Shazeeye's Blog Thoughts on User Experience, Technology and Business


Micromarketing: Location data to better serve your customers – Part 1 of 2

Location data such as using a zip code to find out how much revenue a grocery store can make is critical in your decision to decide if you want to open the store at that location. This is just one example of the powerful potential of micromarketing. Let's go through an example of using location data to open a grocery store in Orange County. We will be using SRC's Allocate to help analyze the location data and MapInfo Professional to map the data.

Mapping propensity and density to determine revenue potential of the store: As we see in the images below, we use SRC's Allocate to determine the revenue potential of  a grocery store in Orange County (OC). We choose the retail store option as the input variable and the dollar per store as the output using the software. Data is also available for furniture stores, sports stores, etc. After the variables are input a map is produced (below) which can be interpreted as follows. For Orange County, the average grocery expenditure per house hold per month (propensity) across a block group (a group of zip codes) where darker green shades indicate  higher expenditure for groceries per household per month is approximately $5800-$16900/month for the darkest or most expensive parts. The hashed region shows total dollars spent for groceries per square mile per month in Orange County (expenditure density). The darkest hashed regions indicate people in OC spend a total of $18,000,000 to $103,000,000 per month on groceries. This data helps you determine if the revenue potential is close to what you expect and can help compute your approximate profit given all the expenses you will incur. It also helps you compare revenue potential across different locations to help you determine the ideal/optimal location for you.

Choosing a Store Location by Mapping Competitors Location Data: Using the Yellow pages we identify the zip codes of the competitors. For this example - a grocery store - let's assume it's Trader Joe's and Whole Foods. We identified 19 Trader Joe's and 2 Whole Foods store in the OC area and mapped their trade areas (area from where customers visit the store - usually a 5 minute radius for a grocery store) using the software.  The blue areas represent the Trader Joe's and the red and fluorescent green represent Whole Foods. This is mapped on the propensity and density map from above using MapInfo Professional. With this information we choose a location (in yellow) that is far from competitors and has good propensity and density. You will also check for magnet stores, customer demographics and traffic (info in next paragraph) and ensure that the information provided by these parameters will help drive your store's growth. You can also compute the break even demand (average retail demand per square mile) as seen below to inform your decision.

Identifying magnet stores, traffic, customer demographics and trade areas for the new store location: The software helps to draw the trade area for the new store location (for this example a 5 minute radius as seen in black) and can identify the magnet stores or stores that will help pull traffic (for example, drug stores).  It computes traffic - 32,800 cars/day. It also helps define the type of people in the trade area. Types of people are defined by PRIZM clusters (for details check  PRIZM Clusters) and gives you demographics and characteristics of the population you are likely going to attract. According to the report this store will attract 54% of people belonging to the PRIZM cluster defined as White-collar Suburbia. This group can be described as "upscale, college-educated baby boomers living in suburban comfort in expensive new subdivisions". For more details on this segment visit Experian's description. Now that you have such a wealth of information on your customers you can tailor your marketing message as well as grocery needs to better suit them.


Using the Four Actions Framework to Craft a Firm’s Strategy

A firm has to have a clear vision in the form of a strategy to define who it is and where it wants to go. Sometimes somewhere along the way this strategy gets blurred and its customers can't differentiate it from its competitors. The four actions framework asks four questions to sharpen the focus and realign the firm's game plan. The four actions framework can also be used to reconstruct customer value in an industry to identify a gap or find new value. The four questions as seen in the image identify factors that reduce, eliminate, raise and create value.

Let's apply this to a case study- PetSmart vs. Petco. You can read the detailed analysis in my paper here - Petsmart vs Petco - 4 Actions Framework or get the highlights below.

Industry analysis

PetSmart and Petco compete in the Pet Care Industry which includes pet food, clothing, healthcare and other pet services. This is an attractive industry based on Porter's 5 forces analysis (read paper for details) with spending reaching $41 billion/year (number which doubled from a year ago). Americans spend more on pet care than what they spend on movies, video games and music put together.

PetSmart’s strategy was to connect emotionally with pet owners by providing services (services strategy) such as adoption, grooming, training, day care and pet hotels. These luxurious pet services made pet owners feel that their pets were being treated as well as family and thus commanded the higher market share (30%) of the pet care industry. Petco their rival which held 20% market share concentrated on selling a larger variety of pets at a premium price (11% more than PetSmart). As PetSmart was a services strategy it partnered with alliances such as Banfield to help in hospital needs and its stores were located in “power centers” unlike Petco whose stores were “neighborhood pet stores” and much smaller in size.

