Stanford University EE353/CS394
Business Management for Electrical Engineers & Computer Scientists

Summary of Concepts, Frameworks, Tools, and Related Articles
by
Fred M. Gibbons

EE353/CS394 presents the major functional areas and key concepts involved in making successful business decisions. These areas include: corporate strategy, new product development, marketing, sales, distribution, customer service, and financial accounting. The central objective is to teach students how to identify and analyze issues in each of these areas. The course develops frameworks and tools for formulating, evaluating and recommending action from the perspective of the general manager in computer, high tech, and Silicon Valley firms. Below is a summary of theses concepts plus a list of related articles which illustrate them.


Definitions of Strategy

Business strategy is a plan of action carried out tactically to achieve a business objective. A business objective is a desired result.

I) The Classic Approach to Formulating Strategy: "Competitive strategy is a combination of goals for which the firm is striving and the means by which it is seeking to get there."

II) The Decision Based Definition of Strategy: "A business strategy is a set of dynamic, integrated decisions which you must make in order to position your business in a complex environment."

III) The "Bottom-up Marketing" View of Strategy: Traditional strategy is top down, in other words, decide what you want to do and figure out how to do it. An alternative is to find a tactic that works and build a strategy around it. Go down to the front lines, where the marketing battle is being fought. Where is the front? In the minds of your customers and your prospects.

Example:

Motorola's vision is a world where people want to be able to send and receive information anywhere, anytime and in any imaginable form, from voice to high-speed data transmission.

Motorola figures that such a roomy universe of opportunity will allow it to set a goal of expanding its techno-empire at a 15 percent annual clip, doubling revenues every five or six years, just as it has for the last two decades.

Motorola's strategy – and size – also force it into an ever-shifting and sometimes confusing array of alliances and battles with governments, rivals and customers. In addition, Motorola is building a worldwide consumer brand

Related Articles:

What Is Strategy by Michael Porter
What's Wrong with Strategy?
Value Innovation: The Strategic Logic of High Growth
Strategy and the New Economics of Information
Going Where the Money Is (THE PROFIT ZONE)
Price/Features Matrix
The New Business-Cycle
Foresight, Complexity and Strategy
Successful Entrepreneurs Tell Where Great Ideas Come From.....myths and realities


How competitive forces shape strategy

The nature and degree of competition in an industry hinge on five forces:

  1. The threat of new entrants
  2. The bargaining power of customers
  3. The bargaining power of suppliers
  4. The threat of substitute products or services
  5. The jockey for position among current contestants

The weaker the forces collectively, the greater the opportunity for superior performance. Often a subset of the forces are responsible for the industry dynamics, e.g., Intel and Microsoft as suppliers have been the primary force in the PC industry. Understanding the current competitive forces and anticipating which ones will become most important in the future is critical for shaping a firm's strategy.

Related Articles:

IBM: Becoming a growth company again
Intel: The silicon age it's just dawning ( and the DRAM system chip)
Microsoft: Microsoft's Future
Netscape: Strategy Redux
The PC Industry: Morgan Stanley Overview
Yahoo: Challenges AOL As a Portal to the Web


Core Competence

Core competencies are the collective learning in an organization. Sony's core competence in miniaturization has led it to develop consumer products in markets where smaller size is valued. 3M's core competence in sticky tapes led to “post-it” notes. A firm's core competencies can be seen in its primary products.

At least three tests can be applied to identify core competencies within a corporation:

  1. A core competence provides access to a wide variety of markets;
  2. A core competence should make a significant contribution to the perceived customer benefits of the end product;
  3. A core competence should be difficult for competitors to imitate.

Core competencies spawn unanticipated products (e.g., post-it notes). A corporation must know and grow its core competencies in order to survive and prosper.


Matching the Process of Product Development to Its Context

Key marketing and development issues are highlighted by positioning a product in the context of a "newness" map and its "development risk versus opportunity cost" map.

Newness is plotted as a function of newness to the company and newness to the market.

Newness Map

Hi

New product lines

Example: 3Com's development of disc-less workstation

 

New to the world

Example: Apple's Newton personal digital assistant

Newness to Firm (Product/Company fit issue) 

Improve existing products

Intel Multimedia chips

 

Low

Cost reduction

Example: HP's DeskjetLC printer

 

Repositioning

Example: ETAK's digitized map images used as a geo-locating service on the WorldWide Web

 

Low

Newness to Market (Product/Market fit issue) 

Hi

Lower Left: New products in the lower left portion of the map may be sold at the expense of existing products (cannibalization). But, if a company does not cannibalized its own products, a competitor will.

