Strategic Innovation

Offering-based Sustainable Competitive

Advantage

© Robert Palmatier 1
 Agenda

◼ Introduction

◼ Offering and Innovation Strategies

 Developing Innovative Offerings
◼ Repositioning and Disruptive Innovations
◼ Conjoint Analysis
 Launching and Diffusing Innovation Strategies
◼ Psychological, People, and Products Factors
◼ Bass Diffusion Model

◼ Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

◼ Takeaways

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 Developing an Innovative Offering is
Critical to Many Firms’ SCA
◼ GE is pursuing 100 “imagination breakthrough” projects to drive
growth
◼ “Innovation is the only way that Microsoft can keep customers
happy and competition at bay” (Ballmer)
◼ Today, innovation is the number one strategic priority at 40% of
companies versus 19% in 2005 (BCG)
◼ 86% of senior managers believe that “innovation is more
important than cost reduction for long-term success” (Bain)
◼ However: short-term business pressures often undermines
innovation
 CEOs want returns from marketing in 6-12 months
 Resources taken from long-term initiatives to hit short-term targets
 Accounting practices for market-based assets impact decisions

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 Innovation Offering

◼ Innovative new offerings help firms build and maintain SCA

and barriers to the competitive attacks that arise because
competitors continually react to a firm’s success (MP#3)

◼ Offering is a purposely broad term that captures both

tangible products and intangible services provided by firms

◼ Most offerings must be augmented by and linked to brands

and relationships to ensure the firm’s SCA, because it
generally is relatively easy for competitors to copy offerings,
given enough time and money

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 Example: Dell (US)

◼ Dell operates in a technology space, but perhaps its most compelling

innovation has been the ordering and logistics processes that it
introduced in the market

◼ Building-to-order “semi-custom” computer products and selling them

directly to consumers online was radical when it first appeared

◼ Dell’s SCA did not depend on its design or manufacturing competencies;

Dell even outsourced the manufacturing. Rather, the SCA came from an
offering in which it built computers to order, sold them online, and
significantly cut costs by avoiding the expenditures associated with
maintaining storefronts and inventory or suffering obsoletion costs

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 What Is Innovation?

◼ Innovation is the “creation of substantial new value for

customers and the firm by creatively changing one or more
dimensions of the business”
See 12 Different
◼ Key Aspects of Innovation Ways for
 Broader than product or technology innovation Companies to
Innovate
 Must generate new value for customer and seller
 Involves change leading to differentiation and SCA
 How did Starbucks, Dell, and IPod create value and SCA?

© Palmatier (Sawhney, Wolcott, and Arroniz) 6

 Many Aspects of the Offering Can be
Innovated
◼ There are many different ways a firm can innovate; it helps define the
innovation space according to what, who, how, and where aspects
 Change what the firm offers, in line with a traditional view of new product or
service innovation
 Changing who the customer is represents another route that involves
innovations related to customers, experiences, and value capture
 Changing how you sell to customers pertains to the processes, organizations,
and supply chains that a firm uses
 Changing where to sell to customers comprises presence, networking, and
brand innovations

◼ Innovation Rader
 Captures many different ways a firm can innovate; helps define the innovation
space according to what, who, how, and where

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 Innovation Radar

Changing Brand
where to sell Offering Changing
Leverage Develop new what the firm
to customers
the brand products or offers
Networking into new services Platform
markets Use
Interconnections
interchangeable
as a strength
designs

Presence Solutions
Change where Provide a total
products are sold solution

Organization Value capture

Change firm Change how
structure customers pay

Experience
Supply chain Change Changing who
Change supply customer the customer
Changing
how to sell to
chain Processes Customer interactions is
Change Change
customers
operating customers to
processes target

Adapted from Sawhney, M., Wolcott, R.C., & Arroniz, I.

(2006), “The 12 Different Ways for Companies to Innovate,”
MIT Sloan Management Review, Vol. 47 (3), p. 75.

