AN ILLUSTRATION OF COMPETITIVE EVOLUTION: THE U.S. AUTOMOBILE INDUSTRY
The history of the automobile industry in the United States illustrates how strategic evolution and interaction occurs within a single industry. Four distinct phases can be identified in the competition for market share.
-1908: The Margin-Orientation Era
Competition during the early history of the industry was largely characterized by a margin orientation. Hundreds of small producers each built a handful of automobiles using small-scale production methods,24 and competition took place on the basis of quality or design. Most car chassis were built in small quantities and then fitted with handmade bodies that were customized to each buyer's unique specifications or preferences. As a result, variable costs per unit, and thus prices, were necessarily high—generally above $2,500 or the price of an average house at that time. These prices were not, however, considered to be a major impediment to sales since the prevailing wisdom of virtually all producers was that automobiles were luxury goods for the very rich. Since there were few paved roads and early automobiles were largely unreliable from a mechanical standpoint, few envisioned the future of automobiles as practical replacements for horse-drawn vehicles.
-1925: The Volume-Orientation Era
The volume-orientation era began with Henry Ford's introduction of the Model-T in late 1908. Ford was visionary in that he foresaw the future of automobiles as practical transportation for the average person, rather than merely recreational toys for the wealthy. He understood that the automobile market was largely price sensitive, and although in retrospect this appears obvious, at the time it was considered lunacy. As a result, Ford lost many investors due to his persistence with this vision. Ford's domination during the VO era was unassailable and competitively devastating. Competitors eagerly attempted to copy Ford's production methods, which were based on a number of innovations including the then-revolutionary moving assembly line, but none approached the level of efficiency needed to be truly competitive. By 1925, Ford was selling cars for less than $300, and competing cars were priced at nearly twice this amount. By the time production of the Model-T came to an end in 1927, Ford had sold over 15 million cars, and half of the cars on the road were Model-Ts. In the 19 years during which the Model-T was sold, 90 percent of automobile producers either left the automobile industry or were absorbed by one of the few survivors. Indeed, it is likely that Ford's success with the VO approach contributed to the brevity of this period in the auto industry, since competitors (such as General Motors) were forced to develop a viable alternative strategy merely to survive.25
-1974: The Margin-Volume-Differentiation Equilibrium Era
Ford's single-minded commitment to cost reduction and volume production eventually became self-defeating, as the company discovered by the mid-1920s. As the automobile market approached saturation (by this time, nearly 70% of U.S. households owned an automobile),26 prospects for stimulating further sales using price reductions alone began to dim. Moreover, industry margins had virtually evaporated, with Ford making as little as $2 per car in profit by 1924.27 Since automobiles were a durable good, it was also difficult to sell additional units to existing owners. As a result, the major automobile producers began resorting to mergers and to cultivating export markets in an attempt to preserve production volumes. For a short period of time, these measures allowed some U.S. car producers to survive in the face of a saturated domestic market and cutthroat pricing.
The MVD era began in the mid-1920s as General Motors discovered that product differentiation and target marketing of multiple product lines not only generated higher margins but also expanded the market beyond the economy-minded buyer of basic transportation.28 Moreover, it provided a means to compete with Ford on factors other than price. GM implemented this MVD strategy using multiple product lines, the "annual model change," the extension of consumer credit, and "lifestyle" advertising.2 9 These strategies shifted consumer perceptions of automobiles from commodities that offered simple transportation toward their being objects of fashion or status, allowing GM to sell more expensive (higher margin) automobiles. It also allowed carmakers to accelerate consumer repurchase rates, since obsolescence in style was accepted by consumers that would have contested functional obsolescence. The MVD approach allowed General Motors to quickly overtake all other car companies in terms of sales volume. For the next 50 years, the automobile industry was characterized by worldwide dominance of the "Big Three" U.S. carmakers: General Motors, Ford, and Chrysler.30 Schumpeter31 noted that by the 1940s, the "Big Three" controlled over 80 percent of the market, and, facilitated by this domination, tended to refrain from practices that would have been injurious to their profits (such as price competition). This resulted in the gradual increase in average profit margins as the industry enjoyed competitive equilibrium.