Avoid ‘me-too’ strategies. Try to differentiate instead and define a competitive strategy that fits with your core strengths.
There are three main competitive strategy (see also Michael Porter):
- Lowest costs
- Tata, Aldi, Ikea
- Unique customer experience
- BMW, Toyota (service can be amazing!)
- Bentley (10k cars?), Porsche (100k cars…)
- Most small businesses (geographical niche)
And if you want to read to long version, here you are:
Strategy starts with the ability to say “No”. In the context of competition, this means the ability to decide where you want to put all your weight and resources, and become a top tier player. Free yourself up! Where you want to compete is your decision. Where does not only mean geographically, but also in terms of customer segments, product portfolio, price and positioning in the value chain. Maybe it is time to wake up and put into question decisions that have been made so long ago in the past that nobody remembers why your company is competing the current way.
From the study of many industries, Porter has derived that there are three generic competing strategies that apply across the board.
Strategy One: Cost leadership
This requires low cost of production, high volume, low cost of distribution, and a mass-market approach. And more importantly a corporate culture and management that is completely dedicated to low cost in everything that they do, and breathe this philosophy every day. The danger of this strategy is that it tends to translate into cut-throat price wars creating one winner and many losers, and as everybody tries to be the winner, customers capture all the value while all suppliers, except perhaps one, struggle financially.
Strategy Two: Differentiation by bringing something unique to customers
Unlike cost leadership, there are numerous ways to compete in a differentiation strategy, creating room for many companies to be successful in the market. Typical differentiation strategies are:
- innovation. This requires strong R&D and trend-setting capability, as well as short development cycle.
- quality. Quality can mean all sorts of things, in particularly reliability, competence, short reaction speed, professionalism. Product quality requires strong process capability and system integration capabilities so that individual components best match each other. Competitive strategies focusing on quality might primarily address the premium market, but it does not have to be so (e.g. Toyota).
- service excellence. This requires efficient but affordable after-sales processes, and in case you are a service business, a passion for serving customers, looking at issues in an end-to-end way, and improving your processes continuously.
- perceptions including packaging and advertising. Many companies are successful not so much because of the quality of the products that they sell (these are largely commoditised) but because of their marketing approach. Think about big household product brands like washing powders, chocolate or jeans.
Strategy Three: Focus on a small market segment or a niche rather than the mass market
By narrowing your market focus, your target is to create for yourself a Unique Selling Proposition that larger competitors can not match and provide your customers with something that perfectly satisfies their needs. This can again be a focus on cost leadership or a differentiated product offering.
A competing strategy based on differentiation does not mean that you can afford to forget costs, but that you are not primarily competing on a low cost and low price basis. So differentiation is really about finding the right trade- off between cost, innovation, quality and services. You need to push your analysis deeper and identify the right mix and how it makes most sense for you to compete, based on the value that you can bring to your customers. This is a value that they don’t get from others today, and also not tomorrow due to your own efforts to continue developing and protecting your USPs.
A “me-too” strategy is not good enough. Imitation can be a short-term by-pass, and god knows how imitation is easy on paper and how difficult it can be in practice. However this won’t be sufficient in the long term. It is probably not worth competing in an area where you do not have USPs and can not make a difference, because this will only lead to below average performance and profitability.
Make sure that there is an appropriate match between the size of the market that you want to address and your own resources. If the market is too large compared to your resources, then you are unlikely to be able to make a difference. You are like a drop in the ocean. You are running the risk of spreading your efforts too thinly across too many opportunities. Venture capitalists also prefer narrow, but well-defined markets where you can become the leader, rather than huge markets where you want to take 0.1% market share. On the other hand, you should not think too small either, otherwise you are acting too conservatively. If you believe that you are spreading your efforts too thinly on too many activities, scale down and focus on those segments where you are or have the potential to become a leader. If your addressable market is still too large compared to your means, then focus on segments of the value chain where concentration levels are higher, or where concentration is likely to happen. Concentrated industries have a reputation for being less competitive and more profitable.
As a start-up, you should choose your angle of attack so that you get maximum spinning from one market segment to the next. It is like a game of bowling. Start by putting all your resources on a market segment that is neither too small nor too large and where you can bring unique value, but make sure that this market segment gives you an evolution path towards a second segment leading to a third and so on. In the long term you could be addressing a much larger market.