The following models/tools were used to assess Bang and Olufsen's (B&O)'s strategy, relative advantages and disadvantages in its design-led approach.
- Porter's Generic Competitive Advantage Model (Porter 1985)
- Porter's Five Forces Model (Porter 1985)
- Kaplan and Norton's Balanced Score Card Model (Kaplan and Norton 2001)
- A strengths, weakness, opportunities and threats (SWOT) analysis was completed to expose key themes.
Porter's Generic Competitive Advantage Model
Porter states competitive advantage is achieved through the 'value a firm is able to create for its buyers that exceeds the firm's cost of creating it' (Ed. Montgomery and Porter 1991).
Porter states competitive advantage may be achieved via one, or a combination of the following strategies:
Competitive scope shapes the configuration and economics of the value chain.
Broad scope services the full range of product and buyer segments within the industry. Narrow scope enables tailoring of the chain to serve a particular target segment, geographic area or industry to achieve lower cost, or to serve the target in a unique way (Porter 1985).
Cost leadership strategy is achieved by low cost, volume production for a given level of quality, selling products at either average industry prices (to earn a profit higher than its rivals), or below the average industry prices (to gain market share). Examples for the consumer electronics industry are Samsung and Philips.
Differentiation strategy requires production of unique attributes valued by customers and perceived to be better than, or different from competitor's products, enabling premium pricing. Apple is an example in the consumer electronics industry.
Cost focus aims at being the lowest cost producer in a chosen niche or segment; for example the BayGen Freeplay wind-up radio focused on the third world.
Applying Porter's model, B&O uses 'differentiation focus' as its competitive strategy. Focus is on a narrow market, ie, discerning professionals prepared to pay for a lifestyle experience, as evidenced by the slogan "Bang & Olufsen, for those who discuss design and quality before price." 1
B&O products are also aimed at the luxury market, where an additional price premium should be available. In fact, for such Veblen goods (Nellis and Parker 1992), the product should become even more attractive as the price increases; the reverse of the standard economic supply/demand curve.
Porter's Five Forces Model
Based on this model, detailed in Annex A, B&O's value proposition, via differentiation and brand identity, creates a barrier to customers' bargaining power. There is an emotional switching cost, as B&O customers purchase a distinct look, experience and lifestyle. However, this strategy only remains effective for as long as the customer continues to perceive the value as worthwhile (Neumeier 2006).
Core differentiating components are manufactured in-house, creating a barrier to imitation as B&O holds proprietary design and technical knowledge. However, many components are externally sourced, creating a risk of availability and cost increase, eg, a component used in the Beo Vision MX4200 was not available during a busy Christmas period, requiring a design solution to accommodate an alternative. This places power with the supplier.
1In 1968, Danish consumer electronics manufacturer Bang & Olufsen bore the slogan: "Bang & Olufsen, for those who discuss design and quality before price." (BEOWorld 2009)
B&O tries to protect itself from new entrants and imitation through product differentiation, high level of quality, strong brand identity and use of technically complex materials and manufacturing processes.
However, technological advances in electronics and materials are allowing mass manufacturers to threaten the more bespoke offerings of B&O. Hence, the current threat to B&O is from relative price performance substitutes.
Kaplan and Norton's Balanced Score Card Model
In addition to the traditional and fundamental financial perspective of business performance (which is a lagging indicator, ie, reporting what has occurred not what will happen), this model, detailed in Annex B, introduces three further perspectives, giving leading indicators of performance (ie, what is likely to happen). These four perspectives (financial, customer, internal business processes, people/learning and growth) are usually sufficient to describe an organisation's strategy and key indicators of success.
Our SWOT analysis, detailed in Annex C, used in conjunction with the previous models, underpins the following evaluation.
Evaluation of the advantages and disadvantages of B&O's business approach
Applying Porter's model for competitive advantage, B&O's strategy of differentiation focus should place them in the luxury, niche segment. However, B&O's profit ratio during 2007/8 was 5%. In comparison, LVMH Group, which similarly applies differentiation focus as its competitive strategy, achieved 64% (LVMH Group 2008). Samsung, a company in the same product segment as B&O, using a volume/cost leadership strategy achieved 5% (Samsung 2009).
