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리더십

MBA과제) 신규사업투자시 고려할 비용문제 그리고 고객 : The interplay between cost, consumers and exploration for diversification or creation of business


Balance of Cost

by MBA7 Linköping



MBA수업 리더십코스에 제출한 두번째 숙제입니다.

신규사업에 투자할때에 고려되는 비용과 고객간의 상관관계에 대하여 연구하였습니다. 

 

 첨부파일이 있습니다.



 


 

 

The interplay between

cost, consumers and exploration

for diversification or creation of business

 

 

(Cost, Consumers and Exploration)

 

 

 

Reflection Paper #2

 

 

 

 

 

 

 

 

 

 

 

722A23-09-2

 

Leadership and Organization

 

Marie Bengtsson IADM

 

September 24, 2009

 


The interplay between cost, consumers and exploration
for diversification or creation of business
(Cost, Consumers and Exploration)

 

This paper examines the cost based interplay between exploration and exploitation in case of organization decided to explore to new business or new product with new concept they never did before. Equilibrium between new products and preexistent products is very important. Leader’s mistake on decision making driven collapse of equilibrium can cause fatal affection to organization. In fact, there are many cases of major organizations that lost their market share while they were too much focusing on either of exploration or exploitation. Leader should consider and adjust on cost of developing new product and predict on demand before they decide to develop.

 

 


Step 1: Introduction

 

The way how to operate the business is different by style of leader. Since each organization has different vision and mission, they may get different result even though they’ve been through same business. March, J. G (2005) and Gupta, A.K. (2006) explained interplay between exploitation and exploration and insisted that exploration is essential for organization’s future. Kwang-hyun Lee (2003) also emphasized the importance of exploration saying that “if it doesn’t go wrong, you break it down!” Actually exploration is the most important factor to decide the future of organization.

 

Among those various issues to decide the meaning of exploration, the most general issue is developing new product. Many organizations are spending a lot of money on quality and branding of new product (or service) because it is possible that even image of organization can be changed through new product. In fact, the failure of developing new product can cause market share of preexistent product.

 

“Developing sub-brand to expand brand accompany cost which is market share diminution. When seven-up (7-up) introduced seven-up gold (7-up Gold), decline of 7-up gold’s sales caused negative to sales of 7-up altogether.
(Al Ries & Jack Trout, 1997)”

 

Hence organizations have no other options but being prudent on developing new product and its marketing (exploration). Many organizations are at the critical moment on balancing exploration and exploitation. Collapse of this balance can be disaster to the organization. In fact, many organizations got disgraced that naming on “Failure case” after they focused on too much exploration or too much exploitation.

 

 

 

1.1. Failure Case Study

1.1.1.      Too much exploitation

 

  Kodak was one of major film camera companies in 1990s. However they focused on developing better analog film while Sony, Canon, Nikon and even Samsung (which is not related with camera) developing digital camera. And now, consumers still think Kodak makes analog film only even though Kodak introduced their own digital camera. (Changseok Baek, 2006)

 

Sony, Japan developed mp3player at 1999 for the second in the world, following Mpman of Korea. And this was 3years before ipod of Apple (2001). However major decision makers didn’t approve investing on mp3player because Sony’s MDplayer was being loved in that time. Finally Sony introduced their mp3player to market much later.  

 

 

 

 

Figure 1 Sony’s Annual Profit (Yongchae Park, 2006)

 

Xerox developed laser printer for the first. However major product of Xerox was large duplicator in that time.  And Xerox introduced laser printer after IBM and HP introduced their cheap and effective personal laser printer.( Wonyong Cha, 2002)

Dell is well known as a desktop pc maker after Dell focused on desktop pc market only even though they had internal report that saying laptop market is promising with development of wireless network technology.

 

 

"Treat a man as he appears to be and you make him worse. But treat a man as if he already was what he potentially could be, and you make him what he should be."   -Goethe-

 

 

1.1.2.      Too much exploration

 

  Sony tried to lead market with beta video which is much better in performance than VHS in 1980s. However when Sony introduced the world first anti-duplication technology in beta video, consumers choose VHS as a world video standard and this caused Sony to get an astronomical loss. (Michael E. Raynor, 2007)

 

 

Narae mobile service introduced CT phone (personal wireless mobile phone which is works around public telephone booth) in Korea in 1990s. However other companies introduced cell-phone service even before Narae made enough consumption to make break-even point.
(Kwang Choi, 2006)

 

 

To the conclusion, leader should keep balance between exploration and exploitation. (March, 2005) However, it will be easier to win lottery than leader who doesn’t have enough knowledge about market keep balance intermediate. Leader should understand enough about exploration and exploitation and react susceptive on market’s change.

