Archive for the ‘AMS Concepts-Frameworks-Examples’ Category

“Disruptive innovation” … an incomplete idea ?

May 8, 2012

In AMS, we’ve being reading about Clayton Christensen’s theories on disruptive innovation.

For background, see last weeks post disruptive innovation.

This week, Business Week has a feature article on Christensen — focusing on his life values — but also summarizing his research work, including some criticism.

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Criticism of Disruptive Innovation

If there has been one knock against Christensen’s theories, it’s that they are better as analysis than as a course of action.

It’s something Christensen and an impressive network of co-authors and collaborators have worked hard to dispel. 

“The theory is more descriptive than prescriptive,” says Larry Keeley, the co-founder of Doblin, a strategic consulting firm in Chicago, who considers Christensen a peer and a friend.

“There are very few robust intellectuals working on innovation, and I don’t mean to take anything away from Clay’s accomplishment when I say this, but …

[the disruption theory] strikes me as an incomplete idea.”

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Christensen on life values:

To understand a company’s strategy, look at what they actually do rather than what they say they do

The same logic applies to one’s life. For example, ambitious people will reliably tell you that family, or being a mother or father, is the most important thing in their lives.

Yet when pressed to choose between racing home to deal with a chaotic pre-bedtime scene and staying another hour at the office to solve a problem, they will usually keep working.

It’s these small, everyday decisions that reveal if you’re following a path to being the best possible spouse and parent.

“If your family matters most to you, when you think about all the choices you’ve made with your time in a week, does your family come out on top?”

Full article

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Marketing Strategy Rule #1: Follow the money …

January 10, 2012

When diagnosing a current marketing strategy or developing a new one, most marketers jump right in to thinking about market segments, products, or ads.


I  encourage my students to always, always, always start with an analytical understanding of the business economics: how companies make money in the business.

It’s “Ken’s Rule #1” of strategy …


Historical note: During Nixon’s Watergate scandal, a source to Washington Post’s Woodward and Bernstein – nicknamed “Deepthroat” – kept telling the investigative journalists to “follow the money”.  That advice coined the now popular expression.

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HOT: The 4 Stages Strategic Thinking

December 16, 2011

I’ve gotten a couple of requests from alums to post some of the material that I’m now pitching to current classes.

So today, I’m posting the first HOT – Homa Online Tutorial – something right out of the classroom to you via the HomaFiles.

Some stuff will be classic, some will be edgy; some will be original, some will be “borrowed” from other sources (with proper attribution of course).

Here’s the first HOT topic …

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Great Strategy

In my Advanced Marketing Strategy introduction, I tell students that the course goal is to get them to “internalize a mindset geared to creating great marketing strategies.”

That raises a logical question: what’s a “great” strategy … as opposed to a “good” strategy.

I try to put “great” in the context of the 4 stages strategic thinking.

click for the online tutorial “The 4 Stages of Strategic Thinking” (4:30 min)


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Synopsis: The 4 Stages of Strategic Thinking

Companies can be at one of 4 levels of strategic thinking.

Level 1 is “reactionary” … responding to market and forces as they happen … hoping to make it through this day and see the sun come up tomorrow … and rejoicing when it does (think, my dog Captain)

Level 2 is “remedial” … proactively stop doing dumb stuff … and try doing mostly the same things, just a bit better … often by benchmarking companies with best practices and trying to emulate them. Consultants make mucho $$$ on these folks … taking the #3 company in an industry and telling them to be like #1 … in hopes of overtaking #2.

Level 3 is “resourceful” … think typical MBA training … analyze SWOTs, assess competitive advantages, find “white spaces” or “blue oceans” … basically fit the existing world and play by the rules.

Level 4 is “revolutionary” … try to change the way the game is played … alter the rules of the business to your company’s unique advantage … think, FedEx, early Netflix or Apple iPad … don’t just report the weather, create it.

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Wagging the “Long Tail” by self-publishing …

November 7, 2011

TakeAway: Established writers and new writers take advantage of self publishing with the evolution of digital books.

Good example of the Long Tail Strategy. 

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Excerpt from WSJ: “Secret of Self-Publishing: Success”

Self-publishing has been available for decades.

But thanks to digital technology and particularly the emergence of e-books, the number of self-published titles exploded 160% in 2010 from 2006. fueled the growth by offering self-published writers as much as 70% of revenue on digital books.

By comparison, traditional publishers typically pay their authors 25% of net digital sales and even less on print books.

A veteran romance author self-published her first e-book in April 2010. She has since cumulatively sold 265,000 units of 10 self-published titles.

Her total take from those 10 titles since last April: in excess of $500,000 after expenses. Previously, the most she ever made from a book was $33,000.

“One of the big differences between e-books and print is the sales cycle … It’s almost inverted.”

A chain store buyer makes a decision as much as six months before a book is published, and then it has no more than six months on the shelf. At that point, the sales cycle is essentially over.

But with e-books, it’s completely the opposite.

“It’s often six to nine months before your book takes off, and you never take it down.”

Edit by ARK

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P&G going after the bottom of the pyramid

December 15, 2009

TakeAway:  The bottom of the pyramid represents two-thirds of the world’s population yet only a fraction of the world’s income. 

But don’t be fooled, this market can be very profitable. 

With the right combination of volume and capital efficiency, and a focus on economic profit, companies will be rewarded.

P&G has a bullseye on the BOP

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Excerpted from NYTimes, “P.& G. Sees the World as Its Client,” By Leslie Wayne, December 12, 2009

Add close to 548,000 new customers a day. Every day. For the next five years.

That is the goal Procter & Gamble’s new chief executive, has been promoting in recent weeks and that will be an important benchmark for his tenure …

The consumer products giant has to keep expanding its reach beyond its core markets of the United States, Western Europe and Japan, and start winning over new customers in places like Nigeria, India and Somalia, and is taking on steep challenges.

One is that its rivals Unilever and Colgate have long had a presence in many of these far-flung countries, so much so that they are called walled cities within the industry because of the difficulties new competitors face in penetrating these new markets.

“It will be a knife fight, it will be brutal,” said an industry analyst … “It will be fought in shampoo, detergent, deodorant, and Unilever and Colgate won’t roll over.”

The other big challenge is how a company that built itself on selling premium products at premium prices can shift to selling an array of low-priced products for consumers who often live on only a few hundred dollars a month or less.

