December 28, 2009Simon Rodan1 Generic Strategies Entire market Part of the market Ford: Aston Martin, Jaguar, Lincoln, Mercury, Volvo, Ford, Mazda, Land.

December 28, 2009 Simon Rodan 1

Generic StrategiesGeneric Strategies

Entire market Part of the market

Ford: Aston Martin, Jaguar, Lincoln, Mercury,

Volvo, Ford, Mazda, Land Rover

Wal MartHepol Electric Enterprises

Ford (Model T)

Meeti

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eed

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Koenigsegg, TVR, Mercedes, BMW

Full line segmentation High value niche

Cost leader Low price niche

Chery (China)Tata (India)


Profit maximization without segmentationProfit maximization without segmentation

P*

Price

quantity

One big segment (Ford Model T)


Profit maximization without segmentationProfit maximization without segmentation

P*

Price

quantity

Luxury

Mid range

Compact


Differentiation / segmentationDifferentiation / segmentation

Product Segmentation

Yes

No

Competitive differentiation

Yes No

High profitsLow rivalryNon-competing productsPrice discrimination

1 2

43

Low profitsHigh rivalryCompeting productsNo price discrimination

Moderate profitsModerate rivalryCompeting productsPrice discrimination

Moderate profitsModerate rivalryNon-competing productsNo Price discrimination


Intermediate summary 1Intermediate summary 1

► Two broad generic strategiesTwo broad generic strategies• Segmentation & Cost leadershipSegmentation & Cost leadership

► Each comes in two ‘flavors’, Each comes in two ‘flavors’, • Covering the entire market and addressing only a Covering the entire market and addressing only a

small nichesmall niche► Segmentation is close to price discrimination Segmentation is close to price discrimination

(like an auction)(like an auction)• Maximizes firm appropriationMaximizes firm appropriation• Can serve to reduce segment competition Can serve to reduce segment competition


A product market with one segment A product market with one segment

Value ($)Everyone likes red cars. No segmentation possible

Car color

e.g. Aluminum baking foil

Dry wall


Which strategy to choose?Which strategy to choose?

► When to choose cost leadership vs. When to choose cost leadership vs. product segmentation?product segmentation?

► First, are there different market segments?First, are there different market segments?► Next…Next…

• Need to look at the value created or released Need to look at the value created or released by increasing variety…by increasing variety…

• AndAnd the associated increase in production the associated increase in production costscosts


A market with two segments A market with two segments

Value ($)

People who prefer red cars

People who prefer blue cars

Should we segment the market?

Car color


SegmentationSegmentation

Value ($)People who prefer

red carsPeople who prefer

blue cars

Car color


Low costLow cost

Value ($) People who prefer red cars

People who prefer blue cars

Car color

Value accessible with segmentation

Value accessible without segmentation


Costs rise faster than price Costs rise faster than price with product varietywith product variety

1 2 3 4 5 7 8 96Number of product variants

Cost leadership

Cost

Price


Prices rise faster than costPrices rise faster than costwith product varietywith product variety


Differentiation

Cost

Price


Segmented marketsSegmented markets

Value

Cost

Price

Value

Cost

Price

Red car market Blue car market

Red cars Blue cars

Q carsQ cars


You can have any color you like… You can have any color you like… (as long as its magenta)(as long as its magenta)

Value

Cost

PriceValue

Cost

Price

Value

Cost

Price

Red car market Blue car market

Red cars Magenta cars Blue cars

Q carsQ cars2Q carsOR…


Prices rise slowly at low product Prices rise slowly at low product variety but quickly when variety is highvariety but quickly when variety is high


Differentiation

CostPrice

Cost leadership

Not enough scale to generate low costs

Not enough variety to meet customer needs, create value

“Stuck in the middle”


Stuck in the middleStuck in the middle


Cost leader

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Entire market Part of the market


Not enough variety to meet customer needs, create value

Low price niche



► If prices can only rise slowly with If prices can only rise slowly with increasing segmentation (variety)… increasing segmentation (variety)… • i.e. high cross segment price elasticityi.e. high cross segment price elasticity

► ……and costs rise faster than price with and costs rise faster than price with increasing segmentation (variety) increasing segmentation (variety)

► Choose a Choose a cost leadershipcost leadership strategy strategy



► If prices rise quickly with increasing If prices rise quickly with increasing segmentation (product variety)... segmentation (product variety)... • i.e. low cross segment price elasticityi.e. low cross segment price elasticity

► ……and costs rise more slowly than price and costs rise more slowly than price with increasing segmentation (product with increasing segmentation (product variety) variety)

► Choose aChoose a differentiation differentiation strategy strategy



► If prices rise slowly with increasing If prices rise slowly with increasing segmentation (variety) at low levels of segmentation (variety) at low levels of segmentation… segmentation…

► ……but rise steeply when differentiation is but rise steeply when differentiation is ‘extreme’‘extreme’

► Choose a either high differentiation or cost Choose a either high differentiation or cost leadershipleadership

► BUT don’t try both… BUT don’t try both… • → → Stuck in the middleStuck in the middle


Reducing asset specificityReducing asset specificity

► In the 1980s, it took Ford, Chrysler or GM 8 hours In the 1980s, it took Ford, Chrysler or GM 8 hours to change a body stamping die.to change a body stamping die.

