Does a firm in SR Corp’s position need to focus its marketing activities? What criteria might be used to prioritize these three market niches?

Question

What will be an ideal response?

Answer 1

The instructor should start this discussion with comments about the importance of strategic focus for technology-based firms. Resource-constrained firms need to focus both their R&D and marketing efforts to achieve commercial success.3 In this case, in order to create leverage, SR Corp needs to pick the most attractive market niche for its new technology, create a “win” with an initial customer, and then aggressively pursue companies similar to that customer, all the time seeking to learn from its successes and mistakes.
The instructor may wish to introduce this part of the case by reviewing the “traditional” approaches to market definition.
The standard criteria that students should identify are
• Current Market Demand
• Future Market Demand (Market Growth)
• Competitive Intensity (at various price-performance tiers of the market)
• Suitability of the Firm’s Sales Force to the Given Segment
These criteria would emerge from a reading of established marketing and strategy texts.4
The instructor should challenge the solidity of these traditional criteria for companies working with emerging technologies and markets such as SR Corp:
• Future market demand is dynamic and highly subjective in terms of the rate of projected growth.
• Competitive intensity is unclear because new competitors tend to “pop out of the woodwork” every six months.
• The suitability of the sales force is really not applicable because SR Corp did not really have a sales force yet, other than Hastings himself. Small firms building novel technology cannot be expected to create a distribution capability well in advance of product completion.
This also raises the question regarding when the company should begin hiring sales staff to supplement Hastings’ own efforts. In the case, the lead investor wanted to see plans for enhancing the firm’s marketing function. Some students may argue that new hires in this area should begin immediately. However, this might be premature. Hastings should be able to “close” two or three initial customers with appropriate assistance from Dr. York and Dr. Schall. Further, additional sales staff at this point in time would probably generate leads that the company could not effectively handle.
It should be noted from the prior discussion that all three market niches had high potential volumes for SR Corp’s technology. The telephone company niche appeared the largest. However, one might argue that too fine a differentiation between markets in terms of sales is useless because the projections of market demands were based on working technology solutions (i.e., 99 percent effective discrete speaker-independent speech recognition). Competitors’ voice button systems provided only 90 percent accuracy.
All three niches were being addressed by significant suppliers, ranging from AT&T, to the Baby Bells, to Northern Telecom, to more recent startups, although none had achieved in excess of 15 percent market share in any niche as a supplier of speech recognition systems. While there was potential “knockout” competition in each of the three niches, no single firm had yet been able to deliver the punch in speaker-independent, discrete technology.
The suitability of the SR Corp’s sales force was not an issue yet; it did not have one. The instructor might ask the students to consider the manner in which selling is done in new firms and what that effort would be like for SR Corp. Hastings, York, and Schall would do the selling and their “pitch” would be first to high-level business executives emphasizing the “value” in the solution.
The instructor should now press forward to solicit other criteria from the students. The instructor might ask: “What else really matters in deciding which set of customers to target?”
The following are additional criteria that students should come to understand and then apply to the case:
• Contribution (gross, i.e., after cost of goods sold, initial engineering support costs, an account manager, and field office costs).?This is based on reasonable penetration rates over two to three years of existing market demand (not assuming 50 percent compound market growth rates). Students are encouraged to look beyond only potential sales volume as a criterion for potential market entry and consider personnel and office costs associated with successful implementation.
• Knowledgeable customers.? Much of the success of a new technology is based on the perception that it works and is providing value to the customer. Customers who have rich knowledge of a technology, and more importantly, about how the technology can be applied to solve real problems, will tend to overlook the few bugs in a new technology (which always surface during the first installation) and march on towards enhancement and success. Customers without substantial knowledge of a technology need a perfect product. In brand new computer technology, perfect products are indeed rare. Even though SR Corp was performing a full scope of internal tests, there will probably be some surprises in its initial implementations.
• Intellectual property.?Talking can have its risks. One of the best ways for a competitor to gather proprietary information from a small startup is to pretend to be a customer—particularly to a startup that doesn’t have a customer yet! SR Corp has a number of patents for its new algorithm. Even with these patents, the threat still exists that a competitor can invent around or right through these patents, or even offer big pay raises to entice some of SR Corp’s engineers away from the company. A competitor can also tie up SR Corp in court challenging patents. Would an airline or a Fidelity wish to steal speech recognition technology? Absolutely not. Might a telephone switch manufacturer? Perhaps? Who represents the greatest threat?
Technology businesses often try to have customers sign nondisclosure agreements when showing novel technology. Further, companies generally have employees sign non-compete agreements. While these two legal measures might provide some degree of protection for SR Corp, nondisclosure and non-compete agreements are in reality difficult to enforce. A firm must select its customers wisely. It must also treat its employees well.
The instructor might suggest that Hastings is being paranoid here. An alternative perspective is that since SR Corp has obtained patents for key portions of its technology, key competitors (such as AT&T) will have obtained these documents, studied them, and might be willing to license SR Corp’s technology rather than try to build solutions around it. This would allow AT&T, for example, to gain a first-to-market advantage over its other competitors. In fast-moving technology fields, such as this one, alliances between firms are common. The class discussion should be interesting, weighing the potential threat of AT&T as a hostile litigant with the benefits of AT&T as an ally. Hastings proposes an incremental corporate development approach, based on resources on hand. Another approach might be to achieve strategic alliances with major telephone companies and switch manufacturers, seeking to accelerate the time required for SR Corp’s technology to become the de facto industry standard.
• Duration of the sales cycle.?Selling new technology to large companies can take a very long time. For example, selling to a telephone switch manufacturer (for the first contract) would approach two years even when the customer was very interested. The reason is that the technology would be a “design-in” within a larger turnkey system. The full cycle of selling, contract negotiation, and technology integration, even with good project management, would be lengthy. On the other hand, a telephone company might make more rapid decisions (six months to a year) because it could perceive SR Corp’s technology to be of strategic importance for reducing operation costs. Yet, the numerous departments and hence budget centers that must participate in the decision could extend the sales cycle beyond a year. Fortune 500 companies would probably be the fastest decision makers. The example of the airline company at the end of the case is illustrative; the typical six-month education process for prospective customers seems to have been avoided. The airline executive was willing to make a purchasing decision immediately!
• Reference potential.?New technologies convey risk to the majority of the market. The perception of risk is lessened once a large firm becomes a customer, given that the vendor performs well. This is even more true if the inventor of the new technology is a startup. No one wants to commit millions of dollars to a firm that maynot be around in several years because the firm could fold and leave the customer without the technical know-how and ongoing product development required for longer term success.
Big initial customers and deep pockets among investors are the best way to ease this uncertainty. Securing an MCI, a Northern Telecom, or an airline would be a huge feather in SR Corp’s cap, particularly if executives were willing to take a few phone calls from other prospective customers. A major telephone company would be the very best reference base, simply because of the volumes of telephone calls involved and the fact that the company resells services to other commercial entities.
• Downstream hassle and costs.?The duration and cost of systems integration of SR Corp’s PCs into a telephone company or Fortune 500 firm is another consideration. With the telephone switch manufacturers, such downstream costs and hassle would be minimized since the OEM would be reselling the technology in a turnkey product. Telephone companies represent the greatest in-house knowledge about speech recognition; Fortune 500 firms represent the least amount of prior knowledge.