Marketing & Innovation Management, Appunti di Marketing

Scarica Marketing & Innovation Management e più Appunti in PDF di Marketing solo su Docsity! FEDERICO MICONI ENGINEERING MANAGEMENT | UNIVERSITY OF SIENA MARKETING and INNOVATION MANAGEMENT 1 4 The aim is the maximizations of Customer Lifetime Value (CLV): 𝐶𝐿𝑉 = ∑ (𝑝𝑡 − 𝑐𝑡)𝑟𝑡 (1 + 𝑖)𝑡 𝑇 𝑡=0 − 𝐴𝐶 𝑻: time horizon 𝒑𝒕: price paid 𝒄𝒕: cost of serving customer 𝒓𝒕: probability of customer repeat buying 𝒊: discount rate (1€ today is different from 1€ tomorrow) 𝑨𝑪: cost of customer acquisition Marketing Management: is the art and science of choosing target markets and getting, keeping and growing customers through creating, delivering and communicating superior customer value. It is important to understand the strategies that guarantee the superior value proposition and to do so it is also important to understand the MARKET ENVIRONMENT. Market: a place where transactions take place as a result of buyers (market demand) and sellers (market suppliers) being in contact one another. There are different types of markets: consumer markets, business markets, governmental markets, international markets. DEMAND STATES • Negative demand: the demand for the product is lower than the offered products. • Non-existent demand: the demand of the product is quite zero (eg: google glass explorer) • Overfull demand: the demand is higher than the production level. In this case the consumer has to wait too much for the product (eg: TESLA last year needed to build another production plant to face the demand) • Full demand: the demand is equal to the production level (eg: ‘osteria francescana’ of Massimo Bottura, in which there are few seats always full) • Declining demand: the demand is declining and there is an high level of unsold products. • Irregular demand: affected by seasonality (eg: panettone is sold only once a year). The solution is to have different product. • Latent demand: demand is not satisfied by the existing products (eg: there are not flight between Rome and Sidney in 3hours. They need technological improvements.) • Unwholesome demand: the demand can be satisfied by an existing product, but the production is mined (eg: cigarettes. They continues to sell, but they are mined by the fact that they are dangerous. They need to extent to other types of products.) 5 L2. HOMO OECONOMICUS AND BIASES OF DECISION-MAKING PROCESS We are going to start the analysis of the consumer behavior. The model is called: HOMO OECONOMICUS. It is an artificial being created by the economists. The main characteristics are: • Perfectly rational: able to collect and process data (homo sapiens is limited in this case) • Utility maximizer: it is not happy with solutions lower than the optimal (homo sapiens accept also lower solutions) • Self-interested: non altruistic. • Cold: not driven by emotions, but it is driven by the objective. (homo sapiens is driven by emotions) • Homogeneous: limited differences with its peers • No learning: or very easy. (homo sapiens is based on learning) The decision-making approach applied by homo oeconomicus is based on a cost-benefit approach. 𝐵(𝑥) ≥ 𝐶(𝑥) The TOTAL CUSTOMER BENEFIT must be higher than the TOTAL CUSTOMER VALUE. Considering more products, the consumer purchases product x rather than product y if and only if: 𝐶𝑉(𝑥) > 𝐶𝑉(𝑦) Where CV=B-C. The homo oeconomicus is a rational decision-maker. The need of the development of a more realistic model of homo sapiens has stimulated the study of Herbert Simon who invented the “bounded rationality”: 1. Limited and unreliable available information on the alternatives 2. Limited capacity of processing the information 3. Limited time to make a decision The decision-making process of homo sapiens is based on heuristics that are simple procedures that provide fast, but often imperfect, solutions to decision making processes. Daniel Kanheman provided a more complex description of the human decision making based on two interconnected systems: system 1 (intuitive) and system 2 (reflective). • System 2: it is controlled and conscious, slow and based on serial processing based on algorithms. LAW of LEAST EFFORT: system 2 limits its own effort as low as possible. Usually system 2 confirm the solution provided by system 1 through heuristic. • System 1: it is unconscious and automatic and it is related to personal experience like memory retrieval, similarity, surprise. WYSIATI (What You See Is All There Is): always jump to conclusion, even if the collected data are not sufficient. If the problem is too complex, system 1 sometimes provides a solution to an easier problem. 6 BIASES OF DECISION MAKING We are going to see the biases that can affect the behavior of the consumers. • Confirmation bias (Memory retrieval): people seek, retrieve and process information that confirms their belief and attitudes and neglect information that are not related with their behavior. • Representativeness bias (External search): people estimate the frequency, or the probability, of object by the degree of similarity with a related category. Ex: a well-defined hand-made leather bag in a US shop may come from China or Italy? You intuitively answer Italy. But it is important to see data and look to the ratio on Chinese and Italian leather bags exported in the US (base rates). • Availability bias (Alternatives’ evaluation): people estimate the frequency, or probability, of object by the ease with which it could be retrieved from memory. Ex: in Italy, are there more homicide or suicide? You answer homicide, but it is wrong. Usually there are more suicides than homicide (looking at the data). Why people think uncorrectly? Because every day the media report about homicide (the dead of a famous person, or terrorism) and for this reason out memory thinks that there are more homicides than suicides. • Anchoring (Alternatives’ evaluation): people make an estimate of an object by using some starting values which anchor the final value by insufficient adjustments. Ex: two apartments are valuated 300.000 and 400.000€. The first one is sold for 290.000€ and the second is sold for 350.000€. What is the best deal? The price is set by the seller, so if we base our decision on that we may be leaded to a wrong evaluation. • Role of irrelevant alternatives (Alternatives’ evaluation) Ex: if the choice of a universitary room is based on monthly rent (A) and distance of the campus (B), the decision is 50% for both options. If we consider also option (C), which is more expensive and distant of (B), the preferences for (B) rises up to 70% and the preferences of (A) fall down to 30%, because of the presence of a third (worst) option. • Illusion of control (Decision): people tend to overestimate their own degree of influence over external events. This kind of bias reduce the ability in risk management and in marketing it can affect companies, managers and consumers. Ex: how likely do you think you can be involved in a car accident if you are a driver and if you are a passenger? Due to overconfidence, optimism, illusion of superiority, people think to reduce the risk if they are the driver. • Hindsight bias (Feedback): after an event has occurred, people tend to see it as predictable, despite, before the event occurred, there was no basis for predicting it. Ex: president Nixon visited Peking and Moscow. Before this event, the probability of this event were underestimated while after the event, they were overestimated. In addition to the biases already explained, the decision making process is also affected by the frames, that means how a situation is presented. • Decision framing: starting from the same information, people make different decisions, depending on how that information is presented. There are several elements that can affect a decision frame: - Visual elements: editing, figures,… - Non-verbal elements: position, gestures,… - Para-verbal elements: tone of the voice,.. - Verbal elements: order and description of information 9 L3. THE CONSUMER BEHAVIOR: THE BRAIN AND THE STIMULUS-RESPONSE MODEL We are going to define a more systematic model of the main psychological model of homo sapiens. All stimuli are processed by the neural circuits devoted to perception. Perception processes stimuli in collaboration with memory, all of them are stored in memory. A small fraction of these stimuli provokes a decision. The decision ca produce an action, generates an outcome which generates feedback. PERCEPTION: it is a process by which our brain selects, interprets and retain stimuli. In each second we receive stimuli (from our body or from external factors) and the large majority of them are filtered by the attention (first step) which is usually unconscious. Only the selected stimuli are processed by interpretation which provides a meaning of that stimuli which become encoded stimuli. The encoded stimuli can be used by our mind for decision and only a small fraction of them is retained and stored in memory. How is perception related to marketing? • Selective attention: related to the presence of other stimuli (ex: luxury clothes are sold in fashion boutiques characterized by a specific control of visual and acoustic stimuli), role of consumer needs (ex: if you are hungry, you tend to perceive all the smell which are ignored if you are not hungry), stimuli characteristic (ex: when Renault launched Twingo, it attracts the attention of a lot of people due to its innovative rounded shape). Another aspect is the subliminal perception. • Distorted interpretation: interpretation is based from a result of similarity between the stimuli and the pre- existing frames. The pre-existing frames are based on subjective and non-objective experience, therefore it can be affected by distortion. • Selective retention: our mind tends to more easy retain the stimuli that are aligned with the existing attitudes. After the choice of a product, consumers tend to more easily retain the good points of the chosen product. MEMORY: is composed by interconnected neuronal circuits, made up of neurons linked together by synapses. Can be classified in two categories emotional and cognitive. The emotional represents the attitudes, while the cognitive represents the belief. • Memory retrieval is not perfect --> can be affected by priming: the exposure to previous stimuli unconsciously affect the response of later stimuli. It is fundamental with the so-called brand association (ex: camel price in 1989 associated camel with rally) • Memory operations are not perfect --> Law of least effort. As a consequence, memory avoids dissonance (modification of the pre-existing neuronal circuits) but appreciates consonance (reinforcement of the pre- existing neuronal circuits). LEARNING: mental process of acquiring new, or modifying existing, beliefs and attitudes thanks to the encoding of new stimuli. The effect of learning causes the change in decisions of homo sapiens, while homo oeconomicus is based on a static decision-making process and always make the same decision. There are 3 main theories of learning: • Classical conditioning: learning is based on the reiterated exposition to a conditioned stimulus, paired with an unconditioned stimulus (ex: a dog associates the ring of a bell with the presence of available food, and it starts to salivate even if I does not already feel the smell of the food). This theory is generally associated with BRAND ADVERTISING. • Operant conditioning: learning based of the reiterated feedback (reward/punishment) for a certain behavior (ex: a mouse learns, after several times, that if there is the activation of red color there is the electroshock, with the blue color there is not). This theory is generally associated with GIFTS and COUPONS. • Observational learning: learning based on the observation of the behavior of other people (ex: children that imitates their parents). This theory is associated with the use of ATTRACTIVE TESTIMONIALS in advertising. EMOTION: mental process whose results are characterized by a certain degree of pleasure/displeasure (automatic and fast). Like system1, emotion seems to have a prevalent impact on decision making. There can be two biases: • Affect heuristics: in several occasion, decision are based more on their emotions than on their beliefs. • Halo effect: people tend to extend an initial positive evaluation of an object, also toward other unrelated features of the same object. 10 REASONING: mental process whose results are characterized by a certain degree of truth/untruth (controlled and slow). It rationalizes the decisions chosen by emotions. This dichotomy may remember the distinction between system1 and system2. MOTIVATION: in some cases, people’s decisions are fully driven by emotions. An example is impulsive buying (ex: near the checkout there are some products like chocolate and chewing gum and when you see them you are tempt to buy them). Different form these cases, people decisions are driven from MOTIVATION that is a psychological process that causes a person to implement a specific behavior. It is usually related to one or more needs, that are internal stimuli that emerge when the current state of a human being is different from the desired state. There exists a relationship between needs and emotions: positive(negative) emotions are caused by the satisfaction(unsatisfaction) of a need or there could be the need to experience certain emotions such as those stimulated by sport, art,.. (hedonic needs) HIERARCHY OF NEEDS (Maslow) This hierarchy is limited since: - The higher needs appears when the lower ones are satisfied. This is a clear mistake. - There are no hedonic needs. For this reason there are some modification and alternative version of classification of human needs. STIMULUS-RESPONSE MODEL A qualitative model, explaining the factors that influence the purchase decision of people is the so-called STIMULUS- RESPONSE MODEL, where it is assumed that the purchase decision is influenced by several macro-environmental stimuli. The specific buying process is influenced not only by these durable characteristics but also by contingency factor such as: - Consumer’s involvement - Ability to perceive differences between competing products - Level of perceived risk - Role played by other people Different factors can influence the consumer’s behavior. PERSONAL FACTORS • Personality: is the set of psychological traits (self-confidence, sociality, adaptability) that distinguish each individual and lead to relatively stable and enduring responses to environmental stimuli. There are several test to measure personality. There are some problematics in marketing: personality test are mainly developed for clinical application, research and methods may be inadequate, they may have a low predicting power, it may provide a global view of behavior. • Self-concept: it is the self-image built through the collection of beliefs about oneself. Differently from personality it can be more easily studied in the marketing field. Consumers tend to accept (refuse) products that are consistent (incongruous) with their self-concept, especially for publicly consumed products. The self-concept is measured in a multidimensional way: - actual self-concept: how I view myself - ideal self-concept: how I would like to view myself - social self-concept: how I think the others see me • Lifestyle: pattern of living in the world of a person, as expressed in activities, interests and opinions. It is based on psychographic data: it is more useful than demographic and it is more relevant and simple (for marketing) 11 than personality. Examples of typical lifestyles are the money-constrained lifestyle (low-cost products) and the time-constrained lifestyle (multi-tasking products). Limitations of the lifestyle are the importance of paradigmatic lifestyle and the difficulty in revising consolidated lifestyle. • Age and Stage in the lifecycle: the correlation between age and purchase decision is strong in some society and this is due to the fact that in some society people have a family in early ages. Stages in the lifecycle refer to some critical events that may affect the purchase decision such as the ones: - related to work: first job, career change, first permanent contract,… - related to family: engagement, marriage, childbirth, divorce,… - related to health: illness, disability,… - related to relevant purchase: first car, first house,… • Occupation and Economic situation: the personal economic situation can be measured by: spendable income, savings and assets, short term debts, borrowing power, propensity to spend vs propensity to save SOCIAL FACTORS The role and status are measure of the position of a person in a social group (family and reference group): - Role: pattern of behavior a person is expected to perform - Status: level of prestige accorded by society to people with a certain role. The status symbol are products that communicate the personal status of the owner (ex: wedding ring, the uniform, luxury goods,…) • Family: it is important to distinguish between: - Family of orientation: composed by the person’s parents. The long term influence on personal orientation toward main ethical principle. - Family of procreation: composed by the person’s spouse and children. In this case there are joint decision making characterized by different and interrelated buying roles of the members. Even if parents generally acts as decider and purchaser, a child may act as influencer, initiator and user. • Reference group: they are social groups with a comparative, informational and normative influence on consumer behavior. These groups are characterized by face-to-face and stable influence on consumer behavior: - Primary groups: like family, friends, co-workers. There are continuous and informal interactions. - Secondary groups: like church, professional organizations. There are less continuous and more formal interactions. Other reference groups are characterized by an indirect influence on consumer’s behavior: football team supports, political parties. There are also the socially distant reference groups that can be aspirational (the consumer aspires to join them. Ex: I buy military clothes because I aspire to join) or dissociative (the consumer rejects them). Anyway, a fundamental role is covered by the opinion leader: individual with the ability to influence others on subject matters. CULTULAR FACTORS • Subcultural: a group characterized by specific value, lifestyles and behaviors. Can be defined in: - Strict sense: it contains people of both genders and all ages, based on ethnicity, religion and regions of origin. A peculiar kind of subculture are social classes, which are based on wealth, income, education, occupation,… - Weak sense: a subculture contains person of only one gender or age stage (hipster, emo, punk,…) • Cultural: fundamental determinants of the personal beliefs, values, signals, symbols and habits. These are transmitted over the generations through learning in the family of orientation and observational learning in the society. 14 There are different models used for the evaluation of a product: o Expectancy-value model: Given T competing brands, consumer k chooses j with the maximum Customer Value. How companies should use this model? - Identify the main attributes in order to call attention to the neglected attributes - Asses the quantitative importance of each attribute - Asses the performance of competing brands on each attribute - Asses the performance of company’s brand on each attribute As an alternative to the expectancy-value model, there is the class of NON-COMPENSATORY EVALUATION models: o Lexicographic heuristic: attributes are ranked on importance. The choice of the brand is based on the best performance on the most important attribute. o Elimination-by-aspects heuristic: attributes are ranked on importance and minimum acceptable cut-off for each attribute. The choice of the brand is based on the acceptable performance on the most important attribute. o Conjunctive heuristic: based on the common minimum acceptable cut-off for all attributes. The choice of the brand is based on the first one with acceptable performance on all the attributes. It is not an optimization. 4) Purchase decision: it is not only the choice of the best alternative, but also the time, quantity, payment method. Contingent factors may affect the final moment of the purchase such as: beliefs and attitudes of others, perceived risk, the arrangement of the store, the empathy of the salesperson. All these factors cannot be predicted by the consumer and for this reason the purchase decision cannot be aligned with purchase intention. Companies should try to manage contingent factors. 5) Post-purchase behavior: the product use may provoke satisfaction (in this case, consumer repeat buying) or dissatisfaction (in this case, consumer may decide to stop buying, to provide a negative WOM or to complaint against the company). Companies should monitor post-purchase behaviors and develop strategies. ADOPTION OF A NEW PRODUCT There is the adoption of a new product if and only if: TOTAL CONSUMER BENEFIT > TOTAL CONSUMER COST • TCB is influenced by the relative advantage: the degree to which the innovation appears superior to existing products in terms of higher profitability, time savings,…The perception of relative advantage of a new product is influenced by observability: the degree to which the benefit of innovation are observable or describable by others (Ex: initially Coca Cola launched Acquarius and it was a failure. Then it changes the name in Powerade and it becomes more observable) • TCC is influenced by different factors: - Price - Perceived risk: due to the limited experience with the new product. It is influenced by the scientific credibility and trialability: the degree to which the innovation can be experimented with on a limited base 15 - Switching costs: they are monetary or non-monetary costs due to the differences the new product and the previously adopted by consumers. In particular it is influenced by compatibility (degree to which the new product matches the consumer values and needs) and complexity (the degree to which the new product is difficult to understand or use). It is possible to analyze the CONSUMER ADOPTION PROCESS: 1) Awareness: first hearing about innovation 2) Interests: active search about the innovation 3) Evaluation: try or not the innovation? Very similar to the case of buying process. 4) Trial: before or after the purchase. It is the first use of the innovation in order to validate it 5) Adoption: if the product is fine, the consumer may decide to have a full use of it. Consumer may also try to reinvent the product, using it for other uses (Ex: when you modify the 50cc scooter) Rogers, a marketing scientist, proposed the adopter classification based on time of adoption of innovations. It is computed using some mathematical formula related to standard deviation and mean, and it obtain 5 classes. The first two are innovators, the others are imitators. • Innovator: is the first customer of innovation and he can provide an early feedback to the company and participate in the innovation improvement. The consumer’s innovativeness is specific to product category (heavy users). Maven are the super-innovators and they are characterized by general elements such as: an high income, lifestyle, education and occupation, high flexibility, risk propensity, less sensitivity to small price differences and brand. • Imitators adopt the innovation only after the adoption by a critical mass of consumers. They delay the purchase for different reasons: wait for price reduction and product improvement, reduce the risk thanks to the information provided by the first users, social pressure made by people that already use the product from years, product positive network externality. In particular, a product is affected by: - Direct positive network externality when an increase in its usage leads to a direct increase in the value for other consumers (Ex: when the Facebook users reached a sufficient size, it became used for all) - Indirect positive network externality when an increase in its usage spawns an increase in the value of complementary products which can in turn increase the value of the original product (Ex: playstation increase the value of other complementary products) The diffusion of innovation is also influenced by marketing stimuli, which may affect the WOM and the impact of opinion leaders. In more traditional social systems: some opinion leaders are not innovators and some innovators are not opinion leaders. Companies should target introduction strategies to innovators, especially to opinion leaders. 