Efficiency
Meeting needs
Generic Strategies
December 28, 2009
Entire market
Part of the market
Full line segmentation
High value niche
Ford: Aston Martin, Jaguar,
Lincoln, Mercury,
Volvo, Ford,
Mazda, Land Rover
Wal Mart
Hepol Electric Enterprises
Ford (Model T)
Cost leader
Koenigsegg, TVR,
Mercedes, BMW
Chery (China)
Tata (India)
Low price niche
Simon Rodan
1
Profit maximization without segmentation
Price
P*
One big segment
(Ford Model T)
quantity
December 28, 2009
Simon Rodan
2
Profit maximization without segmentation
Price
P*
Luxury
Mid range
Compact
quantity
December 28, 2009
Simon Rodan
3
Differentiation / segmentation
Competitive differentiation
Yes
1
Yes
Product
Segmentation
No
December 28, 2009
No
2
High profits
Low rivalry
Non-competing products
Price discrimination
3
Moderate profits
Moderate rivalry
Competing products
Price discrimination
4
Moderate profits
Moderate rivalry
Non-competing products
No Price discrimination
Simon Rodan
Low profits
High rivalry
Competing products
No price discrimination
4
Intermediate summary 1
► Two
broad generic strategies
• Segmentation & Cost leadership
► Each
comes in two ‘flavors’,
• Covering the entire market and addressing only a
small niche
► Segmentation
is close to price discrimination
(like an auction)
• Maximizes firm appropriation
• Can serve to reduce segment competition
December 28, 2009
Simon Rodan
5
A product market with one segment
Value ($)
Everyone likes red cars. No segmentation possible
e.g.
Aluminum baking foil
Dry wall
Car color
December 28, 2009
Simon Rodan
6
Which strategy to choose?
► When
to choose cost leadership vs.
product segmentation?
► First, are there different market segments?
► Next…
• Need to look at the value created or released
by increasing variety…
• And the associated increase in production
costs
December 28, 2009
Simon Rodan
7
A market with two segments
Value ($)
Should we segment the market?
People who prefer
red cars
People who prefer
blue cars
Car color
December 28, 2009
Simon Rodan
8
Segmentation
Value ($)
People who prefer
red cars
People who prefer
blue cars
Car color
December 28, 2009
Simon Rodan
9
Low cost
Value ($)
People who prefer
red cars
People who prefer
blue cars
Value accessible with segmentation
Value accessible without segmentation
Car color
December 28, 2009
Simon Rodan
10
Costs rise faster than price
with product variety
Cost leadership
Price
Cost
1
December 28, 2009
2
3
4
5
6
Number of product variants
Simon Rodan
7
8
9
12
Prices rise faster than cost
with product variety
Differentiation
Price
Cost
1
December 28, 2009
2
3
4
5
6
7
Number of product variants
Simon Rodan
8
9
13
Segmented markets
Red car market
Value
Blue car market
Value
Q cars
Price
Price
Cost
Cost
Red cars
December 28, 2009
Q cars
Blue cars
Simon Rodan
14
You can have any color you like…
(as long as its magenta)
Red car market
Value
Q cars
Price
Blue car market
OR…
2Q cars
Value
Cost
Value
Q cars
Price
Cost
Price
Cost
Red cars
December 28, 2009
Magenta cars
Simon Rodan
Blue cars
15
Prices rise slowly at low product
variety but quickly when variety is high
Cost leadership
Differentiation
“Stuck in the middle”
Not enough scale to generate low costs
Cost
Price
Not enough variety to meet customer
needs, create value
1
December 28, 2009
2
3
4
5
6
7
Number of product variants
Simon Rodan
8
9
16
Stuck in the middle
Meeting needs
Efficiency
December 28, 2009
Entire market
Part of the market
Full line segmentation
High value niche
Not enough scale to generate low costs
Not enough variety to meet customer
?
needs, create value
Cost leader
Low price niche
Simon Rodan
17
Intermediate summary 2
► If
prices can only rise slowly with
increasing segmentation (variety)…
• i.e. high cross segment price elasticity
► …and
costs rise faster than price with
increasing segmentation (variety)
► Choose a cost leadership strategy
December 28, 2009
Simon Rodan
18
Intermediate summary 2
► If
prices rise quickly with increasing
segmentation (product variety)...
• i.e. low cross segment price elasticity
► …and
costs rise more slowly than price
with increasing segmentation (product
variety)
► Choose a differentiation strategy
December 28, 2009
Simon Rodan
19
Intermediate summary 2
► If
prices rise slowly with increasing
segmentation (variety) at low levels of
segmentation…
► …but rise steeply when differentiation is
‘extreme’
► Choose a either high differentiation or cost
leadership
► BUT don’t try both…
• → Stuck in the middle
December 28, 2009
Simon Rodan
20
Reducing asset specificity
► In
the 1980s, it took Ford, Chrysler or GM 8
hours to change a body stamping die.
