Ready to Start a Business? The Importance of Knowing Your Place (Position) in the Market
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· Online Store — Check
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There are two main competitive positions in business: Cost Leadership and Product Differentiation. Each of these positions has different (opposing) strategies for how to create a successful business.
It is ‘mission-critical’ to understand these competitive positions and how the underlying strategies differ. Your competitive position in the market will determine how you interact with customers, who are your suppliers, and how you manufacture & distribute your products & services.
Cost Leadership
Cost Leadership Position: a business aims to become the lowest-cost producer in its industry. This allows it to offer products or services at competitive (lower) prices, attracting a broad customer base.
The most crucial requirement for Cost Leadership is operational efficiency. Sourcing affordable materials Effective supply chain management and optimizing production processes are essential practices that allow businesses in this position to be successful.
H&M: A Model of Cost Leadership
- Customers: H&M caters to price-conscious consumers who seek trendy fashion without breaking the bank. Its approach attracts a substantial and diverse customer base.
- Branding: H&M’s branding emphasizes affordability, fashion-forward designs, and inclusivity. It positions itself as a brand that brings fashion to everyone.
- Distribution: The brand has a vast global network of stores and a strong online presence, ensuring accessibility.
- Quality: H&M focuses on affordability while achieving quality to ensure customer satisfaction. This balance is critical for customer retention.
- Suppliers: H&M’s sizable market share translates into strong bargaining power with suppliers, which allows them to maintain favourable relationships with suppliers and maintain cost advantages.
Product Differentiation
Product Differentiation Position: a company seeks to distinguish itself from competitors through unique and high-quality offerings.
Creativity, exceptional product design and attention to branding are fundamental elements for a Product Differentiation position.
Burberry: Product Differentiation ‘In-Action’
- Customers: Burberry caters to a discerning clientele who value luxury, heritage, and individuality. Its customers seek exclusivity and are willing to pay a premium for it.
- Branding: Burberry’s brand identity revolves around heritage, craftsmanship, and timeless elegance. It positions itself as an exclusive, high-end fashion house.
- Distribution: Burberry uses a selective distribution strategy, ensuring its products are available in prestigious locations that align with its brand image.
- Quality: Uncompromising quality is the hallmark of Burberry’s products, contributing to a superior customer experience.
- Suppliers: Burberry collaborates with top-tier suppliers to source the finest materials, aligning with its commitment to excellence.
Position First, Then Strategy Equals Success
The material differences between H&M and Burberry highlight the importance of understanding your competitive position. Launching a business without a clear understanding of your position creates risks throughout your business, of which confusion of the target customer is the most fatal.
Embarking on a Cost Leadership strategy without operational competence and cost control, like H&M, entrepreneurs may realize they can no longer sustain low prices, leading to a competitive disadvantage.
Similarly, an entrepreneur pursuing Product Differentiation without a discipline on product quality and branding, as Burberry does, may struggle to justify premium prices.
Cost Leadership and Product Differentiation are not mutually exclusive (Toyota and Lexus). However, they are distinct pathways to success and require different types of resources. Knowing your competitive position is the prerequisite to strategy and success. //
