incumbent advantage

The Incumbent’s Advantage by

Ian C. Mac Millan & Larry SeldenLecturer:

Ass. Professor Dr. Hj. Mohamad Md YusuffSubject: Marketing Management (YSP 503)

Present by:1) Noorazlin Ani2) Zetty Rosela

3) Haniza Harun4) Nadhirah

IAN C. MACMILLANProfessor of Innovation and Entrepreneurship at the Wharton School, Executive Director of the Sol C. Snider Entrepreneurial Research Center. Formerly, Director of the Entrepreneurship center at NYU and taught at Columbia and Northwestern Universities and the University of South Africa. Prior to joining the academic world, Professor MacMillan was a chemical engineer, and gained experience in gold and uranium mines, chemical and explosives factories, oil refineries, soap and food manufacturers and the South African Atomic Energy Board.

Director of several companies in the travel, import/export and pharmaceutical industries, and has extensive consulting experience, having worked with many international companies throughout the U.S., Asia, and Europe. Professor MacMillan's articles have appeared in several leading journals. His latest books, The Entrepreneurial Mindset and MarketBusters were written with Rita McGrath.

LARRY SELDENProfessor Emeritus of Finance and Economics at Columbia University and the Founder and Managing Director of Selden & Associates, which has been advising the senior most management of companies on share price focused business performance improvement for more than 15 years in North and South America, Europe and Asia.

Co-author the widely acclaimed book Angel Customers and Demon Customers. A former foreign exchange trader, Selden has been an advisor to more than two hundred public and private companies across the globe. Selden has been a lecturer and conference leader in innumerable Executive Programs sponsored by Columbia University as well as other institutions and corporations, often receiving the very highest ratings from attendees.

He is a frequent presenter to Investment Professionals on Investment Management Techniques and Business Strategy and has participated as a panelist and presenter for Fortune’s Global CEO Forums, including a presentation shown on closed circuit TV to 88,000 viewers worldwide. Business Week rated Selden as one of the top ten academic advisors to leading corporations. He has led or participated in business (board) reviews for more than 150 companies in 30 countries and is a frequent advisor on CEO presentations to buy-side and sell-side investors.

A frequent contributor to Fortune and Business 2.0, Professor Selden has published excerpts of his Angel Customers and Demon Customers in Fortune, Harvard Business Review and American Banker and also appeared on Wall $treet Week, the most widely watched business television show.

CEMEX

WHAT IS INCUMBENT’S ADVANTAGES

INTRODUCTION

What is Incumbent’s advantage?In politic:An incumbent advantage is an advantage gained by someone already in a position, as compared to newcomers.

In market:The advantages companies already established in a market have a new entrants.

INCUMBENT’S ADVANTAGE

What is Incumbent’s advantage?

President Obama and Mitt Romney

What is Incumbent’s advantage?Fix line industry

Studies from other journals

Incumbent firms often face severe difficulties inadapting to radical technological change. For example, the Swiss watch making industry was almost entirely destroyed by one of its own inventions — the quartz. New entrants, such as Seiko and Timex, were extraordinarily successful in commercializing this new energy source for clockworks (Glasmeier, 1991).


Radical innovations often initiate a Schumpeterian process of ‘creative destruction’, frequently leading to the replacement of incumbents by new entrants.

Complementary assets, strategic alliances, and the incumbent’s advantage: an empirical study of industry and firm effects in the biopharmaceutical industry Frank T. Rothaermel∗


Incumbent firms often face severe difficulties in adapting to radical technological change (Foster, 1986).

INCUMBENT’S ADVANTAGE THROUGHEXPLOITING COMPLEMENTARY ASSETS VIAINTERFIRM COOPERATIONFRANK T. ROTHAERMEL*


The advent of the personal computer (PC),for example, destroyed the demand for a widearray of products ranging from typewriters tofully dedicated word-processing systems, while atthe same time it created huge opportunities fornew PC manufacturers, their suppliers, and theproducers of complementary products like software and printers

EXTRACTING GOLD FROM CONCRETE

Strength seekers,

who use ready mix concrete for support

columns and other load-

bearing applications.

Workability seekers, who pour cement for

interior spaces such as walls

and staircases.

