Added ValuesAdded Values

Presented by:Presented by:

Nick Newby & Russell DavisNick Newby & Russell Davis

Added Value of a MonopolyAdded Value of a Monopoly

• ““one strong company and the rest weak.” one strong company and the rest weak.” -Hiroshi Yamauchi, President, -Hiroshi Yamauchi, President,

NintendoNintendo

• Nintendo hardware was a bargain to Nintendo hardware was a bargain to produce b/c they used commodity produce b/c they used commodity processorsprocessors

• Personal computers averaged $2500 to Personal computers averaged $2500 to $4000.$4000.

• NES was $100NES was $100

NintendoNintendo

• NES was designed NES was designed to simulate hit to simulate hit arcade games.arcade games.

• Inexpensive Inexpensive hardware and hit hardware and hit games = SALESgames = SALES

Virtuous CircleVirtuous Circle

• Software houses wrote games for the Software houses wrote games for the NES, but Nintendo had complete NES, but Nintendo had complete control over them through licensing control over them through licensing agreementsagreements

• Nintendo also had in house game Nintendo also had in house game writers.writers.

• This meant that Nintendo was not This meant that Nintendo was not dependent upon any one supplierdependent upon any one supplier

NintendoNintendo

• By limiting power of software By limiting power of software developers, Nintendo limited the developers, Nintendo limited the values to outside companies.values to outside companies.

• Nintendo created an intentional Nintendo created an intentional shortage of video the video game shortage of video the video game library at retailers. Was this a smart library at retailers. Was this a smart move?move?

NintendoNintendo

• YeahYeah• Shortage made game cartridges more Shortage made game cartridges more

desirabledesirable• Created publicity due to the shortage Created publicity due to the shortage

during the holiday season (1988)during the holiday season (1988)• Helped retailers move slower selling Helped retailers move slower selling

gamesgames• But kids remembered to tell their parents But kids remembered to tell their parents

they still wanted the real popular gamethey still wanted the real popular game

SupplySupply

• Monopolies and shortages Monopolies and shortages complement each othercomplement each other

• Growing demand for products means:Growing demand for products means:– Expand too little Expand too little →Risk loosing sales→Risk loosing sales– Expand too much → Unused capacityExpand too much → Unused capacity

Added values entails building less instead Added values entails building less instead of moreof more

Limiting Supply ProsLimiting Supply Pros

• Gets you a bigger slice of the pieGets you a bigger slice of the pie

• May give you distinctionMay give you distinction

• May provide free publicityMay provide free publicity

• May lead customers to purchasing May lead customers to purchasing slower-moving products while waiting slower-moving products while waiting for the shortage to endfor the shortage to end

ConsCons

• Shrinks the pie – costs you sales Shrinks the pie – costs you sales todaytoday

• May cost you a relationship and May cost you a relationship and thereby future salesthereby future sales

• Creates ill willCreates ill will

• Leaves a hole in the market inviting Leaves a hole in the market inviting entry.entry.

Trade-OffsTrade-Offs

• Spend $1 so customers value it as $2Spend $1 so customers value it as $2

• TWA goes from worst rated airline to TWA goes from worst rated airline to #1 when it spends $1 million to #1 when it spends $1 million to increase leg room in coach.increase leg room in coach.

Trade OnsTrade Ons

• Create higher quality and lower costs Create higher quality and lower costs simultaneously.simultaneously.

• Costs will initially rise, but customers Costs will initially rise, but customers will eventually come to you will eventually come to you increasing production and increasing production and distribution.distribution.

• Scales of economies will prevail and Scales of economies will prevail and costs will decrease.costs will decrease.

Trade-OffsTrade-Offs

• Raise the amount customers are Raise the amount customers are willing to pay by more than the willing to pay by more than the incremental cost.incremental cost.

• Reduce costs without reducing Reduce costs without reducing willingness to pay as muchwillingness to pay as much

Trade-OnsTrade-Ons

• Lower costs in a way that helps you Lower costs in a way that helps you to deliver a better productto deliver a better product

• Deliver a better product in a way that Deliver a better product in a way that helps you lower costs.helps you lower costs.

Added Value of a Added Value of a RelationshipRelationship

Added valueAdded value

• Provide high quality at low costs.Provide high quality at low costs.• Be unique Be unique (if others can do what you do you have (if others can do what you do you have

little added value).little added value).

• Key to added value is differentiation.Key to added value is differentiation.

