In the strategy development exercise, the best place to start is to define the company’s market position, which leads to an articulation of the company’s value proposition for customers.
What is Market Positioning?
Most of us have bought a car or at least know of the most common car brands. Imagine we need to buy a new car. Even before we do any research into buying a car, our car buying options have likely come down to 5 or 6 brands among dozens of car brands around the world. Why? Because, as customers, each of us have specific needs for a car – commuting to the suburbs car, sporadic-use utilitarian car, soccer parent car, show-off luxury car, cheap city car, weekend getaway car, environmentally friendly car, etc. – and car companies have chosen one or two of those common needs and doubled-down their investment in winning those chosen areas. That’s market positioning.
Market positioning is the act of choosing the company’s identity – a corner of the market that aligns with the company’s biggest strengths. The choice frames what the company offers the market. A company’s value proposition is just an articulation of its position. Marketing a value proposition unlinked from a strategy and position is likely to confuse key operational efforts and cause customer dissatisfaction.
However, many small- and mid-sized companies struggle to make this critical choice of positioning in the market because of two reasons:
- Lack of awareness: When a company is small, every dollar of new revenue is important and selling generally focuses on low-hanging fruit. i.e. easy buyers across the market. The company does everything necessary to close these sales, leading to a very broad combination of tailored product/service packages being sold to customers. So, many mid-sized companies just don’t know where they should focus yet.
- Loss Aversion: As a small company grows, the historic scramble to get early revenue builds an aversion to missing any revenue opportunity throughout the company. Focusing on a corner of the market implies the company is choosing to not proactively sell into other areas (doesn’t mean those other customers can’t voluntarily buy). It takes courage to make this choice. Small- and mid-sized companies have to overcome the fear of not going after every potential customer.
Why is it important for companies to re-program their psyche as they move up the revenue curve and choose an optimal market position? At the risk of repeating myself, it is exactly what we covered under the What is Strategy? article. The simple answer is efficiency. As a company grows from early revenue to a reasonable amount of revenue, two things have changed:
- Unlike the very early days, company has actually learned that there is a real market for its offerings and has gathered a relevant amount of data from the early days of scrambling for revenue. At this stage, it is highly inefficient to continue to spread product and commercial investment across the board and provide average offerings to everyone.
- The early low-hanging sales will quickly disappear and the company will have to deal with customers who have higher expectations on product and commercial prowess. Again, with limited resources, improving product and commercial offerings requires focus and that focus comes from choosing a market position.
What does a Market Position look like?
Essentially, it is a clear and visual framing of the type of solution to a specific market problem. At the very least, it should answer the following questions:
- Flexibility of solution: How rigid is the company’s solution and how well can it be tailored to each customer’s needs?
- Breadth of solution: Where does the company’s responsibilities stop and where does a customer’s responsibilities start?
- Depth of relationship: What are the company’s and customers’ expectations on the longevity of the relationship?
- Cost of solution: Are the answers to the above three questions aligned with a likely customer’s price sensitivity?
In the hypothetical example below about a company that solves in-home lighting problems, there are two extreme ends to a solution. On one end, the company can offer an online platform where a customer can independently design their home lighting solution, order necessary hardware, and complete the installation on their own. At this end, customers choose a company based on the robustness of the design platform, range of products they carry, and price. In this case, the customer takes on majority of the quality risk and thus likely expect a lower overall cost. The company is essentially positioning itself as a low touch player.
On the other end, the company could offer a high-touch solution where a lighting expert would come to the home to assess a customer’s exact needs, source the required hardware, complete the physical installation, and provide a quality guarantee. Here, the customer chooses a company because they just want to outsource all the problem solving and maintenance of the desired outcome, and is willing to pay a much higher price for it.
Neither of these options are better or worse; a choice just allows a company to decide on exact capabilities it should be good at – in the first case, the online design platform and logistics and inventory management of hardware; in the second case, training and deployment of design and implementation experts, and managing appointments.
Choosing a Market Position
As with everything around defining corporate strategy, choosing a market position is a triangulation exercise. It is also a complex exercise that I will touch upon at a high-level.
The company has to draw from its awareness of its operational strengths and weaknesses to choose a market position. Formally known as operational trade-offs (it can be generalized as strategic trade-offs), there are 4 dimensions along which a company can optimize its product and service offerings, no matter the industry or problem. Every single way in which a company can make its product or service more desirable to customers are manifestations of these four trade-offs listed below. In the example above, each underlying choice is a manifestation of one or two of the trade-offs below.
- Flexibility: Does the company offer a canned product or service that every customer uses as-is? Or are the products and services highly customizable for customers?
- Speed: Can the company deliver the product or service as fast as customers expect? Or will the company deliver based on its own readiness / availability without promises of meeting time-related expectations?
- Quality: Is the product or service truly best-in-class and stand the test of time, peak performance, and similar quality measurements?
- Price: Where does the product or service sit on the spectrum of most expensive to least expensive?
A company’s market position is the aggregation of the strengths and weaknesses of strategic trade-offs that are relevant for its offerings.
Assessment of strengths and weaknesses for each strategic trade-off must come from deep and objective assessment of qualitative and quantitative market feedback. It is critical to avoid being biased by internal perceptions of the company’s strengths. Each strategic area offers extreme choices such as best-in-class, average, or low-end. No choices are wrong – in aggregate, these choices allow a company to focus.
In summary, choosing a market position and articulating the resulting value proposition is one of the five important components of developing a corporate strategy. A company has to identify relevant strategic areas where it has to make trade-offs, understand its strengths and weaknesses for each area, and make hard choices on the company’s identity.