Instructor’s Manual
Chapter 13
Crafting a Deployment Strategy
SYNOPSIS OF CHAPTER
A deployment strategy should accelerate adoption of new products through the use of effective
timing, licensing and compatibility, pricing, distribution, and marketing strategies. A new
product launch may be timed to take advantage of business cycle or seasonal effects. The
introduction needs to be well coordinated to ensure production capacity is sufficient to meet
initial demand and that complementary goods will be available. The timing decision should also
include an analysis of the possibility of continuing to generate cash from existing products versus
the likelihood of cannibalizing those cash flows by introducing a new product. Cannibalization
may be an appropriate trade-off to prevent competitors from attaining a competitive advantage.
Licensing and compatibility questions address the need to make a system open enough to
encourage the production of complementary goods while at the same time preventing the firm’s
installed base from serving as a source of leverage for competitors. Pricing strategies can signal
a products’ position in the market and may range between pricing at or below cost to gain market
share to charging the highest price feasible to maximize short-term profits. The opportunity for
significant earnings from complementary goods or services may justify penetration pricing to
gain access to the market. The form and timing of payment for a product can also influence the
customer’s perception of price.
Whether or not to use intermediaries and the role they will play can be an important part of
deployment strategy. Alliances with distributors, bundling goods with more established
products, exposing the market to the new technology via contracts and sponsorships, and using
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guarantees and consignment programs with distributors or developers of complementary goods
are all means of promoting a rapid deployment. Marketing plays an important role in a
deployment strategy by creating demand for the new product. Marketing methods will vary with
the market segment targeted and the nature of the innovation.
TEACHING OBJECTIVES
1. Familiarize students with the key elements of deployment including timing, licensing and
compatibility, pricing, distribution, and marketing.
2. Provide students with an understanding of the analyses that should be conducted when
deciding on a deployment strategy
LECTURE OUTLINE
I. Overview
a. Deployment is a key component of the innovation process because a new product has
little value in and of itself. It is only when people understand the innovation, can access
it and utilize it regularly that the product is of value. The best deployment strategies
accelerate adoption by reducing uncertainty about the product and lowering
resistance to switching from competing goods. Five key elements of deployment are
covered in this chapter: timing, licensing and compatibility, pricing, distribution, and
marketing.
II. Launch Timing
a. Beyond the issues of timing discussed in Chapter 5, timing a product launch to take
advantage of seasonal effects, or to prevent or allow cannibalization of existing
products, can be an important part of a deployment strategy.
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b. Strategic Launch Timing is a function of many factors including seasonal or business
cycles and the availability of complementary goods. Video game producers typically
introduce new game consoles to coincide with the Christmas shopping season, but it is
essential that complementary goods (to help create demand) and sufficient production (to
meet demand) are readily available when the product is introduced. For products
characterized by rapid technological change, new product introductions should not
follow so closely after the previous generation that consumers are reluctant to replace it,
nor should the next generation be so long in coming that a competitor gets to the market
first and establishes itself as the market leader.
c. Optimizing Cash Flow versus Embracing Cannibalization is a very difficult choice
for firms to make. There are instances when it is in the firm’s best interest to introduce
new generations of technology while the current generation is still viable. Though this
strategy will result in the new generation cannibalizing sales of the previous generation,
it is more likely to keep consumers loyal to the product and prevent them from
switching to another manufacturer.
III. Licensing Strategies and Compatibility
a. Firms should consider the new product’s compatibility with competitors’ or its own
products when developing a deployment strategy. By making the new product
compatible with existing products, the firm can take advantage of a large installed base.
A firm with a large installed base for its own goods may choose to make its products
incompatible with other technologies in order to prevent competitors from leveraging the
installed base to create demand for competing products. The decision to make new
products backward compatible with previous generations can be especially effective
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when combined with continuous innovation. It takes advantage of the existing installed
base and prevents competitors from creating a technological gap.
IV. Pricing Strategies
a. Pricing strategies influence a product’s position in the market, the rate of adoption
and the firm’s cash flow. A range of goals and corresponding pricing strategies are listed
below:
i. Survival pricing covers variable costs and some fixed costs and may be
used in short run when there is overcapacity or intense price competition.
ii. Maximize current profit pricing establishes the price to maximize cash
flow or rate of return on investment in the short run and is based on cost and
demand estimates.
iii. Maximum market skimming pricing usually begins with a high
introductory price to signal high value and recover initial development
costs. This approach assumes that demand is unrelated to price and may
attract competitors to market.
iv. Maximum market share or penetration pricing sets the price as low as
possible to attract customers in order to increase volume and decrease
production costs. When an industry is characterized by increasing returns
this can be a successful strategy because it can provide the firm with a
powerful foothold as low cost provider.
v. Pricing below cost can be an effective strategy when a firm expects to
generate profits from the sale of complementary goods.
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vi. Timing strategies enable a firm to manipulate customer perceptions of
price by changing how or when the purchase price is paid. Options include
payment after a free trial period, leasing programs, or a give-away of
the initial product with profits earned from follow-on services. In addition,
introductory pricing allows company to test price points in the market.
V. Distribution
a. Selling Direct versus Using Intermediaries is a function of the degree of control the
company wants to maintain over pricing, service and selling processes and
opportunities to capture customer information and customize products. Firms
should consider the following questions when choosing a distribution channel for a
product:
i. How does the new product fit with distribution of existing product lines?
