STRATEGIC MISTAKES (AVOIDABLE): THE
TOPICALITY OF MICHEL PORTER’S GENERIC STRATEGIES
Leandro A. Viltard
Pontificia Universidad Católica Argentina,
Universidad de Palermo, Buenos Aires,
Universidad Argentina de la Empresa (UADE), Buenos
Aires,
Universidad de San Isidro, Argentina.
Universidad del Pacífico, Ecuador
E-mail: lviltard@yahoo.com.ar
Submission: 29/11/2016
Revision: 09/12/2016
Accept: 19/12/2016
ABSTRACT
This
article explores the topicality of Porter’s generic strategies, assessing about their applicability on two
specific automotive industry projects: The Smart and the New Beetle.
After performing a documentation analysis
on these two projects, it was concluded that both of them may be considered
avoidable strategic mistakes as they show the risks of higher differentiation
that is not being paid by the customer, no matter how if it is about recognized
brands or icon products. Hazards and risks, like big losses and negative
margins, are applicable to every firm.
This is
a qualitative investigation with a not experimental and transversal research
design.
Keywords: Strategy; Generic;
Mistake; Competitiveness; Value; Smart; New Beetle; Michel Porter’s generic
strategies; Competitive Advantage;
Operational Effectiveness
1. INTRODUCTION
Competitive Advantage (CA), strategy and Operational
Effectiveness (OE) have been an academic and empirical discussion for years.
Professor Michael Porter proposed fundamental management theories on these
subjects and, during a long period, critics have been posed on his work. Mekic
and Mekic (2014) suggest that:
·
In accordance with
Speed (1989), the Five Competitive Forces are arbitrary and there is not shown
how to operationalize any analysis based on these forces.
·
CA is best practices
for a company (WELCH, 2005), but also CA can derive from external or internal
forces like resources and environment, basis for CA, too (BARNEY, 1991).
·
Operational
Effectiveness (OE) refers to doing the same things in better ways than others
do, not to strategy (BACHMANN, 2002). Strategy relates to combining activities;
that is why managers may lose the whole picture of the company thinking on core
competencies, critical resources and key success factors (KIPPENBERGER, 1997).
·
Generic strategies
(cost leadership, differentiation and focus) seem to be a parameter of choice
for every firm; however, this choice is bounded by the size of the firm,
industry and competitive analysis, and access to resources. As a result, small
companies should only compete through focus strategy whereas bigger firms may
choose cost leadership and differentiation (WRIGHT, 1987).
In
addition, Dawes (1996) suggests that the generic strategy schema do not fit with what
happens in reality and that they are
not a route to superior profitability.
Datta (2009) argues that cost leadership theory rests well with a heavy initial investment in
state-of-the-art equipment, which is impossible for small firms when they are not clear about its CA. The author insists
that cost leadership needs a high market share, which is unachievable at the beginning of a business.
·
Although not relying
solely on Porter’s work, it should be considered because it could be the basis
when deciding on strategy and CA (RECKLIES, 2011). Moreover, that strategy, OE and generic strategies are relevant
factors to understand and prevent from strategic mistakes that derive into
losses and negative margins in every firm.
1.1.
Objective of this investigation
To
explore the topicality of Porter’s generic strategies, assessing about their
applicability on two specific automotive projects: the Smart and the New
Beetle, proposing actions to improve strategic decisions and implementations.
1.2.
Design: Methodology and analysis
This
is a qualitative study, which explores and describes information of relevant authors
and specialists gathered in the period Jul. 2016 - Nov. 2016.
The investigation design is not
experimental and, among them, transversal as it is referred at a precise moment
in time.
The
analysis unit included the study of strategy, OE and generic strategies.
Important secondary sources were used to complete this review.
This
study was performed in Buenos Aires, Argentina.
1.3.
Research limitations/clarifications
The
information included in this analysis is the one that was judged to be needed in
order to support -in a reasonable way- the basis of this investigation.
As this study is based on
bibliographical review, it was not used an empirical analysis.
Conclusions are based on what is
exposed in this study and -as a qualitative research-results shown cannot be
generalized; however, they may be useful for management decisions.
1.4.
Findings
A deeper understanding on strategy,
CA, OE and generic strategies should be put in place in every organization, no
matter its size and location. The specific organization and skills needed are
directly connected with a proper implementation of that understanding.
There
were taken two projects as examples: the Smart and the New Beetle, which are
shown as avoidable strategic mistakes due to a higher differentiation that was
applied to these products and it, finally, was not paid by the customer.
Recognized brand or icon products do not guarantee success in the business
arena; big losses and negative margins are applicable to every company.
Leadership
is about strategy and management is about OE. In order to have sustainable
growth, the leader’s job refers to:
· Focus
on their present and future industries and select the right one/s to compete.
· Establish
an adequate set of distinctive activities.
· Develop
the next practices needed to go forward.
· Be
open and flexible, and look for nonconformity, uncharted territories,
development through learning, helping others, inclusion, transparency, and
loyalty.
1.5.
