Chapter 13 CRAFTING A DEPLOYMENT STRATEGY

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Strategic Management of Technological Innovation
Melissa Schilling
Chapter 13CRAFTING A DEPLOYMENT STRATEGY
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Deployment Tactics in the U.S. Video Game Industry

• 1972, Nolan Bushnell founded Atari and introduced
  the game Pong (http//www.xnet.se/javaTest/jPong/j
  Pong.html) that was played on a TV set with an
  Atari console. Pong earned 1million revenue in
  its first year
• By 1984, video game console and game sales
  reached 3 billion in the US alone. Console
  makers did not provide strict security and
  unauthorized games of poor quality flooded the
  market. Sales dropped dramatically and by 1985
  the video game industry was declared dead.
• Much to everyones surprise, Nintendo and Sega
  entered the market with 8-bit systems. They spent
  15 million on advertising. Nintendo had a near
  monopoly from 1985-1989.
• Nintendo made games in-house and through 3rd part
  developers with strict licensing policies
• Limited number of titles a licensee could produce
• Developer had to pre-order a minimum number of
  cartridges
• Developer could not make similar games for other
  consoles
• Very profitable policies but they were sanctioned
  by the FTC and alienated distributors and
  developers

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Deployment Tactics in the U.S. Video Game Industry

• In 1989, Sega was able to overthrow Nintendos
  dominance by introducing the 16-bit Genesis
  system 1½ years before Nintendo.
• Backward compatible to their 8-bit games
• Nintendo introduced its 16-bit system in 1991 but
  Sega had too much of a jump on them and was the
  market leader
• Nintendo did not make it backward compatible
• In 1995, Sony was able to break into the video
  game industry by introducing a 32-bit system,
  investing heavily in game development, and
  leveraging its massive clout with distributors.
• By 1996, Sonys installed base was 2.9 million
  units vs Segas 1.2 million units
• In late 2001, Microsoft entered the video game
  industry with a 128-bit system. It had an
  advanced machine, and spent a lot on marketing
  and games, but Playstation2 (also 128-bit)
  already had an installed base of 20 million.
• On the first weekend of PS2 sales (March 4,
  2000), 1 million units were sold. The website had
  more than 100,000 hits in one minute and had to
  temporarily shut down

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Deployment Tactics in the U.S. Video Game Industry

• In late 2005, Microsoft introduces the Xbox 360,
  beating the Playstation3 to market.
• The figures as of 5/4/2008 (http//vgchartz.com/)
  are in the chart below the game never ends and
  has now extended into the hand-held market as
  well.

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Overview

• Only part of the value of any technological
  innovation is determined by what the technology
  can do.
• A large part is determined by the degree to which
  people understand it, access it and integrate it
  with their lives.
• An effective deployment strategy is thus a key
  element in a technological innovation strategy.
• It is not just a way for the firm to earn
  revenues but is a core part of the innovation
  process itself

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Overview

• Deployment strategies can
• influence the receptivity of customers,
  distributors and complementary goods providers
• Reduce uncertainty about the product, lower
  resistance to switching from competitors and
  accelerate adoption
• 3DO and Phillips introduced the first two 32-bit
  systems but they failed because they were priced
  too high and had few games
• Segas 32-bit system was priced right but weak
  distribution hobbled its deployment
• Sony, on the other hand, used intense marketing,
  low prices, strong game availability and
  aggressive distribution to ensure a very
  successful launch of the Playstation

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Launch Timing

• The timing of a market launch can be an important
  deployment strategy
• Nintendo held back on releasing its 16-bit system
  for fear of cannibalizing their 8-bit system even
  though Sega had released Genesis
• Strategic Launch Timing
• Firms can use the timing of product launch to
  take advantage of business cycle or seasonal
  effects
• e.g., video game consoles are always launched
  just before Christmas.
• Timing also signals customers about the
  generation of technology the product represents.
• e.g., if a next generation console is launched
  too soon after a previous generation console, the
  market may not want to spend money on a new
  console after having just purchased a previous
  generation console.
• Xbox next generation but launched too close to
  PS2s launch
• Timing must be coordinated with production
  capacity and complements availability, or launch
  could be weak.

