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The aftermarket business strategy was conceived in 1906 by
King C. Gillette to sell safety razors and blades. It was Gillette’s idea to “give the razors away, but charge whatever traffic will bear for the blades.” Gillette’s aftermarket strategy and his safety razor patent made him a millionaire and the strategy, which became known as the “razors and blades business model,” is still successfully used by the Gillette Corporation nearly 100 years later.

Today the aftermarket strategy is used by a variety of businesses. Aftermarket sales often eclipse primary product sales for both profit and revenue generated. For example, 75% of aerospace and defense providers revenue comes from aftermarket support and related sales. Likewise, many other industrial equipment manufacturers rely on their aftermarkets for profitability. The same is true for certain categories of consumer goods—for example, inkjet printers and printer cartridges.

Below is a list of some common primary products and their aftermarkets. Click on the links below to run simulations of these aftermarkets.

Aftermarket Essentials

There are two essential parts to an aftermarket strategy: installed base and lock-in. The installed base is what makes the aftermarket so enticing to businesses because aftermarket products and services are sold repeatedly to the entire installed base of primary product customers. In order to sell to the installed base over several years, a solid aftermarket strategy requires that customers are in some way locked-in to using the aftermarket product or service.

Here’s a simple example that illustrates the power of a good aftermarket strategy and why the installed base is essential to aftermarket strategy success. Say you’ve patented a new three-prong staple and stapler. There isn’t a huge market for your new stapler. You only expect to sell one hundred per year for the next five years.

Selling 100 staplers each year means that your installed base is growing by 100 customers each year. After five years, you have an installed base of 500 customers.

Because your stapler is patented, your company is the only producer of three-prong staples. Not only do you sell your three-prong staples to your entire installed base of customers, but you’re repeatedly selling to them. Assume that each customer buys five boxes of staples a year. Your staple sales now look like this:

So selling just 100 staplers per year results in 2,500 boxes of staples sold every year after five years. By Year 5, you’re selling 25 times as many boxes of staples as your are new staplers.

Another appealing aspect to aftermarkets is that sales are less volatile than sales for primary products. For example, assume you stop selling staplers after Year 5. Even with no new stapler sales, if the staplers in your installed base are durable, you can still sell 2,500 boxes of staples in years 6 through 10. The magic of the aftermarket.

Try the aftermarket simulation to get a deeper understanding of the how this installed base works under different market scenarios.

Aftermarkets and Lock-In

If customers are able to buy their aftermarket products from competitors or third-party suppliers, then the whole strategy falls apart. Aftermarket sales are strongest when customers are locked-in to buying from the company that sold them the primary product. Customer lock-in can be achieved through a variety of means including service contracts, technology, service expertise, and patents.

Lock-in through service contracts has been used for years by mobile telecom service providers. Mobile service providers require long-term service contracts in exchange for free or deeply-discounted mobile phones.

Technology lock-in has been used by inkjet printer manufacturers with some success, although customers have complained that ink from printer cartridges can cost more than vintage champagne. Some inkjet printer makers install proprietary chips in their inkjet cartridges to ensure that customers can only purchase replacement cartridges from the company that manufactured the printers. These chips can also contain built-in expiration dates which will stop the cartridge from working, increasing aftermarket sales (but also potentially reducing product attractiveness).

Service expertise has been successfully used by car dealerships and manufacturers. Car companies provide special training and equipment to dealerships. Some vehicle malfunctions can only be diagnosed with manufacturer-provided equipment. This way the dealerships maintain their ability to provide aftermarket service to the customers they originally sold cars to.

Gillette and Schick patent their razor and blade designs to ensure third-party manufacturers can’t sell replacement blades. Since patents eventually expire, razor manufacturers need to innovate new designs and patents in order to maintain customer lock-in. This is one of the reasons for the recent feature escalation in the razor wars.

