t!et !ocation
Sa!es territories
?areho"sing system
So"rce5 Aot!er' .HH@
5.2 4ar*et-1riented Strate-ic Plannin-
I0aret-oriented strategic p!anning is the manageria! process of deve!oping and maintaining a viab!e fit
between the organi(ationEs ob#ectives' si!!s' and reso"rces and its changing maret opport"nities. The aim
of strategic p!anning is to shape and reshape the companyEs b"sinesses and prod"cts so that they yie!d
target profits and growth.K - Aot!er' .HH@
Three ey ideas5
0anage the companyEs b"siness as an investment portfo!io.
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EES&OR $%& Strategy 6rimer &.C
)ssess the f"t"re profit potentia! of each b"siness by consider the maret growth rate and the
companyEs fit.
Deve!op a strategic game p!an that maes sense in !ight of the companyEs ind"stry position' ob#ectives'
si!!s' and reso"rces.
The b"siness strategic p!anning process5
1"siness
mission
E4terna!
environmenta!
ana!ysis
:nterna!
environmenta!
ana!ysis
Boa!
form"!ation
Strategy
form"!ation
6rogram
form"!ation
:mp!ementation
8eedbac
and contro!
1oston 9ons"!ting Bro"p Browth-Share 0atri45 I:nvest in the stars' get rid of the dogsUK The framewor
promotes the importance of maret growth rate and maret share in determining the strategic importance of
a prod"ct.
Stars
Question
Marks
Cash Cows Dogs
M
a
r
k
e
t

G
r
o
w
t
h

R
a
t
e
0
%









1
0
%








2
0
%
10x 1x .1x
Relative Market Share
)!ternative >iews Of The >a!"e 9reation 6rocess5
One traditiona! b"siness approach ignores the impact of mareting research on prod"ct design. Under this
framewor' the first step is to mae the prod"ct' and then the second step is to fig"re o"t how and to whom
it wi!! be so!d. This is sti!! a common prob!em in many companies today. ) more sophisticated paradigm
recogni(es that the cons"mer demand sho"!d drive prod"ct design. 0areting research' segmentation'
positioning' and con#oint ana!ysis are a!! e4amp!es of this more sophisticated approach. The diagrams
be!ow i!!"strate the two paradigms.
Traditiona! physica! process se2"ence5
,.
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0ae the 6rod"ct Se!! the prod"ct
Design
prod"ct
6roc"re 0ae 6rice Se!!
)dvertiseN
6romote
Distrib"te Service
The va!"e creation and de!ivery se2"ence +0cAinsey/5
9hoose the va!"e 9omm"nicate the va!"e
So"rcing
0aing
Distrib"ting
Servicing
6rovide the va!"e
9"stomer
segmentation
0aret
se!ectionN
foc"s
>a!"e
6ositioning
6rod"ct
deve!
Service
deve!
6ricing Sa!esforce
Sa!es
promotion
)dvertising
5.3 4ar*et Se-mentation8 0ar-etin-8 and Positionin-
IST6 0aretingK is one way to characteri(e the modern strategic mareting approach. ST6 stands for
1egmenting' Targeting' and /ositioning. The idea is to "se a more direct Irif!eK approach instead of an
"ndirected Ishotg"nK approach5
.. :dentify segmentation
variab!es and segment the
maret.

,. Deve!op profi!es of
res"!ting segments.
Market argeting Market Positioning Market Segmentation
.. Eva!"ate the
attractiveness of
each segment.

,. Se!ect the target
segment+s/.
.. :dentify possib!e
positioning concepts
for each target segment.

