Applied Innovation Inc. Marketing Audit for Data Communication Network (DCN) Product Line

 

Andy Gruenbaum

 

March 10, 1998

 

• Introduction
• Part I. Marketing Environment Audit
• Part II. Marketing Strategy Audit
• Part III. Marketing Organization Audit
• Part IV. Marketing Systems Audit
• Part V. Marketing Productivity Audit
• Part VI. Marketing Function Audit
• Proposed Suggestions
• EXHIBITS

Introduction

Applied Innovation, Inc. provides data communications equipment for connecting Network Elements (NEs) with Operations Support Systems (OSSs) in a telecommunications service provider’s network. This equipment enables monitoring, management and software download from a centralized operations system to remote NEs, such as: CO switches, alarm systems, and SDH/SONET equipment.

Our product (as shown in Exhibit A) connects a variety of different equipment used at the phone companies. Applied Innovation’s (AI) Data Communication Network products allows one device to monitor hundreds of devices found at a phone companies central office (CO). When the DCN product is connected to all of the CO’s equipment, the DCN products have the ability to translate the equipment’s signal into whatever format the receiving piece of equipment needs to receive it.

As shown in Exhibit A, AI’s DCN product consists of a large metal box. This box has many slots to allow the insertion of plug-able cards. (See Exhibit B) Each card uses the box to access all the assorted abilities each card provides.

Part I. Marketing Environment Audit

Macro-environment

Demographics

• Demographically, the future looks very bright for Applied Innovation. As the population grows, so does the need for our product. Since our product is used by the phone companies to monitor their equipment’s effectiveness, the rapid expansion of telephone area codes requires additional COs which increases the demand for AI’s product. Also, since phone companies have a wide variety of equipment from a variety of manufactures within the COs, a piece of equipment that can communicate with all of this different equipment is almost a necessity. This product is the DCN product line. As AI’s customers add new equipment to handle present and future needs, the addition of new pluggable cards will allow the DCN products to communicate with the new equipment as well.
• As the telecommunication needs grow in third world countries, AI will continue to explore the possibility of growing internationally. This growth has been confirmed by recent inquiries from around the world. Many countries do not have phones in every household, but as this becomes a growing reality, the need to have AI products in the background monitoring the integrity of the network’s equipment will continue to grow.

Economic

• Because of heavy R&D expenses, AI did not show a profit for the year ending 1997. Thus, the stock price is below $8 per share which is very low. Since the stock price 3 ½ years ago was over $30 per share, concerns have developed within the investment community. A new CFO started almost a year ago. Within that time, much has been done to try and make AI more efficient. However, the challenge of how to address the future still exists. Most of the R&D budget is being spent on an internet based product. This product will not be released until later this year. Until the new product generates some income, the DCN products must continue to sell well. Additionally, the CFO has cut down on many of the lesser benefits. These sacrifices are all done in anticipation of the worst possible sales results for the new products.
• A press release from the first week of March announced AI is looking for a “strategic partner”. If this pursuit is successful, it might easily provide some relief. If a partner can help with the R&D expenses, the company will show some profit. This profit will make stockholders happier.

Technological

• The Internets growth has greatly affected the way the phone companies anticipate their future growth. Because of this, AI has found it necessary to incorporate Internet connectibility into the equipment sold to the phone companies. As needs change and competition develops, more specific needs will need to be addressed. In the past AI, was able to use its size to its advantage. If something needed done quickly, the AI engineering staff was able to work through solutions rather quickly. An increase in the number of customers has created challenges. As AI goes forward, it must focus on technology that will make the customers job easier.
• Often Applied Innovation is spoken as if there were an “s” at the end. This is not true, but the joke is often stated, “We have used our one innovation very well.” This part is true. AI has taken its one product, watched it mature, and then continued to add new abilities to the product line. AI recognizes its need to continue to provide products for customers that address their unique needs. Because of the incredible growth in phone traffic, this segment of the market is becoming more attractive. Companies that are very proficient in routing Internet traffic and companies that are very prominent in providing equipment located within the phone companies COs are the types of substitutes currently available. If AI fails to maintain its edge, it is very likely a competitor could sell its product as a true substitute for AI’s product.