16 L5. INDUSTRIAL MARKET AND INDUSTRIAL BUYING PROCESS INDUSTRIAL MARKET We are going to focus now on the business-to-business market, in which the buyer is another company. The peculiarity of the industrial market are the ones that distinguish it from the consumer market: - Fewer and larger buyers (in the consumer market there are millions of buyers) - Geographically concentrated buyers which has a strong impact on the distribution - Demand is strongly dependent on the demand of the related consumer good - Acceleration effect: a variation in the consumer market provokes a larger variation in the industrial market - Price inelastic demand in the short run (even if the supplier increases the price of a component, the buyer cannot give up to buy it) - Direct purchasing (direct relationship between the supplier and the buyer) - Close supplier-customer relationships (because the production must be accurate since the requirements of the buyer are specific) - Multiple sales call - Professional purchasing (this imply that the purchasing behavior of a firm is closer to the one of the homo oeconomicus, because the firm has an objective which is the profit maximization and it is not emotionally driven. - Multiple buying influences In case of industrial market it is possible to define the buying center, which is the set of individuals or groups who participate in the purchase decision-making process sharing the goals and the risks arising from the decision. We can define different personalities that belong to the buying centers: • Innovators: request the purchase of an item • Users: the ones that use the item • Influencers: the ones who influence the buying decision evaluating alternatives • Deciders: the ones who decide the general features of the purchase such as item requirements, possible suppliers and time of delivery • Approvers: the ones who authorize the decision provided by the deciders • Buyers: the ones who select the final supplier, negotiate and arrange the purchase terms • Gatekeepers: the ones who can prevent sellers or information from reaching the buying center There can be different buying situations: • Straight rebuy: items with recurring requirements. In this case there are routine purchases even with automatic reordering systems. • Modified rebuy: items with modifications in product specifications. In this case there is an active negotiation with the pre-existing supplier or new supplier. • New task: items never bought before. It is an Extended Problem Solving, especially for complex, costly and risky items. The INDUSTRIAL BUYING PROCESS is composed of several stages: 1) Problem recognition: the buying process starts with the presence of internal stimuli (break of machines, development of new product, unsatisfied past purchase) or external stimuli (competitive benchmarking, sectoral journal or website, participation in trade shows) 2) General need description and product specification: there is the definition of the quantity and general specification of the item, made by users and technicians. A particular phase is the Product Value Analysis in which the technical specification are based on the cost reduction obtained through the redesign of components or cheaper methods of production, without the loss of product performance. 3) Supplier search: the step of identifying the possible suppliers through the contacts with other companies, trade shows and advertising. The potential suppliers are also evaluated through visits in which the development, production process and financial status are evaluated in order to obtain only a shortlist of qualified supplier. A particular tool used to research the supplier is the E-procurement. This research using internet can be performed in different ways: 19 • Marketing intermediaries: set of actors that provide inputs for the development of company’s offerings, but not for the production of the company’s products/service (in this case, they are suppliers). Examples of intermediaries are: - Distribution intermediaries: classified in Agents and Merchants - Logistic firms: - Marketing service firms: specialized in marketing research and communication - Financial intermediaries: specialized in customer credit management, like company that manage credit cards. • COMPETITORS: there are several steps of the COMPETITORS’ ANALYSIS: 1) Identifying competitors: they can be classified based on substitutability with the company’s products/service: - Industry level competitors: all the firms with the same product (brand/product competitors) (Ex: I want to go to the cinema to watch Joker, but I can alternatively go to watch Maleficient) - Market level competitors: all the firms with products which satisfy the same needs (generic competitors) (Ex: instead of Joker, I see something on Netflix at home) or alternative needs (total budget competitors) (Ex: instead of watching something, I go dancing) They can be classified based on the presence in the market: - Current competitors (incumbent) - Potential competitors: they can enter the market 2) Industry analysis: an industry is made up of firms, from a certain geographical area, that offer products/service characterized by an high level of substitutability measured through the cross elasticity 𝜀𝑥𝑦(percent change in quantity demanded Q of a good x, due to a percent change in price of another good y). We can classify goods as: complementary (𝜀𝑥𝑦 < 0), substitute (𝜀𝑥𝑦 > 0) and independent (𝜀𝑥𝑦 = 0). In case of the industrial analysis we can refer to the STRUCTURE-CONDUCT PERFORMANCE paradigm for which the industry structure influences competitors conduct that influences the industry performance. The industry structure is influenced by: Demand characteristics - overall size (related to the widespread consumers wants) - growth rate (related to persistent and growing consumers wants) - variability (related to variable consumer wants. Ex: the demand for ice-cream depends on seasonality) - concentration (few customers interested in the products) - price elasticity: percentage change in the quantity demanded due a change in the price (Ex: salt is inelastic because there are few substitutes) - income elasticity: percentage change in the quantity demanded due to a change in the income (inferior and normal goods) - cross elasticity Product characteristics - Differentiation: related to the perceived differences among competing products - Network externalities: an increase in the quantity sold of a good leads to a variation of the Customer Value and consequently of quantity demanded. There is positive (negative) externalities in case of goods affected by bandwagon (snob) effect - Future substitutability: influenced by innovation (Ex: if you expect a new smartphone in the market soon, the demand for the existing ones is lower) (low market power of incumbents) - Legal protection: related to patents and so on. You cannot introduce new product without violating the existing patent (strong market power of the incumbents) Incumbent characteristics - Number of incumbents: in case of few competitors the market power is higher and viceversa. - Market share: measured as the quantity sold by each incumbent on total market sales. (Ex: Apple is not the company with the highest market share, Huawei is). Industry concentration is influenced by the number of incumbents and market share. - Globalization: it is related to product differentiation and logistics cost - Financial situation: related to profitability, liquidity and solvency. In case of high profitability it is expected that other firms will enter the market in order to capture a share of the profits. 20 - Product variety: number of different product offered by the companies. An high product variety increases the available choices for customers and at the same time can limit other firms to enter the market. - Cost structure: related to Operating leverage. An higher proportion of variable (fixed) costs to fixed (variable) costs, decreases (increases) risks and increases incumbent’s flexibility (rigidity), but reduces (increases) its profitability. - Cost variation: variation of the unit costs with respect to production level. There can be different situations: o Economies of scale: larger production level leads to lower average costs o Economies of scope: production of more than one good leads to lower average costs o Learning economies: large cumulative production level leads to lower average costs - Sunk costs: investments in plants, R&D, innovation, advertising, popularity. They leads to an increase of the market power of incumbents and the barriers of potential entries. - Vertical integration: related to access to important inputs and distribution channels. It increases the market power of incumbents. (Ex: Coca Cola provided gratis refrigerators for pizzerias. This was contrasted by the anti-trust because the available space in pizzeria is low and in this way they had space only for free refrigerators by Coca Cola) Market characteristics - Competition rules: related to competitive rules (competition vs collusion), strategic variable (quantity vs price), interaction time (simultaneous vs sequential), number of interactions - Transparency: related to availability of relevant information on competitors and consumers. A too much transparent market may increase the probability of collusion. - Barriers to entry (to exit): factors that prevent the entry (exit) of potential competitors (incumbents) in (from) the industry. They can be classified in: o Structural barriers: independent of incumbent’s behavior, such as economies of scale, network externalities, legal protection, etc. o Strategic barriers: dependent on incumbent’s behavior, such as sunk costs, vertical integration, etc. 3) Identify competitors’ strategies: it is possible to identify the set of firms that adopt the same business model in a given industry. It is possible to use the map of strategic groups (Hunt, 1972) which has 3 dimensions and can be built in three steps: I. Identification of strategic dimensions, used to define the groups II. Classification of every competitor in a strategic group III. Analysis of the existing intra- and inter-group relationships 4) Determine competitors’ objectives: there are different steps: I. Identify the main competitors’ objectives II. Identify the importance attributed to each objective III. Identify the motivation related to each objective so to anticipate how competitors might pursue it 5) Assessing competitors’ strengths and weaknesses: it consists in the benchmarking of industry competitors: - Profitability - Liquidity - Marketing capacity: in order to understand this, it is important to understand how much a firm invest in marketing. There are different measure indexes: o Salience index (share of mind): it is the share of consumers who first associate a brand when they think of the industry it belongs to o Preference index (share of heart): it is the share of consumers who choose a brand as the most preferred in the industry o Market share - Innovation capacity - Productive capacity 6) Estimating competitors’ reaction patterns: there can be different competitors: - Laidback competitors with scarce or delayed reaction to competitors moves - Selective competitors with reaction to only certain competitors move - Tiger competitors with strong reaction - Stochastic competitors with unpredictable reaction 21 L7. THE MARKETING INFORMATION SYSTEM AND ESTIMATION OF DEMAND MARKET INFORMATION SYSTEM It is a system that support companies in making marketing-decisions. The components analyze the information and then the information is distributed. The main components of these system are: • INTERNAL COMPANY RECORDS: related to the orders, sales, inventory level, costs, productions, customers, etc. These information can be collected using three different sources: - Order-to-payment cycle: documents that contains information of companies that directly sell the products. They contain orders, shipping documents, inventory documents, etc. - Consumer sales report: in case of product sold by intermediaries, they are a periodic report on consumer sales, involving sample of retailers (affected by errors) - Customer database: it is the demographic, geographic and behavioral data of current and potential customers • MARKETING INTELLIGENCE: this includes several sources of data that can provide information on the current state of the marketing environment. Possible sources are: - Government-related data sources - Purchase of secondary data from outside research firms (companies that track the purchase history of supermarket) - Consultancy of external experts - Monitoring of specialized media (Ex: trip advisor collects the real opinion of customers and for competitive companies) - Monitoring of competitors (product inspection, financial and industrial reports, contact with employees) - Monitoring of retailers (Ex: mystery shoppers method) - Involvement of distributors and sales forces as intelligence gathers ( - Customer involvement in advisory panels • MARKETING RESEARCH: it is a specific study of a marketing problem based on the collection of primary data otherwise unavailable to the firm. It aims to obtain useful marketing insights such as diagnostic information about how and why certain effects are observed in the environment and what that means to marketers. It is based on data collection and research planning. • MARKETING DECISION SUPPORT SYSTEM: it is usually computer-based and it analyzes the collected data through pre-defined marketing models, providing predicted outcomes from different business scenarios and marketing strategies. It assists marketers and reduces decision risks. It is strongly dependent on: ICT infrastructure, pre- defined marketing models, quality and quantity of input data. MARKET HIERARCHY One of the most important task carried out by a firm through its Marketing Information System is the estimation of the demand for a product. Before analyzing it, it is necessary to distinguish different Marketing Hierarchies that a firm can face. Consider for example the possible markets faced by Harley Davidson: • Potential market: includes all the consumers with sufficient interest in the motorcycle offered by Harley Davidson. In this market there can be for example people under the necessary age to drive a motorcycle and people that cannot afford a motorcycle. • Available market: includes all the consumers with interest, income and access to the offering. • Qualified available market: includes the part of the consumers that are in the available market who have qualifications. In case of the Harley Davidson, they are all the consumers with the specific license for driving a motorcycle. • Target market: includes all the firm’s target customers. Harley Davidson cannot serve people in all the geographical area due to its limited quantity. • Penetrated market: includes all the firm’s current customers. Only a part of the consumers in the target market currently buy the motorcycle. MARKET DEMAND AND COMPANY DEMAND Rarely a firm can modified the potential, available and qualified market, unless it reduces the price or the quality of the product. It is very hard to modify the target and penetrated market. 24 Stationary market: there is an invariant market share over time (product characterized by habitual buying behavior). In this case it is applied the o ZERO ORDER MODEL: it assumes that the consumer purchase is not dependent on past purchases. Since the purchase frequency is almost the same for different brands, the success of a brand depends on its penetration. This model may allow to understand which is the number of repeated- buying related to a brand and may be useful to investigate cross-purchase from a brand to another one by using the so-called conditional trend analysis. Dynamic market: the market share may vary over time (because of customer satisfaction). In this case are used more complex models: o MARKOV MODELS: consumer purchase depends only on the last purchase o LEARNING MODELS: consumer purchase depends on his past purchases, sometimes giving an higher impact on the most recent ones. The main limitation of these two models is the fact that they do not consider the effect of consumer’s motivational factors. A.T.A.R MODEL: it is used in case of new product’s market and the forecast of new product sales is based on post-trial data. TPS (Total Potential Sales) = Potential # of buyers of the product category * Avg quantity purchase by each buyer Aw (Awareness): % buyers aware of the new product. It depends on the communication strategies decided in the marketing plan. The number of aware buyers are given by the typical audience for the adopted communication strategy. Tr (Trial): % buyers who will try the new product at least once. It can be estimated by the analysis of the product concept which let to understand the share of consumers interested in that product. The analysis can be integrated with specific questions in the questionnaire. Av (Availability): % buyers who will have access to the new product. This depends on the distribution strategy chosen in the marketing plan. Re (Repeat): % buyers who will repeat the purchase of the new product. If the product is durable, this element is ignored. Otherwise it can be computed starting from the measure of satisfaction and assuming that only satisfied customers will probably buy again the product. • Market forecast: in this case we analyze the estimate of product category demand and there are two kind of models: o TIME SERIES ANALYSIS: mainly used in mature markets where products are well-known by consumers. Time series analysis allows to forecast short and long run variations of market demand, also in presence of promotions. T (Trend): long-run demand pattern, due to macro-environment evolution (Ex: technological development, such as the rising trend of hybrid cars) C (Cycle): long run oscillating component, due to some macro-environmental forces (Ex: TV are characterized by two-year cycle because of soccer and Olympic competition and for this reason in the summer there is an increase of sales of TV) S (Seasonality): short run oscillating component, due to some users experience or production issues (Ex: ice- cream, hot chocolate) R (Randomness): unpredictable component due to accidental event Let’s analyze the steps of Time Series analysis (Ex: estimate the monthly sales of shoes): 1) Data collection: evaluating these data it is possible to find trends and peaks. 25 2) Data visualization 3) Compute the trend and cycle combined: the Moving Avg (MA) on 12 months. Since 12 is an even number it is necessary to compute the Centered Moving Average (CMA) between two next moving average 4) Compute the trend: in order to separate trend from cycle, it is possible to use regression. It is necessary also to choose which kind of regression model: linear or quadratic, from the visualization of the Centered Moving Average data. Applying the equation to the collected data it is possible to estimate the level of the trend. 5) Compute the cycle: once computed the trend, the cycle is given by the ratio of the Centered Moving Avg (CMA) and the trend (T). Cycle is usually characterized by long run oscillation that influence the trend curve, but if it is characterized by limited short run oscillation it can be included in the randomness (R). 6) Compute seasonality and randomness combined: the product R*S can be computed by dividing the value of sales in a certain period by the CMA of the same period 7) Compute the seasonality: it is necessary to group per month the value of R*S computed in each period and the value of seasonality related to each month is equal to the final mean. 8) Compute the randomness: the randomness is given by the ratio between R*S and the seasonality. 9) Compute the forecast: it can be done in three different steps: I. Compute the value of the future trend using the trend function II. Multiply the trend by the specific seasonality index III. Compute two different scenarios: one with the lowest value of randomness, the other with the highest value of randomness o BASS DIFFUSION MODEL: it estimates the initial single-unit purchase (not replacement purchase, case in which a consumer wants to replace a product with another in the same product category) of a new durable good. It estimates the likelihood that a consumer purchases the product for the first time at time T: 26 p: share of the innovators in the market that buy the product at time T=0 q: coefficient of imitation (q>=0) m: total number of consumers, who are potential buyers of the product Y(T): share of previous buyers, who have already bought the product the product up to time T 𝒒 𝒎 ∗ 𝒀(𝑻): share of imitators in the market at time T. It reflects the pressure operating on imitators as the number of previous buyers increase (Ex: because of word-of-mouth). Today the adoption behavior is more heterogeneous and for this reason the model is not very robust. Another problem is the estimate of p and q, which usually are estimated ex-post. In some cases it is possible to use values of p and q which are related to similar product category, but it is not sure their reliability. The Bass model can be extended and completed by considering: - Dynamic level of market potential: initially it is considered fixed, but it can vary depending on different aspect such as the increase of population - Replacement and multiple purchase: - Variable imitation effect over time: variable value of q over time - Different consumer behavior: in fact it is assumed that if you are innovator you buy the first time, if you are imitator you wait for others that purchase. But it is not so automatic because of other possibilities: trials, positive or negative word-of-mouth - Impact of spatial and network relationships among consumers - Reciprocal influences with other products such pre-existing rival products, rival new products - Impact of marketing mix variables (most complete model, very complicated) 29 FOCUS GROUP: it consists of a discussion conducted by a trained moderator with a small group of pre- screened and motivated people. The group members stimulate each other and reveal unexpected finding to the motivator. The motivator uses a topic guide containing questions and topics for the discussions. Data are collected through notes, audio and video recording. The main problem are the interference of the motivator, the presence of conflicts among members and the tendence to confirm the group opinion (groupthink). QUALITATIVE INTERVIEW: it can be direct (indirect) approach in which the purpose of the research are disclosed (disguised) to the respondent, improving ethics (data collection). There can be two types of the interview: o DEPTH INTERVIEW: unstructured, direct, personal interview in which an experienced interviewer asks about a topic to a single respondent. A particular and successful example is the laddering, in which during the interview a line of “why” questioning proceeds from product characteristics to user characteristics, till to motivation. Now it is not so used, because the majority of questions are related to “how”. o PROJECTIVE INTERVIEW: unstructured and indirect interview in which a respondent is encouraged to project his underlying motivations on a topic. This can be supported by association, completion and construction techniques. SURVEY: based on a questionnaire and on the analysis of the collected data using also some statistical techniques. EXPERIMENT: process of manipulating one or more independent variables and measuring their effect on the dependent variables. There can be two types: o LABORATORY EXPERIMENT: carried out in an artificial setting, like a fake shop, with an high level of validity, but a low level of generalizability o FIELD EXPERIMENT: carried out in a natural setting and with higher generalizability. A particular class is the test marketing that are field experiment in a limited, but selected, test market. They can be of three types: - Stimulated test market: marketing stimulus to preselected respondents and analysis of their actions - Controlled test market: carried out by a marketing research firm which selects relevant stores and plans local strategies - Standard test market: carried out directly by a firm with the involvement of its distributors RESEARCH INSTRUMENTS: there can be of different types: QUESTIONNAIRE QUALITATIVE INSTRUMENT such as: o MOOD BOARD: collages created by respondents by snipping words and pictures o WORD ASSOCIATION: a word is presented and respondents are asked to give the first word that comes in mind o SENTENCE: an incomplete story is presented and the respondent is asked to complete it o CARTOON TEST: a dialogue among cartoon characters to be completed o THEMATIC APPERCEPTION TEST: a picture is presented and respondent are asked to describe it o ROLE PLAYING: respondents are asked to assume the behavior of someone else QUANTITATIVE INSTRUMENT such as: o OPTICAL SCANNER (quello delle casse) o METER: device that record the tuned TV channel o TURNSTILE: device that measure the #people entering in the shop o GALVANOMETER, PUPILOMETER o BRAIN WAVE SCANNER: electroencephalographic o COOKIE: small piece of data sent from a website and stored by the browser on the user’s computer, so to identify it o GPS AND WPS DEVICE: records the user localization SAMPLING PLAN: the ideal situation is to make a research that includes all the population, but it is difficult. It has to choose a sample of the population. The selection of the sample is based on six steps: 1. Define the sampling unit and the target population 2. Define the sampling frame: a list of directories for identifying the target population 3. Select the sampling technique: they can be classified in: 30 • Probability sampling: each unit has the same probability to be selected. Usually used in case of conclusive research. The forms are: o SIMPLE RANDOM SAMPLING: each selection is independent. From a sampling frame, with a random procedure the sample is drawn using a software. Simple, but expensive due to because you have to repeat n times the sampling for n elements. o SYSTEMATIC SAMPLING: selects randomly the first element. The remaining n-1 elements are selected by picking every i-th element in succession, where i is obtained dividing the population size N by n. Less expensive, but less quality of representativeness. o STRATIFIED SAMPLING: the population is partitioned in internally homogeneous groups. Using a random procedure the elements are selected from each group. Good representativeness, but expensive. • Non-probability sampling: based on the personal judgement of the analyst. Usually used in exploratory research. The forms are: o JUDGEMENT SAMPLING: the sample elements are selected based on the judgement of the analyst. Low cost and short time, but not generalizability. o QUOTA SAMPLING: the population is partitioned in internally homogeneous groups. Samples are selected using judgement. More representativeness. o SNOWBALL SAMPLING: start with a random small group of respondents. The other samples are selected on the base of referrals provided by the initial respondents. Time consuming, useful for rare phenomenon where it is quite difficult to detect the interested people. 