In some cases, potential customers do not use many of P.& G.’s products and may even have to be taught how to do so …

Sales from developing countries are doubling every four years. Today, sales from developing markets represent 32 percent of P.& G.’s $78 billion in annual revenue, up from 23 percent four years ago.  Unilever and Colgate, though, already get about 45 percent of their sales from emerging markets.

Today, P.& G. has annual sales of $25 billion from developing countries, compared with $8 billion eight years ago. Procter already operates in 80 countries, selling its wares everywhere — large superstores in cities and tiny storefronts in remote villages …

The pitch from P.& G. executives … Americans spend about $110 a year per capita on Procter’s products. The worldwide per-capita figure is $12. In Mexico, the number is $20; it’s less than $3 in China and less than $1 in India.

The goal is to get the per-capita numbers in China and India to look like Mexico’s. If that were to happen … sales at P.& G. would increase by $40 billion …

Of course, customers in developing countries have little money to spend. And getting Procter’s goods to small towns and villages is a difficult logistical challenge …

Products, too, have to be adjusted. P.& G. has had to break down products like shampoos and soaps into smaller and less expensive sizes …

“There may be one billion new customers,” said Deutsche Bank. “But it is a question of the price per customer and what they can buy. How can you maintain profit margins when you are trying to sell small shampoos or little bars of soap in deepest India or sub-Saharan Africa?”

Procter has come up with marketing efforts that are decidedly different than those in the United States and other more developed countries.

Many infants, for instance, simply go without diapers, which means that P.& G. goes to hospitals and mobile clinics to demonstrate the use of diapers. Because the cost of diapers are often an issue and because children and parents often share the same family bed, P.& G. is promoting diaper use only at nighttime …

Edit by TJS

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Full Article

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Creating demand … by tapping non-customers.

December 8, 2009

Ken’s Take: “Blue Ocean” Strategists say to stop competing head-on in established markets and refocus on uncontested part of markets — the wide open, blue ocean.  A critical componect of a blue ocean strategy is to “unlock” non-customers …

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From the folks at the Blue Ocean Institute …

Traditional strategic thinking looks to capture a greater share of existing demand. But companies can reach beyond existing demand to unlock demand from non-customers, too.

The key is to understand the three tiers of non-customers who buy opportunistically  … or  refuse to buy  …or are unaware of the product offering.

First-tier non-customers are closest to the existing market. They are the buyers who minimally purchase an industry’s offering out of necessity but are mentally
non-customers. They are waiting to jump ship and leave as soon as an alternative is spotted. These are potentially “soon-to-be” non-customers.  But, if they are offered a step-up in value, they can be retained … and may even increase their purchases.

Second-tier non-customers are people who consciously refuse an company’s offerings. These are buyers who have recognized an company’s offerings as an
option to fulfill their needs but have opted against them. These are “refusing” non-customers.

Third-tier non-customers are furthest from the existing market. They are non-customers who have never thought of a company’s offerings as an option. These are “unexplored” non-customers.

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The key question to ask: “What are the factors keep non-customers out of the market … and what can be done to pull them into the market?”

Start by by focusing on the key commonalities – not differences – across these non-customers and existing customers to gain insight into how to create demand among these non-customers.

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GE’s “Reverse Innovation” … no, it doesn’t mean going retro.

December 7, 2009

TakeAway: For decades, GE has sold modified Western products to emerging markets. Now, to preempt the emerging giants, it’s trying the reverse.

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From WSJ:” GE CEO Touts ‘Reverse Innovation’ Model”, Sept 22, 2009 

To better compete in emerging markets and elsewhere, General Electric is is changing its method of innovation and developing products in low-cost countries, such as China and India, then distributing them worldwide.

Two products – a $1,000 handheld electrocardiogram device and a portable, personal-computer-based ultrasound machine that sells for about $15,000 – are examples of GE’s “reverse innovation.”

They were originally developed for markets in emerging countries and are now being sold in the U.S., a contrast from the past when GE and many other industrial companies created products in the U.S., then adapted them for global sales.

The new business model allows the company to expand into emerging countries and keep firms there from creating similar products, then expanding sales to the U.S.

“Success in developing countries is a prerequisite for continued vitality in developed ones.”

For reverse innovation to work, product developers must be based and managed in the local market, and when the products are sold globally, they may need to be sold at lower prices even if they cannibalize higher-margin products in rich countries.

GE now has more than a dozen “local growth teams” in China and India.

Full article:

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From the HBS article:

Two myths must be shattered:

Myth #1: Emerging economies will largely evolve in the same way that wealthy economies did.

The reality is, developing countries aren’t following the same path and could actually jump ahead of developed countries because of their greater willingness to adopt breakthrough innovations.

With far smaller per capita incomes, developing countries are more than happy with high-tech solutions that deliver decent performance at an ultralow cost—a 50% solution at a 15% price.

Myth #2: Products that address developing countries’ special needs can’t be sold in developed countries because they’re not good enough to compete there.

The reality here is, these products can create brand new markets in the developed world — by establishing dramatically lower price points or pioneering new applications.  And, technology often can be improved until it satisfies more demanding customers.

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Local Growth Team (LGT) model,  is based on five critical principles.

1. Shift power to where the growth is.
Without autonomy, the LGTs will become pawns of the global business and won’t be able to focus on the problems of customers in emerging markets. Specifically, they need the power to develop their own strategies, organizations, and products.

2. Build new offerings from the ground up.
Given the tremendous gulfs between rich countries and poor ones in income, infrastructure, and sustainability needs, reverse innovation must be zero-based. These wide differences cannot be spanned by adapting global products.

3. Build LGTs from the ground up, like new companies.
Zero-based innovation doesn’t happen without zero-based organizational design. GE’s organizational “software”— its hiring practices, reporting structures, titles, job descriptions, norms for working relationships, and power balances between functions—all evolved to support glocalization. LGTs need to rewrite the software.

4. Customize objectives, targets, and metrics.
Innovation endeavors are, by nature, uncertain. It’s more important to learn quickly by efficiently testing assumptions than to hit
the numbers. So the relevant metrics and standards for LGTs—the ones that resolve the critical unknowns—are rarely the same as
those used by the established businesses.  The new business model emphasized training, offered online guides, designed simpler
products, created built-in presets for certain tasks, and tracked customer satisfaction to gauge success.

5. Have the LGT report to someone high in the organization.
LGTs cannot thrive without strong support from the top. The executive overseeing the LGT has three critical roles: mediating conflicts between the team and
the global business, connecting the team to resources such as global R&D centers, and helping take the innovations that the team develops into rich countries. Only a senior executive in the global business unit, or even its leader, can accomplish all of that.