 

 

 

Step 2: Cost and Exploration

 

2.1. Profit and Exploration

 

The most important factor for organization to survive is “cost”. Once and organization made enough fund retrieval and get over crisis, they can launch other strategies any time and they can re-build their image on organization. However if an organization didn’t establish cost problem at first, crisis can be happened periodically. The reason sometimes organizations suffer a serious financial crisis while they are developing new product also is because they didn’t consider about the interplay between on exploration and exploitation.

 

In the case of “cost”, exploration seems to absolutely depend on exploitation. Profit that organizations made from preexistent industry (exploitation) is spending for development new industry (exploration). Exploration spends various resources like as profit, Human effort, time and etc. Assuming to exclude special situation which is possible to develop new product without any resource, the situation of exploitation affect enormous on exploration (Figure 2)

 

Figure 2 Cost based interplay between exploitation and exploration

 

Once exploitation can make more profit, organization can invest more resource on developing new product. On the other hand, failure on making profit from exploitation can cause collapse exploration, too. For example, Conglomerates with enough resource are operating independent product developing department while small companies are developing new product very slowly and sometimes researchers take charge of sales with other business altogether. This assures that exploration stands on exploitation as its basis and profit (financial) problem is connected directly to new product development (exploration).

 

 

2.2. Cost and Exploration

 

When an organization decided to develop new product, the leader should find out that it cost a lot or a little or it cost same as pre-existent exploitation. Acquiring exploration without any cost will be the best but that situation can be an exception. This cost includes all kinds of opportunity cost like as fund, time, and effort. Leader should control the way and method of exploration by cost of development of new product.

 

 

 2.2.1. Cost-able

 

This case presents the situation that stable profit is being made from pre-existent industry, organization is trying to develop new product based on the profit. New product is just an extension on old product category. The leader can divide exploration and exploitation. Operating them as individual departments is effective. In case of small company, the leader should keep focus more on exploitation to assure funds circulate well between exploration and exploitation. Generally speaking, organizations should keep focus on exploitation at first and they should run parallel with exploration after exploitation has been established firmly. (Figure 3)

 

 

 

 

 

 

 

Figure 3 the cost-able exploration

 

 

2.2.2. Same Cost

 

This case presents the situation that cost on exploitation and exploration is same like as students are still paying same tuition after they change their major or course. Leader can give up pre-existent product category or strategy (exploitation) resolutely and switch to exploration. In this case, leader should precede enough preparatory research on choosing exploration. The organization barely gets advantage from exploitation which they gave up.

 

Case: After Samsung outruns in family-electronic devices, Sony decided to develop entertaining product instead of new family electronic product.

 

Figure 4 the same-cost exploration

 

2.2.3. Costless

 

  This case presents the special situation that exploration happened with input of any resource (exploitation). However  with assumtion that all of time, effort and money as a resource, exploration without cost is not possible but donation. Moreover even though an organization got exploration without any cost, they should parallel exploitation altogether.

 

Figure 5 the cost-less exploration

 

2.2.4. Non-related exploration

 

  This case presents the situation that an exploring organization gets barely merit from exploitation, since their new business or new product is barely related with their pre-existent business category

 

Sometimes conglomerates decide to start new business which is not related with their pre-existent business to expand their business area. In this case, leader can set businesses as a group company. If this exploration is new kind of product, leader should develop new brand altogether because different products with same brand can cause fading of brand’s characteristics. For example, what can we expect if Microsoft as a company in fashion or food industry?

 

Case: many Korean major conglomerates (Not only Samsung and LG, even some of food companies like as Lotte) have construction companies with them. This is because it is easier to raise a slush fund in Construction Company, not expecting a role as a group subsidiary.

 

 

 

 

 

 

Figure 6 the non-related exploration

 

 

Step 3: Consumers and Exploration

 

Then how leader can know when is proper time to develop new product?

 

 

知彼知己 百戰百勝

If you know yourself and know your enemy,
even though you fight 100 times you may win 100 times.

-Chinese proverb-

 

 

  First of all, leader should grasp the organization and consumers. Since there are plenty of data on organization analysis, this step will focus on analyzing consumers.

 

 

 

3.1. Consumer analysis

 

When organization wants to introduce new product, they test possibility before introducing to forecast demand. Jongseok Lee & Jeho Lee & Habin Lee (2003) divided consumers in IT industry into Ordinary users and Power users who are less sensitive to compatibility.  They insisted that “since new IT products are incompatible, they need enough power users when they want to introduce new IT product.” It drives us to conclusion which is “when you want to make new product, make something who your consumers want to buy”

 

Their theory can be applied on every industry. For example, when Food Company wants to introduce new types of food product, they need to know how many of your consumers didn’t get inertia and are curious on new tastes. They, early adopters are very important factor to grasp first impression of new product.

