Lecture 7

1. Lecture 7 Bookkeeping Disruptive Technology continued Learning curve Engineering Economics (if time)

2. Bookkeeping • Wednesday Pizza Lecture 5:30-7:00 PM • Next week- note change • Henry Kressel Case Tuesday • Midterm Thursday

3. Segmentation • Identifying groups of customers that are similar enough that the same product will appeal to all of them • Segmented by Price Point or Product Type • Customers Demographics • Age • Sex • Geographic Location • Income • Occupation • Religion • Ethnic Group • Customer Psychographics • Ideology • Values • beliefs • attitudes

4. What market segment (s) are your companies/technologies suited for? • Alt energy • Med-large • Not experts Memory leading edge companies consumer apple server companies

5. Early Majority Late Majority Early Adopters Rate of Adoption Innovators Laggards Time The Technology Adoption Model as the Basis for Segment Focus A measure of the rate of adoption of a cluster of new technologies by a community over time How do you get from innovators to early adopters?

6. “Predictable” Marketing • Customers have “jobs” that need to be done • They “hire” a product to get the job done. • Need to know the circumstances in which the customer finds himself and target the circumstance, rather than the customer himself. • Market research focuses then on observing what people seem to be trying to do for themselves and then asking them about it. • Example Sony’s Akio Morita and 5 associates introduced- Transistor radio, solid state B&W TV, videocassette players, Walkman, floppy disk drives

7. New Market Disruptions • Transistor was invented- first thought was replace vacuum tubes in traditional applications • Sony competed against non-consumption, targeted teenagers who • Wanted to be cool • Had little money • Did not worry about sound quality • Required low power advantage of new technology • Portability enabled them to hear R&R with friends out of parents earshot • Competition was no radio at all

8. Road Warrior • Answer e-mail • Areturn phone calls • Chat • Book hotel rent car • Entertainment • Web surfing • remote desk top

9. Market DisruptionsSolar Energy • Difficult to compete with conventional energy sources • Consider competing against non-consumption • South Asia • Africa • Rural Areas • Much less expensive then full bore power grid • Problems with this model? • Reliability vs cheapness • Weather • Political instability • Poverty • Infrastructure

10. Market DisruptionsCell phone • Compete with poorly managed, government-controlled telephone systems • Poor infrastructure • Cheaper than wire-line • Grows incrementally

11. Market Disruptions • Low Cost Airlines • Compete against Auto and Bus • Makes air travel possible for people who can’t manage high fairs • People ignored by major airlines in favor of business travelers • Point to point convenience and speed • Fun

12. Is the I Phone disruptive?

13. Extracting Growth from non-consumption • Target customers are trying to get a job done but lack money or skill- simple, inexpensive solution did not exist • These customers compare disruptive product with having nothing at all. Delighted to buy even though it may not be as good as other offerings • Technology might be sophisticated but “user interface” simple, convenient and foolproof • Disruptive innovation creates new value network. New customers often purchase through new channels

14. Avoiding Commoditization • Commoditization means that the customer does not value any distinctive features on your product and is motivated only by cost. • Very difficult to be profitable unless you have large economies of scale • Technology is better than customer requires • Example: semiconductor memory, PCs, disk drives, Low end TVs, • Sol’n: look for regions of the value chain where technology is still valued and the solutions are still “not good enough”

15. What about start-ups? “Good money” and “bad money” Impatient for growth and patient for profit VS Impatient for profit and patient for growth Which is preferable?

16. Growth Patience • Disruptive markets take time to develop • Competing against non-consumption • Moving disruptively up market • Fast growth means that high volume users switch en masse to new product. This occurs only with sustaining innovation.

17. Profit impatience • Management is forced to test ASAP that customers will pay a profitable price for the product. • Real products must be shown to have real value and earn real money • Need to rapidly experiment with market • If no pressure, management can postpone this test, burning cash and finding out that the business is unprofitable

18. 1990s Internet business model • Measuring business success by “eyeballs”, Revenue, not profits • What about social networking in 2008?

