Encyclopedia Michael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension (Porter was originally an engineer, then an economist before he specialized in strategy) and looks at the size and composition of the market you intend to target . Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost (efficiency He originally ranked each of the three dimensions (level of differentiation, relative product cost, and scope of target market) as either low, medium, or high, and juxtaposed them in a three dimensional matrix. That is, the category scheme was displayed as a 3 by 3 by 3 cube. But most of the 27 combinations were not viable. 1 | Page
Transcript
Encyclopedia
Michael Porter
has described a category scheme consisting of three general types of strategies
that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension (Porter was originally an engineer, then an economist before he specialized in strategy) and looks at the size and
composition of the market you intend to target
. Strategic strength is a supply-side dimension and looks at the strength or core
competency
of the firm. In particular he identified two competencies that he felt were most
important: product differentiation
and product cost (efficiency
He originally ranked each of the three dimensions (level of differentiation, relative product cost, and scope of target market) as either low, medium, or high, and juxtaposed them in a three dimensional matrix. That is, the category scheme was displayed as a 3 by 3 by 3 cube. But most of the 27 combinations were not viable.
In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and Competitors, Porter simplifies the scheme by reducing it down to the three best
strategies. They are cost leadership, differentiation, and market segmentation (or focus). Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.
Empirical research on the profit impact of marketing strategy
indicated that firms with a high market share were often quite profitable, but so were many firms with low market share. The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem. Porter’s explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable market niche. Firms in the middle were less profitable because they did not have a viable generic strategy.
Porter suggested combining multiple strategies is successful in only one case. Combining a market segmentation strategy with a product differentiation strategy was seen as an effective way of matching a firm’s product strategy (supply side) to the characteristics of your target market segments (demand side). But combinations like cost leadership with product differentiation were seen as hard (but not impossible) to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.
Since that time, empirical research has indicated companies pursuing both differentiation and low-cost strategies may be more successful than companies pursuing only one strategy.
Some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. They claim that a low cost strategy is rarely able to
provide a sustainable competitive advantage
. In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price.
Cost Leadership Strategy
This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what customers receive). To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower
cost than its rivals. There are three main ways to achieve this.
The first approach is achieving a high asset turnover. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.e the firm hopes to take
advantage of economies of scale
and experience curve effects
. For industrial firms, mass production becomes both a strategy and an end in itself. Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices.
The second dimension is achieving low direct and indirect operating costs. This is
achieved by offering high volumes of standardized products
, offering basic no-frills products and limiting customization and personalization of service. Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs. Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. This will include outsourcing, controlling production costs, increasing asset capacity utilization, and minimizing other costs including distribution, R&D and advertising. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features.
The third dimension is control over the supply/procurement chain to ensure low costs. This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contracts, working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory. Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. Dell Computer initially achieved market share by keeping inventories low and only building computers to order. Other procurement advantages could come from preferential access to raw materials, or backward integration.
Some writers posit that cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes. However, this
takes a limited industrial view of strategy. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs. For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wage. Innovation of products or processes may also enable a startup or small company to offer a cheaper product or service where incumbents' costs and prices have become too high. An example is the success of low-cost budget airlines who despite having fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those of the larger incumbents.
A cost leadership strategy may have the disadvantage of lower customer loyalty, as price-sensitive customers will switch once a lower-priced substitute is available. A reputation as a cost leader may also result in a reputation for low quality, which may make it difficult for a firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in future.
Differentiation Strategy
Differentiation is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customers service. Differentiation is a viable strategy for earning above average returns in a specific business because the resulting brand loyalty lowers customers' sensitivity to price. Increased costs can usually be passed on to the buyers. Buyers loyalty can also serve as an entry barrier-new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles.
A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy. These could include patents or other Intellectual Property (IP), unique technical expertise (e.g. Apple's design skills or Pixar's animation prowess), talented personnel (e.g. a sports team's star players or a brokerage firm's star traders), or innovative processes. Successful brand management also results in perceived uniqueness even when the physical product is the same as competitors. This way, Chiquita was able to brand bananas, Starbucks could brand coffee, and Nike could brand sneakers. Fashion
4 | P a g e
brands rely heavily on this form of image differentiation.
Some research does suggest that a differentiation strategy is more likely to generate higher profits than is a low cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to generate increases in market share. This however, may result from a limited understanding of 'profits'. Differentiation strategies are indeed likely to result in higher gross and net profit margins due to the pricing power created by perceived uniqueness and high customer satisfaction. However, these higher prices will also likely result in lower sales volumes and lower asset turnovers. As such, the effects on Returns on Capital are likely to be neutral. As illustrated in the Dupont ratio therefore, a firm can achieve high profitability and Returns on Capital by being either a successful differentiator (with high margins and low volumes) or a successful cost leader (with low margins and high volumes). One strategy is not necessarily more profitable than the other.
Variants on the Differentiation Strategy
The shareholder value model holds that the timing of the use of specialized knowledge can create a differentiation advantage as long as the knowledge remains unique . This model suggests that customers buy products or services from an organization to have access to its unique knowledge. The advantage is static, rather than dynamic, because the purchase is a one-time event.
The unlimited resources model utilizes a large base of resources that allows an organization to outlast competitors by practicing a differentiation strategy. An organization with greater resources can manage risk and sustain profits more easily than one with fewer resources. This deep-pocket strategy provides a short-term advantage only. If a firm lacks the capacity for continual innovation, it will not sustain its competitive position over time.
Focus or Strategic Scope
This dimension is not a separate strategy per se, but describes the scope over which the company should compete based on cost leadership or differentiation. The firm can choose to compete in the mass market (like Wal-Mart) with a broad scope, or in a defined, focused market segment with a narrow scope. In either case, the basis of competition will still be either cost leadership or differentiation.
