As previously discussed in this blog, the marketing academic Michael Porter described three primary business strategies:
- Cost Leadership
Porter argued that firms that did not identify their generic marketing strategy, or who attempted a strategy which was a combination of the three shown above: firms he designated ‘middle of the roaders’: were entering the marketing wilderness.
A cost leadership position is where a firm aims to achieve the lowest costs in relation to production and distribution of their products. This enables your firm to set prices which are lower than those of your competitors.
A differentiation strategy is to make your product and services meaningfully different to those of your competitors. This can be through the use of technology or by being the first to identify and enter a new market segment.
A focus strategy is that which is pursued by a niche marketer. It is identifying a gap in the market not served by your competitors and filling that gap.
For small firms, a cost leadership strategy may be impossible. Small firms may be unable to match the economies of scale of larger competitors. Cost leadership may require the acceptance of smaller margins limiting revenue growth. Large firms in a sector may be able to absorb reduced income for longer than their smaller competitors and therefore can use a cost leadership position to drive smaller firms out of the market. As many small firms operate in prestige markets, a cost leadership position may not meet customer expectations.
Being different also costs. Developing different product features and high design costs may be prohibitive. Any differences in your product must be meaningful to your intended customer base. In crowded markets, finding a viable unique position may be difficult.
It isn’t that some small firms cannot survive using differentiation or cost leadership strategies or that a firm can survive in the ‘marketing wilderness’. It is that such a position is open to attack from competitors and can be precarious. You may invest a lot of your resources in defending yourself against attacks from larger competitors rather than serving your customer base.
Take the coffee shop and bookshop markets. These used to be dominated by small independent retailers but it is now the domain of large multinationals such as Amazon and Starbucks. In both these markets, it is difficult for small firms to match the purchasing power of the large firms or to significantly differentiate their products and services.
For many small firms, that leaves a focus strategy, more often referred to as niche marketing. Identifying a particular market segment and designing your products and services to meet the needs of that segment. Ugg Boots began life as a niche footwear product positioned to meet the needs of the surfing community.
A small firm may have sufficient resources to dominate a niche segment but be unable to dominate the market as a whole.
In developing a niche marketing strategy, it is important that you meet the following criteria:
- Your Niche must be of sufficient size to sustain your business. This is the reason many businesses are rejected on Dragon’s Den as, in the view of the assembled venture capitalists, there simply isn’t a market for the product.
- The niche must have sufficient scope for your company to grow. A niche that has no long-term future or which is of a limited size may prevent your business surviving in the long-term.
- A niche must be of little interest to market-leading competitors. They have the resources to take your niche market from you.
- You must have the resources and ability to service your niche effectively.
- You must be able to defend your niche. For example, through the use of intellectual property rights or through the development customer loyalty programmes.
It is possible for a niche firm to become extremely successful. Ugg successfully grew from a supplier of foot-warming boots in the surfing community to a major fashion brand. Many firms have become successful ‘super-nichers’. For example Hohner dominate the market for harmonicas and Loctite controls about 80% of the super glue market. These are big multinational brands.
So how did they develop large niche businesses. In the majority of cases, they:
- Aggressively pursued the goal of being the market leader within their particular segment (A ‘niche’ leader)
- They narrowly defined their target market.
- They had a global view of that narrowly defined market.
- They deal directly with their customers worldwide. They don’t use independent agents.
- They keep their customers close through regular interaction and service performance.
- All functions within these firms interact with customers.
- They continually innovate their products and procedures.
- They identified clear-cut advantages in their products and continually strengthen distinct selling propositions.
- Core competencies are kept in-house. Non-core competencies are outsourced.
- They have rigorous recruitment procedures and once the right staff are employed, they work hard to retain them over the long-term. A good example of this is Richer Sounds, the niche audio/visual electronics retailer who employs relatives of existing staff members to give their stores a ‘family business’ appeal.
- These firms often have authoritarian leadership on business fundamentals but allow employees to participate in developing the details of strategy. They have an ‘objectives down: plans up’ approach to strategy.
Ugg shows that it is possible for a small business to grow beyond its initial niche. The supernichers show a niche position can grow into a major business.