Task Environment

Markets

• The market is expanding rapidly. The continued growth in cellular, pagers, home offices, and Internet usage has forced the local telephone service providers to add many services for their customers. As they add services, they must also try to stay ahead of the services the local competitors are providing. These competitors may be companies who are leasing services from the local provider, or they may be the cable or electric company taking advantage of their “right of ways”.
• As companies continue to search for ways to cut costs and as more and more competitors rise to compete against the Regional Bell Operating Companies (RBOCs or “Baby Bells”), AI’s products become more and more of an asset. In the local market, Cellular One has announced it will begin competing with Ameritech for dial-up service. After multiplying this competition for every market around the country, the growing need becomes clear. In order to remain profitable, competition demands being more conscientious of cost and expenses.
• Prior to competition, the “old way” of monitoring a CO was to have a person stationed there at all times. This amounted to approximately 3 ½ salaries (7 x 24) for each CO. With AI’s equipment, these salaries can be eliminated. The monitoring function is shifted to a network management location where many COs are monitored by a much smaller staff. If a RBOC had 650 salaries committed to monitoring the COs prior to installing AI’s equipment, they might only have 50 afterwards.
• Recent legislation has also complicated this area. To encourage companies to compete with the Baby Bells, the local Baby Bell, Ameritech, is typically put at a disadvantage. This recent legislation would mean Ameritech would have to give local competitors access to Ameritech’s COs. For Ameritech to give true access to the COs, Ameritech would need to give access to Ameritech’s support system. Because the Telecom Act states that all competitive providers, including Ameritech, must give all competitors that have equipment in its COs equal access to the networks management systems, the DCN product has great opportunity to grow. Since AI’s equipment gives access to the network management system, called the Operation Support System (OSS) within the industry, AI’s equipment allows Ameritech to adhere to this legal requirement.
• Because a company must have a “right of way” to run the necessary cables to provide any type of telecommunication service, right of ways granted for other purposes are now much more valuable. A natural gas company may now be selling phone service because it has used its right of ways for this additional purpose. As long as this activity continues, the possibility of Applied Innovation developing new customers is very good.
• As AI’s particular segment of the market is viewed as being more essential, competition arises. AI is beginning to compete with large companies who have yet to assign resources toward this particular market segment. As those resources are directed toward providing the type of equipment AI provides, AI will have to rely on the relationships it has with its customers. Without this relationship, many of AI’s “near” competitors could quickly overcome AI’s technical advantages.
• Because AI provides a product that can immediately save customers money, the customer benefits by installing AI’s equipment. The continued dependence on network monitoring equipment and the growth in competition will keep AI equipment profitable for its customers.
• Potential customers for AI products are: RBOCs; independent telephone companies; cellular; long distance; federal/ state/ local governments; power and utilities companies; military; railroad; cable TV; dispatching systems; broadcasting; wireless; and paging. If a company has a need to monitor a publicly available network and the equipment on the network, AI would be able to propose solutions for the company. Presently, the major carriers of telecommunication signals are the source of most of our sales. As other needs are discovered, AI will continue to explore them as well.
• AI has a licensing agreement with Cisco. This gives us the ability to sell their product in situations where we are not competing directly with them.

Customers

• The present customer base is comprised of the larger phone companies (i.e. Ameritech, Bell Atlantic, etc.). Many of their buying decisions are determined at a senior management level. During the buying process, the AI salesperson deals mostly with technicians, but typically a management person has to make the buying decision. AI is not alone with this predicament.
• Most of the purchases by the phone companies are based on budgetary constraints. Budgets often are monitored very tightly until the end of the year. Thus most of AI’s purchase orders are received in the fourth quarter of the year.
• AI has always been in the habit of working very quickly to address customers concerns. Because AI’s has less then ten major customers, AI has to be very responsive to keep these customers happy. If AI fail to keep one of its customers happy, AI may jeopardize more than 10% of its business. If AI spread its sales out over many more customers, this would not be as serious of a concern. Since this is not the case, AI will continue to focus on customer satisfaction and rapidly meeting their needs. AI has done a good job on service, but the competitive forces have made AI aware of the need to improve efficiencies and control cost. The sales force has continued to grow sales and continues to rely on sales engineers to ensure that AI products are properly working to meet customer needs.
• As with AI’s competitors, most of the customers in this industry are loyal. Typically, such customers have a substantial investment in the equipment already on-site. Thus, they are very hesitant to switch to other providers which would require new equipment. Fortunately, AI’s DCN product line has a chameleon like status. Because of the ability of the DCN product line to communicate with all types of manufactures equipment, our competitors welcome our product when it will allow their equipment to work with other company’s equipment.
• Due to the nature of the products, most products are sold under contract pricing. This arrangement makes the pricing of AI product a combination of variables, including delivery time, functionality, and quantity.

