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‘Bring in the voice of the customer’,

‘understand what your customer wants’

are now common sense. How though to

find out what your customer wants when

there is no customer yet, which is the

case in highly entrepreneurial and

innovative cases?

Marketing

Innovation The Innovation Challenge

Michael Ehret

Kostas Galanakis

Table of Contents

Table of Figures _____________________________ iv

Table of Tables ______________________________ vi

Summary __________________________________ 2

1 Introduction: Marketing-Innovation Challenge __ 3

1.1 Marketing and Innovation ______________________________________________ 4

1.2 Module Objectives ____________________________________________________ 6

2 Marketing – Creating and Capturing Customer

Perceived Value _____________________________ 7

2.1 Market-based strategy: Using Marketing in the strategy process _____________ 13

2.2 Marketing Strategy and the Marketing Mix ______________________________ 18

2.2.1 Marketing analysis _________________________________________________________ 19

2.2.2 Marketing Planning ________________________________________________________ 20

2.2.3 Marketing Implementation __________________________________________________ 22

2.2.4 Marketing Control _________________________________________________________ 31

2.3 Marketing Instruments _______________________________________________ 32

2.3.1 Product – Customer Solution _________________________________________________ 35

2.3.2 Price – Customer Cost ______________________________________________________ 40

2.3.3 Place – Customer Convenience _______________________________________________ 42

2.3.4 Promotion – Customer Communication ________________________________________ 44

2.4 The Marketing Plan __________________________________________________ 46

3 Innovation-Marketing Challenge ____________ 49

3.1 Disruptive innovation and marketing’s innovation failure ___________________ 50

3.2 The Marketing Process and Innovation – Insights from Entrepreneurship Theory

___________________________________________________________________ 56

3.3 The rise of business models as a response to the innovation challenge _________ 58

CREATIVE TRAINER module: „Innovation Marketing“

ii

3.4 Marketing and business models _________________________________________ 69

4 Marketing in the Entrepreneurship Process ____ 72

4.1 Transforming Business Models to Marketing Strategy _____________________ 75

4.1.1 Defining the Value Proposition (Product Policy in an innovative environment)__________ 75

4.1.2 Designing and quantifying revenue generation mechanisms _________________________ 80

4.1.3 Design of the Resource base and Value network __________________________________ 83

4.2 Marketing in the Exploration Phase _____________________________________ 85

4.3 Marketing in the Exploitation Phase_____________________________________ 87

5 Marketing Innovation Plan ________________ 92

Source directory ____________________________ 94

Internet links _____________________________ 102

Appendix A. Mini E ________________________ 103

i. History ______________________________________________________________ 104

ii. Specifications _________________________________________________________ 104

Powertrain ____________________________________________________________________ 104

Charging ______________________________________________________________________ 105

Performance ___________________________________________________________________ 105

Production ____________________________________________________________________ 105

iii. Field trial program ____________________________________________________ 106

U.S. program __________________________________________________________________ 106

European program _____________________________________________________________ 107

iv. Field test experience ___________________________________________________ 108

v. UC Davis study _______________________________________________________ 109

Range record __________________________________________________________________ 110

vi. Alternative electric Mini ________________________________________________ 111

References ________________________________________________________________ 112


iii

Appendix B. What is it like to live with an electric car?

_____________________________ 115

Bibliography ______________________________ 119


iv

Table of Figures

Figure 1. The marketing process ................................................................................................................. 8

Figure 2. The Maslow’s pyramids of needs ................................................................................................. 9

Figure 3. The marketing strategy process .................................................................................................. 11

Figure 4. SWOT an example ...................................................................................................................... 12

Figure 5. Strategy as an outcome of planning ........................................................................................... 13

Figure 6. The corporate strategy process .................................................................................................. 14

Figure 7. The BCG Growth-Share Matrix ................................................................................................... 16

Figure 8. The Ansoff Matrix ....................................................................................................................... 18

Figure 9. The Market Mix based on 4Ps concept ....................................................................................... 21

Figure 10. The Market Mix based on 4Cs concept ..................................................................................... 22

Figure 11. Functional specialisation vs. customer orientation ................................................................... 23

Figure 12. Criteria for customer orientation .............................................................................................. 24

Figure 13. The construct of market orientation ......................................................................................... 24

Figure 14. Types of Team Organisation. .................................................................................................... 26

Figure 15. Dimensions of Communication Between Upstream and Downstream Groups. ........................ 29

Figure 16. Activities under Cross-Functional Integration. .......................................................................... 30

Figure 17. The marketing control process ................................................................................................. 31

Figure 18. Product Strategy and Marketing-Mix ....................................................................................... 37

Figure 19. The Brand Prism ....................................................................................................................... 39

Figure 20. Pricing approaches ................................................................................................................... 41

Figure 21. Pricing decisions ....................................................................................................................... 41

Figure 22. Multichannel distribution system ............................................................................................. 43

Figure 23. Communication process ........................................................................................................... 45

Figure 24. The Laswell communication formula ........................................................................................ 46

Figure 25. Mobile phone market share and profit distribution over time ................................................. 53

Figure 26. Disruptive vs. Sustaining innovations ....................................................................................... 54

Figure 27. Market pro-activeness and reactiveness .................................................................................. 55

Figure 28. The value of the firm during the innovation process ................................................................ 57

Figure 29. Development Funnel Model ..................................................................................................... 59

Figure 30. Innovation based competition and the rise of open innovation models ................................... 62

Figure 31. Open Innovation Process .......................................................................................................... 63

Figure 32. Implementing adaptive marketing capabilities ......................................................................... 70

Figure 33. Marketing in an open network ................................................................................................. 72

Figure 34. Marketing Roles in the innovation process ............................................................................... 73

Figure 35. Elements of a Value Proposition ............................................................................................... 77

Figure 36. Business model and risk sharing ............................................................................................... 81


v

Figure 37. User Base community: the case of Nike sneakers ..................................................................... 87

Figure 38. Purpose Brands vs. Endorser Brands ........................................................................................ 88

Figure 39. Adopter Categories within the Diffusion Process ...................................................................... 89


vi

Table of Tables

Table 1. SWOT: suggestions of what to look for ........................................................................................ 11

Table 2. Team Structures .......................................................................................................................... 25

Table 3. Types of Organisational Structure ............................................................................................... 27

Table 4. Marketing objectives and control indicators (Examples) ............................................................. 32

Table 5. Marketing Instruments vs. Customer Perception......................................................................... 33

Table 6. Actions to be taken in order to Accelerate the NPDD Process ..................................................... 36

Table 7. Key intermediaries or channel members ..................................................................................... 43

Table 8. Contents of a Marketing Plan ...................................................................................................... 48

Table 9. Differences of Sustaining and Disruptive Innovations .................................................................. 55

Table 10. Sources of Information for new Ideas ........................................................................................ 60

Table 11. Sources of Opportunities for new Ideas ..................................................................................... 60

Table 12. Business model vs. product market strategy ............................................................................. 69


2

Summary

Firms should identify the role of marketing and its distinctive tasks in the

different stages of the innovation process:

• Marketing in the exploration phase: The exploration phase is

concerned with new opportunities. Here marketing is concerned with

un-addressed needs of users, user-based value of an innovation as well

as perception of an innovation. A potential challenge of established

companies is that relevant users of an innovation are not necessarily its

present customers. A challenge of customer valuation and prioritization

is to identify customers or users with potential future value.

• Formulation of business models: The formulation of a business

model is a vital step to make an innovation strategy operational. A

business model aims to direct the introduction and capitalization of a

value proposition. Thus a business model comprises: the formulation of

a value proposition; the revenue-generation mechanism that a company

intends to apply; and, the definition of the relevant resources and the

value network needed for the realization.

• The exploitation phase: Here the role of marketing is focused on

generating the revenue stream. Communicating with prospective

customers, orchestrating the value network, i.e. the distribution

channel.

From this perspective it becomes clear, why incumbents tend to struggle with

disruptive innovations. While almost every company is involved in some sort of

innovation process, incumbents are primarily focusing on the exploitation

phase of that process. They relate to their most profitable customers and cater

to their highest valued needs. When the most promising future business ideas

emerge in domains that are distant from the present customer base of

company, customer-centric approaches are likely to disconnect the company

from future markets. Therefore, the exploration phase can rely only partly on

existing market information. Thus, this phase is dominated by the search of

new dimensions of ‘Value-in-Use’ that are currently not served by the current

market supply.


3

1 Introduction: Marketing-Innovation Challenge

“The management process responsible for

identifying, anticipating and satisfying

customer requirements profitably”

Institute of Marketing

“Marketing is concerned with all the

exhilarating big things and all the

troublesome little things that must be done in

every nook and cranny of the creative

organisation in order to achieve the corporate

purpose of attracting and holding clients”

Theodore Levitt

Innovation is a risky process by definition. Presumably 2% of all product ideas

make it to the market. Many blame over-engineering approaches, where

product designers develop brilliant technologies that prove irrelevant or too

expensive for the final customer. Thus, researchers and managers call for

innovative approaches that convert to better market performance. An

imminent reaction is to consult marketing as the discipline that has made

market performance its main task. However, Steve Jobs, CEO of Apple,

currently the most valuable technology company, one of greatest marketing

talents, states: “We don’t do market research”.

Studies of disruptive innovation provide a mixed testimonial on the

performance of marketing in innovative environment. Christensen (1997)

identifies what he calls “the tyranny of the served market”, that ties marketers

to yesterday’s products for today’s customers rather than breakthrough

innovations that stay at the heart of new markets and industries. This tyranny

is especially tricky for established successful firms. Their very success holds

them back to commercialise even their most brilliant ideas, simply because

their current customers do not value their innovations. That opens up

opportunities for start-up companies operating from small, neglected niches

that provide high potential for growth. Quite frequently, these disruptors are

able to outpace incumbents and even break into their core segments.


4

So is there no role for marketing in innovation processes? Not for some

standard textbook versions of marketing. For most of its history, marketing

has been a function within large dominant incumbent firms. However, early on

pioneering marketers like Theodore Levitt realised that sustainable marketing

is concerned with potential rather than existing products. The marketing

discipline is undertaking significant innovations, in its values, approaches,

methods and technologies.

1.1 Marketing and Innovation

The fate of a business organisation operating in a market environment is ruled

by its customers. If customers value the goods and services more than the

costs for their creation, the business thrives, otherwise it needs external

support or goes bust. This led Peter Drucker to the conclusion: “Because the

purpose of business is to create a customer, the business enterprise has two

and only two basic functions: marketing and innovation” (Drucker, 1973).

By intuition, we would expect businesses that excel in marketing to thrive at

innovation. However, management research has shown that this is not

necessarily the case. The tyranny of the served market (Christensen, 1997;

Christensen and Bower, 1996) demonstrates that: market leaders can face a

systematic handicap on markets, while outsiders can innovate simply because

they can ignore established market standards.

How can we explain this counterintuitive phenomenon?

Let us first take a close look at the role of marketing and innovation in

business life. According to the American Marketing Association, “Marketing is

the activity, set of institutions, and processes for creating, communicating,

delivering, and exchanging offerings that have value for customers, clients,

partners, and society at large” (AMA 2007). Core activities of marketing are

market research and customer relationship management, identifying valuable

market offerings, developing a market-strategy and designing policies for

creating, delivering and communicating the value. Within the business,

marketing is responsible for sales and thereby is in charge for the top-line of

the earnings report of a business (Kotler, 2012).


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Innovation on the other hand is according to Schumpeter “The introduction of

new goods […], new methods of production […], the opening of new markets

[…], the conquest of new sources of supply […] and the carrying out of a new

organisation of any industry” (Schumpeter, 1934).

Ultimately, only new products and services that generate customer value

thrive. By the same token, marketing needs to engage in innovation,

especially in a competitive environment where companies are eager to lure

customers by offering better value or lower costs.

In practice, marketing and innovation do face conflicting goals. For example

one potential contribution of marketing in the product development process, is

to provide market research in order to identify the market value of an

innovation. “We don’t do market research”, claims Steve Jobs, CEO of Apple

and arguable one of the best performing innovators (Morris and Levinstein,

2008). Henry Ford is famous for claiming “If I had asked my customers I

would have produced a horse carriage”.

Marketing activities seem to be quite well performing in producing intelligence

of present demand, but face hard times in estimating future demand. The

marketing researcher Sunil Gupta did an experiment and compared the

valuation of the Internet Auction house, ebay, in its infancy by customer

relationship managers using customer lifetime value (Gupta and Lehmann,

2004; Gupta and Mina, 2008). The marketing managers underestimated the

financial value of ebay systematically, collectively they arrived at one tenth of

the actual market valuation. Gupta’s analysis revealed that the marketers

systematically ignored new types of customers, for example ebay users that

started to buy on ebay, which soon started to act as sellers, thus generating

growth of commissions for ebay.

This should strike alarm clocks with businesses, as increased competition

forces them to innovate continuously almost as a routine. This leads George

Day, one of the leading researchers on marketing strategy to the conclusion

that marketing needs new skillsets and competencies in order to thrive in a

climate shaped by innovation competition (Day, 2011).


6

1.2 Module Objectives

In this module we are going to take a closer look at the marketing innovation

challenge. You will get an understanding of the role of marketing within the

innovation process and its implications for the selection and development of

marketing approaches, methods and techniques. You should understand the

inherent logic of disruptive innovations and its implications for innovation

strategies and their support through marketing. At the end of the module you

should be able to gather market intelligence, identify value propositions, direct

effective communication policies in the environment of incremental and

disruptive innovation. You should become sensitive towards potential pitfalls of

disruptive innovation.

Specifically the objectives of the module are to:

• Understand the fundamentals of marketing, including marketing

concepts, marketing system, marketing research, consumer behaviour,

customer requirements etc, in the new innovation based competition

environment;

• Understand the interplay of the marketing mix variables;

• Appreciate how innovation and information technology can enhance

marketing;

• Apply the marketing concepts to develop strategic marketing plans for

innovative business operations.


7

2 Marketing – Creating and Capturing Customer

Perceived Value

Marketing is all around us. In economies ruled by markets, companies need to

engage with customers, identify their needs and transform them into valuable

as well as profitable offerings. Whether you wake up by clockwork radios, read

your morning newspaper, search the internet or commute to work you are

permanently running into companies that send out marketing messages,

gather data or engage in relationships with you.

In market societies, customers have the final say over the top-line of the

income-statement of a company, the sales and revenue. If they value the

results of a company higher than its costs, the company earns a profit.

Marketing has evolved from the aim of a systematic approach towards the

management of the activities that lean towards the market side and convert

what customers perceive as value.

Hence Kotler and Armstrong define marketing “as the process by which

companies create value for its customers and build strong customer

relationships in order to capture value from customers in return” (Kotler and

Armstrong, 2004, p.5).

A first insight is that customer value is not trivial: “Telling and selling” (Kotler

and Armstrong, 2004, p. 5), are important elements of marketing activities,

but run on empty if customers feel not addressed. More and more, customers

are trying to fence themselves against pointless, irrelevant marketing

messages. “Sorry PR people, you’re blocked”, blogged Chris Anderson, editor

of the Wired magazine and started a rant among masses of like-minded

people who feel overwhelmed by inappropriate and unwanted emails

(Anderson, 2007). In the inferno of voices calling for customer attention, will

be heard only those that provide valuable offerings and messages to their

customers.


8

Capture

value from

customers

to create

profits and

customer

equity

Figure 1. The marketing process Source: Kotler and Armstrong (2004), p. 5

Core elements of the marketing process are (Figure 1):

• Understanding the marketplace and customer needs and wants. The

basis of any marketing activity is an understanding of market reality, by

gathering data and information, conducing market research, and

systematic management of customer relationships. At the core of the

marketing concept are basic human needs (Figure 2) that exist without

the interference of marketers, like physical needs for food and energy,

social needs for participation and community or individual needs like

self-fulfilment and expression. These needs are transformed into

wants, as culture, customs and habits take form. For example the need

for nutrition can give rise to the wants of hamburgers, seaweed or

octopus in different cultures. As soon as customers use their purchasing

power to satisfy their wants, these wants become effectively market

demand (Kotler and Armstrong, p.6)

Understanding

Customers

Designing

customer

driven

strategies

Construct a

marketing

Program

that derives

value

Build profitable

relationships

and build

customer

satisfaction


9

Figure 2. The Maslow’s pyramids of needs

• Design a customer-driven marketing strategy. At the core of marketing

strategy is the definition of the relevant market for the firms offerings,

describing what customers and specific needs a company aims to

address. This entails the choice of a value proposition that relates to a

unique position of the company in the market place. Furthermore, the

company should define the type or the mix of marketing orientation of

their strategy. The production oriented strategies assume, that a

company excels with superior manufacturing or logistics capabilities.

The product oriented strategies assume that differentiated products are

crucial for a strong market position. The selling approaches embrace

that customer perception is the crucial condition for market

performance. The marketing oriented strategies prioritise on the

understanding of needs and wants of customers as the basis for

formulating marketing programs. Finally the societal marketing ones

aim at addressing long-term welfare, like sustainable living conditions,


10

improving social relationships and strengthen ethnic standards in

working and living conditions (Kotler and Armstrong, 2004).

