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Monday, January 25, 2010

Choosing a Strategy for Start-up Businesses

One mistake that many businesses make is thinking they can be everything to all consumers.  That is a dangerous assumption and makes it difficult to market the company's products and services.  According to Harvard Business School professor Michael Porter there are three generic strategies that companies should use to identify and achieve competitive advantages:
  • Cost Leadership Strategy- Used when a company offers lower prices than competitors (Sam's Club provides commodity items in bulk for cheaper prices)
  • Differentiation Strategy- Used if a company creates goods and services that are unique (iPhone has features that other smart phones lack, like multi-touch)
  • Focus (Niche) Strategy- Used when a company targets very specific market segments (Curves gym for women)
Which strategy makes the most sense for start-ups?   Cost leadership is usually not where a fledgling company will find its advantage.  Competitors have been around longer will typically have better economies of scale and be prepared to fight a price war.  Differentiation can be a great way to charge a premium price for products and services, but it can be difficult for start-ups to reach prospective customers on a large scale.  This is why I love targeting Niche markets.  Rather than being a small fish in a big pond a new company can quickly become the big fish in a small pond.  Or better yet, the big fish in several small ponds.
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