Several years ago, BMW ran into a problem with its technologically advanced automobiles. It found that some customers were reluctant to buy their cars because the customers were concerned about the cost of maintaining products with such high technology. But BMW believed in its product and felt that the customer should believe equally. So, for more than the last ten years, BMW has offered free maintenance with its new cars. For four years, or 50,000 miles, a BMW customer will not pay for maintenance except for gas and tires. BMW continues to gain share and profitability in the North American market. (See “Audio Tip #160: How Do We Segment Customers by Emotional Needs?” on StrategyStreet.com.) Competitors have noticed.
Now, competition is beginning to offer free maintenance of its own. As always, the devil is in the details of “free maintenance.” The “Gold Standard” BMW covers everything but gas and tires. Competition offers “free” maintenance, but their version of free maintenance does not match BMW’s. Volvo’s “Safe + Secure Coverage Plan” covers five years or 60,000 miles, and includes oil and filter changes and replacement of brake pads and rotors and windshield wipers. Cadillac’s “Premium Care Maintenance” doesn’t cover brakes and is limited to scheduled oil changes, tire rotations, replacement of engine and cabin air filters and a multi-point vehicle inspection.
Other competitors cover what BMW covers, but charges for it. Audi sells a maintenance plan separately with the list price of about $790. Mercedes Benz offers prepaid service packages.
All of these competitors to BMW fall short of the mark. If you were a customer deciding on an automobile to buy, and you cared about the Reliability of the vehicle during the time you owned it, who would you trust more? On the one hand, you have the company that promises true “free maintenance.” On the other hand, you have competitors who qualify, or charge for, their promise of “free maintenance.” If you want to compete with the standard, you have to be at least as good as the standard. BMW still leads the pack in Reliability when it comes to “free maintenance.” (See “Video #14: Definition of Reliability” on StrategyStreet.com.)
Showing posts with label high end competitor. Show all posts
Showing posts with label high end competitor. Show all posts
Thursday, August 19, 2010
Thursday, April 15, 2010
Recycling of Capacity in a Tough Market
Sweden is a small country with a proud tradition of producing tough, high-end, automobiles. We call these high-end products Performance Leaders. In a hostile market, a Performance Leader usually suffers from scale disadvantages compared to the much larger industry leaders, whom we call Standard Leaders. Often, these Performance Leaders become acquisitions for the industry’s Standard Leaders. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on StrategyStreet.com.) That was the case when GM bought Saab and Ford bought Volvo.
Both of these automobile industry Standard Leaders operated their Swedish acquisitions as separate companies. However, as GM and Ford themselves faltered in the market, they both decided to jettison their foreign high-end products. Spyker Cars NV, a Dutch company, has purchased Saab from General Motors. China’s Geely Automobile Holdings Ltd. has purchased Volvo from Ford. Both the Saab and the Volvo brands, then, will continue into the future.
These purchases illustrate the sometimes difficult workings of a hostile marketplace. (See “Video #10: Industry Consolidation and Recycling of Capacity” on StrategyStreet.com.) Both Volvo and Saab were failing as stand-alone Performance Leader competitors. But they did not go out of business. Instead, larger industry Standard Leaders bought them and kept their capacity in operation. This is a first example of the recycling of brands, but more particularly, productive capacity in an industry that already had too much of it. Neither GM nor Ford was able to make a go of it with these Performance Leader brands. Rather than shut the brands and their productive capacity down, however, both the Standard Leaders found willing buyers for the brands and their industry capacity. This is the second example of recycling of the same capacity. In each case, the buyer got the company and its capacity for a cost below the book value of the original seller.
We have found this recycling of capacity to occur in virtually every industry that goes through over-capacity and hostile times. Capacity will not go away until it cannot produce cash for any owner. The recent closing of the San Francisco Bay Area Nummi plant, once co-owned by GM and Toyota, is a clear indication that the plant can no longer produce cash as an automobile plant. It may finally stop producing automobiles forever. It is worth noting, however, that this was a GM automobile plant before it became Nummi. It had already been recycled once in the mid-1980s.
Both of these automobile industry Standard Leaders operated their Swedish acquisitions as separate companies. However, as GM and Ford themselves faltered in the market, they both decided to jettison their foreign high-end products. Spyker Cars NV, a Dutch company, has purchased Saab from General Motors. China’s Geely Automobile Holdings Ltd. has purchased Volvo from Ford. Both the Saab and the Volvo brands, then, will continue into the future.
