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
ng
n
eed
sEffi
cie
nc
y
Koenigsegg, TVR, Mercedes, BMW
Full line segmentation High value niche
Cost leader Low price niche
Chery (China)Tata (India)
December 28, 2009 Simon Rodan 2
Profit maximization without segmentationProfit maximization without segmentation
P*
Price
quantity
One big segment (Ford Model T)
December 28, 2009 Simon Rodan 3
Profit maximization without segmentationProfit maximization without segmentation
P*
Price
quantity
Luxury
Mid range
Compact
December 28, 2009 Simon Rodan 4
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
December 28, 2009 Simon Rodan 5
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
December 28, 2009 Simon Rodan 6
A product market with one segment A product market with one segment
Value ($)Everyone likes red cars. No segmentation possible
Car color
e.g. Aluminum baking foil
Dry wall
December 28, 2009 Simon Rodan 7
Which strategy to choose?Which strategy to choose?
► When to choose cost leadership vs. When to choose cost leadership vs. product segmentation?product segmentation?
► First, are there different market segments?First, are there different market segments?► Next…Next…
• Need to look at the value created or released Need to look at the value created or released by increasing variety…by increasing variety…
• AndAnd the associated increase in production the associated increase in production costscosts
December 28, 2009 Simon Rodan 8
A market with two segments A market with two segments
Value ($)
People who prefer red cars
People who prefer blue cars
Should we segment the market?
Car color
December 28, 2009 Simon Rodan 9
SegmentationSegmentation
Value ($)People who prefer
red carsPeople who prefer
blue cars
Car color
December 28, 2009 Simon Rodan 10
Low costLow cost
Value ($) People who prefer red cars
People who prefer blue cars
Car color
Value accessible with segmentation
Value accessible without segmentation
December 28, 2009 Simon Rodan 12
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
December 28, 2009 Simon Rodan 13
Prices rise faster than costPrices rise faster than costwith product varietywith product variety
1 2 3 4 5 7 8 96Number of product variants
Differentiation
Cost
Price
December 28, 2009 Simon Rodan 14
Segmented marketsSegmented markets
Value
Cost
Price
Value
Cost
Price
Red car market Blue car market
Red cars Blue cars
Q carsQ cars
December 28, 2009 Simon Rodan 15
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…
December 28, 2009 Simon Rodan 16
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
1 2 3 4 5 7 8 96Number of product variants
Differentiation
CostPrice
Cost leadership
Not enough scale to generate low costs
Not enough variety to meet customer needs, create value
“Stuck in the middle”
December 28, 2009 Simon Rodan 17
Stuck in the middleStuck in the middle
Full line segmentation High value niche
Cost leader
?
Meetin
g
need
sEffi
cie
nc
y
Entire market Part of the market
Not enough scale to generate low costs
Not enough variety to meet customer needs, create value
Low price niche
December 28, 2009 Simon Rodan 18
Intermediate summary 2Intermediate summary 2
► 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
December 28, 2009 Simon Rodan 19
Intermediate summary 2Intermediate summary 2
► 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
December 28, 2009 Simon Rodan 20
Intermediate summary 2Intermediate summary 2
► 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
December 28, 2009 Simon Rodan 21
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)
December 28, 2009 Simon Rodan 22
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’
December 28, 2009 Simon Rodan 23
Flexible manufacturingFlexible manufacturing
?
Meetin
g
need
sEffi
cie
nc
y
Entire market Part(s) of the market
Not enough scale to generate low costs
Not enough variety to 1) Accurately meet needs, create
value2) Get close to needs than
competitors
Full line segmentation High value niche
Cost leader Low price niche
December 28, 2009 Simon Rodan 24
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
December 28, 2009 Simon Rodan 25
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
December 28, 2009 Simon Rodan 26
Flexible manufacturingFlexible manufacturing
?
Meetin
g
need
sEffi
cie
nc
y
Entire market Part(s) of the market
Not enough scale to generate low costs
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
Cost leader Low price niche
December 28, 2009 Simon Rodan 27
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
December 28, 2009 Simon Rodan 28
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
December 28, 2009 Simon Rodan 29
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
December 28, 2009 Simon Rodan 30
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
December 28, 2009 Simon Rodan 31
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
December 28, 2009 Simon Rodan 32
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)
December 28, 2009 Simon Rodan 33
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