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 Starbucks

Offering
Brand
(WHAT) Platform

Networking Solution

Presence Customers
(WHERE) (WHO)

Supply Chain Customer Experience

Organization Value Capture

Process
(HOW)

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 Walmart

Offering
(WHAT)
Brand Platform

Networking Solution

Presence Customers
(WHERE) (WHO)

Supply Chain Customer Experience

Organization Value Capture

Process
(HOW)

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 Innovation Radar Exercise: Take a Few
Minutes and Develop Innovation Ideas
1. Offering: Develop new products or new services
◼ Team exercise (IPOD)
2. Platform: Design modular platforms and
◼ Think of one way to innovate strategic control points (Nissan)
for the assigned radar 3. Solution: Solve end-to-end customer problems
(John Deere)
dimension 4. Customer: Discover unmet customer needs or
underserved segments (DIY)
◼ Use one of the companies 5. Experience: Rethink how customers interface
below: with you (IKEA)
 Your firm 6. Value Capture: Redefine how you get paid
(Google)
 T-Mobile 7. Processes: Innovate in your core operating
 Microsoft processes (Progressive)
8. Organization: Change form, function or scope
 Alaska Airlines (IBM, Arrow)
 Nordstrom 9. Supply chain: Rethink sources (Dell)
10. Presence: Innovative points of presences
(Starbucks at airport)
11. Networking: Integrated offering, leverage others
(Otis elevator)
12. Brand: Leverage the brand into new domains
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 Benefits of Innovation and Offering’s Equity

◼ By building offering equity, an innovative firm can make it more difficult

for competitors to encroach on its business

◼ Offering equity refers to the core value that the performance of the
product or service offers the customer, absent any brand or relationship
equity effects

◼ New offerings often motivate customers to switch from competitors to

the innovative firm, to gain access to the new product

◼ New offerings also can help the firm acquire new customers or enter new
markets when they offer similar performance but at a lower price

◼ Offering new and innovative products tends to enhance the firm’s brand,
even if customers don’t buy the new offering

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 Example: BlueScope (Australia)

◼ BlueScope is an international supplier of steel products based in

Australia

◼ Patented groundbreaking Castrip process that produces 70% less

greenhouse gas emissions and requires 10% of the floor space of
conventional steel mills

◼ To protect its offering equity from foreign competitors, the innovation is

patented. The protected innovation is highly anticipated to enhance
BlueScope’s positioning as a leading global supplier of steel products and
solutions.

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 Example: TomTom (the Netherlands)

◼ Netherlands-based electronics company TomTom launched its first

navigation product in 2002 when there were relatively few firms focusing
on this area

◼ Through quick innovation and responding to customers’ needs, TomTom

was able to stay ahead of its competitors and build itself into a world-
recognized brand that, by 2007, had more than 50% of the market share
in Europe for navigational devices

◼ However, GPS-enabled smartphones have now disrupted TomTom’s once

strong position in this application.

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 Agenda

◼ Introduction

◼ Offering and Innovation Strategies

 Developing Innovative Offerings
◼ Repositioning and Disruptive Innovations
◼ Conjoint Analysis
 Launching and Diffusing Innovation Strategies
◼ Psychological, People, and Products Factors
◼ Bass Diffusion Model

◼ Managing Offering-Based Sustainable Competitive Advantages

 Steps to Building Offering Equity
 Research Approaches to Designing and Launching New Offerings

◼ Takeaways

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 Offering and Innovation Strategies

◼ Marketing contributes to and defines offering and innovation strategies

in two main ways:
1. It helps the firm develop innovative offerings by collecting customer input
and forecasting customer and market trends, so that the firm can understand
the trade-offs among potential product attributes
2. Marketing is responsible for launching the new offering to customers to
generate sales with acceptable profit levels

◼ Many good products fail to achieve their set financial objectives due to
poor product launches

◼ Extensive efforts go in to test marketing and understanding the factors

that will influence whether customers adopt a new offering and increase
the likelihood of a successful launch

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 Developing Innovative Offerings

◼ Most firms rely on a stage-gate development process to increase the

speed of their offering development and enhance their likelihood of
success, while also reducing development costs

