Transcript Product Decisions - Stevens Institute of Technology

Today’s Topic:
Making Product Decisions
(based on financial, market, and
competitive considerations)
or
“Putting it all together”
Second Course Module
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Market/customer analysis
(DLJdirect case – online brokerage)
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Competitive analysis
(Airborne Express case – package delivery)
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Making product decisions --- today
(Techsonic case – depthsounders/fishfinders)
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Midterm exam on making product decisions
(THINK case – electric cars) Th, Oct 20th
Today’s Agenda
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Review of what we’ve learned
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Midcourse feedback survey
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Making product decisions --- methodology, and
the Techsonic case
Preparation for midterm exam --- THINK case
What we’ve learned ……
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Companies try to maximize the wealth of their owners -- market cap (stock price) plus dividends
Stock price and the ability to pay dividends are driven
by earnings, and beliefs about future earnings
growth
Individual products and services are expected to
contribute targeted amounts to earnings/growth
Earnings growth (ultimately) requires revenue growth
Firms use financial statements to develop plans, and
measure/analyze/report on their performance
…..and, in terms of
business objectives…..
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A company’s basic financial objective is to
grow its earnings quickly and sustainably,
in order to raise its stock price and have
the ability to pay its owners dividends
Products are successful if and only if they
attain their targeted contribution to
corporate earnings
The Income Statement
Revenues
- Cost of Goods Sold (COGS)
= Gross Margin (gross profit)
- M&S expense
- R&D expense
- G&A expense
= Operating income (EBIT)
- Interest
- Taxes
= Net income (earnings)
Key Financial Concepts
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Operations vs. total (e.g., OI vs. NI)
Normalizing results: return measures (e.g., OI as
% of revenue; operating return on assets)
Knowing what “good” results are: competitive
(industry) analogs and/or general benchmarks
Recognizing cash vs. non-cash
- Measures (e.g., OI vs. NOCF)
- Capital goods: depreciation/amortization
- Working capital: inventory, accounts rec’bl.
Method: How to analyze an
Income Statement
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(First, compute “the percentages”)
Operating income vs. net income comparison
In-period operating performance: costs and
expenses as a % of revenue; compare to
benchmarks
Cross-period performance (trends): relative
change in rev, costs, expenses, earnings…
improvements vs. deteriorations, and why
Going-forward opportunities and challenges/
risks for each line item
“Good” Operating Returns
in the Business Market
Sold direct
Higher GM %
Higher R&D %
Sold
indirect
Software
27%
23%
Hardware
18%
12%
Service
15%
-
Lower GM %
Lower M&S %
“Good” Operating Returns
in the Consumer Market
Sold direct
Higher GM %
Higher R&D %
Sold indirect
Software
20%
16%
Hardware
11%
7%
Service
9%
Lower GM %
Lower M&S %
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Business/Product Plan Learnings
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Content/scope of a business/product plan
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Critical aspects of a “winning” plan
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Differentiation: importance, definition,
identification
Start-ups: success factors, funding requirements,
success profiles
Business Plan: Key Contents
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Company: people, skills, resources
Product: “whole” product & its benefits
Market: attractiveness & target customers
Competition: differentiation !!
Sales and marketing plan: channels
Operations plan: mfg, logistics, service
Financials: investor liquidity
Markets/Customers
Key Learnings
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Market attractiveness: the five forces
model
The concept of target customers, and how
to describe them
Target customer selection method/process
Market Attractiveness:
Porter’s “Five Forces” Model
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Threat from substitute
products
Ease of market entry and exit
Bargaining power of buyers
Bargaining power of suppliers
Degree of competitive rivalry
Four Ways of
Describing Target Customers
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Name: customer (individual or group
names), industry or occupation,
affiliations,…
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Demographics: revenues/income, size of
firm/size of family, location, …
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Psychographics: cost-conscious, prestige
oriented, early adopter, risk adverse, …
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Needs……throughout the buying/using
experience (remember the whole product!)