• Construct a marketing program (action-plan) that delivers superior

value. Crucial elements are: the core offering (product), the price, the

distribution policy and communication.

• Build profitable relationships and create superior customer satisfaction.

From a long-term perspective a company relies on valuable and

profitable customer relationships. Building blocks are the customer

perceived value, customer satisfaction and loyalty towards the

company.

• Capture value from customers to create profits and customer equity.

Keeping customers can be more efficient than wining new ones. This

leads companies to manage the customer ‘lifetime value’, which is the

expected discounted cash flow generated with each customer over his

or her lifetime. The ‘lifetime value’ of a customer can be increased by

rising the share of a company in the customer’s purse, for example by

synergies, cross- or upselling. Ultimately the firm tries to maximise

customer equity, that is the lifetime value related to the entire customer

base.

To conclude, marketing is a systematic process for navigating the company

through the modern market environment (Figure 3).


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Figure 3. The marketing strategy process

The marketing strategy is an outcome of planning. It requires Internal and

External analysis (Figure 5). Often the first step is to generate a SWOT

analysis (strengths, weaknesses, opportunities, threats). A SWOT analysis is

an examination of an organisation’s strengths and weaknesses (an evaluation

of its resources) in relation to possible opportunities and threats (an

assessment of the environment). SWOT analysis represents an evaluation of

how well the resources of an organisation match the needs of the environment

in which the firm operates and competes. Some useful questions in order to

conduct a SWOT analysis are presented on Table 1.

Table 1. SWOT: suggestions of what to look for

Strengths & Weaknesses Opportunities & Threats • What advantages does your

company have? • What do you do better than

anyone else? • What unique or lowest-cost

resources do you have access to? • What do people in your market see

as your strengths? • What factors mean that you "get

the sale"? • What could you improve?

• Where are the good opportunities facing you?

• What are the interesting trends you are aware of?

• What obstacles do you face? • What is your competition doing

that you should be worried about? • Are the required specifications for

your job, products or services changing?

• Is changing technology threatening

Corporate Strategy

Core Strategy

Competitive Positioning

Implementation

Marketing Mix

Industry Analysis

Company Analysis

Market Target

Differential Advantage

Control Organisation


12

• What should you avoid? • What are people in your market

likely to see as weaknesses? • What factors lose you sales?

your position? • Adverse demographic changes? • Do you have bad debt or cash-flow

problems? • Could any of your weaknesses

seriously threaten your business? Useful opportunities can come from such things as:

• Changes in technology and markets on both a broad and narrow scale.

• Changes in government policy related to your field.

• Changes in social patterns, population profiles, lifestyle changes.

• Local events.

Figure 4. SWOT an example


13

Internal Analysis External Analysis Corporate goals and strategies: • Mission statement • Rate of Growth • Profit targets • Turn over • Image – Brand name

• Strategic plan Marketing Operations Finance R&D

Strengths & Weaknesses • Production capabilities

• Financial sources • Market share • Production lines • R&D capabilities • Customer base • Customer royalty • Management team • Human Resources • Distribution channels

• Quality • Sales and services

Market Analysis • Total size • Size of the main segments

• Growth rates • Position of the Competitors

• Customer needs/trends

• Market development/trend

• Cost transfer • Entry/Exit barriers • Available information for requirements & expectations

Analysis of the Environment • Economic factors • Technology factors

• Law Issues • Demographic issues

• Business models/trends

• Social trends • Availability of resources and supplies

• International factors

Figure 5. Strategy as an outcome of planning

2.1 Market-based strategy: Using Marketing in the strategy process

In a market economy, organisations need to justify their existence. If the

organisation provides levers for peoples’ actions they thrive, otherwise, they

vanish. In their research on crucial characteristics of outstanding

corporations, Anderson (2009) identified their ‘ideology’ as a core feature. An

ideology provides a company with a ‘true north’ for directing its actions. It is

also part of its personality as perceived in the marketplace and by

stakeholders of a society.

Marketing Strategies

• Market Selection • Segmentation and targeting • Product differentiation • Pricing approach • Promotional mix • Distributor selection and management • Logistics • Service level • Sales support • Product servicing


14

The secret of long-living companies is that they focus on clock-building rather

than time telling. In that analogy, working on great products and business

ideas is ‘time-telling’, while establishing values and a strong corporate culture

is ‘clock-building’. Examples for companies with strong ideologies are 3M with

its focus on innovation, Procter & Gamble with its emphasis on superior

consumer product quality or L.L. Bean with its paranoia for customer

satisfaction including a lifetime return policy. Strong values help a company to

survive hard times. In 2011 IBM is celebrating its 100 anniversary. But around

2002 it did not look like that. The company faced losses and had to make

almost 50% of its workforce redundant. But its core ideology of business

customer relationships helped IBM to stage one of the most remarkable

turnarounds of recent decades. One of its key-features was to bring in Lou

Gerstner, then CEO of IBM’s client RJL Nabisco and former CEO at American

Express. As IBM customer, Gerstner had understood the future potential for

outsourcing IT services and made this part of his outstanding turnaround

strategy. In its 100 anniversary IBM again enjoys outstanding profits and

growth and is among the worlds most admired companies.

Figure 6. The corporate strategy process

The mission statement is an expression of the core values a company aims to

stand for. A marketing based mission statement is broad enough to reflect

basic customer needs and focused enough to be meaningful and provide

guidance. For example “We sell shoes” would be a rather narrow vision for

Nike, whereas “We help people experience the emotion of competition,

Defining the

company mission

Setting company

objectives and goals

Designing the

business portfolio

Planning functional

strategies (e.g.

marketing, supply

chain)

Corporate Level

Business Unit, Product and market level


15

winning and crushing competitors” reflects rather basic needs of customers

(Kotler and Armstrong, 2004).

Missions remain empty phrases if they are not being put into action and

people are taking responsibilities. In that regard, setting objectives at all

management levels is crucial. While missions are focusing on basic values,

objectives define concrete targets that are measurable. Important elements of

market relating objectives are market share, sales, brand value or customer

satisfaction.

Additionally, mission and objectives should direct the way an organisation

allocates its resources. A strategy process (Figure 6) indicates the business

units, products or brands a corporation prioritises its investment. Strategic

management uses portfolio analysis to direct investments. Boston Consulting

Group developed a market based portfolio strategy, based on the relative

market share and growth rate. High growth-high market share products are

rising ‘stars’ of the company’s portfolio that should be nurtured with prioritised

investments. Low growth and high market share products are the ‘cash cows’.

They should be maintained, but with a prioritization of capitalizing profits. Low

growth. low market share products are ‘dogs’ that should be eliminated from

the portfolio. Low growth-high market share products are question marks, that

are presumably in the early and highly uncertain stage of their life-cycle, or

the late one that although still on growth may indicate a product or paradigm

change. These portfolios should be scrutinised with the aim to identify

potential for new opportunities, re-launch or emerging pressure to establish

exit strategies and eliminate.


16

Figure 7. The BCG Growth-Share Matrix

These groups are explained below (MindTools.com):

• Dogs: Low Market Share / Low Market Growth. In these areas,

your market presence is weak, so it's going to take a lot of hard work to

get noticed. You won't enjoy the scale economies of the larger players,

so it's going to be difficult to make a profit. And because market growth

is low, it's going to take a lot of hard work to improve the situation.

• Cash Cows: High Market Share / Low Market Growth. Here, you're

well-established, so it's easier to get attention and exploit new

opportunities. However it's only worth expending a certain amount of

effort, because the market isn't growing, and your opportunities are

limited.

• Stars: High Market Share / High Market Growth. Here you're well-

established, and growth is exciting! There should be some strong

opportunities here, and you should work hard to realize them.

• Question Marks (Problem Child): Low Market Share / High

Market Growth. These are the opportunities no one knows what to do

with. They aren't generating much revenue right now because you don't

have a large market share. But, they are in high growth markets so the

potential to make money is there.

Question Marks might become Stars and eventual Cash Cows, but they

could just as easily absorb effort with little return. These opportunities

need serious thought as to whether increased investment is warranted.


17

The aim of using the matrix is to determine what you will do with each

product/product line. There are typically four different strategies to apply:

• Build Market Share: Make further investments (for example, to maintain

Star status, or to turn a Question Mark into a Star).

• Hold: Maintain the status quo (do nothing).

• Harvest: Reduce the investment (enjoy positive cash flow and maximize

profits from a Star or a Cash Cow).

• Divest: For example, get rid of the Dogs, and use the capital you

receive to invest in Stars and Question Marks.

To portray alternative corporate growth strategies though, Igor Ansoff

presented a matrix that focused on the firm's present and potential products

and markets (customers). By considering ways to grow via existing products

and new products, and in existing markets and new markets, there are four

possible product-market combinations (Figure 8):

• Market Penetration - the firm seeks to achieve growth with existing

products in their current market segments, aiming to increase its

market share. This is the least risky since it leverages many of the

firm's existing resources and capabilities. In a growing market, simply

maintaining market share will result in growth, and there may exist

opportunities to increase market share if competitors reach capacity

limits. However, market penetration has limits, and once the market

approaches saturation another strategy must be pursued if the firm is to

continue to grow.

• Market Development - the firm seeks growth by targeting its existing

products to new market segments. This options include the pursuit of

additional market segments or geographical regions. The development

of new markets for the product may be a good strategy if the firm's

core competencies are related more to the specific product than to its

experience with a specific market segment. Because the firm is

expanding into a new market, a market development strategy typically

has more risk than a market penetration strategy.

• Product Development - the firms develops new products targeted to

its existing market segments. This strategy may be appropriate if the

firm's strengths are related to its specific customers rather than to the


18

specific product itself. In this situation, it can leverage its strengths by

developing a new product targeted to its existing customers. Similar to

the case of new market development, new product development carries

more risk than simply attempting to increase market share.

• Diversification - the firm grows by diversifying into new businesses by

developing new products for new markets. This is the most risky of the

four growth strategies since it requires both product and market

development and may be outside the core competencies of the firm. In

fact, this quadrant of the matrix has been referred to by some as the

‘suicide cell’. However, diversification may be a reasonable choice if the

high risk is compensated by the chance of a high rate of return. Other

advantages of diversification include the potential to gain a foothold in

an attractive industry and the education of overall business portfolio

risk.

Figure 8. The Ansoff Matrix

2.2 Marketing Strategy and the Marketing Mix

Marketing managers contribute to identifying the market conditions and

manage the marketing operations of the business. The marketing strategy


19

converts corporate strategy into action at the business unit and the functional

level. As a function, marketing is responsible for the top-line of the income-

statement – the sales generated with customers. The main responsibility is to

manage for profitable customer relationships.

The marketing management process consists of: marketing analysis;

marketing planning; marketing implementation; and, marketing control.

2.2.1 Marketing analysis

Key activities in the marketing analysis process are market segmentation,

target marketing and market positioning.

• Market segmentation: At the core of marketing strategies stands the

customer. In theory this would mean to focus on individual customers.

In reality this implies complexity and costs. In addition, costs affect

directly the potential of a company to offer competitive prices and

ultimately customer perceived value. As soon as groups of customers

show similar patterns of demand, marketing investments can be spread

and opportunities of scope can be reached. Therefore, the purpose of

market segmentation is: To identify groups of customers who respond

similarly to the company’s marketing program. The bigger a segment,

the more efficient a marketing budget can be applied. In general

marketing segmentation faces the trade-off to arrive at economic viable

segments vs. employing meaningful approaches of buyer segmentation.

• Target Marketing: Setting the market segments, marketers need to

think how to prioritize their marketing investments. Target marketing

implies prioritising on the most promising segments. In its extreme

form, target marketing addresses small niches within a huge market.

Germany’s ‘hidden champions’ have thrived by targeting extremely

specialized segments on a global level. These family businesses offer

highly specialised machines, industrial components or specialised

chemicals on a global scale at outstanding profits. Their focus on

business customers and their gained reputation helped them to quickly

recover from the economic crises and arrive at outstanding growth

figures.


20

• Market Positioning: The crucial force determining marketing reality is

the mind-set of the customer. Thus, any marketing strategy runs on

empty if it does not capture attention in the customers mind. However,

this is only effective as it is grounded on a differentiated market offering

that stands out in customers minds compared to those of the

competition. Thus, would be buyers of automobiles might want to

choose between ‘das Auto’ signifying German engineering culture of

Volkswagen, ‘a lifetime of fresh air with every purchase’ by Toyota’s

hybrid cars, or French design savvy by the ‘createur d’automobile’

(Citroen).

2.2.2 Marketing Planning

Marketing planning translates the marketing strategy into an actionable

program. Developing the marketing mix is the art and science to arrive at a

coherent set of marketing actions for the set of the four core parameters of

marketing called the “4Ps” – product, price, place and promotion (Figure 9).

Product is the core offering consisting of bundles of goods, services and rights

that provides the basis of the company’s value proposition. Price is the

decisive parameter for both, customer value as well as the share of value

captured by the company. Place refers to the delivery and distribution of

value, whereas promotion relates to communication and customer

perceptions. Customers though, value products as solutions; perceived price

as a cost; gained convenience from a well performing delivery system; and,

communication with meaningful and customer relevant promotion campaign

(Figure 10).


21

Figure 9. The Market Mix based on 4Ps concept Source: www.smartdraw.com


22

Figure 10. The Market Mix based on 4Cs concept Source: www.smartdraw.com

2.2.3 Marketing Implementation

All good strategy intentions run into nowhere without execution. Marketing

takes a two-fold role in implementation:

• As the value proposition is the result of the joint effort of the different

members of a company, marketing plays the role in orchestrating and

controlling all relevant activities in the company in line with customer

expectations, perceptions and needs. On the company-wide level

marketing has the task to ensure the market orientation of the company

(Kohli and Jaworski, 1995).


23

• In a more narrow sense, marketing implementation is concerned with

the organisation and control of the marketing function, like the structure

of the marketing unit, incentives for the marketing employees and the

support by external marketing services like market research

consultants, advertising agencies or franchising partners.

In firms with a manufacturing tradition, a core challenge derives from the

organising principle of functional specialisation that obstruct a market

orientation.

In functional specialisation, the firm aims to optimize an activity or operation

in order to reach economies of scale, ensure the adherence of standards and

maintain efficiency (Figure 11). While a functional specialised firm starts with

the definition of the output in order to optimise its activities, a customer

oriented firm aims to develop specifications from the perspective of customer

perception. From the moment that a firm aims to cater the needs of an

individual or diversified its offer according to an extended and differentiated

set of customers’ needs, functional orientation stands as a barrier.

Figure 11. Functional specialisation vs. customer orientation

The key task then of marketing is to create intelligence with regard to

customer requirements, disseminate this in the organisation and

Supply

Operations

Sales

Customer

Group 1

Customer

Group 2

Customer

Group 3

Organisation Principle of Functional Specialisation

Organisation Principle of Customer Integration


24

systematically track the company’s performance from the perspective of the

customer (Kohli and Jaworski, 1990, Figure 12 and Figure 13).

Figure 12. Criteria for customer orientation Source: Kohli and Jaworski, 1990

Figure 13. The construct of market orientation Source: Kohli and Jaworski, 1990

TOP MANAGEMENT

• Emphasis • Risk Aversion

ORGANISATIONAL SYSTEMS

• Formalisation • Centralisation • Departmentalisation • Reward Systems

INTERDEPARTMENTAL DYNAMICS

• Conflict • Connectedness

MARKET ORIENTATION

• Intelligence Generation • Intelligence

Dissemination • Responsiveness

EMPLOYEES

• Organisational Commitment

• Esprit de Corps

ENVIRONMENT

• Market Turbulence • Competitive

Intensity • Technological

Turbulence

BUSINESS PERFORMANCE


25

When a company is faced with a small set of powerful customers, it is advised

to adopt key-account-management. At the extreme, all employees are

organised within Autonomous Key-Account teams and take joint responsibility

on gathering intelligence of customer needs and the development and

implementation of customer driven programs (Figure 14).

These facts and the observation of how successful firms were organised

brought about the concept of ‘team organisation’ as early as the 1960s –

especially multi-functional teams – to create the right mix and increase the

performance of a entrepreneurial firm (see for example: Barczak and

Wilemon, 1989; Peters, 1988; Wheelwright and Clark, 1992; Clark and

Fujimoto, 1991; Galbraith, 1973).

Clark and Fujimoto (1991) identify the basic structure of four types of teams

used in the NPDD process (the authors summarises them in Table 2). Their

study took place in the automotive industry, but the basic idea applies to

industries in general (Figure 14).