In adopting a narrow focus, the company ideally focuses on a few target market
s (also called a segmentation strategy or niche strategy). These should be distinct groups with specialized needs. The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. It is hoped that by focusing your marketing efforts
on one or two narrow market segments and tailoring your marketing mix
to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any company. A focused strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment.
Examples of firm using a focus strategy include Southwest Airlines, which provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers, and Family Dollar.
In adopting a broad focus scope, the principle is the same: the firm must ascertain the needs and wants of the mass market, and compete either on price (low cost) or differentiation (quality, brand and customization) depending on its resources and capabilities. Wal Mart has a broad scope and adopts a cost leadership strategy in the mass market. Pixar also targets the mass market with its movies, but adopts a differentiation strategy, using its unique capabilities in story-telling and animation to produce signature animated movies that are hard to copy, and for which customers are willing to pay to see and own. Apple also targets the mass market with its iPhone and iPod products, but combines this broad scope with a differentiation strategy based on design, branding and user experience that enables it to charge a price premium due to the perceived unavailability of close substitutes.
Recent developments
Michael Treacy and Fred Wiersema (1993) have modified Porter's three strategies to describe three basic "value disciplines" that can create customer value and provide a competitive advantage. They are operational excellence, product leadership, and customer intimacy.
Criticisms of generic strategies
Several commentators have questioned the use of generic strategies claiming they lack specificity, lack flexibility, and are limiting.
In particular, Miller (1992) questions the notion of being "caught in the middle". He claims that there is a viable middle ground between strategies. Many companies, for example, have entered a market as a niche player and gradually expanded. According to Baden-Fuller and Stopford (1992) the most successful companies are the ones that can resolve what they call "the dilemma of opposites".
A popular post-Porter model was presented by W. Chan Kim and Renée Mauborgne in
their 1999 Harvard Business Review
article "Creating New Market Space". In this article they described a "value innovation" model in which companies must look outside their present paradigms to find new value propositions. Their approach fundamentally goes against Porter's concept that a firm must focus either on cost leadership or on differentiation. They later went on to publish
their ideas in the book Blue Ocean Strategy
.
An up-to-date critique of generic strategies and their limitations, including Porter, appears in Bowman, C. (2008) Generic strategies: a substitute for thinking?http://www.stratevolve.com/strategy_papers.htm
Segmentation, targeting and positioning
After developing objectives with a clear the marketing direction, your next step is to develop the supporting strategies. These strategies can be broken into three areas:
Segmentation – Define who are your customers Targeting – Defines the customers you want to attract Positioning – Your product’s place in the market in relation to rival products
Segmentation
How big is the total market, what part of it are you going after and who are your competitors? Your firm has a number of different types of customer to consider. Although markets are diverse, you can group customers with similar needs into segments. The following list provide possible approaches in categorizing your segments.
Demographic Industry:
Which industries should we serve? Company size: What size companies should we serve? Location: Which geographical areas should we serve?
Operating variables Technology: What customer technologies should we focus on? User/non-user status: Should we serve heavy users, medium users, light users, or non-users?
Customer capabilities: Should we serve customers needing many or few services? Purchasing approaches Purchasing-function organization: Should we serve companies with highly centralized or decentralized purchasing organizations ?
Power structure: Should we serve companies that are engineering dominated, financially dominated, and so forth? Nature of existing relationships: Should we serve companies with which we have strong relationships or simply go after the most desirable companies?
General purchase policies: Should we serve companies that prefer leasing? Service contracts? Systems purchases? Sealed bidding?
Purchasing criteria: Should we serve companies that are seeking quality? Service? Price? Situational factors
Urgency: Should we serve companies that need quick and sudden delivery or service? Specific application: Should we focus on certain applications of our product rather than all applications? Size of order: Should we focus on large or small orders?
Personal characteristics Buyer-seller similarity: Should we serve companies whose people and values are similar to ours? Attitudes toward risk: Should we serve risk-taking or risk-avoiding customers?
Loyalty: Should we serve companies that show high loyalty to their suppliers?
Assessing segments After identifying your segments, assess their attractiveness. You can use the following criteria:
Accessible — they can be reached and served Identifiable — clear understanding of the composition of the segment Profitable — and add value Actionable — has the resources to respond to customers in the segment Effective — contains customers with homogeneous characteristics and needs.
Establish a clear target market
After defining your segments, decide which segments they can serve with the available resources. Consider the customer’s propensity to buy and the future potential of the segment, the level of competition for that segment, both now and in the future and your company’s own resources.
There are three key targeting approaches: undifferentiated marketing, differentiated marketing and a concentrated or focused approach.
8 | P a g e
Undifferentiated
With undifferentiated marketing to the whole market, the decision is made to ignore segmentation and target the whole as the differences between the customers are negligible. There is an assumption that the market is homogeneous and can be reached with one marketing mix approach.
Differentiated
With a differentiated approach the company identifies a number of segments in the market which it thinks that it can serve well with its resources, and develops different marketing approaches to meet the needs and satisfy the requirements of different customers in the different segments.
Focused Marketing
A company that decides to target a smaller part of the market can adopt a concentrated or focused approach The organisation may choose to focus on one segment because it does not have the resources to target any of the others even though they may be viable segments. If this is a particularly small and narrowly defined part of the market the company may be considered to be a niche player
9 | P a g e
Example
Positioning
A positioning statement emphasizes the product’s place in the market in relation to rival products — it represents the point of distinction. There are five key elements in any positioning statement that provide the necessary clarity of purpose:
1. Target market: Whom are you aiming at? Explain this succinctly, straightforwardly and in a way that is easily understandable.
2. Buyer’s or influencer’s main problem: What does the product or service have to solve in a functional and/or emotional way? Again, be succinct and direct and keep it simple.