Making It Up on Volume

Aftermarket strategies are often used as part of a pricing strategy. A very simple aftermarket strategy is to deeply discount the primary product in order to entice new customers into the installed base. The idea is, even if the primary product is unprofitable, a profitable business can evolve in the long-term through aftermarket sales. Aftermarket strategies are an example of where you really can lose money on every sale and make it up on volume. Consequently, businesses with aftermarkets often compete very aggressively on price for new customers.

However, aftermarket differentiation based on price can lead to headaches later on, because differentiation based on price targets the most price-sensitive customers. Customers excited about buying a $50 inkjet printer aren’t likely to happily pay $40 for replacement inkjet cartridges six months later. This is why a cottage industry has formed around inkjet cartridge refills and customers feel cheated by paying a lot for inkjet cartridges—all for a printer that has a technology life of about three years before it gets replaced by something newer and better. Moreover, low priced primary products literally reduce switching costs, increase the ability of customers to switch out and shrinking the installed base and ruining the whole aftermarket strategy.

While pricing is one way to differentiate primary products, there are many other ways to successfully differentiate a product with an aftermarket in combination with price. For example, mobile phone service providers differentiate on quality and coverage. Similarly, jet engine makers differentiate on performance and reliability.

Aftermarket Success

What’s needed to create a successful aftermarket strategy?

1. Your primary product should be durable. Every primary product replacement is an opportunity to lose your installed base to competitors. Providing low-cost or free primary upgrades can reduce the likelihood that customers will switch to competitors.
2. Your aftermarket product or service cannot be a commodity. Lock customers into your aftermarket through patents, service expertise, service contracts, and technology.
3. Your aftermarket product or service should be provided to the customer repeatedly and frequently. This way, you leverage the value of your installed base of customers.

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Simulation learning sequences

Typically, a business simulation is just one part of a complete e-learning program or workshop. Preparation, summarization, and testing are essential to help learners interpret and structure their experiences from the simulation.

There are different simulation learning sequences that can be built to achieve these objectives:

Classic learning sequence:

The classic learning sequence, with simulation is a simple structure that is familiar to most students. The way that we’ve presented PDA Sim here roughly follows this sequence, except that there is no test at the end.

Knowledge paced:

Knowledge paced sequences are good when the simulation needs to handle students with different backgrounds or skill levels. Students can advance to the level they find challenging. Students can play multiple times at one level.

Exploratory simulations:

Exploratory simulations are good for educating employees about major company changes or to provide an experience to students. The simulations are intended to provide users with an opportunity to experience what the future might be like for the company or organization.

A few weeks ago I was watching my 5 month old son, Jonah, lie on his belly and reach for a colored block just out of reach to his right. He reached for the block and kicked his legs, successfully moving sideways a small amount, but unfortunately away from the block. He kicked and rotated another inch, again in the wrong direction. With an intent look on his face, Jonah kept straining to reach that block, moving a little more away from it each time. This affair reached its logical conclusion 10 minutes later, when he’d rotated almost 180 degrees, couldn’t see the block anymore, and erupted in loud howls of frustration. (At which point I picked him up and gave him the block).

Motivation as a Catalyst to Learning

This incident made me think about the connections between learning, frustration, and motivation. (also about the nature of unintended consequences to one’s actions (PDF), but that’s another article). Most learning involves significant challenges that can pose intellectual and emotional obstacles to learning. To surpass these difficulties, a learner must have the drive to stay engaged, reflect on the experience, and try again. In Baby Jonah’s case, he kept trying to grab distant objects repeatedly over the next few weeks. This persistence led him to the point where he became a real pro at those important baby mobility skills of rolling around, scooting sideways, and in general, being able to explore his immediate environment.

Admittedly, my son’s motivation is usually the urgent desire to grab anything colorful and put it in his mouth. However, adults have a complex (and often hidden), set of motivating factors.

As an example, last year we held a contest involving PDA Sim, a simulation on our web site. One of the participants, Mike Flanagan, wrote an article about the experience in Online Learning. He described his motivation as based on the classic human drivers of Greed (to win the prize), Impatience (the games were short, so he got quick feedback), and Pride (a public “high score list” motivated him to do well in the simulation).

