Small Business Management Directions: Read the case study Vizio: Disrupting Anot

Question

Small Business Management

Directions: Read the case study Vizio: Disrupting Another Market in Chapter 4 on page 124 of the textbook. Answer the following questions: What challenges does Vizio face as it attempts to introduce a new line of products into a mature industry? Use the Internet to learn more about Vizio. Describe the company’s strengths and weaknesses. What opportunities and threats does the company face? Which of the three strategies described in this chapter is Vizio using? Do you think that Vizio’s strategy for competing in the PC and laptop market will be successful? Explain.

Case Study Vizio: Disrupting Another Market Before he turned 30, William Wang was a successful entrepreneur whose company, MAG Innovision, specialized in computer display screens. In 2002, Wang used $600,000 from the sale of MAG Innovision to launch Vizio Inc., which has surged past industry icons such as Sony, Sharp, and Samsung to become the fastest-growing maker of flat-panel televisions in North America. Wang’s well-executed cost leadership strategy, much of which he developed from the mistakes he made at MAG Innovision, is the key to the company’s success. When he started Vizio (“Where vision meets value”), high-definition televisions sold for $8,000, but Wang’s vision was to offer quality products and to keep costs low, enabling his company to sell televisions at half the going price. “When I started this business, I believed we could do all of the things we’re doing today,” he says. A lean operating strategy has been a hallmark of the Irvine, California–based company since its first day of operation. Outsourcing most functions, including tech support, warehousing, shipping, and research and development, and keeping its employee ranks lean hold operating costs well below the industry average. Vizio’s overhead costs are less than 1 percent of its sales, far below the 10 percent of sales that those costs represent at its competition. “Every single dime counts,” says Wang. Because concept development, marketing, and customer service are keys to success, Wang intentionally keeps them in-house. Vizio’s distribution network is consistent with its low-cost strategy, relying on discount chains such as Sam’s Club, Costco, and others to reach mass-market purchasers who tend to be price sensitive. Wang recently extended Vizio’s low-cost strategy to another maturing market that is ripe for a shake-up: personal computers. “If you rewind eight to ten years, the TV market looked similar to the PC market today,” says Matt McRae, Vizio’s chief technology officer. “It was a mature market with lots of companies. We did pretty well. We’re now the number one TV company in the United States. We’ve done this before.” Vizio introduced a line of computers and laptops that are as stylish as Apple’s successful Macintosh line but run the Microsoft Windows software that drives 90 percent of the world’s computers. The computers sport clean lines, machined lightweight aluminum bodies, and powerful, high-performance components. “PCs have become a sea of black plastic,” says McRae. “We’re building a product people want.” What Vizio’s computers don’t include is the “bloatware,” the preloaded software that clogs most other PCs, which means that Vizio’s computers boot faster and run cleaner. Maintaining consistency with its low price image, Vizio’s computers are priced below Apple products and below competing PCs and laptops with prices that start at $898. The company’s high-end computer, an all-in-one desktop with a crisp, 27-inch display, starts at just $1,098. “Our target audience is people who can’t afford a $2,000 computer,” says Wang. Vizio, which has a very small engineering staff, spent two years designing its line of computers and worked closely with key suppliers such as graphics card manufacturer Nvidia, chip maker Intel, and software designer Microsoft to optimize designs on the components and the systems that run them. “Vizio is doing a good job listening and taking advice from the experts on how to optimize hardware and software,” says Steve Guggenheimer of Microsoft. Relying on experienced companies to assist in the design of its computers not only maximizes the machines’ performance but also controls costs and allows Vizio to focus on providing a positive customer experience. Because the people who purchase computers are more likely to require technical support than those who purchase televisions, Vizio has decided to maintain all technical support services for computers in-house at its service center in Dakota Dunes, South Dakota. Vizio also keeps distribution costs under control by selling its computers through most of the same outlets that it uses to sell its popular line of televisions, including Walmart, Sam’s Club, Amazon, Costco, and Target. The company also sells the computers through portable pop-up mini-stores made from old shipping containers that it sets up on college campuses, at music festivals, and other events. “If anyone says you can’t disrupt a mature market, they’re wrong,” says McRae.

