Today’s Topic:

1. Today’s Topic: Making Product Decisions (based on financial, market, and competitive considerations) or “Putting it all together”

2. Second Course Module • Market/customer analysis (DLJdirect case – online brokerage) • Competitive analysis (Airborne Express case – package delivery) • Making product decisions --- today (Techsonic case – depthsounders/fishfinders) • Midterm exam on making product decisions (THINK case – electric cars) Th, Oct 20th

3. Today’s Agenda • Review of what we’ve learned • Midcourse feedback survey • Making product decisions --- methodology, and the Techsonic case • Preparation for midterm exam --- THINK case

4. What we’ve learned …… • Companies try to maximize the wealth of their owners --- market cap (stock price) plus dividends • Stock price and the ability to pay dividends are driven by earnings, and beliefs about future earnings growth • Individual products and services are expected to contributetargeted amounts to earnings/growth • Earnings growth (ultimately) requires revenue growth • Firms use financial statements to develop plans, and measure/analyze/report on their performance

5. …..and, in terms of business objectives….. • A company’s basic financial objective is to grow its earnings quickly and sustainably, in order to raise its stock price and have the ability to pay its owners dividends • Products are successful if and only if they attain their targeted contribution to corporate earnings

6. The Income Statement Revenues - Cost of Goods Sold (COGS) = Gross Margin (gross profit) - M&S expense - R&D expense - G&A expense = Operating income (EBIT) - Interest - Taxes = Net income (earnings)

7. Key Financial Concepts • Operations vs. total (e.g., OI vs. NI) • Normalizing results: return measures (e.g., OI as % of revenue; operating return on assets) • Knowing what “good” results are: competitive (industry) analogs and/or general benchmarks • Recognizing cash vs. non-cash - Measures (e.g., OI vs. NOCF) - Capital goods: depreciation/amortization - Working capital: inventory, accounts rec’bl.

8. Method: How to analyze anIncome Statement • (First, compute “the percentages”) • Operating income vs. net income comparison • In-period operating performance: costs and expenses as a % of revenue; compare to benchmarks • Cross-period performance (trends): relative change in rev, costs, expenses, earnings… improvements vs. deteriorations, and why • Going-forward opportunities and challenges/ risks for each line item

9. “Good” Operating Returnsin the Business Market Higher GM % Higher R&D % Lower GM % Lower M&S %

10. “Good” Operating Returnsin the Consumer Market Higher GM % Higher R&D % Lower GM % Lower M&S %

11. Business/Product Plan Learnings • Content/scopeof a business/product plan • Critical aspects of a “winning” plan • Differentiation: importance, definition, identification • Start-ups: success factors, funding requirements, success profiles

12. Business Plan: KeyContents • Company: people, skills, resources • Product: “whole” product & its benefits • Market: attractiveness & target customers • Competition: differentiation !! • Sales and marketing plan: channels • Operations plan: mfg, logistics, service • Financials: investor liquidity

13. Markets/Customers Key Learnings • Market attractiveness: the five forces model • The concept of target customers, and how to describe them • Target customer selectionmethod/process

14. Market Attractiveness:Porter’s “Five Forces” Model • Threat from substitute products • Ease of market entry and exit • Bargaining power of buyers • Bargaining power of suppliers • Degree of competitive rivalry

15. Four Ways of Describing Target Customers • Name: customer (individual or group names), industry or occupation, affiliations,… • Demographics: revenues/income, size of firm/size of family, location, … • Psychographics: cost-conscious, prestige oriented, early adopter, risk adverse, … • Needs……throughout the buying/using experience (remember the whole product!)

16. Target Customer Selection Method • Assess financial situation • Determine financial capabilityto address new segments • Identify differentiation from competitors • Assess customer segments’ needs and their fit to current and potential differentiation • Rank the customer segments according to the profit potential in serving them

17. Competition Key Learnings • Competitive advantage, and its relationship to differentiation • Performing a competitive analysis • Making business decisions based on competitive analysis results

18. How the concepts relate…... Competitive Advantage(s) Differentiators Success (earnings)

19. Definitions • Differentiator = a dimension of the “whole product”that is unique or best compared to competitive offerings (whole product differentiation; as measured by the value assessed by the targeted end-customers) • Competitive advantage = a capability, competency, process, skill or position of a companythat enables creation of one or more differentiators

20. Identifying Competitive Options Products Current Position Current products Current target customers Customers

21. Competitive Options • Protect & defend current customer/product segment • Increase market share in current segment • Selectively extend (whole) product offerings to current target customers • Selectively extend target customer set - current products - new products • Become a broad-line supplier

22. Making Product Decisions Financial Analysis (health, challenges) Market Analysis (customers, needs, market trends) Competitive Analysis (strengths, weaknesses) Objectives and Constraints (mkt, finc’l) “decision criteria” Competitive Adv Decision (SCA) Target Customer Decision (C) Product Decisions (4P’s)

23. Decision Criteria are desired outcomes for…… Revenues Market share Gross margins or cost position Expenses (by category) Operating income (or cash) Timeframes for these outcomes Level of risk tolerance

24. Making Product Decisions Using the things we’ve learned so far to make decisions about product definition and product priorities…… this is also the core topic for the mid-term exam

25. What are we “pulling together”? • Financial: income statement analysis, financial objectives and constraints, growth opportunities & challenges; decision criteria • Market: market attractiveness (5 forces), target customer selection, value/needs analysis • Competitive: competitive analysis, strengths/weaknesses, competitive advantage, differentiation • Product decisions: whole product concept, opportunity assessment, objectives and priorities