,. Se!ect' deve!op' and comm"nicate
the chosen positioning concept.
)dditiona! ;otes On Segmentation' Targeting )nd 6ositioning5
The fo!!owing set of notes provides a brief o"t!ine some of the ey ideas in this area.
)!ternative approaches to mareting strategy5
0ass mareting5 one prod"ct for a!! c"stomers
6rod"ct-variety mareting5 a variety of prod"cts for c"stomers to choose from
Target mareting5 targeted prod"cts for specific c"stomer gro"ps
6atterns of maret segmentation5
3omogeneo"s preferences
Diff"sed preferences
9!"stered preferences
0aret segmentation proced"re +one common approach/ +Aot!er' .HH@/5
./ S"rvey Stage5 E4p!oratory interviews and foc"s gro"ps' fo!!owed by 2"estionnaires to assess5
)ttrib"tes and their importance ratings
,,
EES&OR $%& Strategy 6rimer &.C
1rand awareness
6rod"ct-"sage patterns
)ttit"des toward the prod"ct category
Demographics' etc.
,/ )na!ysis Stage5
8actor ana!ysis app!ied to remove high!y corre!ated variab!es.
9!"ster ana!ysis app!ied to Icreate a specific n"mber of ma4ima!!y different segmentsK.
&/ 6rofi!ing Stage5 Each c!"ster is profi!ed in terms of its disting"ishing attit"des' behavior' V Each
c!"ster is a maret segment.
0aret targeting5 & criteria for eva!"ating maret segments5
Segment si(e and growth
Segment str"ct"ra! attractiveness +6orterEs - forces/
9ompany ob#ectives and reso"rces
8ive patterns of target maret se!ection +)be!!/ +p. ,%$/5
M
1
M
2
M
3
M
1
M
2
M
3
M
1
M
2
M
3
M
1
M
2
M
3
M
1
M
2
M
3
P
1
P
1
P
1
P
1
P
1
P
2
P
2
P
2
P
2
P
2
P
3
P
3
P
3
P
3
P
3
Singleseg!ent
"on"entration
Singleseg!ent
"on"entration
Market
s#e"iali$ation
Pro%u"t
s#e"iali$ation
&ull "overage
P ' Pro%u"t M ' Market
Deve!oping a positioning strategy5
I6ositioning is the act of designing the companyEs offer and image so that it occ"pies a distinct and
va!"ed p!ace in the target c"stomersE minds.K +Aot!er/
US65 Uni2"e Se!!ing 6osition. 6romotion of a sing!e benefit to the maretp!ace. Effective strategy
+as opposed to to"ting m"!tip!e benefits/.
6ositioning strategies5
)ttrib"te positioning
1enefit positioning
UseNapp!ication positioning
User positioning
9ompetitor positioning
6rod"ct category positioning
R"a!ityNprice positioning
Three steps5
.. :dentify differences
,. 9hoose most important differences
&. Effective!y signa! differences to the target maret
Economics5 Differentiation premi"m pricing
Treacy and ?iersema5 & strategies that !ead to s"ccessf"! differentiation and maret !eadership5
Operationa! e4ce!!ence
,&
EES&OR $%& Strategy 6rimer &.C
9"stomer intimacy
6rod"ct !eadership
Differentiation5
6rod"ct differentiation5
Service differentiation5
6ersonne! differentiation5
:mage differentiation5
5.' (naly9in- Industries and Competitors
:nd"stries and competition p!ay a centra! ro!e in strategic ana!ysis. The fo!!owing notes reiterate these ideas
from a mareting perspective.
:nd"stry concept of competition - factors affecting ind"stry str"ct"re and competition5
;"mber of se!!ers and degree of differentiation
Entry and mobi!ity barriers
E4it and shrinage barriers
9ost str"ct"res
>ertica! integration
B!oba! reach
:nd"stry str"ct"re types5
6"re monopo!y
6"re o!igopo!y
Differentiated o!igopo!y
0onopo!istic competition
6"re competition
0aret concept of competition5 :t may be important to consider competitors which mae different prod"cts
b"t which meet simi!ar needs. This is different from an ind"stry perspective when the view of competition
is !imited to those firms offering the same or very simi!ar prod"cts.
6rod"ct segmentation
0aret segmentation
9ompetitive inte!!igence5 gathering data abo"t competitors. 1enchmaring.
Tr"e maret orientation ba!ances cons"mer and competitor considerations. 9hanging cons"mer needs and
!atent competitors are ey factors and can be more devastating than e4isting competitor actions.
,$
EES&OR $%& Strategy 6rimer &.C
5.5 0$e 0ec$nolo-y (doption :i#e Cycle+ 3iscontinuous Inno)ations