These purchases illustrate the sometimes difficult workings of a hostile marketplace. (See “Video #10: Industry Consolidation and Recycling of Capacity” on StrategyStreet.com.) Both Volvo and Saab were failing as stand-alone Performance Leader competitors. But they did not go out of business. Instead, larger industry Standard Leaders bought them and kept their capacity in operation. This is a first example of the recycling of brands, but more particularly, productive capacity in an industry that already had too much of it. Neither GM nor Ford was able to make a go of it with these Performance Leader brands. Rather than shut the brands and their productive capacity down, however, both the Standard Leaders found willing buyers for the brands and their industry capacity. This is the second example of recycling of the same capacity. In each case, the buyer got the company and its capacity for a cost below the book value of the original seller.
We have found this recycling of capacity to occur in virtually every industry that goes through over-capacity and hostile times. Capacity will not go away until it cannot produce cash for any owner. The recent closing of the San Francisco Bay Area Nummi plant, once co-owned by GM and Toyota, is a clear indication that the plant can no longer produce cash as an automobile plant. It may finally stop producing automobiles forever. It is worth noting, however, that this was a GM automobile plant before it became Nummi. It had already been recycled once in the mid-1980s.
Wednesday, December 23, 2009
Is The Mojo Coming Back?
In early February, we did a blog on Abercrombie & Fitch and its Leader’s Trap (see blog Here). The company refused to lower its prices for fear of damaging its high-end, exclusive image. (See “Audio Tip #134: What are the Objectives of Our Pricing Policy?” on StrategyStreet.com.) The blog predicted that Abercrombie would have to lower its prices anyway.
In late May, we wrote a second blog on Abercrombie & Fitch and its Leader’s Trap (see blog Here). By then, the company had reported a first quarter loss and said that it would have to reduce its prices. We noted in that blog that companies who let their prices stay high for too long take a long time to recapture market share lost in a Leader’s Trap.
The story goes on. In the third quarter of 2009, Abercrombie same-store sales plunged 22%, the eighth consecutive period of sales declines. Profits dropped 39%. The company’s pricing, and some fashion slips, have cost the company dearly. The company has marked down items by 30% to 40%. It is also adding lower-priced clothing and some trendier styles in its stores.
The problem now is the company’s reputation for high prices. By falling into a Leader’s Trap, the company sent some erstwhile loyal customers to competitors such Aeropostale and American Eagle Outfitters. Many of these defecting customers have not come back yet. Some might never come back.
If prices are falling in a marketplace, even high-end, Performance Leader, competitors have to go along, or lose market share. For example, in the tough automobile industry, even BMW and Mercedes have had to offer price and financing incentives to keep sales going. (See “Audio Tip #142: Defensive Pricing Guidelines” on StrategyStreet.com.)
In late May, we wrote a second blog on Abercrombie & Fitch and its Leader’s Trap (see blog Here). By then, the company had reported a first quarter loss and said that it would have to reduce its prices. We noted in that blog that companies who let their prices stay high for too long take a long time to recapture market share lost in a Leader’s Trap.
The story goes on. In the third quarter of 2009, Abercrombie same-store sales plunged 22%, the eighth consecutive period of sales declines. Profits dropped 39%. The company’s pricing, and some fashion slips, have cost the company dearly. The company has marked down items by 30% to 40%. It is also adding lower-priced clothing and some trendier styles in its stores.
The problem now is the company’s reputation for high prices. By falling into a Leader’s Trap, the company sent some erstwhile loyal customers to competitors such Aeropostale and American Eagle Outfitters. Many of these defecting customers have not come back yet. Some might never come back.
If prices are falling in a marketplace, even high-end, Performance Leader, competitors have to go along, or lose market share. For example, in the tough automobile industry, even BMW and Mercedes have had to offer price and financing incentives to keep sales going. (See “Audio Tip #142: Defensive Pricing Guidelines” on StrategyStreet.com.)
Thursday, September 3, 2009
The eBook Competition
Amazon and its Kindle products have had the eBook market to themselves since the market began taking off a couple of years ago. The eBook market is now starting to grow fairly fast. Sony has decided to grab some of that growth.
Sony is entering the market with three price points: a $199 entry product called the Reader Pocket Edition, the $299 Reader Touch Edition with a touch screen and the high-end Reader Daily Edition at $399 with both touch screen and wireless capability.
Very fast-growing markets see market share changes due to Function and Price innovations. Let’s use the Customer Buying Hierarchy (see Audio Tip #95: Customer Buying Hierarchy on StrategyStreet.com) to evaluate Sony’s prospects against Amazon.
The Customer Buying Hierarchy holds that customers buy using four major criteria: Function, Reliability, Convenience and Price. Customers go through the hierarchy in that specific order and purchase when there is one, and only one, competitor who can offer them a unique benefit.