◼ A stage-gate model divides the development process into a series of steps

or stages

◼ Each project gets evaluated, on multiple dimensions, by independent

evaluators in each stage

◼ This method thus helps ensure effective development approaches

through several elements

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Stage-Gate Design Review Process for Effective
Product Development
Concept and Definition Design and Development Validation and Production Final Audit

Initial
ideas

New Product

The concept and The design and development
definition stage consists stage consists of product and
of an initial screening of process design and development.
all potential ideas, Financial feasibility
concept assessment, considerations also are
project definition, and pertinent, including testing of
feasibility assessment. price points and customer
acceptance.
The validation and production
stage consists of continued
market launch planning and
product manufacturing and
process validation. It also may
include test marketing and
evaluation of launch plans.
The audit stage consists of
final product and product
assessments. It often
includes some reflection on
the previous steps.
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 Example: Tata Motors (India)

◼ Tata Motors innovated the Nano, the cheapest car in the world, launched
in 2009 at a sale price of just $2,000

◼ Most car manufacturers use a sedan chassis to begin building new

models; Tata challenged the conventional wisdom and started with a
blueprint featuring a scooter’s backbone

◼ The ultimate product cost less to build and thus was affordable in the
Indian market, but perhaps even more important, it turned out to be
better suited to busy Indian traffic patterns, which require quick and
frequent maneuvering

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 Repositioning Strategies

◼ An innovative offering can result from dramatically repositioning an

existing offering, such as removing some features or adding others, so
that the total offering appeals to a different customer segment with a
“new” value proposition

◼ The advantage of this strategy is that it generally does not require a new
technology or invention, and marketers thus can to take the lead in these
efforts

◼ Red Ocean markets—thus named to reflect the metaphor of blood in the

water—are very competitive and populated by “sharks” fighting over the
same customers

◼ To pursue more disruptive repositioning strategies, firms instead can

seek out Blue Ocean markets, a metaphor reflecting the blue hue of the
deep ocean waters that are far from land

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 Red vs. Blue Ocean Innovation Approach

◼ Classic STP focuses on red ocean strategies and

incremental innovation
 Known market space, competitive rules, and industry boundaries
(lifecycle mindset)
 Product mature and become commodities
 Can be managed, tested, and analyzed

◼ Disruptive positioning focuses on the blue ocean

 Market space does not exist (unknown boundaries)
 Demand is created rather than fought over (often no direct
competition)
 Hard to test, more of an art, often requires intuition, high risk

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 Example: Cirque du Soleil (Canada)

◼ Cirque du Soleil removed two familiar features associated with

traditional circuses like Ringling Bros. and Barnum & Bailey: large
animals (e.g., elephants, lions) and big name stars (e.g., The Flying
Wallendas, Antoinette Concello). Then it added theater-like productions,
each with a different theme and original music

◼ Cirque du Soleil raised prices and redefined their target market. Rather
than children and families, it sought to appeal to adults, couples on dates,
and business clientele

◼ Cirque du Soleil removed substantial cost drivers from the innovative

offering, added new and unexpected features, and developed a new target
market

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 Defining Characteristics of Blue Ocean
Initiatives

◼ Don’t use competitors as the benchmark

◼ Rejects tradeoff of value versus cost
◼ Redefines value proposition See Blue Ocean
Strategy Reading
 Example: Cirque du Soleil
◼ Reduced cost-animals and stars
◼ Added value-theater like production with theme, original musical

◼ Often first mover develops barrier to imitation

 Economies of scale (Wal-Mart, Fed-Ex)
 Brand (Cirque du Soleil, Fed-Ex)
 Switching costs (Quicken)

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 Comparison of Red and Blue Ocean Strategies
Red Ocean Strategies
New offerings are brand and line
extensions, representing incremental
innovations (uses STP processes)
Account for the majority of sales but
earn lower relative profit levels
High competitive rivalry in existing
markets
Must beat existing competition
Attempts to capture a portion of existing
market demand
© Palmatier
Blue Ocean Strategies
Less numerous but more radical and
repositioned offerings, focused on
creating new markets
Success generates higher profit levels
Creates a new market with less
competitive rivalry
Often transforms the image of
competitors’ brand features, such that
they become a negative attribute in the
new market
Attempts to create new market demand
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 New Technology – Based Innovation Strategies

