Today’s Topic:Today’s Topic:Market and Customer Market and Customer

AnalysisAnalysis

Selecting and Designing Selecting and Designing

for for

Target Markets Target Markets

and and

Target CustomersTarget Customers

First Course ModuleFirst Course Module Companies’ objectives; definition of Companies’ objectives; definition of

product successproduct success

Financial measures; income statement Financial measures; income statement analysis and opportunities/challengesanalysis and opportunities/challenges

How companies bring products to How companies bring products to market (roles/process/compensation)market (roles/process/compensation)

Creating “winning” business plans; key Creating “winning” business plans; key success factors; differentiationsuccess factors; differentiation

Second Course ModuleSecond Course Modulethe next four weeksthe next four weeks

Market/customer analysis Market/customer analysis (DLJdirect case – online brokerage)(DLJdirect case – online brokerage)

Competitive analysis Competitive analysis (Airborne Express case – package delivery)(Airborne Express case – package delivery)

Making product decisions Making product decisions (THINK case – electric cars)(THINK case – electric cars)

Midterm exam Midterm exam on making product decisionson making product decisions (Mathsoft case – engineering analysis software)(Mathsoft case – engineering analysis software)

Learning Outcomes:Learning Outcomes:you will learn to …you will learn to …

(before the midterm exam)(before the midterm exam)

analyze a company’s analyze a company’s financial performance financial performance and and assess its assess its opportunities and challenges for future opportunities and challenges for future growthgrowth

assess the assess the barriers to success barriers to success in a particular in a particular market and select the appropriate market and select the appropriate target target customerscustomers

identify a company’s identify a company’s competitive advantages competitive advantages by by performing a comprehensive performing a comprehensive analysis of its direct analysis of its direct and indirect competitionand indirect competition

define the define the “whole product” “whole product” and decide on and decide on appropriate appropriate product differentiators product differentiators

You will learn to… You will learn to… (after the midterm exam)(after the midterm exam)

select appropriate select appropriate sales/distribution channels sales/distribution channels and and promotional messages and methodspromotional messages and methods

identify best practices in identify best practices in new product developmentnew product development and the challenges in and the challenges in integrating the marketing, integrating the marketing, operations and product development functionsoperations and product development functions

understand understand how technical people interact how technical people interact with with marketing, sales and operations personnel, and marketing, sales and operations personnel, and how they contributehow they contribute to resolution of business issues to resolution of business issues

understand how understand how business issues impact technical business issues impact technical workwork

……because you’ll because you’ll understand and apply understand and apply these these ConceptsConcepts (13) (13)

Definition of Definition of product successproduct success

Whole productWhole product Product plan: key Product plan: key

success factorssuccess factors DifferentiationDifferentiation Market Market

attractivenessattractiveness Target customersTarget customers

Competitive Competitive advantageadvantage

Marketing mix Marketing mix (C+4P)(C+4P)

Product positioningProduct positioning Sales functionsSales functions Channel optionsChannel options Channel value-addedChannel value-added Operations balanceOperations balance

… … and you’ll be able to use and you’ll be able to use these these Methods/ToolsMethods/Tools (13) (13)

Income statement Income statement analysisanalysis

Financial Financial benchmarksbenchmarks

Target customer Target customer descriptiondescription

Target customer Target customer selectionselection

5 Forces analysis5 Forces analysis Competitive Competitive

analysis analysis (10 dimensions)(10 dimensions)

Decision criteriaDecision criteria Identifying Identifying

competitive optionscompetitive options Product decisionsProduct decisions Product competitive Product competitive

positioningpositioning Channel economicsChannel economics Process dimensionsProcess dimensions Product Product

development best development best practicespractices

Business/Product Plan Business/Product Plan LearningsLearnings(last week)(last week)

Content/scope Content/scope of a business/product planof a business/product plan

Critical aspects Critical aspects of a “winning” planof a “winning” plan

DifferentiationDifferentiation: importance, definition, identification: importance, definition, identification

Start-upsStart-ups: success factors, funding requirements, : success factors, funding requirements, success profilessuccess profiles

Interesting entrepreneurship info/course:Interesting entrepreneurship info/course:

http://professionalpractice.asme.org/Entrepreneurial/http://professionalpractice.asme.org/Entrepreneurial/Startups/Introduction.cfmStartups/Introduction.cfm

Differentiation Differentiation from Competitors’ from Competitors’

ProductsProducts Whole product differentiation Whole product differentiation is the answer to:is the answer to: Why do customers choose your product Why do customers choose your product instead of somebody else’s ?instead of somebody else’s ? (or buying nothing at all?)(or buying nothing at all?) Product differentiators are the things that are Product differentiators are the things that are

unique or best unique or best about the whole product, about the whole product, compared to the customers’ other alternativescompared to the customers’ other alternatives

Potential areas for differentiation = Potential areas for differentiation = dimensions of the whole product (product dimensions of the whole product (product features, price, sales, marketing, customer features, price, sales, marketing, customer service/support, brand, etc)service/support, brand, etc)

What we’re learning…...What we’re learning…...

