Robert D. Winsor
STRATEGIC MARKET ORIENTATION
Revenue can be characterized as the energy that feeds a business organization's existence. Because the flow of revenue is indispensable to organizational survival, marketing is perhaps the most critical function within a business organization. Although revenues (and, consequently, profits) can be generated through a variety of ever-evolving market strategies, the most fundamental distinction among these strategies can be viewed as a preference between margin and volume. That is, marketing strategy at its most basic level reduces to a choice between selling goods and services at a higher-than-average markup (gross margin) or a higher-than-average volume. Although either approach can be desirable and worthy, they require implementation approaches that are largely incompatible. A business may aspire to achieve both supra-normal volume and supra-normal margins, but the simultaneous attainment of these goals is difficult in a competitive marketplace. Basic marketing strategy can thus be seen as reflecting an organizational focus on one, or sometimes both, of these paths. These three alternative marketing strategies are referred to as a margin orientation, a volume orientation, and a margin-volume-differentiation (MVD) strategy.1
Margin-oriented (MO) businesses focus primarily on maintaining or improving their per-unit markups or margins, and concerns for volume are largely subordinate to this. MO businesses are by definition those that sell goods and services that have high prices in relation to total costs and for which in most cases, a large proportion of total costs are variable in nature. These high variable costs tend to confound efforts to discount prices, even though margins are high. The relatively small minor proportion of fixed costs also means that few opportunities for scale economies are present. As a result, incentives for volume expansion within an MO organization are limited and provide little advantage from a cost perspective. Faced with having to make a trade-off, the organization will generally be more interested in preserving its markup than its sales volume. MO firms thus use product differentiation as a competitive weapon, and find competitive shelter by pursuing markets in which demand is price inelastic.
A volume-oriented (VO) strategy has several defining characteristics. First, it embodies the pursuit of scale economies in both production and marketing activities. These are made possible through the use of operating leverage (capital investments) in both areas, resulting in a cost structure that is dominated by fixed costs. As a result, volume expansion is motivated by the need to not only increase sales but also reduce unit costs. VO businesses must continually seek to expand sales because larger volumes allow the allocation of fixed costs across more units, effectively lowering fixed costs per unit. Lower unit costs can in turn lead to enhanced profitability or expanded sales and market share, depending upon whether price discounts follow the cost savings. At the same time, utilization of capacity must be high, as unused capacity serves to inflate average fixed costs.2 As a result, VO firms will often embrace strategies that preserve or expand unit sales even if these require the sacrifice of unit gross margins. VO companies may even pursue volume to the point that sales are made at a price below the firm's average total costs. For example, due to their high operating leverage, airlines often sell seats at prices below the average cost for a passenger. Since the negative effects of unused capacity on profits exceed those of discounted prices (and thus reductions in contribution margin), the VO firm will generally discount when necessary to fill capacity.
Second, due to the VO strategy's singular focus on volume, mass production is combined with mass marketing.3 That is, to achieve the highest possible sales volumes, markets must be defined as broadly as possible. As a result, marketing strategy for the VO firm is based on selling a "good enough" product with broad appeal. The drive to minimize average production cost also motivates the firm to produce and market a small number of models, as this enables them to fully exploit experience effects and scale economies. Mass marketing supports this by exploiting market homogeneity, or the ways in which consumer preferences are similar. In other words, the VO strategy succeeds by identifying needs that consumers share in common and satisfying these needs efficiently. Since consumers of such products are typically price sensitive, VO companies must typically offer goods and services that are at or near the low end of the price spectrum. The goal of a volume orientation is thus to competitively provide the greatest perceived value to the greatest number of consumers. In this way, the emphasis on cost reduction strategically complements the low-price marketing strategy necessary for achieving volume, and creates a virtuous cycle whereby low prices drive sales volume, which through scale economies push costs lower. The emphasis on volume and cost reduction coupled with the reliance on standardized output make the VO strategy highly effective when employed in developing economies, but more risky in environments characterized by significant fluctuations in demand.4
A volume-margin-differentiation (VMD) strategy represents an attempt to simultaneously pursue high sales volume and unit margins through product differentiation. Whereas a VO business maximizes efficiency by combining mass production with mass marketing, a VMD strategy sacrifices some efficiency by adopting target marketing in an effort to gain pricing power. In other words, whereas a VO strategy seeks to exploit economies of scale in both production and marketing, a VMD strategy attempts to increase margins through product differentiation and market segmentation, and represents an attempt to improve margins while sacrificing as little volume as possible. It exploits market heterogeneity by identifying product or service dimensions for which consumer preferences differ (or for which customers desire variety), and fulfilling these unique or diverse needs (through product differentiation) in order to extract a price premium over competitive offerings that fail to reflect these differences. VMD embraces a group of target marketing strategies that enable an organization to move away from the relentless and challenging price pressures typical in a volume orientation. In a sense, VMD represents an abandonment of price competition, and seeks the greener pastures of the margin-boosting dimensions of brand and company strategy.