◼ A technological innovation can undermine a firm’s

leadership position in a market, even if that firm is doing
everything else well

◼ To describe the process and ultimate outcomes of innovative

technologies, Clayton Christensen has offered the
framework, which highlights two main categories of these
technologies
 Sustaining technologies are well understood and typically exploited
by market leaders, which produce continuous, incremental
improvements over time
 Disruptive technologies accordingly present highly different price
and performance characteristics or value propositions

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 Sustaining Versus Disruptive “Technological”
Innovation
◼ Companies doing everything well can lose their leadership
position due to failing to manage disruptive innovations
(Polaroid, Xerox, DEC)
◼ Sustaining technologies improve performance of
established products along dimensions valued by
mainstream customers in major markets
 Products often overshoot customer needs
 Processes support incremental product improvements (lower risk)

◼ Disruptive technologies result in “worse” product

performance, at least in the near term
 Brings to market a different value proposition than available
previously
 Underperforms established products in mainstream markets
 Typically cheaper, simpler, smaller, or more convenient to use
 Small off-road motorcycles and transistor radios
 Eventually are good enough (servers vs. mainframes)

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 75% of Products Launched End Up
Failing to Meet Objectives
◼ Failure to provide large enough perceived benefit (poor
development)

◼ No differential advantage (BenGay Aspirin)

◼ Price versus performance (Apple Newton)

◼ Poor product launch (slow diffusion)

◼ Poor targeting of new product (Earring Ken)

◼ Poor positioning of new product (Breakfast Mates, with

warm milk and spoon)

◼ Competitive response (Betamax and VHS)

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 Example: Kellogg’s (US)

◼ Launched Breakfast Mates – a single serving of breakfast cereal, a spoon,

and a serving of pasteurized milk that did not require refrigeration

◼ Kellogg’s positioned the innovation as a solution for harried parents who

wanted to give their children breakfast in the morning but were often
rushing out the door to make it to school on time

◼ Positioning was ineffective, because Kellogg’s failed to realize that

parents hated the idea of giving their children a product that would
enable them to spill milk all over the back seat of the car

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 Takeaways

◼ Most firms rank innovation as a top strategic priority. Innovation involves

more than new technologies or products; it can reflect changes in
business processes or go-to-market strategies

◼ Firms can innovate in four primary ways: changing their offering,

changing who the customer is, changing how they sell to customers, or
changing where they sell

◼ Offering equity captures the core value that the customer obtains from a
new offering, absent any brand or relationship equity

◼ A first-mover advantage is often short-lived, so firms must continually

develop new offerings to build their SCA, in terms of offering equity

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 Takeaways

◼ New and innovative offerings increase firm value by providing more

value to customers (through enhanced performance or better
performance for the price), motivating customers to switch, expanding
customers and markets, and establishing a brand image as a leading,
innovative company

◼ A stage-gate development process improves the speed of product

development, the success likelihood, and the development costs

◼ Two strategies for developing an innovative offering are repositioning

strategies (i.e., Blue Ocean) and technology-based strategies

◼ People-based factors influence innovation diffusion, according to the

adoption lifecycle, which describes differences in people’s propensity to
adopt new products (innovators, early adopters, early majority, late
majority, and laggards). Firms must bridge the chasm between early
adopters and the early majority to succeed

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 Readings

◼ 12 Different Ways for Companies to Innovate (great framework for

thinking of many different ways to innovate in a company)

◼ Blue Ocean Strategy (popular way to think about incremental versus

market creating strategies, lots of examples)

◼ Note on Innovation Diffusion: Roger's Five Factors (discusses both

people- and product-based factors that determine a new offering’s
acceptance/diffusion)

◼ Marketing Strategy Book: Chapter 6

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