(last week)(last week) DifferentiationDifferentiation of the “whole of the “whole product” from competitors is the key product” from competitors is the key driver of success……driver of success……

(this week) (this week) …..…..whichwhich differentiatorsdifferentiators to to choose depends on what thechoose depends on what the target target customerscustomers value…..value…..

(next week) ….and (next week) ….and what competitors what competitors offeroffer to those customers to those customers

Target MarketsTarget Markets

andand

Target CustomersTarget Customers

Today’s Key LearningsToday’s Key Learnings

Market attractiveness: the Market attractiveness: the five forces five forces modelmodel

The concept of The concept of target customerstarget customers, and , and how how to describe themto describe them

Target customer Target customer selectionselection methodmethod/process/process

Designing for the Designing for the MarketMarket

What is your What is your target markettarget market?? Who are your Who are your target customerstarget customers

within that market?within that market? How can you create/present a better How can you create/present a better

““value minus price” value minus price” propositionproposition than competitors? than competitors?

… …..requires understanding/quantifying ..requires understanding/quantifying

“ “value” in the value” in the targettarget customers’ eyes customers’ eyes

… …..requires understanding what ..requires understanding what

competitors’ offerings will/may becompetitors’ offerings will/may be

DefinitionsDefinitions

MarketMarket: an “ecosystem” including a product, : an “ecosystem” including a product, its providers (competitors), its intermediaries its providers (competitors), its intermediaries (channel partners), its input factors (channel partners), its input factors (suppliers) and its potential or existing buyers (suppliers) and its potential or existing buyers (users, customers)(users, customers)

CustomersCustomers: the entities (business, : the entities (business, consumer, or government) who (potentially) consumer, or government) who (potentially) buy and use the product; includes the buy and use the product; includes the end-end-customerscustomers

Why does it make sense Why does it make sense to target to target only a specific only a specific

subsetsubset of all of the customers of all of the customers

in a market?in a market?

(the alternative, of course, is to (the alternative, of course, is to try to attract try to attract allall of the customers) of the customers)

The “Marketing Mix”The “Marketing Mix”( ( C + 4PC + 4P ) )

CCustomers (target)ustomers (target) PProduct roduct PPrice rice PPromotionromotion PPlace (sales/distribution)lace (sales/distribution)

The 4Ps depend on the CThe 4Ps depend on the C

Design-for-Market Design-for-Market ProcessProcess

Select target marketSelect target market

(customer need, product category, (customer need, product category, industry)industry)

Product conceptProduct concept

Select target customersSelect target customers (C) (C)

Value assessment, versus competitionValue assessment, versus competition

Define product & select price Define product & select price (2 P’s)(2 P’s)

Selecting the Target Selecting the Target MarketMarket::

Inter-Industry DifferencesInter-Industry DifferencesOperating Income/Assets (%)Operating Income/Assets (%)

High (15-30%) : Pharmaceuticals, High (15-30%) : Pharmaceuticals, Packaged software, SemiconductorsPackaged software, Semiconductors

Medium (8-15%) : Restaurant chains, Medium (8-15%) : Restaurant chains, Petroleum/natural gas, Engineering Petroleum/natural gas, Engineering servicesservices

Low (2-7%) : CATV service, Motor Low (2-7%) : CATV service, Motor vehicles, Airlinesvehicles, Airlines

1Q08 Industry Profitability 1Q08 Industry Profitability measured by Net Return-on-measured by Net Return-on-

SalesSales(Net Income/Revenues)(Net Income/Revenues)

Pharmaceuticals 25.9%Pharmaceuticals 25.9%Chemicals 15.7%Chemicals 15.7%Electrical equipment 12.1%Electrical equipment 12.1%Oil companies 7.4%Oil companies 7.4%

Market Attractiveness:Market Attractiveness:Porter’s “Five Forces” Porter’s “Five Forces”

ModelModel “ “high” is bad for competitors in the high” is bad for competitors in the marketmarket

Threat from substitute productsThreat from substitute products Ease of market entry Ease of market entry (and exit)(and exit) Bargaining power of buyersBargaining power of buyers

(customers, channels and influencers)(customers, channels and influencers) Bargaining power of suppliersBargaining power of suppliers Degree of competitive rivalryDegree of competitive rivalry

suppliers competitors buyers (incl. customers)

Designing for the Designing for the MarketMarket

What is your What is your target markettarget market?? Who are your Who are your target customerstarget customers

within that market?within that market? How can you create/present a better How can you create/present a better

““value minus price” value minus price” propositionproposition than competitors? than competitors?