Table 2. Team Structures

Team Structure Characteristics

Functional team structure

Functional organisation by disciplinary functions; Specialised function manager; Sequential mode of project running from one group to the other

Lightweight team structure

Functional organisation with one representative on a project co-ordinating committee; Lightweight project manager to co-ordinate the activities of different functions; No power to project manager on resources and people’s tasks

Heavyweight team structure

Usually senior managers or function managers act as project managers with direct access and control of resources and people; Dedication of the core people from each function to the project; Relocation of people around the heavyweight manager

Autonomous team structure

‘Tiger teams’; Dedicated people assigned from each function and co-located to complete the project; Heavyweight manager; Each team has its own rules, structure, project evaluation criteria and decision making responsibility


26

Figure 14. Types of Team Organisation. Source: Hayes et al., 1988 p320 (with modifications)

In many cases, companies implement combinations of customer centric or

functional specialised organisations. For example they can install key-account-

managers as equivalent to staff-organisation, who advices the otherwise

functionally specialised departments on customer-specific issues. Matrix-

DES ENG FIN MFG MKG

FM FM

Function Manager

(FM) FM FM

Working Level

1. Functional Structure

DES ENG FIN MFG MKG

FM FM FM FM

2. Lightweight Structure

FM

Project Manager

(PM)

PM’s Assistants

Area of Strong PM Influence

Liaison (L)

DES ENG FIN MFG MKG

FM FM FM FM

3. Heavyweight Structure

FM

PM

L L L L L

Con-cept

Market

DES ENG FIN MFG MKG

FM FM FM FM

4. Autonomous Structure

FM

PM L L L L L

Con-cept

Market

DES: Design ENG: Engineering FIN: Finance MFG: Manufacturing MKG: Marketing


27

organisations would provide almost equal powers of key account and

functional managers, that may result in conflicts.

This need of customer centric organisations require a overall consideration of a

firm’s structure. Burnes’ and Stalker’s (1961) research developed a basis for

studying the structure of an organisation. They described two idealistic types

of organisation:

• Mechanistic, which is hierarchical, prescribed and demanding of

obedience; and,

• Organic, which avoids precise job descriptions, seeks flexibility and

initiative and encourages commitment to the overall goals of the

organisation.

They suggest that when the environment of an organisation changes rapidly

and a high degree of innovation is required to follow the changes, the organic

type of structure is the better choice.

Henry Mintzberg (1995) identifies seven possible types of organisational

structure that fit between the above two and the author summarises them in

Table 3. Mintzberg (1995) points out that the above types of organisational

structure are idealistic and they do not represent any real organisation even

though some firms come remarkably close. However, most organisations seem

to reflect combinations, with the first five being the most common forms of

organisational structure.

Table 3. Types of Organisational Structure

Type of Organisation Characteristics

1. The Entrepreneurial Organisation

Few top managers; Informal organisation; Minimum or absent middle managers and support staff; Small start-ups; Dependence on few Individuals and their decisions; Limited available capital and human resources

2. The Machine Organisation Large hierarchy with many middle managers; Highly specialised and standardised jobs; Stability but slow response to rapid environmental changes

3. The Professional Organisation

Highly trained autonomous professionals; Highly decentralised horizontally; Hospitals, consultancies or legal firms

4. The Diversified Organisation

Independent entities with their own internal structure and loose central administration; Spread in market segments and product diversity; Often competition between the different entities

5. The Innovative Organic type; Market based project teams with


28

Organisation (or Adhocracy Organisation)

highly trained and specialised experts; Decentralised decisions to project teams; No formal rules and standards; No central control

6. The Missionary Organisation

An ideology unifies the whole structure by a common aim; Shared values; Freedom of decision making as long as it is within the values of the firm; continuous improvement

7. The Political Organisation Temporary organisation structure, usually between changes from one type of strategy or structure to another; Conflicts are not solved but transferred to the future type of organisation

Several studies have shown that a ‘loose-tight’ structure is necessary for

successful management of innovation (see for example: Tushman and

Anderson, 1997). The ‘loose-tight’ structure, although it is based on the

adhocracy organisation (Mintzberg, 1995) which supports the decentralisation

of decision making, is built on cross functional integration and initiates some

bureaucracy to gain a degree of control that provides both the freedom to

create and the discipline to turn creativity into real innovation. Additionally, it

introduces multifunctional project-teams that are responsible for the

development of the new projects (Fairtlough, 1994). The structure inside the

organisation is clear to everybody and each employee knows his/her role and

responsibilities inside the group and the whole firm and so conflicts and

meaningless debates are avoided. In addition, the innovative firms have a

dominant ideology (culture) that is spread throughout the whole organisation;

is supported by the top management’s vision, and is based on the belief in

continuous improvement and continuous change according to the new

business environment (Schoonhoven and Jelinek, 1997).

Cross-functional integration changes the nature of the different functions and,

when and how they get the work done (Wheelwright and Clark, 1992). Figure

16 shows an example of the role of the functions in the development stage of

the NPDD process. The figure shows three of the major functions, engineering,

marketing and manufacturing, and their major activities. The key milestones

and decisions that should be taken as the development proceeds are set in

advance.

In contrast to the sequential type of process, where engineering will complete

its work before passing it to marketing or manufacturing in each activity, in

the integrated type of process, the different functions work together in order


29

to achieve the milestones and take the required decisions. This affects the

timing of when each activity takes place and in effect could reduce the whole

development time (Wheelwright and Clark, 1992).

Cross-functional integration rests on tight linkages in communication between

individuals and groups working on related problems. The type of linkage

however, is a choice that a firm makes either consciously or unconsciously

(Clark and Fujimoto, 1991). The interaction between a project group that

executes an early task (upstream group) and the project group that continues

at a later stage (downstream group) is distinguished according to richness,

frequency, direction and timing.

Wheelwright and Clark (1992) illustrate the extreme levels from a sparse,

infrequent, one way and late pattern of communication, to a rich, frequent,

reciprocal and early pattern (Figure 15).

Figure 15. Dimensions of Communication Between Upstream and

Downstream Groups. Source: Wheelwright and Clark, 1992 p177

Richness of Media

Frequency

Direction

Timing

Dimensions of Communication Range of Choice

Sparse: documents, computer network

Low: one-shot, batch

Late: completed work, ends the process

One-way: monologue

Rich: face-to-face,

models

High: piece-by-piece,

on-line, intensive

Early: preliminary, begins the process

Two-way: dialogue


30

Functional Activities

Phases of Development

Concept Development

Product Planning Detailed Design and Development Commercial Preparation

Market Introduction Phase I Phase II

Engineering Propose new technologies; develop product ideas; build models; conduct simulations

Choose components and interact with suppliers; build early systems prototypes; define product architecture

Do detail design of product and interact with process; build full-scale prototypes; conduct prototype testing

Refine details of product design; participate in building second-phase prototypes

Evaluate and test pilot units; solve problems

Evaluate field experience with product

Marketing

Provide market-based input; propose and investigate product concepts

Define targets customer’s parameters; develop estimates of sales and margins; conduct early interaction with customers

Conduct customer tests of prototypes; participate in prototyping evaluation

Conduct second-phase customer tests; evaluate prototypes; plan marketing rollouts; establish distribution plan

Prepare for market rollout; train sales force and field service personnel; prepare order entry/process system

Fill distribution channels; sell and promote; interact with key customers

Manufacturing Propose and investigate process concepts

Develop cost estimates; define process architecture; conduct process simulation; validate suppliers

Do detailed design of process; design and develop tooling and equipment; participate in building full-scale prototypes

Test and try out tooling and equipment; built second-phase prototypes; install equipment and bring up new procedures

Build pilot units in commercial process; refine process based on pilot experience; train personnel and verify supply channel

Ramp up plant to volume targets; meet targets for quality, yield and cost.

Figure 16. Activities under Cross-Functional Integration. Source: Wheelwright and Clark, 1992 p173

• Concept for product and process defined

• Establish product and process architecture • Define program parameters

• Build and test complete prototype • Verify product design

• Build and refine 2nd phase prototype • Verify process tools and design

• Product pilot units • Operate and test complete commercial system

• Ramp up to volume production • Meet initial commercial objectives

CONCEPT APROVAL

PROGRAM

APROVAL

DETAILED

DESIGN APROVAL

JOINT

PRODUCT

AND

PROCESS

APROVAL

APROVAL

FOR FIRST

COMMERCIAL

SALES

FULL

COMMERCIAL

APROVAL

Key Milestones

Key Decisions


31

2.2.4 Marketing Control

The marketing management controls the implementation process on the basis

of its objectives and management needs indicators that are able to show if the

company is on the right track. From a business perspective the crucial

indicator of marketing performance is customer equity. Customer equity is the

net present value of all future cash-flows of the firm generated with its total

customer base (Rust et al. 1995)

The core figure of marketing performance is customer equity. From a financial

perspective, customer specific cash-flow is one core variable. However, many

marketing objectives might be of a non-financial nature like customer

satisfaction, market share or brand value. The marketing controlling process is

built around a set of key indicators that signify performance of marketing

programs. In the controlling process, management evaluates if marketing is

on track and explores corrective measures as needed.

Figure 17. The marketing control process

Marketing Objectives

Performance

Standards

Compare results

against standards

Corrections and

alterations


32

While the ultimate goal of marketing is rooted in customer equity, this is not

easy to operationalize. Depending on the outcome of customer intelligence,

market research or customer satisfaction, other marketing goals become more

important and need other controlling measures. For example, the customer

value of a new transmission system for mobile-telecommunications increases

exponentially with the communication options. Thus, in the early stage of the

product life-cycle, reaching a dominant market share is a precondition for an

eventual generation of cash-flows.

Table 4. Marketing objectives and control indicators (Examples)

Marketing objective Control indicator

Establish Market Standard Market Share

Increase Brand Awareness Brand Recall

Increase overall customer profitability Average cash-flow per customer

Customer satisfaction with services Service Quality

These indicators are useful to identify if performance is in line with the

strategy and to what extent programs or their implementation need to be

adapted (Figure 17).

2.3 Marketing Instruments

As all other activities of a company, the marketing instruments are exposed to

‘marketing myopia’ in the sense that even well-intended marketing planning

potentially falls short of capturing the customer dimension of marketing

activities. A helpful reminder is to realise that all instruments relate to a

meaningful customer dimension (Table 5).


33

Table 5. Marketing Instruments vs. Customer Perception

4 Ps

Source: www.learnmarketing.net

4 Cs

Source: grey-matter.org

Product

How will you design, package and add value to the product. When an organisation introduces a product into a market they must ask themselves a number of questions.

1. Who is the product aimed at? 2. What benefit will customers

expect? 3. How does the firm plan

to position the product within the market?

4. What differential advantage will the product offer over their competitors?

Customer Solution/Value

You can't develop products and then try to sell them to a mass market. You have to study consumer wants and needs and then attract consumers one by one with something each one wants.

Price

What pricing strategy is appropriate to use. Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a turnover for the organisation. The remaining 3p’s are the variable cost for the organisation.

Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean a loss of sales for the organisation. Pricing should take into account the following factors:

1. Fixed and variable costs.

2. Competition

3. Company objectives

4. Proposed positioning strategies.

5. Target group and willingness to

pay.

At the end of the day you should ask: What my customer is prepared to pay?

Customer Cost to satisfy

You have to realise that price - what you sell the product for - is only one part of the cost to satisfy. If you sell meals, for example, you have to consider the cost of driving to your restaurant - what if you provided a delivery service? Pricing is one of the most difficult decisions to make - selling at the lowest price is not always the best option. If you rely strictly on price to compete you are more vulnerable to competition.

Place

Where will the firm locate? This refers to how an organisation will distribute the product or service they are offering to the

Convenience to buy

You must think of convenience to buy instead of place. You have to know how each subset of the market prefers to buy


34

end user at the right place at the right time.

Two types of channel of distribution methods are available. Indirect distribution involves distributing your product by the use of an intermediary for example a manufacturer selling to a wholesaler and then on to the retailer.. Direct distribution involves distributing direct from a manufacturer to the consumer

Common distribution strategies are:

1. Intensive distribution: Used commonly to distribute low priced or impulse purchase products e.g. chocolates, soft drinks.

2. Exclusive distribution: Involves limiting distribution to a single outlet. The product is usually highly priced, and requires the intermediary to place much detail in its sell.

3. Selective Distribution: A small number of retail outlets are chosen to distribute the product. Selective distribution is common with products such as computers, televisions household appliances, where consumers are willing to shop around and where manufacturers want a large geographical spread.

- on the Internet, from a catalogue, on the phone, using credit cards, etc. Amazon Books and Dell Computers are just a few businesses who do very well over the Internet.

Promotion

How will the firm promote its product? A successful product or service means nothing unless the benefit of such a service can be communicated clearly to the target market.

Communication

You have to consider communication instead of promotion. Promotion is manipulative - it’s a statement from the seller. Communication requires a give and take between the buyer and seller - This is much more subtle. Be creative and you can make any advertising "interactive". Use phone numbers, your web site address, etc. to help here. And listen to your customers when they are "with" you.


35

2.3.1 Product – Customer Solution

The differences that make one product succeed and another fail have been

studied in several surveys, which targeted different industries and countries as

early as the 1970s (see for example: Rothwell et al., 1974; Rothwell, 1992;

Calatone and Cooper, 1979; Cooper, 1980; Maidique and Zirger, 1984; Link,

1987; Booz-Allen and Hamilton, 1982). Most of these studies turn the

attention of the industrialists to the study of market needs and customer

wants, as well as the importance of offering a unique benefit to the customer.

In Cooper’s survey 203 projects that were launched on the market from 125

industries and either succeeded or failed, have been studied. Eight key factors

that separate success from failure were identified and listed in order of

importance (Cooper, 1999):

1. A superior product that delivered unique benefits to the user and was

innovative.

2. A well-defined and justified product prior to the development

phase.

3. High quality of execution of technological activities.

4. Strong technological synergy between the technological strategy of

the firm, its technology competencies and its production resources and

skills.

5. High quality of execution of predevelopment activities.

6. Strong marketing synergy between the needs of the project and the

firm’s sales force and distribution system, its advertising resources and

skills, its marketing research and its customer service capabilities.

7. High quality of execution of marketing activities.

8. Market attractiveness determined by the size and growth rate.

Two more factors, the competitive situation and the top management support,

although they were originally believed to be important were found to make

little difference between success and failure. The message was that top

management often supports the wrong projects and that products that offer

high value and unique benefits to the customer are not significantly affected

by competition. The creative factory model uses the above list of success


36

factors to identify how close the new products that a firm develops come to

these requirements and thus what are their prospects of success.

The unique benefits that a new product may offer to customers, which is the

most important factor of success, may be eliminated because, during the

months or years that are required to develop a product and launch it on the

market, the customers and their needs may change or a rival product may

appear providing these benefits (Stalk and Hout, 1990). Several suggestions,

which have been presented in the literature, can be used in the whole NPDD

process in order to reduce the development time. A summary of them is

presented in Table 6.

Table 6. Actions to be taken in order to Accelerate the NPDD Process

Suggested Actions Characteristic Literature

� Do it right the first time Cooper, 1993; Cooper, 1999

� Homework and definition, or in

other words, control the ‘fuzzy front

end’ of the design process

Smith and Reinertsen, 1997

� Build in the voice of the customer

as early in the process as possible

Patterson, 1993; Smith and Reinertsen,

1997

� Organise around a multifunctional

team with empowerment and

parallel processing of different

stages

Stalk and Hout, 1990; Patterson, 1993;

Cooper, 1999; Wheelwright and Clark,

1992

� Prioritise and focus to the most

important projects

Cooper, 1993; Cooper, 1999

The product, from a firm’s perspective, is the core offering providing the key

benefits sought after by the customer. From a customer perspective, on the

other hand, it provides a solution. In early stages of industrial societies

products used to be almost exclusively standardised material goods, mass

produced and delivered to consumers. In developed societies, customers have

become more demanding and companies have to offer more in order to

capture demand. This has given rise to the mandate for services. In reality,

almost every good is offered with a sort of guarantee, return policy,

maintenance offerings, which are in fact services.


37

Services however, have become a category of offerings on their own, with a

share of 60-80% of the total value of the gross domestic product in developed

economies. More sophisticated needs though are hardly addressed with the

delivery of a material good or a simple service. Food can be delivered as a

standardised mass product to be processed in the microwave or as part of a

unique experience in a three Michelin stars restaurant (Chesbrough 2011). As

a tendency contemporary offerings need to be goods-service bundle

propositions to fulfil a customer need.

Figure 18. Product Strategy and Marketing-Mix Source: Kotler and Armstrong, p.234

A useful way to identify and design valuable goods-service bundle

propositions, is to think in three different levels:

• The core benefit: this can be a pure tangible good, like chocolate bar,

cereal or sugar, or a pure service like consultancy report or music

event.

• The actual product: The more goods and services have been

commoditized, the more companies try to attract customers with

additional features and services. For example, the camcorder of Sony

Augmented Product

Warranty

After sale

service

Installation

Delivery

Actual Product

Brand name

Quality level

Design

Features

Packaging

Core

benefit


38

comprises a brand name, styling, features and components, packaging

and other attributes that makes it a coherent offering.

• The augmented product: In order to attract customers, Sony might

even offer additional services to its camcorders, like a warranty,

financing, delivery and after-sales service.

• The rise of services is partly caused by the increased interactivity of

modern business life. As businesses try harder to cater to customer’s

needs they are more eager to enter a dialogue and give customers a

say in the value creation process.

Industrial goods are more and more becoming platforms for service-delivery.

