Be different
If you believe management guru Michael Porter there are only three ways to be successful as a business: be cheaper, be better or be different.
In the 1980s, Porter developed his famous five-factor model of strategic competitive advantage. Based on that, he developed three generic business strategies:
The low cost strategy, where a company aims to be the lowest cost producer of a good or service. This makes a company able to undercut competitors and gain market share.
The focus strategy, in which a company focuses on a specific product, region or market niche in order to provide the highest-quality product or service in this niche and thus gain market share.
The differentiation strategy, in which a company tries to offer products and services that are clearly differentiated in the eyes of its customers and thus allows the company to charge higher prices and generate loyal customer base.
In a study of 150 companies in Kosovo, these three generic strategies were put to the test. And before you start complaining about business in Kosovo as a relevant comparison to your business, be aware that the advantage of a country like Kosovo is that businesses tend to be very young there and have experienced significant growth over the last two decades. Thus, the different impact of the above-mentioned three strategies is more pronounced and thus easier to detect than in an “older economy” like the United States or the UK.
In any case, the good news is that companies in the study followed only one of these generic strategies and not two at the same time. Thus, it was easier to disentangle the impact of each strategy and the correlation between companies following a low cost strategy and a differentiation strategy, etc. was low. Another bit of good news is that all three strategies lead to higher profitability over time. Thus, if you are a business leader or an investor analysing a business, make sure the company has a clearly articulated strategy that fits one of these generic types and puts all its efforts into implementing this strategy. If management successfully executes any of these strategies, the company is going to do fine.
But the study also showed that not all strategies are created equal. While profitability gains from the low cost and the focus strategy were roughly similar, the differentiation strategy was significantly more profitable for a company and led to much bigger profit growth than the other two. Which rhymes with my experience in investing. Being different as an investor is much more profitable than being better at analysing companies than other investors. There are too many people who engage in a focus strategy (both in investments as well as in business) that competition is too tough. Better to go where competitive pressures are lower and that is exactly what a differentiation strategy will do for you. And if you are a business leader or an investor and want to know how a differentiation strategy can be invented and executed in practice, I recommend you my favourite business book of all time: Different by Yongme Moon.