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An open market invariably has many players competing to offer the same product or service, and customers select the option they like the most. In such a business environment, companies try to gain competitive advantage over their competitors, by providing the customer with something that competitor products do not offer.
Michael Porter (1980) considers cost differentials, product differentials, and market segmentation as the three broad ways by which companies seek competitive advantage. Companies for instance, strive to offer their products at a lesser price than the price of competitor products, strive to offer better value compared to competing products, or cater to the special needs of a segment ignored by competitors.
The Strategy Clock, developed by Cliff Bowman and David Faulkner in 1996 is an attempt at expanding Porter’s model, or making a further in-depth analysis. It expands Porter’s three strategic positions to eight, with each position representing a unique cost and perceived value combination.
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Position 1: Low Price - Low Value
A low price – low value positioning -- is offering poor quality products at the lowest price in the market. Many companies adopt such a strategy when their products come under pressure from the competitors low prices, and they cannot overcome such price wars by offering products that differ in some way.
Companies adopting this strategy would require high sales volumes to compensate for the low prices, and by extension low margins. The low price would fetch such volumes, but the low quality would mean that most customers would try the product only once. As such, this strategy suits only products with a short life cycle, where repeat customers are not relevant, or on products where quality is not an issue.
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Position 2: Low Price
Low price positioning is placing the product at the lowest possible price level, with wafer-thin margins, hoping to balance the low margins with high volumes. Such an approach can trigger price wars that benefit the customers. Companies with limited resources may, however, find competing in price wars unsustainable over time. Only those companies with resources to sacrifice present profits for building up a reputation as a low-cost provider brand name is able to survive and reap long-term benefits.
Wal-Mart is good example of low price positioning. It attracts a large market share by offering products at a price lower than what competitors charge for the same product. The brand impression of a provider of good quality products at low-cost helps in sustaining the business over the long-term.
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Position 3: Hybrid
Hybrid positioning is a "moderate price-moderate value" approach. Companies adopting this strategy offer neither the lowest price nor the highest quality. They rather hope to strike a balance between price and quality and establish a reputation of providing products with reasonable quality at fair prices. They work to create a perception of their products being better in quality when compared to competitor products.
Customers consider the products offered by companies adopting a hybrid strategy as better value for money even when such products cost higher than, or even the same as, competing products. Discount department stores very often adopt such a strategy.
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Position 4: Differentiation
Differentiation is the strategy of offering high value products, either at higher prices to compensate for the low volumes of such products, or at low prices in the expectation that greater market share would compensate for the low margins.
Companies may approach differentiation in many ways, such as:
- Improving the base product with additional features.
- Branding, or sending across the message that the product serves a particular type or segment.
- Undertaking innovative distribution techniques.
Examples of well-known companies adopting a differentiation strategy are Nike, which positions itself as a high quality product with premium prices, Reebok, which has an image of a high value product available at a low premium, and Mark and Spencer, which has a reputation for moderate to high prices for high quality products.
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Position 5: Focused Differentiation
Focused differentiation is the type of differentiation that provides high value at high or premium prices, very often targeting a niche category, and compensating for lack of volume by high margins. The high value is often a result of perception, cultivated through advertisements and careful selection of sales outlets rather than any substantial differentiation in the actual product.
Examples of products that have thrived by using focused differentiation are Gucci, Armani, and Rolls Royce. For instance, Rolls Royce Silver Shadow costs 25 times more than an economy Ford, and both serve the same basic purpose, of taking you from Point A to Point B. A Gucci watch may cost 100 times more than a Chinese made unbranded watch, and both serve the purpose of providing the time.
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Position 6: Increased Price - Standard Product
At times, companies simply increase price without adding any value to the product. The increased price may be owing to an increase of input costs, seasonal factors, or anything else. One company may take the lead in making the hike, with the knowledge that others equally affected by the same factors, would soon follow suit. In other cases, the company may increase the price to take advantage of some short-term factors such as disruption in the competitors supply chain, to rake in cash with a long-term move of doing away with the product as part of a wider strategic goal.
In a competitive market, this approach remains unsustainable for long if adopted without any major triggers or reason. Companies arbitrarily increasing prices soon lose market share, as customers migrate to competitor products that offer the same value at lower prices.
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Position 7: High Price - Low Value
Charging high prices for low value is the default strategy in a monopoly or oligopoly market, where only one or a few companies offer the product or service, and such goods or service remain in much demand. Many products that start as monopolies adopt this positioning until the emergence of competitors forces them into another position. Cartels that indulge in price-fixing also apply this strategy.
Companies offering low value and high price cannot survive for long in a competitive market, but may still make limited gains in an imperfect market where customers don't have access to prices of competing products, or in situations such as a "cruise-ship economy" where the consumer has access only to a limited range of products.
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Position 8: Low Value - Standard Price
Offering low value at standard prices, such as selling a damaged notebook at the price of a fresh one, makes for an extremely shortsighted business strategy, and may sometimes constitute fraud. Companies adopting such practices soon lose market share, as customers see through the defects and feel cheated. Companies that adopt such a strategy are either myopic, or fly-by-night operators who exploit customer ignorance or short-term monopoly conditions to make a quick buck and vanish.Organizations select the competitive strategy from Bowman's Strategy Clock, relevant to their needs after considering their circumstances and the barriers they face. For instance, competing on price requires analyzing whether the company enjoys price leadership and can sustain it, and whether they can exploit the available cost advantages. Competing on perceived value requires a clearly defined target market, an understanding of what such market values are, how the market perceives competitor products, and the ability to differentiate.
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- Bowman, C. and Faulkner, D. (1997), “Competitive and Corporate Strategy", Irwin, London.
- Michael Porter (1980) "Competitive Strategy: Techniques for Analyzing Industries and Competitors" Free Press. ISBN: 978-0684841489.
- "What lesson can be learned for the Ericsson case about the process of developing a business strategy over time?" http://su-bc.org/PDF/tutorials/MGT9A1.pdf. retrieved August 01, 2011.
- "Bowman's Strategy Clock." http://www.mindtools.com/pages/article/newSTR_93.htm. Retrieved Auguust 01, 2011.