3. Key benefit(s): What is the main advantage of using the product or service? 4. Competitors: Who is or are the main competitors and how is the key benefit of your
product or service different from what they offer? 5. Features or attributes: Just how does the product or service manage to provide this
benefit?
Example:
10 | P a g e
1. Target market: Medium to large organizations operating in a distributed network environment dealing fundamental changes within their IT environment where there is a greater acceptance of the need to outsource services driven by recent competitive pressures.
2. Buyer’s or influencer’s main problem: Consistency in quality worldwide. 3. Key benefits: Savings and efficiencies through centralisation and standardisation,
minimise overhead costs, eliminate intermediate production steps, reduce transaction costs, optimise business processes across functional and organisational boundaries and improve manufacturing efficiency.
4. Competitors: NextiraOne is viewed as the strongest competitor. Our geographical coverage, Ericsson heritage, vendor independence and our competence in voice and data will distinguish us form the competition.
5. Features or attributes: Damovo’s services are customised through a listening approach. This is a structured process that turns a customer’s unstructured business issues into a structured, formal service offering. Damovo is focusing on developing Customer Intimacy (Treacy) by concentrating on the customer issues.
Competitive roles in the marketplace
After, choosing your target market, consider your competitive role in the marketplace. You need to anticipate your rival’s retaliation. Competitive roles differ between a company that dominates the marketplace and one that occupies only a small niche. Clearly, the competitive position in the marketplace will also effect the company's marketing mix strategies. The key is to ‘take stock’ of where you are and where you want to go to with your available resources. In this process, an appreciation of the appropriate competitive roles is very important in developing your marketing direction. The competitive roles to consider are ‘market leader,’ ‘market challenger’ and ‘market follower’ and their suggested marketing strategies.
Market leaders
Just about every market has an acknowledged market leader — an organization with dominant market share that sets the standards or rules in the marketplace. Obvious examples are Hewlett Packard with printers, Levi’s with jeans, Microsoft with software and Canon with photocopiers. Market leaders remain vigilant to the activities of close rivals trying to usurp their position by exploiting some weakness in the marketplace. Classic battles would be Fuji versus Kodak, Matsushita versus Sony and Compaq versus IBM.
Marketing strategies for market leaders:
1. Attack challengers. Other strategies might be to attack challengers directly, for example by price reductions, promotions or new technologies, such as with BT in the terrestrial phone marketplace and Esso with the ‘Price Promise’.
2. Diversification. Of course, diversification is a good defensive move for market leaders as it spreads their market base and leaves them less vulnerable to attack from any individual
11 | P a g e
challenger. For example, were Heinz to lose its dominance with Ketchup, it has other markets to fall back upon and does not ‘lose its shirt’ on this one market.
3. Expand the total market. Dominant market leaders need to expand the total market as much as possible as they are the ones most likely to benefit, given their leadership position. They can achieve this with strategies for market usage and new applications as well as considering developing any niche markets previously neglected.
4. Defend market share. Alternatively they may need to defend their market share by continual product innovation, service and brand building, to ensure buyer loyalty. This strategy can be seen in companies like Gillette or Hewlett Packard.
Market challenger
Market challengers are substantial organizations in their own right, with sufficient resources and skills to occupy the market leader spot. Any marketplace is dynamic and a company’s fortunes can go up or down.Market challengers normally do not completely destroy the business of the market leader, but they can edge their way towards equality or gradually overtake the market leader and marginalize their position. Of course, a successful market challenger that usurps the leader changes its competitive role and as market leader has to look ‘over its shoulder’ to retain its new position.
Marketing strategies for market challengers
1. Attack leaders. Market challengers have little alternative but to attack leaders either directly or indirectly. A concentrated all-out attack on a leader may be the best way forward.
2. Attacking other challengers. Attacking other challengers, followers or smaller niche players in the marketplace, rather than attacking leaders, can launch indirect attacks on leaders. Such tactics will result in the challenger discreetly building share without going head-tohead with the leader by picking-off weaker geographic markets or segments in so-called ‘bypass’ attacks. For example, Swatch managed to outmanoeuvre Seiko in the fashion segment.
Market follower
Market followers make a conscious decision to chase and emulate the market decisions of leaders and/or challengers. They may clone fashion, design, innovations, pricing, advertising and so on and trade successfully upon the risks of other companies or institutions. Their profitability emanates from their decision to forego investing in uncertain new product development or in educating consumers to new ways of thinking in favor of simply following the actions of leaders or challengers in the marketplace. Followers, by their nature, do not seek leadership or to challenge a leader overtly. They can make good profits simply by providing imitations of leader or challenger products.
Marketing strategies for market followers - stealth
12 | P a g e
Follow carefully, at a distance, and selectively By definition, market followers need to follow leaders and challengers and not launch attacks. If they launch attacks, they will become challengers and will need the requisite resources and skills to survive such combat.
Market niche
Sole market niche
Success with a niche policy is based upon the reality that market leaders or challengers have little to no interest in niches. Thus, Bang & Olufsen can survive extremely well in its up market, style conscious (but not expert) hi-fi marketplace, knowing that the likes of Sony or Marantz would have great difficulty in stretching their image to challenge them. Similarly, in the brewing industry most major breweries are simply not interested in developing products to rival micro breweries with their wheat, herbal and chocolate beers. The secret of successful sole niching is to operate within a niche that has very little appeal for major players in the wider marketplace.
Corporate Niche
As markets have increasingly fragmented, so many market leaders, challengers and even followers have been drawn into the strategy of niching. Niching can be highly profitable and sometimes offers opportunity for market leadership. Part of the reason Palm is still popular is because of the fundamental design decisions made with the OS. Which is to be, above all, a damn good organizer. Part of what Palm realized (and what Apple hadn't yet with the Newton) is that user requirements for an organizer is significantly different from a computer. Users expect it to work just as well as their wristwatch.