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Extra mayo, please: extending the product life cycle

December 1, 2009

Takeaway: As Americans have tightened their budgets throughout the current recession, the relatively mature mayonnaise market has experienced significant growth.

Sensing a large jump in top-of-mind awareness, Unilever has been making a strong push of its Hellman’s brand to take advantage of the rise of brown-baggers.

With the economy hopefully turning around, the brand is now in a classic dilemma of figuring out how to extend the product life cycle.

Their plan: pushing the “real” ingredients that make up mayo and give it the mystique of the secret ingredient you’ve had in your pantry that can enhance all dishes, from appetizer to dessert.

Creating new uses for a product is a tremendous way to extend that product life cycle; just ask Arm & Hammer. And with Thanksgiving just around the corner, maybe Hellman’s can continue to grow…one clogged artery at a time.

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Excerpted from BrandWeek, “The Mayo Clinic” by Elaine Wong, November 7, 2009

Thanks to the recessionary rise of eating at home and brown-bagging lunches for the office, mayo is no longer the staid standby in the back of the kitchen cupboard. And so sales growth — any sales growth — is welcome news for the folks who work in Hellmann’s nondescript office park in Englewood Cliffs. But Fish’s efforts raise some hard questions, among them: As the recession lifts, will mayo’s popularity fade once more? Will vigorous marketing be enough to overcome the market’s vicissitudes? And, in these health-conscious times, is it even possible to overcome the fact that mayonnaise is among the fattiest foods on the market?

Nonetheless, Fish is confident he can get fat-conscious, weight-obsessed Americans to eat more of the stuff. He plans to do that through a combination of creating more uses for the condiment and through the nostalgia sell — appealing to consumers who long to recreate the good-old days of meat and potatoes and other so-called “real food.”

“Remember,” Fish says, “Hellmann’s has always been made with eggs, oil and vinegar.” It’s the sort of message that purists would appreciate — and there seem to be a growing number of those. They’re the sort who devour books by culinary journalist Michael Pollan, and who thrust Julia Child’s half-century-old Mastering the Art of French Cooking back into best seller status in the wake of the film Julie & Julia.

Fish’s approach is on full display in this month’s “Hellmann’s real holiday helpings” campaign, which stars chef Bobby Flay. The Food Network personality is appearing in print and online ads touting Hellmann’s as an essential component in family-oriented, Thanksgiving meals. Ads from OgilvyEntertainment show Flay cooking alongside mothers and their kids. (It is Hellmann’s contention that involving children in the cooking process renders them more willing to eat the results. Plus, introducing them to mayo can’t hurt, either.)

“Recipes that require you to go to the grocery store and buy 10 new things that you didn’t happen to have is asking a lot of people,” Fish says. “This isn’t the time to be asking people to go the extra mile.” If mom is cooking and happens to have a jar of Hellmann’s around, she won’t have to go that extra mile at all.

At the same time, much of Fish’s strategy also hinges on getting home cooks to consider Hellmann’s mayo as their “secret sauce — that special something that I’ve done that you don’t know about that makes this dish taste so good,” he said. “We know from research that consumers love recipes with a secret ingredient in them,” Longfield adds. And mayonnaise, in this instance, does the trick.

Unilever has, in fact, been a staunch proponent of the “real food” movement. The basic line of reasoning is that consumers are more likely to buy goods from companies who can readily tell their ingredients’ stories. And Unilever’s not alone. In introducing Select Harvest, for instance, The Campbell Soup Co. touted it as a soup line “made from only ingredients that people can readily recognize.” Haagen-Dazs also has a line called Five named after the ice cream’s total list of ingredients.

Americans might not like the idea of fat, but they’re still willing to accept it. As the resurgence of Julia Child’s landmark French cookbook proved, Americans’ fear of fat seems secondary to their appreciation of honest and wholesome foods — many of which have lots of fat.

But how long would the good news last? With economists having just declared the recession officially over, it’s only a matter of time before brown-bagging it for lunch will lose its retro cool and families will again go out to eat for dinner. In fact, according to senior associate brand manager Jessica Teilborg, “the biggest competitor we deal with every day is out-of-home dining.”

Edit by JMZ

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Full Article:

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When it comes to profits, smart guys node a lot !

November 24, 2009

Takeaway: Companies that invest in power nodes, or sources of strength and leverage, have an increased likelihood of earning extraordinary profits.

Accordingly, classically trained strategists understand the potency of a brand, the power of relationships, and the advantage of captive markets. However, two new power nodes have quietly emerged.

Those who understand them well will likely rise to a level of strategic importance in their firms and thereby establish a power node of their own.

What can aikido and hubs do for you?

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Excerpt from Strategy+Business, “The Most Powerful Paths to Profits,” by Mia de Kuijper, November 16, 2009.

In the 1990s, AT&T still controlled a huge share of the lines, hardware, and software required to deliver long-distance networking and telephone services to businesses and consumers. With minimal competition, the telecom giant could charge deliciously high rates for its services. The company’s vast network infrastructure amounted to what is called a power node: a source of strength or leverage that the company could reliably use to effortlessly dominate its market and fend off rivals.

In AT&T’s case, the power node was its preeminent stake in a network. But a power node can also be a coveted brand, a skill, a set of industry relationships, a process, a customer base with switching costs, regulatory protection, or access to resources. In short, it can be anything that a company depends on to influence financial outcomes.

The power nodes listed above have been around for a while, however two power nodes are strikingly novel.

The aikido asset power node is named after the Japanese martial art that exploits the energy of an opposing force. The key to aikido assets is being able to perceive and move with the momentum of the network. In the current information environment, it is no longer useful to “push” advertising and marketing messages to consumers. Most customers reach out for information they need on their own. If they find a source that they like, they tell other customers. They use search engines, which tend to drive large numbers of people to the most popular sources. 

Companies whose power node is based on the aikido approach are skilled in new forms of marketing. They “sow seeds,” tossing out many messages at minimal cost; Frito-Lay, for example, continually puts new flavors and packaging in the marketplace. These companies conduct surveillance, continually analyzing their digital media to see which messages are catching on.  And they react very quickly to what they learn from the networks, introducing or discontinuing products almost instantaneously. This may require the rapid retooling of sourcing, manufacturing, and distribution functions as they shift from one product to another.

Hubs are people or products that attract viewers, clients, buyers, or users in part because others are drawn to them as well; hubs are among the most effective power nodes imaginable in a transparent economy. Hubs represent the ability to become the beneficiary of self-reinforcing popularity.