Function refers to the way the customer uses the product. Function innovations in this eBook market are two types: hardware innovations and content. In hardware, Sony has two Price Points with a touch screen capability that Kindle does not offer. On the other hand, the regular Kindle 2 offers wireless downloads. The only Sony product that offers wireless is the high-end Reader Daily Edition at $399, compared to Kindles’ $299 Price Point. Without considering price, it is hard to call a winner when the Kindle 2 offers wireless connectivity while the Sony offers a touch screen.
Content is likely to be a different story. Sony has adopted the ePub format, which is an international format for digital books and publications. Amazon, on the other hand, offers eBooks which can be read only on Kindle 2 devices, a proprietary approach. Sony argues that its readers can download books from the local library using its format, saving costs. But libraries have only a limited number of digital copies of books available. And, if the market takes off, the authors and publishers are likely to severely limit the number of free library copies available to ereaders. Kindle, for its part, is the progeny of a book retailer. There are many books available through Amazon for the Kindle 2, far more than will be available for the Sony products. In addition, the Apple iPhone and the iPod Touch also allow their owners to read books in the Kindle 2 format. With its extensive experience and product platform already in the market, content providers are highly likely to choose the Kindle 2 format before choosing the Sony format, if they must make a choice. Certainly in the early going, the content, and thus the Function advantage, goes to Amazon and it’s Kindle 2.
Reliability refers to how a company keeps the promises it makes to its customers. For an end user customer, Reliability means that the product works and will be fixed promptly if it does not work. Amazon has a superb reputation for Reliability among consumers. Sony’s reputation is also good. However, since Sony produces mostly electronic gear, its reputation is unlikely to be as good as that of Amazon, who sells mostly digital products. I would guess Amazon gets a slight nod in Reliability.
Convenience refers to the ease with which a customer can buy and begin using the product. Sony’s products will be in 9,000 retail outlets, including all the leaders in the industry, this holiday season. Amazon sells its Kindle online. The customer can see and touch the Sony products in the many retail outlets. Seeing and touching a Kindle is much more difficult for the perspective Amazon customer. The nod in Convenience clearly goes to Sony.
Price is the last consideration. The Kindle 2 product has a price of $299. The Sony Reader Daily Edition has a price of $399. As we noted above, the Sony product offers a touch screen at this price. Kindle does not, at least not yet. The Sony product is a third more expensive than is the Kindle. This additional price is likely to make the Sony product a Performance Leader product (see Audio Tip #82: Performance Leader Products and Companies on StrategyStreet.com), rather than a true competitor for the leading Standard Leader position.
It is going to be difficult for Sony to make the $399 product the most common product in the market. Amazon’s Kindle has already established the industry standard for benefits and price. Sony would have been more successful offering its touch screen benefits at no price increase over the Kindle 2 Standard Leader product. Sony looks to be in a Leader’s Trap here. It will eventually have to reduce that price or see the product garner relatively little market share, likely well below 15% of the market.
Both Sony and Amazon would probably be better off if they responded to the content challenge each offers the other. Sony might try to license the Kindle software and offer that format, as well as the format. Then Sony could have competed on its strengths in making small electronic equipment. Amazon could add the ePub format to its software and open up a new world of content for its customers. This will become imperative for Amazon if a great deal of content comes available in the ePub format that is not also available in the Amazon proprietary format.
Sony is entering the market with three price points: a $199 entry product called the Reader Pocket Edition, the $299 Reader Touch Edition with a touch screen and the high-end Reader Daily Edition at $399 with both touch screen and wireless capability.
Very fast-growing markets see market share changes due to Function and Price innovations. Let’s use the Customer Buying Hierarchy (see Audio Tip #95: Customer Buying Hierarchy on StrategyStreet.com) to evaluate Sony’s prospects against Amazon.
The Customer Buying Hierarchy holds that customers buy using four major criteria: Function, Reliability, Convenience and Price. Customers go through the hierarchy in that specific order and purchase when there is one, and only one, competitor who can offer them a unique benefit.
Function refers to the way the customer uses the product. Function innovations in this eBook market are two types: hardware innovations and content. In hardware, Sony has two Price Points with a touch screen capability that Kindle does not offer. On the other hand, the regular Kindle 2 offers wireless downloads. The only Sony product that offers wireless is the high-end Reader Daily Edition at $399, compared to Kindles’ $299 Price Point. Without considering price, it is hard to call a winner when the Kindle 2 offers wireless connectivity while the Sony offers a touch screen.
Content is likely to be a different story. Sony has adopted the ePub format, which is an international format for digital books and publications. Amazon, on the other hand, offers eBooks which can be read only on Kindle 2 devices, a proprietary approach. Sony argues that its readers can download books from the local library using its format, saving costs. But libraries have only a limited number of digital copies of books available. And, if the market takes off, the authors and publishers are likely to severely limit the number of free library copies available to ereaders. Kindle, for its part, is the progeny of a book retailer. There are many books available through Amazon for the Kindle 2, far more than will be available for the Sony products. In addition, the Apple iPhone and the iPod Touch also allow their owners to read books in the Kindle 2 format. With its extensive experience and product platform already in the market, content providers are highly likely to choose the Kindle 2 format before choosing the Sony format, if they must make a choice. Certainly in the early going, the content, and thus the Function advantage, goes to Amazon and it’s Kindle 2.