Marketing strategies for market ‘nichers’ - Specialize
The basis of the market niche strategy is to specialise. Market niche strategies may be based upon goods or services, segments, channels or promotional images. Best practice for sole nichers is to develop more than one market niche so that the company or institution is less vulnerable to attack from a rival. It is essential that a sole nicher be not seen as a potential rival to a leader or challenger, as this might lead to a direct attack. An ideal position for a sole nicher would be one where just about everyone else in the marketplace regards their niche as too much effort. Leaders or challengers can use niches either to entrench their positions or as a form of attack. As discussed above, in the hands of leaders or challengers a niche can provide a basis for market growth or for indirectly attacking a rival’s market position.
Strategy Models - The Matrix
Ansoff matrix is a widely used framework that outlines some fundamental strategies for marketers. It can be used to help shape strategies and also to develop marketing objectives. In both areas the focus on products and markets are important elements in developing marketing direction and shaping marketing decisions. Developed in the late 1950s, the matrix has now been extended to include the added dimension of market need.
13 | P a g e
Growth in existing product markets strategy is to obtain growth from the existing position either by gaining market share, increasing product usage or developing new applications. Many companies use market share as the key to their strategy.
The idea of new product development to existing markets is to exploit market opportunities amongst existing buyers and to fully develop the ‘stretch’ potential of your products.
Market development strategies fall into two categories: geographic or new markets. Geographic market development seeks new territories. In the global marketplace, this means international markets, as with the US Starbucks Coffee shops opening in the UK and Singapore. It may be new regions at a national level. Use new market growth after a company reaches geographic saturation. It is often more expensive to pursue than geographic expansion as it requires targeting previous non-user types. While geographic expansion also targets non-users, it is generally within a familiar target type that has a known propensity to use the product (for example, the characteristics of a Burberry customer are very similar in both New York and London).
Diversification involves doing some new marketing and may involve new products and new markets by acquisition, merger or new ventures. In a related diversification the new business has commonalities with the core business in terms of similar assets and skills. This might be the strength of a brand name being such that it can stretch from one business to another as with Harley Davidson motorcycles and clothing. By contrast it might be a technical strength such as Honda’s skills in the manufacture and development of combustion engines, which has seen it diversify from cars to lawnmowers. Another aspect might be strength in R&D, such as with General Electric’s electrical engineering capabilities which have enabled the company to diversify around a number of defense, business and consumer markets. The risks associated with related diversification are primarily that the company or institution deludes itself that it knows how to manage the new business area. A classic example was General Food’s ill-fated diversification into the restaurant business with its purchase of Burger Chef. The difficulty arose because rather than being another food company, Burger Chef was a servicebased business that required completely different skills.
14 | P a g e
A niche market refers to a group of potential customers with similar characteristics and similar interest towards a particular product or service. Marketing niche strategy identifies these similar needs to create a niche market from a potential market segment.
The advantage of launching or promoting a product for a niche market is the ease with which the potential customers can be identified and targeted. It reduces considerably the expenditure on promotion and launch activities.
The marketers divide the potential market segment into niche markets such as market for second hand cars, wedding cakes, etc. For instance, Ford manufactures Ferrari and Austin Martin for the niche segment of high rich class.
Sometimes the expected niche markets turn out to be mass markets owing to the huge demand for the product or service as in the case of Apple when it launched its PC in early 1980s. The niche market of PCs became a mass market with subsets such as educational PCs.
One disadvantage of niche marketing is its limited potential which is soon saturated. In such a case, the marketer has to develop or produce a different product to satisfy the new needs of the market.
Niche market is recognized as a type of focus strategy in which the manufacturer focuses his attention on satisfying the needs of a selected target market. When products cannot be customized to individual needs, marketing niche strategy is adopted.
Cultural and social differences in a community of potential customers lead to the development of niche markets to satisfy the different needs of different groups and make the changes to the product or service. Exclusive rights such as patents, brand.
15 | P a g e
Trademarks, etc also result in the formation of niche market where the manufacturer enjoys total control over the niche market due to his differentiated product or service. Delivery channels are another factor leading to the creation of niche markets.
Marketing niche strategy is an important tool to sustain competitive advantage. It can be achieved through identifying a market segment with similar needs and conducting a market research to check the feasibility of the market segment.
The next step is to achieve a dominion over competitors by the means of patents, trademarks or brands. Inventory suppliers need to be identified and delivery channels need to be selected. Promotion and advertising play a major role in creating competitive advantage.
Promotion plan need s to be laid down and implemented effectively to get the desired results. Monitoring the niche market is essential to find out the status of competition and the level of saturation of consumer’s needs.
My fashion background is as the VP of Operations for a handbag production and marketing company. My responsibilities include the inception and monitoring of marketing programs for independent designers who may have a few seasons under their belts, have some solid and sellable designs, and who actually have funding.
While working with these clients, we have noticed that it doesn't matter how cushy the funding, every independent designer that we work with initially wants to market their designs to everyone under the sun...regardless of who really would benefit from their particular designs. They have this overwhelming desire to cast a net over as many customers they can find.
When I ask them to describe their target customer, most of our clients will nearly invariably say something along the lines of, "I'm focusing on women between the ages of 14 and 65 who make any amount of money and who like the look of a high-fashion bag." Keep in mind also that the handbag designs we usually manufacture are in the better-to-high-end echelon, sold at Nordstrom's or Nieman's (and the like) with an MSRP of around $400 or more. But for some reason, some designers are convinced that their handbag is right for every woman.
Say, for example, that in order to entice people to your shopping cart website, you send out a postcard. Let's also say that you rent a mailing list of all the women that fall into the three qualification categories I listed above. Can you imagine how big that list could be? And what about the printing and postage costs involved in sending a postcard out to such a large list?
