MK609 - Marketing

Case Analysis for

SR Corporation: Decisions for an Emerging Technology

October 7, 2009

Introduction

SR Corp was formed in 1986 to develop and commercialize advanced speech recognition technology. The company's mission was to deploy a new generation of speech transaction technologies, products, and systems that could be easily integrated into telephone and computer networks. The company's goal was to become the leader in a new realm of human communications.

SR Corp was financed by private investors. For the past eight years the company focused on developing its core technologies of large-scale speech recognition systems. SR Corp based their solution requirements on feedback from large companies in their target market segment.

The solutions developed by SR Corp are targeted at three distinct niches within the telephony segment of the speech recognition market:

• Fortune 500 corporations • Telephone companies • Telephone switch OEM's

Each niche market provides both opportunities and risks.

SR Corp products have shown to be much further advanced then the leading market research firms and industry experts expected at this point in time. The company also had several other advantages including: • Seven US and foreign patents with other pending that will be in force into the next century • SR Corp technology is different then AT&T and other larger competitors • The product and solutions are distinguished by o Speaker-independent with continuous speech recognition. Internal testing proved the solution had a 98 to 99 percent accuracy rate. o Availability of an application development component, TDAS (Transaction Dialogue Authoring System), for customers to design productivity solutions in a higher level language. o Designed to be integrated at a reasonable cost into the customers existing phone and computer networks o A 3 to 1 cost advantage over competitors for equivalent processing configuration

As of mid-year 1994, SR Corp had not sold any advanced solutions. The current perceived challenge for the executive management team was choosing which niche market to pursue in the coming year.

Problems

One investor summed up the problems by stating:

It all boils down to making sure the technology is bullet-proof and getting the right customer

However, these were not the only problems faced by SR Corp. The problems can be indentified in the following categories:

SR Corporation • Finances were precarious. The investors had already provided 10 million dollars in venture capital funding. The investors needed to see tangible sales before providing additional funding. • Inexperienced in running a manufacturing company with customers. Running a small development company is different than running a company with plants, more employees, multiple office locations, and customers. • The Vice President of Marketing, Darr Hasting, was a recent executive MBA graduate and felt insufficiently prepared to tackle the job before him. One could question the accuracy of his estimates for pricing and number of potential customers. • Hiring the right engineers to implement the solution could prove to be a challenge and it would take time for them to be productive.

Technology • The SR Corp solutions have not been proven to work in real world situations. Internal test result may be good (98 to 99 percent accurate) but will that accuracy rate hold true when the solutions are connected to a virtual hodgepodge of customer systems, applications, networks, and input is coming from a myriad of different phones, voices, and accents. • Possible litigation over intellectual property. Defending these types of cases could consume scare management and finance resources.

Market • Each market niche had different opportunities and risks; choosing the right customer is critical. • Demand was growing fast with estimates from a leading industry forum that annual sales will exceed $3Billion by the year 2000. Demand was being driven by the need to reduce operation costs. Time was of the essence for providing a reliable solution first. Fast growth in markets invites competition therefore new competitors are likely.

Competitors • Large firms, like AT&T, were aggressively trying to achieve the same level of technical performance. They stated they would not achieve 99 percent accuracy no earlier than 1998. • Unknown status of other competitor’s breakthrough technology.

Alternatives

SR Corp can consider the following alternatives:

• Sell their technology to a competitor, a telephone company, or telephone switch OEM. • Continue as ongoing concern marketing to the telephony market segment. If SR Corp decides to continue operations, selecting the first right customer will require a detailed analysis of the advantages, risks and recent events for each niche segment.

Fortune 500

Financial Summary

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Market Analysis and Environment Scanning

The advantages and risks for SR Corp selecting from customers in the Fortune 500 are identified below:

Advantages • Companies look to voice response and message systems as a way create efficiencies and automate operations. • Desire for a system that allows natural conversation exchange with a high degree of accuracy • They have shown a willingness to buy specialized software and turnkey system from smaller vendors • Require a software development environment allowing the internal IT staff to develop custom solutions without over reliance on the solution vendor • End users (the companies customers) are dissatisfied with existing functionality • Industry experts believe these companies would feel comfortable replacing existing solutions with voice commands once the accuracy rates exceed 95 percent • Estimated five customers in two first two years. The result would be approximately $34 million in net profit over two years (given the 50% discount price)

Risks • Typically a bureaucratic decision making process that requires approval and co-operation with several different departments • A steep leaning curve for the organization since internal resources are not familiar with speech recognition technologies • Long sales and implementation cycles • Many would be replacing existing systems that are only a few years old and not fully amortized • The applications are much more complex then simple directory assistance

Recent Events An airline executive clearly stated he would purchase SR Corps systems if the accuracy claims could be proven. This executive could make thing happen fast. The internal IT departments know little about speech recognition technology making integration difficult.

Telephone Companies

Financial Summary

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Market Analysis and Environment Scanning

The advantages and risks for SR Corp selecting from the telephone companies are identified below:

Advantages • Companies would experience substantial cost containment for operator services • Companies would have new sales potential for selling dialing services • The significant and growing cellular phone market (45% growth per year) provides a strong market for speech recognition services • Internal resource would experience a quick learning curve since they are knowledgeable in speech recognition technologies • Applications are relatively simple when compared with the Fortune 500 company requirements • Ten percent of the contract would be due at signing • Estimated two customers in two years. The result would be approximately $39 million in net profit over two years Risks • Project cancellations due to industry consolidation • Long sales cycles • Intellectual property lawsuits since telephone companies are developing their own advanced technologies • Most companies already had existing, less advanced, solutions in operation. The cost of switching would need to be recovered.

