I N F O R M STransactions on Education

Vol. 5, No. 2, January 2005, pp. 64–76issn 1532-0545 �05 �0502 �0064 informs ®

doi 10.1287/ited.5.2.64© 2005 INFORMS

Case Article

Seagate - Quantum: Encroachment Strategies

Glen M. SchmidtThe McDonough School of Business, Georgetown University, Washington, DC 20057,

schmidtg@msb.edu

Jan A. Van MieghemKellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston,

Illinois 60208, USA, VanMieghem@Kellogg.Northwestern.edu

Few terms in the recent literature on innovation management have been as widely used as the phrase disruptivetechnology. Yet this term is widely misunderstood. As Christensen and Raynor (2003, p. 143) note, “Many

readers have equated in their minds the terms disruptive and breakthrough. It is extremely important, for purposesof prediction and understanding, not to confuse the terms.”This case shows how to recognize a potentially disruptive technology: it diffuses via a process of low-end

encroachment. The new technology initially imposes little apparent threat because it sells to low-end or newcustomers, but it eventually encroaches on the current market from the low end upward. The case comparesand contrasts low-end encroachment (using the example of a new, smaller disk drive involving the firms Sea-gate and Quantum) to the case of high-end encroachment, where a new product such as a Pentium IV initiallysells to high-end customers. In an oversimplified but concrete way, the case shows how marketing conceptssuch as conjoint analysis and reservation price tie into the concept of a demand curve, and how operationsimprovements (via the learning curve, or via product and process design) can lead to market share changesand product diffusion. These all have implications on firm strategy. Thus the case integrates material from mul-tiple disciplines and might be used in MBA, MS, executive, or undergraduate courses that cover topics suchas technology management, operations strategy, new product development, marketing strategy, or competitivestrategy.

1. Synopsis of the Case StudyThe case is set in the 1980 time frame and representshistorical fiction, in the sense that it uses Christensen’s(1997) real-life observations and empirical disk drivedata to develop a plausible setting, but not a fac-tual one. Quantum is the market leader selling 8-inchdisk drives, and Seagate Technologies is contemplat-ing the introduction of a new smaller 5.25-inch drive.The basic question students face is whether Seagateshould introduce the drive, which of course has impli-cations on what Quantum might do in response. Thisleads to discussion of wider implications as to pos-sible strategies in different industries. The case isaccompanied by a Supplement that presents a frame-work to help students formulate and structure theirthinking about the relevant issues.To help answer these questions, the case (along with

its Supplement) presents a framework that can be usedto use in evaluating how the market might evolve overtime. That is, it helps assess which market segments

each product might sell to, how these segments mightshift over time, and how prices, sales quantities, andprofits might evolve over time. The Case Supple-ment presents the linear reservation price frameworkof Schmidt and Porteus (2000) as a tool that can beused to help make this assessment. (A reservationprice curve sequences customers in order of highest tolowest willingness-to-pay (reservation price) along thex-axis, and then plots their reservation prices on they-axis. It is assumed the resulting plot is continuousand affine.)As suggested, the linear reservation price frame-

work relies on knowledge of customer willingness-to-pay. So that the student may build the reservationprice curves for the old 8-inch and new 5.25-inchproducts, the case offers some information with regardto product attributes and customer preferences fordifferent levels of attributes. Specifically, it presents“part-worth curves” that depict the amount thatvarious customers would pay for different levels of the

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Schmidt and Van Mieghem: Case Article: Seagate - Quantum: Encroachment StrategiesINFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS 65

two key product attributes, namely, disk drive storagecapacity and compactness (small physical size).Per Christensen (1997), a key distinguishing charac-

teristic of a disruptive technology is that it is deficientalong the traditional measure(s) of performance, butsuperior along some alternate measure(s). The part-worth curves show that the smaller disk drive is defi-cient in terms of capacity, but superior in terms ofcompactness. They also show how different marketsegments view these attributes differently: the exist-ing mainframe market primarily focuses on morecapacity, while new untapped (potential) market seg-ments more highly value compactness. These part-worth curves are used to build the reservation pricecurves for the old and new products, and in turn, thereservation price curves are used to determine whichcustomers buy, quantities sold, and at what price,assuming cost is known. Quantity and price (alongwith cost) in turn allow the calculation of profit.Again per Christensen (1997), another key distin-

guishing characteristic of a disruptive technology isthat product performance changes over time. That is,the new product improves relative to the traditionalperformance measures. Also, learning curve theorysuggests that production costs change over time aswell. Thus the case gives some projections on how thereservation price curves and costs might change overtime, and asks the students to recalculate sales quan-tities, prices, and profits at various snapshots in time.By viewing this sequence of snapshots, students canvisualize the evolution of the market.The Case Supplement also discusses the case of

high-end encroachment. Under this scenario, the newproduct is superior along the traditional measure(s)of performance. The Supplement uses the example ofa new, faster Pentium processor to illustrate the caseof high-end encroachment.In summary, the case is an example of how one may

think about the impact of a “disruptive technology,”while the broader discussion exposes students to twocontrasting modes by which new technologies canencroach on existing markets, namely, from the highend or from the low end.