A rule of thumb in marketing plans for an advertising/marketing budget is 10 percent of gross sales. So how much would it cost to send out a postcard to roughly 50 percent of the population of the United States? If following your marketing plan means that you can't spend more than 10 percent of gross sales, how many bags would a designer have to sell in order to meet profit goals? What number represents 10 percent of YOUR sales? And there is a distinct likelihood that the majority of the list will just trash the postcard because what you're selling doesn't interest that recipient. What a huge waste of money and resources!
16 | P a g e
This is why email marketing is just the thing for independent fashion designers of all stripes. For just a fraction of a traditional direct-mail campaign, you can send out an email to hundreds, even thousands of people. Even better is that most email marketing providers provide reporting that shows you exactly who opened your email, what links they clicked, whether their email "bounced" (proved to be a "dead" email), and even how many times they visited your main site. Still better is that you could conceivably send out a "combo target email" with several different links to dedicated web pages for different products, and you can discover who clicked on which link. You could "segment" your list in this way and send each person an offer that they'd be more likely to take based on their purchasing habits. Cool, right?
However, marketing to a niche makes much better sense in the long run, and incidentally, your niche is not what YOU do, but rather, who you're targeting with your product. The problem with many handbag designers, and many fashion designers in general, is that they often say, "my niche is designing couture-quality, fashion-forward handbags for today's woman." This kind of statement completely ignores what is really important: how like-minded people congregate and not just demographics alone.
Obviously you want people to be able to afford your goods. But you will make the most money from people who are "into" something you offer. You want those groups of highly selective handbag buyers, for example, who when they see each other carrying that special, exclusive handbag, scream excitedly, "ohmigodyou'reintogrysontoo!!!" Or something similar. Have you ever seen anybody get crazy like that over a Coach bag? Not that Coach is a bad bag, but they're everywhere now!
My particular "handbag addiction" is the Francesco Biasia line. Every time I see someone else carry a Biasia, I get excited and rush over with an excited "oh my god" to compare bags.
It's this interaction, this instant bonding moment, upon which you want to capitalize. But how do you know you've stumbled across the right niche? They should have three basic characteristics:
* First, they're lacking something that you can fulfill
* Second, you can find them
* Third, there are enough of them to meet your needs
The best tool I know of to capitalize on a niche is a pay-per-click/search engine optimization campaign. These techniques will actually drive the right traffic to your website. I'll write more about that "oh my god" effect, or psychographics, and how to reach them using these internet marketing techniques, in next week's issue. Stay tuned!
17 | P a g e
SPECIALIST CAN MAKE MORE MONEY THAN GENERALIST
We have all heard the saying: “jack of all trades, master of none”. You should ask yourself if your company is a jack of all trades targeting everyone and being known for everything. What is your expertise? Do you have a niche market that you specialize in?
Who is your ideal client? How do you find them? Do you serve them better than anyone else on the market?
Most times especially when we are starting out we see everyone as a client or customer and forget to specialize in what we know best. The notion of finding a niche market or specializing in what we do may scare us because we believe that we are minimizing the number of people we may sell to. In reality our market or clients are the people that are most inclined to buy our services or products.
It is a fallacy to believe that you are limiting your market and chances of success by niche marketing. Yes that market may be smaller but when you decide to niche you are deciding to service an under served market and you can make yourself an authority and an expert and build loyalty amongst your clients, get referrals and repeat business.
One of the advantages of niche marketing is that it forces you (or it will force you) to research the market and develop a relationship with your clients. Once you understand your clients: where they sleep, eat or spend their time online you will be able to market to them effectively in a way that grabs their attention as opposed to marketing to the masses and hoping to connect with someone.
Most businesses have limited resources; the difference between those that succeed and those that do not is the way that they use resources. If you are a small travel agent dealing with flights going to Asia are you going to market to everyone in your state even though you know that 75% of the general population is not interested in going to Asia?
No, you would do a market segmentation and see who is more likely to fly to Asia: business people, students, and people with family ties to Asia. Once you have done this you can even segment the market further and decide which will be the easiest group for you to reach based on a number of factors: resources, geography etc.
If you target everyone in the general population you are more likely to spend more money and more time before you find the people you are looking for.
Of course finding your niche requires some market research which may take time. The most successful entrepreneurs do not just spend money on marketing or operations: every dollar spent has to have an impact on the bottom line and should be trackable (return on investment). So if you are marketing to everyone and spending money on 5 or 6 different channels to reach your clients, you should know how much revenue or expected revenue comes from those channels.
Despite their initial setback with regards to dealers, they remain aggressive in getting their products in the
shelf of sports shops and clothing boutiques. To ensure that the dealers carry their clothing label, Canning
describes their approach as such: “If a shop were somewhat interested I would give them specific
examples of other well-known stores that have been successful with our product. We also offer free
shipping on first time orders. I would also let them know that we’re a unique brand that not everyone has,
and convince them that sometimes a lack of brand awareness isn’t such a bad thing and that kids today
are looking for something new.”
Now, DirtBag Clothing’s products sell itself. Canning says of their success, “The people that wear Dirtbag
like the fact that we’re a small company. We don’t take out full-page ads in skate and music magazines or
pay people to wear our product. People wear Dirtbag because they want to, not because we tell them
they should.”
The Road Ahead
In 2004, DirtBag Clothing is projected to reach $1.4 million in sales.
Canning attributes their success to “gradual growth, managing inventory, product line expansion and
keeping customers happy. Growth is a good thing, but if you grow too fast and over extend it can ruin
your business.”
“In 2004 we will be working with more than a dozen multi-platinum selling bands, outfitting these bands for
their tours will be our primary focus for marketing in 2004. In addition to the bands we will also be
launching our brand in Canada, Europe and Japan. We’re in 70 shops in the United States and we hope
to add another 50 to that list. On the web front, we’re going to be doing a complete website overhaul with
new graphics, shopping cart and back end.”
