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Kenichi Ohmae and Pricing Strategy

January 2014 Pricing

In his classic 1982 text “The Mind of the Strategist”, Kenichi Ohmae fathered the 3 C’s model of corporate strategy.  What can a veteran strategy book tell us about contemporary  pricing strategy?  Surprisingly, quite a lot.

According to Ohmae, “[corporate] strategy is defined as the way in which a corporation endeavors to differentiate itself from its competitors, using its relative corporate strengths to better satisfy customer needs”.  This identified the three core actors to consider in defining strategy, or three C’s of corporate strategy:  the Company, its Competitors, and the Customers it seeks to serve.

Figure 1

Customers

Starting with the customers, Ohmae stated that a successful strategy must deliver greater value to customers than they could otherwise attain.  Let’s explore this statement.

From an economic perspective, delivering value to customers requires delivering more benefits to customers than the firm extracts in the form of price.  That is, value, in the customer’s perspective, is the benefits delivered less the price extracted.  One can write this as

V = B – P

where V is value, B is benefits, and P is price.

Yet Ohmae didn’t state that the firm should deliver value to customers.  He stated that the firm should deliver more value to its customers than they could attain from its competitors.  This implies that the total value delivered isn’t relevant in defining strategy, but rather the relative value delivered.  That is, the value delivered by the firm relative to the value delivered by its competitors.  Hence, the relevant equation for defining competitive strategy is

Δ V = Δ B – Δ P ≥ 0

where Δ, delta, is the difference in value between the firm’s offerings and its competitors’.  That the firm must deliver more value than its competitors implies that the ΔV is positive, at least at the margin.

Not only have we been claiming for years that this is the foundation of value-based pricing, but this same sentiment can also be found in the work of others.  For instance, denote the firm’s offering with the subscript F and the competitor’s offering with the subscript C, and we can write:

(VF – VC) = (BF – BC) – (PF – PC) ≥ 0

Which can be rearranged to yield the requirement for compelling offers of

(BF – PF) ≥ (BC – PC)

Ignoring differences in notation, this is the same equation that is found in Anderson, Kumar, and Narus’s 2007 text “Value Merchants”, one of the leading books for managing pricing and selling in business marketers today.

From a customer-capture perspective, these statements and equations draw attention to the differences in benefits and the differences in price between offerings.

That is, to capture customers, the firm has to either deliver more benefits to its customers than its competitors at the same price, or deliver the same benefits at a lower price, or offer both more benefits and lower prices simultaneously.

From this vantage point, price becomes a lever to wield in managing the value equation from the customer’s perspective.  The firm can raise or lower prices relative to the differences in benefits between competing offers.  If the firm is delivering more benefits, it can capture a higher price.  If it is delivering fewer benefits, it must accept lower prices or fewer customers.

Competitors

From the competition perspective, a firm seeking to deliver greater value to its customers than its competitors must differentiate itself.  Again, let’s explore this statement.

To differentiate a firm from its competitors in a manner relevant to its customers, that firm must develop some form of competitive advantage.  That is, it must create or acquire some capability or resource that enables it to deliver greater value to its customers without a commensurate increase in costs, and that capability or resource must be rare and unique enough that the competitors cannot simply copy it.

That capability may derive from an organizational strength in its people, routines, and culture.  It may lie in its intellectual property in the form of a unique technology or process.  Or it may be derived from a classic strategic resource such as a highly productive oil field, mine, airport landing gates, etc.

It must be created or acquired, which implies investment.  And it must be rare and unique in order for it to truly differentiate the firm from its competitors.  This implies that the investment may be perceived as risky because it involves throwing money into a capability or resource in which competitor did not invest.  The investment also usually take time to come to fruition, sometimes months but usually years.  Which implies it will be a large and significant investment over time.  This is the epitome of strategic investments.

Additionally, the strategic capability or resource must deliver greater value to the firm’s customers.  Which returns us to pricing.  The strategic capability will be strategic precisely because it either enables the firm to deliver more benefits to customers than they could get elsewhere without a proportionately higher cost, or deliver the same set of relevant benefits at a lower price, or do both simultaneously.

Company

From the company perspective, the firm must make choices regarding the areas in which it will be superior.

No firm can be superior to its competitors for every customer and in every dimension.  The firm must make tradeoffs, such as the classic tradeoff between operational efficiency (low cost) and product creativity (high benefit).  It must also decide which customers it should capture, and which it should cede to its competitors.  These issues also affect the pricing strategy of a firm.

Should a firm choose to pursue market share today at a low profitability (i.e. lower prices) in the anticipation of garnering future profitability due to economies of scale, scope, or learning, or through positive network effects?  Or should the firm alternatively choose to pursue high profitability (i.e. higher prices) today in order to attain the cash resources necessary to invest in the next source of competitive advantage?  This is a crucial strategic decision that the executives within the firm can and must make.

And Pricing

As Kenichi Ohmae stated, “In problem solving, it is vital … to formulate the question in a way that will facilitate the discovery of a solution.”

So let us seek to define a firm’s pricing strategy not as a technique nor an answer, but rather as a series of questions.  And let this series of questions focus our attention on the company, its competitors, and the customers it seeks to serve.  These questions can be boiled down to:

(1)    What is the nearest comparable alternative?

(2)    Is your product or service better or worse?  And

(3)    Does the customer care?

As simple as this series of questions sounds, it is profoundly based on Kenichi Ohmae’s 3 C’s of Competitive Strategy.  These three questions are also of fundamental importance to all firms, as they inform a company’s vision and ethos, and, more tangibly, a clear and current knowledge of the answers to these questions is absolutely essential to any firm’s ability to competitively price.

 



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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