Target Customer
Selection Method
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Assess financial situation
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Determine financial capability to address new
segments
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Identify differentiation from competitors
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Assess customer segments’ needs and their fit
to current and potential differentiation
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Rank the customer segments according to the
profit potential in serving them
Competition Key Learnings
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Competitive advantage, and its
relationship to differentiation
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Performing a competitive analysis
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Making business decisions based on
competitive analysis results
How the concepts relate…...
Competitive
Advantage(s)
Differentiators
Success
(earnings)
Definitions
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Differentiator = a dimension of the “whole
product” that is unique or best compared to
competitive offerings (whole product
differentiation; as measured by the value
assessed by the targeted end-customers)
Competitive advantage = a capability,
competency, process, skill or position of a
company that enables creation of one or more
differentiators
Identifying Competitive Options
Products
Current
products
Current
Position
Current
target
customers
Customers
Competitive Options
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Protect & defend current customer/product
segment
Increase market share in current segment
Selectively extend (whole) product offerings
to current target customers
Selectively extend target customer set
- current products
- new products
Become a broad-line supplier
Making Product Decisions
Financial
Analysis
(health,
challenges)
Market Analysis
(customers, needs,
market trends)
Competitive
Analysis
(strengths,
weaknesses)
Objectives and Constraints (mkt, finc’l)
“decision
criteria”
Competitive Adv Decision (SCA)
Target Customer Decision (C)
Product Decisions
(4P’s)
Decision Criteria are
desired outcomes for……
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Revenues
Market share
Gross margins or cost position
Expenses (by category)
Operating income (or cash)
Timeframes for these outcomes
Level of risk tolerance
Making Product
Decisions
Using the things we’ve learned so
far to make decisions about product
definition and product priorities……
this is also the core topic for the
mid-term exam
What are we “pulling together”?
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Financial: income statement analysis,
financial objectives and constraints, growth
opportunities & challenges; decision
criteria
Market: market attractiveness (5 forces),
target customer selection, value/needs
analysis
Competitive: competitive analysis,
strengths/weaknesses, competitive
advantage, differentiation
Product decisions: whole product
concept, opportunity assessment,
objectives and priorities
Making Product Decisions
Financial
Analysis
(health,
challenges)
Market Analysis
(customers, needs,
market trends)
Competitive
Analysis
(strengths,
weaknesses)
Objectives and Constraints (mkt, finc’l)
Competitive Adv Decision (SCA)
Target Customer Decision (C)
Product Decisions
(4P’s)
1 - Financial Analysis:
“what to look for on the
income statement”
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Operating income vs. net income
In-period operating performance: costs
and expenses as a % of revenue
Cross-period performance (trends):
relative change in rev, costs, earnings
……. improvements vs. deteriorations,
and why
Going-forward: opportunities and
challenges for each item; constraints
2 - Market Analysis
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Market attractiveness --- size?
growth? profitability? “five forces”?
Customer segments? possible
targets?
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Customer needs, especially unmet?
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Market trends?
3 - Competitive Analysis
Dimensions
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Products offered
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Target customers
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Competitive positioning
(incl. price & cost)
Financial performance
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Marketing & sales
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R&D: key competencies
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Customer service
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Culture & human
resource management
Operations:
manufacturing &
logistics
Other relevant
dimensions: e.g.
information technology
in Airborne Express case
4 - Objectives (Decision Criteria)
and Constraints
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Market objectives?
(market share, revenue growth, …)
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Financial objectives?
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Financial constraints?
5 - Competitive Advantage Decision
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Current product differentiators?
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Competitor strengths/weaknesses?
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Current competitive advantage(s)?
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Possibilities for enhanced advantage?
