You remember some companies for the special attention or additional value that you received upon making your purchase – a free bottle of champagne and chocolates in your hotel room, free pillows with the purchase of a bed set or same day delivery where you know that they have gone out of their way to get to your office or home. You take note of personalised attention, where people “go the extra mile” to assist you and meet your needs. Apart from being good at client service, these companies are attempting to distinguish themselves from the competition, even though this differentiation adds costs in order to add value and a distinction, hopefully for which customers are prepared to pay slightly higher prices. The essential ingredient here is that the differentiator must be perceived by the customer to be significant and important, not just by the company.
An equally important strategy to gain market share over the competition is cost leadership – to realise lower costs than the competitors. A company that is a low-cost leader has a competitive advantage in reaching buyers whose most important purchase consideration is price. This strategy is suitable for shoppers who are sensitive to changes in price where competing companies sell similar products and where firms can benefit from economies of scale. A low-cost leader is also well positioned in a price war and can utilise low pricing to take on competitors in the industry.
Now, these two strategies seem to be at odds with each other and in some ways, they are. Differentiation is about spending a little more on what you offer to make the product or service more desirable, whilst cost leadership is about cutting costs through economies of scale, presuming that extensive sales can be achieved. The key to resolving this seeming conflict of strategies lies in understanding the market segment in which you are operating. In the 1970’s, M E Porter did extensive research on this concept and called it “focus” (Competitive Strategy: Techniques for Analysing Industries and Competitors, 1980). A focus strategy, rather than attempting to satisfy all customer requirements for a particular need or want, concentrates on a particular segment of the market. A successful focus strategy creates a sustainable competitive advantage when the company decides to occupy only one segment or niche in the market. The main goal of a focus strategy is to create a monopoly for the company in the specific segment or niche.
A focus strategy is a great strategy for a small business as many small businesses do not have the necessary resources to serve a large market with divergent needs. Here, the small business utilises its means to target and serve the niche more effectively than competitors. To be sustainably successful, the small company must ensure that the segment is large enough to be profitable. It should note, however, that it will also be very sensitive to any changes in that market (for example, any change in preference for the product or service, which results in less demand for the same, can be detrimental to the company’s existence).
All companies need appropriately focused strategies to realise sustainability and growth. Goal formulation should serve the basis for the composition of the chosen strategy and also the basis against which performance can be measured.