Recent Events A new industry report stated more then 70 percent of the survey respondents plan to renew or update their operator services in the next two years with automation. Speech recognition systems were the main interest. Providing a solution quickly was important since once a solution platform was selected new vendors would be basically locked out for two or years due to the need to amortize a large investment.

Telephone Switch OEM’s

Financial Summary

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Market Analysis and Environment Scanning

The advantages and risks for SR Corp selecting from the telephone switch OEM's are identified below:

Advantages • Looking for new technologies to add value to their systems • Strong position to disseminate SR Corp technology because the switches were installed in telephone companies central offices • OEM's show a strong tendency to purchase components from whatever firm had the best solution • Service, sales, and training would be the responsibility of the OEM • Ten percent of the contract would be due at signing • Estimated three customers in two years (18,000 lines). The result would be approximately $32 million in net profit over two years.

Risks • Little or no control in the method or timing on when the OEM's decide to market the technology • The sales cycles can approach two years due to integration and standards • OEM’s could prove to be a tough barrier to entry to SR Corp’s own direct sales

Recent Events Darr Hasting had given a guest lecture to a group of engineering managers. After the speech he was approached by a student and employee of a major telecommunications OEM. The company was designing a state of the art ATM (asynchronous transfer mode) switch which would be needed by telephone and cable companies to provide improved data services and video on demand. The student stated they needed to build the technology into the next-generation switch and wanted SR Corp to visit his company next week.

Assumptions

Financial • The estimates provided by Darr Hastings for pricing and number of customers landed in the next two years are accurate. • List prices may not need to be discounted as deeply as 50% due to the fact that SR Corp has technology that is not available from its competitors. SR Corp also has a 3 to 1 cost advantage based on the 5 line per unit configuration of the chassis. • Additional fixed cost would need to be determined for office support staff • The cost of goods sold has been accurately computed.

Technology • Once the competitors understand the solution, it cannot be easily replicated. The patents will be able to help protect SR Corp.

SR Corp Services – Additional Services • Each account manager would be responsible for additional add-on services including : o Knowledge transfer (customer training) would be sold as a separate service once the engineers completed installation. Customer training is not automatically included in the sales price. o Application development using the TDAS (Transaction Dialogue Authoring System) would be provided on a project or time and material basis for customers who did not want their IS departments spending time on these applications. o Annual system support and maintenance contracts would be available for purchase after the first 12 months.

Solution

The best solution for SR Corp would be to select the airline company within the Fortune 500. This determination is based on the following:

• Demand - The airline wants the solutions to reduce operating cost. They are willing to accept accuracy rates above 95 percent. They also have hundreds of applications that need to be developed. The TDAS development tool will be used for these applications. The applications and improved operational efficiency are the real value to Fortune 500 and telephone companies. • Breakeven - Of the three niche markets, the Fortune 500 provides the quickest breakeven point. • Multifactor Portfolio Matrix (a.k.a - The GE Matrix) – The industry attractiveness is high. Currently, the business strength of SR Corp is weak. They can move into average with success at their first customer. Then they need to set the goal to move into strong. • Risk – This provides the least amount of risk compared with the other two options. • Relationship - The airline executive clearly had a relationship with Darr Hastings since he called him and stated that he would purchase the systems if the accuracy rates can be proven. This executive has the ability to get things done in his organization. • Customer IT Knowledge – The lack of customer knowledge in speech recognition systems can be used as an opportunity to sell those service to the airline (Fortune 500) customers.

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| |Speech Recognition Industry | |SR Corp |
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Implementation

1. Secure contract with airline. To compensate the airline for the current lack of real world experience, the 50% discount will be offered one time. This contact will ensure additional funding from the investors.

2. Hire qualified employees. This is an extremely important step and care should be taken to hire the right people and provide them adequate training.

3. Assign a senior project manager to the customer’s account. The project manager will a. Create the detailed project schedule b. Assign resources to tasks c. Manage budgets d. Track issues e. Provide status reports f. Notify executive management of any issues that need to be resolved or that will impact the delivery date g. Develop a knowledge transfer plan h. Customer resources will also need to be assigned to the team

4. Continue to develop and improve the technology.

5. Market SR Corp Services a. Application development b. Training c. Maintenance and support

6. Start planning for the next airline customer. Once, the first customer has been successfully launched, others will follow suit.

7. As a contingency, a plan should be made to select a telephone switch OEM. This group would be the next best choice for SR Corp.

Measurements - Controls and Feedback

As stated in the beginning - The goal of SR Corp is to become the leader in a new realm of human communications. To achieve that goal will take several years. More intermediate goals would be:

• To become profitable in two to four years after successful implementation of the first customer • Successful implementation and integration into the customers systems and networks • Improve accuracy percentage • Ensure operational efficiencies expected by the customer are attained • Monitor the degree of difficulty for integrating existing customer system and applications

Reference Information

Marketing - Planning and Strategy
Subhash C. Jain / George T. Haley
2009 Cengage Learning
Case 9 - SR Corp: Decisions for an Emerging Technology Introduction