4. Determine the sample size: in case of the estimation of a certain mean 𝜇 of a finite population made up of N elements. Initially, it has to be specified the maximum acceptable error (𝑒 = 𝜇 − ?̅?). Then it has to be specified the confidence level, the z-value and the standard deviation 𝜎. Then the sample size is given by: 5. Execute the sampling process 6. Validate the sample 3) DATA COLLECTION: in this step the information and data are effectively collected using the techniques and methods specified in the plan. 4) DATA CODIFICATION AND ANALYSIS: once the data have been collected, they are analyzed using software in order to find patterns and support the marketing decisions. 5) REPORT PREPARATION AND PRESENTATION: the obtained results are summarized and presented in a report 31 L9. THE SURVEY The survey is a submission of a structured questionnaire to a sample (limited group of respondents) and it is followed by the analysis of collected data also through statistical software. It is different from the qualitative interview and it is characterized by: • More standardized research instrument and data collection • Lower flexibility and ability to scrutinize unexpected phenomena (it is not possible to change the questionnaire when it is used and for this reason it must be as much accurate as possible) There can be some possible criticalities of the survey that can affect the participation rate and the collection of data: • Consistency effect (Ex: considering a questionnaire that aims to investigate impulsive and fast purchases, driven by emotions. The fact is that the respondent who approaches the questionnaire, answers using rationality and this cannot reflect its emotional behavior during the impulsive purchase) • Concerns on intellectual property: the respondent may suspect that the questionnaire aims to analyze not buyers intentions, but for example marketing effectiveness, and for this reason he may be involved to answer in a wrong way • Limited knowledge of the topic under analysis • Social desirability: giving the most common and desirable answer • Impact of emotions and moods: sometimes the questionnaire may also provoke some emotions that can influence the answer of the respondent. It is necessary to avoid this situation. • Impact of survey time, location and method of administration • Survey saturation: the provision of too many survey provoke the reduction of the quality of the answers • Fear of hidden agenda: sometimes the respondent may think about hidden objective of the questionnaire, like the sale of a product. It is important to reassure the respondent. • Privacy concerns: it is important to specify how the data are collected and used by the company. Most of these criticalities may be managed by writing an effective cover letter which is the presentation of the questionnaire to the respondents and it typically contains: • Brief presentation of the marketing research firm • Presentation of the marketing research and its purposes • Motivation to the potential respondent, explaining its contribution • Motivation to the potential respondent to provide genuine answers • Motivation to the potential respondent to provide sensitive information The list of questions can be classified in: • Screening questions: they aim to filter and validate the sample and to collect the first information. At the beginning it is necessary to present some questions that aim to check if the respondent may provide useful information or not. (Ex: are you interested in this specific product category? If the answer is no, then the questionnaire is completed.) • Model questions: they are specifically focused on the main research problem • Classification questions: they aim to provide a full segmentation of the respondents. It is important to put them at the end of the questionnaire because they may contain some personal data and if they are placed at the beginning the respondents may close immediately the questionnaire. There are several STEPS OF THE QUESTIONNAIRE DESIGN: 1) Definition of the research problem 2) Analysis of the literature and previous questionnaire in similar problem: it can be useful to recycle questions used in other similar studies 3) Definition of the conceptual framework of the questionnaire The squares are the questions and the ellipses are the constructs which the questions refer to. Before choosing the questions, it is very important to select which are the main constructs that may affect the intention of buy of consumers. In this case risk propensity and traditionalism are considered as the main factors that influence intention to buy. Sometimes the questions may affect the correspondent construct, which means that the answer given by the 34 The are some scale criticalities: • Response set: tendency to answer always the same alternative (maybe due to survey saturation). One way to prevent this problem is to change the order of the answer. • Acquiescent response set: tendency to answer always the ‘Agree’ alternative in case of Likert scale. One way to prevent this problem is to reaffirm (in the cover letter) the absence of correct answers. You want genuine answers, not correct. • Curvilinearity: tendency to avoid extreme alternatives, in order to not appear too strong in the opinions. The presence of curvilinearity reduce the quality of the codification of the answers. One way to prevent this is to transform an ordinal scale in interval scale or to use more explicit statement 6) Choice of question words: 7) Arrangement of the questions in proper order - At the beginning more simple questions - More difficult questions in the middle of the survey - Questions grouped by related construct - Constructs ordered in accordance with the personal experience of the respondent in the problem under analysis - Funnel approach: from more general to more specific questions so to reduce possible contamination effect - Use of primary (branching)/secondary (contingency) questions where Secondary (contingency) questions are proposed only on the base of the answer to Primary (branching) question 8) Pilot-test and validation of the survey: initial test with limited number of respondents, in order to find some criticalities - Avoid double-barrelled questions (with and/or) - Avoid too long and complex questions - Avoid vague questions - Avoid negative questions - Avoid leading or biasing questions - Avoid embarrassing or sensible questions 35 L10. MODELS FOR THE ANALYSIS OF COLLECTED DATA After the collection of the data it is necessary the use of Confirmatory Factor Analysis to validate the whole conceptual framework of the questionnaire that means how your observed data are aligned with the conceptual framework. In particular, after the CFA estimation it is important to measure the: • global fit of the data by SRMR, RMSEA, CFI and TLI. Moreover it has to be analyzed each construct of the framework through the evaluation of 3 dimensions: • construct reliability measured by CRONBACH’S ALPHA and CR • construct convergent validity measured by FACTOR LOADINGS and AVE • construct discriminant validity measured by FORNELL-LARCKER CRITERION and HTMT FACTOR ANALYSIS It consists in the set of statistical techniques aiming to summarize the information explained by a large number of observed variables (items) with a limited number of latent variables (factors), defined so to have the minimum loss of information (generally measured as loss of variance). The possible uses are: • Detection and elimination of redundant items • Exploratory Factor Analysis (EFA): it is the improvement of data interpretation, by reducing of the original number of items to a more limited number of factors, without any a priori assumption about the relationship among items and factors. This means that the conceptual framework can be totally neglected since the discover of the existence of the factors and of the relationship between factors and items is postponed after the data collection. This increases the difficulty to interpretate the data. This is useful in case of exploratory research, but in case of the adoption of a new product it is better to use the Confirmatory Factor analysis. • Confirmatory Factor Analysis (CFA): make some assumptions before the launch of the survey and it tests some a priori relationships among items and factors. It is important to develop an accurate and appropriate conceptual framework in which the relationships between factor and items are well presented and then, using CFA, these relationships have to be validated. Both EFA and CFA are based on a mathematical model called Common factor model: Given 𝑛 variables 𝑋𝑗, factor analysis aims at defining using mathematical transformations, 𝑚 (linearly independent in case of EFA) factors (𝑚 < 𝑛). In case of CFA, it is better to associate each variable (question) to only one factor (construct). The 𝑛 variables 𝑋𝑗 can be expressed as: 𝑋𝑗 = 𝑘𝑗1𝐹1 + ⋯ + 𝑘𝑗ℎ𝐹ℎ + ⋯ + 𝑘𝑗𝑚𝐹𝑚 + 𝜀𝑗 𝑤𝑖𝑡ℎ 𝑗 = 1,2, … , 𝑛 𝑭𝒉: factors (construct), related to some preselected variable (all in case of EFA). 𝐹ℎ may be correlated with each other 𝜺𝒋: the unique variance for the variable 𝑗 and related only to this variable. It is the loss of information which is the extent to which the variable is not explained by the factor 𝒌𝒋𝒉: the factor loadings that are multiple regression coefficient of variable 𝑗 on factor ℎ. 𝑘𝑗ℎ 2 is the communality which is the portion of variance of the observed variable which is explained by the factor In particular, in EFA it is possible to express the inverse which is the relationship between factors and variable using the factor scores 𝒄𝒉𝒋, which are multiple regression coefficient of factor of factor ℎ on variable 𝑗 (inverse of factor loadings). 𝐹ℎ = 𝑐ℎ1𝑋1 + ⋯ + 𝑐ℎ𝑛𝑋𝑛 36 CFA estimation This is an example of conceptual framework with 2 constructs (factors) and 6 questions (items), 3 for each construct. Due to the presence of correlated errors, this is a congeneric framework. 𝜀56: correlated errors (possible, but it is better to avoid them) 𝜙𝐴𝐵: correlation between constructs A and B After the collection and codification of the data, it is possible to compute the sample variance-covariance matrix 𝑚 ∗ 𝑚 with 𝑚 equal to the number of items (questions). On the main diagonal there are the variance associated to each question, while the other elements are the value of the covariance. The aim of the CFA is to compute the predicted variance-covariance matrix by using the Maximum Likelihood or other estimation methods. In fact, it should be as similar as possible to the sample variance-covariance matrix also in terms of respecting the measurement model (if items 1 is related only to factor A, as shown in the framework, this should be confirmed in the predicted variance-covariance matrix). On the main diagonal there is the total variance of the item expressed as the sum between the communality (the degree of variance expressed by the factor A for the items 1-2-3 and by factor B for the items 4-5-6) and the unique variance of the same item. Outside the main diagonal there is the covariance between items which can belong to the same construct (𝜙𝐴𝐴𝑘1𝐴𝑘2𝐴 , 𝜙𝐴𝐴𝑘1𝐴𝑘3𝐴 , 𝜙𝐴𝐴𝑘2𝐴𝑘3𝐴 , 𝜙𝐵𝐵 … ) or to different constructs (𝜙𝐴𝐵𝑘1𝐴𝑘4𝐵 , 𝜙𝐴𝐵𝑘1𝐴𝑘5𝐵 , 𝜙𝐴𝐵𝑘1𝐴𝑘6𝐵 , 𝜙𝐴𝐵𝑘2𝐴𝑘4𝐵 , … ) After the estimation, it is possible to measure the global goodness of fit and it can be done using different criteria to evaluate the goodness of the prediction made in CFA: o Standardized Root Mean square Residual (SRMR): square root of the average discrepancy between the sample and the predicted variance-covariance matrices (SRMR<0.05). This is a measure of absolute fit, called absolute fit criterion. o Root Mean Square Error Approximation (RMSEA): similar to SRMR but with a penalty function for poor model parsimony, too complex model (RMSEA<0.08). The RMSEA is higher in case of less complex models. o Comparative Fit Index (CFI): discrepancy between the predicted variance-covariance matrix and that related to the independence null model, which is a model in which all the covariances are zero (CFI>0.95). o Tucker-Lewis Index (TLI): similar to CFI but with a penalty function for poor model parsimony, too complex model (TLI>0.95). The results of the CFA can be used also to evaluate the reliability and the validity of the constructs. In case of: 39 Cluster Analysis It is the classification of the units (respondents) in homogeneous clusters, each one characterized by high internal similarities and high external differences with the other clusters. In this case there is not a priori knowledge on clusters. The cluster analysis can be classified in: • HIERARCHICAL methods that develop different hierarchical clusterizations depending on the distance measure considered, as shown in the dendogram. o Agglomerative methods: each unit starts in a separate cluster, then they are agglomerate in bigger clusters reducing the total number of clusters o Divisive method: • NON-HIERARCHICAL methods that develop only one clusterization through the iterative selection of a cluster center and the association of all the units within pre-specified thresholds. Every unit is associated to only one cluster (K-means and K-medoids) Given a sample of N units, each one characterized by specific values on h variables (input data for the cluster analysis). There are 6 steps of the cluster analysis: 1) Choose the classification matrix: selection of the active variables of clusterization so to have a classification matrix 𝑋 = {𝑥𝑖𝑗} where each cell represents the value of the k = 1,2,….,m active variable observed in the unit i = 1,2,…,n 2) Standardization of the variables: transform the values of the active variables in the same 0-1 scale, in order to avoid distortions in cluster analysis. 3) Choose the distance measure: there can be different possible distances: - Manhattan distance: sum of absolute differences for each variable - Chebychev distance: maximum absolute difference for any variable - Euclidean distance: square root of the sum of the squared differences for each variable 4) Build the distance coefficient matrix: a matrix 𝐷 = {𝑑𝑖𝑗} where each cell represents 5) Apply the clustering procedure: there are different possible choices - Linkage method: based on the distance between single units in different clusters - Variance method: based on the minimization of the within-cluster variance - Centroid method: based on the distance from centroids How to apply this procedure? Step 1: select the minimu value in the matrix D and create a cluster with the related units Step 2: for the new cluster, compute the centroid (= mean of the values observed in all the units in the same cluster) Step 3: build a new matrix D by computing the distance on cluster centroids Step 4: if the desired number of cluster is not reached, return to Step 1 6) Identify the number of cluster and describe them: based on the level of distance among the current clusters or practical considerations L11. R SIMULATION (NO NOTES) 40 L12. STRATEGIC AND MARKETING PLANNING COMPANY ORIENTATION TOWARD THE MARKET • Orientation to production: consumers strongly want the product/service and prefer those with a low price and a widespread distribution. If a company want to reduce the price, it has to reduce the production cost and a way is to exploit economies of scale. The firms aim to obtain the maximum distribution coverage and moreover the maximum production efficiency. (Ex: a classical example is the Ford-T by Henry Ford, the first car produced in assembly line that reduced drastically the cost of production and let to sell the car at lower price) • Orientation to product: consumers want an high quality product/service and they are willing to pay an higher price for it. In this case firms have to reach a strong innovation capacity, with constant R&D investments and product innovation.(Ex: SONY launched Walkman in 1979 and cassettes outsold overcame the vinyl. The last Walkman was sold in 2010. The main fact is that in 1979 was able to satisfy a latent need which is listening to musing on the road). A main criticality is the marketing myopia: company focuses more on its needs than on customer’s needs. (Ex: SONY produced the mini-disc in 1992 trying to repeat the success of Walkman, but it was a total failure. The price was too high and the mini-CD were not so used. The majority of people did not know about mini-CD. In 1998 they reduced the price and launch the marketing campaign of mini-CD, but in the same year the firs MP3 was launched and in 2001 the first iPod). • Orientation to selling: consumers don’t buy the product/service or only in limited quantities, unless they are strongly stimulated by firms. This happens when product have negative or decreasing demand or when the quantity produced is higher than the quantity demanded. In this case firms have to reach maximum distribution coverage and to adopt effective tactics of promotions, advertising and personal sales. The main criticalities are the risk of pushy sales and negative word-of-mouth. (Ex: in order to buy Encyclopedia consumers needed to be high stimulated) • Orientation to marketing: consumer-centered, it aims at satisfying consumer needs better than its competitors. - Reactive marketing orientation: firm has to fulfill at best expressed needs of consumers. This requires the ability to detect the needs already expressed by consumers. - Proactive marketing orientation: firm anticipate the consumers’ latent needs by developing an offering able to satisfy these needs. It is risky because it is difficult to understand consumer’s needs and it necessary to be strongly innovative. Firms have to monitor customer needs and customer satisfaction and align all the organizational units with customers’ needs. The main risk is represented by market dynamic. • Orientation to holistic marketing: evolution of the orientation to marketing which aims at strengthening the contribution of all the internal and external actors of the value network, so to improve the value delivery system and guarantee the financial, social and environmental sustainability. It is based on four main elements: - Integrated marketing: coordinate, integrate and multiply the contacts with customers. This can be done by the adoption of a lean organizational structure and top and middle management must have direct relationship with customers. - Internal marketing: hiring, training and communication activities aiming at improving the employees’ ability to effectively serve customers - Relationship marketing: build satisfying long-term relationship with external actors of the value network through customer and partners relationship management programs - Performance marketing: improve the understanding of the financial and non-financial returns of marketing activities to the firm and the society. The firm performance should be evaluated also in terms of market share, customer satisfaction, product quality. Moreover in the corporate social responsibility the legal, ethical and environmental impact of firm’s activities is considered. In this view, it can be defined the green (social) marketing which consists in satisfying customer’s needs better than competitors, but guaranteeing environmental (social) sustainability. STRATEGIC AND MARKETING PLANNING It starts with the definition of a vision: statement of a company’s overarching aspirations of what it hopes to become in the long run. This statement declares the future desired state of the company. The vision is rarely modified mostly due to the fact that it is never fully achievable. 41 • Strategic planning: the managerial process that, starting from the organizational resources and market conditions, sets the company’s objectives and defines the related strategies necessary to achieve them. The strategic plans can be different, depending on the time horizon considered and on the organizational level (corporate VS business unit). • Marketing planning: managerial process that chooses and organizes the marketing activities that the company intends to carry out in the future. These activities are reported in the MARKETING PLAN which is a document that outlines a company’s overall marketing effort in a certain time horizon. It aims at clarifying the current situation of the company and its environment (Analytic marketing), the company’s objectives, strategies (Strategic marketing), detailed tactics (Operative marketing) and how to implement and control them (Control). To correctly carry out the marketing planning, a company must take into consideration several critical factor concerning internal and external environment. 44 L13. BUSINESS UNIT STRATEGIC PLANNING and STRATEGIES BUSINESS UNIT STRATEGIC PLANNING While Corporate Strategic planning can be applied only to company that are characterized by differentiation, Business Unit strategic planning can be applied to all the firms. It aims at defining, implementing and controlling the strategy in a single market. Similarly to corporate strategic planning, also BU strategic planning is composed by 4 main steps and it can be supported by marketing management: 1. Defining business mission: it should be aligned to the overall mission defined at the corporate level. 2. Analysis of external and internal environment (SWOT analysis): it aims at detecting the external threats (in terms of seriousness and probability of occurrence) and opportunities (in terms of attractiveness and success probability). Moreover it detects the internal strengths and weakness compared to competitors. This step is supported by the information provided by the Marketing Information System. 3. Formulation of business goals, strategies and programs: they should be quantitative, realistic, consistent and hierarchically structured. Marketing management can support the definition of the goals. 