Needs to invest in research that exploits its unique access to its customer information.

With customers teases out two main customer segments:

PROFITING FROM INITIAL CUSTOMER RESEARCH

PRODUCT & SERVICES DIFFERENTIATION

PRODUCT DIFFERENTIATION

• FORM• FEATURES• CUSTOMIZATION• PERFORMANCE QUALITY• CONFORMANCE

QUALITY• DURABILITY• REALIABILITY• REPAIRABILITY• STYLE

SERVICES DIFFERENTIATION

• ORDERING EASE• DELIVERY• INSTALLATION• CUSTOMER TRAINING• CUSTOMER CONSULTING• MAINTENANCE AND

REPAIR• RETURNS

Profiting from marketing investments.

USING THE INCUMBENT’S ADVANTAGE

BUILDING YOUR INCUMBENT’S ADVANTAGE

Building Your Incumbent’s Advantage

1) Fragmented structure of most market leading companies give ways to invaders.

2) Invaders tend to target vulnerable customer segments; most likely the segment that cut across product groups.

3) The invasion is hard to spot when too much concentration given on the strong accounts and neglecting the vulnerable one. When the sales for strong account keeps growing, the vulnerable ones are easy to disregard.

Fighting the Invaders

i. Help give powerful insights into the incumbents’ advantage.

ii. Lay the foundation for customer-centric information base.iii. Enable tracking of performance of customer segment.

1. Exploits incumbent’s existing internal information to understand the

economics of the most and least profitable

customers.

2. Organize corporate structure around

customer segments needs by assigning teams to

quickly mend losses and sustain the most

profitable customers.

Techniques

1. Begin with small pilot database and steadily add in more customer data from other sources.

2. Begin with simple proof of concept . Discussion among key players across the organization to

identify the neglected customer segment, hence create product/service specially tailored to meet

their needs .

CREATING YOUR INFORMATION ADVANTAGE

Creating your Information Advantage

1) DO NOT build a customer-segment database from scratch. Do a low-cost analyses of existing databases, which able to extract profits quickly.

2) For a start, DO NOT obsess over accuracy of the database. Identify major customer segments – build segments using the characteristic and behavior that can be extracted from existing record. Constructing a relatively simple customer characteristic database will allow incumbent to rank customers according to their profitability, subsequently identify its Most and Least Profitable Customers.

3 ) Focus on specific segments, i.e. the top and bottom two deciles, following these steps:i. Use regression analysis to uncover statistically significant

relationships among customers’ profitability; behavior vs demographic characteristics .

ii. Perform a cluster analysis to group similar individuals into candidate customer segments.

iii. Identify actions that can reduce losses from profit-eating customers and can prevent defections by the most profitable customers.


iv. Rank the above actions according to their most effective potential to improve incumbent’s profits.

v. Do a more detailed research on what additional resources candidate segments consume other than the one found in the initial profit-contribution calculation.

vi. Identify preliminary needs-based customer segments. Assign each candidate segment to a team who will be in charge of finding ways to increase the segment’s profit contribution.


vii. Start expand the customer-centric information system to include the middle deciles of customers.


Using Organizing to exploit your advantage.

• Build corresponding business unit for the identified needs based segments.

• Provide the team with budget and human resource for them to conduct experiments with customers in their segments.

• The team to focus on growing the segments’ profitability.• Current product managers to support this new segment team.

Purpose of having the Information Base

“To yield comprehensive customer profitability analysis by assembling the required inputs for revenue, costs and capital at the customer segment level”.

It is an incumbent’s advantage because invaders does not have access to this type of information.

Source of Revenue

Accustomed Product or Geography

Customer Segments

SHIFT TO

It is CRITICAL TO SHIFT from thinking in terms of cost allocation TO viewing costs strategically as customer

investments.

CONCLUSION

■ Market-leading companies get attacked when they focus on products and geographic locations rather than on what competitors and disrupters actually target – unmet customer needs.

■ To fend off invaders, an incumbent should strategically analyze and reorganize its customer information base and align its corporate structures accordingly.

■ Unrelenting attention to exploiting your incumbent’s advantage is the key to growing profits organically.

Thank You

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incumbent advantage