For other start-up entrepreneurs, Canning shares the following lessons:
1. Get everything in writing. Everything! 2. If something seems to good to be true, run away immediately. 3. Don’t have a business partner as a roommate. 4. Don’t get frustrated if you don’t make a million in your first year. 5. Prepare to be broke for at least 2 years. 6. Date women/men who don’t mind paying for dinner. 7. Network with other successful people who have started their own businesses and ask them a lot
of questions. 8. Never think you can do everything on your own
22 | P a g e
The lingerie market in India
The overall innerwear market (excluding kids) in India was worth Rs. 1,191,300 lacs in CY 2009. It has grown at a Compounded Annual Growth Rate (CAGR) of 15.8 % over the last four years. The growth can be attributed to the rising disposable incomes, growing consumer class and advent of international brands in the Indian markets.
In volume terms, the men’s innerwear market constitutes 48 % of the total innerwear market in India. The share has remained range bound over the last four years. The women lingerie segment holds a 52 % share. In value terms, the women lingerie segment enjoys 66 % share of the total lingerie market. Larger value share and a smaller volume share depict higher Average Selling Price (ASP) as compared to the men’s innerwear market.
In value terms the lingerie industry in India was worth Rs 7, 89,700 Lacs in CY2009. It has grown at a robust 16.8 % over the last four years (2006-09). The growth can be attributed to the rising disposable income and growing preference for lifestyle products. Over the last decade lingerie has grown from an optional part of the wardrobe to essential clothing for women. It constituted 5.1 % of the total Indian apparel market and 15.8 % of the overall women apparel market during 2009. In volume terms the lingerie industry grew at a rate of 9.4 % over the last four years. The lingerie sales grew from 4,980 Lacs pieces in 2006 to 6,520 Lacs pieces in 2009. In volume terms it constitutes 9.4 % of the overall apparel market and 31.9 % of the women apparel market.
The lingerie market grew at a faster pace in terms of value as compared to volumes during the 2006-2009 period. This signifies a jump in the average selling price which grew from ` 100 in 2006 to `121 in 2009. It grew at a Compounded Annual Growth Rate (CAGR) of 6.7 % during the same period.
The lingerie industry in India is characterized by a high degree of fragmentation with almost two-third of the market controlled by the unbranded and unorganized regional players and the balance one-third share goes to the few big organized and branded players. The advent of some international brands in the Indian market place has brought about some realignment in the fragmented lingerie market. The companies have started advertising boldly through advertisements, fashion shows etc., to catch up with the consumers to understand their preferences.
Segment-wise lingerie market - The lingerie market in India can be divided into five segments based on the price points at which they sell in the market. They are classified in super-premium, premium, mid-market and economy & low-market segment. Approximately, 75 % of the market share is held by the mid-market and economy segment, in both, value and volume terms. The super-premium and premium segments are relatively smaller but fast-growing segments. In volume terms, the economy segment accounts for the maximum share in the lingerie market. The volume-wise share of different segments has remained more or less stable over the last four years. All segments except the low market segment have grown in the volume terms over the last four years. The maximum growth in volume terms was experienced by the super-premium segment followed by the premium segment. This indicates the growing penetration level in these segments. The super-premium and premium segments grew at a CAGR of 18.9 and 16.6 % respectively. This can be attributed to the surge in international brands entering India, rising income levels, changing demographics, growing brand awareness and the willingness amongst the people to spend on lifestyle products. The key brands in the premium
23 | P a g e
and super-premium category are Marks & Spencer, Triumph, Enamor, Lovable and La Senza. The key brands in the economy and mid-segment are Groversons, Body, Bodyline, Daisy Dee and Teenager.
In value terms, the mid-market segment is the largest followed by economy and super-premium and premium segments. Low market constitutes only 6.5 % of the total lingerie market. Approximately, 78 % of the market share is held by the mid-market and economy segments. This segment is majorly dominated by unbranded regional players. Therefore, there lies immense potential for the market participants to launch products in these categories to grab the market share and create a better brand recall.
The average selling price (ASP) of lingerie in India varies from Rs. 37 per piece to Rs.1, 029 per piece. The ASP of the super-premium segment has grown at the fastest pace followed by the premium segment. The ASP in the super- premium and premium segment grew at a CAGR of 14.5 % and 8.9 %, respectively, over the last four years. This kind of a growth can be attributed to the entry of global brands in India, rising percentage of organised retail and the rising brand consciousness amongst the consumers. The growth in the ASP of the lower segment remained at a meager 2.9 %. This indicates that the lower segment is a price-sensitive market. The ASP in the mid-market and economy segment grew at 5.2 % and 4 % respectively.
The brand loyalty factor is the highest amongst the premium and super-premium categories. It decreases as we move down the ladder. According to Images Business of Fashion Magazine, October 2009 issue, Lovable is amongst the top three preferred brands in women’s innerwear in India.
The lingerie industry in India is expected to grow at a CAGR of 18.3 % over the period 2009-2014. It is currently estimated at Rs. 7,89,800 Lacs and is expected to be worth Rs. 18,32,460 Lacs in 2014. This growth would be led by the super-premium, premium and mid-market segment.
The super-premium and premium segment contributed 15.8 % to the total lingerie market in 2009. This share is expected to grow to approximately 28 % by 2014. This can primarily be attributed to the advent of international brands in India, growing brand awareness and brand loyalty amongst the Indian consumer. Mid-market segment is the largest segment of the lingerie market and is expected to remain the largest over the next five years. It currently contributes 43 % (2009) to the total lingerie market. This share is expected to increase to 46.3 % in 2014. This segment is expected to grow at a CAGR of approximately 20 % over the next five years. The growth in this segment can be attributed to the growing urbanization and increasing number of working women. On the other hand, the economy and low segments are expected to grow at a pace slower than the overall lingerie market, thereby, losing its share in the overall pie.