Upper Left: Products in the upper left corner raise the issue of company/product fit. How well can the company deal with the development, manufacturing, and marketing issues as compared to the established competitors?

Upper Right: Products in the upper right corner offer the allure of "breakthrough" opportunities (Brave New World), but the risk of market acceptance and fit with corporate skills is high thus the risk of failure is high.

A product's position identifies its risks and required strategies and resources.


Opportunity Cost and Development Risk

Engineering scheduling and product feature issues are illuminated by positioning a product on the "opportunity risk" map. Opportunity is defined as the cost (primarily in lost sales, but also in reputation which will lead to the loss of future sales) of delaying introduction. Development risk assesses the need to have the right product upon introduction.

Opportunity Risk Map

Hi

Crash program

Example: Microsoft's Internet Explorer version 1.0

.

100% right

Example: Netscape's new browser

Opportunity cost
(the cost of being late to a fast growing market)

 

.

.

Low

New Products

Examples: IBM PC when first introduced in 1981; Sun1

.

New version of established products

Examples: Polaroid's instant camera; Xerox copier

.

Low

Development Risk
(The risk of producing the wrong product for the market) 

Hi

In situations of low development risk and high opportunity cost, getting to market is everything, and a crash program is required. Low opportunity cost coupled with high development risk makes time to market less important, and places the emphasis on making sure the product is right.

Lower Left: Products in the lower left quadrant typically are new markets where customer expectations are low. The early adopters often want the product now because it offers breakthrough benefits, and they will "live with" problems.

Upper Left: Products in the upper left quadrant have the same “forgiving" customer attributes, but expected competition forces a crash program.

Products on the far right are problematic.

Upper Right: The worst case is the upper right quadrant. The product must be perfect the first time, e.g., start-ups going against existing competitors.

Lower Right: The position on the lower right quadrant is often the introduction of a follow on product which is relatively protected from competition (possibly by patent, technological leadership or by monopoly).


A Process for Industrial New Product Development

Findings from many research studies of new product success and failure have led to several major observations and suggest a model for moving a product from idea to launch.

Observations (*) indicate that approximately 90% of product successes are market driven (market pull) and 10% are technology driven (technology push).

At GE labs technology driven breakthrough products shared the following characteristics:

1) Market needs were recognizes and R&D was targeted at satisfying these needs.
2) When a technical success did not have a specific market need, the product was adapted to suit an identified need.
3) Research managers communicated the possibility of a technical breakthrough clearly to other departments which facilitated the identification of a market need.

A study (*) of Japanese and European firms with market pull successes showed the following:

1) No initial difficulties in marketing
2) A real product advantage
3) Strong internal communications
4) Superior techniques for data gathering, analysis, and decision making

A product success development model based on observation includes seven stages:

1) Idea generation
2) Preliminary assessment
3) Concept
4) Development
5) Testing
6) Trial
7) Launch

Each stage is separated from the previous one by an evaluation point and a corresponding GO / Kill decision node.

Related Articles:

Launch Your Product Without Getting Sunk
Technology Integration: Turning Great Research into Great Products
IBM's Research Cutbacks Now Seem to Be Brilliant
Spark Innovation Through Empathic Design
Defining Next-Generation Products: An Inside Look
The Search for New Killer Apps, Systems That Change a Company
Successful Entrepreneurs Tell Where Great Ideas Come From.....myths and realities


Product Life Cycle

The Product Life cycle is a fundamental concept for planning, strategy, product development, marketing, and manufacturing. Product Life Cycle refers here to a category of products like personal computers or workstations, not to the life cycle for an individual product like the IBM PC XT. Individual products ascend and decline but more insight is gained from looking at the category as a whole. Vertical axis below is Sales Volume (in arbitrary units).

Product Life Cycle Chart  

There are five stages and correspondingly five customer types. Varying customer needs and a basis for competition are linked to each stage.
 