Does the firm have an existing sales channel that could be used for the new
product or will the new product warrant the cost and time required to build a
direct sales force?
ii. How numerous and dispersed are customers, and how much product
education or service will they require? Is pre-purchase trial necessary or
desirable? Is installation or customization required? If the answer to any of
these is yes, intermediaries are likely to be the best option.
iii. How are competing products or substitutes sold? Apart from the need to
change customer behavior if trying to change the traditional sales channel, the
means by which a product is sold may affect how it is perceived in the market
(unique, high end, mass market, etc.).
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b. Intermediaries including OEMs (assemble parts into a new product sold under the
OEM’s name) may add value and increase demand by drawing customers with goods
from a variety of manufacturers, providing transportation, carrying inventory,
providing selling services, handling transactions with customers and providing
exposure to customers in geographically dispersed locations.
c. Disintermediation has changed the structure of some markets (due mainly to changes in
information technology) by eliminating or changing intermediaries. For example, the use
of online brokers has reduced reliance on stock brokers and the growth in online sales
has increased the role of package delivery businesses.
d. Strategies for Accelerating Distribution should be considered when an industry is
likely to select single technology as the dominant design. Rapid distribution is central to
establishing a large installed base and to encouraging developers of complementary
goods to produce products that are compatible with a firm’s new product. These
strategies include:
i. Alliances with Distributors or the use of exclusive contracts can provide
incentives to carry and promote certain goods.
ii. Bundling Relationships increase the likelihood that customers will become
familiar with the new product because the product is distributed with another
product already enjoying a large installed base.
iii. Contracts and Sponsorship encourage distributors, complementary goods
providers or large end-users (e.g., universities, government agencies) to use the
product increasing the likelihood they will buy it when faced with their own
purchase decision.
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iv. Guarantees and Consignment arrangements can reduce the impact of market
uncertainty about a product. For example, a manufacturer can encourage
distributors to carry its product by selling it on consignment or agreeing to buy back
unsold stock. Similarly, complementary goods manufacturers can be motivated to
support a new product with guarantees that a particular quantity of goods will be
purchased.
VI. Marketing
a. Marketing strategy must take into account the nature of target market and the
innovation in order to shape perceptions and expectations about the product’s installed
base and availability of complementary goods. Consideration should be given tailoring
marketing to particular adopter categories.
b. Major Marketing Methods include advertising, promotions and publicity/public
relations.
i. Advertising is used to build customer awareness of a technological innovation
through an effective advertising message placed in the advertising media most
likely to reach the target market.
Show Figure 13.1
ii. Promotions are temporary selling tactics used at the customer or distributor
level to stimulate purchase or trial. Examples include:
1. Offering samples or free trial.
2. Offering cash rebates after purchase.
3. Including an additional product with purchase.
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4. Offering sales bonuses to distributor or retailer sales representatives.
iii. Publicity and Public Relations can be used to generate word-of-mouth
recommendations, public awareness and goodwill. Viral marketing attempts to
capitalize on the social networks of individuals to stimulate word-of-mouth advertising.
Information is sent directly to a set of targeted consumers (a process called “seeding”)
that are well-positioned in their social networks in some way (e.g., they may be “hubs” in
that they have many more friends than others, or may have high potential for opinion
leadership). The objective is to spark rapid spreading of the information through social
networks, akin to a viral epidemic.
c. Tailoring the Marketing Plan to Intended Adopters is crucial because each adopter
group responds to different marketing content. For example, early adopters usually
respond to marketing materials emphasizing technical content and the leading edge
nature of innovation. Later adopters respond to marketing materials that communicate a
product’s completeness, ease of use, lifestyle match, and legitimacy. Transitioning
from marketing to early adopters to late adopters may have to overcome some difficulties
when the early majority is not yet convinced of technology’s utility. Show Figure 13.2
VII. Creating an Information Epidemic
a. Certain individuals can have a disproportionate effect on the marketplace. Gladwell
categorized these individuals into three categories:
i. Connectors have an exceptionally high number of diverse acquaintances, a
high social drive, and are likely to bring together people that are otherwise
unlikely to meet.
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ii. Mavens are driven to obtain and share knowledge about items of interest to
them (product prices, attributes, etc.).
iii. Salespersons are able to transmit verbal and nonverbal cues that enable them to
influence other’s emotional responses and for our purposes purchasing decisions.
b. Using Marketing to Shape Perceptions and Expectations – Advertising, promotions
and publicity will all play an important part in shaping the market’s expectations about
the product, the installed base and the availability of complementary goods.
i. Preannouncements and Press Releases aggressively promoting existing and
planned products can increase the actual and perceived installed base, both of which
may drive future adoptions. “Vaporware” is the pre-advertising of products not yet
on the market and are often used to encourage customers to wait for a firms product
when a competitors product is already available.
ii. Reputation (for introducing successful, well-supported innovations) will influence
customers’, distributors’ and complementary goods producers’ expectations of the
new product.
iii. Credible Commitments including financial commitments to a new technology,
either in R&D costs or in new manufacturing capability, will signal the market
about the firm’s confidence in and commitment to the new product.
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