Competition

• In the network managing segment, AI is the largest supplier to this market segment. Competitors within this segment are Dantel and DPS. Any company involved in providing equipment for the phone companies would also be considered a competitor. These companies would include Fujitsu and Nortel which are both very large companies within the industry. The danger is how content will they be in maintaining their present position. If they see the network managing area as profitable, these competitors could devote a group of engineers the size of AI to work on the project tomorrow. AI’s success will be determined by how successfully it stays in its niche. If it ventures into an area that begins to intimidate a competitor, it could become very dangerous. If AI keeps its niche without branching out, it will continue to build its rapport with the phone companies it serves, and should be successful in the network monitoring niche.
• Applied Innovation is in the unique position of not having a “true” competitor. Companies might see us as competitors in one instance, and as a necessity in the next. If a potential customer already has equipment from company A, then company B will want AI involved because the DCN product will allow all of the equipment within the CO to communicate effectively. If a potential customer does not yet have equipment, company B would see us as a competitor. Since very few COs are filled with equipment from one manufacturer, AI is able to enjoy a special status within the industry.
• As networking equipment continues to be concentrated at Network Operation Centers (NOCs), AI may begin to compete more specifically with such companies as Cisco. This is a danger that could occur, but if it does, the relationships AI has with the phone companies will hopefully be its savior.
• As many communication functions are adapted for Internet deployment, AI and its competitors face the challenge of meeting this need. A whole new level of competitors may result from this development. Fortunately, AI has recently created a new division and is devoting substantial resources in Raleigh, NC to developing such products. Regardless of this fact, AI needs to be constantly tuned to input from its customers and its sales engineers. Further consolidations of Baby Bells and other carriers, will continue to justify the need for products that permit various equipment to communicate with each other.

Part II. Marketing Strategy Audit

Business Mission

• The mission statement (Exhibit C) is not clearly stated in market-oriented terms. In fact, it is probably not clear to many of the employees of the company. The marketing people might have specific problems using this statement as the basis for their marketing efforts The feasibility of the mission statement hinges on the final sentence, “Treating our customers as partners.” Because of the markets AI serves, it is impossible to continue to be successful without allowing our customers to provide direction in the process. A recent User’s Conference held in Tucson, AZ is an excellent example of how AI strives to be successful in this endeavor.
• A recent statement circulated by the VP of sales is from Winston Churchill, “The price of greatness is responsibility”. This statement is much clearer and makes it clear that the responsibility for the company’s success rests with the employees of AI.

Marketing Objectives and Goals

• The marketing goals for Applied Innovation are not spelled out clearly. The yearly goal is to grow our sales 15% over the previous year, but this does not give the direction that is necessary to fill in all the details that are associated with this type of goal.
• The selling cycle for AI’s products is unique. The selling cycle is 4 to 5 years once you even get in the door and are talking to potential customers. This makes some generalizations available for estimating yearly sales, but these could vary widely depending on the consolidations and upstarts within the industry. Thus, given the circumstances, AI’s marketing objectives seem appropriate.
• AI promotes its product as providing its customers the technology necessary to connect between old and new equipment, and even equipment acquired in the future.
• Historically, AI has been very niche focused. AI’s business is “control networks”. Whenever a customer has a problem even if the AI product is probably not the source of the problem, AI will send out a technical support representative to solve the problem. After the customer is running again, the details of who pays for what are sorted out.
• In the industry, it is important to be ISO, NEBs and Y2K compliant. AI products are and will continue to seek various approvals to give our customers continued confidence in our products.
• AI provides a case for our products made from 18 gauge steel. Competitors use lighter less sturdy materials. This durability gives AI products an immediate perception of quality.