For example, if you enter an airplane these days, chances are high that the

airline does not own the airplane engine you are flying with. Engine

manufacturers like Rolls-Royce have introduced “power-by-the-hour”

offerings, where they remain owners of the engine and only earn revenues on

the hours the airplane is effectively in operation. This provides an incentive for

Rolls-Royce to excel in maintenance services, with real-time monitoring of the

engine performance and eventual contingencies like bird crashes. What used

to be a goods-business has been transformed into service business (Wirtz and

Ehret, 2009).

A crucial element of an offering is the brand. The brand refers to the customer

perception of a product/service. The purpose of product policy is to occupy the

centre-stage of the ‘evoked-set’ of a customer when looking for a solution.

Brands contain crucial information for customers, like price or quality range,

personality and relation to a social status or brand community. A good brand

has the following qualities (Crane, 2010):

1. Effectively communicates the distinctive value you wish to offer the

customer;

2. Is ‘relevant’ to the customer;

3. ‘Resonates’ with the customer;

4. Reinforces the company’s intended positioning in the marketplace;

5. Is consistent and unifying;

6. Serves as an umbrella for current/future brands in the company’s

portfolio;


39

7. Allows for the building of strong brand equity (i.e. the value added to

the product by the brand);

8. Enables you to command premium pricing;

9. Is easily understood by your customers and your employees;

10.Can be sustained over time.

Figure 19. The Brand Prism Source: Kapferer, 1997

Building brand equity is not automatic. A firms should consider the offering as

a personality further to its physical aspects (Kapferer, 1997), crafting the

brand prism (Figure 19):

• Physique: The key physical qualities, product and brand attributes that

make the brand recognisable;

• Personality: The way in which the brand speaks of its products. The

kind of person it would be if it were human;

• Culture: A brand has its own set of values;

• Relationship: A brand is often at the heart of transactions and

exchanges between people;

Relationship

Culture


40

• Reflection: The desired image of the brand user, the consumer’s

outward mirror;

• Self-image: The consumer’s internal mirror, how people see

themselves when consuming the brand.

Forging a strong emotional connection between the brand and the consumer

can lead to brand differentiation, strong customer loyalty and evangelical

promotion of the brand.

2.3.2 Price – Customer Cost

From the firm’s perspective price is the key-determinant of the firm’s

revenues. From the customer perspective it has a direct effect on the

customer’s cots. The price effectively determines the value created is shared

between customer and company.

A crucial determinant of the price is the positioning strategy. For example a

high price is an important element of the credibility of luxury brands, whereas

cost leaders need to support their credibility with low-band prices.

Prices are also a competitive weapon. Cost leaders can raise barriers of market

entry by setting low prices. By the same token, high prices may enable re-

investments in augmenting offerings strengthening the company’s competitive

position. In addition, prices are affected by additional factors like taxes or

third-party service charges.

In the long run, the cost of a firm’s operations are the low boundary to

determine prices – as permanently loss-making companies are likely to go out

of business. Therefore, the simplest approach to pricing strategy is cost-plus

pricing. It rests on the projection and calculation of costs that identifies the

lower limit of the price-band. Managers set a mark-up for example reflecting

the minimal internal interest on company capital in order to arrive at the final

price.

This method has two major drawbacks:

• It may deter effective demand of customers with a lower willingness-to-

pay and price the company out of the market;

• A company might miss on profit potential when the willingness to pay is

higher than the actual cost-plus-price.


41

The alternative is to apply value-based pricing. In this case, customer-

perceived value marks the upper limit of any price customers might

reasonably accept, as otherwise they are losing by trading with the company

(Figure 20). Therefore, the question is what the customer is prepared to pay

for the offering. Under this perspective the firm should adopt its operations to

deliver the product/services efficiently in order to achieve an adequate profit

margin.

Figure 20. Pricing approaches Source: Kotler and Armstrong, 2004, p. 322

Hence, the pricing strategy should consider both sides – internal and external

– in parallel (Figure 21).

Figure 21. Pricing decisions Source: Kotler and Armstrong, 2004, p. 309

Internal Factors

•Marketing Objectives

•Marketing mix strategy

•Costs

•Organisational

considerations

External Factors

•Nature of the market

and demand

•Competition

•Other environmental

factors (economy,

resellers, government)

Cost-plus pricing

Value based pricing

Pricing Decisions


42

2.3.3 Place – Customer Convenience

The evolution of marketing channels is one of the signature developments of

the marketing system. Marketing intermediaries play an important role in

orchestrating supply and demand in a market system. One of the key-role of

intermediaries, like wholesalers or retailers, is to transform supplier

assortments into those wanted by buyers.

Marketing channel providers perform many additional crucial services that add

value (Kotler and Armstrong, p. 364):

• Information: Gathering and distributing marketing research and

intelligence information about actors and forces in the marketing

environment needed for planning and aiding exchange.

• Promotion: Developing and spreading persuasive communications about

an offer.

• Contact: Finding and communicating with prospective buyers.

• Matching: Shaping and fitting the offer to the buyer’s needs, including

activities such as manufacturing, grading, assembling and packaging.

• Negotiation: Reaching an agreement on price and other terms of the

offer so that ownership or possession can be transferred.

• Physical distribution: transporting and storing goods.

• Financing: Acquiring and using funds to cover the costs of the channel

operations.

• Risk taking: Assuming the risks of carrying out the channel operations.


43

Figure 22. Multichannel distribution system Source: Kotler and Armstrong (2004), p. 369

Crucial decisions of channel design are to identify who is in the best position to

perform these activities and which channels are most appropriate for each

customer type – convenience from the customer’s perspective.

Table 7. Key intermediaries or channel members

Channel members/

Intermediaries

Characteristics

Agent Intermediary or channel member who markets a product/service for a fee. Sometimes called manufacturer’s agents or selling agents depending on the industry

Broker Intermediary or channel member who brings buyers and sellers together to negotiate purchases. Does not take title to or possession of products and has limited authority regarding prices and terms of sales. Often used on a onetime or as-needed basis.

Dealer Not a precise term; can mean the same as a distributor, wholesaler, or retailer.

Distributor Usually used to describe an intermediary or channel member who performs a variety of distribution functions, including maintaining inventory, marketing, etc.

Wholesaler Intermediary or channel member who sells to other

Producer

Direct to

Concumer

Consumer

segment 1

Retailers

Consumer

segment 2

Distributors

Dealers

Business

segment 1

Direct to

Business

Business

segment 2

Sales

Force Catalogues,

telephone,

Internet


44

intermediaries or channel members, usually retailers. Takes possession of products and then markets them. Common in consumer markets.

Retailer An intermediary or channel member that sells directly to customers, ultimate consumers and business customers.

Source: Crane, 2010

The different routes to your target customer should consider the following:

1. Effectiveness. How well does the channel strategy meet customer’s

needs/requirements?

2. Market coverage. Can the customer find and appreciate the value of

your venture’s offerings?

3. Cost-efficiency/profitability. Can the venture gain access to customers in

a cost-efficient way and achieve profitability?

4. Adaptability. Can the channel handle new product/services and

incorporate emergent channel forms?

2.3.4 Promotion – Customer Communication

The customer perception is the crucial determinant of the value of the

company’s marketing offering. Thus, any good intentions of managers in

offering, pricing delivering are lost, if customers do not perceive them

favourably. Marketing managers try to address this by conveying consistent

marketing messages.

Marketing communications employs a set of tools, like (Kotler and Armstrong,

p. 427):

• Advertising: any paid form of non-personal presentation and promotion

of ideas, goods or services by an identified sponsor.

• Sales promotion: Short-term incentives to encourage purchase or sale

of a product or service.

• Public relations: Building good relations with the company’s various

communities and stakeholders, by obtaining favourable publicity,

building up a good corporate image, and handling or heading off

unfavourable rumours, stories and events.


45

• Personal selling: Personal presentation by the firm’s sales force for the

purpose of making sales and building customer relationships.

• Direct marketing: Direct communication with carefully targeted

individual consumers to both obtain an immediate response and

cultivate lasting customer relationships – the use of telephone, mail,

fax, e-mail, the Internet, and other tools to communicate directly with

specific consumers.

A crucial development of today’s marketing system is that communication

channels have been multiplying. In addition to the already complex system of

mass media like radio, television, newspaper or magazines, a myriad of

channels evolved like data-base-mailings, telemarketing, e-mails or the use of

virtual social networks. Thus a key challenge for marketing managers is to

select and orchestrate communication channels in line with the desired market

positioning. This has resonated in the rise of Integrated Marketing

Communications.

Figure 23. Communication process Source: Kotler and Armstrong (2004), p. 431

The Laswell-formula (Figure 24) describes the communication process from a

mass-media perspective: Who says what in which channel to whom with

what effect?


46

Figure 24. The Laswell communication formula

According to this model, key activities of integrated marketing

communications are:

• Creating the message: At the core of the message is its content, related

to the core benefits of an offering or the desired market position of a

marketer. It conveys a rhetoric structure, for example providing a

question for the audience. Not least, the message is delivered in a

format of texts, pictures, graphical design, audio or video that provides

an aesthetic appeal.

• Communication channels: Crucial criteria for channel choice are their

costs and their specific capabilities. Personal selling is a comparatively

high-cost channel predominantly used for key accounts, while mass-

media allow to spread budgets over big audiences.

• Feedback: Marketers must collect feedback and research effect of its

communication on audiences. Ideally marketers would like to know the

effect of a campaign on actual sales. However, as many other factors

like logistics performance, weather or budgeting affect actual sales,

they might use qualitative measures of communication indicators like

brand perception, attitudes or images.

2.4 The Marketing Plan

The marketing plan specifies the marketing strategy and action plan of a

company. It is part of the strategic planning process. It is built upon a review

of the current marketing situation and an estimation of current opportunities

Who?

Communicator

Control Research

Says what?

Message

Content Research

In which channel?

Channel

Medium Research

To whom?

Receiver

Audience Research

With what effect?

Effect

Effects Research

The Laswell formula


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and threats. It expresses the marketing strategy the company aims to pursue

over the mid-range future. It provides a clear action plan, that translates the

strategy into actionable program, like the design of the marketing instruments

or investments into customer relationships. It specifies responsibilities and the

budget allocated for the implementation of the marketing activities.

The most critical questions the marketing plan must address are (Crane,

2010):

1. Is there a viable marketing opportunity?

2. Is there something unique and different about the opportunity that

differentiates the venture from the competitors?

3. Is there a well-defined target market that has expressed an interest in

what you intend to market?

4. Are the revenue/sales and expenses realistic, and is there a healthy

profit picture?

5. Is there a management team with the capabilities and experience to

execute the plan?

6. Does the plan show how those investing in the venture will get their

money back and make a return on their investment?


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Table 8. Contents of a Marketing Plan

Section Purpose

Executive Summary

Presents a brief summary of the main goals and recommendations of the plan for management review, helping top management to find the plan's major points quickly

Current Marketing Situation

Describes the target market and the company's situation in it, including information about the market, product performance, competition and distribution. The section includes:

• A market description that defines the market and its major segments, then reviews customer needs and factors in the marketing environment that may affect customer purchasing.

• A product review, that shows sales, prices, and gross margins of the major products in the product line.

• A reassessed view of competition, which identifies major competitors and assesses their market positions and strategies for product quality, pricing, distribution and promotion.

A review of distribution, which evaluates recent sales trends and other developments in major distribution channels.

Threats and Opportunities Analysis

Assesses major threats and opportunities the product might face.

Action Programs Spells out how marketing strategies will be turned into specific action programs that answer the following questions: What will be done? When will it be done? Where will it be done? How much will it cost?

Marketing Budget/Financials

Details a supporting marketing budget that is essentially a projected profit-and-loss-statement. It shows expected revenues and expected costs.

Marketing team Who is responsible for doing it?

Evaluation and Controls

Outlines the controls that will be used to monitor progress and allow higher management to review implementation results and spot products that are meeting their goals.

Source Kotler and Armstrong (2004), p. 52


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3 Innovation-Marketing Challenge

The task for marketing is to ensure the market orientation of a company, to

strengthen the position of its businesses in product markets and to apply

effective programs for the creation of revenues. So, marketing appears like

the first point of call to ensure the market performance of an innovation. But

the relationship between innovation and marketing is more complex than

initial intuition suggests.

Innovation is concerned with new ideas, concepts or technologies with the

potential to enhance value creation. In market economies all value is derived

from the customers perception. On that grounds, meeting customer

requirements is an imperative for effective innovation activities. In this

perspective, marketing has the role to amplify the voice of the customer in

order to direct effective innovation activities.

Furthermore, a common experience is that even valuable technology does not

sell itself. Since the start of the 19th century companies have started to

systematically drive innovation processes by investing in Research &

Development (R&D).

Take the example of Xerox, that first developed and commercialized the

photo-copy machine (Chesbrough and Rosenbloom, 2002). The photocopy

machine held substantial advantages over the then dominant wet photography

or low quality dry-thermal processes. From a business perspective, it had a

main disadvantage compared to established technologies: it imposed a

substantial higher upfront-investment on companies who want to use it

compared to established copy techniques used .

The path-breaking solution conceived by Xerox was to install the machines at

offices free of charge and earn revenues exclusively based on copies made by

office workers. This took the initial risk from customers. It also directed

subsequent product development by Xerox into improved usability and

efficiency of copying, as higher copy volumes directly translated into additional

revenues (Chesbrough and Rosenbloom, 2002).

The case of Xerox highlights a core challenge for technology-based innovation

management: technological potential needs to be translated into a value


50

proposition for potential customers and a profitable revenue stream for the

company. This is the function of a business model, that describes a value

proposition for the customer, a value capturing mechanism for the supplying

firms and a configuration of the organisational network (Amit and Zott, 2007,

Chesbrough, 2006).

Marketing plays a vital role in the design of effective business models.

Identifying value propositions and translating them into revenues, eventually

with the support of communication or distribution networks, seems like the

generic core of marketing activity. Not surprisingly, market driven activities

are key elements of every innovation strategies. Innovation managers are

embracing market-driven concepts like that of lead user innovation (Von

Hippel, 1986). However, under certain conditions, customer orientation can

stand in the way of innovation and market-based approaches may lead to

spectacular innovation failures.

In this chapter we will first explore the complex relationship between

marketing and innovation, use entrepreneurship theory to elucidate their

relation, and will introduce the concept of business models as an approach for

aligning marketing and innovation activities.

3.1 Disruptive innovation and marketing’s innovation failure

In market economies, the performance of an innovation is driven by its

customer perceived value. The imminent intuition is to start the innovation

process with customer valuation, analysis and market research. Counter to the

expectation, customer orientation can severely impede the effectiveness of

innovation programs of a company.

Clayton Christensen was one of the first researchers to identify customers as a

potential impediment of effective innovation management of a firm

(Christensen 1997; Christensen and Bower, 1996). Christensen identified this

phenomenon first when he studied the solid-state disk drive industry. In the

hard-disk-drive industry, every new product generation bread a new market

leader. Why where incumbents not successful introducing new product

generations? You would assume that they did under-invest in R&D, had


51

incompetent product managers or were simply over-confident to rely on their

cash-cow products. However, all incumbents had technically feasible designs

of next product generations in their development pipeline. Their main problem

was to identify a sustainable customer base to make establish the business

case for their innovation. Being close to the market actually prevented leading

firms to thrive in innovation. Christensen named this phenomenon “the

tyranny of the served market” (Christensen, 1997).

As Christensen showed, this phenomenon prevails most likely under conditions

of disruptive innovation, where new product architectures emerge in initially

unattractive market niches. In the case of hard disks, the Personal Computer

fundamentally changed design parameters for hard disks. Catering to the then

dominant mainframe computer architecture, companies prioritized on storage

space and performance, but did not have to care for disk-size. In contrast,

disk-Suppliers for Personal Computers had to compromise on performance and

storage capacity simply in order to be able to fit disks into desktop computers.

The Personal Computer initially appeared as a negligible niche market.

However, the explosive growth of the PC market increased profits of the

innovators, allowing them to re-invest into R&D and subsequently enhance

performance to levels on former mainstream markets.

In the case of the hard-disk industry, listening to the customer prevented

leading suppliers to mainframe-computer manufacturer prevent from

allocating resources for keeping a foothold in the emerging PC market.

Eventually, start-up companies, often times founded by employees of the

leading firms, filled the gap. Innovators were able to enter the learning curve

and soon could offer hard-disks that beat the critical performance threshold of

mainframe-hard disks and thereby even break into the incumbent market.

This pattern of disruption can be found in many markets. Initially a new

technology underperforms on parameters that are crucial in the established

mainstream market, provides valuable in a seemingly negligible niche. The

niche develops unexpected growth potential. Scale economies in the growing

mass market generate profits that are re-invested in improved performance.

Eventually the innovation can beat established technologies in the mainstream

market. For example CD’s have replaced Floppy Disks, Flash-storage is

replacing CD’s.


52

The mobile-phone market provides a recent intriguing example: Nokia used to

be the dominating company in terms of volumes and sales and for a long time

held a leading position in many segments as well as quality leadership for

many functions, for example mobile photography. Its strategy is based on a

wide range of affordable, high-quality products covering almost any market

segment, from simple user to advanced professional. Its emphasis was on the

design of handsets were it succeeded to integrate an ever growing range of

technical functionality, including USB-connections, FM radio and high-quality

cameras.

