By Frank J. Rich
Most of us face competition. Even those who work in the “not-for-profit” world compete for resources. In fact, competition may be defined as the alternative use of the same resources. That is, the solutions to problems are usually found by the application of these resources, whether by the purchase of a standard product or one that is made to serve its purpose. It’s the old hammer and screwdriver model. When we don’t have a hammer, a screwdriver will do.
In many open markets, most goods and services can be purchased from any number of companies, giving customers a wide variety from which to choose. It’s the work of companies in the market to find their competitive edge and to meet customers’ needs better than their competitors. So, how can one company gain competitive advantage over the others? Whether there are few or many like products and services in the chosen marketplace, how do different organizations sell basically the same things at different prices and with different degrees of success? It is a classic question, and one addressed by many over the years. Among them is Michael Porter, business professor at Harvard University, and market student. In his original work, “Competitive Strategy: Techniques for Analyzing Industries and Competitors,” he summarizes competition into three classic strategies:
- Cost Leadership
- Product Differentiation
- Market Segmentation
These three generic strategies outline the ways organizations provide their customers with what they want 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 on lower prices or by offering more perceived value became very popular (as competitive advantages) for simple reasons. Price is ever present in the mind of the consumer and easily confused with value. If the analysis of value becomes too arduous, many “sellers” of product and service revert to price as the distinguisher to attract customers. Ultimately, price becomes the value proposition.
For many, however, the detail in the choice among the three strategies revealed opportunity. Thus, tools were developed to assist the analysis of competitive advantage. In developing Bowman’s Strategy Clock, Cliff Bowman and David Faulkner looked at Porter’s strategies in a different way.
In 1996, this led to the development of Bowman’s Strategy Clock. As with Porter’s generic strategies, Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. This model of corporate strategy is another suitable way to analyze a company’s competitive position in comparison to others’ offerings. There are six core strategic options, eight in total:
- Low Price/Low Added Value. This strategy is commonly considered to be appropriate only on a segment-by-segment basis. It is generally a high-volume strategy.
- Low Price. This strategy calls for the company to position itself as the “low-cost leader.” The company risks low margins, price wars, and ultimately devalues the market.
- Hybrid of Low Price/Differentiation. Here, the company establishes a low-cost base and reinvests to keep prices low, while still seeking differentiation.
- Differentiation. There are two versions of this strategy — with and without a price premium. With a price premium, the company adds enough value to the product to justify its relatively high price and so, increases margins. Without a price premium, the company adds value to the product in hopes of gaining market share despite lower margins.
- Focused Differentiation. Here, the company adds enough value to the product for a specific customer segment to justify a price premium. This is also called an “exclusivity market.”
- Increased Price/Standard Product. With this strategy, the company raises prices without adding value to the product in hopes of higher margins. Unless the product is the de facto industry standard, however, the company risks losing market share.
- Increased Price/Low Values. This strategy pertains only to monopoly situations.
- Low Value/Standard Price. This strategy invariably ends in loss of market share.
Bowman’s Strategy Clock
The Strategy Clock is adapted from the work of Cliff Bowman
As an exercise, place the following product/services in their likely categories onto the Strategy Clock. Add your own as you get the hang of it.
- New Zealand lamb
- A standard domestic 40-watt light bulb
- A colored 40-watt light bulb
- Pay per view TV
- Hyundai autos
- First class airline flights
- A standard paperclip
The idea is to find out where your product/service rests in the Strategy Clock to determine either your competitiveness or the opportunity to improve it. Products in the high price/low value segment (6-8) are likely to fail. Most brands don’t make money and consequently, company portfolios are replete with loss-making and marginally profitable brands. This occurs because companies too often see core competencies as far as their product definitions reveal, and not as far as the skills necessary to making a market for them. Knee jerk reaction to competitive entries is also at the root of much product formation.
The opportunity in competitive analysis is to capture a clearer picture of the brand strength — either actual or expected. Once identified, the work necessary to effective positioning can begin. As is always the case, if you don’t do your own positioning your competitor will do it (to you).