4. Implementation and control of business strategies: effective tool for control should be provided. This is supported by the information contained in the Marketing Information system. BUSINESS UNIT STRATEGIES The profitability of a firm depends on two main elements: market conditions in which the firm operates, and competitive advantage which is the ability to outperform its competitors. In particular, competitive advantage can be achieved by the adoption of two strategies: • Differentiation: the ability to supply products that are different from the ones supplied by competitors • Cost leadership: the ability to supply products at a lower cost than the competitors The ability to develop these strategies depends on the availability of some resources that represent the sources of competitive advantage and they can be: internal or external, through strategic alliances which can be classified into 4 different categories: • Product or service alliances: firms jointly market their complementary products or services, or a joint new product. (Ex: Skyteam, an airline alliance of 20 companies which coordinate the routes reducing travel time and increase travel destination) • Promotional alliances: a firm agrees to carry a promotion for another firm’s product/service. (Ex: in 1997 Nestlé promoted the “Land” pavilion in a popular park. In this way Nestlé promoted his brand and the management cost of the park were reduced) • Logistics alliances: a firm offers logistical services for another firm’s product. (Ex: some mobile virtual network operator, like Postemobile/CoopVoce, use the infrastructure of real mobile network operator, like Tim/Wind) • Pricing alliances: firms join in a special price collaboration (Ex: SNAV and Trenitalia allowed a SNAV-discount fee for those customers who signed a loyalty program with Trenitalia) The strategies of differentiation and cost leadership can be applied to the whole market or to a limited number of segments (focus strategy). The choice of a general strategy, rather than a focus strategy, depends on the results of segmentation. Market segmentation provide significance results when the computed segments are: measurable (characterized by measurable marketing features), accessible (effectively reachable), substantial (enough large and profitable to be served), actionable (effectively satisfiable), differentiable (can be distinguished, in terms of response 45 to different marketing mix and programs). The results of segmentation can support the choice of the approach to the market segments: • Mass marketing (undifferentiated): the same offering is targeted to the whole market. It is useful when segmentation provide scarce results with limited differences among segments, in terms of consumer preferences. A single offering is defined, characterized by a lower cost, especially in case of economies of scale. This approach can be also applied in case of segmented markets. In this case the offering is defined on the base of the preferences of the largest segment, but with high risk of dissatisfaction in the other segments. In general is rarely used in more developed countries. • Differentiated marketing: different offerings to more segments. In particular it can be classified in: o Full market coverage: if different offerings are applied to all segments o Multiple segment specialization: different offerings to a subset of segments, such as Product Specialization (different offerings based on the same product category) and Market Specialization (offerings based on different product category, but applied to a few homogeneous market segments). This approach is currently highly used since the differentiated offerings can provide the satisfaction of needs and wants of more consumers. The main consequences are the increase of total sales, a better defense against competitors and a better evaluation by retailers, which are more interested in presenting a large variety of products. On the other hand, this approach is more costly, due to more product development activities, lead to a more fragmented production, to larger and costly inventories, to more complex distribution and to more costly marketing and administrative activities. These costs may be partially reduced thanks to: - Synergies in production and purchasing, especially in case of Product Specialization - Synergies in marketing and distribution, especially in case of Market Specialization • Single-segment concentration: one or more offerings, based on the same product category, applied to one segment, such as Niche marketing (targeted to a narrow sub-segment) and One-to-one marketing (customized offering to the single customer). This approach is useful in case of limited resources and in presence of high heterogeneity among segments. It is profitable if consumers will pay a premium for customized offerings. On the other hand it is very risky in the long-run, because of potential entry of new competitors or market modifications. With the advent of Internet, this approach has obtained a larger success, thanks to new possible implementation methods such as: o long tail marketing: countless products to very small niches (Ex: Amazon sold very rare books that were difficult to be found in bookstore and this let it to conquer this niche). This is possible thanks to lower inventory and distribution costs, other than to recommender systems, which are software packages that recommend products on the base of previous purchase made by the singe consumer. o one-to-one marketing: proposal of personalized products to customers, thanks to online platforms that allows product/service customizations. Both methods are based on the large use of consumer’s data and they are related to privacy issues. POSITIONING In any case, whatever the number of selected segments by the firms, in each of them the firm can choose between differentiation (aims to increase the Total Customer Benefit) and cost leadership (may reduce Total Customer Cost) strategies. Both strategies may affect Customer Value (= TCB – TCC) and Value proposition (the promise of value delivered to customers by the firm). Value proposition is communicated to potential customer by building the so- called positioning: the act of designing a company’s offering to occupy a distinctive place in the minds of the target market. It represents how the target consumer perceive the value proposition provided by the firm. In order to manage positioning, a firm should define its competitive frame of reference which consists in all the other firms that are considered as competitors. Generally it includes all the firms that propose a product in the same product category, but the firm can choose a wider frame of reference than the specific product category. This choice is motivated when the firm intends to expand into new categories. Once the frame of reference has been defined, the firm can list the: • Points-of-difference: they should be desirable to customers (since they should provide relevant value to consumer in privileged way), deliverable by the company (since it has sufficient resources to maintain them), differentiating from competitors (since they are distinctive and with a certain degree of superiority) • Points-of-parity: they can be chosen among category points-of-parity (legitimize the offering belonging to a given product category), competitive points-of-parity (aims at overcoming the weaknesses in light of competitor’s 46 points-of-difference), correlational points-of-parity (based on an apparent incoherence with other points-of- difference selected by the firm) The choice of the position by a firm can be evaluated through a PERCEPTUAL MAP which is a visual representation of consumer’s perceptions and preferences. It is useful to evaluate consumer perceptions of real attributes and positioning in the competitive frame of references. Let’s consider the example based on cars (evaluated in terms of max speed and volume). The perceptual map is used to understand if the actual characteristic of the product are correctly perceived by consumers. Moreover, the perceptual map can be used to compare the positioning of the product with the positioning of the rival product. One the firm has planned the positioning, it has to correctly communicate the positioning. First of all the firm needs to clarify which is its competitive frame of reference and for this reason a firm can associate the name of the product with the product description announcing category benefits or comparing to exemplars. Moreover it has to communicate its points-of-difference and points-of-parity, also by using substantiators (reason to believe) that can provide support to certain points-of-difference and/or points-of-parity. Important aspects are the association to corporate values and brand elements, avoid vague positioning. In order to evaluate positioning, a firm can adopt the: o BRAND SUBSTITUTION TEST which is based to the proposal to a sample of consumers of the same positioning by replacing the original product with a rival one. If the consumer has correctly memorize our product, he should easily point out the distortion with the second one. CUSTOMER SATISFACTION MEASUREMENT Positioning is sustainable in the long-run if and only if: 𝑇𝐶𝐵 > 𝑉𝑎𝑙𝑢𝑒 𝑃𝑟𝑜𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 This happens because high satisfied consumers may rebuy the product, be less sensitive to price, pay less attention to rival products, trigger positive word-of-mouth, offer ideas to the company, etc. Consequently, there is the necessity to adopt an orientation to marketing in order to monitor the customer satisfaction. This task may be carried out using internal and external surveys and one of the most important methods to measure is the: o AMERICAN CUSTOMER SATISFACTION INDEX (ACSI) is an index based on three different values: Customer expectations, perceived quality, and perceived value. These parameters consider different aspects of customer satisfaction. The weight for each of these factors is calculated using a proprietary technology. Customer expectations evaluate what the customer considered the product or service to be and what did they actually experience. These expectations can be formed either from word-of-mouth or prior market research or belief in an organization’s previously proven reputation. Perceived quality is a parameter that evaluates customer experience in the recent past. It depends on how competitive the market is and whether the customer has experienced the competitor products or services and also on the frequency of usage. Ex: In order to better understand the construct of positioning, let’s consider the example of IKEA. It is based not only on furniture, but also appliances, lighting, food,…(Your partner in better living). - The main point of difference of IKEA is the low-cost product based on self-assembly (We do our part, you do yours. Together we save money). It is deliverable by the firm since the reduced cost of distribution and it is desirable by consumer since they consider self-assembly as an acceptable challenge. - The main points of parity are full assortment of home furniture (Category point of parity), online shopping (Competitive point of parity, an answer to Amazon competition), high quality and low price (Correlational point of parity) 49 In particular, to favor the conversion of customer into loyal customer there is the Customer Value management. An effective instrument is the Customer Relationship Management (CRM): process of carefully managing detailed information about individual customers and all customers touch points to maximize the loyalty. In particular, it is based on 4 steps: 1. Identify current and potential customers 2. Classify customer based on their needs and profitability for the firm (buy some data through external marketing research) 3. Increase the firm-customer relationship by the interaction with each customer, even with loyalty programs and club membership program (open only to user or customers that pay a fee). This allow the collection of further customer data. 4. Personalize product/service and communication with each customer (thanks to the analysis of collected data) The collected data may support the pursue of main goals of CRM: • Reducing the rate of customer defection • Increase the longevity of customer relationship • Enhance the growth potential of each customer through ‘share of wallet’, cross-selling and up-selling • Making low-profit customers more profitable or terminating them • Focusing disproportionate effort of high-profitable customers • Maximization of customer equity: total combined Customers Lifetime Values of all the company’s customers There are some cases when the Customer Value Management may be useless or cannot be adopted. In particular it is useless in case of: • Once-in-all-lifetime purchase • Low Customer Lifetime Value • Scarce brand loyalty • No direct contact between firm and ultimate customers (Ex: processors producers are not interested in contact with the final customer, Dell is) • High cost of gathering information (higher in case of high distance relationship customers) Moreover CVM can be not effective in case of: • Exaggerated expectations of loyal customers • Customer’s resentments about personal data collection • Regulation of the collection and use of consumer personal data • Cost of the implementation and maintenance of CRM • Employees’ resistance to CVM 50 L14. INNOVATION MANAGEMENT The importance of Innovation is demonstrated by the New Product Vitality Index: Sales from products introduced within past 5 years on Total sales. Firm’s main profits usually come from the traditional products, not the new ones (Ex: McDonald sells more Big Mc, Fries than new introduced products). Anyway in the last years, the role of innovation is increased thanks to: - Stronger global competition - Shorter New Product Development (NPD) Because of these two phenomena the consequences are both positive and negative: + product variety + higher efficiency and flexibility - more fragmented market segments (the variety increase the number of possible segments, this lead to the fact that is not possible to have profit by serving only one segment) - shorter product lifecycle (PLC) (a successful product may be defeated by a new one) What is the definition of innovation? A business innovation is a new or improved product or business process (or combination thereof) that differs significantly from the firm’s previous products or business processes and that has been introduced on the market or brought into use by the firm. This definition is based on three main elements that characterize innovation: • Novelty, at different levels, but in reference to the experience of the individual firm (a new product or a new different use for an existing one). (Ex: “La nave bianca” by Rossellini, was the first movie in which non- professional actors were used as leading actors, this was an example of new use of existing resource. Previously the non-professional actors were used as background actors) • Different nature of innovation: there can be different types of innovation, classified into product and process innovation • Utility: differently from innovation, which can be useless, innovation has always an utility in terms of value preservation or creation. Invention: the outcome of the process of converting intellectual thoughts into a product/process never been made before. Differently from innovation, it has not implementation and market impact. Inventors differ from innovators who implement the invention combining several types of knowledge (technical and market) and resources (capital, plants, distributors, etc.). The following are example of inventors and innovators: - Thomas Edison was both inventors (invented electric bulb) and innovator (founded Edison Electric company) - Nicola Tesla was an inventor (invented induction motor) and it was not good to transform its inventions in innovations - Steve Jobs was an innovator, he obtained a lot of patent, but his contribution in the invention was limited. He was the marketing person of the project. He was a great innovator, not an inventor. The transformation of an invention into an innovation may be long and risky due to: • Trial authorization process (Ex: we are waiting for Covid vaccines, but the authorization requires long processes) • Support provided by the value delivery system (Ex: the firs electric car was invented in 1881, but only recently they are being considered. This delay was due to some issues, like for example the presence of charge stations) • Intensity of the related market needs • Impact of market conditions on value creation and appropriation (the absence of specific market condition can negative affect the transformation of an invention into an innovation. The majority of invention happened when capitalism appeared) Historical role of innovation • Before the I industrial revolution: limited innovation activities. There were agriculture, corruption, war • I industrial revolution (1760): innovation activities autonomously carried out by independent inventors (without basic knowledge, trial-error approach) and applied in craft firms • II industrial revolution (1870): innovation activities carried out by well-educated inventors in R&D labs of large and small firms 51 • III industrial revolution (1948): innovation activities carried out by well-educated inventors in R&D labs of large and small firms, also funded by the State The historical evolution of innovation suggests that the market conditions have an high impact on innovation. The first aspect is that the costs in R&D are sunk costs and for this reason there is the necessity to guarantee the appropriability of the innovation returns. This should be guaranteed by regulations, provided by the State: • Regulation of intellectual properties rights • Regulation of market for technologies • Encouragement of productive rent seeking • Production of knowledge spillovers • Purchasing of innovations by private firms, even through grants On the other hand, even a too strong appropriability of innovation may limit the diffusion and adoption of the innovation itself. If a single firm sells the new product, it obviously sells it at a price that is equal to the TCB. In this way others are not motivated to buy it. It is necessary to have the presence of partial spillovers, which can diffuse the innovation. If there are not spillovers, no company knows about the innovation. The firms are encouraged to invest in R&D because the innovation is one of the main source of competitive advantage. Types of innovation Following the definition of innovation provided, we can identify three kinds of innovation: • Product innovation: new or improved good or service that differs significantly from the firm’s previous goods and services and that has been introduced on the market (Ex: Disney Plus is a new TV service) • Process innovation: new or improved process for one or more business functions that differs significantly from the firm’s previous processes and that has been brought into use by the firm (Ex: new prototype method based on 3D printing). It is related to different functions of the firm: - Production: innovations that speed up the production process - Distribution: online monitoring of the fleet - Marketing: new Customer Relationship Management - Information and Communication system: new intranet which improve the codification - General management: new knowledge management system - Development: new CAD product A strong process innovation requires a so-called Business Model innovation (Business Model = how a firm capture value) with the involvement of all the main business functions, like the transformation from product- based into service-based company (Ex: IBM completely change its business model in 90s, after having incurred in the highest lost in American history. Previously it produced hardware). • Combination of product and process innovation: a production of a new product usually requires innovation in the production processes. NOVELTY-BASED CLASSIFICATION OF INNOVATION Business Model innovation are characterized by novelty. Novelty is one of the key elements of innovation and there are several classification based on the level of novelty. In particular, an innovation can be classified on the base of the reference frame: • Innovation new to the firm: even in case of imitation of competitors’ products (Ex: the first Wal-Mart supermarket opened in 1988 also for food market. This was a firm innovation, because Wal-Mart decided to move into grocery market and it had to change its production processes and distribution) • Innovation new to the firm’s market: even in case of market development (Ex: the first Esselunga supermarket in Milan in 1957. Even if the supermarket already exists in the world, this was an innovation in the Italian market) • Innovation new to the world: like the first supermarket in the world (King Kullen, 1930), thanks to the fact that it introduced the subdivision of food in the store, the parking and other innovations. The level of novelty depends also on the content of innovation, not only on the reference frame (world, market, firm). Therefore innovations can be classified on the base of the content (‘the what’): • New technological elements (processes, materials, features): in this case it is possible to distinguish between: - Component innovation which is limited to peripheral subsystems (Ex: the change of the material of the watch cinturino) 54 (Ex: success of VHS against Betamax. Betamax was more performing in terms of sound and image quality. Consumers largely preferred VHS thanks to the presence of indirect positive network externalities related to the larger diffusion of a decisive complementary product. This complementary product was almost inexistent in Betamax, while it was widely produced in VHS format. The availability of this VHS complementary product induced people to buy VHS recorder since it may provide an improvement in their life. This complementary product was porn movies. Before this, people needed to go to the cinema to watch them). A possible strategy for exploiting positive network externalities of a new design that can be transformed in dominant design is Enhancement of product modularity: degree to which product’s components can be separated and recombined. In this way, firms that produce components are more interested in the success of the final product. Thanks to the involvement of other firms in the creation of product components, a company can create a platform ecosystem: system of mutually dependent entities, such as components, complements and users, mediated by a core product. The creation of platform ecosystem can attract more firms by reducing the cost of components and complements. (Ex: the success of Android is mainly due to the low cost of complementary apps by independent developers who can easy access the open-source code of Android. Android is a winner-take-all-market because it has been able to acquire the whole market. The creation of a rich platform ecosystem enriches Customer Value. ) Prior to the creation of the dominant design, firms are constantly experimenting and therefore cannot enjoy economies of scale. After the emergence of the dominant design, some firms accumulate complementary assets and exploit possible economies of scale, which in turn raises entry and mobility barriers in the industry. 