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Case study questions


1. eBay is one of the only major Internet-based firms to consistently make a profit from its inception. What is eBay’s business model? Why has it been so successful?

eBay’s business model is in some ways a traditional intermediary. It takes a small cut of the money from every trade from the seller and the buyer (now with Paypal). The amounts of money are very small and it is simply because the business is online that this enables eBay to make the transaction cost so low. This in turn means that while it may only make a few pennies from every trade, millions of pennies soon add up to millions of dollars.



2. Other major websites, like Amazon.com and Yahoo, have entered the auction marketplace with far less success than eBay. How has eBay been able to maintain its dominant position?

It is true that eBay was not first in the market. It was one of the first and it bought up other online auction houses around the world. There are many reasons that lie behind eBay’s success, but the community of users cannot be overstated. It has worked hard to try to maintain the spirit of the traditional community of traders. It has used this to develop new services and it is the community of traders that has driven the new service development. eBay does not need to spend large sums of money trying to understand what the customers want because the customers constantly request and suggest changes.

The purchase of Paypal was a significant investment and successful move. eBay’s own online payment system was not liked. The purchase of Skype has yet to deliver. However, many opportunities exist.

3. Why did eBay ban the leaving of negative feedback on buyers? What has been the impact of this change?

eBay felt it had to act because buyers (the people parting with their cash) were receiving negative comments partly in retaliation from sellers who did not like any form of criticism. Even when the criticism may have been justified such as slow delivery or the item was not as described. Ultimately, buyers have power and eBay has returned some of the power back to them. If buyers began to walk away, the whole business model could have collapsed.

The impact of the change has been marginal. This is partly because of the continued growth albeit at a slower pace.

4. eBay makes every effort to conceptualise its users as a community (as opposed to, say ‘customers’ or ‘clients’). What is the purpose of this conceptual difference and does eBay gain something by doing it?

It is the eBay community which has designed the business model. eBay supports the desire to respond to the user community by employing approximately 5,000 people, about half of whom are involved in customer support and about 20 per cent of whom are in technology. eBay does not need to spend large sums of money trying to understand what their customers want because their customers constantly request and suggest changes. In 2003, for example, over 1,00,000 messages, in which tips were shared and system glitches highlighted, were posted by users each week. The technology systems that eBay has introduced over time enable the company to trace every move of every potential customer, yielding rich information that can be acted upon. In addition, category managers for eBay play a crucial role in the company’s development. Unlike others, say product managers in large firms, their roles involve listening, adapting and enabling. It is their responsibility to develop tools that help users buy and sell more effectively.



5. eBay has long been a marketplace for used goods and collectibles. Today, it is increasingly a place where major businesses come to auction their wares. Why would a brand-name vendor set up shop on eBay?

In 2004, eBay began offering commercial sellers the concept of a shop on the site, where they could direct consumers to view more of their merchandise. This has proved extremely popular for the large sellers.

The move in 2004 to sell an increasing number of goods at fixed prices, rather than through auction, was seen as controversial among some suppliers. So too has the strategy of attracting large corporate sellers – such as IBM, now the biggest supplier – which has raised fears among smaller, traditional clients. Such moves risk antagonising the ‘power sellers’, the army of entrepreneurs that have formed the bedrock of eBay’s sellers and make their living by trading on the site. They provide the liquidity that makes eBay the dominant online auctioneer. Many sellers welcome the changes because of the new buyers they attract to the site. Others, however, believe corporations will get special treatment from eBay and this will destroy its culture.

6. Many analysts have argued that by moving to fixed-price sales eBay is risking alienating its traditional community of garage/car boot traders. How can eBay stop becoming just another site for selling?

The answer surely lies in placing emphasis on its community of traders. This eBay community includes more than a hundred million registered members from around the world. It is this community that can make eBay different. It made eBay different, but recent strategic moves may be moving eBay away from its community of users to a more corporate business model. Ensuring the eBay community remains in control and has the power to change and influence trading will help.



7. Given the growth opportunities available to eBay, which ones and in which order should it develop?

VOIP, the online payment system (Paypal) and the eBay community should create new experiences and encourage new developer solutions at the intersection of the three businesses. How open the enlarged business is to the innovation in the developer community could well determine its success. There is a shared opportunity for the company and independent developers. eBay will undoubtedly find ways to achieve a return on the huge investment it has made in Skype, but the rewards could be all the richer if it opens the platform to outside influences. It is worthy of note that what was a weakness for eBay – its technology – has now become a strength.



Case study notes


This case study illustrates many of the obstacles and difficulties of launching a new product. The product in question used new technology that was initially rejected by existing manufacturers; it was priced at more than double that of existing products, but eventually captured more than 50 per cent of the UK vacuum cleaner market in less than four years.

Conventional wisdom would surely suggest that Dyson Appliances Ltd would fail within a few months. After all, it appeared to be a small company with an eccentric manager at its helm, trying to sell an overpriced product of limited appeal in a very competitive market with less expensive, conventional, mass-market products made by respected manufacturers whose names were, quite literally, household words. The result was very different.