 

Introduction

Early Growth

Late Growth

Maturity

Decline

Customer type

Innovators

Early adopters and opinion leaders

Early Majority

Late majority

Laggards

Customer need

Features

Product capability

Price/performance education and capability

Service/support price and assurance of quality

Cheapest solution

Basis for competition

First to market and real benefit

Capability

Price/performance education on how to use

Price and unique fit to their needs (segmentation)

Market share gains

Number of competitors

Few/none

Some but little contention due to expanding market

Several competing head to head

Many players Competition kills some off and consolidation begins

Poor profitability so only the largest survive

Profitability

Uncertain

High

Declining

Declining

Minimal

Risks

High

Lower

Higher

Higher

Highest


Forecasting Total Market Demand

Recent history is filled with stories of companies and entire industries that have made grave strategic errors because of inaccurate industry-wide demand forecasts. These inaccurate forecasts did not stem from a lack of forecasting techniques: regression analysis, historical trend smoothing, etc. The inaccuracy stemmed from not seeing the forest for the trees:

There are four steps in any total market forecast.

1) Define the market (e.g. Personal computers)

2) Divide the total market into segments (e.g. Desktop computers, notebooks, and PDAs)

3) Identify and forecast the drivers for demand in each segment and project how those drivers are likely to change over time (e.g., the cost of components, competitors’ pricing, buyer upgrade cycle, customer acceptance, capability, performance)

4) Build a model and conduct sensitivity analyses to understand the most critical assumptions and to gauge risks to the baseline forecast

Building the model is the essential step. It allows the forecaster to select the fundamental drivers and understand their interaction before the actual numbers obscure the picture.


Essentials of Accounting

Accounting is a language and set of rules to enforce consistent "score keeping" across companies. The purpose of any language is to convey meaning. Accounting information is conveyed by reports called financial statements. These statements convey the financial condition of an entity. The most important of these statements are:

        Balance sheet (assets, liabilities, and equity)

        Income statement (revenues, expenses, and profit)

        Cash flow statement (sources and uses of funds)

Nine concepts govern all of accounting and are used as the guiding principals in recording information in these financial statements.

1) The dual aspect concept (Assets = Liabilities + Equity)

2) The money measurement concept (Accounting reports only facts that can be measured in monetary amounts)

3) The entity concept (Accounts are kept for entities as distinguished from the persons associated with those entities)

4) The going concern concept (Accounting assumes that an entity will continue to operate indefinitely and it is not about to be sold or liquidated)

5) The cost concept (Accounting focuses on the cost of an asset rather than on their market value)

6) The conservatism concept (Revenues are recognized when they are reasonably certain. Expenses are recognized when they are reasonably possible)

7) The materiality concept (Disregard insignificant matters. Disclose all important matters)

8) The realization concept (Revenues are recognized when the goods or services are delivered and accepted)

9) The matching concept (The expenses of a period are associated with the revenues or activities of the period)


Alternate Sources of Financing

Below are several sources of funds for both start-ups and established companies. The list is not exhaustive but is meant to give a broad perspective of where to obtain funds and the relative merits of those sources.

 

Source

Primary fit into Typical
Financing Strategy

Positives

Negatives

Cost

Self

Initial money to at least document or demonstrate the idea to the point where other investors can understand it

Nobody's permission required

It's your money to lose

However much you are willing to risk

Family and Friends

If more money is needed to get the idea to an invest-able point and the individual's funds are limited

These investors don't ask many tough questions

You could alienate friends an family if the money is lost

Friends and family and their money

Angel investors
(ex: informal group of knowledgeable individuals)

Early in the company concept stage

Some coaching and contacts

Some meddling by investors and regular results reporting

5-10% of the company

Venture capital
(ex: traditional VCs, the Sandhill Rd. crowd)

Early stage typically before product and team are built

Don't have to pay the money back. VCs can also bring advice and partners

VCs involvement in the company may challenge management 

Typically 20-50% ownership of the company

Suppliers and trade credit
(ex: parts vendors with net 60 day terms)

Available early in product development and pre production period if the vendor believes in the product and its customers

Easy source of credit

Few

Bundled in the price paid for the product or service

Commercial bank
(ex: Bank of America)

Available after the company has revenues and profits

Low cost

Money must be paid back in the future

Current market rates for borrowed funds

Institutional investors
(ex: Liberty Mutual , AETNA)

Invest just prior to an initial public offering

Typically pay a premium for stock

Few

Equity is sold slightly cheaper than at the time of the IPO

Asset based lenders
(ex: GE Credit capital)

Can be early in the life of a company where lender holds title to equipment in the company

Non equity source of additional cash

Requires monthly cash payments and the company risks repossession of equipment if the business does not meet certain financial milestones

Higher than straight bank debt

Public equity
(ex: NASDAQ)

Historically has occurred when a company is $10M or greater in revenues and profitable. Some companies today go public on the basis of a hot concept with little revenue and a period of substantial losses ahead.