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Launch Timing

• Optimizing Cash Flow versus Embracing
  Cannibalization
• Traditionally firms managed product lifecycles to
  optimize cash flow and return on investment
• would not introduce new generation while old
  generation selling well.
• However, in industries with increasing returns
  this is risky
• Competitors can gain a substantial lead that will
  be difficult to overcome
• Often better for firm to invest in continuous
  innovation and willingly cannibalize its own
  products to make it difficult for competitors to
  gain a technological lead.
• Cannibalization when a firms sales of one
  product (or at one location) diminish its sales
  of another (or another location).
• In the late 1980s, Nintendo did not want to
  cannibalize their 8-bit system despite Segas
  launch of a 16-bit system and thus lost market
  share

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Licensing and Compatibility

• Protecting a technology too little can result in
  low quality complements and clones, a fragmented
  market and little revenue for the developer
• Protecting too much may impede development of
  complements.
• Firm must carefully decide
• How compatible to be with products of others
• If firm is dominant, generally prefers
  incompatibility with others platforms but may
  use controlled licensing for complements.
• If firm is at installed base disadvantage,
  generally prefers some compatibility with others
  and aggressive licensing for complements.
• Whether to make product backward compatible
• If installed base and complements are important,
  backward compatibility usually best leverages
  installed base and complements of previous
  generation, and links generations together. Can
  be combined with incentives to upgrade.
• Sony did this with PS2 which gave incentive to
  current customer base to upgrade and not forfeit
  existing games they own from previous generation
  of console
• Microsoft does this with Windows backward
  compatible with major s/w applications developed
  for previous generations

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Pricing

• Price simultaneously influences product
  positioning, rate of adoption, and cash flow.
• In order to determine a pricing strategy, a firm
  has to decide on its objectives
• Industry has intense price competition and/or
  overcapacity objective short-run strategy may be
  simply survival
• Cover variable and some fixed costs
• In the long-run the firm will want to create
  additional with a strategy of maximizing current
  profits
• Firm estimates costs and demand and then sets the
  price to maximize cash flow or rate of return on
  investment
• For new technological innovations, firms often
  emphasize maximum market skimming or maximum
  market share
• Market skimming strategy (high initial prices)
• Signals market that innovation is significant
• Recoup development expenses (assuming theres
  demand)
• Attracts competitors, may slow adoption

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Pricing

• When seeking high volume, firms will emphasize
  maximum market share objective
• Penetration Pricing is used to achieve this goal
  (very low price or free)
• Accelerates adoption, driving up volume, build
  installed base, attract developers of
  complementary goods
• Requires large production capacity be established
  early
• Risky may lose money on each unit in short run
• Common strategy when competing for dominant
  design
• Honda priced the hybrid car Insight below cost
  because believed it would be profitable in the
  long run and presented Honda as a green car
  company
• Video console developers have sold their consoles
  at or below cost but profit from game sales and
  licensing royalties

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Pricing

• Can manipulate customers perception of price
• Free initial trial or introductory pricing
  enables consumer to overcome uncertainty about
  the new technology, become familiar with the
  technology and appreciate the benefits
• Initial product free but pay for monthly service
• Cable television model
• Firms also use introductory pricing for a
  stipulated amount of time to test the markets
  response without committing to a long-term
  pricing structure

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Distribution

• Selling Direct versus Using Intermediaries
• Selling direct
• Gives firm great control over selling process,
  price and service
• Firm can capture more information about customers
  and can facilitate the customization of products
• Can be expensive and/or impractical
• Intermediaries may include
• Manufacturers representatives independent
  agents that may promote and sell the product
  lines of one or a few manufacturers.
• Useful for direct selling when its impractical
  for manufacturer to have own direct sales force
  for all markets.
• Wholesalers firms that buy manufacturers
  products in bulk then resell them (typically in
  smaller, more diverse bundles)
• Provide bulk breaking and carry inventory.
• Handles transactions with retailers and provides
  transportation.

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Distribution

• Retailers firms that sell goods to public
• Provide convenience for customers
• Enable on-site examination and service
• Original equipment manufacturers (OEMs)
• A company that buys products (or components) from
  other manufacturers and assembles them or
  customizes them and sells under its own brand
  name. E.g., Dell Computer
• Aggregates components from multiple manufacturers
• Provides single point-of-contact and service for
  customer
• Also called Value Added Resellers (VARs)
• In some industries, information technology has
  enabled disintermediation or reconfiguration of
  intermediaries.
• Digital product may be delivered directly to the
  consumer over the Internet
• E.g., online investing enables customers to
  bypass brokers online bookselling requires
  retailer to provide delivery services, online
  grocery shopping shifts the last mile from the
  consumer to grocer

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Distribution

• These factors help determine whether and what
  types of intermediaries the firm should use
• How does the new product fit with the
  distribution requirements of firms existing
  product lines?
• Is there is an existing distribution channel and
  does the new product fit into it?
• How numerous and dispersed are customers, and how
  much product education or service will they
  require? Is installation or customization
  required?
• Customers dispersed but require little training
  use mail order or online ordering
• Customers dispersed and require moderate training
  or service use intermediaries
• Customers not dispersed but require extensive
  training or service may need to provide this
  directly
• How are competing products or substitutes sold?
  The sales channel can influence the customers
  perception of the product