… …..requires understanding/quantifying ..requires understanding/quantifying

“ “value” in the value” in the targettarget customers’ eyes customers’ eyes

… …..requires understanding what ..requires understanding what

competitors’ offerings will/may becompetitors’ offerings will/may be

Target CustomersTarget Customers

All possiblecustomers

TargetCustomers

Selecting Target Customers: Selecting Target Customers: some considerationssome considerations

Segment size and revenue opportunitySegment size and revenue opportunity Customer benefitsCustomer benefits Customer interestCustomer interest (incl. current relationships) (incl. current relationships) Customer ability-to-pay and leverageCustomer ability-to-pay and leverage Competition/market coverageCompetition/market coverage Sales issues: Sales issues: sale time/complexity, cost, sale time/complexity, cost,

channel and associated profit marginchannel and associated profit margin Cost to serve/supportCost to serve/support Customer loyalty/lock-inCustomer loyalty/lock-in Strategic value Strategic value

Method: Method: Four Ways of Four Ways of Describing Target Describing Target

CustomersCustomers NameName: : customer (individual or group customer (individual or group

names), industry or occupation, names), industry or occupation, affiliations,…affiliations,…

DemographicsDemographics: : revenues/income, size of revenues/income, size of firm/size of family, location, …firm/size of family, location, …

PsychographicsPsychographics: : cost-conscious, prestige cost-conscious, prestige oriented, early adopter, risk adverse, …oriented, early adopter, risk adverse, …

NeedsNeeds…………throughout the buying/using throughout the buying/using experience (remember the whole product!)experience (remember the whole product!)

Describe the (Core) Describe the (Core) Target Customers of…...?Target Customers of…...?

WalmartWalmart

Southwest AirlinesSouthwest Airlines

National Broadcasting Corp National Broadcasting Corp (NBC)(NBC)

Objective for Whole Objective for Whole Product:Product:

Superior “Value minus Superior “Value minus Price”Price”

Who are the Who are the targeted customerstargeted customers?? What are their What are their unmet needsunmet needs?? WhatWhat valuevalue would they place on a would they place on a particular particular

“satisfaction” of those needs? (i.e., what is “satisfaction” of those needs? (i.e., what is their willingness to pay for a particular their willingness to pay for a particular product)product)

Preferably, Preferably, quantifyquantify that value….or at least that value….or at least be confident that be confident that (value - price) is (value - price) is greater greater than competitors can/will deliverthan competitors can/will deliver

The “Whole” ProductThe “Whole” Product

TheProduct

The “Whole” Product:The “Whole” Product:What Customers Really Care What Customers Really Care

AboutAbout

The product itself Auxiliary or related

products Price and cost-in-service Awareness and

information Where it is sold Ease of choice,

purchase, ordering Delivery

Installation Payment method Storage/movement Aesthetics/style Advice on use Help in use (e.g.,

hotline) Returns/exchanges Service/repair Disposal

Differentiation is usually Differentiation is usually achieved by choosing to achieved by choosing to

meet meet somesome target customer target customer needs needs better than all better than all

competitorscompetitors…..…..while meeting while meeting mostmost needs needs

(requirements) at an (requirements) at an acceptableacceptable level, level,

and and not meetingnot meeting otherother needs at allneeds at all(“minor” needs, or needs of (“minor” needs, or needs of

non-targeted segments)non-targeted segments)

Identifying Customer NeedsIdentifying Customer Needs Primary customer researchPrimary customer research:: doing end- doing end-

customer surveys, interviews, focus groups customer surveys, interviews, focus groups Secondary customer researchSecondary customer research:: reading or reading or commissioning market studies by analystscommissioning market studies by analysts Benefit studiesBenefit studies:: cost savings, value-in-use, cost savings, value-in-use, revenue-generation impactsrevenue-generation impacts Revealed preferenceRevealed preference:: what customers pay what customers pay

for (partial) equivalentsfor (partial) equivalents ExtrapolationExtrapolation from technical possibilitiesfrom technical possibilities

From Needs to From Needs to Designs….Designs….