Access to large amounts of capital. Liquidity for investors

Scrutiny of investors, inability to give employees very low cost options, cost of public accounting and reporting, defocusing of top management away from the customer and toward Wall Street

High in terms of management time and energy



Marketing Strategy

At the heart of any business strategy is a marketing strategy. Businesses exist to deliver products to markets. Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives. A marketing strategy is composed of several interrelated components called the marketing mix:

The Marketing Mix

1.      Market selection (choosing the customer)

2.      Product planning (what products are the company going to sell to the selected customers)

3.      Pricing (a quantitative expression of the value of the product to the customer)
-See also the discussion of the Price/Features matrix

4.      Distribution (the wholesale and retail channels through which the product moves to the people who ultimately buy it and use it)

5.      Marketing communications

a.      Positioning (what is the message that states the purpose and benefits of the product in the market and how it competes)

b.      Selling (direct or indirect through others)

c.      Promotion (informing people about your product, showing them how it can be useful, and persuading the to buy it)

d.      Support (helping the customer make the product work and replacing or repairing it when its broken)

Decision Making Unit and the Decision Making Process

The actual selling process breaks down into two components called the decision making unit (DMU) and the decision making process (DMP). The decision making unit consists of all of the people who will play a role in the decision to purchase a product. The marketing mix program must understand the needs of each of these individuals and find a way to communicate the marketing message to each of them. These people are typically identified as:

Buyer – the person who actually issues the check i.e. the purchasing agent)
Decider the person or group that actually says this is the product we want, i.e. the MIS manager
Influencer who helps the decider decide, i.e. the press, analysts, peers, evaluation groups
User – the individual or group who actually uses the product and derives benefit from it

The people included in the decision making unit interact to make the purchasing decision. The decision making process (DMP) is a description of this interaction. By understanding this process a salesperson can best understand who, how, and when to work on getting the customer order.

For example, a company has decided to pick a workstation standard. The engineering VP made this decision. Since the standard affects all software engineers within the company, an evaluation team is formed to make the recommendation. The evaluation team hires a consultant to research alternatives. The consultant has great influence due to his strong technical background and years of experience. Recent magazine articles are also reviewed. After a few months, the evaluation team makes a recommendation and the VP R&D decides to accept it and go ahead. The purchasing manager is asked to negotiate the best deal. The salesperson for the winning workstation company was on top of and influenced every person at every stage of the decision making process.

Related Articles:

Are Tech Buyers Different?
The rise of the "Net Generation" stands to transform marketing
The Competitive Dynamics of Network-Based Businesses


Basic Quantitative Analysis for Marketing

Simple calculations often help in making quality marketing decisions. One of the most useful quantities is calculating break-even volumes, i.e., the quantity of units which must be sold to recover an initial investment. With this number we can then ask how long will it take to sell this many units and is it reasonable to assume that the market overall is big enough to support this volume. When sales exceed the break-even volume, the firm starts making a profit.

To apply this calculation we must understand the following definitions:

Variable cost (K) = $cost uniquely associated with each unit produced (example, Microprocessor on a PC mother board)

Fixed cost(FC)= $cost which are fixed and do not vary with the volume of output(example, a new IC fab plant)

Contribution(C) = The difference between the price($P) of one unit - Variable cost per unit($K)

C=P-K


Volume(V)=quantity of units produced

Break-even volume (BEV) = $Fixed Cost FC/C ($contribution per unit)


Distribution Policy

Designing a distribution channel to deliver both a product (or service) and it's benefits to a customer begins with a question:

"What needs to be done to get my product sold?"

Suppose a watch manufacturer decides to compete in the mass market for watches in the $15 price range. Successfully selling this kind of product requires the firm to have:

1.      An Established brand name

2.      Distribution in a large number of convenient outlets

3.      Good display in those outlets

4.      An efficient means of restocking retail outlets

The next question is "Who is to do each task?"

Here we are asking whether the company perform the function or delegate it to an intermediary. This is the question of Channel Length. Consider the good display of watches in a large number of outlets. Theoretically, the manufacturer can perform this function by opening a large number of retail outlets. However, existing retail and department stores accomplish this task more efficiently.

