Generic Strategies

Simon Rodan Generic Strategies Part of the market Entire market Meeting needs Full line segmentation High value niche Ford: Aston Martin, Jaguar, Lincoln, Mercury, Volvo, Ford, Mazda, Land Rover Koenigsegg, TVR, Mercedes, BMW Wal Mart Hepol Electric Enterprises Ford (Model T) Efficiency Chery (China) Tata (India) Cost leader Low price niche

Simon Rodan Profit maximization without segmentation Price One big segment (Ford Model T) P* quantity

Simon Rodan Profit maximization without segmentation Price Luxury Mid range P* Compact quantity

Simon Rodan Competitive differentiation Yes No 1 2 Yes Product Segmentation 3 4 No Differentiation / segmentation High profits Low rivalry Non-competing products Price discrimination Moderate profits Moderate rivalry Competing products Price discrimination Moderate profits Moderate rivalry Non-competing products No Price discrimination Low profits High rivalry Competing products No price discrimination

Simon Rodan 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

Simon Rodan A product market with one segment Value ($) Everyone likes red cars. No segmentation possible e.g. Aluminum baking foil Dry wall Car color

Simon Rodan 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

Simon Rodan A market with two segments Should we segment the market? Value ($) People who prefer red cars People who prefer blue cars Car color

Simon Rodan Segmentation Value ($) People who prefer red cars People who prefer blue cars Car color

Simon Rodan Low cost Value ($) People who prefer red cars People who prefer blue cars Value accessible with segmentation Value accessible without segmentation Car color

Simon Rodan Costs rise faster than price with product variety 1 2 3 4 5 6 7 8 9 Cost leadership Price Cost Number of product variants

Simon Rodan Prices rise faster than costwith product variety 1 2 3 4 5 6 7 8 9 Number of product variants Differentiation Price Cost

Simon Rodan Segmented markets Red car market Blue car market Value Value Q cars Q cars Price Price Cost Cost Red cars Blue cars

Simon Rodan You can have any color you like… (as long as its magenta) Red car market Blue car market OR… Value Value Q cars Q cars 2Q cars Price Price Value Cost Cost Price Cost Red cars Magenta cars Blue cars

Simon Rodan Prices rise slowly at low product variety but quickly when variety is high Not enough scale to generate low costs Not enough variety to meet customer needs, create value Cost leadership Differentiation “Stuck in the middle” Cost Price 1 2 3 4 5 6 7 8 9 Number of product variants

Simon Rodan Stuck in the middle Not enough scale to generate low costs Not enough variety to meet customer needs, create value Part of the market Entire market Meeting needs Full line segmentation High value niche ? Efficiency Cost leader Low price niche

Simon Rodan 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

Simon Rodan 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

Simon Rodan 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

Simon Rodan 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)

Simon Rodan 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’

Simon Rodan Not enough scale to generate low costs Not enough variety to Accurately meet needs, create value Get close to needs than competitors Flexible manufacturing Part(s) of the market Entire market Meeting needs Full line segmentation High value niche ? Efficiency Cost leader Low price niche

Simon Rodan Differentiation =>Higher prices O.H. H.R. R & D I.L. purch Mfact Sales & Mkt O.L distn Cust supp Competitors cannot raise prices Rare, inimitable Higher prices = profit Prod Quality, Cust. Responsiveness Higher value for customer • Sales & Marketing • Customer needs, new product specification • Brand development • R&D • New products and product improvement • Customer support • improve customer after sales experience • repair and replace

Cost leadership => Lower costs O.H. H.R. R & D I.L. purch Mfact Sales & Mkt O.L distn Cust supp Competitors cannot lower price Rare, inimitable Price ‘floor’ above our costs = profit • Purchasing • Lower input costs • JIT (lower inventory holding) • Manufacturing • JIT • Quality (lower re-work) • Productivity • Distribution • Lower costs distribution Process quality Efficiency Creates value for the firm (lower costs) Simon Rodan

Simon Rodan Not enough scale to generate low costs Not enough variety to Accurately meet needs, create value Get close to needs than competitors Conflicting internal goals and messages Flexible manufacturing Part(s) of the market Entire market Meeting needs Full line segmentation High value niche ? Efficiency Cost leader Low price niche

Simon Rodan Two car companies… Value Value Q/2 red cars Q/2 white cars Price Price Cost Cost Red car company Whitecar company

Simon Rodan Two market segments and twoproducers with differentiated products Red car market White car market Red car company White car company

Simon Rodan Each adds a product to capture some of the competitor's market Red car market White car market Red (and white) car company White (and red) car company

Simon Rodan Unit costs riseas volumes for each product fall Value Value Value Value Q/4 cars Q/4 cars Q/4 cars Q/4 cars Price Price Price Price Cost Cost Cost Cost Red and white car company Whiteand redcar company

Simon Rodan Prices decline as customers now have a choice Value Value Value Value Q/2 cars Q/2 cars Q/2 cars Q/2 cars Price Price Price Price Cost Cost Cost Cost Red and white car company Whiteand redcar company

Simon Rodan 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)

Simon Rodan 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

Generic Strategies