Alex Crespo of Miami, Florida, asks:
My company operates in a cut-throat industry of 23 competitors. Though I’ve worked hard in this business for 7 years, I’m not breaking-through to a position of dominance. We have 6 products of varying margin. 19 of my rivals offer all these lines. Three of them offer most. One competitor, a huge player, produces a few lines at high volume. I really love the product my company sells. However, I need a new direction or I’ll be in the same position 7 years from now. Unfortunately, I only have $63,000 above my working capital needs. So, any change I make has to be done on a shoestring. Help!
Kenelm Tonkin, Chairman, Tonkin Corporation answers.
The competitive landscape described is classic commoditisation and is ubiquitous. There are three strategies to pursue: cost leadership, product differentiation or niche. Each is designed to deliver a durable competitive advantage.
Cost leadership is the path you take to produce at lower per unit cost. This frequently requires significant capital, creating a barrier to any new entrant and a durable competitive advantage for the incumbent. Your large-volume adversary has taken the cost leadership strategy and your $63,000 may be insufficient for you to follow.
Product differentiation is about making your product truly unique and unable to be easily replicated by opponents. Business owners with a passion for their product often make the mistake of thinking it is about uniqueness alone. Uniqueness, if profitable, will be copied. You have to protect your product so competitors can’t copy it. Protection costs, perhaps more than $63,000.
Niche involves ruthless selection of your product and target market. Counter-intuitively, it means abandoning some existing customers in your search for a tighter, better-defined customer-base. Be dispassionate about which product to offer. List each of your 6 in descending order by gross margin. Choose the most lucrative product, then determine which sector buys it most. Devise a sustainable timeframe to phase in your niche transition, execute and dominance of a redefined market will be yours.