55 L15. INTELLECTUAL PROPERTIES RIGHTS (IPR) Appropriability: degree to which an actor can capture the rents from its own innovation. Innovation usually does not guarantee appropriability to its inventor because innovation is based on knowledge. Knowledge is characterized by two distinguished features: - Non-rival knowledge: rivalry is the degree to which the consumption of a good by one user prevents simultaneous consumptions by other users. The use of a certain knowledge by a certain user, does not prevent the acquisition of the same knowledge by other users and this may reduce the benefit deriving from the use of this knowledge. - Non-excludable knowledge: excludability is the degree to which a good can be limited to only paying users, preventing the free consumption. An innovator, a firm, will avoid to develop its innovation if he cannot receive sufficient economics returns by it. For this reason innovators requires a legal protection such as Intellectual Properties Rights (IPR) which may guarantee a sufficient level of appropriability and reduce the risk of imitation. Knowledge spillovers are information related to an innovation that is delivered intentionally or not by the innovator and may be used by other firms for the achievement of the innovation goal by the development of rival products. In general, IPR may increase the firm’s rent, but with a cost of their application, disclosure, maintenance and enforcement. IPR is less necessary in case of product that are difficult to imitate. The cases are: • Innovations based on tacit knowledge, that cannot be easily codified into documents and procedure. (Ex: it is difficult to imitate the prestigious course of a famous chef, because it is based on the talent of the chef). Imitation is even more difficult in case of socially complex knowledge in which the interactions between member is complex and it cannot be easily imitated and recreated (Ex: tiki-taka style of Pep Guardiola require synchronism of players and it is very difficult to imitate) • Market with strong reputational effect of innovative capabilities (Ex: software market in which there are open- source software, in which developers are remunerated by carriers opportunity) • Innovations that put a risk by disclosure, even if partial (Ex: Ferrero refuses patent in the formula of Nutella, because it requires too much disclosure) • Importance of limited time market. The IPR requires too much in some cases. (Ex: patent application to be successful should be based to something completely new to the market. Thus the launch of the product related to the patent may be slow for this reason.) • Competition among platform ecosystems in which the real source of competitive advantage is beside the installed base and the availability of complementary products. In sectors like pharmaceutical, medical devices, chemicals and electronics there is the presence of high IPR like patents, while in other sectors like food, software, art, clothing the IPR are less strong. It is possible to analyze different types of IPR: • PATENT: is a title of a legal protection of an invention which is issued by a government office. Only the holders of the patent (applicants/assignees, not necessarily inventors) have an exclusive right to exploit the related invention. They can exclusively produce, rent and sell the invention. Patent is a legal right and it cannot prevent other people to produce, sell and rent the invention. In this case the holder can enhance a lawsuit against them. A patent holder has no obligation to produce the invention, he can use the patent only to prevent other people to use it. Patent protection is limited in terms of: - Duration: generally 20 years in most countries, if the maintenance fee is paid - Geographical coverage: countries of application (patent family) in which there is one invention in different countries - Scope: cover the innovative feature that are explicitly proven in the patent application In order to granted, a patent should be applied in a patent office with the public disclosure of sufficient information on the invention and with specific legal requirements. It is possible to define the patent requirements: o Patentable subject matter: discoveries, scientific theories, mathematical models, aesthetic creations, playing games, medical methods, software,… are all things that cannot be covered by a patent. o Novelty: invention should be not known to the public before filling date of the patent application. An applicant should avoid any disclosure before the patent application. 56 o Non-obviousness: the invention should solve the related technical problem in a non-obvious way. It must contain a distance beyond the state of the art o Utility (industrial applicability): invention should provide identifiable benefits and capable of use (especially in industrial application) o Working requirement: invention should be manufactured in the country of application within a certain time frame from the patent grant Given the requirements, it is possible to classify the patentable inventions in four categories: - Solutions to a new technical problem (Ex: 1967 it was filed a patent for the x-y position of a display system about the first mouse) - Improvement in existing solution (Ex: in 2007 Apple filed a patent about the first audio player to use flash memory) - Solution based on a new combination of some existing elements (Ex: in 1992 Teleflex filed a patent that combine two existing components, an adjustable gas pedal and an electronic sensor located on the pedal assembly) - Application of an existing solution to a completely different problem (Ex: Cortright filed a patent that applies Bag Balm, an existing ointment for cows, to treat human baldness) History of patent … Contents of a patent - Bibliographic data: patent office where the application is filed, application number, the language of the document, International Patent Classification (IPC) codes which assign the industrial sector associated with the patent, the applicants, the agents, the designated states. - Title and Abstract - Filed of the invention that describe the invention utilization - Background of the invention that describe the state of the art - Summary of the invention - ‘Best mode’ that describes how to use the invention at his best - Exemplary embodiments of the invention that includes the description of the preferred way to materialize the invention - Claims which is the most important part, in which the applicant specify the features that cannot be imitated - Drawing with a brief description 59 L16. FIRM’S INTERNAL FACTORS SUPPORTING INNOVATIONS Innovations has a relevant impact on firm’s cumulated profit in the main 3 aspects: - Revenue: is increased since the innovation leads to new offering in the market, creation of new markets, entry in a new market, shorter time to market, IPR licenses and sales. - Cost: is reduced since the innovation leads to less materials, labor, energy, plants, errors,… - Time: (as time of competitive advantage) is increased since the innovation leads to the creation of barrier to entry, reputation, relationships with external organization (university, research institutes), resources, competencies, capabilities Considering the innovation environment it is possible to analyze which internal factors of the firm can support innovation. The effectiveness of innovation management depends on: • Quality and quantity of human resources • Quality and quantity of capital assets. This includes all the assets that the firm can buy in the market such as plants, machinery, financial loans, etc. • Characteristics of the organizational structure of the firm. In particular it is possible to analyze different structure such as centralization, formalization and standardization. • Resources, Competencies, Capabilities that differently from capital assets, cannot be bought in the market. They can be internally built in the firm over time. Within the task environment, considering the external factors: • Competitors can strongly affect the firm’s innovation management. In some special cases, competitors can join the firm in an R&D alliance. • Suppliers can support the firm’s innovation strategies by participating in some code development processes and among the suppliers there is the labor market which may strongly constraint the innovation strategies, because labor is a non-perfect mobile input and the geographical area where the firm is present may be characterized by an insufficient availability of human resources with a certain needed background for the innovation. • Complementors which produce complementary products can strongly influence the innovation strategy of the firm, especially in case of products characterized by indirect positive network externalities. The level of complementors’ investments can boost or slow down the innovative investments of the firm. • Intermediaries may better understand customers’ needs and can even constraint firm’s strategies, especially in deployment of innovative auxiliary services. • Customers and users have a key role in the definition of innovation strategies, since the output aims at better satisfying the customers’ satisfaction. Customers may also participate to the development of some innovation since they have a better knowledge on how to use the product that can satisfy their needs (users). • Publics may affect innovation managements and it includes different kind of organizations such as: financial actors (can encourage the firm to choose some innovative project with low or high risk, depending on the may short- or long-term orientation of the financial actor), government (may address the innovation with regulation or incentives), universities, research institutes and hospitals (they are public and thanks to the scientific capabilities, they can provide advanced knowledge to the firm or join them in focus research project), technology transfer (non-profit organization with the purpose of the transfer of the technology developed by public organizations into private firms, this should encourage the collaboration between industry and public research organization with a more effective exploitation of the scientific knowledge), professional association. 60 The external actors have radically change in the last century, but before analyzing this evolution, it is important to understand the meaning of basic and applied research: Basic Research: experimental or theoretical work undertaken to primarily acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in a view. In substance, basic research aims at creating a new understanding of phenomena and its output is some new knowledge which can be published in scientific publications. Applied Research: original investigation undertaken in order to acquire new knowledge, which is, however, directed primarily toward a specific, practical aim or object. In applied research it is expected to have a practical output, like patents that cannot be directly commercialized. Patents are quite different from a new product ready to be launched in the market. Development: systematic work gained from research and practical experience and producing additional knowledge, which is directed to produce new product or processes or to improving existing products or processes. It is based on the integration of new technology of applied research into commercial application, like product and services. (EX: consider a software company that sells a solution for optimizing transportation. Its basic research may be based on operation research, like for example the study of the travel salesman problem and the development of new mathematical approaches to solve the problem. The applied research may be based on the development of specific algorithm to solve the problem and the implementation of the algorithm in software prototype. The development may be based on the implementation on more reliable and used software that can be more easily commercialized). Technology-push to Demand-pull (the evolution of influence of external actors) II industrial revolution – establishment of large research laboratories with significant advancement in basic and applied research. (Ex: development of nylon) II World War – the laboratories increased the collaboration with external actors like universities and research institutes and there was the diffusion of big science: creation of wide international collaboration networks among academics and corporate researcher. The adoption of this approach lead to the adoption of new technologies. (Ex: development of atomic science, antibiotic,…) 1970 – until this period the basic and applied research in laboratories aimed at creating a new product. This approach was not able to guarantee a continuous and systematic new launch of the product in the market, because of its scarce emphasis on development. In some cases, firms were not able to understand the result and the potential economic returns of the technologies invented and for this reason they permitted to other firms to exploit these technologies in exchange of limited payments. (Ex: Xerox was used by Apple and Microsoft to develop the first computers. It was not able to used its own technology.) 1980 – technology push approach wase replaced by more demand-pull approach. There was stronger emphasis on development, while research was outsourced to universities. The role of R&D alliances and venture capital increased. The shift from a technology-push to a demand-pull approach in innovation management has certainly reduced the importance of large R&D laboratories in favor of R&D specialized firms with small-medium size. This revolution has put into question the importance of having internal large R&D laboratories, even if they can guarantee access to a large amount of capital assets. Here can be listed the advantages of large R&D laboratories: - Higher ability to deal with risky innovation projects because their costs can be covered by the results of other less risky innovation process - Lower transaction cost because most of the activities are inside the firm - Lower knowledge spillovers and consequently it improves the level of appropriability of the innovation output - More architectural control on the evolution of the dominant design, since the other actors of the ecosystem cannot have full access to the knowledge and therefore cannot have incentive for developing the dominant design - Higher scale, scope and learning economies in R&D. Only large laboratories can buy equipment characterized by scale economies in presence of a growing number of its application in different innovation projects. Similarly several pieces of equipment can be used in complementary way, so favoring the emergence of scope economy. Finally, large laboratories can be involved in numerous innovation projects favoring the emergence of learning economy. - More development innovation capabilities 61 In any case, as proposed by Castellacci’s classification, the size of innovation investments is strongly dependent on industry features such as technological regime and competition level (Ex: in pharmaceutical sector there are a lot of R&D investments, while in the oil&gas sector there are not). Larger R&D laboratories also require more human resources and this may lead to organizational problems and high risk of loss of managerial control. In large firms the monitoring of human resources is more difficult and this increases the probability of inefficient behavior by human resources. The loss of managerial control in large firm can be partially solved by the support of organizational structure, leveraging some structural dimensions such as: • Formalization: degree to which the firm utilizes rules and procedures to structure the behavior of employees. An high formalization avoid that the employees may behave in a too free and predictable way, since it reduces the uncertainty and arbitrariness related to the implementation of innovation activities • Standardization: degree to which activities are performed in an uniform manner. An high standardization minimize the variability in the implementation of innovation activities, since it reduces the impact of different level of competencies of each employee. • Centralization: degree to which activities are decided and/or performed at a central location. An high level of centralization guarantees better coordination among the innovation activities, since it reduces the distance among the employees in charge of similar decisions or in the implementation of these decisions. The combination of these three structural dimension in firms characterized by large R&D investments increase the overall level of efficiency and coordination. In particular, these firms are characterized by: - Higher specialization, since the presence of centralized R&D unit with formal and standard procedure guarantees that each employee learn how to perform a single task in a more specialized way - Low risk of redundant investments (reinventing-the-wheel syndrome) in different organizational units, thanks to centralization. The waste of R&D expenses is reduced in more centralized organization. - Wider implementations of new inventions (not-invented-here syndrome) thanks to centralization. The risk that a successful invention developed in a certain organizational unit is not implemented in all the organizational units that may benefit from this invention. Therefore the effect of the three structural dimensions are positive. Anyway, the benefits of these dimensions can be fully exploited only in case of predictable innovation activities, where it is possible to apply the knowledge cumulated in previous projects. (Ex: the activities related to prototyping are characterized by a certain predictability) However, most innovation activities are characterized by uncertainty. This means that many firms avoid to apply a standardized, formalized and centralized approach. For this reason, some innovation activities can be characterized by unformal, unstandardized and decentralized approaches that are typical of small R&D. In particular, this firms are characterized by: - Less distance from demand because the distance between the expressed needs of the customers and the innovation activities adopted by the firm is reduced thanks to decentralization, which represents a crucial element for the implementation of a demand-pull approach. - More flexible and fast innovation responses to environmental dynamics thanks to the absence of formal and standardized procedures. Therefore delays are reduced. - More autonomous, responsible and creative individuals. The employee may become more motivated to develop original and effective approaches to innovation activities since they can be rewarded for the success. In extreme cases, this employees may be encouraged by their companies to create a spin-off which is an independent firm leaded by these employees and supported by the parent organization. This approach is very useful in the case the spin-off operates in a completely different market from the parent firm. The advantages of a more decentralized, unformal and unstandardized approach is more useful in case of innovation activities related to research, where the knowledge of disposal may be more limited and even the consumer’s response is difficult to be understood. The advantages of a more centralized, formal and standardized approach is more useful in case of the management of other innovation activities such as development. The choice between the two approaches is strongly affected by the sector where the firm operates, but even in the same sector there can be opposite approaches. (Ex: Apple adopted a more centralized approach, Google adopted a more decentralized and distributed approach) 64 to particular problems. They can be seen as algorithms that permit to solve specific problem even with the use of some resources. Usually are shared among several employees. • Capabilities: the use and the deployment of firm’s competencies (and resources) to accomplish its organizational goals. For example, a firm may have a specific capability in the satisfaction of customer needs. They are influenced by organizational values that define the implicit norms and rules of the organization. This affect how employees behave and learn and consequently how they contribute to the development of capabilities, competencies and resources. A particular class of capabilities are the dynamic capabilities: firm’s ability to integrate, build and reconfigure internal and external competencies (and resources) to address rapidly changes in the environment. Therefore, dynamic capabilities can have a decisive impact on the competitive advantage. The main challenge for a firm is to address the environment and to do this, the firm can modify the available set of competencies. The firm can adapt to environment or shape the environment, even if it is more difficult. There can be three different classes of dynamic capabilities: Sensing: capacity to scan, sense and shape opportunities. It is characterized by a long-run impact. It allows several relevant tasks: - Scan across current technologies and markets to collect updated information concerning internal and external environment. Can be performed with access to external actors such as customers, suppliers, etc. usually granted by a decentralized approach. - Recognize and interpret current and latent opportunities and customer needs. The firm can correctly analyze the data collected by using analytic framework. In other case it is possible to use foresight techniques. The aim is to avoid to be locked-in in established interpretations. (Ex: Kodak case that underestimate the speed of digital photography) - Select opportunities to exploit. The selection can be supported by the ability of the firm to encourage individual creativity. A used technique is the “employees suggestions schemes” that allows to collect ideas proposed by employees even they are not directly involved in innovation activities and it aims to improve the organization. The most voted ideas can be developed. - Shape opportunities to exploit. A firm can influence the market of a new product especially when it adopts the first-move strategy. Seizing: capacity to seize opportunities. It is also called exploitation and it is characterized by short-run impact and more limited uncertainty. It allows dealing with several relevant tasks: - Prioritize and adequately fund innovation projects. These choices are based on financial methods under uncertainty. They aims at anti-innovation bias which induce firms to avoid competency-destroying projects in favor of more competency-enhancing projects. - Delineate business models. This requires to analyze multiple combinations of product features, target customers, cost structures, so to guarantee adequate value proposition and profit. The planning of the value delivery system should be based on the efficiency and effectiveness of the supply chain, also with the outsourcing of some tasks. - Implement platform ecosystem. It is the implementation of the business model which may require the leverage of co-specialized resources, evaluate IPRs and improve collaborations with producers of components and complementors. This step can be supported by competencies of entrepreneurial managers. Transforming: capacity to maintain competitiveness through enhancing, combining, protecting and reconfiguring the firm’s assets, resources, competencies and capabilities. It is characterized by a more long- run impact than sensing. It concerns the modification of the existing capabilities of the firm. The need of this modification is due to opposite effect: on the one hand firms tend to enhance the existing routines in a path dependence way especially in case of previous success, on the other hand there is the obsolescence of the existing routines due to the dynamic of the environment. It is difficult to change obsolescent routines in case of fast radical changes because the time for the effective reaction is reduced. The reaction could be totally nullified, and there can be the so-called Icarus effect when the firm continue with its innovation strategy until it reaches the inevitable. Another possibility is that the firm adopt investments that are too close to the existing knowledge and for this reason they are not so effective. Therefore, there are more effective approaches: - Orchestration of old and new resources: minimize conflict and enhance co-specialization between old and new resources. This can be more effective in case of outsourcing some tasks. - Decentralize and outsource innovation activities: can favor a stronger co-specialization and even an higher capability to scan the environment and react to its changes. This approach preserves managerial and architectural control. 