Recommendations to PetSmart to Refine their Strategy using the Four Actions Framework

Raise: Continue to focus on services and add to these based on trends. For example pet obesity is a big trend hence providing pet diet plans and support will grow the pet food (diet meals for pets) vertical as well as services vertical (customer support), which is recurring revenue and ties into their current strategy. A limitation of this suggestion is that existing diet plans companies can easily enter this market with some modifications to their food to cater to animals.

Create: Provide pet super stores: hotel, grooming and hospital all in one. Owners will be willing to come to pet super stores. Based on maximum revenue based on location super stores that are a one stop shop for all pet owners can attract and even take away from mom and pop stores. Visiting vets from Banfield (PetSmart's already existing pet hospital) can be a part of this super store. This will also increase revenue for other verticals. For example, after the dog is treated at the vet the owner may pamper him or her at the spa and then buy the month’s food supply at the pet supply store. A limitation of this suggestion is that a lot of capital is required to create this and Francis is already working on expanding his pet hotels so this suggestion can probably wait once that is implemented and a detailed cost-benefit analysis of this suggestion is carried out.

Raise: Owners like to be a part of the pet grooming ritual as it fills an emotional need for the owners. Provide see -through rooms where owners can watch pets being groomed or trained while they wait (instead of waiting in waiting rooms). Remember, this is a business that caters to human needs through the pet. Feelings of belonging, care and connections are expressed through pets and sharing in these activities only strengthens the connection. A limitation of this suggestion is that this may be a small market (or not). In today’s busy world few may want to watch their pets being groomed. Again market research and testing will clarify this point.

Eliminate: As only 2% of their revenue comes from selling other pets such as birds and fish, etc evaluate if you still want to keep that business or use the revenue from there to better focus on the lucrative services, supplies and food verticals at PetSmart. A limitation of this suggestion is that this will change or limit the scope to only dogs and cats.


Growth Strategies and Managing Differences in a Global Economy

As more businesses become global companies face challenges in balancing local conditions with economies of scale. The AAA framework by Pankaj Ghemawat is one way to address this challenge. The three A's stand for Adaptation, Aggregation and Arbitrage. Adaptation boosts revenue and market share by maximizing a firm's local presence such as Mc Donald's in India has adapted its menu to suit Indian tastes by providing the McAloo Tikki burger (spicy potato burger). Aggregation standardizes the firm's product or service offerings by grouping together production processes. Apple manufactures its products in China and markets its products in the US.  Arbitrage exploits the differences between regional markets such as call centers in India, factories in China and retail stores in Western Europe.

A firm can choose one of these strategies or a combination. It can also shift strategies at different points in its evolution. IBM started with the adaptation strategy by setting up mini IBMs in target countries and adapting to local needs. In the 1980s it transformed to a regional dependent organization thus shifting to the aggregation strategy. Most recently it shifted to the arbitrage strategy by exploiting wage differentials in India and increasing its headcount in India.

Which globalization option does a firm choose?

In making this decision managers can use the AAA triangle to make a decision. Firms that do a lot of advertising will need to adapt to the local market and lean more towards the adaptation strategy. Those that do a lot of R&D will use the aggregation strategy and firms that are labor intensive will use the arbitrage strategy. Though firms can use a matrix approach and have two strategies in place employing all three has its constraints in terms of limited managerial capacity and a confused culture. It is important to ensure the strategy is a good organizational fit. A firm could also get external support to integrate across borders. IBM has many vendors and joint ventures to help with its R&D and manufacturing. It is also critical to know when not to integrate as this minimizes points of contact and friction. Choosing to use or not use these strategies can help or hinder a  firm's global growth plans.


Managing Disruptive Innovation

PARC or Palo Alto Research Center, a Xerox Company in Silicon Valley has contributed tremendously to commercial innovation through ethnography. I am a huge advocate of ethnography and PARC pioneered this process of studying human behavior and "hybridized" it with other social science and analytical methods to optimize it for business application - particularly for addressing new opportunities, customers and markets. PARC owns 2500 patents and have created products such as GroupFire (acquired by Google), Inxight (acquired by SAP) and Uppercase (acquired by Microsoft). You can see some of their presentations here. On August 18th I went for a presentation on Managing Disruptive Innovation by Tamara St. Claire, VP of Global Business Development and Head of Commercial Operations.

Tamara spoke about managing disruptive (vs. incremental) innovation, its risks, two case studies and lessons learned.  Incremental innovation happens in existing markets (left column in image on right) while disruptive innovation happens in new markets (right column) and is more challenging to manage. She mentioned three risks in disruptive innovation - technology, market and execution- emphasizing that markets and execution are the most challenging factors to overcome. A further breakdown of the risks are found in the image below. Lack of credibility/experience (includes C level stakeholders), lack of channel (sales/distribution network) and lack (actually the inability to filter through too much) of information are critical risk factors.