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Distribution

• Strategies for Accelerating Distribution
• Alliances with distributors
• Providing distributor with stake in products
  success or exclusivity contract can motivate them
  to promote more.
• Sega had limited distribution for its Saturn
  launch, Nintendo had unlimited distribution for
  Nintendo-64 and Sony had unlimited distribution
  and extensive experience negotiating with
  retailing giants such as Wal-Mart
• Bundling relationships
• Sell in tandem with product already in wide use.
• MS Windows on almost all PCs, MS IE via AOL

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Distribution

• Contracts and sponsorship
• Provide price discounts, special service
  contracts or advertising assistance to
  distributors, complementary goods providers or
  large and influential end users.
• New medical technology is donated or lent to
  large teaching hospitals so that the benefits can
  be seen first hand by doctors and administrators
  which increases future purchases
• Guarantees and consignment
• When there is uncertainty about a product,
  distributors can be given guarantees to take back
  unsold stock thereby reducing the risk to
  intermediaries and complements providers.
• Distributors were reluctant to carry Nintendos
  NES after crash of video-game market in the
  1980s. Nintendo agreed to accept payment for sold
  consoles rather than require up front payment

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Marketing

• Major marketing methods include advertising,
  promotions, and publicity/public relations.
• Advertising
• Requires effective message
• Requires media that conveys message to
  appropriate target market
• Varies in match to audience, richness, reach, and
  cost.
• Must strike appropriate balance between
  entertainment or aesthetics (to make memorable)
  versus information content (to make useful)

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Marketing

• Advantages and Disadvantages of Advertising Media

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Marketing

• Promotions
• Temporary selling tactics that include
• Samples or free trial
• Cash rebates after purchase
• Including an additional product (a premium)
  with purchase
• Incentives for repeat purchase
• Sales bonuses to distributor or retailer sales
  representatives
• Cross promotions between two or more
  non-competing products to increase pulling power
• Point-of-purchase displays to demonstrate the
  products features
• Publicity and Public Relations
• Attempt to generate free publicity and
  word-of-mouth (e.g., mention in articles,
  television programs, etc.)
• Produce own internally generated publications
• Sponsor special events

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Theory In Action

• Generating Awareness for Domosedan
• Farmos wanted to build awareness of its new
  innovation in animal painkillers.
• Asked university professors and advanced
  practitioners to help with testing process for
  drug acted as premarketing tool.
• Drug was featured in conferences, articles,
  dissertations.
• Farmos also hosted a large dinner party for all
  practicing veterinarians at the drugs launch.
• Domosedan was adopted rapidly around the world
  and became a commercial success.

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Marketing

• Tailoring the Marketing Plan to Intended Adopters
• Innovators and Early Adopters respond to
  marketing that offers significant technical
  content and emphasizes leading-edge nature of
  product.
• Need media with high content and selective reach
• Early Majority responds to marketing emphasizing
  products completeness, ease o fuse, consistency
  with customers life, and legitimacy.
• Need media with high reach and high credibility
• Late Majority and Laggards respond to marketing
  emphasizing reliability, simplicity, and
  cost-effectiveness.
• Need media with high reach, high credibility, but
  low cost.

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Marketing

• Often hard to transition from selling to early
  adopters to early majority, resulting in chasm.

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Marketing

• Using Marketing to Shape Perceptions and
  Expectations
• Perceptions and expectations of value can be as
  important as actual value. To influence, can use
• Preannouncements and press releases
• Can build mind share in advance of actual
  market share
• Can forestall purchases of competitors products
• Reputation
• Provides signal to market of likelihood of
  success
• Credible commitments
• Substantial irreversible investments can convince
  market of firms confidence and determination

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Research Brief

• Creating an Information Epidemic
• Gladwell notes that some individuals have a
  disproportionate impact on marketplace behavior
• Connectors
• Have exceptionally large and diverse circle of
  acquaintances
• Knack for remembering names and important dates
• Mavens
• Driven to obtain and disseminate knowledge about
  one or more of their interests
• Will track prices, tend to be consumer activists
• Take great pleasure in helping other consumers
• Salespersons
• Naturally talented persuaders
• Acute ability to send and respond to nonverbal
  cues can infect others with their mood!

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Discussion Questions

1. Can you identify one or more circumstances when a
   company might wish to delay introducing its
   product?
2. What factors will (or should) influence a firms
   pricing strategy?
3. Pick a product you feel you know well. What
   intermediaries do you think are used in bringing
   this product to market? What valuable services do
   you think these intermediaries provide?
4. What marketing strategies are used by the
   producers of the product you identified for
   question 3? What are the advantages and
   disadvantages of these marketing strategies?