B&O and Samsung obtain the same profit margin; B&O is not obtaining the anticipated price premium for a differentiator within a luxury, niche market.
Borja de Mozota expands Porter's model to examine the impact of design on competitive strategy. She concludes that design can influence non-price factors, such as performance, originality, appearance, finish, reliability, durability, and security. Design can also affect service factors, such as point-of-sale presentation, packaging, maintenance, and time of development and delivery, or semantic product value (Borja de Mozota 2003). The following table summarises her analysis:
Adopting a market-driven design strategy, B&O successfully employs design experience to engage and satisfy the customer throughout the value chain, using a cross-disciplinary perspective, from product and retail environment to employee attitude. This is expensive (ie, exclusive shops and floor space through to high-end marketing), but serves to increase brand value, loyalty, repeat purchase and staff retention. (Ardill 2009)
Through its image-driven design strategy, B&O has strong brand representation with a historically loyal customer base. Its focus on product differentiation is achieved via a combination of functionality with art and sensory experience, which ought to command a price premium. Clear brand values are communicated throughout the organization.
Designers have few constraints, so potential for innovation is strong, but B&O's lack of pre-concept market research and product portfolio focus is a risk. Kotler recognises this as an extreme philosophy; allowing designers to design out of their heads without any marketing data for some organizations can be successful, (Kotler P and Rath A 1984),
Finance (blog.monkeypotion.net 2008) launches may be an indication this philosophy
is failing them. Allowing products to evolve, few standard design processes and, willingness to modify designs late in development phase have significant cost and project management implications. Its broad portfolio and diversity of design does not exploit core competencies for maximum financial return. B&O's balance of innovation, quality and finance is an area of risk for them.
B&O has a flexible approach to production. This has a positive impact on its ability to produce a diverse style of products, but a negative impact on its learning curve and reuse of R&D investment, as competencies are continually changing. It does, however, exploit some of its technical expertise through selectively licensing technology to other industries and partnering with technology companies to share knowledge, increasing innovation opportunities. It also has a range of partnering relationships in place within alternative luxury market segments, increasing target market and leveraging its brand.
A Just-in-Time approach to delivery keeps stockholding costs down and due to B&O's market position and branding, the customer is generally happy to wait. This also enables further differentiation of the product through individual customisation of colour and finish.
The B&O brand is driving costs through design dominance and arrogance (unwillingness to adapt designs or quality) and minimal re-use of core competencies. Borja de Mozota has proven that the development of past innovations and existing design is a more reliable strategy for success than attempting to continually introduce new innovative products (Borja de Mozota 2003). B&O's brand is based around luxury experience (marketing, service and retail outlets), which again is expensive. Recent sales figures and stock market performance indicate that the brand is under threat. B&O has attempted to address the situation through re-evaluation of its product portfolio, partnering and trying to tap into a younger market via introduction of less expensive products while retaining brand values (Olufsen 2009).
B&O's core principle of keeping the product operationally and functionally simple and its late recognition of the need to introduce newer technology, has allowed competitors to undermine the benefits of a niche differentiation strategy with newer and more integrateable technology. The speed of technological advancement is enabling some of the mass-producers to compete with cheaper, yet aesthetically attractive product.
Differentiation focus is a risky strategy in the event the price premium becomes too great for the level of differentiation. The differentiation gap for B&O products is reducing as technology advances. This is exacerbated by the current economic downturn, causing customers to question B&O's value proposition and consider offerings from less expensive competitors.
Design has a direct impact on B&O's competitive advantage, but it is not achieving the expected price premium. Maintaining a high-end customer experience is expensive; supporting a significantly design led approach fails to leverage investment in R&D, tooling and production expertise. As a result, B&O's profit margin is more akin to the cost leaders than a luxury product differentiator. For B&O, the product differentiation strategy is under threat due to advances in widely available technology, exacerbated by economic conditions.
B&O's share price was reasonably stable until the beginning of 2008, where it steadily declined to a dramatic low in July 2008. The last three months have shown a marginal recovery in share price.