Dyson invests heavily in R&D and believes that this is the key to success. Not all firms support this view. The level of investment in R&D varies considerably. The high value he places on creativity sets Dyson apart from other firms and helps explain his insistence on maintaining what, in Britain, are considered insanely large annual investments in research and development. Nearly 17 per cent of revenue regularly goes to supporting the company's R&D efforts, a figure some 10 times greater than the average in the UK. Because of these ongoing research expenditures, a company that started with just one product now offers more than a dozen – all either upright or canister vacuum cleaners, each a more refined and technologically advanced model than its predecessors.

Case study questions


1. Explore the key problems Dyson had to overcome?

This is a long list: design problems; a lack of money; lack of support from the UK government; lack of interest from existing manufacturers; lack of interest from retailers, etc.



2. Characterise the type of innovation and new product development in the mature vacuum cleaner market prior to Dyson. Are there other industries in this situation?

The emphasis was on motor power and suction. Increasing the size of the motor was deemed necessary to convince customers that the product was better. Prior to Dyson the vacuum cleaner was virtually a commodity product. Some retailed for as little as £40. Even the best-selling brand was £100. Dyson transformed the industry. NPD in the industry was on process innovation and cutting costs.



3. Manufacturing the product has turned out to be hugely profitable, yet this was not the original plan; why not?

Originally, Dyson was after a quick return on his money through royalties. He did not want to be a manufacturer. But being forced into manufacturing has turned out to be extremely profitable. This is similar to the Victorian entrepreneurs from Stephenson, Carnegie, Watt, etc.



4. Explain the rationale behind Electrolux and Hoover’s decision not to purchase the licence from Dyson. Given Hoover’s recent development of the Triple Vortex vacuum cleaner, how do you assess this decision? What level of royalty would have been reasonable for both parties, that is, Dyson and Hoover?

They clearly did not believe in the technology and/or thought the licence deal was too expensive. They also believed that their own technologists could deliver something similar. There are two strategies available here, both of which have benefits and risks.



5. Why is negotiating a licence for a new product so difficult?

This is because of the large number of unknowns, usually, unknown and untested technology – it could be wonderful or turn out to be a white elephant.

Examine the Dyson example; was his request greedy?

Many would say yes, given the unproven product.

Often, there is so much uncertainty about whether the product will work or whether there is a market.

Linked to this is the question of what is fair and reasonable.



6. How can businesses try to ensure that their senior managers (both buyers and new business development managers) do not dismiss exciting technology and with it potentially profitable business?

This refers to the rejection by domestic appliance manufacturers of Dyson’s product. There is no simple answer it is a collection of things that need to be done. Marketing and business development managers need to be technically aware and not technically illiterate. Good communication between technical and marketing departments can help here. New product proposals need to be viewed by a cross-functional team so that a multiple-perspective is achieved.



7. What is the role of patents? To what extent is it an effective system for protecting intellectual property?

The role is to provide a monopoly for the inventor. The objective is to act as an incentive to the inventor or entrepreneur. Creativity can lead to commercial rewards. Many people argue it is a system for large multinational firms only.



8. Not all firms invest in R&D. What should be the level of expenditure on R&D for a firm?

See Chapters 8 and 9 for industry comparisons of R&D expenditure. Some industries spend very little; what could happen if R&D expenditure is substantially increased?



9. Explain the very different market entry strategy used for the US?

The entry strategy for the US was based on an established brand developed at home. Extensive and unique advertising was used in the US to launch the product. It was a very successful launch.

One of the key problems faced was securing distribution agreements with the big US retailers (department stores, JC Penny). The retailers wanted reassurance that Dyson could deliver the products to the stores on time. This meant Dyson had to fill warehouses across the US with products. The penalty for failing to deliver was severe.

Dyson chose not to defend his patents in the US because he did not want to spend lots of money on lawyer’s fees.



Case study notes


The case study has been updated.

It would be difficult to examine the subject of innovation and new product development without reference to 3M. The company has become synonymous with product innovation. Year after year, 3M appears in the Fortune 500 rankings as the most innovative company. This case study explores why this is so.

Virtually all students will have used a 3M product, but very few will have extensive knowledge of the company or the vast range of products that it manufactures. Part of the rationale for including this 3M case study is to ensure that all students become more familiar with one of the most innovative companies in the world.

The case summarises some of the key successful techniques that the company uses. Many of these are not exclusively used by 3M. Indeed, one of the most important messages to get across to students is that the key to successful product innovation is good management. Moreover, it is the unique combination of activities that is, by definition, difficult to replicate that makes 3M successful.

The company has established an effective culture that nurtures innovation and it has developed a range of management techniques and strategies that together have delivered long-term success.