Part III. Marketing Organization Audit

Formal Structure

• The role of director of marketing is a position which has recently been created. Presently, the company is searching for a suitable candidate to fill the position. The interim director of marketing is the VP of Sales. Although the VP possesses adequate authority, filling the director of marketing position is not the top priority.
• Due to AI’s size, many functions that are present in larger companies are not present within AI. Customer concerns are handled by employees at all levels. No one person is responsible for this function. It is a company wide commitment to maintaining customer satisfaction.
• The structure of the marketing efforts do not easily avail themselves to optimizing. As a relationship is established with a customer his needs are addressed. As the customers needs change, internal shifts are made to best cater to the level of service such customer desires.
• Because of the limited staffing, functions that might normally be marketing functions are addressed within other departments. Since there has never been a director of marketing and the function has always been handled by the vice president of sales, a strong marketing director will need to work to bring the varying marketing functions within his/her jurisdiction.
• At this time, a consultant has been contacted to give feedback on the best structure to use in developing the marketing function

Functional Efficiency

• For the most part, there are good communications and working relations between marketing and sales. This is somewhat deceiving because their is only one person within the marketing department at this time.
• In the past, AI only had one product line manager. The person who was in that role had been in the role less than 6 months. In the past two months, the addition of two new product line manager shows a commitment to filling a need, but it is to early to tell how successful these additions will be.
• Unfortunately, the records for profit and volume have not been maintained in such a way that any useable information can be gathered from them. Internal processes have recently been implemented which will enable this information to be gathered more effectively in the future. Once good information is available, the profits and sales volumes will be much easier to forecast.
• While new sales staff and product management staff have been added recently, the marketing department still lags far behind. Besides the need for training, motivation, supervision, and evaluation, this group of one also needs additional manpower to meet the growing needs of the additional sales staff. The changing market dictates the need for continued learning and training in the more technical areas of the telecommunications industry.

Part IV. Marketing Systems Audit

Marketing Information Systems

• Although AI maintains a library primarily to support the company’s engineers on the technological aspects of their jobs, over the past year, it has also been supporting the sales and marketing areas as well. However, due to increased demand for research, internal staffing is inadequate.
• Recently, a study was conducted by a third party. Within that study, information was compiled that allowed AI to accurately judge the effectiveness of its customers service representatives in dealing with customers issues. The study showed an 80% effectiveness rating. Compared to computer dealers which have a 77% satisfaction rate, AI is average. When compared with other communication equipment manufacturers that received a 94% satisfaction rating, AI needs to make some changes in order to better satisfy customer needs.
• The model where sales forecasting and market measurements are used does not really apply at AI. Because of purchasing cycles, the long period of time between first contact and a sale, and the amount of people involved, forecasting would not be very worthwhile.
• The usage of “indirect qualitative” research does have some benefit. After AI customers buy certain competitive products, sales of AI products often follow. This type of research is facilitated by AI being as close to its customers as possible.

Marketing Planning Systems

• Due to under-staffing and under-financing within the marketing department, marketing plans are not as well conceived or as effectively used as they should be.
• At this point, no decision support systems are available.
• Because a planning system has not yet been implemented, the company is very deficient in this area.

Marketing Control System

• Teleconferences are held at a minimum of every 2 weeks. At these meetings, salesman discuss their forecast, potential sales, and actual orders booked. This information is maintained on a consistent and constant basis.
• The recently hired sales manager uses the information to effectively schedule manufacturing. The fewer peaks and slow downs manufacturing experiences, the more effectively it will run. This, in turn, increases profitability for the company.
• Due to present economic conditions within the company, marketing costs have been under surveillance, although no request has yet been declined.
• Analyzing the profitability of all areas of the sales function has not yet been properly prioritized. The previous sales manager did not push for this type of information, and his other shortcomings have forced the present sales manager to prioritize his goals and profitability analysis as not being a foremost concern. The previous practice has always been, “if we are no longer receiving orders for a product, we stop making it.”

Part V. Marketing Productivity Audit

Profitability Analysis

• The profit margin on AI products is approximately 60-80%. The profit margin on AI products once all labor is included is approximately 50-70%. Because of the heavy amount of R&D necessary for AI to continue to be a player in the market, it is difficult to completely include these costs.
• Previously, the sales quotas were not broken out by different segments. Since most of the prices for purchasing of AI products are determined by contracts, the profit is pretty consistent within all markets.
• For AI to effectively take advantage of the changes within the telecommunication marketplace, AI needs to enter new markets and to expand within its present markets. These new markets would largely be international. All of Latin America, Asia, and even eastern Europe, are excellent places for AI to look for additional sales volume. AI can expand its market by continuing to add functionality to its present system. As the telecommunication landscape continues to change, customers will demand that vendors like AI give them features that are presently not available.