Originality and value
As,
success stories abound in business literature, it is hard to find mistakes because
they are not easily recognized and sometimes hidden. However, it is
demonstrated that admitting a mistake is better when somebody wants to
learn.
As a result, this study may help
executives and entrepreneurs when taking important strategic decisions in their
companies.
2. THE IMPORTANCE OF STRATEGY AND OPERATIONAL EXCELLENCE
(OE)
Strategy,
organization and performance are key issues while considering company results.
White (1986) states that:
· It is
needed a fit between the internal organization and the strategy of a firm. An
inappropriate internal organization may cause to perform less than full
potential.
· There
is a distinction between corporate strategy (where to compete, in which
industries and geographic areas) and business strategy (how to compete within a
given industry). Nevertheless, at business or corporate levels, the
strategy-organization-performance problematic exists.
· In
multi-business companies, business unit strategy can be influenced by key personnel
choice, and by the internal and external business unit organization.
· Cost
strategies efforts are directed to reducing costs. That´s the reason why, they
are connected to concepts like higher ROI while giving lower autonomy and
higher responsibilities sharing.
· Differentiation
efforts are directed to creating perceived uniqueness amongst customers. In
this case, strategy requires of strong functional coordination unified under
the business unit manager.
In
addition, Porter (1996) states that:
· Flexibility,
outsourcing, benchmarking/best practices and positioning are not
differentiators anymore. Copying others is a path to “mutually destructive
competition” and to temporary CA.
· Sustainable
profitability is almost impossible, as there is confusion between operational
effectiveness and strategy. Tools and techniques like change management,
outsourcing, total quality management and the like are helping operational
improvements, but not sustainable profitability.
· Superior
performance needs from Operational Effectiveness (OE) and strategy, but they
work differently. Outperforming rivals implies to charge greater prices and to
have greater efficiencies through lowering unit average costs. As there are many
activities required to carry out the different tasks that are needed in a
company (sell, produce, create products, and distribute, for example), costs
advantages come from being more efficient than competitors are and
differentiation arises from the choice of activities and how they are
performed. As a result, “activities are the basic units of competitive
advantage”. OE is doing better than
rivals, it is about inputs and outputs, and efficiency is its key word; it is
about moving the productivity frontier (new ways of managing, capital
investment or new personnel). On the contrary, strategic positioning means
doing different activities than rivals or in different ways.
· Constant
improvement on OE is necessary but not enough when considering extended period;
best practices imitation is its worst enemy as generic solutions diffuse the
fastest and managers let OE supplant strategy. The result is a pressure on
costs and prices, compromising long term sustainability. In other terms,
homogeneity and imitation are the basis of diminishing returns for incumbents,
and managers are supplanting strategy by OE, which is the basis of performance.
· On
the other hand, competitive strategy is about being different, choosing a
different set of activities than competitors. In this way, the essence of
strategy is in the activities that are chosen. As a result, strategy is “the
creation of a unique and valuable position, involving a different set of
activities” (p. 68) to be chosen, and it is needed a trade-off among them.
Activities cannot be separated from the whole and position comes from positions
built on systems of activities. That is why, trade-offs are the essence of
strategy and imply choosing what not to do.
· While
OE is about achieving excellence in individual activities, strategy is
connected with combining those activities. Organizational structure, processes
and systems must be strategy-specific as strategy is seen as an activity
system. As a consequence, cost-cutting and restructuring are not strategies,
are distractions to growth.
· Leadership
is not about orchestrating operational improvements and making deals. The core
of a general management position is strategy; it is about defining a unique
position, making trade-offs and fit among activities; it is about deciding what
to do and what not to do.
· OE
improvement is part of management job, but it is not strategy. It is connected
with best practices and continual improvement.
· Finally,
OE and strategy are part of two different agendas.
Out
from what it was said, to turn firms into leaders is more than benchmarking other
companies. Prahalad (2010) is convinced that benchmarking has a role in
leadership catching up with competitors but it does not turn companies into
leaders. It is needed to spot big opportunities and next practices in order to
become winners.
He
understands that next practices (not best practices) are about imagining the
future as Apple’s Steve Jobs and Tata Motors’s Ratan Tata do/did. So, to
identify the big opportunities that may arise he proposes questions, as:
·
Is the problem widely recognized and affects other
industries?
·
Does it need radical innovations and can change the
industry economics?
·
Tackling this issue, will give a fresh competitive
advantage and will create a big opportunity?
He
proposes that inclusive development is an example as smart companies had come
up with low priced products as a $ 2,000 car, a $ 100 laptop, a $ 30 cataract
surgery procedure and $ 0,002 cell phone call per minute. In fact, for 2015 he
predicted that 5 billion people all over the world would be using cell phones. Consequently,
giants like Unilever and P&G think that -for 2020- 50% of their worldwide
revenues will come from poor people in the developing world.
Additionally,
due to the connection between inclusive development and sustainability, (more
than 4 billion micro consumers and micro producers will place an unsustainable
stress on the earth in the future), sustainability is another big challenge.
