QuickStrategy

Market Inertia Leads to #1 Position

2005-11-25T15:10:45-07:00

Headlines in the Los Angeles Times and Detroit Free press tell the story. The Japanese automaker may claim the world title from GM next year. Detroit workers have much to worry about as three of Detroit’s biggest auto makers announced nearly 60,000 job cuts in the past week with more to follow. One article says:

“As GM tries to win customers with deep discounts, Toyota is raising prices on some models”.

Clearly U.S. automakers have lost the market inertia they had survived on over the last few decades.

Thirty years ago, my father only bought Plymouths, my grandfather only bought Fords. Today I have friends that rave about their third Toyota purchase or second Lexus purchase and rave about product quality and reliability. Another business associate has had chronic problems with his recently purchased GM truck. The market inertia has shifted to the foreign producers of high quality products and it won’t change soon. The 10 best vehicles according to the latest Consumer Reports analysis are all made by foreign manufacturers with Toyota and Honda leading the pack.

Toyota has the market inertia to lead them to the number one spot and GM will crumble as long as U.S. consumers expect their products to be inferior to Toyota. Like the effect of inertia on turning a big ship, it will take a lot of time and effort to change GM’s direction in the mind of consumers (market inertia) that is leading them away from the #1 spot in the auto market.

Innovation in New Markets

2005-11-23T14:15:36-07:00

In yesterday's post I described how innovation must be managed to get the right balance between customer satisfaction and the cost of operating complexity based on a recent HBR article by Mark Gottfredson and Keith Aspinall. One off the most difficult places to control the rate of innovation is in new markets where customer satisfaction is often a continuously changing variable.

How have cell phones evolved to meet changing customer needs over the last 5 years? From early analog technology that carried only voice transmissions to today’s digital cell phones that provide instant digital messaging and e-mail services along with digital camera features. Could Motorola have limited innovation and survived in the changing cell phone market?

How have liquid crystal display (LCD) televisions evolved to meet changing customer needs over the last 5 years. From small screens with limited resolution and viewing angle to today’s 50 inch high resolution HDTV units. Could Sony not offer the wide range of features available in today’s LCDTV market and still survive?

You could say that these are unique situations where changing technology has driven changes to customer expectations, but not expanding product lines to include new industry wide innovation could leave any competitor on the side lines in these new and evolving markets. Not innovating in markets with evolving technology can lead to higher profits in the short run; we call this “harvesting” the business. Not an option for the market leaders.

However, now that these markets have matured a little, you could claim there is real opportunity to reduce product line complexity and improve margins. I for one don’t think you need a camera in most cell phones. In a recent study of Philips LCDTV’s, I found more product models than the average viewer could ever discriminate between in satisfying their purchase objectives. After a new market has matured there is real opportunity to improve margins and sales by limiting product offerings to a targeted set of customer needs, but in new markets it is a perilous strategy.

Win by Reducing Product Complexity?

2005-11-22T15:16:11-07:00

Mark Gottfredson and Keith Aspinall wrote a great article in the latest issue of Harvard Business Review on balancing product complexity with customer satisfaction. Their point is that “pursuit of innovation can be taken too far” offering customers so many product options that the cost of production complexity outstrips the benefit of incremental sales. Getting the right “balance” between innovation and profitability is the objective of their analytical process.

They suggest that achieving this balance starts at the source, ‘the way your company views customers and their needs”. I would suggest it also is important to consider how your business is positioned relative to those customer needs and your competitors in the market you serve. For example:

The company positioned as the low price competitor can and should focus on every opportunity to reduce cost in order to maintain price leadership. If that means limiting product options (and manufacturing complexity) it is consistent with their market position.
The company that occupies the position of the market leader can and should reduce product line complexity by eliminating those product options outside those that meet the basic needs of its customers and understand they will leave open a market position to those higher priced competitors satisfying unique customer requirements with custom or semi-custom products
The company that is positioned as the performance competitor often caters to unique customer needs and offers greater complexity in its product offerings as the basis for its competitive success. It must to realize that it cannot compete on price as its costs are higher than most rivals.

Ford, with its Model T, positioned itself as the low price leader in the market and offering only one product. General Motors found it could offer more options (adding complexity) and compete with Ford to win the greatest market share. The first step in addressing the balance between product complexity and satisfying customer needs is to understand where you are positioned in the market battlefield. Reducing product complexity may work for the successful low price competitor or market leader but may not work for the performance competitor. Successful business strategy must be tailored to your market position, what works for K-Mart does not necessarily work for Nordstrom.

Market Inertia Kills New Products

2005-11-18T15:52:16-07:00

A small publicly traded company, Cell Robotics International, has developed a laser device to replace the steel lancet diabetics must use to take blood samples several times a day. Their product has been through clinical testing, has been featured in several publications for diabetic patients and touted as a safer and less painful way to take blood samples than the market alternative steel lancet.

Although the company has had over $35 million of investment in this and other product lines and good media coverage, they reported a little over $20,000 in sales for the first quarter of this year. Why isn’t the market rushing to embrace this new safer and less painful alternative product? We call this market inertia.

Market Inertia: Consumers tend to do what they have been doing unless acted upon by an overwhelming external force. All of us that have introduced revolutionary new products face the same dilemma. The customers refuse to change to our better market alternative product.

In the case of Cell Robotics International there are several possible reasons for this market inertia:

Does the diabetic patient want to deal with the allegedly safer and less painful product that is not covered by their health insurance benefits?
Does the diabetic patient change any part of their test procedure without a doctor recommending it?
Can a doctor recommend any new procedure if it costs more and does not offer a significant reduction in risk to their patient’s health?

I look at lots of "neat new ideas" every year and fall in love with new technology faster than most. My first question before investing in a new technology-based product is whether it is significantly advantaged enough to overcome the market inertia of the existing products.

Kodak Listens to Customers in Transition

2005-11-17T22:05:55-07:00

The Eastman Kodak Company founded by George Eastman in Rochester NY in 1888 became the undisputed leader in silver halide film photography; his motto: “You press the button, we do the rest”. With the introduction of low cost digital cameras in 1995 it looked like the end of film photography and some said the demise of Kodak.

If you look closely at Kodak today you will find that more than half of their 3rd quarter 2005 revenue came from digital products not from silver halide photography. The management recently described how they have segmented their business into four major market areas and will reorganize the company around these businesses ending many years of centralized structure around a traditional business.

Each of these businesses will be managed to build market share in the growth areas and harvest cash from those older segments where no growth opportunity exists. Although they lost over $1 billion in the third quarter of 2005 they are on there way out of a massive restructuring effort and winning market share in the process. They have been the market leader in digital cameras for the last four quarters; a feat most would have said was impossible only three years ago as they began their assault against electronic giants like Sony and Cannon.

They did this by listening to customers and addressing their need to “Take, keep and share pictures”. They addressed all aspects of the customer value chain from providing the highest quality (resolution) cameras, to offering on-line storage, to printing the highest quality images while their competitors focused on making cameras.

Don’t count Kodak out. They know what their customers want, and they are focused on dominating the digital photography world in the same way they dominated the film photography world.