2. Classroom Experience2.1. MBA or MS ElectiveThe case has been used for several years by bothauthors in an Operations Strategy elective for MBAs.At the end of the course, the lead author asks the stu-dents to rank all the cases (typically about ten) used inthe course on a scale from one to seven (seven beingbest). Students have ranked this case as the best casein the course each and every time it has been used. Inthe most recent delivery it received an average rating

of 6.3 out of seven among roughly 50 students whilethe course itself received a rating of 4.9 out of five.Nearly all MBA students taking the elective are in

their second-year and have therefore been exposedto the concepts of a demand curve, a Nash equilib-rium, and product diffusion. Familiarity with conjointanalysis (sometimes covered in a Marketing course) isuseful but not required to analyze the case. It is veryuseful to precede the case with analysis of a case onthe learning curve, such as the one based on Intel,by Schmidt and Wood (1999). This gives the studentsthe intuition as to why costs go down over time, andcapacity goes up over time, as they are assumed to dofor the new product introduced by Seagate. This Intelcase shows how these learning effects are the drivingforce behind Moore’s Law, which states that the num-ber of transistors on a chip doubles every 18 monthsor so. The Intel case continually receives the second-highest rating in the lead author’s course.The notion of a reservation price curve is new to

most students. A fair number of students may haveheard the term “disruptive technology” either in thepopular business press, or in other elective MBAcoursework, and have a predisposed notion of whatit means. However, few understand what the termmeans until being presented with the high-end versuslow-end encroachment framework. A few studentsmay initially think it is a waste of time to spend somuch time defining what “disruptive” means: but if itis a disruptive technology that causes incumbents tofail, then being able to recognize a disruptive technol-ogy becomes critically important.

2.1.1. Intensity of Quantitative Approach. Thereare at least three levels of intensity at which the casecan be pursued. If you want to focus on insights only,you can have the students read only the case and askthem to think qualitatively about the issues involved,ignoring the more detailed assignment questions atthe end of the case. During the case discussion, youcan then show the accompanying PowerPoint slidesdepicting the market outcomes, pointing out howlow-end encroachment progresses from the low endof the market upward and high-end encroachmentdoes so in reverse fashion.A more in-depth treatment, and typical use of the

case in an MBA elective, is to ask students to read boththe case and the Case Supplement, along with the Har-vard Business Review article by Bower and Christensen(1995). Students can then use the formulas given inthe Case Supplement to answer the assignment ques-tion which asks them to calculate the equilibrium atvarious points in time. Using the case in this fashion,students need only have a rudimentary understand-ing of the concept of a Nash equilibrium. Most read-ily take the equations for price, quantity, and profitat face value without worrying about the details of

Schmidt and Van Mieghem: Case Article: Seagate - Quantum: Encroachment Strategies66 INFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS

how these were derived. A rare student will ask formore details regarding the underlying derivation ofthe equilibrium equations, in which case Schmidt andPorteus (2000) can be referenced or students can bepointed to a microeconomic text such as Tirole (1988)or Kreps (2003) for a refresher on game theory.If the most intensive economic treatment is pre-

ferred, the students might be asked to derive pricingand quantities on their own without even the aid ofthe Case Supplement. The second author has usedthe case in this fashion in his MBA elective. Mostmay get to the main initial points of the case: how tolink design attributes to market acceptance. Typically,students assume for simplicity that both Quantumand Seagate are separate monopolists and calculatetheir monopoly prices and profits. This actually is agood starting point; they also note that prices shoulddecrease due to competition. The more detailed dis-cussion of actual equilibrium conditions, however,can be done in class. While students may have takenall the traditional MBA core courses and should befamiliar with the economics, the Nash equilibriumconcepts and the meaning of reaction curves willlikely need to be refreshed. Again, texts that mightbe referenced include Tirole (1988) or Kreps (2003).In any case, unless this case is being used to focuson the analytical methodology, one should be carefulto stress the intuitive interpretation, which most stu-dents get, instead of the analytics, which are moreabstract.

2.1.2. Assignments and Grading. Studentsshould come to class ready to discuss the questionsincluded with the case. In the lead-author’s course,students must turn in formal solutions to half of thecases covered in the course (the students can choosewhich cases to turn in for grading, and turn in onesolution per team of four or five students). A largemajority choose to turn in this case (likely due in partto the instructor’s enthusiasm for the case). For thewritten analysis, students are asked to address thecase questions and preface these with an ExecutiveSummary of one-page maximum.

2.1.3. In-Class Delivery. The discussion belowdescribes how the case has been used in an OperationsStrategy MBA elective. In this setting it can be used,for example, as a sequel to the Van Mieghem (1998)case “Seagate Technologies: Operational Hedging,”which focuses on capacity investment planning forone firm. This case then broadens the discussion to acompetitive setting, linking new product introductionto manufacturing andmarketing, and ultimately to theoverall competitive strategy of the firm.One alternative is to initiate a discussion of disrup-

tive technologies in the last 5 minutes of one classsession, and then spend the next full scheduled session

on discussion of the case. In preparation for the ini-tial 5 minute session the students should be assignedto read the Bower and Christensen (1995) HarvardBusiness Review article. Having read this backgroundarticle, the 5 minute “pre-session” is spent simplyasking students to vote on whether certain new tech-nologies were disruptive or not. For example, a listthat has been used is as follows (the % of studentsthat voted “yes” is shown in parenthesis): Smallerdisk drives (90%), Mini-mills used in steel production(50%); MP-3 music files (90%); The Toyota ProductionSystem (30%); Home pregnancy testers (20%); Elec-tric cars (20%); Laser eye surgery (90%); The internet(100%), and Digital cameras (90%). After voting, stu-dents are informed that a second vote will be takenafter preparing and discussing this case. The purposeof the pre and post votes is to help the students realizehow the case can help them more readily identifywhether a technology is disruptive or not. Given thata disruptive technology is reportedly the type that cancause an incumbent to fail, it seems critically impor-tant that the student be able to recognize one whenshe sees one.The first 45 minutes of class time can be devoted

to introduction of the case, discussion of the frame-work of low-end and high-end encroachment, andthe Seagate-Quantum pricing strategies. This involvesansweringQuestion 1 regardingmarket outcomes, andQuestion 2 regarding Quantum’s possible responseto Seagate’s threat. This leads to a broadening ofthe discussion to sustaining technologies (high-endencroachment) and discussion of why a single firmmay supplant its own products (Intel). Question 3,involving a discussion of diffusion, can be optional iftime does not allow their coverage. Question 4 regard-ing the electric car gives students a chance to applytheir knowledge in a new setting. Possible responsesto each of the questions are presented in the TeachingNote.