With simulations, the need to understand motivation is particularly important. Much of the learning that comes from a simulation experience is self-driven. A user who sits in front of a computer and runs a simulation must actively go through the learning cycle: reflect on the business issues, choose a strategy; make decisions, and observe the consequences of those decisions. Without this self-directed effort (and it is a significant effort) the simulation becomes little more than a video game. In the worst case, it becomes a frustrating exercise in which the user gets farther and farther away from the goal, much like Jonah and his blocks.

Motivation in Organizations

In an organizational setting, people may take part in a learning experience for a variety of reasons.

• They may participate in workshops and web content related to an organizational-wide initiative (e.g. a focus on building customer loyalty).
• They may start a new project or position that requires a particular skill (e.g. a course for new managers).
• They may be legally required to attend a workshop (e.g. sexual harassment).

In each of these cases, learners will range from highly enthused to barely interested, depending on their background and experience.

An extreme case of organizationally-induced motivation occurred a few years ago, when I helped develop a simulation for large manufacturing firm undergoing major restructuring. The simulation was used by the top 100 managers during a week workshop covering a variety of issues all present in both the real business and the simulation. In the first session, the CEO introduced the new organizational chart, with one major slot (head of North America) unfilled, announcing he would temporarily take that role. A new compensation scheme was unveiled, in which Economic Value Added (EVA) played a major role. Not coincidentally, we’d designed the simulation so that the key indicator of success for each team was the EVA of their simulated business. To add to the tension, all the senior executives rotated around the teams, observing the discussion and decision-making process. The result was a highly competitive simulation game in which some key issues of competitive strategy were highlighted in a manner unlikely to be forgotten by any of the managers. The winners invested early in key markets and held a strong lead throughout the simulation. At the end all the team members received a medal. The losers lost market share in the third round and found themselves strapped for cash, unable to invest. They received… a copy of the winning team’s strategy.

Designing Simulations to Engage Users

Without necessarily instilling the same level of stress in the users, how can we design a simulation to be a engaging and learning experience?

The number one rule is:

To answer this, consider who the intended users of the sim are. What’s their professional and educational background? What’s important to them, both in business and personal life?

The corollary for this rule is: build the simulation with the audience in mind. Ensure the simulation covers the business issues at the right level for the audience. Make sure the look and feel is something they expect. Include an appropriate amount of explanation and help files.

For example, a simulation for senior executives should focus on the major strategy issues of the company. It should look business-like, with lots of spreadsheet-type reports and graphs. It should be easy to use, but without unnecessary clutter.

As a contrast, a simulation designed for mid-level sales and marketing managers attending a conference might have a fun look and feel, with multimedia snippets highlighting key trouble-spots or successes. It could include features that encourage communication of ideas during the conference (such as a page to post strategies and scores), and provide easy-to-use guidelines and tools that the managers can take back to their jobs after the conference.

Users who run a simulation relevant to their needs will almost automatically be more engaged than those who encounter a simulation designed for someone else.

Another rule is:

It’s useful to know the particulars of how a typical user ended up in the driver seat of a simulation. Were they told by their boss to take an online course? Was the simulation promoted in a particular manner? Are they facing new challenges in their jobs and looking for a particular insight? Is the simulation a main focus for them during the time they run it, or will they constantly be distracted by the daily routine of their work life?

This information will help you understand both how intrinsically motivated a user is, what’s on the top of their mind as they run it, and also what content needs to go into the simulation.

Competition can add significant excitement and energy to a simulation. In Forio simulations like PDA Sim, and Leadership In Action, we’ve had tens of thousands of people play the simulation and post their high score with a description of the strategies they tried to employ. In some cases, a group of people kept playing, leapfrogging each other up the list. The key thing to remember is that competition is only a means to an end; the objective of getting the high score should not overshadow the goal of learning itself.

An oft-ignored aspect of simulation design is the gap between developer expectations and user reality. In part, this is the nature of e-learning; users operate the simulation in a location far removed from the developer and instructor.