Three Strategic Options from Text

The number of strategies from which entrepreneurs can choose is infinite. When all of the glitter is stripped away, however, three basic strategies remain. In his classic book Competitive Strategy, Michael Porter defines these strategies: (1) cost leadership, (2) differentiation, and (3) focus. Cost Leadership A company pursuing a cost leadership strategy strives to be the lowest-cost producer relative to its competitors in the industry. Many small companies attempt to compete by offering low prices, but low costs are a prerequisite for success. “You can’t compete on price if you can’t compete on cost,” explains small business researcher Scott Shane.47 Cost control on all fronts is paramount in companies that pursue this strategy. Economies of scale that are associated with large scale operations are a common source of a company’s cost advantage (high volume = low per unit cost), which makes executing a successful cost leadership strategy difficult for small businesses. However, there are many ways to build a low-cost strategy. The most successful cost leaders know the areas in which they have cost advantages over their competitors and use them as the foundation for their strategies. Low-cost leaders have a competitive advantage in reaching buyers whose primary purchase criterion is price, and they have the power to set the industry’s price floor. This strategy works well when buyers are sensitive to price changes, when competing firms sell the same commodity products, and when companies can benefit from economies of scale. Not only is a low-cost leader in the best position to defend itself in a price war, but it also can use its power to attack competitors with the lowest price in the industry. “You have to be the lowest-cost producer in your patch,” says the president of a small company that sells the classic commodity product—cement. Dangers exist in following a cost leadership strategy. Companies using this strategy are pursuing customers whose purchase decisions are driven almost exclusively by price and are not likely to be brand loyal. If another company dethrones a cost leader from its low-cost position, the former cost leader’s customer base can evaporate quickly. Some companies attempt to compete on price even though their cost structure is not the lowest in the market. Other companies focus exclusively on lower manufacturing costs, without considering the impact of purchasing, distribution, or overhead costs. Another danger is misunderstanding a company’s true cost drivers. For instance, one furniture manufacturer drastically underestimated its overhead costs and, as a result, was selling its products at a loss. Pursuing a cost leadership strategy requires a company to constantly focus on controlling and lowering costs, but if executed properly, it can be an incredibly powerful strategic weapon.

Differentiation A company following a differentiation strategy seeks to build customer loyalty by positioning its goods or services in a unique or different fashion. In other words, a company strives to be better than its competitors at something that its customers value. The primary benefit of successful differentiation is the ability to generate higher profit margins because of customers’ heightened brand loyalty and reduced price sensitivity. There are many ways to create a differentiation strategy, but the key is to be special at something that is important to customers and offers them unique value such as quality, convenience, flexibility, performance, or style. “You’d better be on top of what it is your customers value and continually improve your offerings to better deliver that value,” advises Jill Griffin, a strategic marketing consultant.51 Any small company that can offer products or services that larger competitors do not, improve a product’s or service’s performance, reduce the customer’s risk of purchasing it, or enhance the customer’s status or self-esteem has the potential to differentiate. Even in industries in which giant companies dominate, small companies that differentiate themselves can thrive even though they cannot compete effectively on the basis of price. For instance, the $20 billion pet food industry is dominated by large companies, but several small companies are achieving success with differentiation strategies that are designed to resonate with their target customers. The key to a successful differentiation strategy is to build it on a core competency, something the small company is uniquely good at doing in comparison to its competitors. Common bases for differentiation include superior customer service, special product features, complete product lines, a custom-tailored product or service, instantaneous parts availability, absolute product reliability, supreme product quality, extensive product knowledge, and the ability to build long-term, mutually beneficial relationships with customers. To be successful, a differentiation strategy must create the perception of value to the customer. No customer will purchase a good or service that fails to produce a perceived value, no matter how real that value may be. One business consultant advises, “Make sure you tell your customers and prospects what it is about your business that makes you different. Make sure that difference is on the form of a true benefit to the customer.” Pursuing a differentiation strategy includes risks. One danger is trying to differentiate a product or service on the basis of something that does not boost its performance or lower its cost to the buyer. Another pitfall is trying to differentiate on the basis of something that customers do not perceive as important. Business owners also must consider how long they can sustain a product’s or service’s differentiation; changing customer tastes makes the basis for differentiation temporary at best. Imitations and “knockoffs” from competitors also pose a threat to a successful differentiation strategy. For instance, designers of high-priced original clothing see much cheaper knockoff products on the market shortly after their designs hit the market. Another danger of this strategy is overdifferentiating and charging so much that a company prices its products out of its target customers’ reach. The final risk is focusing only on the physical characteristics of a product or service and ignoring important psychological factors, such as status, prestige, and image, which can be powerful sources of differentiation.

