Chapter 1

Application Questions

1. Based on one of the types of new cars (even flying cars and personal jet-packs) in the
opening vignette, discuss the types of market, technological, and competitive
uncertainty that are most important. What are the marketing implications?

(See also the answers to Chapter 7’s RFID vignette for another application of these sources of
uncertainty. The end-of-book mini-cases also have useful illustrations.)

For the Terrafugia Transition “personal air vehicle,” the following types of uncertainty apply:

Market uncertainty refers to ambiguity about the type and extent of customer needs that can be
satisfied by a particular technology, and includes these five dimensions.

 Customer fear, uncertainty, and doubt about how to use the new technology: Certainly, if
one is going to “fly” their car, there is likely to be a high level of fear, uncertainty and
doubt about one’s ability to do so. (the issue of whether the “car” will actually fly is a
separate issue—see technological uncertainty below).

 Rapid, unpredictable changes in how customer needs will be solved: Although the opening
vignette discusses many innovations in the automotive/transportation industry, it seems that
the Terrafugia will be less affected by “rapid unpredictable changes” in how customer’s
transportation needs might be solved and more by whether they are willing to solve their
needs with such a radical innovation.

 Incompatible technology platforms in an industry (and the concomitant need for an industry
standard with common protocols for plug-and-play interoperability): From a driver’s
perspective, one does not need various “flying cars” to operate on the same technology
platform (they don’t need to “communicate” with each other, and drivers are not looking to
“connect” to swap complementary goods, as in the music or software industries.

Certainly, if flying cars are going to become a viable product class, it would be useful if
flying cars operated similarly (so drivers can switch models). Moreover, standards may be
important if the makers would like to use existing car components (brakes, steering wheels,
fuel stations, etc.) to minimize the need for innovations across the board.

Given that “interoperability” for various models of flying cars is not as important as other
aspects of market uncertainty, the issue of a common technology platform for “plug and
play” compatibility is less of a concern. However, issues such as getting the “vehicles”
assigned a VIN (vehicle identification number) for insurance and licensing purposes, having
a service station infrastructure, and other expectations for “drivability” make sense (parking
issues, etc.).

 Uncertainty over the pace of adoption and the size of the market. These two dimensions of
market uncertainty do affect the Terrafugia. Indeed, one of its competitors, the Moller

©2010 Pearson Education, Inc. publishing as Prentice Hall 1

 SkyCar has been around for over 10 years already, and the pace of adoption and market size
are well below initial ideas.

Marketing implications arising from market uncertainty are to offer customers a high degree of
education and support, testimonials, trials and demonstrations to overcome the FUD factor.

Addressing pace of adoption and market forecasting could best be addressed using one of the
forecasting models presented in Chapter 6 (probably analogous forecasting, the Delphi method or
the Bass diffusion model).

Technological uncertainty refers to the situation of not knowing whether the technology or the
company providing it can deliver on its promises and has five dimensions.

 Will the new product function as promised? Because users will worry about this, stringent
testing for reliability is key to credibility prior to market introduction.

 Will the delivery timetable be met? The Terrafugia Website (as of January 2009)
http://www.terrafugia.com/deposit.html invited users to send in a $10,000 deposit and that
the vehicles would be available in late 2009. It will be interesting to see if this timetable is
met—if not, this is classic “technology uncertainty” in high-tech markets, where products
are promised and then not delivered on time—usually due to complications in technology
development, testing, and/or production.

 Will the vendor give high-quality service? If the Terrafugia Transition needs servicing,
who will provide local service for a customer? Will the product even be “fixable?” How
much will the service cost?

 Will there be side effects (unintended consequences) of the new innovation? Some
legitimate concerns here might include: what if the skies get too crowded? What if the
vehicle drops out of the sky?

 Will new technology make this technology obsolete? If I buy a flying car, will a newer,
better version come along? What about those Jet Packs? Will they be less expensive, more
convenient, safer?

The marketing implications of technological uncertainty are to rigorously test the product prior to
release and possibly even have credible third parties endorse its reliability. Service issues were also
addressed above. Delivery timetables cause notorious problems for high-tech companies and
Terrafugia should have a plan to maintain good relationships with customers who are expecting
their vehicles by a certain time. As readers will learn in Chapter 7, ignoring potential unintended
consequences does not help assuage users’ concerns. Marketers should address these concerns
proactively. Probably the obsolescence issue is not as important as the other ones.

