There are four generic strategies along with a fifth hybrid strategy and each can be identified by the economic proposition it provides to the customer and by the breadth of its target market.
When compared, these strategies form a matrix, as shown in this figure:
01. Cost Leadership
As the name implies, the objective of a cost leadership strategy is to beat your competition on the cost to a broad market.
This strategy involves maintaining a competitive price and a product of acceptable quality while simultaneously reducing production costs.
What makes this strategy tough to master is the constant need to manage and reduce production costs, and not just across one product or service family, but across an entire organization’s offerings.
The allure of this strategy is, of course, that when one firm gets it right, they are difficult to unseat.
Cost leadership strategies can be seen with brands such as the speedy oil change service Jiffy Lube, fast-food giant McDonald’s, and super-retailer Walmart—all brands that are great at what they do.
Generally speaking, a differentiation strategy is designed to convince your customers to pay a premium price for a product or service that solves their problem in unique and compelling ways.
Differentiation strategies target a broad market and allow firms to use a differentiation strategy to compete on uniqueness and features rather than price.
Examples of brands successfully implementing a differentiation strategy include natural grocery retailer Whole Foods, fast-casual Chipotle, and tech giant Apple.
In each of these examples, the firm in question is not the least expensive offering but is a strong contender in its industry based on a differentiated approach.
03. Focused Differentiation
Rather than approaching a broad market with a differentiated offering, a strategy of focused differentiation focuses on a very narrow portion of the total market, and firms that use this strategy tailor their offerings to match.
This narrow market could be a certain limited demographic or a single sales channel such as internet-only sales.
A focused differentiation strategy often targets an underserved minority within a broader market.
This minority is often easier to win over as customers—their problem isn’t adequately being solved and they have been passed over by larger competitors.
Examples of a focused differentiation strategy in action include luxury car manufacturer Rolls Royce, children’s make-your-own-friend Build-A-Bear Workshop, and eclectic culture retailer ThinkGeek.
04. Focused Cost Leadership
A focused cost leadership strategy is built around cost leadership in a narrow market segment or sales channel.
As in the broad cost leadership category, a focused cost leader may not be the lowest priced option in the industry, but it will be the lowest price in relation to the limited target market.
Examples include teen/tween jewelry and clothing retailer Claire’s, discount retailer Dollar General, and one-night DVD/Blu-ray rental kiosk company Redbox.
In the case of Redbox, there are numerous less expensive ways to view movies, but the placement of Redbox kiosks and their target market of customers who prefer the DVD experience mean that their one-night rental price is attractive.
This price can be achieved because Redbox is designed as a self-serve movie vending machine—no need for retail space, cashiers, or other overhead costs.
There is a simple reason for this—their costs are generally much higher than those of their larger, more entrenched competition.
Thinking back to our craft beer example notice that none of the listed points of differentiation
- and specialized niches
are attempting to compete on price.
In fact, their higher price is a signal to their customers of high quality.
Similarly, any discussion concerning competition advocates for focusing on a narrow market niche to start with.
By creating a very specific customer avatar rather than trying to be all things to all people, startups focus their efforts and put their limited resources to maximum effect.
Considering all of this information, the ideal strategic positioning for most new businesses falls solidly in the bottom right quadrant of the strategic positioning matrix:
To be a successfully focused differentiator, a startup will require a very well-formulated value proposition.
Your value proposition is the answer to two fundamental questions:
- Who is your target customer?
- How are you different from your competition?
Your value proposition will make or break your business.
Cool technology, a foolproof financial model, a can’t-miss social media strategy, etc., are irrelevant if you haven’t nailed the two core questions that make up your value proposition.
The specifics of actually constructing a concise value proposition and committing it to paper are covered here, but for now suffice it to say that regardless of how well your value proposition reads, you must have a solid understanding of what it is and how it will impact your business before committing significant time and resources to your venture.
05. Exploring the Fifth Quadrant
By definition, there cannot be such a thing as a “fifth quadrant.”
However, the four approaches that are identified in the strategic positioning matrix give rise to a fifth state:
the state of “in between.”
But just as there cannot be a fifth quadrant, there cannot be a strategy that is both broad and targeted.
The differences between cost leadership and differentiation are also mutually exclusive.
By focusing on differentiation, your firm will incur costs that are inimical to a successful cost leadership strategy.
The strategic positioning matrix is yet another insight from Michael Porter, and he cautioned against firms attempting to position themselves using multiple strategies.
By making their own “quadrants” and tackling a strategy that is both broad and narrow (or focused on cost leadership and differentiation) these firms are “caught in the middle” and see greatly diminished returns compared to what they would see using a single focused strategy.
What is the value of your value proposition?
The value of your value proposition can’t be overstated.
In your business plan, your value proposition takes the form of a literal statement that answers those two questions from the beginning
- who your target customer is
- and how you are different from your competition
But the real form your value proposition takes is in the fabric of your business, in the way your operations are designed to solve your customers’ problems, and in the ways, you are different from your competition.
In short, your value proposition is your business.
It is not uncommon for entrepreneurs to conflate a value proposition with a mission statement, tagline, or positioning statement.
Each of those items certainly has a place, but it is important to remember that they are developed after a solid value proposition.
Without an underlying value proposition, there is no mission for a business.
Without a target customer, there is no tagline, and with no key understanding of differentiation from competitors, there cannot be a positioning statement.
Value Proposition Example
The Demise of Vine
Few apps grew as fast and crashed as quickly as the short-form video sharing service Vine.
Launched in 2013, Vine peaked a year later with hundreds of millions of users. By 2016, owner Twitter announced they were shutting it down.
So, what happened?
Many stories have been written about the reasons for Vine’s demise, but the answer boils down to the elements of their value proposition.
They weren’t solving a significant problem for their customers and they didn’t have any protection against larger competitors offering similar services.
- Customer problem: Vine customers wanted to be able to exchange short, highly consumable, creative videos via a social network platform. Initially, Vine’s trademark six-second constraint seemed fun and encouraged creativity in producing content. However, having a platform that accepted only six-second videos was too limiting for Vine to ever become a major social network. After a brief period of popularity, interest in the platform waned, exacerbated by the intense competition that lured creators to produce content elsewhere.
- Competition: Both new and entrenched competitors saw the skyrocketing popularity of Vine and immediately enhanced their own video offerings. Most also supported longer-form videos, text, and still photos, along with better compensation programs for content creators. With Instagram, Snapchat, Facebook, and YouTube as tenacious competitors, it didn’t take long for Vine to shut down.
Wrapping it up
No venture can be everything to everyone, and it is the rare startup that can compete on price.
This means it is essential that your venture adhere to a defined strategic position and clearly define its target customer. Your value proposition is a make-or-break factor of your venture.
It is the why of your startup, and it is the answer to two questions:
- who is your target customer,
- and how are you different from your competition?
A value proposition is not a tagline or a mission statement. A tagline is an element of your brand’s marketing collateral, and a mission statement is derived from your value proposition.