- Publication: “Cinco Días”
- Authors: Pedro Tellería, Hugh Small
- Date: February 22, 1994
Raising productivity and efficiency, cutting structural and operating costs, and reengineering processes are similar approaches that many firms treat as the only route to greater competitiveness—what we’ll call “Cost-Driven Competitiveness.” Yet corporate culture, labor constraints, limited investment capacity, and the long duration of change programs are some of the limits that make this approach unworkable in many companies.
In many sectors of the economy—developed yet not fully mature—there is room to pursue new market offerings as a strategic alternative to achieve competitiveness, profitability, and returns. We call this approach “Product-Driven Competitiveness,” based on differentiation and offer development as the means to attain margins superior to those of competitors. The term “Market Offer Development” should be understood broadly: new products and services, bundled packages, alternative distribution channels, and more.
Telecommunications operators are seeing worldwide that, even in a sector still growing in employment, margins from their core business—signal transmission and switching—are shrinking. That is why they are investing heavily in developing their offer to present additional services to distinct market segments, including mobile telephony in its various forms (pagers, cellular telephony, trunked radio), data communication services, satellite communications (mainly for broadcasting), phone cards (prepaid and credit), detailed billing, and so on.
This phenomenon is not unique to telecoms: in the 1980s commercial banking went through a similar evolution. While the sector’s initial goal had been to increase the number of people holding bank accounts, that decade saw a qualitative leap as banks began to understand that their profitability depended on their ability to develop new offerings. That shift in mindset drove the launch of services such as telephone banking; high-yield, variable-return, and home-savings accounts; and credit and debit cards. What we have seen in telecoms and banking applies well to other key sectors of the economy, such as tourism and leisure, insurance, and consumer goods.
Returning to telecoms, forecasts point to spectacular sector growth in Europe, from about 14 trillion pesetas in revenues in 1990 to 25 trillion by 2000. However, growth tied to basic telephony will represent only a modest share of the total; the most significant contributions will come from cellular telephony and advanced voice services (including intelligent network services and voice processing). Notably, much of the growth in basic telephony will result from innovative pricing systems (promotional bundles). This reinforces the thesis that the key to success for telecom companies will depend on their capacity to develop new market offerings.
Because telephone penetration in the United States has led Europe and competition has been far more intense, U.S. operators have built stronger capabilities to extend their offer. As an illustration, so-called “advanced voice services” (multi-services, custom calling, call return, phone cards, virtual private networks, etc.) reached a business volume of 20 trillion pesetas in 1992.
The pace at which American operators launch new services shows the importance they attach to this area and how their skills have improved. For example, in 1990 AT&T brought 188 products to market, far above the 76 launches the year before.
Operators place such importance on their ability to develop new offerings that it has been the main driver of some of the most recent and high-profile alliances. Several of these targeted Multimedia: US West with Time Warner, Bell Atlantic with TCI, NYNEX with Viacom, and BCE with C&W and Eunetcom.
Organizational approaches
Although at first glance launching new offerings may seem straightforward, the experience of companies that have tried it says otherwise. Functional organizations structured around existing product or service lines—scaled to today’s business volume—collide with the more dynamic approach required to develop new offerings.
The problems include, among others: the need to work with cross-functional groups; the need for highly agile, results-oriented business approaches; a mismatch between available professionals and required profiles; workload bottlenecks; hierarchical and bureaucratic obstacles; insufficient technical capacity; weak market knowledge; and make-or-buy decisions on outsourcing versus in-house development. Given how critical this is for corporate viability—and how difficult implementation can be—some of the most prestigious international consulting firms have worked on crafting methodologies and building multisector experience.
Arthur D. Little was a pioneer in this field and today has extensive experience and a strong methodological backbone. These methodologies, known as PCP (Product Creation Process), have been successfully applied with many clients across multiple industries and service sectors, producing very positive results. They not only deliver tangible outcomes but also establish new organizational models that persist within companies, turning new-offer launches into a routine part of the business.
Sources of ideas
A key aspect of generating attractive new offerings is identifying “Ideas and Launch Opportunities.” There are many ways to identify opportunities, and several are used frequently:
- Observe and copy developments in other countries. In Singapore, for example, the telephone operator charges a premium for especially memorable phone numbers—the so-called “golden numbers” (like 888-8888). This approach is easy to execute, but in a competitive environment it means arriving late to market.
- Exploit idle capacity and surplus resources. Surplus infrastructure or production capacity can be commercialized at marginal cost. For example, operators could use excess network lines and sell them for marginal applications such as remote alarms.
- Assess industry evolution and exploit synergies. Given the growing integration of telecommunications within the information industry, audiovisual offers such as cable television; transactional services such as teleshopping; and information supply such as access to databases can all be developed.
- Leverage changes in the regulatory framework. Liberalization trends in telecom are progressively opening business opportunities and allowing entry by new competitors. The proliferation and diversity of terminal equipment, the technological, infrastructural, and commercial push behind cellular telephony, and the rise of bespoke data-communication services for businesses are examples.
There are other, less commonly used sources of ideas that also deserve attention: analyzing customer needs, developing strategic objectives, and harnessing technological options.
1- Analyzing customer needs.
This is the path companies most often use, yet it has clear limitations. Airlines would probably never have invented “APEX Fares” if they had limited their inspiration to surveying customer needs. It is hard to imagine a respondent proposing a low fare that requires staying over a Saturday but no more than four consecutive nights, booking three weeks in advance, with no changes allowed.
In our experience there are three types of customer needs, each requiring a different search approach:
- Delight Needs. These are options users would never have imagined could be offered (a classic example, years ago, was mobile telephony).
- Performance Needs. These drive users to compare offers from different suppliers (e.g., the speed and detail of itemized bills).
- Minimum Requirements. The non-negotiable elements of the offer (for example, the accuracy of billed amounts).
How do we detect each type? Several procedures differ by need type. To uncover Delight Needs, one can study so-called “Lead Users”—customers who, due to their business demands or particular habits, anticipate broader market needs. In fact, the main reason telephone operators are so interested in the corporate private-network business is less profitability than the learning that comes from serving their most sophisticated clients. That knowledge can later be transferred to the public network and the wider market.
Another innovation source linked to these needs is studying behavior and analyzing the evolution of social habits.
To identify Performance Needs and Minimum Requirements, more conventional techniques are used: focus groups, measuring product-service usage, analyzing user complaints, and primary market research.
In the second part of this article, we will examine additional sources of ideas and describe the overall methodological approach to product and service development (PCP).
- Pedro Tellería is a Senior Consultant, responsible for the "Telecommunications & Information Industry" Practice for Spain and Portugal at the management consulting firm Arthur D. Little.
- Hugh Small is a Director at Arthur D. Little and leads the Telecommunications Sector for Europe.