By now you’ve got a pretty good idea of what your new business is trying to do; you’ve also got a good picture of who the competition is, and what business you’re actually in. Before you can move on to setting up your operational parameters, however, you’re going to have to figure out what strategy you intend to follow. All of the other aspects of a business, from the location to the décor, are going to depend on the strategy you have elected to use – or else you will invariably end up spending money on the wrong things. But while this might sound daunting, it really isn’t; despite what you may have heard, there are only three generic business strategies, and none of them are that hard to understand…
First, there’s the Low Cost strategy, which is exactly what it sounds like. You attempt to minimize all of the costs associated with running your business, which allows you to compete on the basis of price with everyone else in your industry – at least in theory. Where people go wrong with this is usually in thinking that this strategy is low price, not low cost. To make the Low Cost strategy work, you can’t just do whatever you were planning to do anyway and then put a lower price on the price sticker. By doing that, you’ve lowered your profit margin (the amount you have left over after paying all of your expenses) and made your business less effective; there’s also a hard limit to how far you can lower the price before you’re spending more to make the product than your customers are paying for it. At the point, your business is dead, even if you haven’t realized it yet…
To make a Low Cost strategy work, you need to find all of the places in your operations where it is possible to save money and do so, thus lowering the costs associated with that aspect of the business. Some of these will be obvious – such as getting the best prices from your suppliers, or spending a little on shipping as you can while still meeting delivery commitments – while others won’t be, but the principle is going to be the same throughout. Every amount of money you can save through these lower costs will enable you to lower your final price while maintaining the same profit margin. If you can do more of these things than the competition is doing, you can offer the lowest price on the market while still making the same amount of money. At that point it’s just a matter of cashing the checks…
The second generic strategy is called Differentiation, and it’s even simpler than the Low Cost approach. Under a differentiation strategy, you’re attempting to create something about your product or service that adds value for your customer. This can mean literally anything – more features, better quality, greater convenience, greater status associated with it, better looking, safer, and so on – but it will only work if the difference in your product or service adds value for the customer. Offering an equivalent product with a greater choice of colors will only work if color choice is something your customers would value; it’s likely to help you in selling clothing or cars, but not so much in electronic components or auto parts. If you’ve ever seen a luxury brand crash and burn because potential customers didn’t feel that their additional efforts in design or expenses for superior materials were worth the price increase, you already understand how this strategy works…
The final strategy is what’s called a Focus, or Niche strategy. As you might expect from the name, it’s an approach that focuses on a very specific part of the market and attempts to serve the needs of that limited segment, either by offering more specialized features (Differentiation) or by offering the best price for products that serve the specialized needs of that segment (Low Cost). Some people insist that this is really two strategies: Low Cost Focus and Differentiated Focus, but for our purposes it doesn’t make a lot of difference; in either case you’re setting out to fulfill the needs of a specific group within a larger market. The thing to remember in all three cases is that while you can’t pursue one strategy to the point of ignoring the others (no one will care how cheap your product is if it’s so poorly made that no one can use it, and no one will care how great your product is if no one can afford it) trying to follow both strategies almost never works. This is called getting “stuck in the middle,” and even if the rest of your strategy is sound, this can still sink your company…
No comments:
Post a Comment