Some basic mareting concepts sho"!d be considered when thining abo"t maret forecasts and new
prod"ct strategies. 8or instance' thining of the new prod"ct diff"sion cyc!e +1ass mode!/ as an inevitab!e
cyc!e of sa!es can be very mis!eading. 8irst of a!!' the diff"sion mode! forecasts tota! maret potentia!' and
says nothing abo"t the maret share at a partic"!ar company. Second' the decisions of the firm can
inf!"ence the sa!es. This is fair!y obvio"s when it comes to the inf!"ence of prod"ct 2"a!ity and cost' b"t
mareting strategy is a!so critica!!y important when introd"cing new prod"cts that are discontin"o"s
innovations. :n these cases' the maret is not yet aware of the need for the new prod"ct' and an
"nderstanding of how a prod"ct moves thro"gh the techno!ogy !ife cyc!e wi!! he!p a prod"ct reach its f"!!
potentia! faster and with higher !ie!ihood of s"ccess.
Beoff 0oore' in his boos Crossing the Chasm +.HH./ and )nside the Tornado +.HH-/' draws on mareting
theory and high-tech e4perience to describe the e!ements of the prod"ct !ife cyc!e for techno!ogy
innovations. 3is wor e4amines how comm"nities respond to discontinuous innovations - or any new
prod"cts or services that re2"ire the end "ser in the maretp!ace to dramatica!!y change their past behavior.
3e describes how companies m"st position their prod"cts different!y thro"gh the cyc!e to reach their f"!!
sa!es potentia! and become an ind"stry standard instead of a nove!ty. 0any new hi-tech prod"cts start
a!ong a c!assic new prod"ct diff"sion c"rve' b"t fai! soon thereafter. )nyone deve!oping strategy for
discontinuous innovations sho"!d be fami!iar with the ideas 0oore writes abo"t. Thro"gh the vario"s
phases of the techno!ogy adoption !ife cyc!e' very different strategies for prod"ct and service offering and
positioning are ca!!ed for.
The basis of the techno!ogy adoption !ife cyc!e is simi!ar to the basis for diff"sion mode!s5 different gro"ps
of potentia! c"stomers react different!y to innovations' and adoption proceeds from most enth"siastic to
most conservative. 9omm"nities respond to discontin"o"s innovation - when confronted with the
opport"nity to switch to a new infrastr"ct"re paradigm' c"stomers se!f-segregate a!ong an a4is of ris-
aversion. 0oore separates c"stomers into five categories' a!ong which the cyc!e of new techno!ogy
adoption proceeds5
.. :nnovators * technology enthusiasts who are f"ndamenta!!y committed to new techno!ogy on the
gro"nds that sooner or !ater it wi!! improve their !ives.
,. Ear!y )dopters - visionaries and entreprene"rs in b"siness and government who want to "se the
innovation to mae a brea with the past and start an entire!y new f"t"re
&. Ear!y 0a#ority - pragmatists who mae "p the b"! of a!! techno!ogy infrastr"ct"re p"rchasesO their
p"rchasing behavior is based on evo!"tion rather than revo!"tion' and they b"y on!y when there is a
proven trac record of "sef"! prod"ctivity improvement.
$. <ater 0a#ority - conservatives who are very price sensitive and pessimistic abo"t the added va!"e of
the prod"ctO they b"y on!y when techno!ogy has been simp!ified and commoditi(ed.
-. <aggards - s'eptics who are not rea!!y potentia! c"stomersO goa! is not to se!! to them' b"t se!! aro"nd
their constant criticism.
The c"stomer segments correspond to (ones in the "!andscape" fig"re be!ow. :n addition' there is a si4th
(one that 0oore ca!!s the "chasm'" separating adoption by the ear!y maret c"stomers +.',/ from adoption
by the ear!y ma#ority +&/. 0oore describes the chasm as fo!!ows5
?henever tr"!y innovative high-tech prod"cts are first bro"ght to maret' they wi!! initia!!y en#oy a
warm we!come in an early mar'et made "p of techno!ogy enth"siasts and visionaries b"t then wi!! fa!!
into a chasm' d"ring which sa!es wi!! fa!ter and often p!"mmet. :f the prod"cts can s"ccessf"!!y cross
this chasm' they wi!! gain acceptance within a mainstream mar'et dominated by pragmatists and