2.2. Undergraduate Core Operations ClassThe case has also been used in an undergraduatesetting, in a core Operations class taken by Juniorsor Seniors. Here, the approach has been of the lessintense variety, not because of less aptitude on thepart of the students, but because of the broaderinterests prevalent in a core class. The objective hasbeen to simply expose the students to the concepts oflow-end and high-end encroachment.

2.3. Executive EducationGiven the popularity of the term “disruptive technol-ogy” in the business press, executives are likely tohave a predisposed notion of what it means but againit seems plausible that they will not be able to accu-rately pick the disruptive technologies out of a “police

Schmidt and Van Mieghem: Case Article: Seagate - Quantum: Encroachment StrategiesINFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS 67

lineup.” To convince them of this, the voting exerciseof §2.1.3 might prove useful.The lessons derived from the case are thus crucially

important to executives, so that they may better beable to recognize the type of technology that maydrive them out of business. However, time constraintsmay dictate the less intense approach where onlythe case is assigned (possibly along with the initialintroductory portion of the teaching note), followedqualitative discussion about the issues involved. Theinstructor can then show the accompanying Power-Point slides depicting the market outcomes. The slidescompare and contrast the market outcomes underlow-end encroachment with those observed underhigh-end encroachment.

3. Case DocumentsThere are six files associated with this case,including1. This Case Article,2. The Case,3. The Case Supplement,4. The Teaching Note,5. The Excel Analysis Spreadsheet, and6. The PowerPoint Slides.

The Case and (optional) Case Supplement are in-tended for students.

AcknowledgmentsThe authors appreciate the many useful suggestions of thereviewers and editor, which led to significant improvementsin the case documents.

ReferencesBass, F. M. 1969. A new product growth model for consumer

durables. Management Sci. 15(5) 215–227.Bower, J. and C. M. Christensen. 1995. Disruptive technologies:

Catching the wave. Harvard Bus. Rev. 73(1).Christensen, C. M. 1992. The innovator’s challenge: Understand-

ing the influence of market environment on processes oftechnology development in the rigid disk drive industry.Unpublished doctoral thesis, Harvard Business School, Boston.

Christensen, C. M. 1997. The Innovator’s Dilemma. Harvard BusinessSchool Press, Boston.

Christensen, C. M., G. C. Rogers. 1997. Hewlett Packard: The Flightof the Kittyhawk. Harvard Business School case 9-697-060 andteaching note 5-697-122.

Christensen, C. M., M. E. Raynor. 2003. The Innovator’s Solution.Harvard Business School Press, Boston.

Fisher, J. C., R. H. Pry. 1971. A simple substitution model of tech-nological change. Technological Forecasting and Social Change 375–88.

Gilbert, C. 2003. The disruption opportunity. Sloan Management Rev.44(4) 27–32.

Green, P. E., A. M. Krieger, Y. Wind. 2001. Thirty years of conjointanalysis: Reflections and prospects. Interfaces 31(3) Part 2, S56.

Kreps, D. M. 2003. Microeconomics for Managers. W. W. Norton &Company.

Mahajan, V., F. M. Bass. 1992. Evolution of technological gen-erations: The law of capture. Sloan Management Rev. 33(2)66–77.

Mahajan, V., E. Muller, F. M. Bass. 1995. Diffusion of new products:Empirical generalizations and managerial uses. Marketing Sci.14(3) G79–G88.

Ostlund, L. 1974. Perceived innovation attributes as predictors ofinnovativeness. J. Consumer Res. 1 23–29.

Rogers, E. M. 2003. Diffusion of Innovations, 5th ed. The Free Press,New York.

Schmidt, G. M., S. C. Wood. 1999. The Growth of Intel and theLearning Curve. Stanford Business School case OIT27 andteaching note OIT27T (available through HBS Publishing).

Schmidt, G. M., E. L. Porteus. 2000. The impact of an integratedmarketing and manufacturing innovation.Management and Ser-vice Oper. Management 2(4) 317–36.

Schmidt, G. M. 2004. Low-end and high-end encroachment strate-gies for new product. Internat. J. Innovation Management.Forthcoming.

Tirole, J. 1988. The Theory of Industrial Organization. MIT Press.Van Mieghem, J. A. 1998. Seagate Technologies: Operational Hedging.

Kellogg School of Management. Northwestern University.

∗ ∗ ∗To reference this paper, please use:

Schmidt, G. M. and J. A. Van Mieghem (2005), “Seagate - Quantum:Encroachment Strategies - Case Article,” INFORMS Transactionson Education, Vol. 5, No 2, http://archive.ite.journal.informs.org/Vol5No2/SchmidtVanMieghem/.

