Porter\'s Generic Strategies (B) the Strategy Clock

¶ … Porter's Generic Strategies (b) the Strategy Clock

The question that both models address is the aspect of competition: how one company can gain competitive advantage over another given the finite number of unique products and services out there and the need for different companies to sell similar or common products to a limited sample of people.

In "Competitive Strategy: Techniques for Analyzing Industries and Competitors" (1980), Porter reduced competition to three strategies: 1. Cost leadership; 2. Product differentiation, and; 3. Market segmentation.

In other words, companies compete either on cost (the price of their products); on perceived value (the differentiation in value of their product from that of another company); or / and on by focusing on a particularized customer (i.e. offering a niche / segmented market).

In 1996, Cliff Bowman and David Faulkner created Bowman's Strategy Clock, which extended Porter's model to eight strategies and included identifying the likelihood of success of each strategy as well as explaining the cost and perceived value combinations that many firms use.

Bowman's eight positions are: 1. Low Price / Low value (products are inferior but prices are attractive thus maybe wooing customers). 2. Low Price (companies drive prices down to their minimum, and they balance low margin with high volume (Wal-Mart being an example). With large enough volume and strong strategic position, company can succeed; otherwise, price wars can be triggered that benefit only consumers); 3. Hybrid (moderate price/moderate differentiation) (companies offer fair prices for reasonable goods -- for instance discount department stores. This approach cements customer loyalty); 4. Differentiation (companies offer clients high perceived value achieved through either increasing their price (as with Nike) or through keeping prices low but attracting greater market share (as with Reebok)); 5. Focused differentiation (designer products. High perceived value accompanied by high price. These companies survive through highly targeted markets and high margins); 6. Increased Price/Standard Product (increased price unaccompanied by justified value increase. This may work in the short-term but is highly risky); 7. High Price / Low Value (a classic strategy in a market where one company has the monopoly over the product); 8. Low Value/Standard Price (company pursuing this strategy is bound to fail).

Bowman's Strategy Clock differs from Porter's model in that it stretches out competition into different positions, explaining them and illustrating the advantages and disadvantages of the different positions. Whilst Porter may be described as providing a comprehensive model of corporate competitions, Bowman stretches out the possible positions that a company may take.

2. With reference to the Strategy Clock, what strategy is IKEA pursuing and what

Evidence is there in the case to support your conclusion?

IKEA is pursuing a hybrid strategy (moderate price/moderate differentiation) where the company offers fair prices for reasonable goods. 'If it wasn't for Ikea," writes British design magazine Icon. 'Most people would have no access to affordable contemporary design" (p.708); or, as someone from Germany observing on the web commented, 'Every time, it's trendy for less money' (709). The company works long and hard to identify functional and quality style materials and least costly suppliers. Whilst it sets the price in middle class tastes, focusing on quality, it also accentuates reasonable price tags, consciously showing its tendency to slit prices. IKEA, in fact, aims to lower prices across its whole store by an average of 2% or 3% per year increasing it percentage drop when competing against rivals. Josephine Rydberg-Dumont, president of Ikea

of Sweden, describes IKEA's objective as producing beautiful products that are inexpensive and functional

3. Why do you think this strategy may be hard for competitors to imitate?

Companies need to produce a high margin. They need to demonstrate profit from their business activities in order to keep afloat. Constantly producing quality products (with punctilious care involved in production) whilst simultaneously lowering prices is, as Rydberg-Dumont pointed out, challenging. This is particular so when it means assessing the competitor's price and 'slashing that in half' (as per Mark McCaslin, manager of Ikea Long Island, in Hicksville, N.Y.) (709).

Part of IKEA's success, too, comes in finding the least costly suppliers to work for them. Other companies may have less success with this, causing suppliers and manufacturers to increase their rate once they sense a demand for their service.

In order for IKEA to keep growing, it produces more stores at a regular rate, but to do so it needs to preserve its strong customer enthusiasm. The one factor, therefore, depends on the other, so IKEA is compelled to maintain its reputation for its survival.

A further challenge is the necessity to customize products to make them sell better in local markets. IKEA has had some difficulty in that, primarily in differentiating their American market from that of Sweden (for instance). Other companies (particularly fledgling ones) may have a more difficult time. Intricate and immense research must be conducted to ascertain that the particular and peculiar needs of each specific country are being met, and costs are expended (possibly huge costs) to do so. Some countries, such as Japan in the case of IKEA, might also have a greater insatiable demand for high quality and great material.

4. What are the dangers of this strategy and how can managers avoid the potential pitfalls?

The dangers of this strategy are that IKRA may slash its prices so low in order to beat competition that it may run into debt and fail.

Managers may avoid this, as IKEA is doing, by achieving a loyal and devoted niche of clients. It may also possess a large enough volume and a strong strategic position, as Wal-Mart has in order to reinforce its strategy. IKEA seems to have both of these elements. It may also pursue Reebok's approach of keeping price low whilst attracting greater market share.

Another challenge is that, however low IKEA drops its prices, recent research seems to indicate that low-quality firms, in general, are better positioned to make disproportionate gains in many market products than are producers of high quality gods. This is, particularly, so if the low quality firms features high volume (as Wal-Mart, for instance, does). This report contradicts traditional assumptions that the cost curve is linear and that companies can only succeed by producing high quality that matches the quality goods perceived by other companies, whilst at the same time, trying, somehow or other, to reduce their prices.