Stuck in the middle with you?
When I first started studying marketing, I was overwhelmed by the number of theories and models, developed by “experts” to explain why businesses are less successful than they should be. The more I read, the more I realised most have been developed to serve the needs of book publishers and that they have no relevance whatsoever for real businesses, owner managed small and medium sized enterprises who want to understand business and marketing strategy and planning.
But then I have read a lot of books!
And some of the theories and models developed by the great and the good of marketing are absolute belters and are as relevant to SMEs as they are to the multi-nationals they were designed for. I’ve built a toolbox out of them, with nearly 40 different components, that has been invaluable when working with Corve Consultancy’s clients.
So which one is hot at the moment? Well it’s number 16, the rather grandly titled Porter’s Generic Strategies. (Don’t glaze over yet – it’s good!)
Business guru Michael Porter believes that while a company may have loads of strengths and weaknesses relative to its competitors, there are only three types of real competitive advantage you can develop, by being the cost leader, by serving niche markets or by sustained differentiation.
Lots of SMEs that I talk to are not consciously developing their business with one of these strategies in mind and are (if you view the three options as points of a triangle) floundering about somewhere in the middle.
So what do they all mean?
Being the cost leader is about being the lowest cost producer in the industry. Companies who do this often have a broad scope and serve many different industry segments. Companies can get a cost advantage because they achieve economies of scale; have proprietary technologies, or an advantage in accessing key (raw) materials. Cost leaders are often selling a standard product with no frills and they place considerable emphasis on size, economies of scale and cost advantages from all sources.
It’s a difficult long term position to sustain you are always vulnerable to being undercut and having the closest scrutiny on your price offering as the market tries to catch you out. Ryanair is a good example of this type of business. It’s difficult for SMEs to choose and sustain this position. Our resources usually mean that we have low marketing budgets which are vulnerable to competitors and a s re-seller online trading client of mine is discovering, someone else can always procure cheaper using a bigger budget for bulk purchases, and undercut you.
Serving niche markets is all about becoming a specialist to a specific sector. This is something SMEs do particularly well. We develop a specialist reputation concentrating on one or a small number of segments to the exclusion of all others. This allows us to focus and concentrate our efforts to get a deep understanding of our target segments and become acknowledged as the experts. The greater our expertise and the more we demonstrate our effective affinity with the segments, the higher we make the barrier to entry for others.
If possible we want to choose highly specialised niches which are easier to defend against local or international competition than less specialised ones. The difficulty we can face with this strategy is that to serve niche segments in a market leader position SMEs have to provide high customer and technical support, which can be resource intensive.
Sustained differentiation is where a company selects one or more things that many buyers in an industry perceive as important and then uniquely positions itself to meet those needs. The reward is a premium price! You can base differentiation on product attributes, service levels, the method of distribution, even your marketing campaign. But the trick is to make sure the cost of this unique differentiation does not exceed the value of the price premium it commands.
Delivering the groceries to my house in a stretch limo as opposed to a white van may be a unique proposition, but the marginal price is unlikely to recover the marginal cost! Sustaining differentiation can be hard, but SMEs have the flexibility, adaptability and responsiveness to customer needs to be successful with this strategy.
What’s the most obvious downside? Over time, as a market becomes mature, it can be increasingly hard to sustain true and meaningful differentiation.
Many SMEs that I meet are stuck in the middle, trying each strategy but failing to achieve any of them. As a result, they have established no competitive advantage and they are usually performing below average. In these cases, the SME will only earn profits if the structure of its industry is highly favourable (i.e. the conditions are such that it’s nigh on impossible NOT to make money – Ice cream vans in a hot summer, pubs during the world cup??) or if all your competitors are also stuck in the middle (what an opportunity!).
Businesses become stuck in the middle because they can’t decide how to compete, or don’t know how to make the choices. What have you decided to do?
But then I have read a lot of books!
And some of the theories and models developed by the great and the good of marketing are absolute belters and are as relevant to SMEs as they are to the multi-nationals they were designed for. I’ve built a toolbox out of them, with nearly 40 different components, that has been invaluable when working with Corve Consultancy’s clients.
So which one is hot at the moment? Well it’s number 16, the rather grandly titled Porter’s Generic Strategies. (Don’t glaze over yet – it’s good!)
Business guru Michael Porter believes that while a company may have loads of strengths and weaknesses relative to its competitors, there are only three types of real competitive advantage you can develop, by being the cost leader, by serving niche markets or by sustained differentiation.
Lots of SMEs that I talk to are not consciously developing their business with one of these strategies in mind and are (if you view the three options as points of a triangle) floundering about somewhere in the middle.
So what do they all mean?
Being the cost leader is about being the lowest cost producer in the industry. Companies who do this often have a broad scope and serve many different industry segments. Companies can get a cost advantage because they achieve economies of scale; have proprietary technologies, or an advantage in accessing key (raw) materials. Cost leaders are often selling a standard product with no frills and they place considerable emphasis on size, economies of scale and cost advantages from all sources.
It’s a difficult long term position to sustain you are always vulnerable to being undercut and having the closest scrutiny on your price offering as the market tries to catch you out. Ryanair is a good example of this type of business. It’s difficult for SMEs to choose and sustain this position. Our resources usually mean that we have low marketing budgets which are vulnerable to competitors and a s re-seller online trading client of mine is discovering, someone else can always procure cheaper using a bigger budget for bulk purchases, and undercut you.
Serving niche markets is all about becoming a specialist to a specific sector. This is something SMEs do particularly well. We develop a specialist reputation concentrating on one or a small number of segments to the exclusion of all others. This allows us to focus and concentrate our efforts to get a deep understanding of our target segments and become acknowledged as the experts. The greater our expertise and the more we demonstrate our effective affinity with the segments, the higher we make the barrier to entry for others.
If possible we want to choose highly specialised niches which are easier to defend against local or international competition than less specialised ones. The difficulty we can face with this strategy is that to serve niche segments in a market leader position SMEs have to provide high customer and technical support, which can be resource intensive.
Sustained differentiation is where a company selects one or more things that many buyers in an industry perceive as important and then uniquely positions itself to meet those needs. The reward is a premium price! You can base differentiation on product attributes, service levels, the method of distribution, even your marketing campaign. But the trick is to make sure the cost of this unique differentiation does not exceed the value of the price premium it commands.
Delivering the groceries to my house in a stretch limo as opposed to a white van may be a unique proposition, but the marginal price is unlikely to recover the marginal cost! Sustaining differentiation can be hard, but SMEs have the flexibility, adaptability and responsiveness to customer needs to be successful with this strategy.
What’s the most obvious downside? Over time, as a market becomes mature, it can be increasingly hard to sustain true and meaningful differentiation.
Many SMEs that I meet are stuck in the middle, trying each strategy but failing to achieve any of them. As a result, they have established no competitive advantage and they are usually performing below average. In these cases, the SME will only earn profits if the structure of its industry is highly favourable (i.e. the conditions are such that it’s nigh on impossible NOT to make money – Ice cream vans in a hot summer, pubs during the world cup??) or if all your competitors are also stuck in the middle (what an opportunity!).
Businesses become stuck in the middle because they can’t decide how to compete, or don’t know how to make the choices. What have you decided to do?
Labels: strategy
posted by Marketer at
7/24/2006 02:37:00 PM