The first Harry Potter book took off rapidly because friends recommended it to friends. It became a hub as others wanted to know what was driving people to read it. The existence of this hub ensured the popularity of the rest of the series. The transparency and immediacy of communications added momentum. Companies that can heighten the allure of their products this way, triggering attachment and emerging as hubs, will have a tremendously valuable power node.

When hub dynamics are at work, products or ideas that are ahead stay ahead for a long time.

That explains why Microsoft and Yahoo have not been able to catch up with Google in search volume. But because hubs are not a winner-take-all phenomenon, Google’s rivals have sizable numbers of users, leaving some room for market share to eventually turn against Google if a competitor comes up with a product that itself becomes a preferred hub. Microsoft hopes to exploit this opening with Bing, its new search engine.

Edit by BHC

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Full Article

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About your bold strategic move … how is your competitor likely to respond (if he does)?

November 24, 2009

TakeAway: How to assess a competitor’s response to your strategic moves?  Game theory is often too complex and too assuming to fit the real world.  Intuitive-based war gaming is often skewed by personal biases and hidden agendas.

So, McKinsey proposes a practical approach to predicting competitive behavior that “stays close to the theoretical rigor and accuracy of game theory but is as easy to apply.

A prior post outlined why — at least 1/3 of the time — competitors do not respond at all to their rivals’ strategic moves .

This post outlines what moves — if any — a competitor might actively consider and most likely choose.

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Excerpted from HBR: Predicting Your Competitor’s Reaction, by Coyne and Horn, April 2009

The McKinsey approach involves distilling all possible analyses of a rival’s response to a particular strategic move into a sequential
consideration of three questions, the first of which is “Will the competitor react at all?”

Once it is concluded that a competitive response is likely, it’s time to project the the nature of the response. Specifically, (1) What options will the competitor actively consider? and (2) Which option will the competitor most likely choose?

Although competitors may discuss many response options, they seriously investigate only a small number.

Even if companies consider multiple response options, most will have a clear preference for one or two.

And, the most common option competitors analyzed was “the single most obvious counteraction” (e,g. introducing a me-too product or matching a price change).

Of the options your adversary seriously considers, he will choose the one that is most effective (according to his analytic technique) within the constraints of his trade-off between short-term and long-term pain.

And, managers find it difficult to trade the certainty of short-term expense for the uncertainty of long-term gain.

To understand how competitors will respond to your move, evaluate the situation in their terms — not yours.

Companies often mistakenly assume that everyone measures success in the same way. This explains why many of our clients claim that their competitors are “irrational.”

Ask yourself: has your competitor chosen this moment to take leave of his senses? Or is he simply pursuing a strategy that looks poor according to your preferred measures but looks very clever according to his?

Most companies use simple, short-term measures.

In our survey, only about 15% of respondents used NPV to evaluate their options; 37% focused on market share; 38%  focused on earnings.

And again,  managers usually find it difficult to trade the certainty of short-term expense for the uncertainty of long-term gain.

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Bottom line: A rigorous analysis of competitors’ behavior doesn’t have to involve a lot of math and talk of Nash equilibria.

The key is to focus on understanding how a competitor actually behaves rather than on the theory of how everyone should behave.

By studying your competitor’s past behavior and preferences, you can estimate the likelihood of his responding at all, identify the responses he is likely
to consider, and evaluate which will have the biggest payoff according to his criteria.

This information can give you an accurate idea of what your competitor is likely to do when you make a strategic move.

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Moving forward in uncertain times … 4 success factors.

November 23, 2009

Excerpted from: HBR, How to Get Unstuck, by Rita Gunther McGrath and Ian C. MacMillan, May 2009

A lot of businesspeople seem to be frozen in the headlights, paralyzed by uncertainty, fear of failure, and lack of trust.

In studying how leaders prevail in uncertain times, we’ve observed four practices you can use to get yourself, your people, and your firm moving again.

1. Decrease uncertainty.

  • Rather than wait until you can clearly see the entire route to a distant goal, focus on getting to the next bend.
  • Identify a series of near-term goals that can serve as checkpoints along the way, indicating your progress and illuminating the best way forward.
  • As you proceed down the path, you can stop, change direction, or continue on the same trajectory, depending on what you learn en route to each checkpoint.

This approach is cost-effective and reduces risk because only relatively small investments are required to move from one milestone to the next and because it reveals false starts early.

2. Reduce the fear of failure.

  • People fear failing, particularly in a downturn, when they think any misstep might cost a job.
  • As a result,they tend to freeze because it appears that the easiest way to avoid failing is to do nothing.
  • To spur action, shift your emphasis from cutting the rate of failure to minimizing the cost of failure.
  • To reduce people’s anxiety, give them permission to be wrong but not to make expensive mistakes.

Silicon Valley’s famous discipline—fail fast, fail cheap, and move on—applies here.

3. Hedge your bets.

In some cases, the shortest route to the goal involves investing in simultaneous experiments whose outcomes are mutually exclusive: Try A, B, and C in tandem; whichever succeeds first necessarily negates the others.

4. Create momentum.

Once you’ve settled on a course, two further steps can give the final push needed to get moving:

First, remember that the more uncertain things are, the more people prefer to stick with comfortable and predictable routines. Leaders need to insist on substantial, coordinated changes that depart from obsolete practices and make business-as-usual impossible.

Second, they need to defang or otherwise neutralize the people who persist in resisting change.

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Distinguishing between customers’ nice-to-haves and gotta-haves …

November 19, 2009

Excerpted from: HBR, What Do Customers Really Want?, by Almquist & Lee, April 2009

Most customer-preference rating tools used in product development today are blunt instruments, primarily because consumers have a hard time articulating their real desires.

Asked to rate a long list of product attributes on a scale of 1 (“completely unimportant”) to 10 (“extremely important”), customers are apt to say they want many or even most of them.

To crack that problem, companies need a way to help customers sharpen the distinction between “nice to have” and “gotta have.”

Some companies are beginning to pierce the fog using a research technique called “Maximum Difference Scaling.” which requires customers to make a sequence of explicit trade-offs.

  • Researchers begin by amassing a list of product or brand attributes—typically from 10 to 40— that represent potential benefits.
  • Then they present respondents with sets of four or so attributes at a time, asking them to select which attribute of each set they prefer most and
  • Subsequent rounds of mixed groupings enable the researchers to identify the standing of each attribute relative to all the others by the number of times customers select it as their most or least important consideration.