For a long time the smart-phone market appeared to be a small high-end

niche for technology-savvy and sophisticated business users. The entrance of

Apple re-defined the smartphone, by moving the focus from handset-features

to the user-interface. While Apple started to cater to the smartphone niche, it

improved usability by simplifying user interfaces, attracting software

developers eventually driving the growth of the application. The focus on

usability, intuitive design-interface as well as the omission of features in

favour of simplicity helped to transform the smartphone from a niche to a

mass-consumer product that now is re-defining the mobile phone industry.

Curiously, Apple can pocket-in more than 50% of the industry’s profits with

the tiny share of sales of around 2% (Figure 19). This follows the classic

pattern of disruption, where innovation starts in a seemingly negligible niche

that eventually transforms the mainstream market.


53

Figure 25. Mobile phone market share and profit distribution over time

Disruptive innovations follow a common, general pattern (Figure 20):

• The market leaders have a broad range of innovation projects in the

pipeline but are forced to prioritize on innovations that appeal to their

present customers.

• Their pressure to serve their existing customer base forces incumbents

to move attention from emerging market niches, even in cases where

they perceive an emerging opportunity.

• New entrants focus on the niche and realise its growth potential. Fast

growing markets allow for re-investment and a fast running through the

learning curve.

• Ultimately, new entrants are able to provide performance that matches

the requirements of established markets. They are able to break into

the domain of existing market leaders and disrupt their existing

business.


54

Figure 26. Disruptive vs. Sustaining innovations Source: Christensen et al, 2005

Thus companies need to understand if they operate under the condition of a

sustaining or a disruptive innovation. Sustaining innovations are rather

incremental and refer to the established pattern of demand. Under such

conditions, the existing customer base is a valuable source of ideas for product

improvements, additional features or small clever tweaks.

In the context of disruptive innovations, customer information can be

misleading. Most importantly, disruptive innovations cater to market niches

that are not representative for the mainstream market, like for example

personal computers or smart-phones in their nascent stages. Disruptive

innovations under-perform on many criteria that are highly valued in the

mainstream market. As a consequence, mainstream customers do perceive

disruptive innovations rather as a backward step.

Under the conditions of sustaining innovation, present customers are a

valuable source of intelligence. Ultimately the introduction of a new feature

needs to stand the test of the existing customer base. In disruptive innovation

though, future customers are substantially different from present customers of

an incumbent. Thus, the existing customer base can prove misleading under

conditions of disruptive innovation (Table 9). Therefore, firms should use their


55

customers and at the same time be proactive and brave, disturbing their

beliefs and habits (Figure 27).

Table 9. Differences of Sustaining and Disruptive Innovations

Figure 27. Market pro-activeness and reactiveness Source: Sandberg, 2008


56

3.2 The Marketing Process and Innovation – Insights from Entrepreneurship Theory

How can customers provide a dysfunctional role in the market environment?

How can companies lose track by following customer preferences?

Entrepreneurship theory of the Austrian School of Economics provides a viable

explanation of this curious phenomenon (Shane and Venkataraman, 2000;

Kirzner, 1973, 1997). Hayek (1945) and Von Mises (2006) argue, that the

main contribution of markets in society is to signal the present opportunity

costs of resources (Keizer, 1989). Opportunity costs reflect the next best

valued use of a resource (Rothbard, 2006). Thus, Austrian economists present

a picture of the market that differs fundamentally from the mainstream. In

mainstream economics the market price is the result of given preferences and

production conditions. Under certain conditions, a market clearing equilibrium

arises. In contrast, for Austrian economists, the market is an entrepreneurial

bargaining process, where entrepreneurs speculate about the highest valued

use of a resource (Shane and Venkataraman, 2000; Kirzner, 1997; Von Mises,

2007; Lachmann, 1956). More importantly, entrepreneurs bid for resources

with the expectation of future profit potential for example as part of an

innovation process (Lachmann, 1956). The market price of a resource

indicates what entrepreneurs have to offer to resource owners in order to

unlock resources from their present uses and use them for higher valued

business projects (Foss et al. 2007; Lewin, 1999; Lachmann, 1956).

Von Mises and Hayek argue that this entrepreneurial market process enables

societies to put resources to their highest valued use and enter growth paths

driving innovation and prosperity (Von Mises, 2007; Hayek, 1945; Keizer,

1989). Socialist calculation by a centralised bureaucracy is dysfunctional in

that regard, as it does not allow for entrepreneurial valuation of resources.

This explanation of market-based valuation bears a crucial implication for the

valuation of an innovation. Market prices indicate the valuation of resources in

their present uses, the value that any innovative use has to beat (Foss et al.,

2007; Von Mises, 2007; Lachmann, 1956). But it provides no valid information


57

on the future value of resources, beyond the fact that a bidder shows an

expectation for a higher value potential.

As a managerial implication, real market prices are good indicators for the

present value of resources, but do not express future value of products.

Kirzner (1973 and 1997) highlights that entrepreneurs are systematically

challenging market conditions by spotting and exploiting opportunities that

buyers and sellers have missed (Shane and Venkataraman, 2000).

Entrepreneurs are agile actors who are eager to spot opportunities that others

missed and direct business ventures for their exploitation.

More importantly, levels of business opportunities can differ. The simplest

form of business opportunity is arbitrage, where some buyers are offering too

high prices, some sellers charging to low prices, so that entrepreneurs can

simply profit by buying low and selling dear. However, these low-hanging

fruits of “innovation” are easily competed away. Higher profit opportunities lie

in more complex forms of innovation, for example the integration of hitherto

disconnected markets, the implementation of new manufacturing methods or

the exploitation of valuable knowledge revealed by Research and Development

(R&D) activities.

Figure 28. The value of the firm during the innovation process

According to entrepreneurship theory, this is the essence of business – the

systematic attempt to identify, explore and exploit opportunities for higher


58

valued use of resources (Shane and Venkataraman, 2000; Kirzner, 1973,

1997). In an early stage this is likely to be speculative in nature. If successful,

products of entrepreneurship will be higher valued than resources in their

present uses.

This has important implications for marketing in an innovative environment.

As part of the innovation process, the relevant question of marketing is related

to future potential for value creation and the valuation of future products. This

implies a pro-active market approach, directed towards future needs, latent

needs and unrealised potential. In contrast, once the potential of an

innovation has become apparent and well understood, marketing focus is on

exploitation of the known opportunities with a re-active approach (Sandberg,

2008).

3.3 The rise of business models as a response to the innovation challenge

Following the entrepreneurship theory and the Austrian School of Economics,

the major function of business organisation is the systematic exploration and

exploitation of business opportunities (Shane and Venkatarman, 2000).

In principle, there is no limitation of potential sources of business

opportunities. However, one result of the continuous quest for opportunities

has been the systematic investment by businesses into R&D (Box 1).

Industries like pharmaceuticals, chemical or electronics have thrived by

investing in the acquisition of new knowledge as a basis for new differentiated

products, that provide added value to customers and profits to companies

(Chesbrough, 2006, Arora et al. 2000). Pioneers of R&D-based businesses

have been enjoying differentiated positions and juicy profits from monopoly-

like positions – in cases of valid patents even legally protected.


59

Figure 29. Development Funnel Model Source: Wheelwright and Clark, 1992 p124

Box 1. Traditional sources of New Ideas

New ideas for industrial research may be derived from the correct use of the

information available to a firm. The information and the sources for new

opportunities, theoretically, are available to any firm. Differences between

firms occur because of different levels of preparedness of the firm to interpret

this information (Wheelwright and Clark, 1992). Information may be available

from a firm’s internal or external sources. Tidd, et al. (1997), Cooper (1993)

and Himmelfarb (1992) identify several sources of information that are

summarised by the author in Table 10.

The search for new opportunities that appear in the marketplace is one more

source of product ideas. Robert (1995) and Afuah (1998) refer to several

indicators of opportunities that major innovative firms monitor in order to

identify them and transform them to new products. These sources are

summarised by the author in Table 11.

Screen 1 Screen 2

Ship

Phase One Product/Process idea

generation and concept development

Phase Two Detailing of proposed project bounds and required knowledge

Phase Three Rapid, focused

development projects of multiple types


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Table 10. Sources of Information for new Ideas

Source of Information Characteristics

Managers Entrepreneurs; Start-up firms

Customers Needs and Wants

Suppliers Own research; Co-operation

Production, Engineering & Quality

Departments

Problems; Bottlenecks; Quality

problems

Individual Inventors Inventions; Idea Brokers

Patents & Other Publications New Developments in the market

Rival Products Learn from the rival’s successes and

failures

Ideas held in an Idea Tank Old ideas; Matured markets and

technology

Outsiders Different sector; Converging

technologies

Table 11. Sources of Opportunities for new Ideas

Source of Opportunities Characteristics

Unexpected Successes Changing patterns of customer behaviour

Unexpected Failures End of life cycle; New Strategies are required

Unexpected External Events Social life of people, health, security or

environmental disasters

Process Weaknesses Bottlenecks; Production Process problems; Supply

Chain

Industry/Market Structure

Change

New Regulation/Standards

High-Growth Areas Gross Domestic Product or Population increases

Converging Technologies New technologies and markets

Demographic Change Income, age, education and mix

Perception Change New customer needs and wants; directions from

Advertisement

New Knowledge Research activity

Selection criteria have been proposed in order to standardise the process of

selecting an idea and proceed with its development (Cooper, 1993;


61

Himmelfarb, 1992; Roussel et al., 1991):

� The unique benefit that the new product will offer to the

customers. The new features that the product will include, i.e. the value-

for-money, or the customer needs that have been identified and covered

by this product, should be clear and compared with the competition. This

element has been identified as the number one factor for the success of a

new product (see Section 4.2) and should be reflected in the evaluation

criteria.

� The fundamental fit of the idea with the strategy of the firm.

Additionally, the level of risk that a new idea involves should be compatible

with the risk policy of a firm.

� The feasibility of the ideas against the technical, marketing and

production capabilities of the firm. Shortage of capabilities that have not

been considered will become apparent during the development or the

production phases where capital and resources have already been spent

and wasted.

� Market attractiveness. The market target, market size and target price

need to be identified. This creates a framework for identifying the payback

period and whether the project is economically worthwhile for the firm’s

investment. This information will be tracked in more detail in the next

stages, but a first evaluation often identifies the non-feasible ideas.

� Legal, health, environmental and ethical standards. Potential changes

in legislation or even new technologies that emerge and may be dominant

at the time that the product will be launched on the market need to be

considered.

A low score on any of these criteria should be considered as a ‘kill’ sign for the

project. The easiest points of the NPDD process at which to kill a project are

the early stages of conceptualisation and design, where resources have not

yet been committed and people do not yet feel a strong ownership for the

particular project (Cooper, 1993). The ability of the firm to kill a project is

influenced by factors that attempt to overtake the firm’s official policy.

While R&D based business appeared as a comparatively sure bet on profit

opportunities, its blueprint process (Figure 29) is coming under pressure.


62

Initially, businesses like IBM, Pfizer or Xerox, invested in laboratories, that

directed research with the aim to use finding for the development and

commercialisation of differentiated products.

One consequence of the profitability of R&D, was the attraction of imitators

and increased competition that now has been almost routinizing innovation

activity (Baumol, 2010, 2002). Upstream, competitive investment into R&D

raises the bar for valuable findings in R&D. A prominent example is the

struggle of the pharmaceutical industry to refill its research pipeline.

Downstream, the growing range and speed of innovation activities reduces the

time a company is able to recoup its R&D investments (Chesbrough, 2006).

Rising costs and pressure on revenues are forcing companies to open up their

innovation process. The imminent response is to broaden the revenue base for

exploiting the innovation and while drawing on a broader stream of ideas in

the exploitation phase (Figure 30).

Figure 30. Innovation based competition and the rise of open innovation

models Sources: Chesbrough 2006


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This acceleration of innovation based competition forces companies to re-think

their approach to organisation. Traditionally innovation theory regarded

organisation as devices for “creative destruction” (Schumpeter, 1934) and

therefore as the primary tool for an entrepreneur to implement an innovation

and exploit its value.

Rising costs and decreasing revenues enforce a response, increasing the share

of external sources of innovation. Collaboration with external suppliers,

inventors, universities and research labs shows the potential of decreasing

costs and leverage internal innovation activities. Companies in industries as

diverse as consumer goods (for example Procter & Gamble, Box 2) or

microprocessors (Intel, see Chesbrough, 2006) are using external

collaborators in order to drive down costs and increase performance of

innovation activities.

Figure 31. Open Innovation Process Source: adapted from Chesbrough, 2003


64

Box 2. Procter & Gamble – connect and develop for improved innovation

performance

At the end of millennium, Procter&Gamble started to experience a familiar

pressure of “commoditization” of its product portfolio. Market power of

retailers like Wal-Mart drove down margins and forced redundancies. P&G

managers realized that simply innovating was not enough to match the

bargaining power residing in distribution channels. Its management came with

its “connect & develop” program as a result. At the heart was the aim to

attract a broad range of around 2000 external suppliers and 7000 inventing

partners for increasing the product and brand-portfolio. Collaborators were

established companies, like German chemical giant BASF, but also Italian pizza

bakers and individual inventors. This open innovation initiative led P&G back

on the path to profitability.


65

Source: Houston and Bakkab, 2006


66

Opening-up the organisation can also unlock potential on the revenue-side.

When a company struggles to develop its idea into a product or service, it

might support others that do not have the relevant knowledge and insights but

have the resources and capabilities to implement the innovation. Thus, instead

of selling products and services to consumers, companies can offer their

innovations to collaborating firms and recoup their innovation investments

through licenses or profits from joint ventures with partnering firms.

IBM has created an additional annual revenue of US$ 1bn simply by installing

a department that systematically filed IP and looked for ways to commercialise

ideas that laid idle in the firm and were not used for anything. Another

remarkable example is Qualcomm that succeeded using an IP-licensing for

establishing its CDMA standard for mobile-networks that proved extremely

profitable (Box 3).

Box 3. Qualcomm - using networks for speed and profits

Qualcomms core technology is around mobile signal transmission. When its

engineers invented a standard for digital mobile communication, management

realised that time is almost up, as the competing GSM standard was close to

worldwide market dominance. Initially Qualcomm built all elements of a

mobile-network, antennas, network computers and even handsets. However,

time pressure demanded that Qualcomm needed to find a quick way to the

market in order not to be driven out by competing mobile systems. The

response was to license out the technology to manufacturers of networks and

handsets. Open innovation helped not only Qualcomm to speed up its access

to markets like South Korea and the USA, but also rendered it into one of the

most profitable technology businesses with margins at around 30% and

revenues of US$ 7.5bn.


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Source: Mock, 2005

This opening up of the innovation has transformed the way technology

managers think about organisation. As a consequence, researchers and

managers are broadening their view from the focal organisation towards its

network of suppliers, distribution partners, inventors, partners and other

stakeholders. This open approach to organisation is behind the evolving

concept of the business models. Coming from a technology management

perspective Chesbrough and Rosenbloom define the function of a business

model as (Chesbrough and Rosenbloom, 2002, p. 533):

• to articulate the value proposition, i.e. the value created for users by

the offering based on the technology;

• to identify a market segment, i.e. the users to whom the technology is

useful and for what purpose, and specify the revenue generation

mechanism(s) for the firm;

• to define the structure of the value chain within the firm required to

create and distribute the offering, and determine the complementary

assets needed to support the firm’s position in this chain;

• to estimate the cost structure and profit potential of producing the

offering, given the value proposition and value chain structure chosen.

Business models are also a response to the increased options for connecting

different legally independent organisations, by the means of information


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technology and new types of contracts. Virtualisation enabled decoupling

information from physical activities, thereby enabling new connections

between activities, resources and management-governance (Zott and Amit,

2002). A crucial element of e-Business is the re-configuration of business

activities with the help of information infrastructure. In that regard, the

business model provided a conceptual focus that captured the re-configuration

of factor- and product markets with stakeholder activities, as reflected in Amit

and Zott’s definition:

“A business model depicts the content, structure, and governance of

transactions designed so as to create value through the exploitation of

business opportunities. This provided opportunities for new entrants. For

example online shops are able dis-intermediate stages in the physical

distribution network, by collecting orders online and use them to direct supply,

manufacturing and distribution operations” (Amit and Zott, 2001, p. 511).

Ultimately, e-business is just an indicator of an increased flexible approach to

organisation, with the aim to synchronize organisational structures with

emerging business opportunities. Ultimately, business models are at the heart

of strategies aiming to succeed with a focus on emerging potential for value

creation and furnished by a flexible approach to organisation (2010, p. 3):

“The business model is a structural template of how a focal firm transacts with

customers, partners, and vendors; that is, how it chooses to connect with

factor and product markets. It refers to the overall gestalt of these possibly

interlinked boundary-spanning transactions”.

Thus business models are a strategic response to the challenge to align

structures and strategies in innovation process.

Or in other words they are “the design of organisational structures to enact a

commercial opportunity” (George and Bock, 2011). Business models are

devices to navigate a company towards its most promising business

opportunities.


