Productoverlap Strategy

The product-overlap strategy refers to a situation where a company decides to compete against its own brand. Many factors lead companies to adopt such a strategic posture. For example, A&P stores alone cannot keep the company's 42 manufacturing operations working at full capacity. Therefore, A&P decided to distribute many of its products through independent food retailers. A&P's Eight O'Clock coffee, for example, is sold through 7-Eleven stores. Procter & Gamble has different brands of detergents virtually competing in the same market. Each brand has its own organization for marketing research, product development, merchandising, and promotion. Although sharing the same sales force, each brand behaves aggressively to outdo others in the marketplace. Sears' large appliance brands are actually manufactured by the Whirlpool Corporation. Thus, Whirlpool's branded appliances compete against those that it sells to Sears.

There are alternative ways in which the product-overlap strategy may be operationalized. Principal among them are having competing lines, doing private labeling, and dealing with original-equipment manufacturers.

Competing Brands

In order to gain a larger share of the total market, many companies introduce competing products to the market. When a market is not neatly delineated, a single brand of a product may not be able to make an adequate impact. If a second brand is placed to compete with the first one, overall sales of the two brands should increase substantially, although there will be some cannibalism. In other words, two competing brands provide a more aggressive front against competitors.

Often the competing-brands strategy works out to be a short-term phenomenon. When a new version of a product is introduced, the previous version is allowed to continue until the new one has fully established itself. In this way, the competition is prevented from stealing sales during the time that the new product is coming into its own. In 1989, Gillette introduced the Sensor razor, a revolutionary new product that featured flexible blades that adjusted to follow the unique contours of the face. At the same time, its previous razor, Atra, continued to be promoted as before. It is claimed that together the two brands were very effective in the market. It is estimated that 36 percent of Sensor users converted from Atra. If Atra had not been promoted, this figure would have been much more, and Sensor would have been more vulnerable to the Schick Tracer and other rigid Atra look-alikes.11 Interestingly, however, when Gillette introduced the Mach 3 razor in 1998, it decided to run down stocks of its Sensor and Atra shavers ahead of the new product's launch.12

To expand its overall coffee market, Procter & Gamble introduced a more economical form of ground coffee under the Folgers label. A more efficient milling process that refines coffee into flakes allows hot water to come into contact with

Private Labeling more of each coffee particle when brewing, resulting in savings of up to 15 percent per cup. The new product, packaged in 13-, 26-, and 32-ounce cans, yielded the same number of cups of coffee as standard 16-, 32-, and 48-ounce cans, respectively. Both the new and the old formulations were promoted aggressively, competing with each other and, at the same time, providing a strong front against brands belonging to other manufacturers.

Reebok International products under the Reebok brand name directly compete with its subsidiary's brand, Avia. As noted earlier, the competing-brands strategy is useful in the short run only. Ultimately, each brand, Avia and Reebok, should find its special niche in the market. If that does not happen, they will create confusion among customers and sales will be hurt. Alternatively, in the long run, one of the brands may be withdrawn, thereby yielding its position to the other brand. This strategy is a useful device for achieving growth and for increasing market share.

Private labeling refers to manufacturing a product under another company's brand name. In the case of goods whose intermediaries have significant control of the distribution sector, private labeling, or branding, has become quite common. For large food chains, items produced with their label by an outside manufacturer contribute significantly to sales. Sears, J.C. Penney, and other such companies merchandise many different types of goods—textile goods, electronic goods, large appliances, sporting goods, etc.—each carrying the company's brand name.

The private-label strategy from the viewpoint of the manufacturer is viable for the following reasons:

• Private labeling represents a large (and usually growing) market segment.

• Economies of scale at each step in the business system (manufacturing capacity, distribution, merchandising, and so on) justify the search for additional volume.

• Supplying private labeling will improve relationships with a powerful organized trade.

• Control over technology and raw materials reduces the risk.

• There is a clear consumer segmentation between branded and unbranded goods that supports providing private labels.

• Private labeling helps eliminate small, local competitors.

• Private labeling offers an opportunity to compete on price against other branded products.

• Private labeling increases share of shelf space—a critical factor in motivating impulse purchases.

But here are also strong arguments against the private-label strategy:

• Market share growth through private-label supply always happens at the expense of profitability, as price sensitivity rises and margins fall.