After four and a half years at 3M, McNerney left to take the CEO position at Boeing. Now his successor, George Buckley, seems to recognise the negative impact the process-focused program had on the company’s creativity. Many of the workers say they feel reinvigorated now that the corporate emphasis has shifted back to growth and innovation from McNerney’s focus on process and short-term profits (see Chapter 3 for more on the innovation dilemma).

This case study has highlighted some of the key activities and principles that contribute to 3M’s performance. Many of these are not new and are indeed used by other companies. In 3M’s case, they may be summarised as an effective company culture that nurtures innovation and a range of management techniques and strategies that together have delivered long-term success. Many companies pay lip service to the management principles and practice set out in this case study. There is evidence that 3M supports these fine words with actions.

The struggle between efficiency and creativity is one many public companies face. The market values of company stocks are impacted more by short-term results rather than long-term prospects; and executives have an incentive to drive those results.

There are no easy answers and the best solution most likely lies somewhere between the two extremes of either process control or open-ended innovation.

Case study questions


1. There are many examples of successful companies. To what extent is 3M justifiably highlighted as the ‘innovating machine’?

During the 1980s and 1990s, 3M delivered consistently good results and continued to deliver many new products across a wide range of industries. It was rightly classified as a highly successful and innovative firm. Indeed, it won the Fortune 500 most innovative company award for several years during this time. At about the same time, the business world analysts and business schools started taking an ever closer look at the influence of innovation on firm performance and hence, at the time, 3M was highly regarded and the label has remained.

It is true there are many other very successful and innovative firms such as Nokia, Sony, Apple, Microsoft, etc. Furthermore, arguably 3M’s performance has not been as strong as it was in the past. Some analysts have argued that it has not delivered in terms of return on its investment in R&D.

2. In the 3M case study, what is meant by the statement: ‘the message is more important than the figures’?

This refers to ensuring that employees realise that the 3M reward innovation even if there are times when the guidelines, for whatever reason, may be ignored. While a business may not deliver 25 per cent of sales from new products, so long as it delivers 15, 16, 17 per cent, that will probably be acceptable. Hence, it is about ensuring that the culture of innovation is enforced.



3. Discuss the merits and problems with the so-called ‘15 per cent rule’. Consider cost implications and a busy environment with deadlines to meet. To what extent is this realistic or mere rhetoric?

The idea that scientists can spend almost one day a week on projects that they find interesting seems a wonderful luxury – some may say an unrealistic paradise. What happens when there are turbulent times, unexpected events that cause disruption to the firm, surely then, critics would suggest employees would be required to drop what they are doing and ‘help out’. The firm’s response may well be that the 15 per cent is flexible and while they may be times when it is not feasible, over a long time frame, scientists are afforded approximately 15 per cent of their time. Moreover, they will be some who choose not to use this time. Once again, this is a flexible guideline that is about trying to ensure there is slack in the R&D environment for creativity.



4. Encouraging product and brand managers to achieve 25 per cent of sales from recently introduced products would be welcomed by shareholders, but what happens if a successful business delivers profits without 25 per cent of sales from recently introduced products?

Take the Post-It notes business for instance – for many years in the early period of its development, it could barely keep up with demand for existing products; so the idea that it had to deliver new products was almost humorous and certainly difficult to achieve. Moreover, any firm would probably have said keep doing what you are doing, the profits are great. The point here is once again the emphasis on delivering innovation and new products, in particular, forced the firm to at least think of the future and start considering new products. Arguably, this helped the firm deliver a whole range of different versions of the original yellow Post-It note. So we had different sizes, different colours and later, different types in the form of book marks and other forms of labels.



5. Some people may argue that 3M’s success is largely due to the significance given to science and technology and this is the main lesson for other firms. Discuss the merits of such a view and the extent to which this is the case.

It is unquestionably the case that the firm has an impressive record when it comes to investing in science and technology over a 70-year period. But science and technology alone is not enough as many once-successful firms will testify. Indeed, in the late 1990s, 3M came under severe pressure from investors to show some return from its investment in R&D; this was because profits were sluggish and the new product pipeline was looking empty. Good science alone is not enough; Alexander Flemming was credited with discovering penicillin, but it was 30 years later that a US pharmaceutical firm profited from antibiotics.



6. Explain how the innovation dilemma affected 3M.

The Six Sigma programme is a series of management techniques designed to increase efficiency. For the most part, the implementation of the Six Sigma programme was successful as it focused on the operations (manufacturing/logistics) side of the business. However, when 3M’s R&D personnel were asked to adopt Six Sigma processes, the results were less favourable. While established operational processes like manufacturing require strict monitoring, measuring, and a regimented set of procedures, the innovation process requires a different approach.



3M felt stifled by the new structure and pressured to produce more new products faster. The result was a greater number of incremental product-line extensions than true new product innovations. Traditionally, 3M drew at least one-third of sales from products released in the past five years, but in 2006 that fraction has fallen to one-quarter of sales. In 2004, 3M was ranked No. 1 on the Business Week/BCG list of Most Innovative Companies. In 2007, the company dropped to number seven.
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