 

  Number of consumers who wants innovation (n) is number of consumer who are affordable for new product (b) among number of consumers who know about new product (p) and number of consumer who like new product (e)

 

 

 

 

Consumers’ layer on new product can be expand as following (in case it doesn’t get advertisement)

 

  

Figure 7 Consumers’ layer expansion model

 

  In fact, there are not many consumers who want to buy new product (or new service) right after they are introduced. General consumers choose to wait until the product settle and be stabilized.  This certifies the fact that early adopters are important when organization wants to introduce product or service with new concept.

 

 

3.2. Market analysis

 

 When organization develop new product, organization should put the exploration as an extension of exploitation or related with exploitation.

 

 However sometimes organization develop new product with totally new concept. In this case, organization needs enough funds to struggle while new concept compete pre-existent concepts which means until consumers accept new concept. For example, it took about 3years to be settled when Woongjin Coway introduced rental water purifier service in Korea even though they advertised about the service a lot. If Woongjin Coway didn’t have enough funds or profit for 3 years, they might be in tough period by now. And some other organization might take rental water purifier service in Korea.

 

 

 

Step 4: Case-study

 

Starbucks created new taste and new culture when Howard Schultz found Starbucks for the first and this was recognized as an outstanding exploration to the customers. After that, Starbucks choose to expand franchise branches instead of creating new culture and menu. However Starbucks didn’t recognize customers’ royalty limit line and economic crisis and Starbuck was still on exploitation when they passed those lines. Most of customers of Starbucks came from creation of new culture (exploration) . which means they are early adopter, power users and explorers.

 

  Customers of Starbucks got odious at Starbucks’ cultures and interior design which are same everywhere and finally left Starbucks for new tastes. Analyst criticized that Starbucks is a coffee selling fast-food branches and stock value declined 42% at 2007. (Yurim Kim, 2008)

 

Reaction of organizations on economic crisis were totally different. McDonald choose to explore, creating new menu (Mc-café and Mc-Morning) and challenged to Starbucks’ empire that advertising “No More Star-Café”. On the other hand, Starbucks choose to restructure and price cutting and insisted that Starbucks’ coffee are not very expensive.

 

To make a conclusion, Starbucks choose exploitation instead of exploration while McDonald is exploring. However they already passed customers’ royalty limit line. It’s time to explore for Starbucks.

 

Figure 8 Case of Starbuck and Mccafe

 

 

 

 

Step 5: Conclusion

 

 

This study incites us to analyze consumers and market before developing new product (or service) and let decision about exploration depends on types of consumers. The ability to read market is very important for leader. One of misunderstanding that leaders make easily is that “I can drive the market”.  However the market barely moves by organization. Hence organization should read the movement of market and get ready. Leader can analyze market’s movement and consumers’ needs with analysis on early adopters and power users. Before decide to explore, the leader should check 1) do we have enough profit(resource)?  and 2) are our customers ready to explore? If leader find that the answer for one of them is “no”, leader should consider seriously to exploit more.

 

 The leader should keep asking him/herself that “is it time to explore?” Otherwise, the leader will be absorbed in actual too long or chase unreliable utopia.

 

 

 

 

 

 

 

 

 

For further study; more precisive formula to predict consumers’ reaction on new product is needed.

 

Interplay between cost and exploration should be redefined and fragmented and case study to examine this theory is need.

 


 

 

 

 

 

 

 

 

References

March, J. G. and Weil, T. (2005). On leadership, Malden, MA: Blackwell Pub. ISBN 1405132477

 

Kwang-hyun Lee, (2003). Attack yourself, Korea Efficiency Association

 

Al Ries & Jack Trout(1997), Marketing Warfare, McGrawHill, ISBN 0-07-052730-X

 

Yongchae Park(2006), Sunsetting Sony Empire, Kyunghyang News, 2006-10-20

 

Jongseok Lee & Jeho Lee & Habin Lee(2003) , Exploration and Exploitation in the Presence of Network Externalities, Management Science, Vol. 49, No. 4, April 2003, pp. 553?570

 

Gupta, A.K., Smith, K.G. and Shalley, C.E. (2006), The Interplay between Exploration and Exploitation. Academy of Management Journal, 49, 693-706.

 

Changseok Baek (2006), Renew your brand, Samsung Economic Research Institute, Article Brand Strategy Series-4, 2006.03.13

 

Wonyong Cha (2002), Solution Business Marketing, Quality Management case-study(1960-2000), Goodmorning Media, 12.12.2002

 

Michael E. Raynor (2007), the Strategy paradox : why committing to success leads to failure, Deloitte Development LLC (2007) p.62

 

Kwang Choi (2006), Unengaged Telecommunication Policy (2/2) : Find Solution from Market, Hankook News, 2006/07/20

 

Yurim Kim (2008), Why Starbuck's legend collapsed?, Moneytoday, 2008.01.30