conservatives. Since for prod"ct-oriented enterprises virt"a!!y a!! high-tech wea!th comes from this
third phase of maret deve!opment' crossing the chasm becomes an organi(ationa! imperative. +.HH-'
p..H/
,-
EES&OR $%& Strategy 6rimer &.C
<e ,ands3a:e o6 t<e e3<no5ogy $do:tion ,i6e3y35e +so"rce5 0oore' .HH-' p.,-/
Ear!y 0aret
The
9hasm
The
Tornado
0ain Street
End of <ife
The strategy for "crossing the chasm'" as we!! as the strategy for each of the other "(ones"' are very
partic"!ar to where the prod"ct is in the !ife cyc!e.
The fig"re be!ow emphasi(es the different va!"e discip!ines re2"ired at different stages. ;ote that the
so"rce of competitive advantage changes thro"gh the cyc!e - in 6orter terms' it draws on vario"s
combinations of competing on cost +operationa! e4ce!!ence/' differentiation +prod"ct !eadership/' and foc"s
+c"stomer intimacy/.
(a57e )is3i:5ines and t<e ,i6e Cy35e +so"rce5 0oore' .HH-' p..@=/
6rod"ct
<eadership
on!y
6rod"ct <eadership
&
Operationa! E4ce!!ence
6rod"ct <eadership
&
9"stomer :ntimacy
Operationa! E4ce!!ence
&
9"stomer :ntimacy
0oore +.HH-' p.,-/ characteri(es the (ones as fo!!ows5
The .arly &ar'et
) time of great e4citement when c"stomers are techno!ogy enth"siasts and visionaries !ooing to be
first to get on board with the new paradigm. >isionaries are wi!!ing to wor thro"gh b"gs and p"t in
effort themse!ves to mae the so!"tion wor. The prod"ct se!!s itse!f.
The Chasm
) time of great despair' when the ear!y maret7s interest wanes b"t the mainstream maret is sti!! not
comfortab!e with the immat"rity of the so!"tions avai!ab!e. The on!y safe way to cross the chasm is to
p"t a!! yo"r eggs in one baset - target a sing!e beachhead of pragmatist c"stomers in a mainstream
maret segment and acce!erate the formation of .CC percent of their who!e prod"ct.
,=
EES&OR $%& Strategy 6rimer &.C
The #owling lley
) period of niche-based adoption in advance of the genera! maretp!ace' driven by compe!!ing
c"stomer needs and the wi!!ingness of vendors to craft niche-specific who!e prod"cts. ) whole
product is the minim"m set of prod"cts and services necessary to ens"re that the target c"stomer wi!!
achieve his or her compe!!ing reason to b"y. 6ragmatists want a who!e prod"ct' with the necessary
"ser infrastr"ct"re and c"stomer s"pport. )t this stage' companies sho"!d resist the temptation to try to
provide a genera! p"rpose who!e prod"ct and simp!ify the who!e prod"ct cha!!enge. To get c"stomers
on board' service content is high' RO: to end "ser m"st be high' and partnerships with other companies
may be ca!!ed for. S"ccess in the niche can then be !everaged e!sewhere. The two eys to targeting
the right niche c"stomers here are +./ the segment has a compe!!ing reason to b"y' and +,/ the segment
is not c"rrent!y we!! served by any competitor.
The Tornado
)n "g!y and fren(ied period of mass-maret adoption' when the genera! maretp!ace +ear!y ma#ority
c"stomers/ switches over to the new infrastr"ct"re paradigm. :t7s a herd menta!ity. Aeys to s"ccess in
this period are to ignore c"stomer needs and prod"ct modifications and <ust ship' riding the wave.
0aret share is critica! at this stage to !oc o"t competitors' and partners sho"!d be e!iminated.
9ompanies entering the tornado sho"!d e4pand distrib"tion channe!s' attac the competition' and price
to ma4imi(e maret share.
&ain 1treet
) period of aftermaret deve!opment' when the base infrastr"ct"re has been dep!oyed and the goa! is
now to f!esh o"t the potentia!. )nother reversa! of strategy is needed bac to niche-based mareting.
1efore the prod"ct becomes obso!ete' there is an opport"nity to sett!e into a profitab!e period of
differentiating the commoditi(ed who!e prod"ct with e4tensions foc"sing on the end "ser.
.nd of (ife
?hich comes too soon in high-tech. 9ompanies sho"!d find caretaers that can tae over a f"!!y
commoditi(ed prod"ct with !ow profit margin.
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