Schmidt and Van Mieghem: Case Study: Seagate - Quantum: Encroachment Strategies68 INFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS

Case Study

Seagate - Quantum: Encroachment Strategies

Andrea Forward,1 engineering manager at SeagateTechnologies, was adamant in her support of a newdevelopment program for a 5.25 inch disk drive.“Look, I know this thing is going to be an expen-sive product to develop, and I know there just doesn’tseem to be much of a market for 5.25 inch drivesat the present time. But I’ve been talking to one ofmy engineer friends who now works for this youngand upcoming computer startup, Apple. They thinkthey can grow a market for personal desktop com-puters using such a drive, and a relatively lower-capacity, 5.25-inch drive would be perfect for such acomputer.”“Hold on just a minute,” countered Kwon Suzuki,

VP of Marketing. “I just got back from the big Com-puter Expo, where I talked with all the leading com-puter companies such as DEC. They were ravingabout the 8-inch drive from Quantum and how well itwas performing as a replacement for the old 14-inchdrive. These customers said nothing about wantinga smaller drive. What they wanted was even morecapacity in that 8 inch drive. If we want to competeagainst Quantum and encroach on their market, weshould develop a higher-capacity 8-inch model. AsI said, all that these big users could talk about wascapacity, capacity, and more capacity. You engineeringtypes are always looking to do something technicallydriven, but if it won’t sell, what good is it?“Tell you what, Andrea. There’s this new method-

ology I’ve been hearing about called conjoint analysis.We survey potential customers, find out what the keyattributes are that these customers are looking for in aproduct, and then find out just how much value eachcustomer places on each attribute. Why don’t we tryout this new technique, and let the customers tell uswhat to do?”Several weeks later, Andrea and Kwon got together

to review the conjoint results. “Well, I’m not quitesure just exactly where all this is going to take us butI’ve got a ton of good information,” started Kwon.“We talked to all the primary users of disk drives intoday’s market. First, we contacted mainframe users,and had them go through the necessary exercise as

1 This case study is historical fiction in that the characters and exactnumbers are fictional, but the case is intended to offer a sense ofwhat was transpiring in the disk drive industry in the late 1970sand early 1980s.

prescribed by the conjoint method. And second, wesurveyed companies such as DEC who make the high-volume units that I am going to call mid-range com-puters, to distinguish them from the personal desktopcomputers you mentioned earlier. You know, betweenthe mainframe users and the mid-range users, thatpretty much covers all of Quantum’s current cus-tomers. And it’s just like I told you earlier. They wantmore capacity in that 8-inch drive and show relativelylittle desire for a 5.25-inch form factor. No wonderQuantum is focusing much of its effort on providingmore capacity.“More about that later. But more importantly, you

got me thinking beyond these existing customers. It’srisky, but yes, maybe we should also consider thatthird possible group of customers you mentioned:those who might buy that new Apple desktop per-sonal computer. And then, just to satisfy our curiosity,we peered even further out into the future on this.We came up with a possible fourth group of usersthat might want disk drives for a portable type of com-puter. Some people are envisioning a computer thatan engineer might want to take to a work site so thatshe can collect and analyze her data and write herreport on-sight, for example; something like a verypowerful portable calculator. And after some heavybrainstorming we decided there might even be somespecialty uses for other little devices that you couldcarry around and store data in. Maybe something likea little pocket-sized “personal assistant” that holdsyour daily calendar. Or maybe something that a fork-lift driver could carry around, to keep track of inven-tory levels in a warehouse.“Anyway, as you can see, this analysis left us with

the following five possible customer groups:1. Mainframe users,2. Mid-range users,3. Desktop users,4. Portable computer users, and5. Specialty users.

Now, here’s where it gets interesting. Among all thesepotential users, we found two key things that thesecustomers were all concerned about, to one degree oranother. First, they wanted to know, just how muchdata will the disk drive store? And secondly, theywanted to know, physically, just how big is the diskdrive?

Schmidt and Van Mieghem: Case Study: Seagate - Quantum: Encroachment StrategiesINFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS 69

Figure 1 The Value (Part-Worth) That Each Potential Customer Placeson Storage Capacity

“Regarding these two parameters (storage capacityand physical size), we were able to glean the follow-ing information. We found that, other things beingequal, all of these potential customers prefer morecapacity. Not a surprise, is it? However, not every-body is willing to pay the same amount for a givenlevel of capacity. If you think about mainframe users,they clearly value capacity the most. Mid-range usersvalue capacity only slightly less highly. The potentialdesktop users are more accepting of a drive with lim-ited capacity, and futuristic users of those portablecomputers are even more willing to give up storagecapacity. Finally, for those specialty devices that wecould envision, we had to sort of guess but we felt bigcapacity levels would be of very little value, at leastrelative to the way a mainframe user values capacity.“In fact, we found that if we plot the value (or part-

worth) that each customer places on a disk drive of agiven capacity, starting with the mainframe user whovalues this capacity most highly, we get something likethe graph shown in Figure 1. What this graph is show-ing is that there are 1.275 million potential customersin this total market, broken down within the fivegroups I mentioned earlier. But even within any oneof these groups, some customers value capacity morethan others. In fact, the mainframe customer whovalues capacity the least is similar to the mid-rangeuser who values capacity the most. So we can conve-niently approximate the relationship with the straightline shown in Figure 1. In other words, the first cus-tomer, who is the customer valuing capacity the most,

Tabel 1 Expected Changes in Characteristics Related to the 8-Inch Drive

Years since introduction

0 1 2 4 6 7

Capacity of 8" drive, MB 60 90 135 300 680 1�025Maximum willingness-to-pay for 8" drive∗ ($) 3�500 3�500 3�500 3�500 3�500 3�500Minimum willingness-to-pay for 8" drive∗ ($) 525 525 525 525 525 525Production cost of 8" drive∗ ($) 2�800 2�800 2�800 2�800 2�800 2�800

∗These values apply to a drive of the MB level as given in the first row of the table.