A popular restaurant chain recently used MaxDiff to understand why its expansion efforts were misfiring. In a series of focus groups and preference surveys, consumers agreed about what they wanted: more healthful meal options and updated decor.

But, using MaxDiff showed that prompt service of hot meals and a convenient location were far more important to customers than healthful items and modern furnishings, which ended up well down on the list.

The best path forward was to improve kitchen service and select restaurant sites based on where customers worked.

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“Adoption velocity” and abandonment: Here today, gone tomorrow …

November 17, 2009

TakeAway: Some research indicates that — counter-intuitively — products which catch on too quickly may end up being less successful overall.

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Excerpted from Knowledge@Emory, The Long-term Downside of Overnight Success,  September 16, 2009  

Marketers may dream of coming up with a product that skyrockets in popularity as soon as it is introduced to the public.

Research, however, indicates that products which catch on too quickly may end up being less successful overall.

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There are patterns in “cultural adoption and abandonment.” 

“We often see products, ideas and behaviors catch on and spread like wildfire. But we know less about why once-popular things become unpopular.”

“Most managers want their products to catch on faster, but our analysis suggests that this might not always be the best strategy. If something catches on too quickly, it might not only have a shorter lifespan, but may also end up being less successful overall. Faster adoption may hurt product success.”

Fads tend to be viewed negatively: “If people think that sharply increasing [popularity] will be short lived, they may avoid such items to avoid doing something that may later be seen as a flash in the pan.”

The research into the adoption and abandonment challenges some assumptions about the diffusion of a message and its saturation in the population, which is an important concept in marketing.

As a message spreads — or diffuses — through a population, it reaches more potential adopters. However, diffusion models typically assume a set target population size. But, a group may continually renew itself. Other factors, beyond diffusion and saturation, must be involved: “Adoption velocity is one such factor.”

Conventional wisdom would hold that if a message diffused through a population quickly, more potential adopters would be reached, improving the prospects for widespread adoption. “The effect of adoption velocity on the cumulative number adopters … shows that adoption velocity has a negative effect on the cumulative number of adopters.”

For example, in the music industry, new artists who bolt to the top of sales charts, often realize lower overall sales than those whose popularity grows more slowly. “This seemingly counterintuitive finding has important implications. One is that faster adoption is not only linked to faster abandonment, but may also hurt overall success.”

The research fits into the growing literature about “cultural dynamics.” By “more closely examining the psychological processes behind individual choice and cultural transmission, deeper insight can be gained into the relationship between individual (micro) behavior and collective (macro) outcomes such as cultural success.” 

Advertising might lead to fast adoption of a product, but the popularity of the product or service advertised might decline when that support dies off or switches to a substitute. “Importantly, though, results suggest that independently of its cause, a quick rise in popularity may have an accelerating effect on abandonment … as such, we anticipate that there will be an inherent tendency for items that have been adopted quickly to decline faster, even in cases where advertising persists.”

‘This is here today, gone tomorrow.'”

Full article:

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About your bold strategic move … will your competitors even notice?

November 16, 2009

TakeAway: How to assess a competitor’s response to your strategic moves?  Game theory is often too complex and too assuming to fit the real world.  Intuitive-based war gaming is often skewed by personal biases and hidden agendas.

So, McKinsey proposes a practical approach to predicting competitive behavior that “stays close to the theoretical rigor and accuracy of game theory but is as easy to apply.

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Excerpted from HBR: Predicting Your Competitor’s Reaction, by Coyne and Horn, April 2009

The McKinsey approach involves distilling all possible analyses of a rival’s response to a particular strategic move into a sequential
consideration of three questions:

  1. Will the competitor react at all?
  2. What options will the competitor actively consider?
  3. Which option will the competitor most likely choose?

The first step in analyzing competitor reaction, therefore, is to address the likelihood of no reaction.

To determine this, you must ask four subquestions. If the answer to any of them is no, the chances of a response are low.

1. Will your rival see your actions?
Even if an action appears obvious to you, your competitor may not recognize it.

First, most companies rely on incomplete data to assess changes in the marketplace, e.g. market research that only survey certain segments, markets, or channels.

Second, if your strategic move will affect several of your competitor’s business units, it may not register as significant to any one unit and so may be

2. Will the competitor feel threatened?
Even if your competitor sees your actions, he may not feel threatened—and, accordingly, will not think that mounting a response is
worth the expense and distraction.

That is, the competitor may not consider the strategic move to be statistically significant to their in place plan.

3. Will mounting a response be a priority?
Your adversary probably already has a full agenda before you make a move. On it are product launches, marketing campaigns, reorganizations,
major acquisitions, plant openings, and cost reduction efforts—some or all of which must be curtailed in order to react to your move.

Therefore, to the degree that your adversary has already committed to plans that will fully occupy his attention, he will be reluctant to shift priorities.

4. Can your rival overcome organizational inertia?
Even if top management wants to react, the organization as a whole may resist.

First, if reacting requires the company to make major organizational changes, it is very unlikely to do so unless the threat is immediate and deadly.

Second, managers are generally reluctant to abandon their success formula, and if they decide to go ahead and make a change, they are very poor at doing so.

Third, companies have great difficulty mounting a response that requires the cooperation of third parties, which may not share their sense of urgency.

For example:

In the late 1980s, a small U.S. pizza delivery chain called Papa John’s noticed a change in consumers’ perception of the quality of Pizza Hut and Domino’s (the top two chains) and used the opportunity to create a differentiated value proposition captured in the slogan, “Better ingredients. Better pizza.”

Papa John’s expanded rapidly throughout the 1990s and became the third largest pizza chain in the country, while the two bigger rivals stagnated.

Unable to mobilize their franchises around quality until the threat became undeniable, the big chains did not respond with better pizzas of their own until 2000.

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Punch line: Competitors do not respond to their rivals’ moves at least 1/3 of the time.

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Upcoming: What if your competitor does respond ?

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Market segmentation is so yesterday … today, it’s self-selected “tribes”

November 13, 2009

TakeAway:  The power of the Web is undeniable.  It gives companies access to consumers in ways never thought possible.  Companies enjoy the luxury of leveraging online consumer groups for product development feedback, buzz generation, etc. 

Now, companies are flipping their segmentation strategies upside down and using consumer data gathered from the Web to build their segmentation strategies.  And, these companies are realizing cost and accuracy benefits.