So how do you create added So how do you create added value in a Relationship?value in a Relationship?

• Create LoyaltyCreate Loyalty– Some extent, relationships are Some extent, relationships are

automatic.automatic.– Actively promote strong relationships Actively promote strong relationships

with customers and suppliers.with customers and suppliers.– Create value for the customer.Create value for the customer.

U.S. Airline industryU.S. Airline industry

• 1981 facing extreme competition.1981 facing extreme competition.

• Found passengers after low prices Found passengers after low prices had no loyalty.had no loyalty.

• American Airlines – frequent flyer American Airlines – frequent flyer program.program.

• Customers became loyal at little cost Customers became loyal at little cost to airlines.to airlines.

• Divided LoyaltyDivided Loyalty– Two weeks later United Airlines created Two weeks later United Airlines created

Mileage Plus frequent-flyer program.Mileage Plus frequent-flyer program.

– Within three months all major airline Within three months all major airline companies had frequent-flyer programs.companies had frequent-flyer programs.

– Playing field was level again, every Playing field was level again, every airline had their loyal customers.airline had their loyal customers.

– Important: competitors with little to lose Important: competitors with little to lose have reason to cut prices to attract have reason to cut prices to attract customers.customers.

Thanking the CustomerThanking the Customer

• Important to thank your loyal customers.Important to thank your loyal customers.• Essential part of added value in a Essential part of added value in a

relationship.relationship.• 9 ways to thank the customer.9 ways to thank the customer.

1.1. Say thank you in kind, not cash.Say thank you in kind, not cash.2.2. Save the best than you for your best customers.Save the best than you for your best customers.3.3. Say thank you in a way that builds up your business.Say thank you in a way that builds up your business.4.4. Don’t say thank you too quickly, or too slowly.Don’t say thank you too quickly, or too slowly.5.5. Say that you’re going to say thank you.Say that you’re going to say thank you.6.6. Recognize that you may have to compete for loyalty.Recognize that you may have to compete for loyalty.7.7. Allow your competitors to have loyal customers too.Allow your competitors to have loyal customers too.8.8. Don’t forget to say thank you even if you have a monopoly.Don’t forget to say thank you even if you have a monopoly.9.9. Say thank you to your suppliers as well as to your customers.Say thank you to your suppliers as well as to your customers.

ImitationImitation

• Healthy ImitationHealthy Imitation– Harmful when you think win-lose Harmful when you think win-lose

strategy (win-lose + lose-win = lose-strategy (win-lose + lose-win = lose-lose).lose).

– Win-Win = both companies profit.Win-Win = both companies profit.– Example: frequent-flyer program.Example: frequent-flyer program.

•Greater price stabilityGreater price stability

•Loyal customers Loyal customers

•price rises less riskyprice rises less risky

• Unhealthy ImitationsUnhealthy Imitations– Not everything is win-win.Not everything is win-win.– Game is about how fast you can Game is about how fast you can

improve you improvements.improve you improvements.– Individual Inc. has fine tuned their Individual Inc. has fine tuned their

customer learning process, resulting customer learning process, resulting in preserved added value.in preserved added value.1.1. Getting feedback from customers.Getting feedback from customers.

2.2. Improving products.Improving products.

3.3. Becoming faster at improving products.Becoming faster at improving products.

• Minnetonka Minnetonka – Robert Taylor’s innovation of the Softsoap Robert Taylor’s innovation of the Softsoap

machine.machine.– Ordered 100 million pumps from the only two Ordered 100 million pumps from the only two

suppliers.suppliers.1.1. Locked the suppliers up for two years.Locked the suppliers up for two years.

2.2. Eliminated threat of imitation.Eliminated threat of imitation.

3.3. Gave time to build brand imageGave time to build brand image

• Antidotes to Unhealthy ImitationsAntidotes to Unhealthy Imitations1.1. Collect customer feedback to customize your Collect customer feedback to customize your

product.product.

2.2. Create brand identityCreate brand identity

3.3. Build volume to move down the learning curve.Build volume to move down the learning curve.

4.4. Compete aggressively for volume so that competitors Compete aggressively for volume so that competitors can’t follow you down the learning curve.can’t follow you down the learning curve.

Changing the Added ValuesChanging the Added Values

• Little competition = assured added Little competition = assured added valuevalue

• Competition = find some added Competition = find some added value of your own.value of your own.