The decline in profitability and turnover has been attributed to a downturn in the economy, less successful and fewer product launches and two expensive lawsuits concerning commercial conditions for selling and marketing Bang & Olufsen's products, and a dealer who felt badly treated by Bang & Olufsen France S.A. in connection with the opening of a new sales outlet. Having initially won both cases (subsequently losing on appeal), B&O expected the original verdicts to be upheld and, therefore, no provisions for the outcome of the two cases was made at the end of the third quarter. (Olufsen 2009)
B&O focuses on experience design and placing the customer central to the experience. This focus continues throughout the value chain via exclusive stores where product stands alone, like in an art gallery, not next to mass-produced items. Simulated lounges within stores enables a full taste of the experience prior to purchase. Sales staff have detailed product and technical knowledge, with after sales care carried out in the customer's home. Further reinforcement is achieved through other mediums, such as the B&O customer magazine, the virtual Beo lounge (requiring registration on line before entry is allowed) creating an element of exclusivity.
INTERNAL (Business) PROCESS PERSPECTIVE
Operations management processes
Areas of concern:
From the case study, it can be seen that design sometimes overrules best business practice, such as willingness to modify designs late into development and reluctance to compromise on quality or design, with inherent adverse cost implications.
While they strive to bridge art and repetitive industrialised manufacturing processes, their broad portfolio means they are not making best use of existing core competencies in production to exploit efficiency.
A high percentage of design control is in the hands of one man - David Lewis/Idealand, leaving them in a vulnerable position should he leave the company.
There are few standard design process (evolution) making it difficult to control project development and delivery time frames.
B&O has a slow concept to market delivery in comparison to their competitors.
Many components are sourced externally.
B&O demonstrates its ability to be flexible in production processes in the diversity of its products.
It employs Just-in-Time production, which reduces financial risk and stockholding.
Complexity of production and material finishes gives them a competitive advantage by increasing barriers to competitors.
Core components are manufactured by B&O, keeping proprietary knowledge in-house, again increasing barriers to competitors.
Customer management processes
Relations with the customer are expanded and deepened, at associated cost, through:
Targeted marketing, ie, advertisements in GQ, Esquire, Tatler, and other upscale, lifestyle magazines (Slywotzky and Morrison 200).
Providing a total experience along the length of the value chain, via design and strong co-coordinated branding (Kotler 2000).
Stronger ties and reinforcement of value built through exclusivity of the products (high-end shops are selected to carry the brand, such as the electronics department of Harrods of London). Floor space is not shared with mass-market competitors; instead, they are lavishly displayed next door to the likes of LVMH and Gucci (Slywotzky and Morrison 2000).
Areas of concern:
B&O's frequency of update to its product portfolio is slower than other manufacturers of audio and home entertainment goods.
No market research is carried out prior to product launch and Designers work freely, interpreting in whichever way they feel is best.
B&O is slow to introduce new technology integration; other manufacturers' products incorporate newer technology.
B&O does not employ in-house designers who may be constrained or influenced by daily business, resulting in free unconditional design and access to new talent.
Working with partners within the technology sector helps B&O keep current and increases its scope.
Low stock holding and Just-in-Time manufacturing processes keep costs down.
Partnering with other manufacturers within different product segments broadens its target market. Brand identity is protected by aligning only with other luxury brands.
Lower priced models are being developed and launched to encourage younger less affluent buyers to become their customers of the future. B&O brand identity is not weakened through this strategy, as the product still follows the pricing and branding models used throughout B&O.
Selectively licensed technology is sold to companies in other industries, ie, aluminium brake cables for Lamborghini were anodized using B&O technology.
LEARNING AND GROWTH PERSPECTIVE (skills and capabilities):
The B&O slogan "Bang & Olufsen: the unique combination of technological excellence and emotional appeal" embodies the values it wishes to guide all personnel in decision making. A clear corporate identity gives a sense of purpose and pride. The internal employee brand experience is aligned with that made to customers (Slywotzky and Morrison 200).
Art pictures decorate the walls. Meeting rooms are named after artists. There is a B&O art club with many blue collar workers as members. Full integration into the creative nature of the business is actively encouraged.
The engineers embrace the ethos and contribute in the innovation process, actively searching out and proposing new technologies.
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