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Excerpted from Strategy & Business, “The Promise of “Self Segmentation”,” By Nick Wreden, October 5, 2009

… Today, a community-based approach to segmentation — which is both less expensive and more effective than the traditional methodologies based on customer relationship management (CRM) systems — is becoming possible …

Self-segmentation provides a foundation for leveraging customer experience and input … The rise in social networks and online communities, combined with the new era of the Web-empowered consumer … consumers are increasingly segmenting themselves into communities, based on common characteristics, passions, interests, or needs. Such “self-segmentation” is likely to be much more accurate and reflective of consumers’ attributes …

Companies can now bind themselves to consumer communities of interest or “tribes,” … such self-selected communities not only reflect consumers’ true interests but also involve their connection to others with the same passions. This opens the door to fostering brand ambassadors, enabling customer collaboration, and facilitating word-of-mouth cross-fertilization …

Since relevant communities represent self-selected groups who share one or more interests, marketers can substantially reduce the costs, time, and toil required to identify, and segment, qualified prospects … and the communities provide a better guide to potential purchasing behavior …

Interactions within communities represent an ideal listening post, enabling marketers to glean direct insights without the filter of market research …

Engaged participants can provide product development guidance and identify shortcomings in service or other areas to help a company improve its brand …

Companies can utilize three approaches to leverage self-segmented communities — engaging with social networks, tracking online communication behavior, and mass customization …

Segmentation is vital as mass marketing slips into irrelevancy, with information overload causing consumers to block out many corporate communications … But CRM-based market segmentation can be expensive, complex, one-dimensional, and static. It fails to accommodate the multidimensional nature of consumers … It leads to top-down initiatives that view potential customers as targets to be blitzed with campaigns, ambushed with messages, and subjected to guerrilla marketing.

In this new era of branding, companies must focus on ethnic, cultural, religious, sports, or other segments, not markets. This pivot could be achieved through CRM systems, but self-segmented communities of interest provide a more effective alternative. Such communities can provide fast, low-cost market research, generate ideas and feedback about new offerings, help improve corporate and customer-to-customer service, strengthen relationships, provide an early warning system about problems, and promote favorable word-of-mouth. It all starts with finding communities united by a passion or an interest, and talking with them, not at them.

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Full Article

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If it doesn’t walk like a duck and quack like a duck, what the heck is it?

November 12, 2009

TakeAway: When companies develop innovative products and services that don’t obviously fit into established categories, managers need to help people understand what comparison to make. Without that step, potential customers might just walk away wondering, “What is it?”

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Excerpted from NY Times, It’s Brand New, but Make It Sound Familiar, October 4, 2009

GLANCE through a photo album of early automobiles and you’ll find an eclectic assortment of vehicles, including three-wheeled machines and bicycle-like contraptions. You’d be hard-pressed to identify many as cars.

Early consumers were confused, too, until innovators finally converged on a carriage-like design and coined the term “horseless carriage” in the 1890s, giving a clear point of comparison. More than 100 years later, we can learn from their example.

Humans instinctively sort and classify things. It’s how we make sense of a complex world.

So when companies develop innovative products and services that don’t obviously fit into established categories, managers need to help people understand what comparison to make. Without that step, potential customers might just walk away wondering, “What is it?”

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As a starting point, it helps to understand some basic traits of behavior. When people encounter something they don’t recognize, they make sense of it by associating it with something familiar.

“The category signals not only a set of features to expect, but at a more basic level, when and how you should use the novel item.”

Companies can benefit by using comparisons to create expectations that best match an innovation’s strengths.

Problems can arise if consumers can’t place innovations into familiar categories. Consider the introduction of the Segway, the high-tech motorized scooter, “Nobody was quite sure what it was … There was no clear analogy, so people had no idea how to use it.”

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Finding the right label is only one of the many ways organizations can influence the way consumers categorize a product. They can also experiment with the product’s shape, packaging, pricing and retail store placement.

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As innovative products are introduced, category boundaries are continually shifting and new categories emerging. In some ways, the auto industry is going through a transformation that harks back to the 1800s.

Today’s consumers are confronted with an impressive assortment of new vehicles, including electric models with three wheels and others with designs that just don’t look like what we expect a car to look like.

Will electric vehicles be broadly accepted? And which models will be most popular? The answers may well depend on the associations that automakers try to imprint on consumers.

Full article:

Q&D testing of "killer assumptions" … If you can’t GET the data, then CREATE it.

November 6, 2009

TakeAway: By becoming skilled at experimentation, innovators can gain a competitive edge.

STRATEGY & INNOVATION, Not-So-Risky Business, September 16, 2009

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By systematically attacking the most critical unknowns with tailored, low-cost experiments, innovators can systematically “de-risk” their strategies and thereby increase their chances of success while lowering the associated investment cost.

Systematically testing “killer assumptions” with quick experiments can create the data otherwise not available in market research reports but necessary to move forward to the next step, whether that step is doubling down, re-vectoring, or folding.

This type of approach is generally most critical when data doesn’t exist in market research or other reports, but rather exists in behavior that hasn’t yet happened or outcomes that can only be learned in market. In other words, if you can’t GET the data, then CREATE it through market experiments.

In other words, the goal is to run early experiments up front to gain critical pieces of information that can enable re-vectoring early and increase odds of success at a lower price tag.

“Test and learn” is the mantra. Invest a little and learn a lot is the approach.

And, the prizes over time come in the shape of lower investment costs, more innovation opportunities, and higher odds of success. Again, just remember “invest a little, learn a lot.”
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The first step is detailing “killer assumptions” by assessing risk, confidence, testability:

  • How important is it for this assumption to be true?
  • How confident are we in this assumption?
  • How easy would it be to test this assumption?

Then, start experimenting …

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The best experiments:

  • Isolate the variables being tested and keep it to one (or perhaps two) at a time
  • Keep the experimentation quick & dirty (Q&D) … not elaborate or expensive

Get out of the lab and office and into the “real world
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Armed with information from experiments, make one of three immediate choices:

  1. Double down and continue to the next assumption,
  2. Re-vector and accordingly re-assess the killer assumptions involved,
  3. Determine that it is time to cut your losses and fold.

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Full article

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Brainstorming strategic assumptions …

November 5, 2009

Question: What are the “killer assumptions” that underlie your strategy? 

STRATEGY & INNOVATION, Not-So-Risky Business, September 16, 2009

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Start by asking:

Who is the end user?
What are they willing to pay?
Will they have to change their behavior?

