Advances in technology and electronic design tools, business desegregation, and product-development options provide managers with more choices than ever as they approach new design cycles. Questions arise regarding the use of internal, external, or a hybrid staff; silicon process technology; and lately, if the design should be system on a chip (SOC) or field-programmable gate array (FPGA).
The questioning doesn’t end there. Today, managers also must consider the use of third-party or internally developed IP, the selection of tools, and whether current methodologies will support their product plans.
Should they use programmability in their product and, if so, what type of programmability? Do they need to consider system-level issues? What about support for the product during manufacturing or when it is in the field? Do they need to qualify their silicon vendors and their supply of finished products?
The list of considerations can be endless, so it isn’t surprising when a manager suffers from paralysis by analysis. Poorly chosen options often are not identified until late in the development process and, unfortunately, they can be fatal. A bad decision can kill a project because return on investment (ROI) decreases as development costs increase or the market launch is late.
The largest emphasis must focus on the end market, which can be classified into two segments: established or to be created. The type of market then should guide all decisions ranging from the product architecture through manufacturing, sales, and distribution.
Entering Established Markets
Established markets are those in which infrastructures have been implemented and consumers can identify, define, and name specific products and standards. An example would be a DVD-player market where numerous products, standards, and content providers exist.
To win in an established market, a new entrant has two choices:
- Produce a similar product at a lower cost of ownership.
- Provide an enhanced product that offers more functionality at a price point that customers are willing to pay.
New products that provide the same capabilities as existing products often are cheaper in price. Each of these products is searching for a niche customer base that is profitable.
In an established market, it is easy to identify which products satisfy customers’ requirements as well as the developers of those products. Once you know the companies and products that you have identified as your competition, you must analyze each one. The analysis should include the size of company, revenue, profitability, targeted markets, market share, the strengths and weaknesses of the company, and the products.
The market analysis should concentrate on the total available market (TAM) and the serviced available market (SAM) along with the obsolescence, turnover, and the number of similar products a consumer would purchase. If the sum of the SAMs served by the various companies approaches the TAM, this market is entering a mature phase, and the incumbents have a cost advantage.
In this situation, obsolescence and turnover are key numbers. This will indicate how often a consumer will purchase a next-generation product. For example, DVD players probably are in the two- to three-year timeframe, and a consumer might purchase up to three of them for their home. Cell phones are in the one- to two-year timeframe.
The competitive products also must be analyzed. The estimated cost to manufacture a product and its capabilities are key factors in established markets. If multiple products exist in the market you plan to enter, perform the analysis on several competing products.
Do additional analysis regarding each competitor’s suppliers, manufacturing, and distribution and sales channels. This analysis may be difficult to perform; but by understanding each of these areas, you know what opportunities may exist for you to exploit.
In these areas, there are generic questions to explore and some specific questions relevant to a particular market that should be developed. Create questions based on your specific needs; however, the following list identifies areas often used to complete a market analysis.
Cash Flow
Does your competitor have a large, positive cash flow and cash in the bank to sustain a long, competitive environment? This would allow your competitor to lower prices in the short term. Can you compete against this?
Size of the Market
How large is the market? How do consumers purchase products in this market? How long is the selling process? How quickly does the same supplier introduce products? Are new technologies becoming available that might change the cost structure or provide new functionality that could not be offered previously? Can you expand the number of uses for your product?
Cost of Products
What is the basic cost of these competitive products? Determining this will require purchasing and analyzing competing products. Analysis should not solely concentrate on the pricing of competing products, but also consider the technologies and components used to design and manufacture the products.
Internal vs. External Resources
In the design process, does your competitor rely on internal or external resources? What could be the reason for this choice?
Using external resources might be cheaper and faster than hiring a team, developing a design methodology, and purchasing the tools and equipment required to design and test a product. Various obstacles might prevent your competitor from hiring direct staff, leaving outsourcing as their only option. Would you face the same obstacles? If so, how would you overcome them?
Available Technologies
The technologies available to use in your product can have large effects. Do you use the newest technology that might not be proven and could cause potential market delays or design iterations? If your products do not have sufficient volumes, your costs can be higher than those of your competitor.
Avoiding leading-edge technologies might be the best choice if the technologies do not provide any meaningful advantage for your product. In this situation, it would be better to find the cheaper technologies and compete on price.
New Technology
If you use new technology in the design or manufacturing of your product, how do you plan to mitigate the increased risks associated with this technology? Many companies have gone out of business after choosing new technology that prevented them from entering a market.
Suppliers and Contract Manufacturers
Does your competitor rely on any key part suppliers or contract manufacturers for its product? If so, why? Are these tasks not considered a core competency? If they are not, is your competitor aligning with a strong supplier that has the personnel, skills, and cost structure to manufacture the product cheaper? If cost is the driving factor, are you capable of producing a cheaper product?