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3.4 Marketing and business models

Marketing seems a natural ally of business model thinking. Customer value is

its ultimate ratio, value chain thinking is at the heart of marketing-channel

design and pricing policy is related to the core question of value capturing by

the firm. However, experience of disruptive innovation show, that marketing

and business models can be out of synch. A first step to resolve this paradox

is to understand that business modelling and marketing refer to different

audience.

At the core of marketing is the positioning of the company’s offering on the

product markets (‘product’ understood here in the broader sense as demand

for goods, services and solutions). The focus of product market strategy is the

uniqueness of the firm’s offering, i.e. providing unique benefits, low costs or

serving needs of niche segments. The ultimate purpose of business modelling

is the same – provide the firm with a unique value proposition. While the

product market strategy however, focuses on the design of marketing

programs that in turn need to be implemented by the organisation, the

business model approach builds upon the orchestration of its activities within

the larger network of the firm (Table 12). In contrast a product market

strategy targets the position in the market.

Table 12. Business model vs. product market strategy

Business Model Product market strategy

Definition A structural template of how a focal firm transacts with customers, partners, and vendors. It captures the pattern of the firm’s boundary spanning connections with factor and product markets.

Pattern of managerial actions that explains how a firm achieves and maintains competitive advantage through positioning in product markets

Main questions addressed

• How to connect with factor and product markets

• Which parties to bring together to exploit a business opportunity, and

• how to link them to the focal firm to enable transactions (i.e., what exchange mechanisms to adopt?)

• What information or goods to exchange among the parties, and what resources and capabilities to deploy to enable

• How to control the transactions

• What positioning to adopt against rivals

• What kind of generic strategy to adopt (i.e. cost leadership and/or differentiation)?

• the exchanges? • When to enter the market? • What products to sell? • What customers to serve? • Which geographic markets to address?


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Source: Amit and Zott (2008), p. 5

Product marketing strategies are closely related to a phenomenon that Day

diagnosed as the “Marketing Capabilities Gap” (Day, 2011). Marketing is

experiencing the pressure of similar forces at work in technology management

and e-business. Marketers experience the rapidly explosive environment with

an exploding information overload, a fragmentation of markets, the

proliferation of micro-segments as well as an explosive growth of

communication and distribution channels (Day, 2011; Hagel et al. 2008).

This increasing complexity forces marketers rethink their role in organisations.

Micro-segments, fragmentation and marketing programs aiming at product

market position are becoming increasingly obsolete. A viable response points

towards the same direction as the evolution of business modelling towards

adaptive capabilities of the firm (Figure 32).

Figure 32. Implementing adaptive marketing capabilities Source: Day (2011), p. 191

between the parties, and what incentives to adopt for the parties?

Unit of analysis

Focal firm and its exchange partners Firm

Focus Externally oriented: focus on firm’s exchanges with others

Internally/externally oriented: focus on firm’s activities and actions in light of competition

Organisation

Aligned with

Market •Metrics •Structure •Market orientation

Adaptive Business Models

Adaptive Implementation

Activities •Marketing-mix choices •Brand asset management •Customer asset management

Adaptive Marketing

Capabilities •Vigilant market learning •Adaptive market experimentation •Open marketing

Vigilant Leadership


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In the strategic perspective, marketing needs to develop adaptive marketing

capabilities that support the company in its pursuit of creating open business

models (Day, 2011). Important elements are:

• Vigilant market learning: Elements are a strategic focus with a

perspective beyond the immediate. In that regards, managers need to

be more open, search for diverse inputs and foster wide-ranging

professional and social networks.

• Strategic foresight: This entails a longer time horizon and a more

flexible approach to strategy formulation.

• Adaptive market experimentation: This requires a culture of

exploration and experimentation. Important elements are supporting

employees with providing unstructured time for exploration activities,

support a culture of risk-taking, curiosity and exploration.


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4 Marketing in the Entrepreneurship Process

Marketing has a vital role to play in the entrepreneurship process. Ultimately,

the value of products offered on customer markets needs to exceed the value

of resources needed for their offering. So marketing looks like the first point of

call, when managers need an idea of customer valuation.

Why then incumbent firms failing so often to provide appropriate valuations of

innovations?

As Day (2011) points out, marketing is facing a capabilities gap in the face of

increased innovation based competition. The explosive dynamics and

complexity has undermined the viability of the strategic marketing planning

process. A crucial step for marketing is to embrace the increasing

interconnectivity of businesses channels and build capabilities and structures

that support the design of adaptive business models (Figure 33).

Figure 33. Marketing in an open network Source: Day, 2011, p. 190


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Figure 34. Marketing Roles in the innovation process

Furthermore, firms should identify the role of marketing and its distinctive

tasks in the different stages of the innovation process (Figure 34):

• Marketing in the exploration phase: The exploration phase is

concerned with new opportunities. Here marketing is concerned with

un-addressed needs of users, user-based value of an innovation as well

as perception of an innovation. A potential challenge of established

companies is that relevant users of an innovation are not necessarily its

present customers. A challenge of customer valuation and prioritization

is to identify customers or users with potential future value.

• Formulation of business models: The formulation of a business

model is a vital step to make an innovation strategy operational. A

business model aims to direct the introduction and capitalization of a

value proposition. Thus a business model comprises: the formulation of

a value proposition; the revenue-generation mechanism that a company

intends to apply; and, the definition of the relevant resources and the

value network needed for the realization.

• The exploitation phase: Here the role of marketing is focused on

generating the revenue stream. Communicating with prospective

customers, orchestrating the value network, i.e. the distribution

channel.

Marketing in the

Exploration Phase

•Identifying Sources of

Innvoation

•Connecting with Innovative

Users

•Building Value-in- Use Models

Marketing Strategy and

Business Model Design

•Define the Value Proposition

•Define the Revenue Generating

Mechanism

•Design Resource Base and

Value Network

Marketing in the

Exploitation Phase

•Understanding Diffusion of

Innovations

•Communication in the Diffusion

Process


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From the perspective of this model it becomes clear, why incumbents tend to

struggle with disruptive innovations. While almost every company is involved

in some sort of innovation process, incumbents are primarily focusing on the

exploitation phase of that process. They relate to their most profitable

customers and cater to their highest valued needs. When the most promising

future business ideas emerge in domains that are distant from the present

customer base of company, customer-centric approaches are likely to

disconnect the company from future markets. Therefore, the exploration

phase can rely only partly on existing market information. Thus, this phase is

dominated by the search of new dimensions of ‘Value-in-Use’ that are

currently not served by the current market supply.

A first observation is that marketers of established companies are rather

concerned with exploitation activities – realising sales of products and services

where both customers and companies have gained a good understanding of

their valuation. Once the ‘dominant design’ of a product category is

established, marketers can rely on macro-data to direct their market activities.

The position of the offering in the market place entails information for pricing,

indicators for segmentation like demographics have become apparent, efficient

channels have been identified and established. In such environments,

marketers can use a set of market indicators for the efficient management of

their activities. Furthermore, marketing is related to resource allocation. In

market based economies, companies need to allocate resources to generate

sales. This nurtures innovations that fit into the pattern of demand by present

customers.

In the nascent stages of an innovation, the situation is fundamentally

different. Radical innovations, that draw on new types of users, new

paradigms, usage patterns and different evaluation frameworks, present a

deviation from existing customer-company relationships. To start with, there is

no valid market information about customer valuation of the innovation. How

much the customers are willing to pay will be revealed in the market process.

Current market data might provide some benchmarks or orientation points for

innovations, but they provide no direct valuation. But innovators have an

alternative. Instead of relying on market data, they can rely on the value-in-

use of an innovation. A value-in-use analysis reveals the cost and benefit


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implications of an innovation for its users. Value-in-use expresses the value of

an innovation from the perspective of the user. All benefits of an innovation,

like improved quality, enabling of more efficient processes, ethical values or

social status, as well as user-cost reductions, are potential sources of value-in-

use.

4.1 Transforming Business Models to Marketing Strategy

From a business perspective the vital task of strategy is to translate

opportunities into actionable project that ultimately converts into profits. At

the core of the strategy stands the business model, where a company defines

its value proposition (the innovative offering), the mechanism for revenue

generation and the architecture of its value creation network.

As discussed in Section 3.3, the business model approach differs substantially

from product oriented marketing strategy. Product oriented strategy starts

with an analysis of the company, its specific strengths and weaknesses and

continues with its position within an industry in order to identify generic

strategies. Like product differentiation, cost leadership or the focus on a

profitable niche-segment.

Business model philosophy starts with the identification of the business

opportunity, and seeks the formulation of value propositions, revenue

mechanisms and the design of the value network.

The value proposition describes a value generating offering. The revenue

mechanism describes how the innovating company intends to recover its

investments in innovation. The design of the value network describes what

organization design the company implies for the exploitation of the

opportunity and how potential partner, complementors and suppliers are

involved in the exploitation of the innovation.

4.1.1 Defining the Value Proposition (Product Policy in an innovative

environment)

Business model thinking starts with the identification of an opportunity as

starting point for the definition of value propositions. While value propositions


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are the basis for the definitions of innovative products, they precede the

definition of innovative products or service offerings.

The starting point is a rather general idea, like a new technology, a more

efficient process or a new design. The crucial step towards a value proposition

is to identify the relevant customers for its markets. A successful innovation

should either offer more value for end-consumers or reduce the costs for value

creation. However, in a complex 'networked” economy, many individuals and

organizations are involved in the value creation process. Innovators need to

understand, how their invention is implemented in the value-stream from idea

creation towards the end-consumer. In many cases, the end-consumer is not

necessarily the crucial client, but firms within the value network. Take a look

at the case of Qualcomm, described in chapter 3.3. Qualcomm had developed

a potential valuable technology for digital mobile telecommunication.

Initially, Qualcomm produced all elements that are needed for such a network,

like the network infrastructure, antennas and the mobile phones. The crucial

decision for Qualcomm’s success was to refrain from offering the complete

system. Instead they exclusively rely on licensing the technology to company’s

producing telecommunication equipment or consumer handsets. Instead of

focusing on the consumer market, Qualcomm focused on the business market,

offering companies in the telecommunication business opportunities for

differentiation by digital mobile communication, or cost reductions in the

operation of a mobile communication network. This step provided the following

crucial advantages:

1. Time advantage: As licensor of its technology, Qualcomm did not need

to take heavy investments into transmission equipment, network

infrastructure or handset development. This time advantage helped its

CDMA standard to be considered as an alternative to the GSM status.

2. Differentiation advantage: As an engineering company, Qualcomm

lacked the crucial competencies for differentiation on consumer

markets, like product design, branding or the offering of value added

services. Offering its technology to handset-manufacturers provided

them with a valuable opportunity for the differentiation or their product

portfolio.


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3. Profitability: focusing on business rather than consumer markets helped

Qualcomm to leverage on complementary investments by industry

players. This translated into an extremely profitable business

proposition.

Identifying value propositions have substantial implications for eventual

product and service-design. In the case of Qualcomm, its first definition to

provide an integrated network for the network operator, required the design of

a systems architecture and the production of a wide set of at times complex

component. In contrast, as a licensor, Qualcomm has almost completely

refrained from product design. Handsets using Qualcomm standards get a the

computer processor that directs connection and communication.

In short, the crucial redefinition of the value proposition, was to substitute

consumers with equipment and handset manufacturers as the main

addressees of the value proposition.

Figure 35. Elements of a Value Proposition

Identification

of Value

Potential

Determining

key Addresses

of Value

Proposition

Implications

for Product

and Service

Design

Value Proposition


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Box 4.Better Place: Value propositions for electric cars

The electric car holds many promises, like reducing gas and noise emission,

enhancing driving comfort and performance. To date all these benefits come at

the trade-offs of short mileages per full battery charge and long recharging

times. Better Place develops a value proposition to deal with this problem:

Offering the switching of charged for empty batteries as a service.

Car drivers do not get the battery as part of the car, but just rent one fully

charged battery. As soon as they run out of power they drive to a battery

switch station and switch a battery for a fully charged one. While technically

the battery charging process takes intolerable time for long-range journeys,

switching batteries is only marginally different from gas-refuelling.

From a business perspective, value propositions need to be quantified for

designing and directing business projects. A starting point for quantifying the

value proposition is to identify the net value of its implementation, balancing

all benefits and costs and contrasting with the next best alternative in the

market. This is the basis for the following formula (see Anderson et al. 2006):

Vs-Ps>Va-Pa

Where Vs is the value of the supplier’s offering, Ps its price, Va the value of

the best alternative and Pa the price of the next best alternative.


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This simple formula gives the first insights that are useful for the

determination of value propositions. Basically it indicates that the net-value of

an innovation must exceed the net value of the next best alternative.

Two sources of value propositions strike at first sight:

• Innovators can arrive at a superior overall proposition by providing

higher value for the same price as the next best alternative. The crucial

information for these types of value proposition are insights from the

value-in-use study of users. All sorts of benefits are potential elements

of this value, for example: better performance, reduction of costs,

simpler operation, higher quality, higher level of reliability, increase of

revenues, enlarging of brand value or strengthening of reputation.

• Innovators can arrive at superior overall propositions by introducing

innovations that allow the provision of equal value at lower prices. This

type of innovations has gained ground by the rise of emerging

economies, that grow by ‘frugal innovations’ that are driven by lower

cost. Fast growing developing economies call for innovations that cater

to the bottom of the pyramid. There, the main challenge is not for

performance barriers, but to provide affordable solutions that work in

the context of underdeveloped infrastructures. One major success, for

example, of General Electrics was the development of a mobile cardio-

meter, that is mobile enough for physicians caring for huge rural areas

and affordable at the same time.

Furthermore the value proposition should look at the types of alternatives,

which may not confined to products and services available on the market, but

self-production and self-service of potential customers. For example

alternative value proposition may be gained not by offering a product or

service but by convincing the customer to ‘produce’ the product/service and

consume it directly. The firm on such cases gains by saving the operational

costs of delivering such products/services. Such examples are the internet

banking services, the ATM based services or the booking and self-check in

services by the airlines.


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4.1.2 Designing and quantifying revenue generation mechanisms

Even if a start-up company may incur losses over years with the support of

external investors, the ultimate business test of an innovation is if it can

recoup its investments. Thus, determined innovators need to care about

revenue generating mechanisms.

The challenge rises from the need to balance customer risk with the need of

the supplier for a basis for value capturing. In the pioneering days of Internet-

business, most business plans prioritised on maximising the user base of a

service, mostly by offering internet-services for free. While this most probably

drove the tremendous speed of Internet-adoption, still today profit-searching

companies try to use mobile-services where payment mechanisms are

established and accepted in favour of the free-wheeling web-culture.

From a customer perspective, innovation revenue is one substantial element of

the costs of innovation, in addition to costs related to implementation, the life-

cycle costs and effects on the cost structure of the users process.

Business models help to share risks between suppliers and customers. From a

business model perspective, products and services are alternative means for

exchange of value for revenues. Take the case of Rolls Royce Airplane

engines. Airlines can buy an aircraft, including its engine. In that case they are

responsible for all costs, recurring to maintenance and repairs over the life-

cycle of the airplane. Alternatively, Rolls-Royce offers maintenance and repair-

services for a service fee. In that case, Rolls-Royce takes responsibility for a

basic functionality of the airplane engine. The most extreme form is a

performance contract. In its “power-by-the-hour” contracts, Rolls-Royce is

only compensated for the hours the airplane is effectively in operation. This

makes Rolls-Royce effectively part of the flight operation, and incurs

substantial business risks of flight operations. From the perspective of the

airline, this shifts part of the risk of flight operation to the engine

manufacturer (See Wirtz and Ehret 2009; Ehret and Wirtz 2010).


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Figure 36. Business model and risk sharing

Box 5. Examples of funding mechanisms

Charge the customer in a palatable

way. The classic approach to funding

something of value is simply to have the

customer pay for it, but often it is

possible to make the form that payment

takes less objectionable to customers.

Rarely is that done with à la carte

pricing for the niceties. A large part of

Starbucks’s appeal is that a customer

can linger almost indefinitely in a

coffeehouse setting. It’s unthinkable

that Starbucks would place meters next

to its overstuffed chairs; a better way to

fund the atmosphere is to charge more

for the coffee. Commerce Bank is open

late and on weekends – earning it high

marks on extended hours – and it pays

for that service by giving a half

percentage point less in interest on

deposits. Could it fund the extra labor

hours by charging for evening and

weekend visits? Perhaps, but a slightly

lower interest rate is more palatable.

Management in any setting would do

well to creatively consider what feels

Have the customer do the work. One

other type of funding mechanism for

enhanced service puts the cost back in

the customer’s court, but in the form of

labor. Offering self-service, from pump-

your-own gas to self-managed

brokerage accounts, is a well-

established way to keep costs low. If

the goal is service excellence, though,

you must create a situation in which the

customer will prefer the do-it-yourself

capability over a readily available full-

service alternative. Airlines have

achieved this, at last, with flight check-

in kiosks, although the value proposition

they initially presented was dubious. At

first, passengers felt compelled to use

the relatively unappealing kiosks only

because carriers had allowed the lines in

front of manned desks to become

intolerable.

Today, however, frequent fliers prefer

the kiosks because they provide readier

access to useful tools like seat maps.