Prahalad
(2010) cites that Drucker once said that opportunities are “visible, but not
seen”. That is why inclusive development is seen as a Corporate Social
Responsibility (CSR) not as a path to growth. He ends up saying that
sustainability is not a problem but an opportunity to innovate. Imagination is
the principal constraint to discovering mega-.opportunities, not resources.
Likewise,
Prahalad (2010) remarks important characteristics of managerial
responsibilities, as follows:
-
Nonconformity and the value to entering into uncharted
territories.
-
Displaying a commitment to learning and developing
yourself in order to help others.
-
Help others displaying their full potential investing
on them.
-
Good leaders are inclusive, so relate with the
unfortunate.
-
Develop fair and transparent processes and take a look
at how results are achieved. You will be judged by what you do and how well you
do it, not for what you said you wanted to do.
-
Remark loyalty to the organization, profession,
community, society and family, as anything can be achieved without family’s
support.
-
Leadership is about self-awareness, modesty, humility
and humanity it is requested to be aware of the poor and disabled, accepting
human weaknesses.
Big
opportunities are about to come and leaders must set the right strategy and
organization to transform them into sustainable and inclusive growth. OE is a need,
but not all what is needed. To select the right industry to compete, the right
set of activity system and the right next practices are a must. Openness and
flexibility are an imperative for growth.
In
the following Table 1 it is shown a summary of what it was said in this section:
Table 1: Strategy and
Operational Excellence
3. UNDERSTANDING GENERIC STRATEGIES
It is
hard to win playing the same game others do. That is why the competitive arena
is about playing a different game that the leader plays as the leader is who
designed the rules and have the resources to defend them.
Throughout
history, in different markets and industrial sectors, there were companies that
changed the rules and have control in their industries, others who influence and
others that neither one nor the other. The difference among them is to have a
clear strategy and to change the rules of the game[1].
Moreover,
to think about competitive strategy is to work on what the company should seem
in the future, and to think that operational strategy is emphasize operational
efficiency and effectiveness. Both are needed, but OE is not enough to
sustainable growth as it was said before.
In
this sense, Porter (2008) proposes three generic strategies:
·
Cost leadership (no frills): it
relates to gaining CA through lowest costs of production, removing costs from
every link of the value chain. The product can be priced at a competitive
parity and profit per product is lower if it is compared with differentiation
generic strategy. That is the reason why it requires high market share in order
to achieve revenue targets.
Key
concepts under this strategy are: scale (big volume and efficient capacity
utilization), cost reduction/minimization, integration, quick learning and
control. There is a point in which it must be done a differentiation sacrifice
and no more features must be added to the product/service.
The
risks that may be faced are: being trapped on high investments, to ignore
differentiation basis and/or to be exposed a cost reductions that are
implementable by other competitors. As an example, General Motors and Wal-Mart
are firms that target price-sensible customers.
To be successful with this generic
strategy it is needed to have access to technologies
that will bring costs down, to be very efficient in logistic and/or consistently be in the position to cut
costs below those of other competitors.
·
Differentiation (creating uniquely desirable products
and services): it relates to the creation of differentiated/more
attractive products for different segments, charging customers with premium
prices. Profit per product is higher in comparison to cost leadership generic
strategy, but market share is smaller. This generic strategy includes quality
and certainly is costly. How to do this depends on industry characteristics but
it may include: features, durability, functionality, brand image, support, and
the like.
Key
concepts under this strategy are: to be unique, brand loyalty, less price
sensibility and exclusivity.
Its
risks imply high cost of differentiation, no need for differentiation and
imitative products. Examples: Mercedes
Benz, Audi or BMW.
To be
successful with this generic strategy implies to nurture R&D, innovation,
ability to deliver high-quality products/services, and to build an effective
sales and marketing to make the market understand the benefits offered.
·
Focus or niche segment (offering a specialized service
in a niche market): it is related to focusing on a narrow and defined
market segment. It means that it will be developed a uniquely low cost or
well-specified product/service, generally with a strong brand loyalty among
their customers. After deciding a focus strategy, it is requested to decide if
it is going to be pursued cost leadership or differentiation, as focus in not
normally enough on its own. It is necessary to offer something extra in the
selected niche. Porsche is a case: their customers appreciate the CA created
especially for that niche.
Risks are connected with situations
like the niche may not grow or disappear.
As it
was mentioned above and considering that focus or niche segment generic
strategy is finally a differentiation or cost strategy for a specific segment,
for the purpose of this study it will be generalized that there are two generic
strategies: cost leadership and differentiation.
In
addition, Porter (2008) suggests that:
·
It is not convenient to be positioned in the middle of
these generic strategies as the company: a) doesn’t achieve any generic
strategy, having difficulties to generate profits, and b) there is uncertainty
and lack of clarity. A clear example is the automotive company Fiat/Chrysler;
historically, both firms had problems delivering positive results.