What constitutes “good enough”?
What are the technical challenges?
Are there logical external partners?
Do we have/need IP protection?

Profit System:
What price makes sense?
What do we expect in terms of trial/repeat purchase?
What capital investment is required?
What marketing support will be needed to launch?

Who are the necessary channel partners?
Are they willing to push the solution?
What incentives are required?

Who are they?
How do we expect them to respond?
How quickly?
What impact would it have?

Do we have the capabilities required?
Are resource allocation processes conducive to success?
Will we gain buy-in from key internal constituents?

How scalable is the solution?
What are the stepping stones to the broader opportunity?
How will we achieve longer-term competitive advantage?
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Full article:

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McKinsey’s “enduring” strategy frameworks … Check this out !

November 2, 2009

McKinsey consultants are in the process of constructing an interactive site with tutorials on core strategic analysis frameworks.

Below is a snapshot of the current “map” of frameworks .. those in green are active; those in blue or black are under development.

To access the site, go to

A great resource for current students and alums …



CPG market tests … experimenting "outside the box".

November 2, 2009

TakeAway: Big test markets are very old school.  Today, test marketing is done through “alternative venues”.

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Innosight, STRATEGY & INNOVATION, Thinking Outside the (Big) Box, September 16, 2009

Market experimentation in CPG often requires thinking “outside the (big) box (store)”.

The results of tests run in alternative channels can offer evidence to support (or refute) launch in the traditional and concept refinement in advance of such a launch.

Further, in many cases these channels can represent not only a venue for experimentation but also an early or alternate form of distribution.

The bottom line? Don’t focus on volume when running experiments.

Rather, focus intently on speed, affordability, connecting directly with consumers, and concept refinement.

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6 out-of-the-box alternatives: the company store, a virtual launch, TV direct response, product sampling services, small retailers and temporary pop shops.


1. Give It a Spot in the Company Store
Offering a new product internally can enable a good-enough approach across several dimensions (i.e., packaging, messaging). The price tag is cheap, and the testing can happen very quickly. Overall, to get an early read on consumer appetite for a new idea, the company store offers a lot of advantages.

2. Leverage Cyberspace with a Virtual Launch
Want to bypass the retail channel altogether when testing a concept? The Internet enables manufacturers to conduct small-scale launches that do just that by setting up simple websites with order-taking and fulfillment capabilities.

Virtual launches offer a lot of other advantages when testing assumptions around new concepts.

First, such launches enable rapid testing of consumer response to formulation, packaging, and branding
without the crippling cost of a full-scale launch.

Second, such launches can create buzz as they can attract early adopters, bloggers, Twitter and Facebook users, and even the increasing numbers of
mainstream press who are listening to these channels.

Third, manufacturers are able to gather valuable consumer information not possible through traditional channels, including feedback (i.e., comment
boxes, chat boards), purchase behaviors (i.e., trial vs. repeat), and customer characteristics (i.e., location, demographics).

P&G has been very active in its experimentation with virtual launches with products including Crest Whitestrips, Pampers Change ‘N Go, Swash by Tide, and Align GI.

In the case of Crest Whitestrips, a virtual launch on and in select dental offices generated unexpectedly high sales ($23 million from August 2000 to May 2001) and led to an acceleration of the retail launch timeline.

3. Reach for the TV Waves with Direct Response
Along the same lines as the virtual launch, television can offer a unique placement opportunity for manufacturers seeking input on product, pricing, trial/repeat, marketing, messaging, and a host of other product dimensions.

These channels are typically most applicable for more complex or new-to-market products benefiting from such a high-touch sales model.

The two most common alternatives are home shopping networks (i.e., QVC) and infomercials.

Home shopping networks offer a captive audience, live product demonstration, and rich data analytics. This combination enables rapid iteration of messaging based on near real-time sales data.

QVC, for example, boasts an 80+ million household audience to its 24/7 storefront.

Infomercials offer similar advantages to home shopping networks, with a twist.

First, longer formats make them even more applicable for complicated sales models (i.e., devices, new platforms of products, new categories).

Second, higher investment costs in the form of production make them more appropriate for later-stage tests versus a home shopping placement.

Infomercials have also served as stepping stones for many products that have gone on to reach broader audiences. Looking for examples? Think of products like OxiClean (now distributed broadly in FDM channels, and Proactiv available online and through kiosks.

4. Consider Sampling Services
Sampling services often cater to early adopters seeking the newest products on the market. While these solutions do not offer insight on pricing or at-the-shelf behavior, they do offer manufacturers the opportunity to glean valuable early perspectives on certain dimensions (i.e., formulation, packaging, marketing) before a product is ready for the mass market.

Other advantages of such services include being quick to launch, having built-in consumer bases, and incorporating a feedback protocol.

5. Remember that Good Things Come in Small Boxes
Sometimes a more traditional shelf setting is required. In these types of situations, small independent retail outlets can provide a great alternative for under
the radar testing of new products.

For personal care products, spas and salons can provide very relevant data points.

For food products, self-serve restaurants, gourmet stores, or health food stores are a good bet.

For beverages, bodegas or self-serve restaurants get the job done.

All of these settings can provide consumer insights similar to the traditional channel shelf in a smaller scale experiment, often with the added advantage of providing feedback from the proprietor or salesperson.

6.Get Focus Fast with a Pop-Up Shop
Have a defined sense of your foothold consumer but unsure if the concept will resonate?

Setting up a “pop-up shop” in close proximity of your target audience can quickly provide valuable insights at a low price tag.

Think broadly and you’ll surely find that appropriate venues can be found for almost all consumer segments.

Interested in college kids? Try a university campus or bookstore.

Aiming at athletes? Outside a gym might be a good bet.

Have your sights on parents of young kids? A community fair will surely provide a captive audience.

Urban youth? Hit the local basketball courts.

Another twist on the physical pop-shop is to leverage a vending kiosk or a mobile truck offering.

A recent, interesting example of this type of approach is the Coke Freestyle beverage dispenser. Through this novel vending machine, Coke is able to offer over 100 different varieties of beverages (i.e., soda, tea, juice and water) by combining different “micro-doses” from about 30 cartridges in the machine.

Yes, the concept offers mass customization and drives much greater choice for the consumer. Beyond that, however, the machine offers Coke the opportunity to experiment with different flavors and beverages and to get instant feedback on consumer uptake by geography through RFID technology
present on the cartridge.