• Disclosing cost information to the trade—usually essential for a private-label supplier—can threaten a firm's branded products.

• In order to displace existing private-label suppliers, new entrants must undercut current prices, and thus risk starting a price war—in an environment where trade loyalty offers little protection.

Dealing with Original-Equipment Manufacturers (OEMs)

• In young, growing markets, it is the brand leaders, not the private-label suppliers, that influence whether the market will develop toward branded or commodity goods.

• Private labeling is inconsistent with a leader's global brand and product strategy—it raises questions about quality and standards, dilutes management attention, and affects consumers' perception of the main branded business.

Many large manufacturers deal in private brands while simultaneously offering their own brands. In this situation, they are competing against themselves. They do so, however, hoping that overall revenues will be higher with the offering of the private brand than without it. Coca-Cola, for example, supplies to A&P stores both its own brand of orange juice, Minute Maid, and the brand it produces with the A&P label. At one time, many companies equated supplying private brands with lowering their brands' images. But the business swings of the 1980s changed attitudes on this issue. Frigidaire appliances at one time were not offered under a private label. However, in the 1980s Frigidaire began offering them under Montgomery Ward's name. An interesting question that can be raised about private branding is whether cars can be sold under a distributor's own label. The idea has surfaced at Auto Nation, the country's biggest car retailer, who might one day buy a car manufactured in, say, South Korea, and sell it under its own label.13

A retailer's interest in selling goods under its own brand name is also motivated by economic considerations. The retailer buys goods with its brand name at low cost, then offers the goods to customers at a slightly lower price than the price of a manufacturer's brand (also referred to as a national brand). The assumption is that the customer, motivated by the lower price, will buy a private brand, assuming that its quality is on a par with that of the national brand. This assumption is, of course, based on the premise that a reputable retailer will not offer something under its name if it is not high quality. Consider the Save-A-Lot chain, a unit of Minneapolis food distribution Super Valu Inc. whose 85% of sales come from private-label items. With a total of 706 stores in 31 states, with sales amounting to $ 3 billion, it is one of the nation's fastest growing grocery chains.14

Following the strategy of dealing with an OEM, a company may sell to competitors the components used in its own product. This enables competitors to compete with the company in the market. For example, in the initial stages of color television, RCA was the only company that manufactured picture tubes. It sold these picture tubes to GE and to other competitors, enabling them to compete with RCA color television sets in the market.

The relevance of this strategy may be discussed from the viewpoint of both the seller and the OEM. The motivation for the seller comes from two sources: the desire to work at near-capacity level and the desire to have help in promoting primary demand. Working at full capacity is essential for capitalizing on the experience effect (see Chapter 12). Thus, by selling a component to competitors, a company may reduce the across-the-board costs of the component for itself, and it will have the price leverage to compete with those manufacturers to whom it sold the component. Besides, the company will always have the option of refusing to do business with a competitor who becomes a problem.

The second source of motivation is the support competitors can provide in stimulating primary demand for a new product. Many companies may be working on a new-product idea. When one of them successfully introduces the product, the others may be unable to do so because they lack an essential component or the technology that the former has. Since the product is new, the innovator may find the task of developing primary demand by itself tedious. It may make a strategic decision to share the essential-component technology with other competitors, thus encouraging them to enter the market and share the burden of stimulating primary demand.

A number of companies follow the OEM strategy. Auto manufacturers sell parts to each other. Texas Instruments sold electronic chips to its competitors during the initial stages of the calculator's development. In the 1950s, Polaroid bought certain essential ingredients from Kodak to manufacture film. IBM has shared a variety of technological components with other computer producers. In many situations, however, the OEM strategy may be forced upon companies by the Justice Department in its efforts to promote competition in an industry. Both Kodak and Xerox shared the products of their technology with competitors at the behest of the government. Thus, as a matter of strategy, when government interference may be expected, a company will gain more by sharing its components with others and assuming industry leadership. From the standpoint of results, this strategy is useful in seeking increased profitability, though it may not have much effect on market share or growth.

As far as the OEMs are concerned, the strategy of depending upon a competitor for an essential component only works in the short run because the supplier may at some point refuse entirely to sell the component or may make it difficult for the buyer to purchase it by delaying deliveries or by increasing prices enormously.

Continue reading here: Productscope Strategy

Was this article helpful?

+2 0