·
It is not possible to choose both strategies at a time
as cost leaderships needs an internal focus on processes and differentiation an
outward highly creative approach. In order to choose wisely a generic strategy
it is essential to consider organization’s competencies, strengths and
weaknesses, as per the following steps:
1- SWOT
analysis, to understand where success and risks are.
2- Five
competitive forces analysis, to know the nature of the industry you are in.
3- Compare
1 and 2, and ask yourself if it could be reduced or managed the supplier and customer power,
and the threat of substitution or new entry, and finally if it could be built
an uncontested place in the market.
4- Generic
strategy selection will give you the best and strongest set of options.
It is
essential to take into consideration that, when selecting a generic strategy,
it will be very difficult to change it in the near future as it implies a whole
organizational context to be developed (abilities and skills, among others).
Complementing
what Porter says, Dess and Davis (1984) demonstrates the “viability and
usefulness of categorizing firms within an industry into strategic groups on
the basis of their intended strategies” or Porter’s generic strategies. They
suggest that:
·
Strategies differ among firms and better strategies
make a difference in performance results.
·
There are groups of firms in the same industry with
similar strategies, like home appliances, chemical process and consumer goods
which differ along dimensions rather than size and market share.
·
Each generic strategy represents a group of strategy
groups in which a firm may want to compete in. To be “stuck in the middle”
implies low profitability as the firm will not take advantage of any generic
strategy. As a consequence, these three groups (two, as per our purpose) serve
to explain profitability and performance of firms within an industry.
Finally,
Porter indicates that each generic strategy is connected with different
organizational skills, and strategy influences any industrial sector.
The
following Table 2 shows the basic elements of generic strategies suggested
before:
Table 2: Generic
strategies
|
|
Cost Leadership |
Differentiation |
|
It is about |
Lower production costs–No frills. Making differentiation sacrifices. |
Differentiated/more attractive products creation. Includes quality and is costly. |
|
Price |
Competitive parity |
Premium |
|
Profit per product |
Less |
Higher |
|
Market share |
High |
Small |
|
Key concepts |
Scale. Cost reduction/minimization. Integration. Quick learning. Control. |
To be unique. Brand loyalty. Less price sensibility. Exclusivity. |
|
Risks |
High investments. Ignore differentiation basis. Imitable cost reductions. |
High cost of differentiation. No need for differentiation. Imitative products. |
|
Company emphasis / skills and abilities |
Efficiency and effectiveness |
R&D and innovation. |
|
Examples |
General Motors / Wal-Mart. |
Mercedes Benz, Audi or BMW. |
|
To be successful means |
Access to technologies that will bring costs down. Cost and logistic efficiencies. |
R&D focus + Innovation. Ability to deliver high-quality products/services. |
As it was shown in this section, to
have a solid strategic view it is needed to understand the basic principles of
Porter’s generic strategies, its benefits and how it should be selected.
A
generic strategy influences present and future performance of a firm and
impacts on the industrial sector in which competes.
To
decide one of these generic strategies implies a specific set of skills and
abilities to be developed, and a specific organization to be put in place.
A
middle position involves harsh risks like low profitability, uncertainty and
lack of clarity. There is not a company in the world which can stand them.
4. THE SMART PROJECT
At
the beginning, every project is a big interrogation mark and the Smart was not
an exception. The initial ideas of Daimler Chrysler’s (DC)[2] executives were not met on this
project, and they collided with what experts of the industry said. Let’s review
some of the positive and negative opinions that were found in our
investigation.
“Positive”
opinions
There are not a lot of specialists
who have positive opinions on the Smart, although there were found positive
points of view but with some reservations. For instance, Keuning (2007) states
that:
·
Smart is a kind of a revolution with a lot of skepticism
around, and the breakeven may come in many years. It was launched in Oct., 1998
with an initial hope of 120,000 units to be sold in the first year but rapidly
revised to 80,000 units. In the half-year to June 2000, 54,000 cars were sold
but the first estimate of 3 to 4 years of breakeven is history.
·
The initial argument to launch this project was that it
would bring down the fuel consumption figures for Daimler helping the giant
S-class to be on the road and not cannibalizing actual products.
·
Wealthy families would use two cars: an S-class for longer
trips and a Smart to get into the city. As a consequence, two Daimler cars
would be bought by the same family.
·
There were two inconveniences:
1.
The elk test for A-class retarded the development of the
Smart, increasing costs further.
2.
Over-emphasis on fun: targeting young people and offering
crazy colors. In addition, it was marketed like a toy, not being taken
seriously. That is why it took more than a year to become acceptable for the
streets of Munich and Berlin.
·
This car is successful in cities like Rome (as Italians are
used to small cars) and countries like Switzerland (for its link with Swatch
Group, as Nicholas Hayek, its chairman, who in the early 1990s joined Daimler
with the idea of bringing a watch manufacturer to the car industry).
Negative opinions
Negative
opinions are found not only from specialists but from the executives of DC. The
article “Smart is a disaster – Mercedes boss” (2005) states that E. Cordes, the
Head of the Mercedes Car Group, described that the Smart brand was a “disaster”
but still has a future. Targets were not met and Cordes predicts that it would
break even in 2007. Although Chief Executive J. Schrempp ruled it out to
closure, he is convinced that “adds sympathy to the Group and helps to achieve
voluntary emission targets”.
