Absolute profit

Author: Zhang Jingbo
Publisher:
Publish Date: 2004-06-01
Features: Porter is a global authority on strategy, hailed as the "father of competitive strategy" and one of the greatest business thinkers of our time. Porter graduated from Princeton University and later earned a Ph.D. in Business Economics from Harvard University, receiving honorary doctorates from seven renowned universities, including the Stockholm School of Economics. In December 2000, Porter was awarded the highest honor at Harvard University, the title of "University Professor," becoming the fourth professor at the Harvard Business School to receive this prestigious distinction. In May 2002, Porter ranked among the top 50 contemporary management thinkers by Essen Philosophy Company. As one of the most respected business gurus, Porter's works are listed by U.S. Forbes magazine as the "bible" for managers, consultants, and securities analysts in the top 500 companies in the United States. The "Five Forces Model" and "Three Competitive Strategies" he proposed are widely accepted and practiced. His competitive strategy concepts are a required course for MBA students at Harvard Business School. Professor Porter is also an independent director and strategic advisor to numerous Fortune 500 companies, including Procter & Gamble, DuPont, and Intel.
1. A low-cost strategy cannot sacrifice product quality and service
"Price wars" are common, with some companies cutting prices just to follow the trend, while others do so under intense competitive pressure, feeling compelled to act to retain market share. Without a low-cost foundation, companies caught in price wars are forced to compromise on product quality and service.
Misunderstanding "price wars" and Porter's low-cost strategy
Many people mistakenly believe that "price wars" and Porter's proposed low-cost strategy are the same thing, but this is a dangerous misconception. Companies involved in price wars often assume that consumers are solely price-sensitive, yet in reality, consumers care about more than just price—they also value product quality, functionality, packaging, design, and after-sales service. If a company lowers costs at the expense of product quality and service, it will only weaken the premium image of its products. In the end, the company will devalue itself in the eyes of consumers, and the advantages gained from price cuts will vanish. Therefore, when discussing the pitfalls of cost leadership, Porter sharply pointed out that if a company overlooks the uniqueness of its products during cost-cutting efforts, it may damage its differentiated image. However, many of our companies fail to thoroughly consider the impact of price cuts and cost reductions before making hasty decisions, ultimately leading to fatal flaws.
In fact, when Porter talks about cost advantages, there is an underlying premise: efforts to reduce costs should focus on activities that contribute little to the company's differentiation strategy. Many companies mistakenly believe that once costs are lowered, they have the capital to launch price wars and deliver a fatal blow to competitors, completely ignoring the broader effects of price reductions on their products and other aspects.
Ignoring product differentiation: A clear example is Newer Technology (Shenzhou Computer). Leveraging its parent company Newer Group's strengths in motherboard and graphics card research and production—such as the popular Aopen motherboards and Higame graphics cards—Newer Technology targeted key PC components to control overall PC prices, making its voice heard in price wars. One of its most classic moves was the Pentium 4 model. When competitors like Lenovo and TCL were still battling in the thousands-of-yuan range for Pentium 4 computers, Newer Technology launched a Pentium 4 model under five thousand yuan, stirring up a storm in the market. However, problems soon followed. Despite having a fast CPU and large-capacity hard drives, Newer Technology's overall system performance was unsatisfactory, and its advertising promises couldn't be fully delivered. The reason? Every component was chosen for low quality and low price. The slight performance sacrifices on individual components may seem insignificant, but when accumulated in the whole system, they create a significant performance gap. Especially with the operating system, replacing Windows with Linux made people wary of this "masterpiece"—can this computer even work? Faced with the high risks associated with low prices, consumers were clearly not eager to buy.
Changhong's price war in the domestic TV industry can be considered a prime example of...