26. Making Product Decisions Financial Analysis (health, challenges) Market Analysis (customers, needs, market trends) Competitive Analysis (strengths, weaknesses) Objectives and Constraints (mkt, finc’l) Competitive Adv Decision (SCA) Target Customer Decision (C) Product Decisions (4P’s)

27. 1 - Financial Analysis:“what to look for on theincome statement” • Operating income vs. net income • In-period operating performance: costs and expenses as a % of revenue • Cross-period performance (trends): relative change in rev, costs, earnings ……. improvements vs. deteriorations, and why • Going-forward: opportunities and challenges for each item; constraints

28. 2 - Market Analysis • Market attractiveness --- size? growth? profitability? “five forces”? • Customer segments? possible targets? • Customer needs, especially unmet? • Market trends?

29. Products offered Target customers Competitive positioning (incl. price & cost) Financial performance Culture & human resource management Operations: manufacturing & logistics Marketing & sales R&D: key competencies Customer service Other relevant dimensions: e.g. information technology in Airborne Express case 3 - Competitive Analysis Dimensions

30. 4 - Objectives (Decision Criteria) and Constraints • Market objectives? (market share, revenue growth, …) • Financial objectives? • Financial constraints?

31. 5 - Competitive Advantage Decision • Current product differentiators? • Competitor strengths/weaknesses? • Current competitive advantage(s)? • Possibilities for enhanced advantage?

32. 6 - Target Market Selection:“process used for DLJdirect” • Financial situation • Capability to address new segments • Differentiators (and competitive advantages) • (Unmet) Needs of each segment • Fit to current and potential differentiators • Profit potential of each segment • Choose target customer segments

33. 7 - Product Decisions:the rest of the “marketing mix” • Product • Price • Promotion • Place

34. 7a - Key Concepts to Remember for product decisions • Definition of success: earnings • The business equation: (value-price)…etc • Customer segmentation possibilities • Identifying needs: 5 techniques • Importance of differentiation • Whole product: opportunities for diff’n • Competitive advantage: the source of differentiators • Opportunity assessment aperture • Being clear on objectives and priorities

35. Definition of product success Whole product Product plan: key success factors Differentiation Market attractiveness Target customers Competitive advantage Marketing mix (C+4P) Product positioning Sales functions Channel options Channel value-added Operations balance Course Concepts (13)

36. Income statement analysis Financial benchmarks Target customer description Target customer selection 5 Forces analysis Competitive analysis (10 dimensions) Identifying competitive options Decision criteria Product decisions Product competitive positioning Channel economics Process dimensions Product development best practices Course Methods/Tools (13)

37. Techsonic: case summary • Private company in 1989 • Market leader in depth sounders/fish finders under the Humminbird brand • Growing and profitable until….. • Recent industry-wide downturn in new boat sales • Three new products at various stages of development: next-gen depth sounder (901), VHF marine radio, and navigation product (“GPS”) • Which one(s) to pursue…..?

38. Homework Questions - 1 • Calculate Techsonic’s absolute and relative operating income for 1987, 1988, and 1989; are these operating results “good”? Why did operating income fall between 1988 and 1989? Identify both financial and market reasons. • What are the decision criteria Techsonic should use in making decisions at this point? (I.e., what are the outcomes a “good” decision would achieve?) • Perform a 5 forces analysis of the U.S. market for depthsounders/fishfinders

39. Homework Questions - 2 What are Techsonic’scompetitive advantages? What are the 901’sdifferentiators? What are the potential differentiators of the navigation product? Who are Techsonic’scurrent target customers (provide at least eight descriptors) ? Separately, identify the positives-and-negatives of focusing primarily on: (1) 901, (2) VHF marine radio, (3) GPS-based navigation product.

40. Process for Midterm • Case is available in casebook • Analyze the case (individually and/or in groups) over the next week • During exam, several questions will be posed and you will write your answers (individually, on paper) • Exam is “open book” -- you may bring any information resources you wish to; no electronic devices or communication during exam • <2 hrs for exam; 30 min to discuss answers ( this will be the only exam review )

41. Typical Grade Distributionindividual semesters vary considerably

42. Case for Mid-term exam Re-THINK-ing THINK: The Electric Car Company

43. THINK Case Summary Case timeframe: 2010 Norway-based company; turbulent history “Re-started” in 2008 1,700 cars sold, mostly in Europe Planning to sell and manufacture in the US Considering targeting fleets and consumers Profits highly sensitive to volume and price

44. Exam Questions will derive from course topics to date….. • Financial analysis, opportunities, challenges • Identifying decision criteria (objectives) • Market assessment/attractiveness • Target markets and target customers • Customer needs and product benefits • Differentiation: whole product and company • Competitive analysis • Competitive advantage • Making product decisions

45. Definition of product success Whole product Product plan: key success factors Differentiation Market attractiveness Target customers Competitive advantage Marketing mix (C+4P) Product positioning Sales functions Channel options Channel value-added Operations balance Course Concepts (13)

46. Income statement analysis Financial benchmarks Target customer description Target customer selection 5 Forces analysis Competitive analysis (10 dimensions) Identifying competitive options Decision criteria Product decisions Product competitive positioning Channel economics Process dimensions Product development best practices Course Methods/Tools (13)