Cost-effectiveness Analysis

• The largest marketing costs is the use of outsides sources to perform many of the marketing functions. Many of the brochures, graphics, and photos are all contracted to outside companies.
• If internal marketing staff is added, many of the outside vendors could be used on a much more limited basis.

Part VI. Marketing Function Audit

Products

• AI’s product line objectives are to continue to offer new plug-in modules with additional features. Because of the recent addition of 2 new product line managers, any further objectives are largely unclear.
• AI continues to strive to reach further upward and further downward within its product line. Although under staffing limits the ability to bring products with some of the necessary features to market, an ongoing goal is to span upward and downward within the market niche. AI’s business is to manufacture inter-connective equipment. If we can build it bigger and better, we will.
• A variety of products have been phased out, but due to customer warranty issues most cannot be completely phased out until sometime in the next 2 to 10 years.
• To be successful, AI needs to continue to add products. Desirable products would address issues relating to newer protocols, higher data rates, lower power consumption, and lower costs.

Price

• The price for AI products is determined by competition and the perceived value. If we sell a plug-in module with 4 ports, and then another module with 16 ports, the module with 4 ports will be priced more expensively per port.
• The individual salesmen have very little latitude in setting price. Many of the contracts have a “favored nation” clause. This clause declares that AI must inform our customer who have this statement in their contract whenever we sell one of our products below the price they are paying. If specials features are added to the card that make a card unique for a particular customer, this clause can be largely gotten around.
• Lack of present staffing in the marketing department makes much of the research of competitors inadequate.
• Again, because of understaffing issues, the vice president of sales is reviewing all areas of the pricing strategy.

Distribution

• Because of the quantity and the size of AI products sold, AI works with a delivery company to get the product out in a timely manner. This is important because a fully built rack system can weigh several hundred pounds and be over 6 feet tall.
• The customer service department has increased its staff by 40% in recent months. Many of these positions were for installation engineers. AI’s goal is to make the introduction of new equipment into the customers network as seamless as possible.

Advertising Sales Promotion, Publicity, and Direct Marketing

• Because of the size of AI’s customers, AI is typically seeking them out rather than the customers seeking AI out in response to an advertisement. The purpose of the ads placed in trade journals is to maintain visibility. These ads generally do not help to achieve any specific sales goals.
• Because of the goals of advertising, the budget seems to be adequate. Nearly 4 years ago, there was no advertising. The themes have not changed much, but the presence of AI in the marketplace has been maintained.
• The tools have just recently been put in place to make use of direct, online, and database marketing. As the companies in the industry continues to grow, these method of generating sales will be much more of an asset.
• Again, the lack of proper staffing makes AI largely ineffective in this area. Many of the specific functions (PR and advertising) are handled by different departments within the company or by outside consultants.

Proposed Suggestions

The central problem within the marketing department is lack of staffing. This lack of staffing has made many of the customary marketing functions much more limited than they should be. With additional staffing, many of the outside contractors and agencies might still be used, but on a much more limited basis. This cost savings would allow some of the cost to be defrayed for adding staffing. After the additional staff has been added, many of the present marketing functions that receive little or no attention can be addressed. AI could begin maintaining a more thorough resource for competitive information. The new staff could also build a marketing foundation to anticipate market changes and to better support the salespeople. To effectively accomplish these tasks, the marketing staff will need to be better trained and current on product knowledge. Without additional marketing people, none of these other goals will be able to be achieved. Without new personnel, no amount of training, budgeting, planning or implementing of marketing control systems will have any chance of success.

Another issue AI needs to address is to make technology easier for its customers. This might be as simple as providing an “all-in-one” solution to fit many of the basic needs rather than a box with a seemingly endless amount of combinations to address basic customer needs. This could be done by taking a “cookie cutter” approach to solving our customers problems. Instead of the standard box with a variety of card combinations, a specific PC-looking box could be used to meet a specific need. This box could be pre-configured. The entire purpose of this system would be the customer’s ease of use. The ability of Internet web browsers to properly configure many varying types of equipment should also be taken into account. If each piece of AI’s equipment was an Internet server, it would allow assorted levels of hints to be available to support users as they configure AI’s equipment. These readily available hints would help users whether they were working with the equipment for the first time or the one hundred and first time.

