Which Niche? Get clear about how you want to play.
It’s said that in Hollywood, there are only a handful of basic movie plots: David and Goliath, rags to riches, quest, comedy, tragedy, rebirth. Characters, twists and turns, and the details vary, but every movie storyline is built from these basics. In the business world, we can say the same thing. The basic competitive strategy plotlines are: low-price leadership, product innovation, differentiation or niche player.
As with movie storylines, a company chooses its fundamental operating strategy, then builds its business around the positioning. As examples, consider:
- Walmart: Low-price leadership
- Apple: Product innovation
- Chipotle: Differentiation
- Navy Federal Credit Union: Niche player
In his seminal book “Competitive Strategy: Techniques for Analyzing Industries and Competitors,” Michael Porter describes these foundational strategies in the context of an industry’s competitive intensity — defined as the relative power of suppliers, level of threat from potential new industry participants, relative power of customers, level of threat from potential substitutes for the product or service, and the degree of competition among current industry participants.
With each strategy choice comes a set of supporting actions. A business competing as a low-price leader, for example, must apply its attention, resources and objectives to driving costs as low as possible in order to succeed.
Product innovators, meanwhile, disproportionately invest in research and development to populate a pipeline of new, monetizable ideas.
Differentiators focus on what makes their offering unique and of value to customers.
And, finally, niche players build and sustain competency earning relevance with their specific, unique clientele.
A frequent challenge arises when a business either loses clarity about its competitive positioning or drifts from its strengths.
I had a consulting engagement with a well-run tract homebuilder in Southern California. They built appealing, good quality, reasonably priced starter homes by the hundreds. Then, as they saw the trend of “equity bandits” — people selling highly appreciated homes in California, taking their equity profits and moving to nearby, lower-cost-of-living states — the company decided to try their hand at building custom homes in Henderson, Nev.
What we discovered through our work together was how different the custom homebuilding business (aka niche) is, versus high-volume, tract-home production (aka: low price leader). Our conclusion: Stick to your core competency of building tract homes.
This same issue arises in all industries. Community banks (by definition, either niche players or differentiators, not low-cost providers) deploy a strategy to pay high deposit rates to attract new deposit customers. Result: Transitory deposits from non-customers always looking for the next best deal.
High-volume manufacturers getting the itch to niche (think General Motors developing the Saturn brand or United Airlines with their Ted brand). Result: suboptimal outcomes.
How to define your competitive strategy?
Here are three actionable ideas to help leaders affirm a competitive strategy that fit business competencies:
1. Get clear about how you want to play the game
How do you want to compete? How is your company best prepared to compete? Is the company structured to be a low-price leader, or better aligned with differentiation? Answering these questions requires being candid about the company’s strengths and challenges.
2. Take a close look at activities in the business that don’t align with your chosen strategy
If the business has drifted into a danger zone (for instance, you find that new customers your sales people source are only interested in low prices, but your operating costs don’t support heavy discounts), it’s time to do a competitive strategy alignment assessment. There may be activities that should be discontinued or refined to align with your foundational competitive strategy.
Strategy drift hurts your business and creates disruptions for team members.
3. Ask yourself and your team: “How can we build on our company’s strengths”?
This question help you answer how you’ll solidify your competitive position. Organizational strengths — capturing continuous efficiency gains, innovativeness, distinctive customer engagement approach, natural niches — are opportunities to build upon and add color to your business’s storyline.