Profitability is a common objective of a typical business. Michael E. Porter in his book, “Competitive Strategy”, argued that two factors affect the profitability of a business:
- Industry structure and competition within the industry; which he used the Five Forces model to explain the factors affecting competition
- At the level of the individual company, achieving a sustainable competitive advantage. Sustainable competitive advantage is achieved by creating value for customers.
Positioning on the other hand, is an important strategic consideration for every organization. Positioning falls under the segmentation – targeting and positioning threshold. How do you want your products to be positioned? How are your competitors positioned? And what can you do to change your own positioning to match your target market? These are some important questions to which a business should have the right answers.
Business entities in a competitive market often seek to gain advantages over their competitors, in other words, aspire to do something better than competitors and offering customers better value. Different perception value exist, as a result, each company has to make a strategic decision on the best possible ways to offer value and gain competitive advantage.
The Strategic Clock Model
One of the several approaches available for identifying and choosing business strategies is The Strategic Clock. Strategic Clock or Bowman’s Strategic Clock is a model developed in 1996 by the two famous economists Cliff Bowman and David Faulkner. The main focus of the model is to make a business aware of their position in the market as compared to their competitors. It is purely a marketing model that can help a business to analyze their position in the market. As per Bowman, the factor of competitive advantage is then the factor of cost advantage as it works as a distinctive element for a company and harps on the strategic positioning and the overall positioning of the product in the market.
The two factors in providing value to customers are the price of the product or service and the benefits that customers believe the product or service provides. A combination of price and perceived benefits give rise to a competitive advantage. Therefore, The purpose of Bowman’s Strategic clock is to illustrate that a business will have a variety of options of how to position a product based on two dimensions – price and perceived value.
- Position 1: Low price and low added value (A no Frills Strategy)
In this strategy position, keeping the price relatively low is the only means of competitive method that the company can use to compete with its contemporaries in the market. It is to offer a product or service at a low price and with low perceived benefits. It should attract customers who are price-conscious, and are happy to buy a basic product at the lowest possible price.
This is not a very good competitive position for a business. The product is not differentiated and the customer perceives very little value, despite a low price. Customers understand that they are buying a product or service that gives them fewer benefits than rival products or services in the market.
- Position 2: Low Price Strategy
With a ‘low price’ strategy, customers perceived that the product or service gives average or normal benefits. A business positioning itself here look to be the low-cost leader in a market. A strategy of cost minimization is required for this to be successful, often associated with economies of scale. Profit margins on each product are low, but the high volume of output can still generate high overall profits.
However, a ‘low price’ strategy can be applied in segments or sections of the market. For example, supermarkets offer their ‘own brand’ products at prices that are lower than similar branded goods. Customers shopping in a supermarket might buy the low-price own-brand products rather than higher-priced branded goods which might be perceived as offering more benefits to customers.
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- Position 3: Hybrid Strategy
As the name implies, a hybrid position involves some element of low price (relative to the competition), but also some product differentiation. The aim is to persuade consumers that there is good added value through the combination of a reasonable price and acceptable product differentiation. Put in a different way, A hybrid strategy involves selling a product or service that combines:
– higher-than average benefits to customers, and
– a below-average selling price.
This can be a very effective positioning strategy, particularly if the added value involved is offered consistently. To be successful, this business strategy requires low-cost production and also the ability to provide larger benefits, with a mix between a low price strategy and a differentiation strategy.
- Position 4: Differentiation Strategy
The aim of a differentiation strategy is to offer customers the highest level of perceived added value. Branding plays a key role in this strategy, as does product quality. Company opting for the differentiation strategy offer high quality products at an average price and wish to offer their customers the highest level of perceived added value which gives it a distinctive identity in the market.
Companies try to differentiate their products – make them seem different. There are various ways in which differentiation can be achieved: products or services might have different features, so that rival products do not offer exactly the same benefits. they might also promote perception that their products or services are much better in quality.
Apart from focusing on the product quality, they put significant efforts on the branding; making their brand a reliable one to retain a set of loyal customers. The customers are even ready to pay more for these products as they are sensitive to the high-quality products of a renowned brand in the market.
Therefore, differentiation strategy involves charging average prices for the product or service, or prices that are perhaps only slightly higher than average. Customer therefore believe that they are getting more benefits for every $1 they spend.
- Position 5: Focused Differentiation Strategy
Focused Differentiation Strategy is mainly applicable to brands that focus on the luxury and exclusive products that are high on quality and are sold at a high price such as Gourmet restaurant and Ferrari sports cars. Products in this category are often strongly branded as premium products so that their high price can be justified.
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Other Business Strategies to carefully watch out for in Strategic Clock Model
As the Strategic Clock model indicates, there are some business strategies that will prove unsuccessful because they do not really help a business gain competitive advantage. Such strategies that could be described as ‘three o’clock’ to ‘six o’clock’ on the strategic clock model are clearly inferior to strategies on the other part of the clock. These are;
- Position 6: Risky High Margins
This is a high risk positioning strategy that you might argue is doomed to failure – eventually. The companies using this strategy from the model charge high prices for the products that are perceived as mediocre in value by the customers. It is the very risky strategy to opt for and the position of the company is most likely to fail in the long-term. Other than in the short-term, Risky High Margins is a non competitive strategy. Being able to sell for a price premium without justification is tough in any normal competitive market.
The customers will look for a better quality product in a similar price range or a similar type of product at a lower price to cut their costs with an objective of value for money.
- Position 7: Monopoly Pricing
Where there is a monopoly in a market, there is only one business offering the product. The monopolist doesn’t need to be too concerned about what value the customer perceives in the product – the only choice they have is to buy or not. There are no alternatives. In theory the monopolist can set whatever price they wish. Fortunately, in most countries, monopolies are tightly regulated to prevent them from setting prices as they wish.
- Position 8: Loss of Market Share
This strategic position in the Bowman’s Strategy Clock is not a very desirable one for any company as it basically means that the company is not able to offer the products or services that the customers value. The customers do not indulge in the purchase as the price is too high. The companies in this segment opt for the standard prices of their product offerings to stay relevant and competitive in the market and in the minds of the customers.
In conclusion, each business strategy is market facing, which means that it aims to meet the needs of customers, or a large proportion of potential customers in the market. It is therefore very important to understand the Critical Success Factors (CSFs) for each position in the strategic clock.
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