Competitive volatility is defined as “intensity in the degree of change in the competitive landscape
and uncertainty about competitors and their strategies;” it includes three dimensions:

©2010 Pearson Education, Inc. publishing as Prentice Hall 2

  Uncertainty over which firms will be new competitors in the future. Terrafugia represents a
form of competitive volatility in the automotive industry, because traditional car companies
likely have not been considering that they will need to compete with “flying cars.”

 Market strategies used by new competitors rely on new competitive tactics that may
undermine existing competitors’ business models and with which incumbents may be
unfamiliar. These new players may end up rewriting the “rules of the game,” and changing
the face of the industry for all players. Probably this dimension of competitive volatility
would apply more explicitly to some of the other cars mentioned in the vignette, such as the
CityCar and the Tata Nano who are relying on new business models with their innovations.

 New competition often arises as product form competition, or new technological

developments that provide a different way to satisfy the same underlying customer need or
problem. Flying cars represent a new form of meeting customer’s transportation needs (as
do jet packs).

Because Terrafugia represents competitive volatility, the implications of this dimension probably
apply more to more traditional car companies (engage in creative destruction, don’t be myopic,
don’t be paralyzed by the innovator’s dilemma). At the same time Terrafugia should continue to be
vigilant about changes in the industry and not become overly enamored of a particular approach to
“flying transportation.”

2. Is the Tata Nano car (from the opening vignette) a disruptive innovation, as defined later in
the chapter? If so, what are the implications for industry incumbents?

A distinguishing feature of disruptive innovation (defined in Chapter 1 on p. 27) is “whether the

innovation appeals to a low-end or emerging customer segment rather than existing, mainstream
customers.” Moreover, disruptive innovations arise because existing companies “increase the
sophistication of the feature set in their products at a higher rate than customers’ capabilities to
use/need that sophisticated feature set. As a result, new companies can enter the market with lower-
end products, first selling them to lower-end customers, but eventually making inroads into the
established company’s customer base. The new technologies may appear crude to established
companies, and as a result, established companies tend to underestimate the threat they pose.

The Tata Nano definitely fits this definition. It is an extreme version of the “sub-sub-compact” car
segment, and because it is targeted to be affordable to families in India, targets a low-end customer
segment with a low-end product. As the vignette states on p. 3, analysts believe the Nano may force
other companies to lower their own pricing and that the process innovations necessary to produce
such a car will threaten the operating models of market leaders. Competitors in emerging markets
who refine their low-end business models and then “export” them to mainstream markets are a force
to be reckoned with.

These technologies do not initially perform well enough to be sold or used successfully in
mainstream markets. However, they have other attributes – most often simplicity, convenience and
low cost – that appeal to a new, small and initially unattractive (to established firms) set of
customers, who use them in new or low-end applications. In other words, disruption enables lower-

©2010 Pearson Education, Inc. publishing as Prentice Hall 3

end customers (in this case, less affluent customers in base-of-the-pyramid markets) to do things
that were previously the exclusive domain of more traditional markets (top-of-the-pyramid
markets).

It is also interesting to consider the potential for disruption to the two-wheeled and three-wheeled
vehicle market in these countries (tuk tuks, motor cycles, etc.)

3. You’ve been asked to assess the market potential for mobile advertising (advertising over
mobile phones, sometimes referred to as the “third screen” for advertising media, coming
after TV and computer/Internet advertising). What factors will affect the adoption rate of this
media platform by advertisers? To what extent do network externalities have an effect?

(Instructors may also want to look at the section in Chapter 10 on Mobile Advertising, as well as the
end-of-book case on Goomzee Mobile Marketing.)

Adoption rates of mobile marketing by advertisers are likely affected by:

* Number of “eyeballs” available on the mobile platform: This is an indirect network externality
driving advertisers’ decisions.

* The FUD factor of how mobile advertising will work: Advertisers will likely be plagued by the
following factors that will affect their adoption: Will mobile campaigns be positively received by
the target audience? Will advertisers have the ability to modify their campaigns for this new
technology platform? How will it be integrated with their existing campaigns?

* Availability of vendors and platforms to deliver mobile marketing: Advertisers will look to
specialized agencies’ expertise to help them navigate this new terrain. Questions are: will these
new vendors understand the advertisers’ business? Will the mobile campaign be limited to one
carrier’s network (say, Verizon), or can it be delivered across multiple networks?