Figure 2 The Value (Part-Worth) That Each Potential Customer Placeson Physical Size

would effectively pay $2,415 for 60 megabytes (MB)of capacity in a disk drive. We call this her part-worthfor capacity, as this is only part of what the diskdrive is worth to her. She will also pay some addi-tional amount depending how compact the drive is,as we will see later. Other customers aren’t willingto fork over that much money for the 60 MB drive:Willingness to pay for capacity decreases linearlywith each customer until we get to the last customer(namely, the 1.275 millionth customer), who wouldpay nothing. Effectively, this last customer needs onlya miniscule level of capacity, with no use for higherlevels of capacity.“Now, not so surprisingly when you think about it,

we found the reverse relationship for physical size.In other words, mainframe users don’t really caremuch about physical size. At least they don’t care asmuch as the mid-range users, who in turn don’t valuecompactness as much as desktop users, who don’tvalue compactness as much as the portable computersusers, who don’t value compactness as much as spe-cialty users. In fact, if we plot the value (or part-worth)these same 1.275 million customers place on compact-ness, we find a graph something like that shown inFigure 2. At one extreme, a mainframe user has a part-worth of $1,085 regardless of size, while at the otherextreme a specialty user has a wide disparity.“Now, perhaps we can use this type of analysis to

figure out what each customer will pay for any givendisk drive. We can call this amount the customer’sreservation price, and calculate it as simply the sum

Schmidt and Van Mieghem: Case Study: Seagate - Quantum: Encroachment Strategies70 INFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS

Tabel 2 Expected Changes in Characteristics Related to the 5.25-Inch Drive

Years since introduction

0 1 2 4 6 7

Capacity of 5.25" drive, MB 10 15 22 50 115 170Maximum willingness-to-pay for a 5.25" drive∗ ($) 2�275 2�300 2�375 2�500 2�700 3�000Minimum willingness-to-pay for 5.25" drive∗ ($) 1�085 1�110 1�185 1�310 1�510 1�810Production cost of 5.25" drive∗ ($) 2�100 2�050 2�011 1�950 1�900 1�880

∗These values apply to a drive of the MB level as given in the first row of the table.

of the two part-worths for capacity and physical size.This framework gives us a way of thinking aboutwhat it takes to actually make a sale to a customer.We have to price our disk drive at a level below thatcustomer’s reservation price, and, if there is a com-petitor, our disk drive has to provide that customerwith more value than the competitor’s disk drive.Or else she will buy the competitor’s product.”“I’m think I’m beginning to get it,” replied Andrea.

“That’s why Quantum’s 8 inch drive is doing sowell right now. Look, Quantum recently upped thecapacity of its 8 inch drives, but the mainframe usersstill want more, more, more. The mid-range customersalso love it, as they still primarily favor more capacityover smaller physical size! So to keep its customershappy, that’s what Quantum is focusing on: more andmore capacity. I understand Quantum is extremelyprofitable with their 8-inch drive and can produce itat a cost of $2,800. What if we assume, for simplicity,that they basically have a monopoly on the market?I’ve heard they sell about 150,000 units. Would yourdata support that number?“At the same time, I have a hunch that your data

suggests we can encroach on Quantum’s market in aseemingly non-threatening sort of way. What if we doindeed pursue the 5.25-inch form factor? I mean, let’sget specific. From an engineering perspective, I thinkwe can develop a 5.25-inch drive with 10 MB of capac-ity. At the time of introduction, production cost wouldbe $2,100, but it will go down as we grow our vol-ume. Also, I think we can increase capacity of thedrive at a rate of about 50% per year. And I thinkcustomers will then increase their willingness to payfor our drive, because as capacity increases it comescloser to meeting their appetite for capacity.“I suspect Quantum will continue to increase the

8" drive capacity as well, and while Quantum’s cus-tomers will expect continually increasing capacity inan 8" drive over time I’m not sure they will actuallybe willing to pay more as capacity goes up, givenhow much capacity those drives already have. Forsimplicity, let’s assume willingness-to-pay for the 8"drive remains constant as its capacity goes up fromhere. With regard to Quantum’s production cost, they

will be able to reduce cost per MB but I don’t thinkthey can reduce per-unit cost like we can because theyare already further down the learning curve.“To be specific, what if we assume the disk drive

characteristics and customer willingness-to-paychange over time as shown in Tables 1 and 2? Whichcustomer segments do you think would buy ourdrive, how much market share would we get overtime, and how much profit would we make? Will ourdrive encroach on Quantum’s 8-inch product? Howwill it impact their profitability? I think we needto answer at least some of these questions beforemaking a decision.”

Assignment Questions1. If you were Seagate, would you introduce a

5.25 inch drive? Estimate pricing, market share, andprofitability at introduction, and also at one year, twoyears, four years, six years, and seven years afterintroduction.2. If you were Quantum, how would you react to

Seagate’s new product introduction strategy?3. One “view of the world” seems to be that

new products diffuse through the market because ofcommunication. Some personality types buy becauseof communication external to the social system(these customers are sometimes called “innovators”)while others require communication internal to thesocial system (these are “imitators”). At first, only“innovator-types” buy the product. Then “earlyadopters” become convinced, followed by the “earlymajority.” The “late majority” types are risk-averseand are exceeded in their reluctance to convert onlyby the “laggards.” How does the reservation price per-spective compare with this marketing view?4. What are the possible scenarios under which

the electric car might make inroads into the auto-motive market? Describe both a low-end encroach-ment scenario and a high-end encroachment strategy.In your discussion, identify who are the first cus-tomers, from what segments does the market grow,etc. In what time frame do you envision the electriccar, or some other alternate fueled vehicle? Whichof these strategies would you choose if you were amanufacturer?

