How Strategy Drives Pricing

I was fortunate enough to attend Harvard Business School’s Owner/President/Management Executive Education program. Professor Cynthia Montgomery taught the classes on strategy. Professor Montgomery was Michael Porter’s protégé. Michael Porter, for all intents and purposes, invented strategy as far as US businesses are concerned. His Five Forces analysis is still widely used.

The central outcome of the strategy class was creating a sustainable competitive advantage – some combination of differentiators that would allow you to capture and grow market share and build a company that could last. Strategy is about how you compete and win, and Sales is where the rubber meets the road.

There’s a little book called The Disciplines of Market Leaders. This short book can teach you a good deal of what you need to know about competitive strategy rather quickly. Essentially, you compete by having the lowest price, by having the best product, or by having the greatest customer intimacy, which means the best overall combination of products, services, and solutions. Most of us are competing on customer intimacy.

Porter’s work, as well as The Disciplines, are both decades old. There are great and immutable laws that exist in their work. Strategy is not only what you decide to do to compete, but it is also what you decide not to do. The “not to do” can be more important than the “to do.”

A Choice of Two Strategies

What is emerging now is a choice of two strategies, with a decision to play in the muddy middle making competition tough because you are neither fish nor fowl.

Those two strategies are “caring” or “transactional.”

Some companies have decided that their strategy is to compete by having a high touch, high caring, high value-creation approach to competition. They are occupying the higher end of the continuum when it comes to caring. Because they have this approach, they need to capture enough profit to deliver what their clients expect from them.

Other companies have decided to be transactional, eliminating the high touch, high caring, high value-creation, and instead competing by reducing friction, mostly by using technology and disintermediating existing industries. The best example I can give you is Amazon.com (where I spend lots of money).

The Muddy Middle

The challenge is trying to occupy a space between caring and transactional. The buyers who want you to be transactional believe your price is too high. The buyers who want you to be high touch, high value, high caring, don’t recognize that in your offering.

The problem with occupying the middle is that you believe you are competing against a lower price when your strategy is not designed to provide you with a competitive advantage there.

By occupying the middle, you are not differentiated enough to compete with competitors that have chosen that strategy. Your middle price doesn’t provide the profit to deliver the high touch and high caring.

The middle is a tougher and tougher space to occupy, even though there are companies who have figured out how to do so by being “the next best thing.”

What We Are Learning

The lesson we are being taught is that if you intend to create value you need to capture some of that value to maintain and execute that strategy.

And if you plan to compete by being transactional, you need to go all in on that strategy reducing your costs dramatically and finding a way to improve your efficiencies to a level that allows you to make that a competitive advantage.

There may no longer be a sustainable competitive advantage. Because the economy and technology are providing us more and more disruptive change, the strategic advantage may be temporary. Innovation and reinvention may be the best hope for a sustainable competitive advantage, if there is still such a thing.

• What strategy have you chosen in order to create a competitive advantage?
• Are you staying true to that strategy by pricing your offering accordingly and saying no to business that is outside of your real capabilities?