Although there are other issues, including consideration of end-user customers’ willingness to
receive ads via mobile devices (do they have mobile Web capabilities that allow ad delivery, or are
the mobile campaigns limited to SMS/text messaging only?) However, the indirect network
externality noted above (the increasing number of eyeballs on the mobile platform—coupled with
the decreasing number of viewers in traditional media like newspaper and TV) is the most
compelling reason for advertisers to experiment with this new form of advertising. Direct network
externalities are less of an issue (even one advertiser can experience high value from its campaign,
even if no other advertisers use mobile marketing—it is not dependent upon connectivity and
communication among the other advertisers). Students may make the case that as more advertisers
use mobile marketing, end-users will become more comfortable with it, but that does not speak
directly to the value for an advertisers per se. They may also say that the viral capability can’t be
generated without a large number of users, and although this is true, it refers to the number of end-
users rather than the number of advertisers.

4. Select one car innovation that would be considered more incremental in nature, and one
that would be considered more breakthrough in nature (or two innovations of your choice
from another industry). Explain which of the characteristics of breakthough versus
incremental innovation your examples exhibit. Draw a supply chain and show where the
©2010 Pearson Education, Inc. publishing as Prentice Hall 4
innovations occur. Offer specific marketing implications based on the contingency theory for
high-tech marketing.

One car innovation that would be more incremental in nature would be an iPod dock.
As shown in Figure 1.6 on p. 26, incremental innovations are those that are characterized by:
 an extension of an existing product or process
 product characteristics are well defined
 competitive advantage is frequently found in low-cost production processes
 are often developed in response to specific market (customer) needs, also known as a
demand-side or customer-pull market.

People already listen to music in their cars, customers have purchased “jacks” to connect their iPods
to the car’s music/stereo system. In that sense, adding factory-installed iPod stations to a car is
developed in response to specific customer needs.

As p. 26 states, another incremental innovation would be innovations in internal combustion

engines that improve fuel efficiency.

Other incremental innovations in the automotive industry might include styling/design changes in
the car’s appearance, new safety features inside the car that don’t require customers to learn new
behaviors or drive in different ways, or other attributes such as large cup holders, rear-passenger
temperature controls, etc.

Certainly, a large part of competitive advantage in the existing car industry is low-cost production
that allows manufacturers to earn sufficient profit margin to be profitable (witness the problems of
American car companies in the late 2008 time period with their lack of competitive advantage not
only in low-cost production, but also in design and car models that are desired by a large segment of
the auto market.

A breakthrough or radical innovation in the car industry would be the flying SkyCar offered by
Moller (www.moller.com). The characteristics of a breakthrough innovation are:
 New technology creates new market
 The innovation was invented through R&D (in the lab)
 The specific market opportunity/customer need is of only secondary concern to the
developer, which is characteristic of a technology-push or supply side market.
 Typically, the new invention offers superior functional performance over the “old”
technology.

Certainly, people have not been clamoring for flying cars (or jet packs, for that matter). But astute
scientists in the lab have created a machine that can both drive and fly. The question is who will
buy it. These aspects of flying cars correspond to the characteristics of breakthrough innovations.

The question of whether flying cars offer superior functional performance is probably yet to be
seen. Certainly, they can avoid traffic jams and get places more quickly. However, fuel efficiency
and the prices make the price/performance ratio of the breakthrough potentially questionable at this
early stage of the technology’s development.

©2010 Pearson Education, Inc. publishing as Prentice Hall 5

An interesting breakthrough or radical innovation to discuss in class would be the new electric cars
offered by the company, A Better Place (not covered in the opening vignette). Although some
could argue that electric cars are no longer “breakthrough innovations,” a key breakthrough
innovation of this California-based company is its radical business model. As stated on its Website
(http://www.betterplace.com), the Better Place business model is similar to the way the mobile
phone industry works.

“We pay mobile providers for minute-by-minute access to cell towers connected together in cellular
networks. Truth is, we pay comparatively little - or next to nothing - for the phones themselves.
After all, what you’re really buying is air time, not a box with buttons. The same model works for
transportation. Just replace the phone with an electric car, replace the cell towers with battery
recharge stations, and replace the cellular networks with an electric recharge grid. Now you’re
buying miles, not minutes.