The best way to enter a market of disruptive innovation (with existing or new technology) is to start with a minimal viable product (MVP) introduced at the right time and a strong value chain. MVP is a product with a limited set of features that fits the user needs of a niche market. Once the product has gained an audience ideas to gain mass market with added features can be explored. Tamara gave an example of one of PARC's chip packaging technology which was introduced seven years ago but shelved due to bad timing. It was reworked seven years later by partnering with Sun Microsystems and Oracle due to their advances in chip technology. The value chain are a group of activities (see image below- extreme right) that help to bring the product to market. In existing markets best practices help define a path to market entry but in disruptive markets one has to be flexible and shift gears depending on learnings. It is also critical to partner with experts and consultants studying these new markets as well as visit trade shoes and conferences to learn as much as possible. Partnerships are forged to strengthen the chain and build credibility.

Case Study: Printed Electronics Services

PARC developed low cost disposable printed flexible electronic expertise and devices can be applied in health electronics, packaging and biomedicine. When DARPA (Defense Agency) contacted them to develop an early detection solution to prevent brain injury for soldiers they partnered with consultants and experts to expand their printed electronics services for defense applications. They soon realized they couldn't manufacture the films at the scale desired and thus decided to play a connector role (flexibilty to change is key) between materials and manufacturing.  They partnered with Polyera and 2 other manufacturers thus giving up positions in the value chain and concentrating on their strength (network orchestrator). The lessons are outlined in the image on the right where N=1 means that they relied on more than one consultant or expert to help traverse this new territory and in many cases related to disruptive innovation a group of experts help bring together a holistic viewpoint and a superior product. The other lessons were to be flexible to change course, focus on strengths in the value chain and partner in areas of weaknesses.

Case Study: Content-Centric Networking Protocol

PARC developed a communication protocol complementing existing IP infrastructure to reduce the cost of distributing video and other content in IP/TV networks. Content-Centric Networking uses a unique architecture that caches content closest to the users who request it most thus reducing network capital cost and operating expense.  To create this solution PARC collaborated with Van Jacobson, Chief Scientist at Cisco and an IP/TV expert and took it to open source for feedback. They tested this network with the government and early adopters and used feedback to improve the solution to get critical mass. The lessons here were to get the right commitment, gain critical mass and engage user feedback early.

Overall lessons are to use ethnography to understand how people are using your products and thus have a well defined MVP. Disruptive innovation is more about unique business models and integrating technology. As a company expands it is critical to have a portfolio of products ranging from core to next gen products and using a process to manage this innovation can be the difference between success and failure.


Useful Frameworks to Drive your Business Strategy – Part 2 of 2

This post is a continuation of an earlier post. For the first four business strategy frameworks please read the earlier post.

5. Porter's Five Forces: Porter's five forces analyze the competitive forces in your industry - specifically, new entrants, substitutes, buyer power, supplier power, intensity of rivalry- so that you can optimally position yourself for sustainable competitive advantage and thus profitability. Nike's 5 forces show that overall it's an attractive industry for Nike with three of the five forces in favor for Nike - supplier power, threat of new entrants and buyer power.

6. Value Proposition and Positioning (4Ps & 3Cs): Value proposition defines the value you deliver to your target audience (benefits minus cost; benefits include points of parity and points of differences with respect to competitors) and positioning defines where the brand is in the customer's mind (hopefully customer and company perceptions are aligned). These terms can be better defined with the 4Ps and 3Cs. The 4Ps define your Product, Price, Promotion, Place (how you distribute your product) and the 3Cs define your Company, Customer and Competitors. The Land Rover positioning as well as the positioning for its individual car segments is seen on the image in the left.

7. Value Chain Analysis: The value chain analysis looks at the activities that reinforce the value proposition. It is a group of integrated value-added activities that are provided to the customer. It's easier for competitors to copy a company's value proposition but not it's value chain. The image below on the left shows the value chain for Crown Cork and Seal.

8. Boston Consulting Group's Growth-Share Matrix: The Boston Consulting Group suggests you look at two factors - market share and growth - to determine which products you should keep in your product portfolio and which you should drop. The image below gives you clear direction in terms of what to do if your product is a dog (divest), cow (milk), question mark (analyze further) or star (invest).

Happy New Year, Dear Readers! I wish you and your loved ones a blessed new year. May all your dreams come true!

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