Customer Needs (and relative importance)Customer Needs (and relative importance) Engineering characteristics impacting needsEngineering characteristics impacting needs Competitive position (in customers’ eyes, Competitive position (in customers’ eyes,

andand technical terms) technical terms) Difficulty/importance/cost of featuresDifficulty/importance/cost of features Leads to…..engineering targetsLeads to…..engineering targets

There are many methodologies to implement There are many methodologies to implement the above, e.g. the above, e.g. House of QualityHouse of Quality

DLJdirect Case SummaryDLJdirect Case Summary

DLJdirect has a successful online DLJdirect has a successful online brokerage business brokerage business targeting targeting “aggressively affluent” customers“aggressively affluent” customers

Other segments are Other segments are growing fastergrowing faster

DLJdirect has to decide whether to DLJdirect has to decide whether to address additional customer address additional customer segmentssegments and whether to and whether to significantly significantly increase its advertisingincrease its advertising to capture to capture customers in those segmentscustomers in those segments

Online Stock TradingOnline Stock Trading

Customer(trader)

Online Broker

Market-maker

Clearing-house

StockExchangecustomer’s

account

Hint: 6 Sources of Hint: 6 Sources of RevenueRevenue

From End-customersFrom End-customers Trading commissionsTrading commissions Account management feesAccount management fees Interest on margin purchasesInterest on margin purchases

From partnersFrom partners Order flow rebatesOrder flow rebates Mutual fund and money market feesMutual fund and money market fees iNautix revenuesiNautix revenues

Assignment QuestionsAssignment Questions Are DLJdirect’s current Are DLJdirect’s current financial results financial results “good”“good”? ? What is their trend?What is their trend?

Does DLJdirect have the Does DLJdirect have the financial capabilityfinancial capability to address to address new segments, e.g. to modify it’s whole product, or to new segments, e.g. to modify it’s whole product, or to do more advertising to attract new kinds of do more advertising to attract new kinds of customers? How much money might be available in customers? How much money might be available in 2000?2000?

Identify the ways DLJdirect’s service is Identify the ways DLJdirect’s service is differentiateddifferentiated from competitors’ offeringsfrom competitors’ offerings

What are the What are the key key nneedeedss of each of the four customer of each of the four customer segments? Which are segments? Which are well-matchedwell-matched to DLJdirect’s to DLJdirect’s differentiators and other capabilities?differentiators and other capabilities?

Use your judgment to rank the customer segments Use your judgment to rank the customer segments according to the according to the profit potentialprofit potential in serving them in serving them (hint: (hint: consider both size of the segment and the average consider both size of the segment and the average profit/customer in that segment)profit/customer in that segment)

DLJdirect’s Financial DLJdirect’s Financial SituationSituation

(partial income statement)(partial income statement)

$M 1-3Q98 %rev %growth 1-3Q99 %rev

Revenues 82.5 96.1 161.8

-commissions 54.3 65.8 81.2 98.4 60.8

-fees 18.4 22.3 108.2 38.3 23.7

-interest 9.8 11.9 155.1 25 15.5

Total cost & exp 83.1 100.7 72.1 143 88.4

-advertising 19.9 24.1 88.4 37.5 23.2

Income before tax -0.5 -0.6 NA 18.7 11.6

Profit potential of segmentProfit potential of segment==

# of customers in segment# of customers in segmentxx

probability of attracting and probability of attracting and retaining themretaining them

x x profit potential per customerprofit potential per customer

Size of Customer Size of Customer SegmentsSegments

(estimated from Exhibits 5 & 10)(estimated from Exhibits 5 & 10)

# in 1999 %total %growth

# in 2002 %total

AA 1.43 26 10 1.56 12

GRF 1.38 25 -43 0.78 6

PCC 0.88 16 461 4.94 38

RBB 1.82 33 214 5.72 44

Total # 5.5M 13.0M

Assignment Questions Assignment Questions (continued)(continued)

Assuming that DLJdirect continues to target the Assuming that DLJdirect continues to target the aggressively affluent aggressively affluent segment: segment:

Should DLJdirect also target the Should DLJdirect also target the Get Rich FastGet Rich Fast (day trader)(day trader) segment? Why? segment? Why?

In your opinion, is there In your opinion, is there ananotherother customer customer segment that DLJdirect should target? Why?segment that DLJdirect should target? Why?