Businesses looking to achieve service

Supplier

Performance

based Business

Models (Supplier takes Risk)

Service based

Business Models

(Supplier and Customer share

Risks)

Customer

Product based

Business Models

(Customer takes Risks)


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fair to its customers. Often, the least

creative solution is to charge more for

the particular service feature you are

funding.

excellence in other settings should not

take such an indirect route. They should

set themselves the challenge of creating

self-service capabilities that customers

will welcome. Indeed, if a self-service

option is truly preferable, customers

should be willing to take on the work for

nothing or even pay for the privilege.

When managers designing self-service

solutions are not permitted to add the

inducement of price discounts, they are

forced to focus on improving the

customer experience.

Whatever funding mechanism is used to cover the costs of excellence, it is best

thought out as thoroughly as possible prior to the launch of a new service, rather than

amended in light of experience afterward. When a service that’s been perceived as

free suddenly has fees associated with it, customers tend to react with

disproportionate displeasure. And since companies cannot thrive by offering service

gratis, it is vital that they not set expectations that can’t be sustained. With careful

analysis and design, a company can offer and fund a better service experience than its

customers would enjoy elsewhere.

Source: Frei, 2008

The supplier challenge in revenue generation is mostly incurred into a

mechanism for capturing value of an innovation. This resides with the

challenge of entrepreneurial imitation (Kirzner, 1997). Profit indicates

opportunities and attracts imitators who want to capture a share of the pie,

including the customers using an innovation.

The core condition of an innovation is its appropriation regime, that is the way

a regime is protecting an innovator from imitation (Teece and Pisano, 2007).

According to Teece and Pisano (2007) strong appropriability regime is one

where the innovation is hard to imitate, either because of strong legal

protection, for example by patents, copyrights or trademarks, or, because a

technology is difficult to imitate. For example, standards of international

telecommunication are worldwide codified and enforced. This provides a strong


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appropriability regime for Qualcomm. In contrast, despite music distribution is

in theory partly protected by copyrights, it is hard to enforce in internet

services (Chesbrough, 2006). Thus, the music industry has started lately to

move into mobile platforms, like itunes; to alternative revenue streams

including subscription services like Spotify; or, the value capturing of live

events.

The case of live events is just one example of how services can provide strong

appropriation regimes. A crucial element of services is customer interaction.

To the extent that services entail specific elements for a customer, like

personal training, or to a group, like an event, they provide a strong

appropriation regime. Bhide (2008) goes as far to state, that complex services

provide developed economies with a strong competitive advantage over

emerging economies trying to compete by the means of imitative competition.

Many innovators combine customer risk and appropriation regimes when

designing their revenue stream mechanisms. Take the example of open

software, like the Linux operating system. This takes part of the customer risk,

as customers do not need to invest financially into the operating system.

However, open-source software providers use value added services in order to

re-coup software development costs. IBM backs up the Linux system with a

range of software patents for free use, and therefore can use a platform for

IT-services that is independent from competitors like Microsoft. IBM recoups

by the means of its service offerings (Chesbrough, 2006).

4.1.3 Design of the Resource base and Value network

A crucial question of a business is the definition of its scope. Management fads

of recent decades have approached this with “outsourcing” or “make-or-buy”

decisions. But in fact, every business needs an idea of what activities are part

of its operations and which are not. Thus, traditional manufacturers used to

“outsource” downstream activities to distribution channels. But decisions of

scope refer to insourcing as well. Take Nike for example, which has a

reputation for a low-level of vertical integration. While this is true in a general

sense, Nike controls activities on every stage of the value creation process.

Upstream, it holds firms that develop and manufacture special high-value

materials. Downstream it operates Nike town-shops, where its products are

presented in an exclusive appealing environment.


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The philosophy behind this is to orchestrate a value network, that converts

into a premium experience for the customer.

Companies play different roles within value networks. At the core, operation-

network-architects provide a core entrepreneurial vision for the network, own

the brand, signifying its identity, and are in the position of an orchestrator.

Famous network orchestrators are companies like Nike in sports, Apple in

electronics or big automotive companies like Toyota, Ford or Volkswagen.

Frequently these architects find themselves in favourable positions, as they

control access to the network, contribute the basic philosophy and govern the

critical rules of the network. This puts network architects in the position to

shape core activities, philosophy and rules and thereby also get a substantial

share of profits generated from innovation.

Complementing firms however, operate around the core, have opportunities

too. With such a network they find the infrastructure that may provide a fast

avenue for their innovations. Consider for example the Apple application store,

where Apple acts as the network architect for an ecosystem of small to

medium software engineering companies and mobile service providers. Apple

finds itself in a favourable position, enabling it to claim 30% of all revenues

generated on its app-store for videos, music, books and apps. But it can be

profitable for complementing firms too. Roxio for example, a small gaming

studio that used to make its living with programming jobs for big gaming

studios. The company was close to bankruptcy when it developed “Angry

birds” an addictive game that proved as the most popular application on the

Apple app-store. The Apple application store worked for Roxio as the fast lane

to success and a valuable alternative to other congested channels. Ultimately,

it saved the company and paved the wave for an astonishing growth story.

As a conclusion, value network design entails the following crucial steps:

• Based on the value proposition, the description of all critical

components and activities that are crucial for value delivering and

revenue generation.

• An account of organizations and persons who are capable to offer the

critical elements.


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• An analysis of the competencies, strengths and limitations of the

customer.

• Framework of risk-sharing in the value network, that allocates

entrepreneurial responsibilities in line with profit incentives and

customer value.

4.2 Marketing in the Exploration Phase

Where do innovations come from? In a market context, by definition they

might come from almost anywhere. An efficient market is built upon the free

flow of information about available products and services as well as their

prices. Thus innovation policies of companies have to target opportunities that

have not yet been reflected in market prices.

A prominent case is the consumer goods company Procter & Gamble that

found itself squeezed by powerful retailers. In the face of massive losses and

the prospect of redundancies the company decided to open up its innovation

process with its “connect and develop” initiative. The program initiated 2000

innovation projects with suppliers and other external companies. It proved a

massive success, re-strengthening the brand equity of Procter & Gamble and

reinforcing its clout in negotiating with retailers .

A lesson that many companies have learned through the recent decades is

that there are many more valuable sources of innovation further to the R&D

department. These can be suppliers working on improvements of components,

external Research organisations like university-labs, partnering companies or

customers.

Marketing plays a key role in this process, as customers are a potential viable

source of innovation and have the decisive say in the verdict over an

innovation.

One surprising outcome of innovation activities often is that users have

already developed the next successful innovation. Eric von Hippel (1988) first

spotted the phenomenon in the market for medical instruments. Leading

laboratories are actively tweaking, crafting and adapting their instruments.

Medical systems companies learned soon that these clients are a valuable


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source of innovation. In these cases the crucial step was to translate these

innovations into mass-market designs. The bulk of the R&D had already been

provided by the users.

For many reasons users are a valuable source of innovation. First, they are

perceiving challenges first hand. To the extent that they actively deal with

these challenges, often they are pioneers in that field. In many instances their

user-based-knowledge, which is an implicit type of knowledge that is not easy

to communicate, provides them with relevant expertise for developing an

innovative product or services.

Therefore, an important task of marketing in the exploration phase is to

connect with users and attract them as co-designers for a company. For

examples, Nike was successful by attracting a community of basketball-

players as co-designers of a basketball sneaker. The players were well aware

of major requirements, e.g. reducing pressure on knees and bones. This

awareness in combination with an advanced virtual design package enabled

them to transform implicit knowledge in a productive way.

In several cases however the user is not necessarily identical with the buyer.

For example, business companies have established large procurement

departments that direct the buying process. While they control the spending

budget, users may have a substantial influence through their valuation and

initiative in the buying process. Similarly on consumer markets, users are not

necessarily identical with buyers, e.g. toys for kids are often bought by their

parents. At any case in order for the users to play this crucial role in

innovation, or to press their procurement actors to such direction, is to

perceive the new offer as a considerable added value.


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Figure 37. User Base community: the case of Nike sneakers Source: Füller et al, 2007

4.3 Marketing in the Exploitation Phase

A crucial element of branding innovations is to communicate their value in use.

The most convincing position of a brand is when it is associated with a

valuable everyday activity, i.e. becoming a ‘verb’. Google as one of the most

valuable brands has reached that status, as ‘to Google’ is the equivalent word

for internet search, or in UK ‘to hoover’ is the equivalent of vacuum cleaning.

Many service companies have been successful in establishing purpose brands.


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In the US, office worker use to Xerox, if they need copies of documents, or to

Fedex, if they want to send them from coast to coast.

Figure 38. Purpose Brands vs. Endorser Brands Source: Christensen et al., 2005

Moreover for an innovation to raise to its full potential it is necessary to

capture a promising market position. At this point communicating the value

proposition and convincing customers is the crucial task. Demographic

segmentation, practiced in traditional marketing, is almost useless in that

regard. Innovation research reveals that users show specific behaviour

towards innovation. While innovative users are appreciating innovations for

the sake of newness, conservatives need to be coerced in order to accept new

products or services.

Rogers (1995) provided a series of studies on the diffusion of innovations. He

was able to identify significantly different innovation behaviour of users. He

claims that, users can be segmented along a normal distribution over time

(Figure 39).


89

Figure 39. Adopter Categories within the Diffusion Process Source: Rogers, 1995

Depending on the variance of their time of adoption, he claims five categories

of adopters:

• Innovators are risk taking users, that experience benefits simply by

experimenting with new products and services. For them, tangible value

is not relevant. Simply trying out new things is part of their life driven

by curiosity and experimentation.

• Early adopters are rather innovation agents of a social systems. They

try to spot promising innovations and gain from acting as pioneers.

• The early majority are taking a rational approach towards innovation

and tend to adopt them as soon as it has proven its value propositions.

Often times they act as opinion leaders who influence more

conservative adopters.

• Around the average point of adoption are the late majority. They

represent moderate risk-taking or risk-aversion attitudes towards an

innovation.

• Laggards are conservatives who show a negative attitude towards

innovation. They will only adopt it when it has been proved risk free and

has become a commodity.

The major implication for innovating companies is to address and convince the

innovative segments of user, like the innovators, early adopters and early

majority. These are likely to take risk and work as multipliers in the course of

the innovation process. They are also valuable targets of “viral marketing”

strategies, that predominantly try to stimulate communication within the

market place, than overwhelming the market with advertising messages.


90

Viral marketing is a rather recent marketing approach. It bases on the insight

that users demonstrate different adoption behaviour, from experimental

innovation, towards stubborn conservatism. In addition, users seek

experiences of peer users as a credible information about the benefits and

risks of an innovation. The core idea of viral marketing is to tap into the

communication process among users, rather than spreading messages to an

anonymous audience. Crucial elements of a viral marketing strategy are:

• Identification of the social network relevant for the adoption of an

innovation. For many product and service categories there are easily

identifiable self-organising user groups, like biker clubs for motor cycles,

user groups for software and games or self-help groups for specific

health topics.

• Identification of communication relationships and key influencers in the

network. At this point it is crucial to address the key influencers within

the network.

• Identification of viral instruments. Early attempts of viral strategies

where the automated or personalised recommendation systems, as the

one still used by amazon.com. More active strategies are blogs, where

innovation prone users generate content and initiate debate of

innovation. In consumer electronics, blogs like engadget or gizmodo

have recently become influential. A more active approach is to make the

product itself viral, by making it part of a communication network, as

part of virtual social networks like facebook. A crucial part is a network

presence including a “share” button. In categories like movies, adoption

rates could be boosted by the factor 400 (Zsolt et al. 2011).

To conclude, the diffusion of innovations is driven by communication among

users. Viral marketing strategies try to stimulate such communication

processes, by tapping into social networks and nurturing communication.


91

Box 6. The 4 things a service business must get right

Diagnosing Service Design

The success or failure of a service business comes down to whether it gets four

things right or wrong – and whether it balances them effectively. Here are some

questions that will sharpen managers’ thinking along each dimension and help

companies gauge how well their service models are integrated.

1. The Offering • Which service attributes (convenience? friendliness?) does the firm target

for excellence? • Which ones does it compromise in order to achieve excellence in other

areas? • How do its service attributes match up with targeted customers’ priorities?

2. The Funding Mechanism • Are customers paying as palatably as possible? • Can operational benefits be reaped from service features? • Are there longer-term benefits to current service features? • Are customers happily choosing to perform work (without the lure of a

discount) or just trying to avoid more-miserable alternatives? 3. The Employee Management System

• What makes employees reasonably able to produce excellence? • What makes them reasonably motivated to produce excellence? • Have jobs been designed realistically, given employee selection, training,

and motivation challenges? 4. The Customer Management System

• Which customers are you incorporating into your operations? • What is their job design? • What have you done to ensure they have the skills to do the job? • What have you done to ensure they want to do the job? • How will you manage any gaps in their performance?

The Whole Service Model

Are the decisions you make in one dimension supported by those you’ve made in the

others?

Does the service model create long-term value for customers, employees, and

shareholders?

How well do extensions to your core business fit with your existing service model?

Are you trying to be all things to all people – or specific things to specific people?

Source: Frei, 2008


92

5 Marketing Innovation Plan

The automobiles market is currently experiencing a boom of new

opportunities, like new power sources, materials and approaches to design.

Your task is, using the info from Appendix A and B, to set-up an exploration

project for spotting valuable ideas for innovating the automobile industry.

Provide an overview of potential sources of innovation. Develop an idea to

bring in the user perspective and design contributions to market that project!

Task 1. The New Offering

Try to identify and characterise customer types: innovators, early adopters

and laggards of the product.

Using the Marketing Instruments (section 2.3) identify your Value Offering

from your firm’s point of view and the customer’s point of view (4Ps/4Cs).

Task 2. Market/Offer Organisation

Briefly review of key concepts of marketing in innovative environments (Figure

34) with reference to the new offering.

Map out how you think your potential customer goes about making a potential

purchase decision for the product. What are the key internal influences (e.g.

motivation) and external influences (e.g. personal influences) that affect their

decision to buy?

Point out how you might be able to influence their decision with your

marketing programme.

Which are the implications into your business model, e.g. transactions with

customers, partners, and vendors.

Task 3. Market Exploration

Using the concept from the previous task, translate this into a value

proposition. Identify the most direct competitors and record the prices they

charge. Apply the value-proposition formula and explain and validate your

proposition (section 4.1).

Identify the revenue stream for your innovation.


93

Design the value network for your innovation. Do you aim for the role of the

architect or of that of the complementor?

Task 4. Diffusion (communication)

Design a communication strategy (Messages, segments, channels) for the

introduction to the product in the market using the Laswell communication

formula (Figure 24).

Develop a purpose brand for the product.

Task 5. Strategic Implementation and Control

What are the most important tasks that you must complete to exploit this

opportunity?

An outline of key indicators for controlling the marketing innovation process.

Task 6. Conclusion

Using the information from the above tasks create a comprehensive Marketing

Plan.


94

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Appendix A. Mini E

Source: Wikipedia, the free encyclopaedia, August 2011

The Mini E is a demonstration

electric car developed by BMW as a

conversion of its Mini Cooper car.

The MINI E was developed for field

trials and deployed in several

countries, including the United

States, Germany, UK, France,

Japan and China.[1] The field

testing of the Mini E is part of BMW

Project i, which will be followed in

mid 2011 by a similar trial with

the BMW Active E, and the last

phase of project is the

development of the BMW i3 urban

electric car, that is expected to go

into mass production between

2013 and 2015.[2][3]

The first trial was launched in the

U.S. in June 2009 and the Mini E

was available through leasing to

private users in Los Angeles and

the New York/New Jersey area.[4]

Another field test was launched in

the U.K. in December 2009, where

more than forty Mini E cars were

handed to private users for a two

consecutive six-month field trial

periods.[5] This trial program

allowed the BMW Group to become

the world's first major car

manufacturer to deploy a fleet of

Mini E

Manufacturer BMW

Production 2009-

Assembly Oxford, England

Class Small family car

Body style 3-door hatchback

Layout FF layout

Electric motor 150 kW (200 hp) asynchronous

motor

Transmission 1-speed helical

Battery 35 kilowatt-hours

(130 MJ) lithium ion battery

Range 100 mi (160 km)

Wheelbase 97.1 in (2,466 mm)

Length 146.2 in (3,713 mm)

Width 66.3 in (1,684 mm)

Height 55.4 in (1,407 mm)


104

more than 500 all-electric vehicles for private use.[6]

i. History

The Mini E was unveiled at the 2008 Los Angeles Auto Show.[7] BMW is

using its Mini brand to test the market with its electric powertrain

technology but the vehicle was also developed in order to meet new

California regulations that require carmakers to offer zero emission

vehicles.[8]

ii. Specifications

Powertrain

The Mini E is powered by an asynchronous electric motor that is mounted

in the former engine bay and is rated at 204 PS (150 kW) and 220 N�m

(160 ft�lbf) of torque. Drive is sent to the front wheels. The Mini E

employs a lithium-ion battery pack with an overall capacity of a 35

kilowatt-hours (130 MJ). The batteries weigh 572 pounds (259 kg) and

replace the back seat.[9] Top speed is electronically limited to 95 mph (153

km/h). The car’s range is 156 miles (251 km) on a single charge under

optimal conditions. Estimates of normal driving conditions put ranges at

109 miles (175 km) city and 96 miles (154 km) highway.[10]

Mini E under the hood

AC Propulsion issued a news release on November 19, 2008, stating that

AC Propulsion is a supplier for Mini E.[11] The news release states that AC

Propulsion supplies a specially developed version of its proprietary tzero, a

registered trademark, technology, including air-cooled copper-rotor


105

induction motor and Li ion battery on the Mini E. It is characterized by

high performance, high efficiency, and fast charging.