Additionally,
Flint (2005) says that Smart had no sense from day one as they forgot what a
car is about. He suggests that every auto company (like Toyota, Honda, BMW and
Porsche) makes mistakes and that some cars make no sense. For instance: the
1997 GM’s electric car (two-seater with 40 to 80 miles of autonomy), the 2002
Ford Blackwood (a pick-up that couldn’t pick up anything and lacked four-wheel
drive). He insists that a car is valuable because of its versatility: carries a
lot for huge distances in every condition, if not it doesn’t sell.
His
personal view is that, as Smart is a partnership with Swatch watch
(Switzerland) and Volkswagen rejected the project, it has different mistakes:
·
A car is not conceived to be parked in crowded cities, it
is bought for mobility. Parking is not a reason for existence.
·
It is only for two people, and a couple cannot carry a baby
or a friend. Lienert (2005) adds that smaller cars in America are not welcome
as they are full of capacity and parking is easy, unless someone lives in New
York or San Francisco. In addition, they are small for a medium American person
and for American roads.
·
The fuel-stingy engine makes it slow not making it
friendly-driven in any distance. The American traffic is not for this car.
·
The car body could be taken apart to match it with a dress,
but nobody would do that in his/her right mind.
·
Smart needed to sell 200,000 units a year to breakeven but,
at the most, they have not surpassed 100,000 a year.
·
In the first four years, the Smart lost $3 billion, which
are compromising DaimlerChrysler results as, in accordance with Lienert (2005),
needs resources to fix premium cars.
·
For the price of the Smart, Europeans could buy a more
competent car like VW Polo with four seats and can go anywhere.
To
add some more information to what Flint says on more competent cars found in
different markets, it was made a price comparison in USA and Argentina on
different models and brands which suggests that, in both countries, more
comfortable/competent cars could be bought for what a Smart is priced. In
addition, in USA the Smart is priced between $15,000 and $21,000[3],
and in Argentina prices varies from $22,300 to $26,400[4].In
addition, Davies (2013) says that he has a lot of fun zipping around Manhattan
and Brooklyn but he will not buy one. He points out some positive points in its
favor: it is targeted for people who are prone to new and interesting designs
(ex.: Millenials, environmentalists, and city dwellers) and it is built for
urban driving with great visibility. Parking and driving it is an excellent
experience. However, also, he points out the negative: the automated manual
transmission which offers a “jerky shifting of a poorly driven manual” and that
being knocked by the wind it offers an unpleasant sensation.
Finally,
Flint argues that quitting would be admitting a mistake, and executives hate to
do that. In addition, the plant was
built in France as a symbol of German-French cooperation, and dismissing French
people would be politically embarrassing. DC leaders forgot that a car is much
more than parking and cute as they must be able to do more things of what they
are supposed to do.
The impacts of this
project
Chronic losses, additional costs
incurred and negative margins are the fundamental impacts of this project. In
addition, some Institutions and specialists are recommending closing this
project.
In
addition, different specialists are against the way this project has been
carried on and advert that what is being done is not enough, as follows:
·
The “Smart division has been a
chronic loss maker since its birth in 1998 and promises of break-even have
never been fulfilled”.
With
2004 financial results, DC disclosed a 500 million Euros loss in the year.
Morgan Stanley investment bank estimates that each unit sold gives DC 4,000
Euros loss and a 35% of negative margin.
In
addition, the ForFour and the ForMore had been the source of many problems for
the brand, and Smart is a huge problem DC has to deal with. Dismissing people
is not enough, plants should be closed (WINTON, 2015).
·
Tran (2005) insists that DC would spend €1.2bn on Smart
revamp after years of losses with this brand. The large costs of this project
were impacting the firm’s earnings forecast for 2005 and obliged to recall 1.3
million Mercedes-Benz vehicles worldwide. Significant earnings increase for
2007 (€600 million), reductions in the workforce and to
discontinue production of its roadster and SmartSUV were planned in order to
restructure the Smart business model. Credit Suisse First Boston was skeptical
on these moves as the announcement on Smart is not aggressive enough to deal
with DC problems.
Moreover, Morgan Stanley bank advises that
it is necessary to close this project. The article “Mercedes advised to close
Smart” states that this bank urged DC to dump the £1.9bn cost incurred in
closing Smart following BMW, whose share price went up after it jettisoned
Rover in 2000. E. Cordes, Mercedes Benz boss, said that they “will present
Smart anew”.
Because of
this section, Smart was not conceived for what a car is about to be:
versatility and friendly driven for long-distances. More competent cars are
offered in the market and may be that is the reason why break even hasn’t come
yet. In other words, it was followed a differentiation strategy and positioned
in a higher target market for a car that is not price competitive for what it
is. As huge losses and negative margins are the fundamental impacts seen, the
peril of this project is that it may compromise Daimler as a whole.