65 - Knowledge management: systematic management of organizational knowledge. The aim is to maximize the long-run return of the use of organizational knowledge and this should allow to maintain the competitive advantage. This can be done by a larger codification of tacit knowledge that may lead to a better protection of organizational knowledge, better human resource management, larger knowledge sharing and organizational learning. The implementation of knowledge management is based on IT tools, like document management systems. Although the diffusion of these tools in many firms, the creation of a learning organization, which is a firm that facilitate the learning of its members and continuously transform this learning and the organizational knowledge, has not occurred yet. This failure is due to the fact that employees know very well that knowledge is a source of power and avoid to easily put a risk this power or to donate the source of this power to the firm. 66 L17. FIRM’S EXTERNAL FACTORS SUPPORTING INNOVATIONS In this lesson we are going to consider the external use of knowledge and the external collaboration that a firm can establish to improve the effectiveness and efficiency of innovation management activities. Open innovation is an expression that assumes that in order to advance their innovation management, firms should open up their boundaries, by combining both external (inbound knowledge flows, acquire expertise from outside) and internal knowledge and sharing the internal knowledge with external actors (outbound knowledge flows, knowledge spillovers form the firm to external actors). The presence of outbound knowledge flows can negatively affect the firms since it can lead to a lower appropriability. Anyway if the open source strategy is effective, the contribution of inbound knowledge flows is higher than the one of outbound knowledge flows and this may lead to some benefits for the firm: • Access to resources provided by more specialized external actors. The collaboration allows to develop and commercialize products that could not have been developed by the firm on its own • Higher revenues from management of its own IPRs when the firm allows outbound knowledge flows. For example, R&D collaboration are usually based on the use of some patents owned by one of the partner which can have revenues by the license. • Cost and risk pooling of innovation projects • Shorter time-to-market • Higher firm’s flexibility since it can focus the competencies in a more limited technological scope and avoid to invest in too many technological fields • Improvement of sensing and seizing capabilities, thanks to learning from external actors • Enhancement of dominant design and standard since it depends on the number of organizations that adopt the dominant design. These potential benefits can be obtained through the implementation of some specific OPEN INNOVATION STRATEGIES that can be based on: • the acquisition of existing external knowledge (absorption of available knowledge spillovers, in-licensing and IPRs purchases, merger and acquisition of external firms): the success of this strategy is limited by the fact that the acquired knowledge may not perfectly fit with the firm’s needs. • the collaboration with external actors (firms (suppliers, partners, distributors, competitors), users, universities): even in this case the effectiveness of this strategy is not so easy since the collaboration may be affected by several problems. Before analyzing in detail the open innovation strategies, it is necessary to introduce another dynamic capability, fundamental for the open innovation strategy, that is the absorptive capacity: capacity to recognize new external knowledge, to assimilate it and to apply it to commercial ends. Without a sufficient level of absorptive capacity, a firm is not able to find the necessary knowledge and interpretate it from external sources. It depends on: knowledge base (previous R&D investments and experience of the firm that can have created sufficient learning), overlap between knowledge base and external knowledge (only in presence of this overlap the firm is able to detect and interpret the new knowledge), type of external knowledge (for example, tacit knowledge requires long learning process to be assimilated), technological opportunity (probability that R&D investments can result in technological advantage, a low level may reduce the propensity to acquire external knowledge) and appropriability (low level may discourage the acquisition of external knowledge, because its implementation may be scarcely profitable). Absorptive capacity can be distinguished in: - potential absorptive capacity (recognize and assimilate knowledge), it depends on the knowledge base of the firm - realized absorptive capacity (apply the new knowledge in new product/services), it depends on market characteristics such as appropriability and technological opportunity Absorptive capacity is also strongly related to collaborations. In fact, it is possible to say that the collaborations are strongly influenced by the relative absorptive capacity of the firms. In particular, a common basic knowledge of the collaborators favors the interactive learning, but at the same time an effective collaboration is influenced by the presence of different specialized knowledge between the partners. 69 A typical example is the research consortia that involves both universities, research institutes and privet firm which aim at developing new technological solution based on solid scientific knowledge. Another form of open innovation strategy is the one that include directly THE COLLABORATION OF THE FINAL USER. User-developed innovation has been favored by the passage: o From a Producer-developed innovation (traditional approach): based on provision of standardized products developed by firms on the base of their idea of customers’ needs. Even most demand oriented firms can have a not complete idea of the customer. The ineffective approach is due to: - Re-invention of machineries by industrial users, so to increase the ability to meet their specific needs. - Evens some consumers’ products re-invented by users, so to guarantee an higher personalization. (Ex: sport’s equipment are usually modified to fit physical characteristics) o To a User-developed innovation (new approach): had a greater diffusion thanks to: - Higher digitalization of product development (diffusion of cheaper digital tools for prototyping, and the possibility to directly manufacture the product thanks to the FabLab, places where you can 3D-print a prototype of your product) - Higher product modularization (the modularity of the product can be increased, so to involve other firms to produce the components. Moreover the modularity favors a more distributed innovation, since the separated sub-system can be worked and produced independently without intense communication between different component-producers) - Better and cheaper communication tools that supports large and distant collaboration There are three possible forms of user collaborations: • Innovation by a single user (firm or individual): it is usually driven by the so-called lead user that are anticipators of the future market trends. The single user may have an high incentive to create his own innovation in order to satisfy the needs. In this case there can be two options: - Direct creation and commercialization of the innovation: users, who have already perceived the needs, have an incentive to create the innovation able to satisfy this needs and to commercialize it by creating their own firm. The creation of a company associated with a product innovation is not easy.(Ex: GoPro was funded by a surfer in 2002. In 2014 it went public closing the first day at 31$ per share. Starting from 2016 GoPro had troubles and in 2019 the price is 4.48$ per share. The CEO, even if a great inventor, is not a great CEO). - Incorporation of the innovation in the offering of an existing firm (incumbent): in this way, an existing firm can enhance its offering and at the same time resign costs and increase the likelihood of success. The incumbent can also send kit of product-design tools (called product platform) to support users in the development of the innovation and sell products that are complementary to the user’s innovation. • Closed collaborative innovation: users actively participate in collaborative project characterized by the absence of any disclosure of the innovation. This strategy is adopted, for example, by pharmaceutical firms that ask for volunteers and the most diffused form is: o Crowdsourcing is an innovation challenge proposed by a sponsor and open to potential inventors. It is based on 4 steps: 1. Need translation: clear, concise request of proposal about specific need 2. Connecting: broadcast of request for proposal to the network of potential inventors. The interested inventors can submit their proposal on the platform. 3. Evaluation: review of proposal to select the most promising ones 4. Acquisition: negotiation between the sponsors and the selected inventors about proposal negotiation, IPRs and compensation The success is influenced by the use of extreme modularity of the project to encourage users’ proposal and protect sponsors’ knowledge. • Open collaborative innovation: users actively participate in collaborative project characterized by the full disclosure of the innovation. The most diffused form is: o Open Source Software: in this case, it is necessary to clarify that are different kinds of users’ roles: observers (use the software and report bugs), developers (write the code and documentation, they are contributors. Also called prosumers since they are consumer but also producers), project managers (responsible for the overall project, they assure coordination and architectural control). Developers may participate for many reasons: enjoyment in coding, fight against property software and altruism (gift culture, strengthened by copyleft license, which reduce opportunistic behavior), more interactive learning thanks to the interactions with other developers, availability of more satisfying software, enhancement of personal reputation and monetary or career rewards. 70 Firms may participate for many reasons: fight against competitors software, reduced cost to access and to protect the software (if the firm is the producer), creation of platform ecosystem by partitioning software into closed (developed by the firm) and open modules (developed by large Open Source Software community). The choice of the two is based on development cost and the need of customer information. Other motivation are increase the installed base of software, sale of complementary products and service, enhancement of firm’s reputation, improvement of the hiring process and of the internal capability thanks to the learning from the community. UNIVERSITIES COLLABORATIONS are now considered as one of the most important factor in the innovation activities, since they usually develop knowledge that can be implemented especially in breakthrough innovation. The main missions of university in the promotion of innovation are: 1. education: increase the quality of the workforce. 2. research: enhance the development of knowledge spillovers that can be absorbed by the firms in their innovation activities. 3. impact on the society: the aim is the transfer of technology and this can be done in three ways: - University patenting and licensing. University patenting has increased its relevance since the approval of the Bayh-Dole Act, which is a law that assigns the IPR to the university and not to the single professor. There are no more professor privilege, but it is assigned to the university. It is more effective because the university has Technology Transfer Office and then management of IPRs is better than the one of a single professor. - University-Industry (UI) collaboration: forms of consultancies (low scientific content), R&D consortia, joint research projects,… All these forms can results in the complementary between the scientific knowledge provided by universities (explorative approach to research) and marketer expertise of the firms (explorative approach to innovation). - Academic spin-off: start-ups firm funded by academics that aims at commercialize the knowledge developed in some groups. They maintain the relationship with the parent organization (university) by sharing employees and assets, and the success is influenced by the involvement of external actors. Like venture capitals. The death-rate of academic spin-off is very high due to the fact that the professor has not sufficient managerial competences. For this reason, many universities develop specific organization that support the initial steps of academic spin-off called incubators. Incubators often provide facilities, high speed connection, uses of specialize machinery, access to scientist and workers involved in other start-up. The implementation of university collaborations presents also some dilemmas. - How to establish the optimal quality of innovation? (UI collaboration) --> the aim is to create a breakthrough innovation able to create a new technological paradigm. Anyway, usually an incremental innovation is preferred thanks to the related success and the reduced costs and risks. - How to balance the disclosure of knowledge required by 2nd mission (enhance knowledge spillovers) with the confidentiality required by the 3rd mission (university patenting)? (University’s dilemma) --> the answer is not so easy. - How to allocate the limited time among the three missions? (Academic dilemma) --> an effective effort in the 3rd mission can provide monetary returns. Another large debate in the literature concerns the role of universities as supporter of regional economy. They are part of the Regional Innovation System: network of organization that promotes the creation and diffusion of knowledge. In a regional level it is more effective thanks to agglomeration economies that occur when a large number of actors operate in the same geographical area. There are several advantages: - Lower communication and transportation costs thanks to geographical proximity - High possibilities to start collaboration and businesses because there can be more occasion to discuss the common problems - Easier sharing of tacit knowledge (more face-to-face interactions). This interaction increases the risk of technological leakages provoked by the opportunistic behavior of an employer who sells a secret information to a competitor - Concentration and limited mobility of the workforce. If the local workforce is aligned with the firm, this can increase its innovation activity, otherwise this can be constrained by the lack of adequate workforce. - Common institutional context of the organizations operation in the same region (common language and habits) In the earliest steps, agglomerates economies are fundamentals. Some region are characterized by technological clusters: regional clusters of firms operating in a common technology, often involved in the same supply chain and/or collaborations. (Ex: Silicon Valley) 71 L18. INNOVATION PROJECTS How the firm can implement its innovation activities? Innovation Portfolio is the overall evaluation of the set of firm’s innovation projects. The portfolio should be constantly monitored to avoid wastes and it aims at maximizing of the long run value. The portfolio should: - be aligned with firm’s business strategy, since the development of new product affects the marketing and production plans of the firm - guarantee an adequate selection of new innovation projects. The presence of too many projects with high risks, costs and duration may not be sustainable by the firm, while the presence of too many projects with low risks, costs and duration may affect the result in the long-run. Since projects are characterized by uncertainty, they should be ordered on the base of prioritizing. - have an integrated plan of new and current innovation project. When the projects develop product that may be substituted by new project, it is important to manage the portfolio in an integral way. It should also consider the evolution of the market, since the output will be evaluated in accordance with the market acceptance. - define the most appropriate resource allocation, considering also dependencies among different projects. - monitor the existence of innovation projects. In a firm usually there are many innovation projects, and as explained by the Innovation funnel, only some of those in the research phase go to the development phase and even less to the commercialization phase. During their journey, some innovation projects can be also spin-off (creation of an independent company) or sold to other companies through licenses. This ability of the firm to release knowledge toward external organizations more able to commercialize it is called Desorptive capacity. It is the ability to release the internal knowledge to some external organization. An high desorpitve capacity lead to an high death-rate of innovation project. Other causes of failure are: environmental changes that reduce profitability of projects, technological uncertainty that may prevent the development of research ideas at convenient cost, inadequate internal capabilities, resources and competencies, insufficient support of external actors, lack of organizational support since the product does not match with the organizational culture, inadequate innovation and marketing strategies. All these factors suggest that the portfolio management is quite risky and this can affect the cost of the firm if it is not able to immediately detect the potential failure of projects. The selection of successful projects is not easy, due to the risk of discard of some ideas that could be useful. The selection of a sustainable portfolio can be supported by a classification of the innovation projects. • Technology development project: long run oriented projects that a firm develop to create a new technology. These projects do not necessarily end with the creation of a new product, due to the fact that the technology cannot be sufficiently mature. • Product development project: short run oriented projects that can be classified based on different criteria: - New product platform: aim at creating a new family of products. The launch of a new product platform aims at developing further products in the future, based on the same technology and characteristics. - Derivatives of existing product platform: aim at creating new product that extend or improve the variety of existing product. - Fundamentally new product: aim at creating radically new products. Due to the breakthrough nature, it is associated with uncertainty and it can lead to the creation of new families. An alternative classification can be based on other factors such as: level of novelty of the firm, novelty of the market, expected adoption rate by customers, impact on firms’ capabilities, expected time to market, expected costs, expected profit. Generally these classification are presented in multidimensional maps such as bubble maps or roadmaps (like Gant diagram). This map classify the innovation project in two dimensions: newness to company and newness to market. It is divided in three areas (low, medium, high). New to world product (create new market), new product lines (entry of the firm in an existing market, new to the firm), additions to existing product lines, improvement of existing products, repositioning (based on some original application of the existing firm’s product on a new segment for the firm), cost reductions (provide the same performance and characteristics of existing products at a lower cost). Thanks to this matrix, the firm can understand the innovativeness of its projects. 74 L19. NEW PRODUCT DEVELOPMENT (NPD) In this lesson we will focus on the management of a single project, discussing how a firm can develop a new product/service. It is important to find a trade-off between the three sometimes-conflicting objectives: • Maximization of the product’s fit with customer requirement. It can be achieved through an accurate discover of customer’s latent and expressed needs. Then needs and wants have to be translated into an affordable product. It requires time and cost. • Minimization of the development of cycle time. Increase the ability to exploit pioneer advantages and propose update versions, reducing development cost and obsolescence risks. • Control of development costs. They tend to increase with time, in fact the last stages (test, market launch) are expensive. For this reason it is important to avoid that the failure of the project occurs in these last stages. To control the risk of the project, firms can adopt different approaches to NPD based on the stages: - Sequential NPD: each stage starts only after the end of the previous one. - PROs --> better process control, thanks to the so-called go/kill decision point. At the end of each stage is evaluated the state of the project and decide if continue or not. This reduce the risk to continue a potential failure project. - CONs --> longer development cycle time, because stages’ delays increase the overall time. Moreover, there is less coordination between different organizational function involved in the project and this increase the risk that the stage completed by an organizational unit is not compatible with the sequent one. - Partly Parallel NPD: each stage starts before the end of the previous one. One of the most advanced model is the Concurrent Engineering: guarantees an overlap between stages and includes also post commercialization stages such as maintenance, disposal and recycling. - PROs --> shorter development cycle time, better coordination between organizational units and more flexibility. - CONs --> less process control, because it is more difficult to find go/kill decision points, especially in case of ongoing modifications Whatever the approach used, there are 8 different stages of NPD. 1. IDEA GENERATION: generation of original ideas for developing a new product that will be able to satisfying latent needs of consumers. The aim is to capture the Voice of the Customer and to develop ideas aligned with it. The MAIN SOURCES of ideas can be: • Customers: through marketing research, surveys, focus groups or direct involvement in product development (crucial in user-oriented design, in which the customer is central) • Competitors: through the inspection of their products and the analysis of the specialized media • Partners: such as suppliers in case of incremental innovations and research organizations • Employees: through interactions with customers and suppliers. Some firms leaves sufficient scouting time to the technicians for developing pet projects which can be the adopted by the firm. In these case more open access and review of idea in progress can favor a stronger generation of new ideas. 75 To transform the stimula provided by the sources into some ideas of product, the firm can adopt specific CREATIVITY TECHNIQUES. Most of them are based on divergent thinking (generation of ideas in a spontaneous and free-flowing manner, by exploring many possible concepts) and sometimes followed by convergent thinking (combination of ideas through logical steps so to arrive to one or few useful solutions). The main creativity techniques are: • Brainstorming: a few heterogeneous well-prepared and collaborative individuals. The participants should avoid negative judgments of the ideas of others and a facilitator should write down all of the ideas. When the generation step ends, the most useful ideas are selected. • Mind Mapping: spontaneous and iterative development of a map with a starting concept in the center. The central concept is then linked to some associated concept that are linked to others and so on. As soon as the sufficient level of analysis of these associations is reached, the iteration stops. • Attributes listing: list of the possible attributes of the new product. Then for each attribute, the participant involved can propose some modifications until the new product modified is obtained. • Morphological analysis: list of the possible attributes of the new product and the possible alternative configurations for each attribute. Then, analyze random combinations among configurations on the different attributes. • Reverse-assumption analysis: list all the normal configurations of a product and then reverse them. • Forced relationships: list of several ideas that are the integrated each other. It is based on lateral thinking (provocative association of unrelated ideas), followed by convergent thinking to arrive at one useful solution. 2. IDEA SCREENING: check of the compatibility between the generated ideas and the firm’s strategies, objectives, competencies and capabilities. This step aims at minimizing the drop errors (discard of profitable ideas) and pick- up error (retention of ideas that are not sufficiently profitable). The screening should be based on: relevance and size of the customers’ needs (find motivation for the purchase of the new product, the possible usage, benefit and cost required), presence of substitute products and competitors’ competitiveness (evaluate the capability of competitors to develop better substitute products), compatibility with firm’s resources and its value network (the firm may not have sufficient resources to develop the new product), compatibility with firm’s objectives and strategies (the new product may cannibalize existing products of the firm), cost, timing and probability of completion. 3. CONCEPT DEVELOPMENT AND TESTING: definition of the product concept and design. 