This type of vending experiment offers enormous cost savings versus the traditional approach of testing a concept by bottling and pushing through the traditional distribution channel to separate winners from losers.
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Rolling Out the Chevy Volt

March 6, 2009

Excerpted from Washington Post, “GM’s Volt to Debut in Washington, Bay Area”, by Kendra Marr, February 5, 2009

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General Motors’ new plug-in electric car, the Chevrolet Volt, will go on sale in Washington and San Francisco first, the automaker announced this week, as it began laying plans to work with area government and power companies to ease the car’s introduction.

The San Francisco Bay Area was an obvious choice to be one of the first plugged-in cities. A warm climate combined with a wealthy, tech-savvy population has boosted sales of the Toyota Prius.

The D.C. region’s relatively high concentration of hybrid vehicles suggested people in this area were also willing to pay more for a vehicle with better fuel economy.

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It also helps to have an iconic car like the Volt close to Washington’s power brokers, who will soon be considering additional federal loans for the struggling automaker.

“You want your clean technologies to be very visible and build trust with public policy makers, even if city isn’t the ideal in demographics or in terms of infrastructure.”

“What we’re talking about is signaling to decision makers in Washington that the car is on its way to not just America, but to your garage.”

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The goal is to create strategies that make the pricey technology more attractive for Washington drivers, in hopes of eventually ramping up production. High manufacturing volumes means cheaper batteries and cheaper cars.

In addition, the automaker hopes the governments themselves will become early adopters, setting an example by buying large fleets of plug-ins.

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Even in a recession, companies still paying big bucks for potential blockbusters.

January 9, 2009
Excerpted from WSJ, “Blockbuster or Bust” by Anita Elberse, January 4, 2009

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Amid the worst economic crisis to hit the United States in decades, publishing executives are still making what many see as outrageous gambles on new manuscripts.

With double-or-nothing daring, most large media firms make outsized investments to acquire and market a small number of titles with strong hit potential, and bank on their sales to make up for middling performance in the rest of their catalogs.

Given the constantly shifting tastes of consumers, it is extremely difficult to forecast demand for a new title. The one useful indicator is its resemblance to an existing bestseller. This similarity is an indicator that’s evident to any editor or publisher who sees the proposal … triggering competitive bidding situations.

When a publisher spends an inordinate amount on an acquisition, it will do everything in its power to make that project a market success. Most importantly, this means supporting the book with higher-than-average marketing, advertising and distribution support.  With such high stakes and money tied up in a few big projects in the pipeline, the need to score big becomes more pressing, and the process repeats itself. The result is a spiral of ever-increasing bets on the most promising concepts, creating a “blockbuster trap.”

But what would happen if a publisher decided to stop making large bids and systematically walked away from the most sought-after — and therefore expensive — new properties?

First, agents would stop sending such a publisher their most promising book proposals, the most talented editors and other creative talent would leave to work for a publisher that would let them pursue the projects they thought had the highest chances of success, and firing up the publisher’s sales reps would be a major challenge.

In most media markets, support from the biggest retailers is decisive. A significant share of books is bought on impulse, so significant shelf space and room on display tables (“pile ’em high and watch ’em fly” tactics) are particularly important. Book retailers like Borders and Barnes & Noble want to see evidence that a book is worthy of their scarce resources. They like nothing better than to know that a book publisher … is planning an extensive marketing campaign. 

Consumers prefer blockbusters. Because they are inherently social, people find value in reading the same books and watching the same movies that others do. This is true even in today’s markets where, thanks to the Internet, buyers have easy access to millions and millions of titles. Compounding this tendency is the fact that media products are what economists call “experience goods”: that is, shoppers have trouble evaluating them before having consumed or experienced them. Unable to judge a book by its cover, readers look for cues as to its suitability for them, and find it very useful to hear that “Dewey” is “a ‘Marley & Me’ for cat lovers.” In much the same way that potential publishers do, readers value resemblances to past favorites.

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By the way: Saw Marley & Me over the break — a major disappointment.  ALL of the funny scenes are in the trailer and TV commercial.  Marley was undisciplined and unlovable, Owen Wilson is a dufass (grossly miscast as a reporter), and Jennifer Aniston is showing some serious mileage.  Even a shot of Oxyglobin wouldn’t have saved Marley or the movie. Wait for it on free TV.

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Netflix and TiVo Expand Their Niche

November 17, 2008

Excerpted from the Associated Press, “Netflix, TiVo Team Up After 4-Year Courtship”, by Michael Liedtke, & BusinessWeek “TiVo Does Netflix”, by Cliff Edwards, October 30, 2008 

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Netflix . and TiVo . are finally joining forces to deliver more movies and old TV episodes to their mutual subscribers, consummating a relationship that was supposed to come together four years ago.

Under the partnership , the latest generation of TiVo’s digital video recorders will be able to beam selections from 12,000 movies and TV shows offered through Netflix’s streaming service, which must be piped over high-speed Internet connections. 

TiVo ended July with 3.6 million subscribers and Netflix ended with 8.7 million subscribers. The streaming service is available at no extra charge to any Netflix subscriber paying at least $8.99 per month for DVD rentals — a prerequisite that most customers meet.

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Both companies have been moving aggressively to add more value to their services.

Netflix now has struck deals with Microsoft, Sony, Samsung, LG and Roku to deliver movies and TV shows through televisions, set-top boxes and game consoles.

TiVo, which charges a monthly or lifetime service fee, has expanded from its partnership with Amazon’s Unbox video service. In recent months, it has added CinemaNow and Jaman movie downloads and the Rhapsody movie subscription service.

Netflix is a bigger deal to TiVo because people who own the standalone box won’t have to shell out any additional cash. It might one day become an industry-changing deal if Hollywood opens the floodgates on the amount of content they license to Netflix and offers more current movies for streaming.

Most anyone who owns a TiVo will tell you how much they love it … but the service remains a niche product. Potential customers have balked at both paying for the box and monthly service. Each announcement of additional functionality helps overcome that reticence and offers another proof-point that TiVo has a lot of life left in it still.

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In addition, the growing selection of streaming devices could help boost Netflix’s profits by causing subscribers to request fewer DVDs. Each DVD rental makes a round trip through the postal service that costs Netflix 84 cents, so fewer requests will lower expenses.

Netflix still has to pay movie and TV studios licensing fees for the streaming rights, but that doesn’t cost as much as mailing DVDs.

“Netflix has really stumbled upon something that’s pretty clever  …  the customer gets the instant gratification of watching a movie over the Internet, studios get more licensing fees and Netflix saves money.”

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