Charging

The Mini E can be charged through 120-volt (at 12 amp) and 240-volt (at

32 or 48 amp) power sources, and correspondingly, charging times are 20

hours and 3.5 hours (fast-charge system).[12] The user must set the

correct charge rate using the instrument panel before beginning charging.

Detailed instructions are in the user's manual.

The 240-volt 32-amp home "wall box" charging stations for the USA trial

were made by Clipper Creek,[13] with a proprietary electrical connector to

the car made by ODU.[14]

Performance

The acceleration is via drive-by-wire technology. A software mediated

delay makes the vehicle hesitate a little when the acceleration pedal is

first pressed. This artificially limits the electric motor's response,

preventing burnout from a standstill. After this initial delay, response goes

back to normal, making the Mini E a peppy little car.

The Mini E regenerative braking is designed to capture as much kinetic

energy as possible giving the Mini E a distinct driving characteristic. Once

the driver's right foot leaves the acceleration pedal, the Mini E starts full

regenerative braking. The vehicle slows down significantly as if the brake

pedal were pressed and the brake lights will turn on. On level surfaces

Mini E stops completely and the brake lights will turn off. To slow down,

one may just back off the acceleration pedal a little. Use of the brake

pedal may be reserved for emergencies and quick stops.

Production

The Mini factory located in Oxford, England, supplies vehicle gliders (cars

without powertrains) to a team located in Munich, Germany, which then

adds the electric running gear.[8]


106

iii. Field trial program

Rear view of the Mini E.

The Mini E trial will be followed by the field testing of the BMW Active E in

2011.

The field testing of the Mini E is part of BMW Project i, which will be

followed in mid 2011 by a similar trial with the BMW Active E all-electric

vehicle which will accommodate seats for four adults and cargo. The

Active E is based on the BMW 1 Series Coupe and will be built based on

the lessons learned from the Mini E field testing. The last phase of "Project

i" is the development of the Mega City Vehicle (MCV) urban electric car

(renamed BMW i3), which will be part of a new brand that will be sold

separately from BMW or Mini, and is expected to go into mass production

between 2013 and 2015.[2][3][15][16] The field testing of the Active E will

include fewer than 1000 cars and will be conducted in Los Angeles and

New York, but BMW is also considering expansion to other areas.[2][3]

U.S. program

In the U.S. a total of 9,500 people signed up to lease the MINI E for the

450 cars available.[17][18] In June 2009, Mini started the program by


107

leasing 250 units in Los Angeles area and 200 in the New York/New Jersey

area.[2] The leasing price was set at US$850 (approx. €600) a month for

one year and included collision coverage, maintenance costs, and home

installation of the charging station.[3] Residents of New Jersey did not pay

sales tax on their lease due to the existing state exemption for battery

electric vehicles.[19]

In May 2010 BMW announced that leasing could be renewed for another

year at a lower price of US$600 a month.[15][20] This renewal was offered

to all individuals who currently have a Mini E but fleet customers are

excluded, and according to BMW half of all current lessees agreed to the

extension.[15][20]

European program

France

Field testing in Paris was scheduled to begin in 2010.[21][22]

Germany

A total of 100 trial vehicles were assigned to Germany.[2] Field testing was

schedule to begin in Munich in September 2010, for a leasing fee of €400

(approx. US$517) per month.[23][24]

United Kingdom

Testing in the U.K. began in December 2009 with more than 40 Mini E

cars handed to private users for a two consecutive six-month field trial

periods.[5] The leasing price was set at GB£330 (approx. US$536) per

month, which includes VAT, insurance, service and maintenance.[5] In

addition, one MINI E was delivered to the Government car pool in

Downing Street to be tested by ministers in an urban environment on

their official business around London.[25]

The UK trial is a partnership between BMW Group UK, Scottish and

Southern Energy, the South East England Development Agency (SEEDA),


108

Oxford City Council and Oxfordshire County Council. Data collection and

research will be conducted by Oxford Brookes University’s Sustainable

Vehicle Engineering Centre throughout the UK project. Funding support is

provided by the Technology Strategy Board and the Department for

Transport (DFT) as part of a UK-wide program involving trials of 340

ultra-low carbon vehicles from several carmakers.[5][25] The selected test

area is roughly a triangle contained within the M40 motorway between the

M25 motorway and Oxford, the A34 south to the M3 motorway, and the

M3 back to the M25.[26]

China

Field testing in Beijing started on February 22, 2011.[27]

iv. Field test experience

The main concerns reported by some of the users participating in the U.S.

during the first year trial were range anxiety and lack of public charging

infrastructure, as the country had only 734 public charging stations, and

most of them were located in California.[6][12][28] Another concern reported

is that the already restrictive 100-mile (160 km) range on a fully charged

battery reduces to between 80 to 90 miles (140 km) during very cold

weather.[6][28] In the UK, an abnormally harsh winter also showed how

very low temperatures diminishes power output until the battery is

‘warmed-up’ once in use.[21] There was even one report of the range

dropping below 40 miles (64 km) in sub-zero weather.[29] There have also

been issues with exterior charging points as winter temperatures drop

dramatically.[21]

Other complaints in the U.S. related to the lack of space in the car as the

battery pack eliminates the Mini’s back seat and most of its cargo

area,[28][30] and the difficulties found in practice to install the charging

equipment in homes, which took longer than anticipated, as just getting

the installation permit in the U.S., including site visits and inspections

took up to a month.[30][31]


109

BMW

According to the BMW team of engineers responsible for the

demonstration program, the following are facts and key lessons learned

during the Mini E first year trial:[32]

� Most of the Mini E applicants were well-educated and well-off males

over 35, with an affinity for new technology, willing to experience a

new and clean technology, and for them the lower vehicle running

costs were not very important.

� Most drivers used the Mini E as a second vehicle and for the daily

commute.

� Longest trip in a Mini E to date was 158 kilometres (98 mi)

� In the Berlin trial, the average Mini E remained stationary for over five

hours in 80% of the cases while being charged and most of the

customers only charged their vehicles only two or three times a week.

U.S. participants were more likely to charge up every night.

� Before the test, drivers said they expected range and charging time

limitations to be a problem, however, during the actual trials these

issues were only felt to be limitations in very few specific cases.

� In the Berlin test, BMW decided to compare how people drive an

electric car to how they drive a more traditional model. For this

purpose they identified willing applicants who had either a BMW 116i

or a Mini Cooper and put data loggers in those vehicles. The results

showed that vehicle usage of the Mini E only differs marginally from

that of comparable Mini Cooper and BMW 116i trips.

v. UC Davis study

In May 2011 the Plug‐in Hybrid & Electric Vehicle (PH&EV) Research

Centre at the University of California, Davis published the results of a

consumer study of the U.S. Mini E field trial. The study is based on

surveys and interviews conducted with more than 120 families who leased


110

the electric car for the period of June 2009 to June 2010.[1][33] Some of the

key findings of the consumer study are the following:[1][33][34]

� 95% of the respondents drove fewer than 80 miles (130 km) a day;

and 71% drove fewer than 40 miles (64 km).

� The study shows that households adapted their driving around the

capabilities of the electric car, and respondents said the MINI E met

90% of their daily driving needs.

� Many drivers found that having limited cargo space and only two seats

was more restrictive than the limited range.

� Cold weather had a significant impact on drivers in the New York and

New Jersey areas, which suffered a particularly harsh winter during the

study period. These drivers discovered an unacceptable drop in the

vehicles' range when using the heater.

� In California, though infrequent, hot weather during August 2009

resulted in range loss and battery thermal management problems that

required attention from BMW.

� Most drivers reported initial difficulties in mastering the MINI E

aggressive regenerative braking system which is integrated into the

accelerator pedal. However, all drivers said that once they learned to

like the system, they discovered that they could travel more smoothly,

and learned to control almost all acceleration and braking events with

one pedal. They also discovered, thanks to the display panel

information, that they recovered energy proportional to their expertise

with the single pedal.

� 99% of respondents found home charging easy to use.

� 71% of respondents said they were more likely now to purchase an

electric vehicle than they were a year ago, and only 9% said they are

less likely.

� 88% of respondents said they are interested in buying a battery

electric vehicle or plug-in hybrid electric vehicle in the next five years.

Range record


111

As part of the 21st Century Automotive Challenge held at Penn State

University on May 23, 2010, the Mini E #466 achieved the longest trip in

such electric car to date, achieving 147.3 miles (237.1 km).[citation needed]

The Mini E went on to win the competition in efficiency. The competition

traversed three mountain ranges in the rain.[citation needed] The Mini E was

followed by a Tesla Roadster.[dubious – discuss]

vi. Alternative electric Mini

Nevada’s Hybrid Technologies has started production of its electric-

powered BMW Mini Cooper all-lithium model. The new electric Mini uses

Hybrid Tech’s own proprietary advanced lithium management and battery-

balancing system. Top speed is only around 80 mph (130 km/h) but

driving at a slower speed preserves battery-life and means owners will be

able to travel up to 120 miles (190 km) on a single charge.[35]

EVTV.ME has published a free "how-to" series of videos documenting their

conversion of a 2009 Mini Cooper Clubman to electric drive.[36] The

project uses a more powerful AC induction motor from MES-DEA and

TIMS600 controller to provide 177 lb�ft (240 N�m) of torque. It uses 112

readily available Sky Energy 100Ah LiFePO4 cells to provide an energy

storage of 40.3 kWh and a range of 125 miles (201 km). Top speed of 120

mph (190 km/h). This is an open source project using parts readily

available to anyone from existing suppliers and intended for those inclined

to do their own conversion of an existing 2009 Mini Cooper Clubman.


112

References

1. ^ a b c Turrentine, Thomas S., Dahlia Garas, Andy Lentz, Justin

Woodjack (2011). "The UC Davis MINI E Consumer Study".

Institute of Transportation Studies,University of California, Davis.

Retrieved 2011-06-14.Research Report UCD-ITS-RR-11-05

2. ^ a b c d e Tom Murphy (2010-05-19). "Mini E Only Beginning of

BMW EV Strategy". Wards Auto. Retrieved 2010-06-13.

3. ^ a b c d Joe Lorio (May 2010). "Green: Rich Steinberg Interview".

Automobile Magazine. Retrieved 2010-06-12.

4. ^ "BMW and UC Davis Partner on MINI E Study". Green Car

Congress. 2009-08-14. Retrieved 2009-12-25.

5. ^ a b c d "BMW Delivers 40 Electric MINI E Cars for UK Trial". Green

Car Congress. 2009-12-14. Retrieved 2009-12-25.

6. ^ a b c Peter Whoriskey (2009-12-24). "Recharging and other

concerns keep electric cars far from mainstream". Washington

Post. Retrieved 2009-12-25.

7. ^ Abuelsamid, Sam (2008-10-18). "LA Preview: Officially, official:

the MINI E!". Autobloggreen.com. Retrieved 2010-12-30.

8. ^ a b Alex Kaufmann. "Technical details for Mini ‘E’ electric vehicle".

MotorAuthority. Retrieved 2009-10-17.

9. ^ Taylor III, Alex (March 30, 2009). "Bavaria's Next Top Model".

Fortune 159 (6): 102.

10.^ "MINI USA: MINI E spec sheet (PDF)" (PDF). Retrieved 2010-12-

30.

11.^ Press release from AC Propulsion[dead link]

12.^ a b John O'Dell (September 2009). "BMW Learing Lessons From

Mini E Tes". Edmunds. Retrieved 2009-09-25.

13.^ Richard Steinberg (2009-09-21). "Mini Priority 1 Slides". Mini

USA. Retrieved 2010-06-22.


113

14.^ Edgju (2009-07-25). "ODU's connector for MINI E - is this a

robust design?". Retrieved 2010-06-22.

15.^ a b c "Mini Says Half of Last Year's Mini E Lessees Renewed for

Another Year". Edmunds.com. 2010-05-12. Retrieved 2010-06-12.

16.^ Phil Patton (2010-07-03). "Envisioning a Small Electric BMW for

the World’s Very Big Cities". New York Times. Retrieved 2010-07-

03.

17.^ Abuelsamid, Sam (2008-11-06). "MINI E will reportedly cost

$850/month for one-year lease — Autoblog Green".

Autobloggreen.com. Retrieved 2009-10-17.

18.^ "creative projects, competitions, events, thoughts and ideas, by

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19.^ "State and Federal Incentives for EVs, PHEVs and Charge

Stations". Plug In America. Retrieved 2010-05-29.

20.^ a b "Half of Mini E lessees renew for another year, price dropped

to $600/month". AutoblogGreen. 2010-05-14. Retrieved 2010-06-

12.

21.^ a b c Chris Wright (2010-06-03). "UK: Harsh winter provides

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24.^ Zaher Karp (May 2010). "Upcoming Munich MIni E Trial".

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114

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Retrieved 2010-12-30.


115

Appendix B. What is it like to live with an electric

car?

By Jorn Madslien Business reporter, BBC News, Oxford, 4 June 2010

Ever more mainstream carmakers are planning to make electric

cars for sale to ordinary drivers, though none of them has done so

yet. But there are trial cars out there, and Oxford-based

businessman David Beesley has been driving one for six months.

And Mr Beesley is not a happy man. Another week or so and that is it. He

has to hand the car back.

"I am livid," the 60-something head of business supplies company B-line

says.

For Mr Beesley, the journey began about a year ago, when he first learnt

that Mini was building an electric car in its Cowley factory on the edge of

Oxford.

At the time, he was in a very different mood.

"I heard about it through my son whose best friend works in the plant,"

he says, and being the sort of guy who enjoys messing abount in battery-

powered boats or racing electric buggies around the garden, Mr Beesley

knew he had to get involved.

"If you want something, you'll go for it, don't you?" he grins.

Different experience

Mr Beesley took delivery of his Mini-E in December 2009 as one of the so-

called "pioneers" who pay just over £300 per month to take part in BMW

Group's electric motoring trial.

And it has not been an entirely smooth experience.


116

During sub-zero temperatures, the battery capacity dropped to a range of

just 40 miles, compared with almost 100 miles during summer, he recalls.

And, well, that's it. Beyond such teething problems, which BMW insists will

be overcome before it starts selling electric cars to consumers, he has not

had any problems whatsoever.

In short, Mr Beesley says, the experience has given him an insatiable

thirst for more. These days, he rarely drives anything other than the Mini

E.

"It is a totally different experience to anything I've driven before and

probably anything I'll be driving in the future," says Mr Beesley, a

petrolhead whose other cars include three large Lexus saloons, a Chrysler

Voyager, a Smart car and an enormous Winnebago mobile home.

"Yes, I like big cars," he says. "But I have begun to question whether big

cars is the way forward."

Never empty

So Mr Beesley is far from livid about the electric Mini's shortcomings.

Rather, he is furious because he will have to hand it back when the first

part of the Mini-E trial comes to an end next week, on 11 June.

As yet, the BMW Group has not got a production model for sale, so Mr

Beesley has been driving a prototype.

"I cannot fault the thing, even in its present form," he says.

"People say it does only this many miles or that many miles or that it

takes so-and-so long to charge it.

"Meanwhile, I go past the petrol stations and laugh at the silly sods

wasting time and money filling up fuel."


117

The Mini-E is clearly very cheap to use, though Mr Beesley has no idea

exactly how much it costs him.

"I'm told it's about £3 for a full charge, but it never is a full charge

because the battery is never actually empty," he says.

No problems

The realities of living with an electric car are very different from what

most people would expect, Mr Beesley explains.

"I never used to consider how far my journey would be," he says. "I now

reckon my average journey is five to 10 miles. I guess people think they

drive more miles than they actually do.

"Clearly, if you do 90 miles per day, then this is probably not the car for

you, but how often do you drive more than 90 miles in one stretch? And

how often do you have sub-zero temperatures in Britain?"

Mr Beesley is even taking issue with the supposed need to roll out public

charging points to molify people's range anxiety.

On most journeys, there is no need to top up the batteries to get home,

Mr Beesley insists.

"And if I go to see a client in High Wycombe or my auntie in

Southampton, it is not a problem if I want to plug into their socket while

I'm there. It's just a bit of fun."

BMW says it takes about three hours to charge the battery with a 30-amp

fast-charger, which uses the same type of electric cable that electric

cookers use, or eight hours when using an ordinary 13-amp socket.

But again, Mr Beesley insists that once you get used to electric motoring,

even this seems irrelevant.

"I come home, I get out of the car and I plug it straight in. It takes about

two or three seconds and it charges on low tariffs overnight," he says.


118

"All this stuff about range and charge time amounts to scepticism and

objection.

"Why do you want to keep objecting about something that is fantastic?"


119

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