December 28, 2009Simon Rodan1 Generic Strategies Entire market Part of the market Ford: Aston Martin, Jaguar, Lincoln, Mercury, Volvo, Ford, Mazda, Land Rover Wal Mart Hepol Electric Enterprises Ford (Model T) Meeting needs Efficiency Koenigsegg, TVR, Mercedes, BMW Full line segmentationHigh value niche Cost leaderLow price niche Chery (China) Tata (India)

December 28, 2009Simon Rodan2 Profit maximization without segmentation P* Price quantity One big segment (Ford Model T)

December 28, 2009Simon Rodan3 Profit maximization without segmentation P* Price quantity Luxury Mid range Compact

December 28, 2009Simon Rodan4 Differentiation / segmentation Product Segmentation Yes No Competitive differentiation YesNo High profits Low rivalry Non-competing products Price discrimination Low profits High rivalry Competing products No price discrimination Moderate profits Moderate rivalry Competing products Price discrimination Moderate profits Moderate rivalry Non-competing products No Price discrimination

December 28, 2009Simon Rodan5 Intermediate summary 1 ► Two broad generic strategies Segmentation & Cost leadershipSegmentation & Cost leadership ► Each comes in two ‘flavors’, Covering the entire market and addressing only a small nicheCovering the entire market and addressing only a small niche ► Segmentation is close to price discrimination (like an auction) Maximizes firm appropriationMaximizes firm appropriation Can serve to reduce segment competitionCan serve to reduce segment competition

December 28, 2009Simon Rodan6 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, 2009Simon Rodan7 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…Need to look at the value created or released by increasing variety… And the associated increase in production costsAnd the associated increase in production costs

December 28, 2009Simon Rodan8 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, 2009Simon Rodan9 Segmentation Value ($) People who prefer red cars People who prefer blue cars Car color

December 28, 2009Simon Rodan10 Low cost Value ($) People who prefer red cars People who prefer blue cars Car color Value accessible with segmentation Value accessible without segmentation

December 28, 2009Simon Rodan11 Spirits or Cars Styling Power

December 28, 2009Simon Rodan12 Costs rise faster than price with product variety Number of product variants Cost leadership Cost Price

December 28, 2009Simon Rodan13 Prices rise faster than cost with product variety Number of product variants Differentiation Cost Price

December 28, 2009Simon Rodan14 Segmented markets Value Cost Price Value Cost Price Red car marketBlue car market Red carsBlue cars Q cars

December 28, 2009Simon Rodan15 You can have any color you like… (as long as its magenta) Value Cost Price Value Cost Price Value Cost Price Red car marketBlue car market Red carsMagenta carsBlue cars Q cars 2Q cars OR…

December 28, 2009Simon Rodan16 Prices rise slowly at low product variety but quickly when variety is high Number of product variants Differentiation Cost Price Cost leadership Not enough scale to generate low costs Not enough variety to meet customer needs, create value “Stuck in the middle”

December 28, 2009Simon Rodan17 Stuck in the middle Full line segmentationHigh value niche Cost leader ? Meeting needs Efficiency 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, 2009Simon Rodan18 Intermediate summary 2 ► If prices can only rise slowly with increasing segmentation (variety)… i.e. high cross segment price elasticityi.e. high cross segment price elasticity ► …and costs rise faster than price with increasing segmentation (variety) ► Choose a cost leadership strategy

December 28, 2009Simon Rodan19 Intermediate summary 2 ► If prices rise quickly with increasing segmentation (product variety)... i.e. low cross segment price elasticityi.e. low cross segment price elasticity ► …and costs rise more slowly than price with increasing segmentation (product variety) ► Choose a differentiation strategy

December 28, 2009Simon Rodan20 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→ Stuck in the middle

December 28, 2009Simon Rodan21 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)to 10 minutes (Ten Minutes Exchange of Dies) and later to a single minute (SMED)and later to a single minute (SMED)

December 28, 2009Simon Rodan22 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, 2009Simon Rodan23 Flexible manufacturing ? Meeting needs Efficiency Entire market Part(s) of the market Not enough scale to generate low costs Not enough variety to 1)Accurately meet needs, create value 2)Get close to needs than competitors Full line segmentationHigh value niche Cost leaderLow price niche

December 28, 2009Simon Rodan24 I.L. purch Mfact Sales & Mkt O.L distn Cust supp H.R. O.H. R & D Differentiation =>Higher prices Prod Quality, Cust. Responsiveness Higher value for 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, 2009Simon Rodan25 I.L. purch Mfact Sales & Mkt O.L distn Cust supp H.R. O.H. R & D Cost leadership => Lower costs Process quality Efficiency Creates value for the firm (lower costs) Rare, inimitable ► Purchasing Lower input costsLower input costs JIT (lower inventory holding)JIT (lower inventory holding) ► Manufacturing JITJIT Quality (lower re- work)Quality (lower re- work) ProductivityProductivity ► Distribution Lower costs distributionLower costs distribution Competitors cannot lower price Price ‘floor’ above our costs = profit

December 28, 2009Simon Rodan26 Flexible manufacturing ? Meeting needs Efficiency Entire market Part(s) of the market Not enough scale to generate low costs Not enough variety to 1)Accurately meet needs, create value 2)Get close to needs than competitors Conflicting internal goals and messages Full line segmentationHigh value niche Cost leaderLow price niche

December 28, 2009Simon Rodan27 Two car companies… Value Cost Price Value Cost Price Red car companyWhite car company Q/2 white carsQ/2 red cars

December 28, 2009Simon Rodan28 Two market segments and two producers with differentiated products Red car marketWhite car market Red car companyWhite car company

December 28, 2009Simon Rodan29 Each adds a product to capture some of the competitor's market Red car marketWhite car market Red (and white) car companyWhite (and red) car company

December 28, 2009Simon Rodan30 Unit costs rise as volumes for each product fall Value Cost Price Value Cost Price Red and white car companyWhite and red car company Value Cost Price Value Cost Price Q/4 cars

December 28, 2009Simon Rodan31 Prices decline as customers now have a choice Value Cost Price Value Cost Price Red and white car companyWhite and red car company Value Cost Price Value Cost Price Q/2 cars

December 28, 2009Simon Rodan32 Segmentation ► When customers’ needs are not homogeneous… Segmentation and tailoring products to each segment leads to higher value being created for customersSegmentation and tailoring products to each segment leads to higher value being created for customers However, does this lead to higher profits?However, does this lead to higher profits? Need to considerNeed to consider ► Cost of variety ► Ability to appropriate (segment competition)

December 28, 2009Simon Rodan33 Summary ► Four 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 volume Variety means lower volume thus higher costsVariety means lower volume thus higher costs Cost leadership and product variety (segmentation) are/were almost mutually exclusive → “Stuck in the middle”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…Less impact on cost from increasing variety, BUT… Each function may have different goals and prioritiesEach function may have different goals and priorities