Focus A focus strategy recognizes that not all markets are homogeneous. In fact, in any given market, there are many different customer segments, each having different needs, wants, and characteristics. The principal idea of this strategy is to select one (or more) segment(s); identify customers’ special needs, wants, and interests; and approach them with a good or service designed to excel in meeting these needs, wants, and interests. Focus strategies build on differences among market segments. Using a focus strategy, entrepreneurs concentrate on serving a niche in the market rather than trying to reach the entire market. A successful focus strategy depends on a small company’s ability to identify the changing needs of its targeted customer group and to develop the skills required to serve them. That means the owner and everyone in the organization must have a clear understanding of how to add value to the product or service for the customer. Rather than attempting to serve the total market, a small company pursuing a focus strategy specializes in serving a specific target segment or niche that larger companies do not serve or cannot serve profitably. A focus strategy is ideally suited to many small businesses, which often lack the resources to reach the overall market. Their goal is to serve their narrow target markets more effectively and efficiently than do competitors that pound away at the broad market. Common bases for building a focus strategy include zeroing in on a small geographic area, targeting a group of customers with similar needs or interests (e.g., left-handed people), or specializing in a specific product or service (e.g., petite clothing). Like Jay Lehman, the most successful focusers build a competitive edge by concentrating on specific market niches and serving them better than any other competitor can. Essentially, this strategy depends on creating value for the customer either by being the lowest-cost producer or by differentiating the product or service in a unique fashion but doing so in a narrow target segment. Speedy service, a unique product or service, specialized knowledge, superior customer service, value pricing, and convenience are just some of the ways that companies using focus strategies meet their target customers’ unique needs. To be worth targeting, a niche must be large enough to be profitable, reachable through marketing media, and capable of sustaining a business over time (in other words, not a passing fad). Many small companies thrive in small yet profitable niches. The rewards of dominating a niche can be huge, but pursuing a focus strategy does carry risks. Companies sometimes must struggle to capture a large enough share of a small market to be profitable. A niche must be big enough for a company to generate a profit. A successful focus strategy also brings with it a threat: invasion by competitors. If a small company is successful in its niche, there is the danger of larger competitors entering the market and eroding or controlling it. Sometimes a company with a successful niche strategy gets distracted by its success and tries to branch out into other areas. As it drifts farther away from its core strategy, it loses its competitive edge and runs the risk of confusing or alienating its customers. Muddying its image with customers puts a company in danger of losing its identity. A successful strategic plan identifies a complete set of success factors—financial, operating, and marketing—that, taken together, produce a competitive advantage for a small business. The resulting action plan distinguishes the firm from its competitors by exploiting its competitive advantages. The focal point of this entire strategic plan is the customer. The customer is the nucleus of any business, and a competitive strategy will succeed only if it is aimed at serving customers better than competitors do. An effective strategy draws out the competitive advantage in a small company by building on its strengths and by making the customer its focus. It also defines methods for overcoming a company’s weaknesses, and it identifies opportunities and threats that demand action.

What challenges does Vizio face as it attempts to introduce a new line of products into a mature industry?

Use the Internet to learn more about Vizio. Describe the company’s strengths and weaknesses.

What opportunities and threats does the company face?

Which of the three strategies described in this chapter is Vizio using?

Do you think that Vizio’s strategy for competing in the PC and laptop market will be successful? Explain.

Explanation / Answer

Vizio being a company which follows low cost strategy there are several challenges faced by it. It has to compete in a niche field against big player who has deep pockets. There are several technical challenges as well which needs to be overcome. The field in which Vizio is sensitive to pricing and therefore, needs to be careful about costs as well as product quality.

The strength of the company lies in the fact that it executes a low cost strategy effectively and efficiently. The different levels of cost leadership strategy has been implemented by Vizio with perfection. The focused approach is another strength of Vizio which has lead to branding of its products in a niche market. The weakness of Vizio lies in the fact that its had limited product variety and can cater to only a single market.

The opportunities for the company is the affluency in the lower middle class segment and the aspirational attitude of consumers towards TVs and desktops. The threat would be from large players like Sony or Apple who would want to enter the low cost strategy.

The company follows a cost leadership strategy alongwith a focused approach towards manufacturing.

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