Reliability refers to how a company keeps the promises it makes to its customers. For an end user customer, Reliability means that the product works and will be fixed promptly if it does not work. Amazon has a superb reputation for Reliability among consumers. Sony’s reputation is also good. However, since Sony produces mostly electronic gear, its reputation is unlikely to be as good as that of Amazon, who sells mostly digital products. I would guess Amazon gets a slight nod in Reliability.
Convenience refers to the ease with which a customer can buy and begin using the product. Sony’s products will be in 9,000 retail outlets, including all the leaders in the industry, this holiday season. Amazon sells its Kindle online. The customer can see and touch the Sony products in the many retail outlets. Seeing and touching a Kindle is much more difficult for the perspective Amazon customer. The nod in Convenience clearly goes to Sony.
Price is the last consideration. The Kindle 2 product has a price of $299. The Sony Reader Daily Edition has a price of $399. As we noted above, the Sony product offers a touch screen at this price. Kindle does not, at least not yet. The Sony product is a third more expensive than is the Kindle. This additional price is likely to make the Sony product a Performance Leader product (see Audio Tip #82: Performance Leader Products and Companies on StrategyStreet.com), rather than a true competitor for the leading Standard Leader position.
It is going to be difficult for Sony to make the $399 product the most common product in the market. Amazon’s Kindle has already established the industry standard for benefits and price. Sony would have been more successful offering its touch screen benefits at no price increase over the Kindle 2 Standard Leader product. Sony looks to be in a Leader’s Trap here. It will eventually have to reduce that price or see the product garner relatively little market share, likely well below 15% of the market.
Both Sony and Amazon would probably be better off if they responded to the content challenge each offers the other. Sony might try to license the Kindle software and offer that format, as well as the format. Then Sony could have competed on its strengths in making small electronic equipment. Amazon could add the ePub format to its software and open up a new world of content for its customers. This will become imperative for Amazon if a great deal of content comes available in the ePub format that is not also available in the Amazon proprietary format.
Monday, August 31, 2009
Sony in the Game Business
Sony has just introduced a new PlayStation3. This product comes in a new slim form factor. Its price is $299. This is a 25% reduction from the $399 price of the current model of the PlayStation3. The price cut comes as the PS3 has struggled against its competitors, whose products have carried lower prices. Sony was in a Leader’s Trap.
Not only is the PS3 struggling against lower-priced competitors, it is also facing the head winds of a badly depressed market. Industry sales of game hardware and software are down 29% from a year ago.
The problem? Even at the new price, the product is more expensive than the industry leader. Nintendo’s Wii console sells for $250. The wildly successful Wii sets the price bar for the heart of the market. Its total console sales have passed 20.7MM compared to just over 15.5MM for the Microsoft Xbox and about 7.9M for the PS3. A competing console price higher than $250 really focuses the customer’s attention on the value of the marginal benefits.
Sony justifies the fact that the PS3 will remain the more expensive console because it offers a Blu-Ray player. Customers may not see it that way (see the Perspective, “The Two Greatest Consultants in the World” on StrategyStreet.com). The new PS3 may end up as a high end, Performance Leader, product with limited market share.
Sony has climbed part way out of its Leader’s Trap (see Video #42: Leader’s Trap on StrategyStreet.com) but still has a way to go. You will see more of the same in our next blog.
Not only is the PS3 struggling against lower-priced competitors, it is also facing the head winds of a badly depressed market. Industry sales of game hardware and software are down 29% from a year ago.
The problem? Even at the new price, the product is more expensive than the industry leader. Nintendo’s Wii console sells for $250. The wildly successful Wii sets the price bar for the heart of the market. Its total console sales have passed 20.7MM compared to just over 15.5MM for the Microsoft Xbox and about 7.9M for the PS3. A competing console price higher than $250 really focuses the customer’s attention on the value of the marginal benefits.
Sony justifies the fact that the PS3 will remain the more expensive console because it offers a Blu-Ray player. Customers may not see it that way (see the Perspective, “The Two Greatest Consultants in the World” on StrategyStreet.com). The new PS3 may end up as a high end, Performance Leader, product with limited market share.
Sony has climbed part way out of its Leader’s Trap (see Video #42: Leader’s Trap on StrategyStreet.com) but still has a way to go. You will see more of the same in our next blog.
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