Schmidt and Van Mieghem: Case Supplement: Seagate - Quantum: Encroachment StrategiesINFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS 71

Case Supplement

Seagate - Quantum: Encroachment Strategies

1. High-End versus Low-EndEncroachment

Consider Intel’s continual growth and expansion of itsline of microprocessors, as discussed in Schmidt andWood (1999), for example. As shown in Figure 1, Intelhas continually upgraded its product offering, fromthe 286 model in 1982 to the current P-IV version. His-torically, Intel’s new product has been a new high-endmodel. In other words, the new model has supercededthe previous model in terms of performance (process-ing power). The new model is priced at a high level,and initially sells to the “best” customers (where wedefine the best customers to be those who are willingto pay the most for this type of product). We call this ahigh-end encroachment strategy, since the new productencroaches on the existing market from the high end(the new product is bought by high-end customers, ata high price).In the late 1990s, Intel modified its strategy to

include the Celeron microprocessor. The Celeron didnot supercede the current model in terms of per-formance, but rather sold to lower-end customerswho wanted sub-$1,000 computers. In other words, itencroached on the low-end of the market, a strategywe refer to as low-end encroachment.Intel’s revision of its strategy was, in part, precipi-

tated by studying history. Consider, for example, whathappened to the market leaders in the steel indus-try and the disk drive industry. In the steel industry,integrated mills (the market leaders) watched as newcompanies such as Chaparral Steel and Nucor builtmini-mills. The integrated mills were not particularlyconcerned, because the mini-mills made low-end,low-margin products such as rebar. As the mini-mills

Figure 1 Intel Maintained Leadership by Continual Upgrading ofMicroprocessors

improved their quality and process capability, how-ever, they began moving up in terms of product offer-ing. In our terminology, they were encroaching on theexisting market of the integrated mills from the lowend. Eventually, they became formidable competitorsto the integrated mills.The hard disk drive industry also provides a clas-

sical example of low-end encroachment. Hard diskdrives are devices that store digital information andare found inside virtually all computers. (Comput-ers may also have floppy disk drives which writedigital data to a portable medium, a floppy disk.)Unlike the microprocessor market, where Intel hassustained a market leadership position from gener-ation to generation, the disk drive market created anew market leader with each generation. As shownin Figure 2, between 1975 and 1990 the computerhard disk drive industry underwent a transition froma standard product size of 14 inches, to 8 inches,to 5.25 inches, and subsequently to 3.5 inches. They-axis of Figure 2 implies disk drive performancegrew over time as smaller and smaller drives weredeveloped, however this is an oversimplification inthat performance is not so readily expressed alongone dimension. Previous buyers measured perfor-mance primarily on storage capacity (a new smallerdrive initially had less capacity than its predecessormodel but grew over time) while initial buyers of anew smaller drive measured performance more basedon physical size. Unlike the microprocessor exam-ple just presented, there was a new market leaderwith each generation. Watching the market shifts waslike observing the game of musical chairs: Leadersswitched from Storage Technologies, to Quantum, toSeagate, to Conner Peripherals, respectively.

Figure 2 The Disk Drive Market Had a New Leader Every Generation

Schmidt and Van Mieghem: Case Supplement: Seagate - Quantum: Encroachment Strategies72 INFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS

Per Christensen (1997), the incumbent’s loss ofmarket position resulted from its failure to recog-nize the manner in which the newcomer’s smallersized entry in the marketplace encroached on themainstream product. The entrant’s product did not(initially) appeal to the incumbent’s mainstream cus-tomers, but rather, appealed to fringe customers whowere not buying the incumbent’s product anyway.Over time, however, the trajectory of improvementsin the smaller drives (namely, increases in storagecapacity) led to their acceptance by these same main-stream customers.In other words, it seems that the adage of “listen to

your customers” may not always be a good one. How-ever, this adage may indeed be sound if one takes abroader view of who your customer is and what your“customer” is “telling” you: a true market-orientedperspective goes further than simply asking existingcustomers what they want. Beyond merely asking, itseeks a fuller understanding of latent or unexpressedneeds. And beyond looking at existing customers, itlooks at future needs of future customers.Having learned of these instances of successful low-

end encroachment in other industries (other examplesinclude the Japanese move from economy cars intoluxury cars, and encroachment by hydraulic excava-tors into the markets held by mechanical excavators),Intel was determined not to let AMD pull off a similarcoup in the microprocessor market. Thus Intel coun-tered with its own move: the Celeron. What appearsto have made this an appropriate strategy for Intelwas a shift in the appetites of many customers, froma desire for computers at the $2,000 price point toa preference for less-powerful sub-$1,000 models. Ofcourse, Intel did not abandon the high-end encroach-ment strategy, but merely supplemented it with thelower-end Celeron.

2. A Model to Help Understand HowNew Products Encroach on OldMarkets

To better understand the market outcomes underhigh-end and low-end encroachment, we describeherein a framework from which to think about cus-tomer preferences and product positioning.We begin this section by reviewing the linear reser-

vation price curve framework. We do so by firstdeveloping plausible reservation price curves for diskdrives. We follow this with an analysis of market out-comes given these reservation price curves. The bulkof our analysis centers on the low-end encroachmentexample: Since incumbent firms reportedly often failin the face of a disruptive technology, it is impera-tive that a firm have a clear understanding of whatthe potential market outcomes are in this setting. We

then briefly discuss market outcomes in the case ofhigh-end encroachment.

2.1. Linear Reservation Price FrameworkWe illustrate the development of the linear reser-vation price curve framework by building plausible(but not necessarily factual) curves for computer diskdrives. To find a product’s reservation price curve, weneed to first generate the part-worth curves for eachattribute of the product. The case study “Seagate-Quantum: Encroachment Strategies” illustrates plau-sible part-worth curves for disk drives.Note how this framework will allow us to model

a crucial characteristic of a disruptive technology asidentified by Christensen (1997). Namely, it allowsus to consider the situation where a new product isquite deficient with regard to the traditional perfor-mance criterion (or criteria) of concern to the firm’sbest existing customers, while offering a significantimprovement with regard to a feature (or set of fea-tures) that is not of major concern to existing cus-tomers. In the case of disk drives, which in the late1970s were being sold primarily to mainframe andmid-range users, such a new product would be onethat is low on capacity but which is of smaller size.