Forio’s subscription simulation service, Forio Broadcast Pro, automatically tracks every page viewed by every user, click by click. This is a useful way of checking assumptions on usage. In one simulation, we included some fancy reports, but later discovered no one was viewing them. As a result, we made sure that they only included extra background information and not critical data on those pages. (We could have also redesigned the navigation to make the links to those pages more prominent). In another simulation, we discovered that users started the simulations, viewed the initial graphs and reports, then quit without stepping the simulation. It turned out that the target audience didn’t understand they were supposed to click “Advance Time”. We added explicit help instructions that told users to go step by step: viewing results, entering decisions, and advancing time.

Michael Bean has written a great paper on this available elsewhere on the site. More users will play the simulation and will be successful in learning from the simulation if they don’t encounter user interface obstacles. A few guidelines: the simulation should load quickly, start without many extra pages, avoid incompatible software/hardware issues, and help the user remove/ignore environmental distractions.

This rule is obvious to some and ignored by others.

Michael Bean describes both Fun and Accessibility as two of the four critical elements of F.A.C.E. value (fun, accessible, clear, educational) that make a successful simulation.

Create a simulation that is fun, and users will play it again and again. They’ll recommend it to their friends and colleagues, who will go to the web page or sign up for the course. As Michael says:

“Fun simulations are memorable experiences. People play and learn from them without being compelled to. A community of players spontaneously forms around the simulation. Without realizing it, they develop and internalize rules for success that they can intuitively apply in the real-world.”

To conclude, I have to go back to my champion scooter. By staying focused on the task at hand despite his frustration, he eventually reached his objective. His excitement at accomplishing this task and sharing it with his community (his parents) was matched only by his determination to go after his next challenge… standing up.

Again, the guidelines on motivating simulation learners:

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One of the great advances of the industrial age– division of labor– has only recently been gaining widespread adoption in the Internet world. This is in part due to the history of the web itself.

Early web pages consisted of static text and pictures, stored as HTML files on a server. Corporations put brochures online. Individuals shared travelogues, resumes and lots of silly lists. Research groups enlivened their collections of scientific papers with an occasional live camera pointed at a coffee pot.

Putting up a static web site was (and still is) quite simple. Create an HTML file using either a text editor or a graphical tool, and upload it to your server. Presto – you’re on the web! Amateur (and then professional) “Webmaster” roles sprung up in which one person had primary responsibility to create and maintain a web site.

Later, web sites became “dynamic web pages,” which allowed users to interact with a web site and view web pages dynamically generated in response to their inputs, often based on a database or simple set of responses to user inputs. These web sites ranged from sites that would search databases of DNA sequences to sending electronic greeting cards.

These early dynamic web sites were often still created by one person, who was more of a “web guru” or “web monkey” than a graphic designer. Many of these sites were built using CGI (Common Gateway Interface) scripts written in a language called Perl. Typically, each page would be created by a CGI script which would analyze the user input and return HTML. Perl is still used as part of many sites today, including Forio’s Forum. (One of the reason for Perl’s continuing popularity is that there are thousands of public domain CGI scripts available to solve simple web tasks). Here’s a small excerpt that generates a layout table listing a Forio article.

Note how easy the code is to understand– after you spend a month banging your head against the infamous Camel book.

The problem is that people who are good at creating Perl scripts to create dynamic web pages (or in using other technologies, such as Active Server Pages) are not necessarily that good at things like graphic design or usability. (or at least it is rare to find someone good at both). And the nature of Perl is that the HTML code that determines graphic design is woven incomprehensibly into the programming code that controls the logic.

The third phase of web applications involves sophisticated web sites in which the static and the dynamic web pages are largely indistinguishable. Millions of consumers regularly access the web sites of banks, brokerages, retail outlets, and e-learning companies, entering information and performing transactions without a second thought. To develop such elaborate and robust sites in a cost-effective manner, a more efficient way of developing the sites was needed.

