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The Good News and the Bad News of Reliability in Product Innovation

Over the years, we have studied several thousand customer buying decisions. We concluded from these studies that customers buy in a hierarchy of needs: Function, Reliability, Convenience and Price. Functions describe how a customer uses a product. Reliability defines how the company fulfills the promises made or implied to the customer. Convenience indicates the ease with which the customer can find, purchase and install the product.

Reliability is critical to a company’s success in any market, save the very fast growing, newly-developing markets. (See “Reliability: The Hard Road to Sustainable Advantage” in the Perspectives on StrategyStreet.com.) And, even there, it quickly demonstrates its value to a company who would rely upon it. Reliability indicates to the consumer that the product works, or will be fixed quickly if it fails. For the distributor or retailer customer, Reliability of a manufacturer indicates that the product will be delivered as and when it is promised and that the company will maintain a consistent market presence with the retailer or distributor.

Reliability innovations are powerful factors for both good and bad. Two examples.

A good news story. I traveled to Philadelphia recently. The Philadelphia natives speak fondly of Wanamaker’s department stores, gone now for several years. The department stores are now part of Macys. At its beginning, though, Wanamaker’s built its success largely on Reliability.

John Wanamaker started his first store in the late 1800s. People called him “Honest John.” He attributed his success in business to his golden rule of “fair value, courtesy and satisfaction.” He spent much of his time working to gain the trust of his customers. This trust bred customer loyalty, which led to bigger sales and profits. He taught his sales people to avoid pressuring customers. They should, instead, act as guides for them around the store. This created a bond between the sales associates and customers. Some of these sales associates worked for Wanamaker for over thirty years and kept their customers coming back. The pricing practice at the time was to haggle with customers around the list price. Wanamaker did not like that. He listed one price and then promised a money-back guarantee if the customer were not satisfied. These tactics certainly paid off for Wanamaker. By 1900, he was the largest retailer in the world.

Advance Micro Devices offers a bad news example of the power of Reliability. In the fall of 2007, the company introduced the Barcelona chip product. The Barcelona chip was part of the Opteron family of chips, which offer customers higher performance and higher prices than the average chip in the marketplace. Unfortunately, Barcelona was late to the market and, worse, had early technical problems. These Reliability failures contributed to substantial losses for the company for a year. The big beneficiary of AMD’s problems has been Intel. Intel now has an 81% share of chips for PCs and servers. That share has risen more than four percentage points from 2007. AMD’s Reliability failure opened the door for Intel and Intel was able to take advantage of it.

AMD learns from its mistakes, however. It has come back strong in the past. Recently, it introduced the Shanghai chip to replace the Barcelona product. AMD did not release Shanghai until it was thoroughly tested by beta customers. Perhaps Reliability will start to work in favor of AMD this time. (See the Symptom & Implication, “Competitors are emphasizing reliability in product quality” on StrategyStreet.com.)

Posted 12/8/08

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