The key factors influencing the choice of the consumers are comfort, price, brand and durability. Comfort plays a key role in the choice of the consumers followed by price and brand name.
Consumer Preferences Size is the most crucial component in the lingerie market. The best selling size is 90 cm followed by 85 cm. In brassieres type, regular full cup are more in demand, followed by the seamless and strapless bra categories. Colour- wise, white seems to be in more demand followed by pink, black and peach. When it comes to fabric, sales are led by cotton brassieres followed by cotton lace and cotton Lycra.
Overview of apparel & textile industry
24 | P a g e
In 2009, world apparel production stood at US$140 billion, with 71% of production accounted for by Asian countries. The developed nations/regions such as US and European Union (“EU”) accounted for 11% and 14% of global production respectively. Being a matured industry, growth rate of the Global Textile and Apparel industry is in sync with the growth rate in global GDP. Of the total apparel retail market valued at approximately US$500 billion in 2009, the developed nations/regions like US and EU accounted for 33% and 30% respectively.
The Indian textile and apparel industry is estimated to be worth Rs. 2,700 billion in fiscal year 2010. It has been estimated on the basis of industry interactions. Approximately 65% of the total textile and apparel production (wholesale price level) is consumed domestically. India’s domestic textiles and apparel consumption is estimated at Rs. 1,750 billion (wholesale price level), of which apparels account for approximately 71%. India exported US$20 billion worth of textiles and apparel of which 45% are apparel exports.
The textile and apparel industry is one of the largest and the most important sectors in the Indian economy in terms of output, foreign exchange earnings and employment. It contributes approximately 14% to India‟s industrial production, 4% to the country‟s GDP and 17% to the country’s export earnings. It provides direct employment to over 35 million people and is the second largest provider of employment after the agricultural sector. Thus the development of this sector has an overall impact on the economy. The Indian textile and apparel industry contributes approximately 4% to the global textile and apparel market. Since the textile industry has such economic importance, it has always attracted the Government’s attention. Therefore, the Government has introduced policies such as the Technology Upgradation Fund Scheme (“TUFS”), Scheme for Integrated Textile Parks (“SITP”), low excise duty, high import duty (to discourage imports) and National Textile Policy to develop the textile sector.
Indian Apparel Industry
Estimates say (based on industry interactions) that the Indian apparel market grew at a CAGR of 6.5% from Rs. 1,225 billion in fiscal year 2005 to Rs. 1,675 billion in fiscal year 2010 (wholesale level). The Indian apparel market comprises domestic apparel consumption and exports. The domestic market is estimated to be worth Rs. 1,250 billion in fiscal year 2010 (at wholesale level). Spending on domestic retail apparel has grown at a high rate of approximately 13–14%. The apparel market size at the retail level is estimated at Rs. 2,000 billion in fiscal year 2010. The retail purchases on apparels is expected to double to approximately Rs. 4,000 billion by fiscal year 2015, a CAGR of approximately 15%. Factors expected to contribute to the growth of the Indian apparel industry include:
Ø Rising levels of disposable income;
Ø Growing preference for ready-to-wear apparels;
25 | P a g e
Ø Increasing penetration of organised retail;
Ø Changing consumer habits;
Ø Increasing trend towards urbanization; and
Ø A comparatively younger populace.
Often when we think of fashion we think first of catwalk models and the magazines which feature
them, then of the more modest versions of the clothes we see there which are sold in high street
chain stores. But the fashion industry isn't just one entity with one direction. It's split into numerous
subsections with rules all their own.
Aiming your designs at a niche market can make it much easier to get noticed when you start out. It
can help you to focus and it can be a good way to take advantage of your existing familiarity with a
particular group. On the other hand, it can limit your ability to expand and it may make it more
difficult for you to get your work taken seriously in the wider marketplace. What's more, niche
markets are often crowded - your designs will need to be really good in order to compete.
Types of Niche MarketMost people who enter a niche marketplace as designers do so because they already have an
interest in its customers. However, it's important to understand that knowing the customers is not the
same as knowing the industry. With each type of market, there are specific factors to consider.
Industrial Clothing - People care about what they wear at work, even if they have to wear
a uniform or if their clothing has to be designed specially to protect them from industrial
hazards. Managers are always on the lookout for industrial clothing which will be more
26 | P a g e
practical to wear or which will make a better impression on business clients. However, you'll
often find that one or two big companies control the whole marketplace and that it's very
difficult to compete with them.
Hobby Clothing - There are all kinds of hobbies and sports for which specialist gear is
essential. Often this will need to meet strict safety standards, so make sure you know your
stuff. Customers in this group often follow fashion closely and are excited by new fabrics,
colours and designs, but they also tend to be conservative and to depend a lot on prior
experience or word-of-mouth recommendations.
Subculture Clothing - This can range from highly noticeable items like gothic or rave
wear to fashions aimed at less visible groups such as elderly people who have retained the
cultivated tastes of their youth. Generally speaking, the more fashionable the group, the
more designers are competing to serve it. Some may be doing it as a hobby and making very
little profit, making them difficult to compete with.
Despite these problems, there can be big rewards involved in targeting a niche marketplace.
If you are successful, it's much easier to remain that way than in the more fickle world of
mainstream fashion. Niche marketing won't make you a star and it's unlikely to make you a
millionaire, but it can be an effective way to swiftly reach a point where you're generating a
steady income.
