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Expanding Upon Porter
Porter’s Generic Strategies have been the subject of considerable student and expansion since their introduction in 1985. One notable expansion was that offered by Cliff Bowman and David Faulkner in 1996. They expanded (or rather re-divided) Porter’s three strategic positions to eight identifiable positions, by focusing on the value proposition to customers. They created a diagram know as the Bowman’s Strategic Clock. This breakdown has been very influential on strategic theory, so below we give a brief introduction.
Low Price/Low Value
This strategic position focuses on volume of sales. A low price/low value model necessarily must command a higher share of the market in order to produce adequate returns to make the business profitable. Companies with products or services with a low perceived value (inferior goods) to customers often compete in this space.
Note: Don’t confuse retailers of lowest-consumer-cost products (ex. Wal-Mart) with the company that actually produces the product. Think of it as the generic or no-name brand of product on the shelf at a lower price than the brand-name product.
This strategy, like the low price/low value strategy, depends upon attracting customers by having the lowest price. However, this strategy does not involve producing a notably inferior product; rather, it focuses on undercutting equally or less valuable competitor products via lower costs. Because prices are pushes down, the margins for the company is lower. These companies have to compete on volume.
- Example: Larger retailers, such as Wal-Mart, push down prices by offering the lowest price available. Wal-Mart’s profit margin is equally low and the store depends on selling large volumes of products in order to be profitable.
Hybrid (moderate price/moderate differentiation)
The Hybrid strategic model straddles the low-cost and differentiation strategies. They generally produce a lower-cost product or service and also offer some form of product differentiation. Porter warned that this technique was difficult to accomplish and could give rise to lack of focus.
- Note: Many small businesses fall into this model. They cannot compete on price with larger businesses in the same market. Also, they may not have the ability to produce extremely high value (luxury) goods or products. Rather, they focus on producing good, dependable products and services at a fair price. Small businesses typically depend on customer convenience and loyalty to succeed.
Differentiation, as contemplated by Bowman and Faulkner, is the same as under Porter’s Generic Strategies. By differentiating the product or service, the business is creating some unique form of value for the customer. The unique value can be similar to the value proposition of another product or service, but some aspect of the differentiated product makes the value proposition higher. This unique value allows for the profit margin charged by the business.
- Example: Apple computer differentiates its laptop products from PC makers by offering a unique user experiences (simple operating system). The product serves the same function as a PC, but does it in a manner that differentiates it.
As described above, focused differentiation concerns the unique attributes of a product or service in comparison to others in the market that are focused toward a specific customer segment. These unique aspects create a higher value proposition for the target market segment. The higher value proposition allows for a higher price on the product. The business will seek to ensure that the higher price also means a higher margin, given the additional cost incurred in differentiating the product. Luxury goodsgenerally follow a focused differentiation strategy
- Example: A Rolex watch is a luxury good. The quality of the product is very high in order to build a brand image. The differentiating feature is the quality combined with the brand name. Rolex targets a smaller market who has the capability of paying a premium for the luxury watch.
Increased Price/Standard Product
The increased price/standard product approach is a short-term strategy generally used to take advantage of some market supply disequilibrium. It involves taking a standard (non-differentiated) product and applying a higher price. The value proposition to the consumer does not warrant the higher price. A certain number of customers will continue to purchase until they identify a suitable replacement or substitute product. Over time less consumers will buy the product. In a market where substitutes are not readily available, this strategy can grab a higher margin for a temporary period. However, this situation readily attracts competitors or substitute products into the market. In some situations a business will use this strategy in an attempt to signal that a non-differentiated product is of higher quality. The pricing technique may serve to build product brand.
High Price/Low Value
The high price/low value strategy is effective when there are no other competitors or substitute products in the market. Consumers are forced to purchase the product at the given price in order to fulfill their need or want. This situation often arises in highly isolated markets or in product monopoly situations. This strategy is generally more effective with regards to products or services that are needs rather than wants. A want is an emotional reaction or desire for a product or service, where the need has some level of consequence. In an isolated market needs have a higher priority, leading to continued sales at the higher price. Because the product does not have a high value proposition, consumers are less likely to pay the higher prices for a want.
- Example: In a market where only one pharmaceutical drug is available, due to intellectual property rights, the price of the drug will rise considerably. Even if there are far better drugs on the market, the low quality (low-value) drug will be able to charge higher prices due to its power in the isolate market.
Low Value/Standard Price
This strategy generally involves taking an inferior product and pricing it to match the value proposition of superior competitor or substitute products. This strategy may be effective in short-term or trend markets. Over time, however, this tactic will alienate customers and lose market share.