Principles of management

5-4bPositioning Strategies

After analyzing industry forces, the next step in industry-level strategy is to protect your company from the negative effects of industry-wide competition and to create a sustainable competitive advantage. According to Michael Porter, there are three positioning strategies: cost leadership, differentiation, and focus.

Cost leadership  means producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry. Cost leadership protects companies from industry forces by deterring new entrants, who will have to match low costs and prices. Cost leadership also forces down the prices of substitute products and services, attracts bargain-seeking buyers, and increases bargaining power with suppliers, who have to keep their prices low if they want to do business with the cost leader.

Differentiation  means making your product or service sufficiently different from competitors’ offerings so that customers are willing to pay a premium price for the extra value or performance that it provides. Differentiation protects companies from industry forces by reducing the threat of substitute products. It also protects companies by making it easier to retain customers and more difficult for new entrants trying to attract new customers. For example, starting prices of hybrid cars are $22,000 for a Toyota Prius, $26,000 for a Honda Civic, and $28,000 for a Ford Fusion. With these lower-priced options, why would anyone spend $40,000 on a Chevy Volt hybrid? Hopefully because the Volt’s innovative gas–electric hybrid goes 40 miles before the gas engine kicks in, making the Volt the most fuel-efficient car on the market.

With a  focus strategy , a company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment. Focus strategies typically work in market niches that competitors have overlooked or have difficulty serving. Axe began selling body spray in the United States in 2002. In just five short years, it grew into a $2.5 billion global brand and the dominant force in the men’s body spray market, with a 72 percent market share (58 points higher than its nearest competitor, Old Spice). Axe accomplished this with a relentless focus on its key demographic—men ages 20 to 25. It does not target its products or its marketing campaigns to a younger audience, and it does not try to follow its customers as they age to their late 20s and beyond. Accordingly, Axe’s products, campaigns, and marketing strategy are based on extensive research conducted in college towns and urban settings.