When you think of it in those terms, suddenly a seemingly revolutionary business model becomes
something a lot more proven - and more than a little appealing.

Why pay for an addictive, expensive and harmful substance like oil when you can simply pay for
transportation as a sustainable service? Why produce pollution when you can bring your emissions
to zero and produce economic advantage as the only by-product? The proposition sells itself.

• Drivers pay to access a network of charging spots and conveniently located battery exchange
stations powered by renewable energy.
• Drivers pay for the miles they drive.
• Cars are made much more affordable - even free in some markets - by the business model’s
financial and environmental incentives to add drivers into the network.
• Better Place operates the electric recharge grid that brings it all together.

This is transportation as a sustainable service, with drivers as subscribers, and Better Place as a true
“mobility operator.”

To make the model work requires charging spots, battery switching stations, and software that
automates the experience. The charging spots will keep the batteries topped off with power so that
they always have 100 miles of driving capacity. They are located where you work, live, shop and
dine in parking lots so that an electric car will have the ability to recharge when the software
instructs it to top off. For trips longer than 100 miles (161 km), battery switching stations will be
available roadside. Stations are completely automated, and the driver’s subscription takes care of
everything. The driver pulls in, and the depleted battery is quickly replaced with a fresh one,
without anyone having to leave the vehicle. The process takes less time than it does to fill a tank of
liquid fuel.

Because most electric vehicles will be charging during the evenings while at home, the batteries
become distributed storage for clean electricity. In Israel, for example, excess power from the
growing solar industry will be stored in the cars’ batteries. Similarly, in Denmark, un-stored energy
from the country’s wind turbines will be utilized. Australia possesses wind farms throughout the
country, as does California. Hawaii ranked 4th in the nation in renewable energy use in 2007 and

©2010 Pearson Education, Inc. publishing as Prentice Hall 6

plans to continue their efforts. Better Place can help each market identify and develop its own
“virtual oil fields” of renewable energy.

Due to the open, standards-based approach that Better Place has adopted in the development of its
batteries, there will be many manufacturers contributing to the pool of available batteries.  This will
maintain a steady supply and stable prices as more and more nations join us in our efforts to remake
transportation as a sustainable service.”

This innovation is more of an “organizational innovation” in business strategy (Table 1.7, p. 25)
than a technological breakthrough.

5. Select an industry that is characterized by network externalities. Discuss the implications

for industry standards, get-big-fast strategies, dominant designs, and other issues.

Industries characterized by direct network externalities are those in which the value of the product is
driven in large part by connectivity and communications between users. The greater the number of
users, the more value each user receives (p. 19). This is true for the social networking industry. As
the member base increases on websites such as Facebook, eHarmony, and Second Life, the appeal
to join and member value increases as well. Opportunities to connect are more apparent and the
levels on which to connect (social, educational or business) are more diverse. Likewise, as the
number of users increases, the economic value of the website increases (say, through advertising
opportunities).

There are many different types of social networks and each caters to a specific target market. At
this point, the various social networks are independent of each other—for example, Facebook users
aren’t connected to MySpace users. Facebook has said its platform will become more open over
time, but this involves both risks and opportunities.

There is a growing trend for social networks to be incorporated into other industries. For example,
during the 2009 Presidential Inauguration, Facebook teamed with CNN to offer a simultaneous
Facebook chat stream integrated in the CNN.com Live Channel. The combination of social
networking with specific applications allows the websites to reach more potential users and
increases the member base.

A get-big-fast strategy is important for social networks. Most people will choose to maintain a
select few profiles so getting big fast is crucial to have customer lock-in. Since people generally
join networks to connect with other people, the social networking community tends to congregate at
the sites with the most populous member base. If the website fails to become established and
popular quickly, it is likely doomed to failure—not only because users won’t receive the value of
direct network externalities, but also because advertisers won’t see the value (indirect network
externalities) either.

The dominant design as a concept may not be directly relevant to social networking websites
(compared to BluRay as a dominant design for high-definition DVD players, etc.) There will be
new emerging technologies, and new target markets and site purposes. Site developers should

©2010 Pearson Education, Inc. publishing as Prentice Hall 7

always consider ease of use and the sharing of protocols to allow third-party developers to develop
new applications to keep the installed base intrigued.

©2010 Pearson Education, Inc. publishing as Prentice Hall 8