Incompatibility hypothesis
Incompatibility hypothesis is a term used in economics . According to the considerations and work of Michael E. Porter in the field of competitive strategy, a company cannot strive for the lowest possible price and the greatest possible additional benefit for the customer at the same time. There is a risk of not making sufficient profits and of falling "between the chairs" or of falling into the state of the so-called " stuck in the middle ".
As part of the discussions about the hybrid strategies, Porter later revised this strict view. The outpacing strategies approach should also be mentioned in this context .
Incompatibility hypothesis
The main message of Michael Porter is that companies that for none of the three standard strategies (s. Competition matrix ) decide "on the fence" ( "Stuck in the Middle") sit and thereby operate less profitable, or even from the Market can exit. This main statement is also known as the incompatibility hypothesis .
Markets for which the incompatibility hypothesis applies have a hyperbolic demand function . An example of a market that has a hyperbolic-like demand function is the wristwatch market. Very small amounts in the five or six-digit dollar range and a large amount in the double-digit dollar range are sold here.
The following figure explains the situation:
The graphic illustrates how, with a hyperbolic demand function for companies, with different output sizes, a different ratio of sales and costs can occur. If the respective sales volume is multiplied by the price based on the hyperbolic demand curve , a "turnover function" is created. The different costs for each company size are estimated using a typical cost function that falls over the long term based on economies of scales .
The graphic also shows how the situation described "Stuck in the Middle" by Porter occurs with a hyperbolic demand function (see area "c").
Neither a clear strategy of differentiation (see area "b" with low quantities and high prices) nor a strategy of cost leadership (see area "d" with low prices but high quantities) is given in this situation. These companies do not follow a clear strategy, they are "stuck in the middle" . As a result, these market participants have poor profitability and, sooner or later, run the risk of leaving the market. In area "c" of the graphic it can be seen that the profitability is low, since the gap between the sales curve and the long-term cost curve is very small here.
In area "a" it is advisable, as part of the market entry strategy , to quickly reach profitability through growth. Established companies are mainly in area "b". These pursue either a niche or a differentiation strategy . Due to product innovations, their products have features that justify a higher price and are considered to be of higher quality. Therefore, a higher price is paid for these products.
The cost leaders move in the area "d", as do the few companies that manage to combine the strategies of cost leadership and differentiation without contradictions.
source
- ^ H. Corsten (1998) Basics of Competitive Strategy , Stuttgart; Leipzig: Teubner; Pp. 112-120, ISBN 3-519-00230-2
- ↑ a b c d e f Martin Kaschny, Daniel Ruppert, Alexander Bitzhoefer, Kai Andre Doniges: Incompatibility Hypothesis: Graphical and Mathematical Explanations . In: American Journal of Business, Economics and Management . tape 3 , no. 4 , 2015, p. 177-185 .