There is also the question of Channel Breadth

How many firms of each type does the manufacturer want to have? The basic alternatives are:

1.      Exclusive distribution (only one place to get it, typically for high priced specialty goods "Rolls Royce")

2.      Selective distribution (a few well trained and qualified "Mercedes")

3.      Intensive distribution (find it everywhere thus convenience is the driver "Honda")


Sales Strategies

The intention here is to present a collection of sales strategies to provide a common reference base and vocabulary. The marketing manager operates at a level selecting the target segments and executing the marketing mix. The sales manager must deal at a lower level with the specific customers (names, addresses) .

Team selling (Multiple disciplines and people working together on a high price, complex sale)

Key accounts (A culling of potential customers into those who display a desirable attribute: size, profitability, or opinion leadership, etc.)

National accounts (Companies with nation wide disbursement that are sold to at a central headquarters location)

Multi-level selling (Contacting people at all levels in the organization from engineer to VP marketing and convincing them to buy the product)

Systems selling (Involves elements of team selling and includes multiple products which tied together often deliver a "solution")

Third party sales (Using other organizations like retailers or OEMs to sell your product)

Telemarketing (Telephone selling often involving automatic dialing from targeted lists. )

Related Articles:

Fly by Night, Sell by Day Managing sales is different from any other kind of management


Putting the Service-Profit Chain to Work

The service-profit chain establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity. The links in the chain are as follows:

Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided the customer. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.

It is estimated (*) that a 5% increase in customer loyalty can produce profit increases from 25% to 85%


Media Selection

For many firms an important means of achieving marketing communications goals is the development of an advertising strategy. Communications goals are usually expressed as desired increases in sales or market share. Sometimes intermediate goals such as product awareness and knowledge are employed. Integral to good advertising strategy is an efficient media plan that maximizes the achievement of communications goals within the constraint of a fixed budget.

Some of the more important criteria for evaluating a media plan are:

1) Cost of space/time- the price for a one page ad or a 30 second TV spot
2) Reach- The size of the audience reached (ex. LA times circulation of 1,000,000)
3) Audience composition- description of the audience in terms of various demographic characteristics such as age, income, or education.
4) Impact- is one media type more forceful at commanding attention than another
5) Exposure value- evaluation of a given media vehicle may be undertaken on the basis of cost per thousand (CPM) exposures.

In the example of life cereal, both children and mothers are desired targets. Beyond this, mothers of families with children 10-18 might be considered better prospects than those with younger children. Also, families with higher education might be considered generally more receptive to nutritional claims in the advertising strategy.

 


The Focused Factory

The conventional factory produces many products for numerous customers in a variety of markets, thereby demanding the performance of a multiplicity of manufacturing tasks all at once from one set of assets and people. Its rationale is "economy of scale" and lower capital investment.

A factory that focuses on a narrow product mix for a particular product niche will outperform the conventional plant, which attempts a broader mission. Because its equipment, supporting systems, and procedures can concentrate on a limited task for one set of customers, its costs and especially its overhead are likely to be lower than those of the conventional plant. But, more important, such a plant can become a competitive weapon because its entire apparatus is focused to accomplish the particular task demanded by the company's overall strategy and marketing objective.

Related Articles:

Why (and How) to Take a Plant Tour


The Job of the General Manager

The general manager's job can be one of the most challenging and desirable assignments in any business. It is distinguished from the functional manager's job by its significant multi functional and profit responsibilities. A GM may be responsible for running a company, a division, or several of each.

GMs have different responsibilities in different companies and industries but most often they face common issues. The basic job of the GM is to get results in both the long and short term. To that end, the job entails the following:

1)     Establishing strategic direction

2)     Setting goals and maintaining standards of performance

3)     Marshaling and allocating resources

4)     Selecting and developing people

5)     Organizing the effort

6)     Maintaining an understanding of day to day operations

7)     Building a positive work environment

Related Articles:

Chief Executive Officer (CEO) Skills Inventory
Making a Good Hire
How management teams can have a good fight
The Myth of the Top Management Team
Fair Process: Managing in the knowledge economy
Real Work
A New Mandate for Human Resources
Making the Deal Real: How GE Capital Integrates Acquisitions
The Necessary Art of Persuasion