2.1.1. Summing the Part-Worth Curves Yields theReservation Price Curve. By adding the part-worthcurves that are depicted in Figures 1 and 2 of theaccompanying Case Study, we can determine whateach customer will pay for any given disk drive. Wecall this the customer’s reservation price, and calcu-late it as simply the sum of the two part-worths forcapacity and physical size. In other industries theremay be more than two crucial performance attributes.If so, the part-worth curves would be generated foreach level of each attribute, and then, given a specificchoice of product to be offered, the part-worths forthat product would be summed to yield the product’sreservation price curve.In 1981 a typical 8" disk drive had about 60 MB of

capacity. Looking back at Figure 1 of the Case Study,note that the part-worths for 60 MB of capacity rangedlinearly from $2,415 for the first customer, down tozero for the 1,275,000th customer. Looking back atFigure 2 of the Case Study, note that the part-worthsfor the physical size attribute of an 8" drive rangedlinearly from $1,085 for the first customer, downto $525 for the 1,275,000th customer. Starting withthe first customer, we add her two part worths andfind she has a reservation price of $2�415+ $1�085=$3�500. For the 1,275,000th customer we again addher two part-worths and find she has a reservationprice of $0 + $525 = $525. If we similarly add thepart-worths for all other customers to get each cus-tomer’s reservation price for an 8" drive of 60 MBcapacity, and then plot all these reservation prices,

Schmidt and Van Mieghem: Case Supplement: Seagate - Quantum: Encroachment StrategiesINFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS 73

Figure 3 With Only the 8" Drive, the Reservation Price Curve Is theDemand Curve

we get the reservation price curve for an 8" drive of60 MB capacity as shown in Figure 3. (Given that thecustomers are numerous, we can consider it to effec-tively be a continuous straight line rather than beingcomprised of 1,275,000 discrete points.)Figure 3 shows that the most a customer is will-

ing to pay for this 60 MB 8" drive is $3,500 (i.e., themaximum reservation price is $3,500). The plot fur-ther suggests the drive has a total market potentialof 1.275 million customers and the 1,275,000th cus-tomer is willing to pay $525. In this figure and allsimilar figures that follow, the unit sales rate is indi-cated by a vertical line intercepting the x-axis (in Fig-ure 3 the sales volume is 150,000 units per year). Thearea of the shaded rectangle represents the profit asso-ciated with the product, while the shaded area plusthe rectangular area below it indicates sales dollarvolume.We interpret a “customer” to be an “application”

of the product that consumes one unit per year.For example, the 1,275,000th customer in Figure 3 iswilling to buy one unit per year at a price of $525.Thus when we derive sales quantities the results arein units sold per year.

2.1.2. The Market Outcome When There Is OnlyOne Product. If there is only one product in themarket, then the reservation price curve of Figure 3effectively represents the product’s demand curvefor a monopolist. Say each 8" disk drive of 60 MBof capacity costs $2,800 to produce. Many standardeconomics textbooks show how to find the profit-maximizing sales price in the case of monopolistfacing a linear demand curve so we forego the math-ematics and present the solution: The firm charges$3,150, such that it sells 150,000 units per year, andmakes a profit of $52.5 million (calculated as priceminus cost, times units sold).In Figure 3, note that the “best customers” are

defined as those willing to pay the most. Also, notethat the profit is indicated by the shaded area and thebuying segment is indicated by the diagonal hatching

Figure 4 Reservation Price Curves Upon Introduction of a New 5.25"Drive

(i.e., buyers are the best customers numbered zero to150,000).

2.1.3. The Market Outcome When Two ProductsAre Sold by Different Firms. Now assume a new5.25" disk drive with 10 MB of capacity is intro-duced into the market by a competitive firm (welater address the case where it is introduced by thesame firm). Further assume the production cost forthe new drive is $2,100 upon introduction. This prod-uct’s reservation price curve is calculated in the samemanner as that of the 8" drive with 60 MB of capac-ity, yielding the curve shown in Figure 4, where themost any customer is willing to pay is $2,275, and theprice that the 1,275,000th customer is willing to payis $1,085.If there are two or more products, then the reser-

vation price curve can no longer be considered to bea demand curve. We address the situation in whichthere are at most two products, one old and one new.To facilitate the discussion, we call the product whosereservation price curve has a flatter slope product B,because it has relatively broad appeal, and the prod-uct whose curve has a steeper slope will be calledproduct N, for niche appeal. (Consider a range of reser-vation prices, say between $2,000 and $2,100 in Fig-ure 4. Now consider how broad the set of customersis that holds a reservation price within this range. Forproduct B, the set is broader, while for product N, itis narrower.) Firm’s B and N will denote the firmsselling products B and N, respectively.It is important to note that the old product may

be product N while the new product is product B, asin Figure 4, or it may be that the old product is Band the new product is N. Furthermore, it should benoted that the reservation price curves may cross, asshown here, or one may lie entirely above the other.The slopes of both curves do, however, need to be ofthe same sign (we rule out the case where one slopeis positive and the other negative).Let rN and rB denote the maximum reservation

prices for products N and B, respectively (subscripts

Schmidt and Van Mieghem: Case Supplement: Seagate - Quantum: Encroachment Strategies74 INFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS

Table 1 Sales Prices, Quantities, and Profits When Different Firms Sell the Two Products