5. THE NEW BEETLE PROJECT
Sass (2013) and other publications[5]
say that the old Beetle was born in 1930s. It is a record with +21 million
produced and bestselling car of the 1950 decade with 40% market share,
remaining unchanged during 58 years and in production for 65 years (1938 to
2003).
Dhabhar (2016)
remembers that the Beetle was created by Ferdinand Porsche during Hitler’s
period with a subsidized plan (SASS, 2013), and was called the “People’s car”,
helping a lot to motor the world.
McGinn (1998) suggests
that it is not an easy job to create a modern version of a fable. After
nineteen years that VW took the old Bug off the market in USA, it remained as
the bestselling car in history and an icon for collectors. The author insists,
“For a car designer, this was the equivalent of repainting the Mona Lisa”. Five
years were needed to be designed, having 80% of its parts in common with VW´s
Golf. It is stated that for elder people it can stir up emotions but after the
design work, sales must happen.
Out of the study of
different authors Dhabhar (2016), Sass (2013) and Lal (2005) it is possible to
have an additional understanding on specific issues of both cars, the classic
and the new Beetle:
·
In the 1950s, the Beetle was a success in India but in
2008 with an “exorbitant price tag”, it had few buyers. Its price is
“absolutely ridiculous” and its price point is “absolutely far from the
people’s car”. It is more a “fashion accessory” than a “mode of transport”. The
original Beetle was inexpensive, but never cheap.
·
Its shape and low price rapidly attracted new
generations of Americans. For many, it was their first car. A memorable
advertising said it all: “Buy low. Sell high”. By 1970, the Beetle’s sales peaked
at +400,000 units and it became an American icon.
·
In the period 1970-1993, the New Beetle sales declined
from 500,000 units to 50,000 in USA. However, in the period 1993-1997 sales
rebounded to an annual 29% growth thanks to targeting a younger new generation.
·
The appreciation of the Deutsche mark against the
dollar (1970s), the drop in oil prices (1982) and the declining popularity of
hatchbacks contributed to the declining in its sales. In 1979, VW was impeded
to comply with environmental legislation stopping selling cars in USA. Finally,
and with a huge Japanese competition, in mid-1980s and for the first time since
1958, VW sales were dip below 100,000 units.
·
More than 10 years after the last Beetle was sold in
USA, VW designers begun to design a New Beetle, based in four concepts: honest,
simple, reliable, and original, with up-to-date German engineering and superior
driving performance. By 1993, the concept car was finished and presented in the
1994 Auto Show in Detroit.
·
The first step was the design process and the second
one was directed to define the target market. In order to comply with this
task, they begun to talk with potential customers, knowing that most of the old
ones had personal histories, memories, and affection with the old Beetle, but
the new ones had no emotional connection with the car. As a result, it was thought for the small-car
segment, changing its positioning behind drivability. Its price range was
$17,000-$18,000, more than the average price of competitors ($15,200).
·
It was very important to assess the right selling
proposition. That is why it was needed to position The Beetle into the right
segment and not as “a toy” but as a “real, drivable car”.
·
In 1994, VW prepared a relaunch in the USA market
trying to modify the perception of poor quality and reliability of its
products. In 1995 and 1996 and thanks to a new ad campaign, sales increased in
each year 29% and by 1997, sales increased 178% in comparison to 1993 sales.
·
Jim Mateja (Chicago Tribune of 02/13/1994) said that
VW must came up with a new, small and inexpensive car as the old Beetle, giving
the opportunity to have what many people couldn’t. However, the New Beetle
-made on the VW Golf platform- was larger, more spacious, had a better engine
and nice shape, and offered front and side airbags.
·
Although the Classic Beetle has the outright charm to
call the attention of any and every person, the New Beetle is prettier, larger
and more comfortable, and incorporated the Porsche inspired spoiler. Both cars
are solid and of good quality.
Both
cars are shown in the following image:
Figure 1: The
Classic and the New Beetle
Source: Dhabhar (2016)
Moreover,
in the article “The whim’s duel: Mini Cooper versus New Beetle” (2012) it is
compared esthetic, mechanic and comfort of both cars. It states that Mini
Cooper wins in sportsmanship and the New Beetle in comfort, but both are
treated as a whim. However, in this sense Mini Cooper wins.
Finally,
it says that the New Beetle would end production in 2018 after 20 years and two
generations (this news is about to be confirmed), as traditional cars are not
selling as utility-like vehicles are and VW needs to open production capacity.
In addition, it has never good sales, and during the first quarter, 2016 VW
delivered 5,700 Beetles in USA, representing a 42% decline over previous year (GANZ,
2016).
Price
comparison
In USA, the New Beatle is priced in
a range of $20,000-$26,000 and in Argentina it is approx. $ 28,000 for the hard
top[6].
It is presented as “stylish, extravagant, and cool” and the Cabriolet version
as “dynamic, sporty, and confident” with “an unusual denim-like finish”[7].