Capacity
What is the full capacity that your competitor can supply, and what is the current utilization? The answers to these questions can indicate if the competitor has additional capacity and how much lower it can drive the cost to manufacture its product.
Publications
Are there publications such as Consumer Reports or trade magazines that provide help in analyzing existing products?
The marketing group should perform most of the competitive analysis, but it really takes a team to do a complete evaluation. That team should include design, manufacturing, purchasing, and sales personnel to clearly identify what is needed to successfully compete in an established market.
The common challenges faced in an established market are designing a product and manufacturing infrastructure that can provide your product with a cost advantage. If your company does not have a manufacturing infrastructure that can be leveraged on a new product, outsourcing might be the best initial strategy to minimize expenses.
Establishing New Markets
New markets are exactly that—new. Many characteristics typical of an established market do not yet exist, specifically competitors, products, or infrastructure. What does exist are potential customers that would purchase a new product if offered.
In new markets, the analysis is different from that for established markets. Rather than perform analysis on competitors and their products, the new market analysis must concentrate on target customers and the value they would derive from your product, the pricing strategy, and the infrastructure required to support your product. Instead of focusing solely on cost and functionality as in an established market, you must concentrate on how to create a market and enable rapid product adaptation to meet changing requirements.
As a new market and a product idea are being formulated, identifying customers with a vision that matches your new product is critical. These customers, often referred to as teaching customers, are willing to pay and assume risk for an opportunity to significantly change how they perform a task without any guarantee that the new product will work. They also expect you to modify the product to meet their evolving requirements.
Teaching customers are critical to new markets. If chosen correctly, they can significantly influence other consumers to accept the new product.
Ideally, a small set of early adopters, typically three to five, is chosen to help mold the product. If too many are selected, it becomes difficult to support all of their requirements and ensure that your early adopters are successful.
When working with a small set of customers, rapid design and manufacturing capabilities are critical. The shorter the time required for product iterations, the faster the product is honed for a wider market distribution.
Fast cycles will influence how the product is designed and manufactured. This work is the start of benchmarking activities concerning performance and costs.
Once this benchmark is established, it can be used to evaluate competitive products as they enter your market. Competitive analysis is not a one-time event but an ongoing process.
Working with these teaching customers helps you understand the value proposition your product can offer the market. They also help define the infrastructure and standards required for your product.
As you build experience in designing and manufacturing your product, this will help drive down your product’s cost. Although this is not as critical in a new market, as your market becomes established and other competitors join you, reducing product cost will be invaluable for your continued success.
New markets will require their own set of questions. The following list identifies some typical questions. Again, your company should create its own list based upon specific needs.
- What problem is your product trying to solve? Does your solution provide sufficient value that a customer would buy it?
- What is the projected cost to design and manufacture? Based on the pricing strategy, is your product profitable?
- Which customers would purchase the product? How would they purchase the product?
- Of these customers, which would be teaching customers that could help hone your product as well as influence the market?
- What infrastructure or content must be available for your product to be successful? Which partners do you need to align with and influence to establish the infrastructure? Can infrastructure and content partners be successful with their products? If not, can your product be successful? How long will it take to create the infrastructure?
- What kind of technologies should you use to design and manufacture the product given that you need rapid iterations?
- What is the core competency of your company? Is it design, manufacturing, distribution, or other? If not a core competency, should an element be outsourced? Does outsourcing allow too much competitive knowledge to leave your company?
- Besides your teaching customers, what other activities exist to establish and influence a market?
In attempting to create new markets, the challenges are determining if a market exists for your product, what infrastructure must exist for your product’s success, the methods to create this market, and how long it will take to establish a market. Keys to success are listening to customer feedback, quick product iterations, and a pricing structure that allows you to control the number of customers you sell to. The time required to establish a new market might take months to decades depending upon the choices made.
Conclusion
Understanding whether you are establishing a new market or entering an existing one can help you quickly identify key objectives you must accomplish to be successful. Companies could improve their chances of success by creating analysis templates for the market situations that help evaluate options and reduce the paralysis-by-analysis syndrome.
About the Author
Bill Martin is vice president of the Mentor Consulting Division of Mentor Graphics. His background includes 22 years of experience in consulting, project management, and product design, most recently at Synopsys and VLSI Technology before joining Mentor in 2000. Mr. Martin holds an M.B.A. in marketing/finance from the University of Texas and a B.S. in computer engineering from the University of Illinois. Mentor Graphics, Mentor Consulting Division, 15455 N. Dallas Pkwy., Suite 1000, Addison, TX 75001, 972-391-2413, e-mail: [email protected]
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June 2003