► Building two models meant either having
sufficient volume for a dedicated line or
changing the dies on a single line
► Toyota saw that the obstacle to greater variety
(increasing costs) could be reduced if die
changing times were cut:
• to 10 minutes (Ten Minutes Exchange of Dies)
• and later to a single minute (SMED)
December 28, 2009
Simon Rodan
21
Other Advances
► Computer
aided design (CAD) and
computer aided manufacturing (CAM)
► Robots can switch effortlessly from one
model to another
► Shared 'platform' (common components,
chassis / drive train: Trucks == SUV
► While the initial investment may be large,
once made variety is ‘costless’
December 28, 2009
Simon Rodan
22
Flexible manufacturing
Meeting needs
Efficiency
December 28, 2009
Entire market
Part(s) of the market
Full line segmentation
High value niche
Not enough scale to generate low costs
Not enough variety to
?
1) Accurately meet needs, create value
2) Get close to needs than competitors
Cost leader
Low price niche
Simon Rodan
23
Differentiation =>Higher prices
Rare, inimitable
Competitors cannot
raise prices
Prod Quality, Cust.
Responsiveness
Higher value
for customer
Higher prices
= profit
►
• Customer needs, new
product specification
• Brand development
O.H.
H.R.
R&D
I.L.
purch
December 28, 2009
Mfact
Sales
& Mkt
Sales & Marketing
►
O.L
distn
Cust
supp
Simon Rodan
R&D
• New products and
product improvement
►
Customer support
• improve customer after
sales experience
• repair and replace
24
Cost leadership => Lower costs
Rare, inimitable
Competitors cannot
lower price
Process quality
Efficiency
Creates value for
the firm (lower costs)
Price ‘floor’ above
our costs = profit
►
• Lower input costs
• JIT (lower inventory
holding)
O.H.
H.R.
►
R&D
I.L.
purch
Mfact
Sales
& Mkt
O.L
distn
Purchasing
Manufacturing
• JIT
• Quality (lower rework)
• Productivity
Cust
supp
►
Distribution
• Lower costs
distribution
December 28, 2009
Simon Rodan
25
Flexible manufacturing
Meeting needs
Efficiency
December 28, 2009
Entire market
Part(s) of the market
Full line segmentation
High value niche
Not enough scale to generate low costs
Not enough variety to
?
1) Accurately meet needs, create value
2) Get close to needs than competitors
Cost leader
Low price niche
Simon Rodan
26
Two car companies…
Value
Value
Q/2 red cars
Q/2 white cars
Price
Price
Cost
Cost
Red car company
December 28, 2009
White car company
Simon Rodan
27
Two market segments and two
producers with differentiated products
Red car market
White car market
Red car company
December 28, 2009
White car company
Simon Rodan
28
Each adds a product
to capture some of the competitor's market
Red car market
White car market
Red (and white) car company
December 28, 2009
White (and red) car company
Simon Rodan
29
Unit costs rise
as volumes for each product fall
Value
Value
Value
Q/4 cars Q/4 cars
Price
Q/4 cars
Price
Cost
Cost
Q/4 cars
Price
Price
Cost
Red and white car company
December 28, 2009
Value
Cost
White and red car company
Simon Rodan
30
Prices decline
as customers now have a choice
Value
Value
Value
Q/2 cars Q/2 cars
Price
Q/2 cars
Price
Cost
Cost
Q/2 cars
Price
Price
Cost
Red and white car company
December 28, 2009
Value
Cost
White and red car company
Simon Rodan
31
Segmentation
► When
customers’ needs are not
homogeneous…
• Segmentation and tailoring products to each
segment leads to higher value being created
for customers
• However, does this lead to higher profits?
• Need to consider
Cost of variety
► Ability to appropriate (segment competition)
►
December 28, 2009
Simon Rodan
32
Summary
►
Four generic strategies
•
•
•
•
►
Full line segmentation
Entire market cost leadership
High value niche market
Cost leader niche market
Lowering costs (E.O.S) often requires high volume
• Variety means lower volume thus higher costs
• Cost leadership and product variety (segmentation) are/were
almost mutually exclusive → “Stuck in the middle”
►
Flexible manufacturing and quality
• Less impact on cost from increasing variety, BUT…
• Each function may have different goals and priorities
December 28, 2009
Simon Rodan
33