Product N Product B

Price pN =2�rN + cN�− �rB − cB�− krN

�4− k�pB =

2�rB + cB�− k�rN − cN�− krB�4− k�

Quantities qN =n��2− k��rN − cN�− �rB − cB�

rN �4− k��1− k�qB =

n��2− k��rB − cB�− k�rN − cN�

krN �4− k��1− k�

Profits �N = �pN − cN�qN �B = �pB − cB�qB

denote the product), let cN and cB denote the produc-tion costs, let pN and pB denote the sales prices, andlet qN and qB denote the sales quantities. Let k denotethe ratio of the slope of the reservation price curveof product B to that of product N. Thus by defini-tion, k is a number between zero and one. Finally, letn denote the x-axis intercept of product N’s reserva-tion price curve (n effectively represents the numberof potential customers who hold positive reservationprices for product N). If the curve does not interceptthe x axis, it should be extended to do so to find n(in the example of Figure 3, n = 1�5 million). Notethat there is only one n, representing the x-axis inter-cept for product N (we do not need to use the x-axisintercept for product B in our calculations, as this isaccounted for by our use of k and n).It is assumed that a customer will buy at most one

product. Namely, she will buy a product if it is pricedat or below her reservation price, while also provid-ing her with more value than the alternate product.That is, the customer buys the product with the largestpositive surplus (where surplus is defined as the dif-ference between reservation price and actual price), orshe buys nothing if all surpluses are negative.With regard to the firm’s pricing decision, we

assume that each firm sets price to maximize, at asnapshot in time, its current rate of profit generation,given the price of the competitive product. That is, atthe snapshot in time, each firm finds its best pricingresponse to the price set by the other firm, consider-ing only its current rate of profit generation. This iscalled a Nash equilibrium.When two different firms sell the two products, the

Nash equilibrium prices, quantities, and profits foreach firm are given by the equations shown in Table 1(technically, these equations apply only if certain con-ditions are met—these conditions are met in this CaseStudy). To analyze the case is not necessary to under-stand the underlying mathematical details from whichthese equations are derived, but if further informationis desired, refer to Schmidt and Porteus (2000).

2.1.4. The Market Outcome When There AreTwo Products Sold by the Same Firm. In the casewhere the same firm sells both the old and the newproducts, we proceed again to identify the reservationprice curves for products N and B, using the same

procedure and notation as developed to this point.But instead of finding the Nash equilibrium pricingoutcome, we find the monopolist firm’s profit max-imizing prices. The profit maximizing outcomes forthis case (where the same firm sells both productsand both products realize positive sales quantities) aregiven in Table 2 (again, these equations apply only ifcertain conditions are met, and these conditions aremet in the situations where we apply the equations).

2.2. Market Outcome for the Case ofHigh-End Encroachment

To illustrate a the case of high-end encroachment,assume a single firm (a monopolist) offers a version II(V-II) microprocessor. Assume there are 100 millionpotential customers (see Figure 5), the maximumreservation price is $800, and production cost is $400.Again, since there is only a single product, the reser-vation price curve is equivalent to the demand curve,and standard economics suggests the firm’s optimalselling price is $600, with 25 million units per yearsold to high-end customers, resulting in a monopolyprofit of $5 billion per year.Now assume the same firm introduces a new, faster

V-III. A high-end customer who always wants to havethe latest and greatest computer is willing to pay abit more for a faster chip. On the other hand, a low-end customer who was not willing to pay much fora V-II chip probably has little use for a computer ofany speed, and thus a V-III chip is of almost no morevalue than a V-II. Thus we might predict the reser-vation price curve for the V-III to be shifted upwardas compared to the V-II in the manner as shown inFigure 6. Here, we assume the maximum reservationprice for the new product is $1,000, and its cost is $550.

Table 2 Sales Prices, Quantities, and Profits When the Same FirmSells the Two Products

Product N Product B

Price pN =�rN + cN�

2pB =

�rB + cB�

2

Quantities qN =n��rN − cN�− �rB − cB�

2rN �1− k�qB =

n��rB − cB�− k�rN − cN�

2krN�1− k�

Profits �N = �pN − cN�qN �B = �pB − cB�qB

Schmidt and Van Mieghem: Case Supplement: Seagate - Quantum: Encroachment StrategiesINFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS 75

Figure 5 A Market with Only the V-II Microprocessor

(These values might represent the situation at, say, oneyear after the point of introduction of the V-III.)The new outcome is calculated using the equa-

tions given previously in Table 2, and the results aredepicted in Figure 6. Many of those high-end cus-tomers who would previously have bought the V-IInow opt for the V-III instead. Accordingly, we callthis a case of high-end encroachment (the new productencroaches on the market from the high end). The oldV-II is relegated to selling to lower-end customers.In this example, we analyze only one pair of reser-

vation price curves and costs. A more thorough anal-ysis would again look at how these change over time,to get a better feel for market outcomes at variouspoints in time.

Figure 6 The V-III Microprocessor Encroaches on the High End ofthe Market

In the microprocessor example just presented, high-end encroachment resulted from the firm’s introduc-tion of its own new product, rather than that ofa competitor. Of course, had the competitor intro-duced the new V-II product, we would still haveobserved high-end encroachment, but the resultingprices, quantities, and profits would have been quitedifferent. In this case, using Table 1, we find the com-petitive market results in lower prices, with pN = $594and pB = $438. These lower prices in turn yield highersales rates of qN = 21�88 million units per year andqB = 23�44 million units per year, albeit lower profitsof N = $957 million per year and B = $957 millionper year.

Schmidt and Van Mieghem: Teaching Note: Seagate - Quantum: Encroachment Strategies76 INFORMS Transactions on Education 5(2), pp. 64–76, © 2005 INFORMS

Teaching Note

Seagate - Quantum: Encroachment Strategies

Available from the authors upon documentation of instructor status.