Strategy, Positioning and Differentiation
This is the last session prior to writing the business plan. We now have a business focus that is both motivational for the entrepreneur and a market driven opportunity. We have gathered considerable information through market research and we have a clearer picture of the opportunity.
Now, we need to solidify the business opportunity such that it provides an excellent potential for success. This requires the business to be differentiated from others in the economic system. Direct competition will not create new customers – it will only take customers from another business in the community.
- Understand the importance of the concept of differentiation
- Realizing your competitive advantages
- Assessing your strategic options
- Understanding the concept of positioning
- Establishing a business model that will guide decision making
- Solidifying the details of the vision
Decisions need to be made about pricing policy, promotion, production, quality, distribution and a number of other variables prior to writing the business plan. The business plan has to be visualized before it can be written and a good understanding of your strategy is necessary before you can commit your vision to writing.
Strategic options can be generalized into two distinct categories. You can decide to be the mass-market producer that sells to everyone at the lowest price. Typically this is reserved for businesses like Wal-Mart, Dollarama, Price Club and other major retailers who have the economies of scale to be the low price leader.
On the other hand, you can choose to pursue a focused niche strategy based on differentiation and high value-added services. Essentially this means that you find a small market, highly loyal, repeat market niche and provide them with an upscale product along with the value-added services.
Let’s assume you tie fishing flies as a hobby. You would like to have a business selling these flies. Your preliminary research shows that it takes you one hour to tie 2 flies and the material, per fly, is about $.50
You want to get at least $20 per hour for your time, so your cost, per fly is $10 labor + $.50 material = $10.50 (your cost of goods sold)
You need some advertising, equipment, space and a vehicle and trade booth expenses for going to outfitter shows. Telephone, electric and other expenses also need to be considered. When all is researched you need to allocate $1.50 per fly for overheads.
Total cost, per fly, is now $12.00 ($10.50 direct costs and $1.50 in allocated overheads). What this means is that you need to sell the flies at a minimum of $12 just to pay the bills and your production salary. This does not include the income you would want from running the business.
In doing some market research you notice that Wal-Mart has fishing flies (made in China) and they sell for $5. As you can see, you cannot compete directly with Wal-Mart on price alone. You would need to do the following:
- NICHE MARKET
You would need to find the serious fishermen – the ones who are interested in quality and are not price sensitive. These fishermen are looking for the best equipment; it is a source of pride that they have the latest and greatest fishing gear. They read fishing magazines and watch fishing shows on TV. They have high disposable income, and are most ready to purchase around vacation time when they go on fishing trips.
You need to really emphasize the difference between your product and the Wal-Mart product. “Hand-crafted”, “original”, “tested”, “professionally designed” and “superior quality” are some of the terms you would want to use in your promotion. A brochure describing the design and detailing the production process would also be helpful.
- VALUE-ADDED SERVICES
In order to justify your price (in comparison to Wal-Mart) you could provide extra benefits that are not available in the Wal-Mart version. Some could include:
(1) A booklet which indicates your expertise and includes “fishing tips” should also be included with each order of 5 or more.
(2) Gift packaging and shipping for those who want it sent as a gift
(3) A web site for posting the pictures of the fish caught with the fly
(4) Shipping is available through the convenience of calling 1-800 # or ordering on the web site.
- REPEAT CLIENT BASE
(1) Join the “fishing fly of the month club” and be eligible to win fishing gear or a trip to a fishing camp.
(2) Get a friend to join ( people fish in groups ) and get a monthly newsletter on fishing.
(3) Be a frequent purchaser – for every 5 flies purchased in the next 12 months you get 2 free
(4) Have a “gold member” club for your best customers to give them “front of the line” service and invitations to special events.
Entrepreneurs frequently need to follow a focused, niche strategy rather than being a low price leader. Entrepreneurs make profits by selling goods and services at a high price in low volume. Wal-Mart makes profit by selling goods and services at low price and in high volume.
The only exception to this model is to have your overhead costs extremely low and sell a recognized brand for credibility. The following is another example:
You would think that it would not be possible to compete with major retailers in the home appliance market ( fridges, stoves, air conditioners, dishwashers, clothes washers, dryers, humidifiers, de-humidifiers, etc. ). An entrepreneur was very successful in this business, however, and outlasted many of the major retailers.
First you have to understand the market for home appliances. You need a lot of floor space to show the multitude of brands and styles available. You also need sales personnel to explain the features of each of the models available. This is very costly overhead ( Note that Wal-Mart does not sell many of the home appliances ).
On the demand side, home appliances are a shopping good which means that customers will “shop around” for the best price because most name brand appliances are available at all appliance retailers.
So, the market is one where overheads are high (floor space, inventory, sales personnel, expensive advertising). Potential customers will take a lot of the salesperson’s time asking for information rather than buying and there is pressure to sell at a low price because others carry exactly the same brands and models that you do ( customers can do direct price comparisons ).
With this in mind, our entrepreneur has the following business model to compete against the retail giants:
(1) The entrepreneur has instant credibility because he is selling the same name brand and models as the large appliance retailers.
(2) The entrepreneur does not carry any inventory and works from a small, inexpensive location.
(3) The entrepreneur only uses inexpensive “word of mouth” advertising. He lets the large retailers spend the large advertising dollars.
(4) The customer begins by responding to the large retailer ads and gets information ( from the large retailers ) on the features of each brand/model and the prices
(5) Customer starts to shop around at other retailers and tells friends and relatives that they are looking for a new fridge, stove, etc.