Selecting Target Customers: Selecting Target Customers: some considerationssome considerations

Segment size and revenue opportunitySegment size and revenue opportunity Customer benefitsCustomer benefits Customer interestCustomer interest (incl. current relationships) (incl. current relationships) Customer ability-to-pay and leverageCustomer ability-to-pay and leverage Competition/market coverageCompetition/market coverage Sales issues: Sales issues: sale time/complexity, cost, sale time/complexity, cost,

channel and associated profit marginchannel and associated profit margin Cost to serve/supportCost to serve/support Customer loyalty/lock-inCustomer loyalty/lock-in Strategic value Strategic value

Selecting Customer Selecting Customer SegmentsSegments

Hint: identify the positives-and-Hint: identify the positives-and-negatives of each of other three negatives of each of other three segments (use the AA pos-neg segments (use the AA pos-neg provided as a guide)provided as a guide)

Positives-and-negatives Positives-and-negatives of focusing on the AA segmentof focusing on the AA segment

PositivesPositives- large segment; currently 26% of the market- large segment; currently 26% of the market

- wealthy; high ability to pay- wealthy; high ability to pay- likely to buy all 3 products - likely to buy all 3 products (trades, acct mgmt, (trades, acct mgmt, margin)margin)

- attracted by DLJd brand image and differentiators- attracted by DLJd brand image and differentiators

- most profitable?- most profitable?

NegativesNegatives- slow growing segment; declines to 12% of market- slow growing segment; declines to 12% of market

- desirable: competitive rivalry- desirable: competitive rivalry

- “aggressive” - “aggressive” modest customer loyalty? modest customer loyalty?

Today’s Key LearningsToday’s Key Learnings

Market attractiveness: the Market attractiveness: the five forces five forces modelmodel

The concept of The concept of target customerstarget customers, and , and how how to describe themto describe them

Target customer Target customer selectionselection methodmethod/process/process

Next Week’s Topic:Next Week’s Topic:

(Analyzing and)(Analyzing and)

Beating the Beating the CompetitionCompetition

Reading for Next WeekReading for Next Week

Airborne ExpressAirborne Express (a case focused on competitive analysis (a case focused on competitive analysis

and subsequent market/product decisions)and subsequent market/product decisions)

What we’re learning…...What we’re learning…...

(last week)(last week) DifferentiationDifferentiation of the “whole of the “whole product” from competitors is the key product” from competitors is the key driver of success……driver of success……

(this week) …..(this week) …..whichwhich differentiatorsdifferentiators to to choose depends on what thechoose depends on what the target target customerscustomers value…..value…..

(next week) ….and (next week) ….and what competitors what competitors offeroffer to those customersto those customers

Airborne Express: Case Airborne Express: Case SummarySummary

The timeframe is 1997The timeframe is 1997

The market is the $16-17B U.S. express mail delivery The market is the $16-17B U.S. express mail delivery (letter, package) market(letter, package) market

Airborne is the smallest of the three major competitors Airborne is the smallest of the three major competitors with 16% market share (FedEx 45%; UPS 25%)with 16% market share (FedEx 45%; UPS 25%)

It is recently the fastest growing, but historically the It is recently the fastest growing, but historically the least profitable, of the Big 3least profitable, of the Big 3

The US Postal Service is threatening to enter the The US Postal Service is threatening to enter the marketmarket

Case NoteCase Note

In 2003, Airborne ExpressIn 2003, Airborne Express

was acquired by DHLwas acquired by DHL

for $1.2Bfor $1.2B

Assignment for Next Assignment for Next WeekWeek

Perform a Perform a Five Forces analysisFive Forces analysis of the US express of the US express delivery industrydelivery industry

Perform a Perform a competitive analysiscompetitive analysis of FedEx, UPS and of FedEx, UPS and Airborne in the 10 dimensions shown on the next slide Airborne in the 10 dimensions shown on the next slide

(display as a 3 x 10 matrix)(display as a 3 x 10 matrix)

Based on the competitive analysis, what are Based on the competitive analysis, what are Airborne’s Airborne’s competitive strengths and weaknessescompetitive strengths and weaknesses vis- vis-à-vis FedEx and UPS?à-vis FedEx and UPS?

How is Airborne’s (whole) productHow is Airborne’s (whole) product differentiated differentiated ? ?

What does Airborne need to doWhat does Airborne need to do to assure that it to assure that it survives and thrives in the future? survives and thrives in the future? (hint: start by (hint: start by identifying its opportunities and challenges)identifying its opportunities and challenges)

Competitive Analysis Competitive Analysis Dimensions Dimensions (10)(10)

Products offeredProducts offered

Target customersTarget customers

Competitive positioning Competitive positioning (incl. price & cost)(incl. price & cost)

Financial performanceFinancial performance

Culture & human Culture & human resource managementresource management

Operations: pickup & Operations: pickup & deliverydelivery

Operations: air & hub Operations: air & hub operationsoperations

Marketing & salesMarketing & sales

Customer serviceCustomer service

Information technologyInformation technology