Generic Strategies Price discrimination Simon A Rodan Ph

Generic Strategies Price discrimination Simon A. Rodan, Ph. D

Profit maximization Price P* One product variant (e. g. , Model T) Cost quantity

Profit maximization Price P* Consumer surplus Un-tapped market One product variant (e. g. , Model T) Cost quantity

Profit maximization, segmentation Mid-size Full-size P* Luxury Price Compact Cost quantity Economy

Generic Strategies Simon A. Rodan, Ph. D

Generic Strategies • Cost-leadership – (Price-cost leadership) • Differentiation – Segmentation

Generic Strategies Meeting segment needs Production Efficiency Entire market Part of the market Full line segmentation High value niche Ford, GM… Mc. Laren, Morgan Cost leader Low price niche Fort (Model T)

Market segments Minivan SUV Interior space Luxury Sedan Sub-compact Sports cars MPG

Cost leadership Minivan SUV Interior space Ford Luxury Model T Sedan Sub-compact Sports cars MPG

Full line differentiation Minivan SUV Interior space Luxury Sedan Sub-compact Sports cars MPG

Low price (high volume) niche Minivan SUV Interior space Luxury Sedan Sub-compact Sports cars MPG

High value niche Minivan SUV Interior space Luxury Sedan Sub-compact Sports cars MPG

Market segmentation http: //www. wsj. com/mdc/public/page/2_3022 -autosales. html https: //www. avis. com/en/reservation#/vehicles

Summary ► Two broad generic strategies • Segmentation & Cost leadership

Summary ► Two broad generic strategies • Segmentation & Cost leadership ► Each comes in two ‘flavors’, • Covering the entire market and addressing only a small niche

Summary ► Two broad generic strategies • Segmentation & Cost leadership ► Each comes in two ‘flavors’, • Covering the entire market and addressing only a small niche ► Segmentation approaches price discrimination (like an auction) • Maximizes firm appropriation • Can serve to reduce segment competition

Summary ► Two broad generic strategies • Segmentation & Cost leadership ► Each comes in two ‘flavors’, • Covering the entire market and addressing only a small niche ► Segmentation approaches price discrimination (like an auction) • Maximizes firm appropriation • Can serve to reduce segment competition

Generic Strategies Differentiation… leadership? Simonor A. cost Rodan, Ph. D

Which to choose? ► First, are there distinct market segments?

Which to choose? ► First, are there distinct market segments? ► Next… • Need to research the value created with increasing variety…

Which to choose? ► First, are there distinct market segments? ► Next… • Need to research the value created with increasing variety… • And the associated increase in production costs

A product market with only one segment e. g. Electricity Nitrogen gas Aluminum foil Staples Paper clips

Staples… Office Depot Premium Staples $3. 29 Bostitch Premium Staples $5. 59 Swingline Standard Staples $5. 29

Paper clips

Paper clips

Paper clips

Paper clips

Paper clips

A product market, one segment Value ($) Paper clips Color

A market with two segments Should the market be segmented? Value ($) People who prefer red paper clips People who prefer blue paper clips Color

A market with two segments Should the market be segmented? Value ($) People who prefer red paper clips People who prefer blue paper clips Magenta, a compromise no one likes Color

A market with two segments Should the market be segmented? Value ($) People who prefer red paper clips People who prefer blue paper clips Magenta, not ideal, but if the price it right… Color

A market with two segments Should the market be segmented? Value ($) Value with segmentation V V P P C Color C

A market with two segments Should the market be segmented? Value ($) V Value without segmentation Color P C

A market with two segments Should the market be segmented? V P (pm-cm)*qm V C One variant P C Two variants qr+qb=qm C (pr-cr)*qr + (pb-cb)*qb

Price rises faster than cost Differentiation Price Cost 1 2 7 3 5 4 6 Number of product variants 8 9

A market with two segments Should the market be segmented? V V P C P (pm-cm)*qm C One variant Two variants qr+qb=qm C (pr-cr)*qr + (pb-cb)*qb

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

Generic Strategies “Stuck in the middle” Simon A. Rodan, Ph. D

“Stuck in the middle” Not enough scale to generate low costs Price Not enough variety to meet customer needs, create value Cost 1 2 7 3 5 4 6 8 Number of product variants 9

“Traditional” mass production ► Building two models meant either… ► having sufficient volume on each line ► or changing the dies on a single line

“Traditional” mass production ► ► Building two models meant either… ► having sufficient volume on each line ► or changing the dies on a single line It took Ford, GM, and Chrysler 8 hours to change a die.

“Traditional” mass production ► ► Building two models meant either… ► having sufficient volume on each line ► or changing the dies on a single line It took Ford, GM, and Chrysler 8 hours to change a die ► Which held up production (which was costly)

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“Traditional” mass production ► ► Building two models meant either… ► having sufficient volume on each line ► or changing the dies on a single line It took Ford, GM, and Chrysler 8 hours to change a die ► ► Which meant stopping the line, which was costly Toyota’s process insight ► Reduce die changes to under 10 (SMED)

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’

Pre-flexible manufacturing… Differentiation Cost leadership Price 1 2 Old Cost 7 3 5 4 6 8 Number of product variants 9

Flexible manufacturing… Differentiation Cost leadership Price Old Cost New Cost 1 2 7 3 5 4 6 8 Number of product variants 9

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)

Generic Strategies “Stuck in the middle” final thought… Simon. One A. Rodan, Ph. D

Value chain considerations Accounting, finance, legal gin Mar Human resource management Research and development Porter, M. E. (1985) “Competitive Advantage: Creating and Sustaining Superior Performance”. New York. : Simon and Schuster. gin Mar Service Sales and marketing Outbound logistics Production & operations Inbound logistics Purchasing

Cost leadership Accounting, finance, legal gin Mar Human resource management Research and development Porter, M. E. (1985) “Competitive Advantage: Creating and Sustaining Superior Performance”. New York. : Simon and Schuster. gin Mar Service Sales and marketing Outbound logistics Production & operations Inbound logistics Purchasing

Differentiation Accounting, finance, legal gin Mar Human resource management Research and development Porter, M. E. (1985) “Competitive Advantage: Creating and Sustaining Superior Performance”. New York. : Simon and Schuster. gin Mar Service Sales and marketing Outbound logistics Production & operations Inbound logistics Purchasing

Generic Strategies “Stay in your lane” Simon A. Rodan, Ph. D

Two market segments and two producers with differentiated / segmented products Blue paper clip market Red paper clip market Total market for Q paper clips Red paper clip company Blue paper clip company

The two companies… V V P Q/2 red paper clips C Red paper clip company P Q/2 blue paper clips C Blue paper clip company

Each company adds a new product …to enter its competitor’s segment Red paper clip market Blue paper clip market Total market for Q paper clips Red paper clip company Blue paper clip company

Costs rise …as each line is working at half capacity V V -> Q/2 Q/2 P P C C Red (and blue) paper clip company C C Blue (and red) paper clip company

Prices fall …as customers now have a choice as manufacturers compete directly V V -> Q/2 Q/2 P P C C Red (and blue) paper clip company C C Blue (and red) paper clip company

Generic Strategies Summary Simon A. Rodan, Ph. D

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 • Makes segmentation possible in market that were previously too small