Because AI has been so successful with its DCN product line, AI needs to continue to make the product as versatile as possible. To do this successfully, AI will need to continue to develop its plug-able cards with greater functionality and improved Internet configure-ability. Because AI’s customer base is a very loyal group, AI must continue the introduction and continued support of the DCN product line.

As AI looks to expand its market, the ability of the marketing department to address these concerns will be crucial. Since AI has been marketing its product within the U.S. for 14 years with no true competitor, it has products that have been well tested and are quite stable. For AI to be successful in international markets, it needs to only make slight modifications to the core product. Internationally, some additional methods are used to communicate between telecommunication equipment. The addition of these communication methods by way of additional pluggable cards will allow AI to move comfortably into these areas with little modification to the core DCN product. The recent hiring of the international sales manager is a giant step toward making the contacts necessary to achieve these goals. AI will need to proactively develop the functionality necessary to be successful in these environments. Additionally, product literature and all documentation will need to be available in a variety of languages. These issues and the above mentioned concerns make a very strong case for additional marketing staff.

As all forms of communication grow, so will the need to monitor the network equipment that provides these services. AI has already made some slight inroads within the cable industry, but the networks that provide cellular service, electric power, and communication within a companies network are largely unexplored. Finally, AI has developed a niche. If it tries to venture too far out of its niche, it will catch the attention of much wealthier and more technical competitors. If AI stays within its niche and makes minor adaptations to its DCN product, it will likely continue to monitor networks regardless of the type of signals the network is carrying.

To immediately improve the staffing of the sales and marketing department, a couple things can be done. First, the webmaster for AI is a member of the Information Systems department. If this position were to become a part of the marketing department, any time not spent on Internet related activities could be channeled into picking up the slack within the marketing department. Additionally, the Internet site could develop more of a marketing focus rather than “a place to lookup product documentation and new jobs.” This would by no means eliminate all of the staffing concerns the department faces, but it would help off load some of the excess work. Additionally, as greater importance is placed on international marketing, the AI internet site will become a greater source of company information. Although staffing needs within the sales coordinators has been changed, more can be done. A recent study was conducted within AI. This study found a customer order is carried almost 30 miles through the hallways of AI before the product is sent out of the door. If this very important process has so much excess involved in completing it, how many other processes have similar redundancies?

AI needs to sell service in addition to the products it sells. Currently, AI includes a large amount of service with the products it sells. This service comes at no additional cost and often leaves AI paying any outstanding costs, regardless of AI’s responsibility. If AI salespeople are able to sell product and charge an additional percentage of the product cost as part of an “on-site” maintenance agreement, AI would receive revenue not previously available. The cost of AI’s pluggable cards would likely drop slightly to compensate for this additional charge. The customer, however, would get additional assurance from AI that, if necessary, an AI technician could be rapidly deployed to help them with any problems that occur. If a problem does develop within the CO, AI will be available to support any problems the customer encounters, regardless of the equipment’s manufacturer.

In conclusion, with staffing improvements, AI can greatly improve its marketing weaknesses. Some of the present responsibilities, including the webmaster, need to become a part of the marketing function. Additional staffing will allow many of the functions that are not being addressed to get the necessary attention. To have a complete grasp on these areas, AI needs to better understand its competitors, the future of the telecommunication industry, and all of the many potential international markets. To maintain a grasp on all of these markets, consistent effort is necessary. The only way to remain consistent is through the hiring of individuals dedicated to these efforts. Once these individuals receive the necessary industry knowledge, they can help AI to determine markets, establish marketing plans, and become a company with the ability to address the needs of customers regardless of their language, equipment, or technical abilities.

 

EXHIBITS

Exhibit C Mission Statement

“The mission of Applied Innovation is to develop, manufacture, and market mission critical network mediation and interoperability products and services to provide our customers the ability to create and fully realize the benefits of open system networking. It is our intention to provide a supportive team oriented environment that helps each employee realize his or her full potential while pursuing the corporate mission. We treat our customers as partners in pursuing our mission.”