One concept students (and scholars) of strategic management sometimes struggle with is the warning from Michael Porter about being stuck in the middle. So too do businesses.
The idea is that firms who sit on the fence, differentiating somewhat while keeping costs at the lower end, will invariably struggle with the incompatibility of such goals, and thus fail. More single-minded competitors will win out by pursuing EITHER (i) uniqueness that competitors value (and therefore pay for); OR (ii) cost efficiencies such that their products will have a low price advantage.
Critics of Porter’s generic strategies have argued that he is too simplistic in his conceptualisation of markets and consumer behaviour, and that firms adhering to his gospel may miss a large, valuable middle ground of consumers where some slight differences and some best price offering will win out.
Data presented in this Economist article (and the accompanying graph – right) would seem to support Porter’s arguments. It shows the massive uptake in store brand groceries (a.k.a. private label or home brands), and the corresponding drop in sales for other brands in the German market over the past decade.
High end offerings and the most popular brand in a given category have held their ground. But elsewhere in a category, it is the more efficiently manufactured (due, in part, to the enormous economies of scale guaranteed by retailer endorsement), lower priced products that have won out.
Message to firms: be very, very good at what you do (that smells like the resource-based view to me) and/or find an attribute consumers will pay considerably more for, or get extremely efficient at product manufacturing (thus winning the contract to produce a store brand). Otherwise, you will perish.
Tags: business strategy, consumer goods, FMCG, generic strategies, Market position, michael porter, Strategic management, Stuck in the middle
International BS Blog 
August 22, 2009 at 5:48 pm |
To understand (and criticise) the concept of stuck in the middle it is worth pointing out the central assumption underpinning it: disproportionate tradeoffs. And it is also worth noting that segment shifts in particular markets do not constitute strong evidence of stuck in the middle. Let me elaborate…
Porter talks a lot about tradeoffs in his publications but to my knowledge fails to point out that his “stuck in the middle” is really about a disproportionate tradeoff. It is not just a matter of, say, gaining a little extra differentiation by giving up a little cost competitiveness but, in the Porter world, gaining a little extra differentiation entails giving up a lot of cost competitiveness. Because the ccost leader setting out to gain a little differentiation will end up compromised: they won’t achieve differentiation and will lose their cost leadership. (The same holds of course for the differentiator setting out in the other direction).
Stuck in the middle is a useful pedagogical concept and a useful discussion starter. Whether it actually exists is debatable. In the least it would seem to be a phenomenon that is highly contextual. It may exist in certain settings but not in others.
The retail sector has often been suggested as one where companies may easily get stuck in the “muddy middle” (as a former colleague of mine used to call it). In parallel, the consulting literature talks a lot about “schizophrenic (retail) customers” who increasingly turn to both high end and low-end products (typically in different categories). And the Economist figures quoted in Andre’s blogspot would seem to confirm all of that. But two points are worth noting. FIrst, the above Economist stats offer limited evidence inasmuch as the notion of a “store/home brand” is a slippery one. Supermarkets as well as department stores (in Australia as well as overseas) are increasingly working with hierarchies of storebrands, ranging from lowest price to mid-market to up-market. In other words, the fact that the proportion of storebrands is growing need not tell us that the low cost segment is taking over. Second, even if we accept that at least in some industries the low end and high end are claiming ground from the mid-market it does not follow that competitors cannot profitably mine this very segment. In discussing such segment shifts is often conveniently “forgotten” that even if the mid-segment is shrinking as customers trade up and/or down, it does not follow that the middle ends up as a low profit segment. (One could even argue that if sufficient companies follow Porter’s dictum and get closer to the extremes of the market, the middle might be the most attractive segment of them all. ) For that to happen disproportionate tradeoff must be present. A proportionate tradeoff just won’t do it.
Yet all we have is anecdotal evidence that such disproportionate tradeoffs exist. They would seem more likely in some industries than in others.
Looking beyond the above special cases it would seem in most industries the mid-segment — customers wanting a modicum of differentiation at a good price — would seem to be a promising hunting ground and a middle-of-the-road strategy in terms of an intermediate level of differentation and cost might be just as promising as more extreme strategy variants. In the end, the specifics of the value proposition — i.e. exactly how much of what kind of differentiation at what particular price — may be more decisive than the crude “generic strategy” label that happens to apply.