In many open markets, most goods and services can be purchased from any number of companies, and customers have a tremendous amount of choice. It's the job of companies in the market to find their competitive edge and meet customers needs better than the next company. So, how, given the high degree of competitiveness among companies in a marketplace, does one company gain competitive advantage over the others? When there are only a finite number of unique products and services out there, how do different organizations sell basically the same things at different prices and with different degrees of success?
This is a classic question that has been asked for generations of business professionals. In 1980, Michael Porter published his seminal book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors", where he reduced competition down to three classic strategies:
These generic strategies represented the three ways in which an organization could provide its customers with what they wanted at a better price, or more effectively than others. Essentially Porter maintained that companies compete either on price (cost), on perceived value (differentiation), or by focusing on a very specific customer (market segmentation).
Competing through lower prices or through offering more perceived value became a very popular way to think of competitive advantage. For many businesspeople, however, these strategies were a bit too general, and they wanted to think about different value and price combinations in more detail.
Looking at Porter's strategies in a different way, in 1996, Cliff Bowman and David Faulkner developed Bowman's Strategy Clock. This model of corporate strategy extends Porter's three strategic positions to eight, and explains the cost and perceived value combinations many firms use, as well as identifying the likelihood of success for each strategy.
Figure 1 below, represents Bowman's eight different strategies that are identified by varying levels of price and value.
Firms do not usually choose to compete in this category. This is the "bargain basement" bin and not a lot of companies want to be in this position. Rather it's a position they find themselves forced to compete in because their product lacks differentiated value. The only way to "make it" here is through cost effectively selling volume, and by continually attracting new customers. You won't be winning any customer loyalty contests, but you may be able to sustain yourself as long as you stay one step ahead of the consumer (we're not going to mention any names here!) Products are inferior but the prices are attractive enough to convince consumers to try them.once.
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Companies competing in this category are the low cost leaders. These are the companies that drive prices down to bare minimums, and they balance very low margins with very high volume. If low cost leaders have large enough volume or strong strategic reasons for their position, they can sustain this approach and become a powerful force in the market. If they don't, they can trigger price wars that only benefit consumers, as the prices are unsustainable over anything but the shortest of terms. Walmart is a key example of a low price competitor that persuades suppliers to enter the low price arena with the promise of extremely high volumes.
Hybrids are interesting companies. They offer products at a low cost, but offer products with a higher perceived value than thos of other low cost competitors. Volume is an issue here but these companies build a reputation of offering fair prices for reasonable goods. Good examples of companies that pursue this strategy are discount department stores. The quality and value is good and the consumer is assured of reasonable prices. This combination builds customer loyalty.
Companies that differentiate offer their customers high perceived-value. To be able to afford to do this they either increase their price and sustain themselves through higher margins, or they keep their prices low and seek greater market share. Branding is important with differentiation strategies as it allows a company to become synonymous with quality as well as a price point. Nike is known for high quality and premium prices; Reebok is also a strong brand but it provides high value with a lower premium.
These are your designer products: High perceived value and high prices. Consumers will buy in this category based on perceived value alone. The product does not necessarily have to have any more real value, but the perception of value is enough to charge very large premiums. Think Gucci, Armani, Rolls Royce.clothes either cover you or they don't, and a car either gets you around the block or it doesn't. If you believe pulling up in your Rolls Royce Silver Shadow is worth 25 times more than in an economy Ford then you will pay the premium. Highly targeted markets and high margins are the ways these companies survive.
Sometimes companies take a gamble and simply increase their prices without any increase to the value side of the equation. When the price increase is accepted, they enjoy higher profitability. When it isn't, their share of the market plummets, until they make an adjustment to their price or value. This strategy may work in the short term, but it is not a long-term proposition as an unjustified price premium will soon be discovered in a competitive market.
This is classic monopoly pricing, in a market where only one company offers the goods or service. As a monopolist, you don't have to be concerned about adding value because, if customers need what you offer, they will pay the price you set, period. Fortunately for consumers in a market economy, monopolies do not last very long, if they ever get started, and companies are forced to compete on a more level playing field.
Any company that pursues this type of strategy will lose market share. If you have a low value product, the only way you will sell it is on price. You can't sell day-old bread at fresh prices. Mark it down a few cents, and suddenly you have a viable product. That is the nature of consumer behavior, and you will not get around it, no matter how hard you try.
When considering which competitive strategy to pursue, here are some questions you should ask yourself.
If you intend to compete on price:
If you intend to compete on perceived value:
As you are analyzing how you'd like to position yourself, keep in mind your organizational competencies. While you may want to choose a focused differentiation strategy and market your "designer" goods, you need to understand that it takes a unique set of circumstances to establish that kind of reputation in the marketplace. You are better to compete in an area where your competitive strategy is congruent with your corporate strategy and competencies, the resources you have available to you, the environment in which you operate, and any market expectations you have already established.
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