(6) Friends/relatives tell the customer about the new entrepreneur. Customer calls Entrepreneur says, “Continue to look at the major retailers. When you know exactly what brand and model you want get the best price they can offer then come see me”.
(7) Once the customer finalizes their search and has the brand, model and price the entrepreneur will beat the price.
This happens because the entrepreneur does not have the high overheads of the large retailers. The entrepreneur carries no stock but he is a small retailer for the large appliance manufacturers. So, he doesn’t get economies of scale (he pays more for the appliances than the large appliance retailers who buy in volume). His savings in overhead and delivery (he has the appliance shipped directly from the manufacturer to the client) more than makes up for the extra cost to him for the appliances. So, he can beat the major appliance retailers on price to the consumer.
Most entrepreneurs want to work towards a business model that will put them in a “specialty” category where they will sell goods/services at a premium price to a loyal, repetitive client base that grows through word of mouth. In order to do this you need to establish your credibility and consistency. This usually takes time to build and the first year can be one of survival while you develop your reputation.
In some instances you can get instant credibility by selling brand names (like our appliance entrepreneur). Unfortunately, many others sell those brand names as well so your differentiation is low unless you have the lowest price or considerable value-added services.
Barriers to Entry
We’ve stressed the importance of “differentiation” to have your business perceived as a specialty good/service. You have to distinguish yourself from the competition in order to charge premium pricing. Naturally, if you are successful, other businesses will try to copy your success and try to eliminate the differentiation you are trying to create. So, you need to erect barriers to entry or barriers to copy. This will prevent competition from directly copying your business differentiation.
One method for instant credibility, and differentiation, is to have “exclusive rights” to a brand name good/service. The visible application of this concept is a franchise where you get the exclusive rights to sell a particular product/service in a specific geographic location. There are many exclusive rights that are given which are not a complete package like a franchise. Many rights are for product/service distribution only without the need to comply to a franchise package. This also provides that all important “barrier to copy” because no other entrepreneur can sell the same brand product/service. As an example, if you were to get the exclusive rights for a “Ticketron Admission Outlet” in Kahnawake you would be the only regional location that would be able to sell tickets to shows at the Bell Center, Place des Arts, etc. – What an exclusive!
Probably the best way to create a barrier to entry is through excellent attention to customer needs. Genuinely caring about the customer and working to solve their problems and satisfy their needs is the greatest barrier to entry that you can erect. You will be perceived as the original, the one who cares about the customer. Loyalty will develop and copycats will be not seen as genuinely interested in customer satisfaction.
Although every entrepreneur wants to be perceived as a specialty product/service, at the initial start of the business you have no track record, no credibility. Unless you have exclusive rights to an existing, known name brand product/service, or you buy into a name brand franchise, you will not have any credibility at the beginning. Some tactics to establish your credibility include:
- Associate your business with existing organizations that already have credibility. Perhaps your supplier is well known; maybe you can associate with the local legion or Elks. Another way is to have influential people be your first customers (even if you provide the product/service to them for free). Have them write a testimonial which you will use in your advertising.
- Have a “try it you’ll like it” strategy whereby you provide free samples, discount coupons, introductory offers and other incentives to get initial clients. This will give you an opportunity to show them your capability with little or no risk for them. Build on that using the Canadian Tire Technique of giving them something, with each sale, that gives them an incentive to come back ( discount coupon for next visit e.g. ).
- Make sure that your offers are only for a limited time to encourage decision making.
Michaelee established Sequoia and differentiates in a few ways (Direct competition is the body shop + fruits and passion). All these differentiate from soaps and body products that you can buy at Wal-Mart. Michaelee does the following:
- Uses tree oil, sweet grass and other Native herbs
- Hand crafted product made by the entrepreneur
- Web site developed by her
Prior to writing a business plan it should be developed in your mind, based on the research you’ve done and the opportunity you found to develop. This session establishes the base strategy for your business and that will make a lot of the decisions you need to incorporate in your business plan.
It is difficult to compete on price. Most entrepreneurs need a niche of clients who will be loyal, purchase repetitively and not be price sensitive. This usually requires a product/service that is not a shopping good.
In order to develop this business model you need to understand your core competencies. Once you know this you can begin to construct the framework for your business plan:
- A solid understanding of your niche market and the needs of that market
- The knowledge you have about your competitive advantage and how you will promote that differentiation in your business plan
- A realization of the ways you can “add value” to justify a premium pricing strategy
- The understanding of the importance to encourage repeat purchases and word of mouth marketing
- The importance of developing barriers to copying, barriers to entry
- An understanding of the necessity to penetrate an existing market and establish a position
Exercise # 1
Thinking about your product/service, would you categorize it as a shopping good? A convenience good? A specialty good? Describe the process of how your customer makes decisions, searches for satisfaction and how they are influenced.
Exercise # 2
Determine your strategy for pricing, distribution, value added services and establishing a repetitive client base.
Exercise # 3
Develop your strategy for market penetration and erecting barriers to copying.
- Considering Sequoia, how would you identify their market niche? Their differentiation? The category of their product (shopping, convenience, specialty)? Value-added services? Repeat client base?
- OCR gas competes with other regional gas stations and gas is a regulated commodity. All gas stations in a region charge the same price. What type of strategy can OCR use to differentiate from competitors? What are some tactics?
- A very popular business model is the concept of “home parties”. Started by Tupperware years ago, it has been extended to include a variety of products. Discuss the successful strategy of this model. Can the concept be modified for your business?