6 - Target Market Selection:
“process used for DLJdirect”
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Financial situation
Capability to address new segments
Differentiators (and competitive
advantages)
(Unmet) Needs of each segment
Fit to current and potential
differentiators
Profit potential of each segment
Choose target customer segments
7 - Product Decisions:
the rest of the “marketing mix”
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Product
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Price
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Promotion
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Place
7a - Key Concepts to Remember
for product decisions
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Definition of success: earnings
The business equation: (value-price)…etc
Customer segmentation possibilities
Identifying needs: 5 techniques
Importance of differentiation
Whole product: opportunities for diff’n
Competitive advantage: the source of
differentiators
Opportunity assessment aperture
Being clear on objectives and priorities
Course Concepts (13)
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Definition of
product success
Whole product
Product plan: key
success factors
Differentiation
Market
attractiveness
Target customers
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Competitive
advantage
Marketing mix
(C+4P)
Product positioning
Sales functions
Channel options
Channel valueadded
Operations balance
Course Methods/Tools (13)
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Income statement
analysis
Financial
benchmarks
Target customer
description
Target customer
selection
5 Forces analysis
Competitive
analysis (10
dimensions)
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Identifying
competitive options
Decision criteria
Product decisions
Product
competitive
positioning
Channel economics
Process dimensions
Product
development best
practices
Techsonic: case summary
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Private company in 1989
Market leader in depth sounders/fish
finders under the Humminbird brand
Growing and profitable until…..
Recent industry-wide downturn in new
boat sales
Three new products at various stages of
development:
next-gen depth sounder (901),
VHF marine radio, and
navigation product (“GPS”)
Which one(s) to pursue…..?
Homework Questions - 1
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Calculate Techsonic’s absolute and relative
operating income for 1987, 1988, and 1989; are
these operating results “good”? Why did
operating income fall between 1988 and 1989?
Identify both financial and market reasons.
What are the decision criteria Techsonic should
use in making decisions at this point? (I.e., what
are the outcomes a “good” decision would achieve?)
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Perform a 5 forces analysis of the U.S. market for
depthsounders/fishfinders
Homework Questions - 2
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What are Techsonic’s competitive advantages?
What are the 901’s differentiators? What are the
potential differentiators of the navigation
product?
Who are Techsonic’s current target customers
(provide at least eight descriptors) ?
Separately, identify the positives-and-negatives
of focusing primarily on: (1) 901, (2) VHF marine
radio, (3) GPS-based navigation product.
Process for Midterm
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Case is available in casebook
Analyze the case (individually and/or in groups) over
the next week
During exam, several questions will be posed and
you will write your answers (individually, on paper)
Exam is “open book” -- you may bring any
information resources you wish to; no electronic
devices or communication during exam
<2 hrs for exam; 30 min to discuss answers
( this will be the only exam review )
Typical Grade Distribution
individual semesters vary considerably
D/F
C
B
A
homework
0+
10%
10%
80+%
class participation
0+
30%
45%
25%
mid-term exam
out of 26 students
5%
1
35%
9
40%
11
20%
5
final exam
0+
25%
50%
25%
course grade
0+
15%
60%
25%
out of 36 students
0+
5
22
9
Case for Mid-term exam
Re-THINK-ing THINK:
The Electric Car Company
THINK Case Summary
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Case timeframe: 2010
Norway-based company; turbulent history
“Re-started” in 2008
1,700 cars sold, mostly in Europe
Planning to sell and manufacture in the US
Considering targeting fleets and consumers
Profits highly sensitive to volume and price
Exam Questions will derive
from course topics to date…..
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Financial analysis, opportunities, challenges
Identifying decision criteria (objectives)
Market assessment/attractiveness
Target markets and target customers
Customer needs and product benefits
Differentiation: whole product and company
Competitive analysis
Competitive advantage
Making product decisions
Course Concepts (13)
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Definition of
product success
Whole product
Product plan: key
success factors
Differentiation
Market
attractiveness
Target customers
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Competitive
advantage
Marketing mix
(C+4P)
Product positioning
Sales functions
Channel options
Channel valueadded
Operations balance
Course Methods/Tools (13)
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Income statement
analysis
Financial
benchmarks
Target customer
description
Target customer
selection
5 Forces analysis
Competitive
analysis (10
dimensions)
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Identifying
competitive options
Decision criteria
Product decisions
Product
competitive
positioning
Channel economics
Process dimensions
Product
development best
practices