The Wealth of Nations

The solution comes directly from the philosophical guru of the Industrial Age, Adam Smith. In the Wealth of Nations (1776) Adam Smith said:

This basic principle created the fortune of many a nineteenth century robber baron. Samuel Colt invented the modern firearm industry in 1856 by building a plant in Hartford, Connecticut that used precisely machined interchangeable parts. A year after production, the plant was making an unprecedented 150 weapons a day (and making Colt one of the wealthiest businessmen in the country). Henry Ford was in a similar position in 1903, when he was running a small operation in which 2-3 men built cars from components that were made to order. After launching the famous Model T in 1908, Ford built a new plant that combined precision manufacturing, standardized and interchangeable parts, a division of labor, and, in 1913, a continuous moving assembly line. Ford’s production of Model T’s made his company the largest automobile manufacturer in the world.

It is only recently that web developers en-masse have realized that web applications must be created in a similar fashion (with division of labor and standardized architectures). The challenge (detailed in the next section) is to create a mechanism that allows each worker to combine together steps in the web development effort as efficiently as Samuel Colt manufactured his firearms and Henry Ford his cars.

To sum up…

Model-View-Controller

Go to any web seminar these days and you may hear the commandment: “thou shalt separate the business logic from the presentation logic”. What does this mean and why is so important?

Typically, they are referring to the first two of the three primary components of a web application:

The term “Model-View-Controller” (MVC) comes out of Smalltalk but has been popularized by Sun Microsystems. Sun writes about this on its Java web site java.sun.com. (The term J2EE refers to Java 2 Enterprise Edition, Sun’s platform for enterprise development.)

Not discussed in the Sun excerpt is the efficiency boost a development team gets from being able to staff a team with members who are highly skilled in one area of web design (such as graphic design) but not in others (such as programming). A key goal is to have the entire team efficiently working in parallel, able to update and revise each part of the site logic without requiring changes in any other part.

There are a number of different technologies that have been developed in the last year to support MVC web development including JSP pages, Java Servlets and WebMacro.

MVC Applied to Business Simulations

Although many early web-based simulations were hand-crafted, the MVC approach applies naturally to business simulations. As an example, a Forio business simulation such as the Pricing Simulation breaks down as follows.

A typical business simulation development team includes a modeler and a web designer. The modeler builds the model using commercial business model software. Similarly, the web designer builds the web pages with a web design program or a text editor. All Controller functionality is included in the packaged product Forio Server– no programming expertise is required to build a custom business simulation with the Forio platform.

As a side note, a template approach is used to allow the web designer to create dynamic web pages. the designer creates the web page, and includes simple Forio Macro Language (FML) statements such as “$Variables.Price” to indicate where the value of the “Price” variable should be inserted. For example, including in the HTML file the line “The competitor price is $Variables.Price” causes the output to the end user to be “The competitor price is 23″ if the variable Price in the simulation has been set to 23. (For more information on FML, read the Support Section of Forio Broadcast).

A contrasting (and older) approach in the online simulation world is analogous to the “dynamic web page” scripted approach discussed above. Several commercial software vendors with legacy desktop software have implemented this approach by adding a Web API to their desktop products.

Similar to the MVC architecture, this approach abstracts the model equations away from the simulation (allowing for easy updating of model assumptions). However, creating and maintaining the interface requires script programming experience. Consequently, development requires programming expertise and typically takes longer to complete and revise.

Conclusion

Programming a web application (or simulation!) directly works great if you are the only person on your team, and you anticipate building a small application. But for any sizable application, taking a MVC approach (and in particular, separating the View from the rest of the application) can speed up development by a significant amount. End users and clients will almost always request changes to an application once it is developed. By separating the View from the Model and Controller up front, you can drastically reduce the effort and cost to make these changes and provide higher levels of satisfaction to your end users.

Many decisions must be made in creating a learning lab. These decisions include both big ones (what type of issues the simulation should address) and small ones (what type of computer equipment to use). Three critical factors that drive many of these design choices are the levels of detail complexity, dynamic complexity, and simulator interface sophistication included in the learning lab. These can be summarized on a three-dimensional axis.

from Designing Effective Learning Laboratories, published February 1998 in The Systems Thinker.< ?P>