3.1 Concept Development: each selected idea should be better described through the development of the so- called: • Product concept that is a simple, written statement of a product’s positioning which clarifies its main users, the needs addressed, its benefit, its usage and the main differences from the rival’s products. It is the base of positioning and it should define the competitive frame of reference, point-of-difference and point-of- parity. In the first application it is possible to identify the most promising market for the product, while in the second step the product is compared with the rivals’ ones. 76 • Pre-design: design of a product platform based on modular (integral) architecture of parts, each of them associated with a specific function (all together for a specific function). There can be used the parts already existing in other products (carryover, reduce cost, time and level of novelty and increase reliability) and those outsourced to partners (co-design, improve the efficiency of the innovation project). (Ex: Swatch used standardized modular parts to develop a great variety of watches). After the completion of the product’s pre-design, the concept can be specified in more detailed by applying the method of Quality Function Deployment, which translate customers’ requirements into engineering attributes. It is based on the construction of a matrix called “House of quality” where both customer’s requirements and engineering attributes are represented. The construction of this matrix is based on the following steps: 1) Identification of customer requirements 2) Requirements are weighted on the base of relative importance. Weights are obtained through marketing research 3) Engineering attributes that drive performance are identified 4) Correlations among engineering attributes are computed (not real statistical correlations, but a measure of association between pairs of engineering attributes) 5) Relationships between engineering attributes and customer requirements are indicated 6) Computation of relative importance of engineering attributes (summation of the product between the importance and the attributes-requirements relationships) 7) Evaluation of competitors on customer requirements 8) Design target identification (using relative importance of engineering attributes and competitors evaluation) 9) New design evaluation (based on design targets) 3.2 Concept Testing: the concept need to be tested by the evaluation of consumer’s response expressed in terms of awareness, interest, evaluation, trial and adoption (adoption process). Thanks to this test the firm can evaluate the idea before the development of the real prototype. Concept testing can be carried out following several steps: 1) Involvement of a sample of customers (enough large but not tool large so to maintain confidentiality of the product concept) 2) Choice of the method of communication for the product concept (verbal descriptions, drawings, rendering, virtual reality, videos) 3) Choice of the research tools to record consumer’s responses 4) Quantitative and qualitative method to analyze the collected data, such as CONJOINT ANALYSIS: statistical method that attempts to determine the relative importance consumers attach to salient attributes and the utilities they attach to the levels of attributes. This method is useful to assess the list of attributes and compare the concept with alternative existing or ideal concepts. It is based on the following steps: I. Choice of significant actionable (manageable by the firm) attributes II. Choice of significant (interesting and credible) levels for each attributes III. Creation of full profiles, based on the combination of the levels for each attributes IV. Rating of each full profile by the sample of customers V. Application of the conjoint analysis procedure VI. Assessment of validity and interpretation of the results Conjoint analysis is based on the computation of the overall utility of the concept: 𝑼(𝑿) = ∑ ∑ 𝒂𝒊𝒋𝒙𝒊𝒋 𝑲𝒊 𝒋=𝟏 𝑴 𝒊=𝟏 79 L20. PRODUCT LIFE CYCLE The commercialization is the last step of NPD and the first step of product lifecycle. There are four main stages of the product lifecycle: 1. INTRODUCTION: slow growth of sales since the product awareness and distribution are limited. The profit are negative, since the revenues are not sufficient to cover the costs. The main aim of the firm is to create product awareness and trial, and secure distribution in retail outlets. These elements are essential for the long-run success of the new product and they can be pursued only through communication strategies focused on innovators (because they can speed up the diffusion) and intermediaries. Since the profit are negative, the risk is maximum. For this reason, the firm should try to reduce cost and risk: - Selective distribution on a few selected market segments and areas: the firm should choose profitable segments which can also influence the adoption of the product by other segments in the future - Offering based on a basic product since it is quite difficult to predict the specific preference of the product feature of the customer. - Price based on expenses plus an higher profit to partially recover the costs of product development and product launch. Another important decision is related to the timing of product introduction. In particular, the firm should decide to introduce the new product as a pioneer or to wait for the introduction of a similar product by the competitor. This choice depends on an accurate evaluation of the pioneers’ advantages and disadvantages. • Pioneers’ advantages - Temporary monopoly in the market which allows to set an higher price and obtain larger profits - Easier legal protection (patents, copyrights, IPRs), since one of the requirements is the novelty - Secure access to scarce assets such as key locations, government permits, suppliers,… - Shaping customer expectations on the new product, especially when the product is strongly innovative - Increase the switching costs incurred by customers when they decide to pass to a rival product. This can be done through the protection of important feature of the product (EX: Amazon patented the one-click system that makes more efficient the process of making orders in e-commerce. A new entry in the e- commerce has to develop an alternative method which requires an higher effort by the customer to learn) or through the development of a large number of complementary products by external firms, that cannot be easily available for a new entry firm. - Better ability to reach network externalities because the customer interested in the product can only buy the one proposed by the pioneer. This increase the installed base and can stimulate the variety of complementary product. Thanks to this, customers prefer to remain loyal to the pioneer instead of choosing a rival product. - Better ability to reach learning economies - Technological leadership reputation that can increase brand loyalty and partner relationship management. - Creation of barriers to entry thanks to the elements previous mentioned. • Pioneers’ disadvantages - Inexistent awareness of the new product, therefore the pioneer has to invest a lot in advertising - Uncertainty of customer requirements due to the absence of familiarity with the product, especially in case of radical innovations. The pioneer may have overestimate or underestimate the requirements. - Higher marketing investments due to the absence of awareness and the uncertainty of customer requirements - Inexistent technological paradigm that increases the uncertainty and the cost of the development of the new product, because the level of knowledge cannot be sufficiently validated. 80 - Immature component and complementary products which can strongly increase the risk of failure of the launch. To solve this, the pioneer should involve other firms in the launch of the complementary product in a fast and efficient way. - Higher R&D investments - Underdeveloped supplier and distribution channels that may increase the development costs and reduce the effectiveness of the strategy for the launch in the market - Risk of incumbent inertia that is the tendency to be slow to respond to changes in the industry environment So, in the long-run, late entrants perform better than pioneers. A firm should choose to enter as a pioneer on the base of a complex evaluation based on the state of the existing technology and market maturity. Especially in presence of potential learning and barrier to entry. The firm should evaluate the rival products and understand the competitive advantage. Moreover, it should evaluate the relationships with existing products, competencies, capabilities and resources. In very few cases, the pioneer was able to maintain is advantages (EX: INTEL) 2. GROWTH: the market rapidly accept the product, with substantial profit improvement for the firm. The success of the firm may attract competitors to offer rival product for the same market segment. To face the attraction of competitors, the pioneers should adopt a market penetration strategy, which aims at maximizing the market share. The objective is the creation of a larger customer base, even partially reducing short-run profits, so to increase long-run profits. Such strategy requires: - Entry in new market segments, passing from a selective to an intensive distribution - Improvement of the product (providing better quality, adding new features), assortment (new models), production (learning economies) - Communication campaigns more oriented to preference and loyalty - Price reduction to attract more price-sensitive customer 3. MATURITY: slowdown in sales growth, since the product is already accepted by most potential buyers. Replacement purchase increase the importance until they overcome initial purchases. The competition is maximum with the coverage of all the possible market segments and profits stabilize or starts to decline. The longest stage of product lifecycle. The size of the demand is maximum and also the attraction of competitors is maximized. Also the products available are highly diversified so to cover all the possible market segments. The market structure is often characterized by the presence of firms with specific roles in the market: the most efficient firm adopt a cost leadership strategy, other firms may adopt strategy based on the maximization of product quality and service. Other small firms, may adopt the role of specialists focused on specific markets or specific product models. Finally, some firms may be specialized in the customization of the products. In this stage, a company may adopt strategies that can be based on three possible modifications that aim at increasing the company’s sales: • Market modification: it is based on two possible objectives: - Expand the number of users: pursued by converting non-users, entering new market segments and attracting competitors’ customers (Ex: Coca-Cola may convert people that hate Coca-Cola by the explanation of its quality, may enter new country such as North-Korea, may attract Pepsi customers) - Increase the usage rates among users: pursued by increasing the level of the usage product in each occasion or the number of occasions of use of the product. More radical way is the promotion of new uses of the product (Ex: Coca-Cola may increase the usage rate among users by increasing the size of the drinks provided by fast-food, may promote the use of it as substitute of water during a meal, may promote the use of its product as anti-rust product) • Product modification: can be carried out by the improvement of the quality, features and style of the product. In some cases a firm can propose a new product characterized by lower quality level compared to the existing ones. This strategy may be successful in case of overshooting when the existing products are too sophisticated and performing for customers’ needs. Generally, product modification is based on the copying of the offering of the leader company in the market: cloning (emulate with slight variation), imitating (emulate but with different marketing mix), adapting (adapt own offering with some characteristics of the leader’s one). In the last years, the imitation strategy is highly used. (Ex: ZARA and H&M adopted a quick production of clothes in a cost-efficient manner to respond to a fast-changing consumer tastes. This is based on the understanding of the customers’ wants, thanks to the imitation of trends presented in fashion weeks, and on the quickly answer to these wants, thanks to the smaller time to market and lower production costs. • Marketing program modification: more effective price, promotion, placement, services,… 81 4. DECLINE: downward drift of sales due to demand relaxation and a possible erosion of profit. In order to defend its market share, the firms should reduce its market price and marketing expenses, and accurately select which channel and product continue to serve. This selection is based on a review of the product portfolio carried out by multifunctional committees that detect which are the weak products still offered by the firm. These products should be eliminated since they generate high managerial costs, cast a negative shadow on a corporate image and they may delay the search for alternative successful product. In this stage, the firm can choose strategies depending on the market attractiveness and company’s competitive strength: • The exit from the market by divesting or liquidating the product (no firms are interested) • Harvesting which is based on the reduction of costs so to maintain the market share. It is not easy due to the possible reaction of competitors. • Shrink selectivity product and channel choosing only those characterized by profitability • Strengthen the investments to rejuvenate the product only if the declining market as sufficient potential demand. Alternative Product Life Cycle patterns 84 Good marketers also know the importance of managing the brand internally. Internal branding consists of activities and processes that help inform and inspire employees about brands. Holistic marketers must go even further and train and encourage distributors and dealers to serve their customers well. Poorly trained dealers or other intermediaries can ruin the best efforts to build a strong brand image. A firm’s branding strategy—often called its brand architecture—reflects the number and nature of both common and distinctive brand elements. Today, branding is such a strong force that hardly anything goes unbranded. Assuming a firm decides to brand its products or services, it must choose which brand names to use. Three general strategies are popular: • House of brands: Individual or separate family brand names. Consumer packaged-goods companies have a long tradition of branding different products by different names. If a company produces quite different products, one blanket name is often not desirable. Swift & Company developed separate family names for its hams (Premium) and fertilizers (Vigoro). Companies often use different brand names for different quality lines within the same product class. A major advantage of separate family brand names is that if a product fails or appears to be of low quality, the company has not tied its reputation to it (Cannibalization). Another aspect to be considered is the lower economies of scale in case of different brand names. - PROs: less risky (since a single product failure does not affect corporate reputation), support more efficient brand management (each marketing manager is clearly in charge of a specific brand and this increase marketing control), satisfy variety-seeking buying behavior of consumers (Ex: Barilla sells biscuit under the name of Pavesi and Mulino Bianco), increases the presence of the firm’s products in the retailer shelves - CONs: cannibalization (when an existing brand is affected by a sales reduction as a consequence of the introduction of a new brand by the same firm. The higher is the differentiation, the lower is cannibalization), slower and more costly acceptance of new brands, lower economies of scale (production and packaging should be differentiated among different brands), fragmented corporate image • Branded house: Corporate umbrella or company brand name. Many firms, such as Heinz and GE, use their corporate brand as an umbrella brand across their entire range of products. Development costs are lower with umbrella names because there’s no need to research a name or spend heavily on advertising to create recognition. Campbell Soup introduces new soups under its brand name with extreme simplicity and achieves instant recognition. Sales of the new product are likely to be strong if the manufacturer’s name is good. Corporate-image associations of innovativeness, expertise, and trustworthiness have been shown to directly influence consumer evaluations. Finally, a corporate branding strategy can lead to greater intangible value for the firm. • Sub-brand name. Sub-brands combine two or more of the corporate brand, family brand, or individual product brand names. Kellogg employs a sub-brand or hybrid branding strategy by combining the corporate brand with individual product brands as with Kellogg’s Rice Krispies, Kellogg’s Raisin Bran, and Kellogg’s Corn Flakes. Many durable-goods makers such as Honda, Sony, and Hewlett-Packard use sub-brands for their products. The corporate or company name legitimizes, and the individual name individualizes, the new product. Marketers often need multiple brands in order to pursue multiple segments. Some other reasons for introducing multiple brands in a category include: 1) Increasing shelf presence and retailer dependence in the store 2) Attracting consumers seeking variety who may otherwise have switched to another brand 3) Increasing internal competition within the firm 4) Yielding economies of scale in advertising, sales, merchandising, and physical distribution The brand portfolio is the set of all brands and brand lines a particular firm offers for sale in a particular category or market segment. Building a good brand portfolio requires careful thinking and creative execution. Brands can also play a number of specific roles as part of a portfolio: Flagship brands: best-seller, most important and profitable brands High-end prestige brands: targeted to high-income customers, add prestige and credibility to the entire portfolio Low-end entry level brands: attract to the company new and young customers, who may move toward its higher- priced brands Cash cows brands: despite dwindling sales, maintain profitability with no marketing support Flankers brands: positioned with respect to the competitors’ brands, designed to neither cannibalize nor damage the reputation of flagship brands Many firms have decided to leverage their most valuable asset by introducing a host of new products under their strongest brand names. Most new products are in fact brand extensions. The brand can be extended within its 85 current product category (Line extension, ex: Danone yogurt) or in different product categories (Category extension, ex: Honda started with motorcycle, then cars, robotics,…). Two main advantages of brand extensions are that they can facilitate new-product acceptance and provide positive feedback to the parent brand and company. On the downside, brand extensions may cause the brand dilution (when consumers no longer associate a brand with a specific or highly similar set of products and start thinking less of the brand), cannibalization or marketing failures. Brand monitoring systems are based on: o A brand audit is a focused series of procedures to assess the health of the brand, uncover its sources of brand equity, and suggest ways to improve and leverage its equity. Marketers should conduct a brand audit when setting up marketing plans and when considering shifts in strategic direction. Conducting brand audits on a regular basis, such as annually, allows marketers to keep their fingers on the pulse of their brands so they can manage them more proactively and responsively. A good brand audit provides keen insights into consumers, brands, and the relationship between the two. A brand audit support strategic and marketing planning. o Brand-tracking studies use the brand audit as input to collect quantitative data from consumers over time, providing consistent, baseline information about how brands and marketing programs are performing. Tracking studies help us understand where, how much, and in what ways brand value is being created to facilitate day-to- day decision making. Marketers should distinguish brand equity from brand valuation, which is the job of estimating the total financial value of the brand. Top brand-management firm Interbrand has developed a model to formally estimate the dollar value of a brand. It defines brand value as the net present value of the future earnings that can be attributed to the brand alone. The firm believes marketing and financial analyses are equally important in determining the value of a brand. Its process follows five steps: 1. Market Segmentation—The first step is to divide the market(s) in which the brand is sold into mutually exclusive segments that help determine variations among the brand’s different customer groups. 2. Financial Analysis—Interbrand assesses purchase price, volume, and frequency to help calculate accurate forecasts of future brand sales and revenues. Once it has established Brand Revenues, it deducts all associated operating costs to derive Economic Earnings, that is, the earnings attributed to the branded business. 3. Role of Branding—Interbrand next attributes a proportion of Economic Earnings to the brand in each market segment by first identifying the various drivers of demand and then determining the degree to which the brand directly influences each. Multiplying the Role of Branding by Economic Earnings yields Brand Earnings. 4. Brand Strength—Interbrand then assesses the brand’s strength profile to determine the likelihood that the brand will realize forecasted Brand Earnings. For each segment, assessment of Brand Discount Rate, that is the risk premium assigned to the brand, based on Brand Strength. The Brand Discount Rate, applied to the forecasted Brand Earnings, yields the net present value of the Brand Earnings. The stronger the brand, the lower the discount rate, and vice versa. 5. Brand Value Calculation—Brand Value is the net present value (NPV) of the forecasted Brand Earnings, discounted by the Brand Discount Rate. 86 L22. PRODUCT and SERVICE MANAGEMENT The PRODUCT is anything that can be offered to a market to satisfy a want and consequently a need. It can be classified on the base of tangibility and durability: • DURABLE GOODS: tangible goods consumed in many uses • NON-DURABLE GOODS: tangible goods consumed in few uses • SERVICE: intangible goods consumed one or more times Another classification concerns the type of customer who can be distinguished in consumer and industrial: • CONSUMER-GOODS classification is based on shopping habits: - Convenience goods: staples (regularly bought such as milk), impulse (not planned in advance such as chocolate), emergency (urgent such as umbrella when it rains) - Shopping goods: based on the evaluation of several attributes such as price, performance, style, etc. - Specialty goods: based on brand (Ex: Ferrari and Apple products bought thanks to the brand) - Unsought goods: with negative or weak demand such as coffee, life insurance that require a strong marketing effort • INDUSTRIAL-GOODS classification is based on their roles in production process: - Materials and parts: the input of a production process which represent the main source of variable costs (raw materials) - Capital items: represent the main source of fixed costs (equipment) - Supplies and business services: necessary for the production even if they are not inputs (operating supplies, maintenance) The possible PRODUCT’S MARKETING TACTICS can be distinguished in: • Product configuration: can be understood by the possible level of value provided by the product to customers. This level is well-described by the customer-value hierarchy that explain the possible variation of product configuration from the basic version to the richest one, which include all the possible additional attributes. - Core benefit: the basic need satisfied with the product (Ex: considering a car, the core benefit is mobility) - Basic product: basic version of the product, characterized by a configuration which is only sufficient to satisfy the related need (Ex: a vehicle that fulfill the need for mobility in a certain time) - Expected product: product with attributes usually expected by the customer (Ex: additional attributes such as electric power windows) - Augmented product: product with additional attributes that distinguish it from rivals one (Ex: the hybrid system of Toyota car) - Potential product: product with all the possible additional attributes that can be offered in the future (Ex: an effective self-driven system) On the base of the position chosen by the customer-value hierarchy, the firm can define the product configuration, by specifying a specific level of the following variables: 1) Features: can be classified into basic and optional features. Thanks to product modularity, while the basic features are present in all product versions, the optional ones allow customer to increase the customization. 