► Building two models meant either having sufficient Building two models meant either having sufficient volume for a dedicated line or changing the dies volume for a dedicated line or changing the dies on a single lineon a single line

► Toyota saw that the obstacle to greater variety Toyota saw that the obstacle to greater variety (increasing costs) could be reduced if die (increasing costs) could be reduced if die changing times were cut:changing times were cut:• to 10 minutes (Ten Minutes Exchange of Dies)to 10 minutes (Ten Minutes Exchange of Dies)• and later to a single minute (SMED)and later to a single minute (SMED)


Other AdvancesOther Advances

► Computer aided design (CAD) and computer Computer aided design (CAD) and computer aided manufacturing (CAM)aided manufacturing (CAM)

► Robots can switch effortlessly from one Robots can switch effortlessly from one model to anothermodel to another

► Shared 'platform' (common components, Shared 'platform' (common components, chassis / drive train: Trucks == SUVchassis / drive train: Trucks == SUV

► While the initial investment may be large, While the initial investment may be large, once made variety is ‘costless’ once made variety is ‘costless’


Flexible manufacturingFlexible manufacturing

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Entire market Part(s) of the market


Not enough variety to 1) Accurately meet needs, create

value2) Get close to needs than

competitors




I.L.purc

hMfact

Sales&

Mkt

O.Ldistn

Custsupp

H.R.

O.H.

R & D

Differentiation =>Higher pricesDifferentiation =>Higher prices

Prod Quality, Cust.Responsiveness

Higher valuefor customer

Rare, inimitable Competitors cannot raise prices Higher prices

= profit

► 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


I.L.purch

MfactSales

& Mkt

O.Ldistn

Custsupp

H.R.

O.H.

R & D

Cost leadership => Lower costsCost leadership => Lower costs

Process qualityEfficiency

Creates value for the firm (lower costs)

Rare, inimitable

► PurchasingPurchasing• Lower input costsLower input costs

• JIT (lower inventory JIT (lower inventory holding)holding)

► ManufacturingManufacturing• JITJIT

• Quality (lower re-Quality (lower re-work)work)

• ProductivityProductivity

► DistributionDistribution• Lower costs Lower costs

distribution distribution

Competitors cannot lower price Price ‘floor’ above

our costs = profit


Flexible manufacturingFlexible manufacturing

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need

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Entire market Part(s) of the market


Not enough variety to 1) Accurately meet needs, create

value2) Get close to needs than

competitors

Conflicting internal goals and messagesFull line segmentation High value niche



Two car companies…Two car companies…

Value

Cost

Price

Value

Cost

Price

Red car company White car company

Q/2 white carsQ/2 red cars


Two market segments and twoTwo market segments and twoproducers with differentiated products producers with differentiated products

Red car market White car market

Red car company White car company


Each adds a product Each adds a product to capture some of the competitor's marketto capture some of the competitor's market

Red car market White car market

Red (and white) car company White (and red) car company


Unit costs riseUnit costs riseas volumes for each product fallas volumes for each product fall

Value

Cost

Price

Value

Cost

Price

Red and white car company White and red car company

Value

Cost

Price

Value

Cost

Price

Q/4 carsQ/4 cars Q/4 cars Q/4 cars


Prices decline Prices decline as customers now have a choiceas customers now have a choice

Value

Cost

Price

Value

Cost

Price

Red and white car company White and red car company

Value

Cost

Price

Value

Cost

Price

Q/2 carsQ/2 cars Q/2 cars Q/2 cars


SegmentationSegmentation

► When customers’ needs are not When customers’ needs are not homogeneous…homogeneous…• Segmentation and tailoring products to each Segmentation and tailoring products to each

segment leads to higher value being created for segment leads to higher value being created for customerscustomers

• However, does this lead to higher profits?However, does this lead to higher profits?• Need to consider Need to consider

► Cost of varietyCost of variety► Ability to appropriate (segment competition)Ability to appropriate (segment competition)


SummarySummary

► Four generic strategiesFour generic strategies• Full line segmentationFull line segmentation• Entire market cost leadershipEntire market cost leadership• High value niche marketHigh value niche market• Cost leader niche marketCost leader niche market

► Lowering costs (E.O.S) often requires high volumeLowering costs (E.O.S) often requires high volume• Variety means lower volume thus higher costsVariety means lower volume thus higher costs• Cost leadership and product variety (segmentation) are/were Cost leadership and product variety (segmentation) are/were

almost mutually exclusive almost mutually exclusive → → “Stuck in the middle”“Stuck in the middle”► Flexible manufacturing and quality Flexible manufacturing and quality

• Less impact on cost from increasing variety, BUT…Less impact on cost from increasing variety, BUT…• Each function may have different goals and prioritiesEach function may have different goals and priorities

December 28, 2009Simon Rodan1 Generic Strategies Entire market Part of the market Ford: Aston Martin, Jaguar, Lincoln, Mercury, Volvo, Ford, Mazda, Land.

Documents

product segmentation

segment value

low product variety

segments value

red carspeople

different market segments

blue carsshould

segmentationvalue accessible