It is
fully equipped with features like six-speed automatic transmission, 2.5 liter
five-cylinder and Electronic Stabilization Program (ESP), for safe driving
under most conditions[8].
The
article “Apuntes del lanzamiento del Volkswagen The Beetle” (2014) says that in
Argentina the sales expectations for 2014 were (only) 500 units. In 2016, it was priced approx. $28,000/30,000
for a hard top[9] (a VW
Vento costs approx. 26,000/31,000[10])
and in USA $20,000/26,000[11].
Because
of this paragraph, it is noted that in time, the New Beetle changed its
positioning from an “inexpensive car”, to a “toy” and to a “real and drivable
car”, but simplicity, smallness and inexpensiveness were not maintained as in
the classic Bug.
In
addition, it was infused with German engineering and superiority in many areas
of the product, made on the Golf platform. As a result, the “people’s car” was
not for everyone, changing the original generic strategy (leadership in cost)
to a differentiation strategy.
In
addition, the target market and the selling proposition were thought after its
design was completed, not before. Consequently,
VW had not thought on what was needed in the market but on what they could
produce.
Finally,
prices are high in comparison to other cars offered in the market.
6. CONCLUSIONS
Sustainable
growth comes from a proper fit between strategy (a sufficient condition) and
Operational Effectiveness (OE, a necessary condition, but not sufficient).
While strategies is a path to sustainable profitability, selecting a different
set of activities or do them in a different way, OE is about inputs and outputs
and in doing better than competitors. In this sense, inclusive development
should be seen as a big opportunity for growth.
Leadership
is about strategy and management is about OE. That is why, leaders must focus
on the present and future of their industries, selecting the right one to
compete, an adequate set of activities and the next practices needed to go
forward.
To be
open and flexible is an imperative for sustainable growth. That is why leaders
characteristics relate to nonconformity, look for uncharted territories,
development through learning, helping others, inclusion, transparency, and
loyalty.
To
have a solid strategic perspective implies the understanding of the basic
principles of Porter’s generic strategies, its benefits and how it should be
selected. As a result, it is important to understand generic strategies, as
follows:
·
Cost leadership implies cost reductions (no frills),
efficiencies and ROI. There are needed differentiation sacrifices, if apply.
As
price is in competitive parity, the profit per product is low and the market
share should be high.
Its
key concepts are: scale, cost reduction/minimization, integration, quick
learning and control.
Key
company emphasis should be on efficiency and effectiveness.
·
Differentiation relates to building a perceived
uniqueness and attractiveness on products/services, and higher quality.
As premium
prices should be established, the profit per product is high and the market
share is low.
Its
key concepts are: uniqueness, brand loyalty, less price sensibility and
exclusivity.
Key
company emphasis should be on R&D and innovation.
·
A middle position among one of these generic
strategies involves harsh risks like low profitability, uncertainty and lack of
clarity.
·
Each generic strategy needs to develop a different set
of organizational skills and a specific organization to be put in place,
influencing the industrial sector in which the firm competes.
Taking
into consideration what it was said before, the Smart and the New Beetle could
be considered avoidable strategic mistakes, as per the following reasons:
·
The Smart was not conceived for what it is expected
from a car: versatility and friendly driven for long-distances; other better
offers are found in the market. For the segment in which it competes, high
differentiation and huge price premiums are not recognized because of
customers’ price sensibility.
Moreover,
it is possible that the Mercedes Benz’s customer would not like to pay what is supposed for one of its
products having the Smart (a cheaper product)
as part of Mercedes’ product line,
giving an additional argument for which
the Smart may compromise Daimler as a whole.
·
The New Beetle (more seen as a toy than as a drivable
car) changed the positioning of the old Beetle (simplicity, smallness and
inexpensiveness), and its original generic strategy (from leadership in costs
to differentiation). Being priced very high for what the classic Beetle was, it
seems a car “not-for-everyone” and not a “people’s car”.
For
what it was said before, it is not said that a generic strategy is impossible to be changed.
The fact is that pretending to sell a product just because it was an icon and not considering the
minimum strategic basis may be a fault.
New generations “forget” history and look for actual results.
In addition, as the target market and
the selling proposition were thought after
completing the product design,
VW seemed doing as in Ford’s times: selling what
is produced and not thinking on customer’s desire or on what he/she could be delighted. To replicate icon
products is not a synonym of excellent
future sales and breakeven point
achievement.
Professor
Porter while talking about strategy and generic strategies warns hazards and
risks. The Smart and the New Beetle show
the risks of higher differentiation that is not being paid by the customer, no
matter how if it is about recognized brands or icon products. Losses and
negative margins are applicable to every firm.
REFERENCES
Apuntes del lanzamiento del Volkswagen The Beetle
(05/16/2014), from http://autoblog.com.ar/2014/05/16/apuntes-del-lanzamiento-del-volkswagen-the-beetle/, retrieved
11/21/2016.
ÁLVAREZ PERALTA, D. H.; VILTARD, L. A. (2016) Herramientas estratégicas para la Pequeña y
Mediana Empresa (PYME). El caso de las empresas de Quito, Ecuador. B. S. Lab., Italia:
Avellino.