Niche Markets Need Strong IdeasIf there's one rule in niche fashion marketing, it's that there's no room for copycats. Many
people are drawn to this type of work because they admire existing designs, but attempting
to recreate them won't get you anywhere - customers will stick with what they know, even if
your work is a little cheaper. In the mainstream market you can adapt high fashion styles and
get away with it. In niche marketing it's much more important for you to find your own voice.
Customers are often hungry for new styles, so innovative work can lead to quick success.
High quality work is also more important in a niche market where word of mouth is a much
more significant factor. This may seem like a burden, but on the other hand it means that
good work will quickly get you noticed. Niche markets reward talent and hard work far more
consistently than the mainstream market does. They may limit your options as a designer but
they'll present you with strong opportunities as a business.
Succeeding in the niche apparel marketClothing and apparel is a cutthroat industry. For small businesses to survive – and thrive – they need to create products that are emotionalized, authentic and, above all, differentiated. These businesses must be able to differentiate themselves from their direct competitors and establish themselves in customers’ minds.
Abdul Jameel, with his wife Raiza Jameel as the fashion designer, started an apparel business in 1988 with one sewing machine, which later became known as R&J Apparels Pvt Ltd.
27 | P a g e
Now after 16 years of specializing in ladies wear, they have 150 sewing machines, 250 employees, and most of all, they have brands such as Jezza, She-D, Vatsa and Lisi that are renowned for quality in the fashion market.Gayathri Jayadevan, Business Development Specialist at the International Labour Organization - SIYB Program, who has been writing this series on small business development, spoke to Abdul Jameel to find out more about how to meet the changing demands in the fashion industry.
The birth of R&J ApparelsWhen I was a training manager at a textiles shop in Badulla, female customers would request particular designs to be custom made for them in their choice of selected fabrics. This emphasized the existing need to keep up in the fashion industry, and after speaking to 20 or so people, I knew designing my own clothes had a potential.
Start-up challenges and setbacksLike many other businesses, R&J experienced its own share of setbacks and difficulties. In the start-up phase, the staff expected better benefits which we could not afford, and there was no recognition or incentive from the government for growth-oriented entrepreneurs in the domestic apparel industry.
Due to these reasons in the early days, though we had potential for more variety, our product line was limited. As sales increased, we managed to lower our production costs significantly, increase our margins by 20-25% across the board and expand to a wide range of product line.
Marketing a clothing lineThough difficult it may be for small businesses (limited resources and all) - success comes to those who take risks and are able to communicate that it offers something new, fresh and innovative. Most of all, they must create a brand R&J Apparels, has been successful in establishing itself as a young brand in the ladies wear apparel market with the labels Jezza, She-D, Vatsa and Lisi which are well recognized for office, exclusive and casual wear.
These are now widely available in maor stores such as No Limits, Kandy Tex in Wattala, Tilakawardane Textiles in Kiribathgoda and Prasad Tex in Piliyandala. “The initial reaction of dealers and buyers when it comes to taking on a new brand was very conservative. We got a lot of “NO THANKS”.
Through dogged persistence and perseverance, we worked on carefully reaching our audience using strategies that will not empty out their pockets. We relied heavily on fashion shows, search engine optimization, and word of mouth to create brand awareness.
I participated in the Expand Your Business training of the ILO through Start and Improve Your Business Association. Among many practical outcomes, the situational analysis made me think about where the business was and how to map out future marketing opportunities.
Road aheadIn 2010, R&J is projected to capture 10 per cent of the market share for ladies wear. We want to continue to design quality ladies wear customizing to the taste and needs of lower to middle class Sri Lankan women. By increasing the production capacity and the product range, we are aiming to increase our distribution from 175 dealers at present to 1000 dealers island-wide in 5 years time.
For other growth-oriented entrepreneurs, Jameel shares the following lessons:
28 | P a g e
* Recruit and work with people who have the ‘can do’ attitude, are passionate, and creative.
* All managers should lead the organization with clear direction in the short term and long run.
* In order to survive in the fashion industry, anticipate about new trends and competitors, be proactive and respond well.Jameel can be contacted at [email protected] (www.jezzafashions.com) while the writer can be contacted at [email protected] (www.siyblanka.com).
Niche Marketing: By customers, to customers, for customers!
It is adapted according to the needs, wishes and expectations of small, precisely defined groups of individuals. A form of Market Segmentation but meant only for a very small segment. The one big benefit in this is that it is extremely cost-effective. Other is it also involve low-risk as compared to other strategies. There are three golden rules for it which will definitely boost business growth as: 1) Satisfy unique needs by customers, Position right things to customers, and Always test-market for customers.
Satisfy unique needs by customers
The benefits promise must have special appeal to the market in niche strategy. New and compelling at a time! Identify the unique needs of potential audience and look for ways to tailor product or service accordingly by customers mind test.Blue Ocean Strategy
Start by considering all the product or service variations one can might offer. When it comes to marketing soap, for example, not much has changed over the years. But suppose one as a soap
maker and invented a new brand to gently remove dandruff from hairs. That is not done by any soap maker earlier so one can be pioneer by offering this in soap line.
Position right things to customers
When approaching a new market niche, it's essential to speak their language. In other words, one should understand the market's "hot buttons" and be prepared to communicate with the target group as an understanding member not as an outsider. In new niche market it's vital to understand its members' key issues and how they prefer to communicate with companies. For example, suppose a business that markets leather goods primarily to men through a Web site decides to target working women. Like men working women appreciate the convenience of shopping on the Web but they expect more content so that they can comprehensively evaluate the brands and the company behind them. To successfully increase sales from the new niche, the Web marketer would need to change the way it communicates with them by expanding its site along with revising its marketing message.
Always test-market for customers
Before moving ahead, assess the direct competitors one will find in the new market niche and determine how it will position against them. For an overview, it's best to conduct a competitive analysis by reviewing competitors' ads, brochures and Web sites, looking for their key selling points, along with pricing, delivery and other service
