Running a business is the act of creating value for customers, and capturing it for shareholders, through a sustainable competitive advantage.
The key to developing and sustaining a competitive advantage is to pursue a specific strategy. In the classical definition, Michael Porter broadly outline three different strategies: Differentiation strategy, low-cost strategy and focus strategy. All your tasks, activities and actions are defined by and aligned with the strategy you commit to pursue.
And the important term here is ‘commit’. Flip-flopping between different strategies does not help develop a competitive advantage, actually erodes an established competitive advantage and leads to a mediocre business. Most great businesses commit to one of these strategies very early in their life and drive all their decisions in line with their strategy. Lets take a brief look at what each strategy entails, what are the general themes of each strategy, identify (retail and ecommerce) businesses that pursue such strategies and see how mixing two strategies is not consistent.
Differentiation strategy
You differentiate your business, product or service from others in the market. Typically your target market is not very price sensitive. Differentiation allows you to charge a premium for your product/service. To sustain this advantage you need to either continuously invest in creating and maintaining this differentiation or introduce barriers for other folks aping your differentiation (aka patents). Apple is a fine example in both, the retail and online space that follows this strategy. They invest heavily in both – product innovation and patents. Zappos is another example of how a company follows this strategy in customer service. There are several online stores you can buy footwear from but Zappos differentiates themselves by investing in their people.
Very few small/medium online businesses follow this strategy. Typically they are a single product business that have some barrier that prevents copycats (patents or exclusive suppliers). Dodocase is one such example.
Low cost strategy
You commit to having the lowest cost for your product/service compared to your competitors, continue to lowering the costs and invest in operational efficiencies. Large scale and low-cost strategy go hand-in hand. Scale enables businesses lower their cost in a couple of ways. One – it helps spread fixed costs over a large number of units – the larger the scale, the lower the fixed cost per product/service. Scale also helps negotiate better terms and costs with vendors.
This is a very difficult strategy for small/medium online businesses to pursue. Mostly because of the fact that they are small/medium businesses and to succeed at this strategy the business implicitly needs to be big. Since scale is a major factor in success of the low cost strategy, for a given industry, the winner takes all. We see this in the online marketplace (Amazon), big box retail (Walmart), online search (Google), etc.
Focus strategy
You focus on a specific niche and build a relationship with your market. This involves immersing the businesses in and around a specific niche. Create a reputation in the niche by building expertise, speak the same lingo and provide help to folks in the niche. This is typically done by generating content, participating in forums, speaking at engagements, sponsoring relevant events, etc. Some examples of businesses who have done this (in the home improvement industry) are Houzz.com for ecommerce and Homedepot for retail stores.
Most small/medium online businesses pursue the focus strategy. They focus on a specific community or interest group. Generate content about their niche and build a recognizable brand around it. They show up as top results for Google searches in their niche. As a matter of fact the whole SEO industry enables niche businesses.
Summary
It is important to at least think through what strategy you want to pursue with your business – as this influences the decisions you make everyday, helps them stay consistent and builds a business that is successful in the long term. Very few companies are capable of successfully pulling off two strategies at the same time. All small businesses must pick one strategy to build a solid, sustainable competitive advantage.
