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Deciding On Differentiation In Your Hearing Health Practice
Moving into the New Year is always a time to take stock of what has gone before and deciding how to move forward. This Year is no different, however the imperative on strategy for moving forward for our profession in some countries is great.
In the USA divergent pressures have arisen in the last twelve months that may or may not lead to an even more competitive market place and a possible decision on change in service offerings. Here in Ireland, we have probably one of the worst recessions in modern memory aligned with the reduction in our grant. We also face the external pressures of possible regulation and the commercial pressure of large Nationals upping their game.
These market conditions, whilst not necessarily new in some cases are pressing because of their alignment. However, it is not yet the time to take your hat and coat and leave by any means. We will need to look at the coming year intelligently, look at our businesses honestly and decide how we mean to move forward in order that our businesses survive and thrive.
It is my opinion that small Independents can and will survive into the future. I think that they may well have to change their thinking about the services they offer and indeed how they offer them. I also think that they may have to look at collaboration with other Independents to increase their buying power and Strategic power. I have been advising my customers to carve out a niche for themselves and then defend that niche moving forward.
When I discuss this concept the principles I am discussing are based on Porter’s Generic Strategies. The strategies were first set out in 1985 by Michael Porter in 1985 in his book, “Competitive Advantage, Creating And Sustaining Superior Performance”. Porter called the generic strategies
Cost Leadership Strategy
Differentiation Strategy
Focus Strategy
The Cost Leadership Strategy
Porter’s generic strategies are ways of gaining competitive advantage. There are two main ways of achieving this within a Cost Leadership strategy:
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Increasing profits by reducing costs, while charging industry-average prices.
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Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you’ve reduced costs.
We see this strategy at work in our profession already, most notably with one of the large Nationals that trades within the UK and Ireland. Elements of this strategy are also at play in the USA with some of the players that have entered the market in the last few years. Remember that Cost Leadership is about minimizing the cost to the organization of delivering the products and services. The cost of goods or services to the customer is in fact a separate issue!
The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or market. This strategy is quite dangerous to an organization unless there is also real differentiation. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low cost producers who may undercut your prices and therefore block your attempts to increase market share.
You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:
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Access to the capital needed to invest in technology that will bring costs down.
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Very efficient logistics.
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A low cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors.
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it’s important to continuously find ways of reducing every cost.
The Differentiation Strategy
Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value.
To make a success of a Differentiation strategy, organizations need:
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Good research, development and innovation.
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The ability to deliver high-quality products or services.
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Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings.
Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments.
The Focus Strategy
Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low cost or well-specified products for the market. Because they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors.
As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own.
But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche. It’s simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against better-resourced broad market companies’ offerings.)
Your choice of which generic strategy to pursue underpins every other strategic decision you make, so it’s worth spending time to get it right. But you do need to make a decision, Porter specifically warns against trying to hedge your bets by following more than one strategy. One of the most important reasons for this advice is that the things you need to do to make each type of strategy work appeal to different types of people. Cost Leadership requires a very detailed internal focus on processes. Differentiation, on the other hand, demands an outward-facing, highly creative approach.
So, when you come to choose which of the three generic strategies is for you, it’s vital that you take your organization’s competencies and strengths into account. It is advised that you use some steps that will allow you choose the strategy that is right for you.
Step 1: For each generic strategy, carry out a SWOT Analysis of your business strengths and weaknesses, and the opportunities and threats you would face, if you in fact adopted that strategy.
Having done this, it may be clear that your organization is unlikely to be able to make a success of some of the generic strategies.
Step 2: You can use one of Porter’s other tools, “A Five Forces Analysis” to understand the nature of the industry you are in.
Step 3: Compare the SWOT Analyses of the viable strategic options with the results of your Five Forces analysis. For each strategic option, ask yourself how you could use that strategy to:
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Reduce or manage supplier power.
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Reduce or manage buyer/customer power.
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Come out on top of the competitive rivalry.
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Reduce or eliminate the threat of substitution.
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Reduce or eliminate the threat of new entry.
These business tools are deeply conceptual, but they give structure to your business analysis and good data that you can use as a foundation for business planning. These exercises have true value for you as a business person, they will allow you to make informed and intelligent decisions based on hard data that will allow you to hopefully thrive.
It would be my feeling that a differentiation or focus strategy would be the right strategies to follow for most Independents. Going back to that carving out a niche statement earlier, you need to find your niche, carve it out and defend it. What your niche is, is something that you would know better than I. However, I feel that an important element is the down home, local, friendly and willing to go the extra mile attitude that smaller Independents bring to table. That is a hard differentiator of you as a business, now all you need to do is find your other hard differentiators and then drive them forward.
Regards
Geoff
Articles on Porter’s concepts can be found at
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