2) Performance quality: level at which the product’s primary characteristics operate. An higher performance quality, enable the request of higher price. Above a certain a level, only few consumers are willing to pay a quality premium. 3) Conformance quality: degree to which all the produced unit are identical and meet the promised specifications. This is not relevant in case of artistic objects. 4) Durability: the product’s expected operating life under natural or stressful conditions. It is usually appreciated by consumers and the maximization of it reduces the willingness to rebuy the product in the future, since their need is still satisfied by the already purchased product. For this reason, the firms limit the durability by including a declining indicator or even an expiring date, that should support the consumer in replacing the product when the quality and safety is no more ensured. In more extreme cases, the firm may intentionally reduce durability through the planned obsolescence, that is an artificially planned operating life that will shortening the replacement time. There can be different forms of planned obsolescence: - Contrived durability: ex-ante shortening the product lifetime by using inferior materials that may quickly deteriorate 89 • Perishability: service cannot be stored, saved and resold once it has been used. This aspect impacts demand fluctuations since the matching of demand and supply cannot be used by the use of inventory. This matching can be at least partially pursued by managing both of them: - Service demand can be managed by using: o Differentiated pricing (higher price in period of peak demand, lower price in period of low demand). This method aims at moving the excessive demand typical of peak period to other off-peak demand. o Stimulation of non-peak demand (Ex: fast-food may launch some discounted breakfast to increase the demand even in the morning) o Use of reservation system that allows to know in advance the level of demand and to avoid an excessive demand in peak hours. This improve the planning of service delivery. o Improving waiting time experience (Ex: some restaurants propose a free cocktail to customers where there are not seats available) - Service supply can be managed by using: o Shared services among customers so to increase the service availability (Ex: private lecture can be devoted to more than one student) o Service automation which can speed up the service delivery and requires fewer human resources (Ex: the use of automatic checkout in the supermarket) o Customer participation in service delivery (Ex: self-service approach in meal delivery) o Demand forecast methods which allow to predict the number of customers and plan the necessary resources and future capacity expansions o Peak-demand tactics based on involvement of part-time employees, the use of resources shared with other services characterized by a different peak-hours or the adoption of efficiency routines which prescribe a quick service delivery in case of peak demand. • Variability: services depend of the variable conditions of the provider. They are often characterized by a low conformance quality. To control and reduce the variability a firm can increase investments in hiring and training process, can better standardize service delivery and monitor service performance and customer satisfaction. All this tactics may reduce service variability, but cannot eliminate it at all. The only possible tactic to guarantee a perfect elimination of variability is the investment of service automation, since machine can guarantee an almost perfect standardization in service delivery. There are other possible classifications of services that are based on: - Ownership: public (police) vs private (massage service) - Objectives: profit vs no-profit (civil register service) - Target customer: business customer (consultancy) vs consumer customer (educational) - Service differentiation: personal (lecture for one student), shared (lecture for more students), service options (business class in transportation services) - Information availability before the purchase: zero information (legal service) vs full information (flight service) - Access rules: reservable (barber shop) vs non-reservable - Types of service delivery process: different delivery processes between for example housework services and financial services - Resources used for delivery process: fully automated (parking service) vs human based (nursing service) - Channels used for service delivery: on-site (restaurants) vs online (banking services) - Customer involvement in delivery process: delivery without customer (car fixing) vs self-service (car washing) - Service duration: for example the duration of a lunch and the duration of a life insurance - Service pricing: subscription (cable TV), one-shot purchased (funeral services) 90 The SERVICE DESIGN is an essential task because it deals with its critical elements (intangibility, perishability, etc.). Service design can support a certain degree of service quality. One of the most used tool is the so-called service blueprint which is a process chart that shows the service delivery process from the customer perspective, but highlighting also the necessary tasks to be performed by the firm to carry out the service. • Physical evidence: tangible elements associated with each customer step. The tangble elements have the potential to influence customers. • Customer actions: actions taken by the customers • On-stage employee contact: the steps taken by contact employees as part of the face-to-face service encounter with the customers (take the food order, deliver the food to the customer,…). It is separated by the customers’ actions by the line of interaction. • Back-stage employee contact: not visible to customers (the chef prepare the food, the dish-washer,…) and separated by the on-stage employee by the line of visibility. • Support processes: carried out by different firms from the service provider such as suppliers, financial companies, software house and the waste disposal company. They are separated by the line of internal interaction. The use of service blueprint may support the analysis of the determinants of SERVICE QUALITY, which is the most important aspect for customer satisfaction and it cannot be easily measured due to intangibility. There are five possible indicators of service quality, which are related to the possible gap experiences in service delivery: • Gap 5: between perceived service and expected service. It may come from excessive expectations of the customer due to word-of-mouth, needs and past experience. It may be also provoked by the external communication adopted by the firm, inadequate service delivery or bad service planning. • Gap 1: between expected service and management perceptions of customer expectations. It may be provoked by an incorrect analysis of customers’ needs and wants. 91 • Gap 2: between management perceptions of customer expectations and adequate translation into service-quality specification. In this case, even if the firm is able to correctly predict customer expectations, it is not able to translate them into adequate service-quality specifications. • Gap 3: between translation into service-quality specification and correct service delivery.in this case, even if the firm is able to correctly specify the service-quality needed, it is not able to correctly deliver the related service, due to for example for not trained employee. • Gap 4: between the service actually delivered and the service quality previously communicated to customers. In this case, the firm is actually able to deliver the service, but it does not respect the quality communicated through advertisement. A famous method adopted for the management of service quality is the so-called SERVQUAL. This method is based on a questionnaire made up of 22 items on which the method identifies 5 different latent determinants of service quality, presented in descending order importance: • Reliability: ability to perform the promised service dependably and accurately. It is influenced by the ability of the firm to meet customer expectations. • Responsiveness: willingness to help customers and provide prompt services. It is influenced by the ability of the firm to quickly answer to customers’ request. • Assurance: knowledge and courtesy of employees and their ability to convey trust and confidence to customers. It is influenced by the competencies of the firm’s employees. • Empathy: the provision of caring individualized attention to customer. It is influenced by the ability of the firm to listen to customer request and provide a personalized answer. • Tangibles: appearance of physical facilities, equipment, staff and communication materials. It is influenced all the tangibles proof elements of quality provided by the firm In addition to the attributes provided by the SERVQUAL, a firm can improve its service quality by the application of some best practices: - Strategic planning based on customer expectations - Strong commitment of top management --> to guarantee alignment of objectives and actions carried out by each unit - Improvement employees’ satisfaction ---> assign them objectives aligned with the overall organizational goals - Set high standard --> the maximization of service quality is too costly, thus it is better to choose an adequate quality level, taking into consideration the quality level of competitors and the opportunities provided by innovations - Pragmatic approach --> sometimes differentiate the service depending on customer profitability (Ex: transportation or hotel offer basic package for low-income customer and additional service for high-income customers) - Implement monitoring system --> to collect the voice of the customer and detect the perceived performance on the most important service attributes - Satisfaction of customer complaints --> essential role of front-line employees 94 o Two-part pricing: a lump-sum fee to access the product + per-unit charge to consume the product (Ex: sports club membership) o Three-part pricing: a lump-sum fee to access the product and to consume it up to a basic quantity in a certain period + per-unit charge to consume the product over this basic quantity (Ex: I pay tot €/month for 20 Gb of internet, but if I use more than 20Gb I have to pay more) o Block-pricing: declining (increasing) per-unit charges associated with higher block of cumulated quantity of consumed product (Ex: energy consumption bills) o Quantity-discount: declining per-unit charges associated with higher cumulated quantity of consumed product. Also in product-form pricing (Ex: a bottle of 2L of water, usually cost less than a bottle of 1L) Multiple products non-linear pricing o Pure bundling: two or more products are offered only in a combined package. This allows to sell a weak demand product combined with a successful one. This is successful in case of economies of scope in production and/or distribution. (Ex: Microsoft Office application, you cannot buy only Excel or Word) o Mixed bundling: two or more products are offered either individually or in a combined package. To be successful the price of the combined package should be lower than the sum of the two single products. o Tying (captive-product pricing): to use product A (the tying product), the consumer should also purchase product B (tied product). It is often based on a less profitable ‘tying’ product and a more profitable ‘tied’ product. The firm usually set a lower margin on the ‘tying’ product and an higher margin on the ‘tied’ product.(Ex: if you want to use a certain printer (tying), you have to use the cartage (tied)) o By-product pricing: firm can set a low price for the main product, becoming more competitive, thanks to the setting of an higher price of saleable by-product, resulting from the main product manufacturing o Loss-leader pricing: a limited amount of well-known sold at a very low price, so to draw customers into a store and stimulate the sale of more profitable products Quality-based non-linear pricing o Versioning: the firm offers different versions of the same product, typically a premium version at high price and basic version at low price. Different versions are based on specific service-level, in terms of available capacity and continuity (low versions may contain advertising and interruptions). Often there are time-based versions. (Ex: usually many books are offered in they cover version, and after some months are offered in paper version, which is cheaper) o Optional-feature pricing: offering of optional features, such as low-interest financing, longer payment terms, additional warranties. It often based on nickel and dime pricing. o Priority access fee: higher price to reduce the waiting time o Seasonal discount (peak load pricing): higher prices for services delivered in fast selling periods, lower prices for services delivered in slow selling periods (Ex: Eclecticists charge different prices based on the day and the hour) o Location pricing: differentiating prices in accordance with the place to enjoy an event (Ex: seat in a concert) o Channel pricing: differentiating prices in accordance on distribution channel (Ex: bottle of wine at the restaurant vs at the supermarket) o Packaging pricing: differentiating prices in accordance to the package Purchase timing-based non-linear pricing o Special event pricing: based on price promotions in a certain seasons (saldi di fine stagione). This may be affected by the risk of psychological discount when the seller rise the price before the discount. o Yield pricing: in case of limited amount of perishable product, for which customers have different willingness to pay. Usually set low price for early purchases, high prices for late purchases and very low prices just before the service delivery (last-minute). o Cash rebates: price reduction to customers who promptly pay the bills. Auto companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturers' products within a specified time period. Rebates can help clear inventories without cutting the stated list price Customer-based non-linear pricing o Multi-person pricing: lower price offered to group of users like a family (Ex: Spotify family) o Special customer pricing: lower price offered to loyal customers or members of loyalty programs (Ex: discounts for Italo members) 95 o Customer-segments pricing: different customer groups pay different prices for the same product or service. (ex. museums often charge a lower admission fee to students and senior citizens) o Geographical pricing: there are at least 5 different model: different prices in accordance with the geographical location of the customer: Free on-Board origin (whole shipping cost paid by the customer), Basing point pricing (shipping cost based on the distance between customer location and some pre- determined basing points, chosen by the firm), Zone pricing (every customer assigned to a zone, characterized by a specific shipping cost), Uniform delivery pricing (same shipping cost paid by every customer, wherever they are located), Freight-absorption pricing (all the shipping cost paid by the firm) o Pricing based on customer reservation price: it can guarantee a larger share of customers’ surplus. It is not so easy to implement. Possible forms are coupons and actions. There are different types of auctions: English auction (the seller puts up an item and the buyer raise the offer price until the auctions end with the highest bidder), Dutch auction (the auctioneer announce an high price and then it start to decrease the price until the buyer accept the price. This is often used in case of a single buyer and many suppliers), Sealed-bid auctions (each buyer submits anonymously a bid, the highest wins) The main motivations for nonlinear pricing are (1) Support the matching between demand and supply (2) Recover of fixed cost (3) Alignment of price with variable unit cost (4) Increase the number of customers (5) Implement a form of price discrimination, to achieve a larger portion of the surplus of each customer, by considering her specific price elasticity and reservation price. Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. Not always is possible to perform price discrimination and some conditions have to be met: - The firm has non-zero market power - The market can be divided into different units, each one characterized by a specific price elasticity and reservation price. The firm knows, at least partially, this information for each unit (screening) - Customers in lower-price segments cannot resell the product to customers in higher-price segments (absence of arbitrage). Arbitrage can be limited by Government, in case of services (it is more difficult to resell them), and in case of fencing (When a firm adopts some tactics to hinder arbitrage) such as restrict pricing information and make price comparison difficult, strongly differentiate the product offered to lower- price segments from that offered to higher-price segments, use specific contractual terms that forbid resale or make it unprofitable or risky… - Competitors cannot undersell the firm in higher-price segments - Cost due to the implementation of price discrimination is lower than additional revenue derived from price discrimination - The specific form of price discrimination does not cause customer unsatisfaction and is not illegal There are three types of price discrimination: first-degree or perfect price discrimination, second-degree, and third-degree. These degrees of price discrimination are also known as personalized pricing (1st-degree pricing), product versioning or menu pricing (2nd-degree pricing), and group pricing (3rd-degree pricing). 1. First-degree Price Discrimination: First-degree discrimination, or perfect price discrimination, occurs when a business charges the maximum possible price for each unit consumed. Because prices vary among units, the firm captures all available consumer surplus for itself, or the economic surplus. Many industries involving client services practice first-degree price discrimination, where a company charges a different price for every good or service sold. The achievement of the whole aggregate customer surplus is not possible by using the other two forms. (Price different for each unit of product and for each customer) 2. Second-degree Price Discrimination: Second-degree price discrimination occurs when a company charges a different price for different quantities consumed, such as quantity discounts on bulk purchases. (Price different for each unit of product and uniform for each customer) 3. Third-degree Price Discrimination: Third-degree price discrimination occurs when a company charges a different price to different consumer groups. For example, a theatre may divide moviegoers into seniors, adults, and children, each paying a different price when seeing the same movie. This discrimination is the most common. (Price uniform for each unit of product and different for each customer segment) In the last years, online market is becoming even more important. This means both consumers and firms can easily compare prices, but this has favoured the use of some innovative pricing models and tools: Price comparator websites, Group buying websites, Online auction websites, Online bartering websites, Pay-per- use (like renting in sharing economy platforms), Customer-driven pricing (like Name-Your-Own-Price and Pay- What-You-Want), Free offering (Two-side markets), Freemium (free and premium customers), Price promotion to registered user. 96 L24. DISTRIBUTION STRATEGIES Distribution channels are fundamental elements in marketing strategies, because almost all producers do not sell the product directly to the final customer since they have no sufficient abilities and resources to manage product’s distribution. A distribution channel involves a set of intermediaries: - Agents: do not take title to the products (brokers, producer’s representatives, sales agents) - Distributors: buy, take title and resell the product to customers (retailers, wholesales) - Facilitators: (transportation company, independent warehouses, banks, internet service providers) All these actors may be member of distribution channel: set of interdependent actors participating in the process of making the products available for their use. The main functions of distribution channel are: • Information flow (bidirectional): gather and transfer information on marketing environment. It is bidirectional since the manufacturer may transmit information based on some marketing research, while retailers may transmit information to the manufacturer related to their everyday contact with customers. • Promotion flow (top-down): it is planned by product’s manufacturer and wholesale and retailers and it aims at disseminate communication to promote the products • Ordering flow (bottom-up): management and transmission of product’s orders. Once the purchase is completed, the retailer transmits the product’s order to the manufacturer. More indirect in make-to-stock production, while it is more direct in make-to-order production. • Physical flow (bidirectional): management of product’s storage, transportation and installation (top-down), but also the return, reuse, recycling and disposal (bottom-up) • Title flow (top-down): transfer of ownership of the product • Payment flow (bottom-up): management of payments related to purchases of products. The money start from the buyer, who pays in cash, to the producer, who receive the moneys. In addition to the flows, distribution channels are involved in the negotiation of the sales agreement, the management of the funds to finance inventories and management of the risks related to distribution. The objectives of distribution channels are based on the provision of a certain service level expected by the customer and based on some criteria: desired lot size of the product, limited waiting an delivery time, spatial convenience (geographical proximity), product variety and service backup. In general, the service level, may vary from sector to sector (Ex: if you buy a luxury bag, you have to wait some weeks, since the product is part of a make- to-order approach). Distribution strategies are also influenced by some constraints, related to: - Product’s characteristics: shorter distribution channels for perishable products, bulky products (with logistic and transportation problems), non-standard products (with high specific requirements), high-unit-value product (expensive) and for products requiring installation and maintenance. In these cases, a shorter distribution channel reduce the risk and cost for transportation and make the fulfillment of customers’ requirements easier. - Competitors’ characteristics: competitors’ distribution channels may represent their competitive advantage (less transaction costs for the customers) - Firm’s target segments, positioning and marketing mix strategies - Firm’s contractual power: depends also on the firm’s size, product’s popularity and prestige, and level of assortment of the firm Once defined the desired objectives and existing constraints, the DEFINITION OF A DISTRIBUTION CHANNEL is based on several alternatives: • Number of channels: in last year many firms are adopting a multichannel marketing system, which combine traditional distribution channels (brick-and-mortar) with personal sales, direct marketing channels and online marketing channels. The adoption of this strategy has some PROs (larger market coverage, lower channel costs thanks to the synergies among different channels , more customized selling thanks to multiple customers touch- points) and CONs (risk of higher distribution costs, risk of channel conflicts -> differentiate the channels used in terms of target segments, risk of vague positioning -> should coordinate the marketing mix variables according to the different distribution channels).