ÁLVAREZ PERALTA,
D. H.; VILTARD, L. A. (2015) Strategic Analysis Tools
Application at SMEs in Ecuador, Independent Journal of Management &
Production, v. 6, n. 4.
ÁLVAREZ PERALTA,
D. H.; VILTARD, L. A. (2015) Simple Strategic Analysis Tools
at SMEs in Ecuador, Independent Journal of Management & Production, v. 6, n. 2.
COPPING, R. A.
(2014) Volkswagen Beatle, Shire
Publications Ltd., from www.shirebooksco.uk, retrieved 11/19/2016.
DAVIES, A.
(2013) I won’t buy a Smart car until the
price tag hits $13.000 – Here´s why, from http://www.businessinsider.com/should-you-buy-a-smart-car-2013-4, retrieved
11/13/2016.
DESS, G. G.; DAVIS,
P. S. (1984) Porter’s (1980) generic strategies as determinants of strategic
group membership and organizational performance, Academy of Management Journal, v. 27, n. 3, p. 467-488.
DHABBAR, C.
(2016) 2016 Beetle versus 1963 Beetle:
The modern versus classic Volkswagen shootout, from https://www.zigwheels.com/reviews-advice/shootouts/2016-beetle-vs-1963-beetle-the-modern-vs-classic-volkswagen-shootout/24717/, retrieved
11/20/2016.
FLINT, J.
(02/14/2005) Not so Smart, from http://www.forbes.com/forbes/2005/0214/128.html, retrieved 11/13/2016.
GANZ, A. (04/15/2016) VW Beetle to get the axe after 2018, from http://www.motorauthority.com/news/1103445_vw-beetle-to-get-the-axe-after-2018, retrieved 11/19/2016.
KEUNING, D.
(2007) Management: a European
perspective, Routledge, Taylor & Francis Group, Noorthhoff Uitgevers: The
Netherlands.
LAL, R.
(09/25/2005) The New Beetle, Harvard
Business School, Boston: USA.
LIENERT, D.
(2005) Daimler's dumb decisions. Forbes, New York: USA.
MEKIC´, E.; MEKIC´, E. (2014) Supports and critics con Porter’s
competitive strategy and competitive advantage, ResearchGate, from file:///C:/Users/.%C2%B4%C2%BF/Downloads/icesos%20mo%208%20final%20(1).pdf, retrieved 11/26/2016.
MCGINN, D. (1998) New legs for a bug, Newsweek, from https://www.highbeam.com/doc/1G1-20117743.html, retrieved
11/19/2016.
Mercedes advised to close Smart (w/d) from http://www.autocar.co.uk/car-news/industry/mercedes-advised-close-smart, retrieved
11/13/2016.
PORTER, M. E.
(2008) Competitive advantage: creating
and sustaining superior performance, Simon and Shuster, New York: USA.
PORTER, M. E.
(1996) What is strategy?, Harvard
Business Review, Boston: USA.
PRAHALAD, C. K.
(s/f) Remembering C. K. Prahalad,
the management guru (26/4/2010), from https://www.youtube.com/watch?v=100V0iaHFcQ, retrieved
10/30/2016.
PRAHALAD, C. K.
(2010) Best practices get you only so far,
Harvard Business Review, Boston:
USA.
PRAHALAD, C. K.
(2010) The responsible manager, Harvard
Business Review, Boston: USA.
Smart factory with networked value chain (08/03/2016),
from http://www.hf-mixinggroup.com/en/news/blog/mixing-highlights/smart-factory-with-networked-value-chain/, retrieved
11/13/2016.
SASS, R.
(01/25/2013) Secrets of the original
Volkswagen Beetle, from http://www.foxnews.com/leisure/2013/01/27/secrets-volkswagen-beetle/, retrieved 11/21/2016.
Smart is a disaster – Mercedes boss (2005), from http://www.am-online.com/news/2005/3/4/-smart-is-a-disaster-mercedes-boss/8242/, retrieved
11/13/2016.
The whims’ duel: Mini Cooper versus New Beetle (2012), from http://www.bolsamania.com/kmph/el-duelo-del-capricho-mini-cooper-vs-new-beetle/, retrieved
11/19/2016.
TRAN, M. (4/1/2005) Daimler to spend €1.2bn on Smart revamp, The Guardian, UK.
20 Facts about the VW Beetle (w/d), from http://www.thefactsite.com/2016/07/volkswagen-beetle-facts.html, retrieved 11/21/2016.
WHITE, R. D. (1986) Generic business strategies,
organizational context and performance: an empirical investigation, Strategic Management Journal, v. 7, n. 3, p. 217.
WINTON, N.
(04/01/2015) Smart reaction:
DaimlerChrysler’s Smart action feeble, say bankers, from http://www.just-auto.com/news/daimlerchryslers-smart-action-feeble-say-bankers_id73025.aspx,
retrieved 11/13/2016.