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Strategic Options Analysis Applying the Value Function

Strategic Options Analysis Applying the Value Function. Ken Homa. V =. PRODUCT VALUATION MODEL. V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit

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Strategic Options Analysis Applying the Value Function

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  1. Strategic Options AnalysisApplying the Value Function Ken Homa

  2. V = PRODUCT VALUATION MODEL V = Value of Product i =Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit P = Price of product

  3. V = V = Value of Product i = Product attribute MARKSTRAT WORLDThere are 5 given product attributes (n=5): power, design, volume, weight, frequency

  4. V = Incorporate a highly weighted attribute (i) that is not currently in the product design. Add a CD-ROM or modem as standard features in mobile PCs Add an attribnute

  5. V = Incorporate a highly weighted attribute (i) that is not currently in the product design. Add an attribnute MARKSTRAT WORLD Not an option since all brands have the 5 fixed product attributes

  6. V = Introduce a new attribute (i = n +1) that was previously not available, but satisfies a salient or latent need • iMac’s radical ‘space age’ industrial design • ‘Bags and brakes’: air bags & ABS in cars Add a new attribute

  7. V = Introduce a new attribute (i = n +1) that was previously not available, but satisfies a salient or latent need Add a new attribute MARKSTRAT WORLD Not an option: all brands constrained to the 5 fixed product attributes

  8. V = V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point)

  9. Ideal Points • Perceptions (vs. actual) • Aggregate of individuals • Distribution around points • Segment variations • Evolutionary progression • Nice to have => must have • Different ‘shapes’ • Optimal point, vectors

  10. Point Preference Vector Preference IncreasingPreference Preference Preference DecreasingPreference Ideal Point Attribute Attribute (eg, sweetness) (eg, service speed) Ideal Points

  11. Ideal Point Strategies • What is the ideal point?Specific ‘going in’ criteria • Does a product satisfy the ideal point?Objective criteria vs. perceptions • Do customers think that a product satisfies the ideal point (better than competitive products)?Relative perception • Can the ideal point be ‘shaped’?

  12. Product does match the target market’s ideal point,but not current perceptions ..

  13. V = “Pepsi Challenge”: highly publicized blind test tastes demonstrate that Pepsi is preferred to Coke on a heavily weighted (dominant) product attribute : taste Communicate proximity to ideal points (b)

  14. V = • If perceptions are accurate and awareness is low, advertise to build awareness (intensity) • If perceptions are inaccurate and awareness is low, reposition the brand by specifying ‘perceptual objectives’ while building awareness (message). • If perceptions are inaccurate and awareness is high, either reposition - a potentially very high cost option - or launch a new brand with similar specs (relaunch). Communicate proximity to ideal points (b)

  15. Product specs do not match the target market’s ideal point

  16. V = Redefine product specifications to match current or projected ideal points (b’s) Customers want increasing CPU speed in PCs. Existing units are 700 Mhz, competitors have intro’d 900 Mhz units Redesign for speeds in excess of 700 Mhz to hit projected ideal point Design closer to ideal point

  17. V = Redefine product specifications to match current or projected ideal points (b’s) Design closer to ideal point MARKSTRAT WORLD Each market segment (Hi-earners, Buffs, etc.) has an ideal combination of specific product attributes (that may change over time).Design (or redesign) products to hit projected ideal points of attractive market segments.

  18. V = V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit

  19. V = British Air promotes “business class” amenities including preferred check-in, enroute services, arrival shower facilities, etc. Target a segment with importance weights (a) and ideal points (b) matched to product

  20. V = Federal Express promotes “absolutely, positively” next day delivery service for packagesShifts focus to an advantaged attribute (e.g. speed versus economy) Change importance weights (a) via promotion

  21. V = Persuade target customers that more (or less) of an attribute is more desirable. Higher horsepower uses more fuel High fat content tastes good but raises cholesterol levels. ‘Reshape’ the ideal point

  22. V = Communicate proximity to ideal points (anyway) • Obvious ethical issue Caveat emptor • Short-term fix at bestPerceptions eventually catch up to reality • Common rationalization: “no harm, no foul” • Unjustifiable desperate act

  23. V = Communicate proximity to ideal points (anyway) • Obvious ethical issue Caveat emptor • Short-term fix at bestPerceptions eventually catch up to reality • Common rationalization: “no harm, no foul” • Unjustifiable desperate act… in real life, but not in MARKSTRAT

  24. V = V = Value of Product i = Product attribute b = Magnitude of benefit from attribute i (proximity to ideal point) a = Importance weighting of benefit P = Price of product

  25. V = Cost reduce existing products to allow a price reduction (P) which improves relative perceived value position, i.e. rebalance benefits and price Reduce costs / price

  26. Core NPD Question How to translate the ideal point point into product specifications?

  27. Correlation: Strong positive X Positive X X Negative X X X Strong negative * Engineering Characteristics Competitive evaluation Energy needed to close door Energy needed to open door X = Us Accoust. Trans. Window Door seal resistance Check force on level ground A = Comp. A Water resistance Importance to Cust. B = Comp. B Customer Requirements (5 is best) 1 2 3 4 5 AB X Easy to close 7 X AB Stays open on a hill 5 Easy to open XAB 3 A X B Doesn’t leak in rain 3 No road noise X A B 2 Relationships: Importance weighting 10 6 6 9 2 3 Strong = 9 Medium = 3 Reduce energy level to 7.5 ft/lb Target values Reduce energy to 7.5 ft/lb. Reduce force to 9 lb. Maintain current level Maintain current level Maintain current level Small = 1 5 BA BA B B BXA X B X Technical evaluation (5 is best) 4 A X A 3 A X 2 X 1 QFD

  28. Value FunctionReal WorldImplications • Must be at least parity on all heavily weighted attributes to be competitive • Must win on some differentiating attribute • Little leverage from low weighted variables • Best case : introduce a new (proprietary) attribute and drive weighting up • Cost reduction both an on-going necessity and a last resort

  29. Strategic Options AnalysisApplying the Value Function

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