19. Rules for successful growth in larger companies • Start Early- plan to continuously grow new businesses while the core is healthy • Acquire new businesses in a predetermined rhythm- look for disruptive potential • Start Small- keep dividing operating units • Small is beautiful • Demand early success • Don’t waste a lot of money subsidizing businesses that don’t meet their goals

20. Conclusions • Most businesses- even “good” businesses- eventually fail • The processes that drive this are beginning to be understood • Disruptive technologies can be a weapon to sustain and grow a business • It is difficult to emerge from a “death spiral” • Big is not necessarily better except if big is made up of small entrepreneurial units • Growth requires impatience for profits

21. References • See especially, • Christensen: “The Innovator’s Dilemma” and “The Innovator’s solution

22. addenda • Porters Six Forces and disruptive technology

23. Six Forces Diagram to Determine how Competitive a Company is (Porter) Power, Vigor and Competence of Existing Competitors Power, Vigor and Competence of Suppliers Power, Vigor and Competence of Complementors The Business Power, Vigor and Competence of Potential Competitors Possibility that what your business is doing can be done in a different way Power, Vigor and Competence of Customers

24. Strategic Inflection Point Six Forces Diagram with a “10X” Force Power, Vigor and Competence of Existing Competitors Power, Vigor and Competence of Complementors Power, Vigor and Competence of Suppliers The Business Power, Vigor and Competence of Potential Competitors Power, Vigor and Competence of Customers Possibility that what your business is doing can be done in a different way Disruptive!

25. Learning Curve

26. Calculating the Best Alternative and Net Present Value

27. Investment Alternatives • The object is to take capital earned, borrowed or from investors and allocate it in a fashion that earns the highest return for the shareholders of the company. • There needs to be an appropriate balance of long and short term returns. • More complex and as simple as a matter of dollars and cents. Question: What are some investment alternatives for a company?

28. What CEOs do for a living Opportunity 1 Opportunity 2 CEO Business 2 Business 1

29. What are typical investment alternatives. . . • Invest in • product line a or product line b • Advertising • Information Systems • A new factory • Buy-back companies stock • Acquisition • Employee bonus or salary raise • Hire more HR personnel • etc.,etc. The Criteria is: Which investment(s) gives the highest return?

30. Question • How do you calculate which gives the highest return?

31. Principal of Equivalence • The state of being equal in value • amount • discount assumptions • Time transactions occur All investments must be normalized to give equivalence so comparisons can be made

32. Net Present Value of an Investment • Holds for all investments • Takes into account inflation, cost of capital, corporate expectations of return • Reduces all times to a common point

33. Calculation of Net Present Value Where k is the expected rate of return A sub t is the cash flow in the period t Choose the programs whose NPV is highest consistent with strategy, risk, resource, etc.

34. Calculation of Payback Period Where r = discount rate is the cash flow in period t

35. Preparing an economic feasibility study • Compare product Returns on Investment example: Sample business plan pro forma Dollars Time (Years)

36. What should the discount rate be • For a start-up • For a growth company • For a mature company • For an Aerospace company

37. To calculate NPV, first assume a cash flow Cash Flow Time (Years)

38. Calculation of NPV and Payback Period of an investment

39. Calculation of NPV and Payback Period of an investment

40. Calculation of Internal Rate of Return (IRR) for a project • Calculate a discount rate (k) that reduces the NPV of a project to zero

41. Calculation of Internal Rate of Return IRR) of an investment IRR=24.3%

42. Net Present Value • What are the Problems with this analysis methodology? Trying to predict many years in advance Adjust it to give you the “right” number

43. What’s wrong with this picture? • Predictions are very difficult- especially when they involve the future. • Extrinsic • Markets change • Competitors change • Macro-economic conditions change • Intrinsic • The analyses are based on flawed assumptions • Program delays • Manufacturing snafus • Technologies not ready • Externalities (out of your control) • Many other reasons Then why does everybody do it?

44. Advantages of a quantitative methodology

45. Sensitivity Analysis • Reduce (Increase) Price • Change Product Development Time • Consider competitive response

46. Some thoughts on how to increase profitsP=SP-C1. Increase Selling Price Increase Customer Value • Put extra features in product which require little marginal cost • Provide extra service • Target less competitive segment of the market • Get to market before competition • Price at the maximum the customer is willing to pay Price models should reflect customer value- not cost (except in government contracts if you wish to avoid jail Note in English gardening magazine: Even though seed sales are at an all time high, the price is not expected to come down

47. Some thoughts on how to increase profitsP=SP-C2. Decrease Selling Price • Why?

48. Some thoughts on how to increase profitsP=SP-C3. Decrease Product Development (NRE) and Manufacturing (RE) costs • Do it right the first time • Don’t commit to detailed design until you have customers specs firm then don’t change • Build a manufacturable product. Bring manufacturing in early • Don’t overload with features that the customer doesn’t want that are costly to develop • Manage tightly to schedule with appropriate risk and risk reduction plans • Use rigid phase exit criteria All of these consistent with Fast C/T

49. Some thoughts on how to increase profitsP=SP-C4. Decrease Cycle Time for product Development • Effect on product price in being first to market? • Effect on total revenue of turning out products faster? • Effect on Cost?

50. Assume the decision is made to invest in developing new products • How do you make the decision on which new product to invest in? • What are the criteria for this decision-making process? • How do we maximize profit? • in the long range • in the short range