Sunday, January 17, 2010

Niche as a Sustainable Competitive Strategy

Niche is a popular and fashionable term in strategic parlance. Many corporate leaders prefer their firms to be niche players rather than mass players. There is, however, an inadequate appreciation of what constitutes niche, and where niche fits in a firm’s quest for scale and scope, as much as for revenue and profitability. This paper seeks to clear some popular misconceptions and establish some logical foundations for niche strategy.

Porter’s generic strategies

No discussion of strategy can be meaningful without touching base with Professor Michael Porter’s pioneering work on strategy. Porter proposed in the 1980s three generic strategies as three uniquely different approaches for a firm to achieve competitive advantage. These are: cost leadership, differentiation and focus. While each of these strategies has to be defined in terms of the industry context and the competitive forces that operate therein, each fulfills a core purpose. Cost leadership requires a firm to be the lowest cost producer for a given level of quality. The differentiation strategy requires a product or service to have certain unique attributes that the competitor products or services do not have. The focus strategy concentrates on a narrow market segment, and within that achieves competitive superiority through either cost leadership or differentiation.

As with any generic strategy, the supportive assumptions tend to be simplistic. Cost leadership is considered to be an internally focused strategic approach where the drivers are internal process efficiencies, productivity improvements and cost-competitiveness in product development and manufacture. On the other hand, differentiation is viewed as being externally focused in terms of identifying what provides differentiation in the market place. The arguments for focus are similar; internal or external as the case may be. Porter even advocates that firms should resist the temptation of following all the three strategies simultaneously lest one should be stuck in the middle. The reality, however, is that in today’s competitive world which is three decades more mature and more competitive than the 1980s (when Porter first propounded his landmark theories of competitive strategy) the drivers of strategy have simply converged.

Niche; old or new in concept?

There are many interpretations of niche as a strategy. The physical definition of niche is that of a crevice where one can be safely ensconced. The managerial definition of niche is one of a unique product-market segmentation by which a firm can enjoy low competition and high profits. Although oftentimes a product or service is seen to lead to a niche position it is the market segmentation that enables premium pricing and dictates the need for niche products and services. Niche as a concept is not new. From Ferrari, Rolls Royce and Jaguar in the automobile industry to Omega, Rolex and Tudor in the watch industry, niche strategy is as old as the beginning of industrialization and as new as the challenge of competitiveness.

The concept of niche in the olden days was based on developing and manufacturing products with a high level of sophistication, and therefore with a high cost and a price premium which only certain segments of the markets can accept. Niche in the olden days was associated with the pride of ownership of a premium brand. Niche strategy thus involved a significant marketing and promotional input. Niche also came to be interpreted in terms of a differentiated product catering to very specific and narrow segment. Niche strategy in modern times, however, needs to be a much more inclusive concept. It is no longer one of identifying a slot which others would not (or cannot) address but rather is one of retaining invincibility and sustainability despite ingress of intense competition. Niche in modern times is the possession of an ability or set of abilities which most firms in the industry do not have. Apple demonstrates what niche as relevant to the contemporary times can do for corporate strategy and performance.

Apple “i products”; icons of niche

Apple Inc., led by Steve Jobs virtually rewrote the book of strategy as well as the history of consumer electronics, with its pioneering “i products”: the iPod and iPhone. These products are differentiated with features that multiple niche market segments would appreciate and pay for but are also cost-competitive helping most people become the users of the products. The niches that each of the products occupies, therefore, cover almost the entire market place questioning the very definition of niche. The introduction of iPod and iPhone generated so many competitors, yet iPod and iPhone remain the pioneers with an amazing invincibility. The sustainability of Apple products relates to the fact that they ushered in, and successfully maintained a whole new and complete user experience, which could not be matched by any competitor products in totality despite their being superior in parts. They were highly effective products that were reached to customers with attractive ownership options and distinctive retailing formats. The products constituted the core that created the markets, however.

Apple iPod provided for the user, for the first time, a total digital audio-visual experience in the most miniaturized and most elegant form factor, with unprecedented memory levels ranging from 2 GB to 160 GB. First introduced in 2001, iPod emerged as a well-segmented product family of Shuffle, Nano, Classic and Touch, meeting different user needs. The iPod user experience was heightened by the Net based proprietary iTunes which made available thousands of tunes to the music lovers owning the iPods. Apple iPhone provided, for the first time, a total convergence experience for the smart phone user, once again with the most elegant and user friendly form factor, and vastly superior memory levels. The iPhone experience was heightened by a Net based application store hosting thousands of proprietary and third party applications. Apple iPod and iPhone thus represented a unique fusion of state-of-the-art design and manufacturing on one hand and cutting-edge hardware and software on the other. And both the streams of products kept getting continuous enhancements; iPod with touch technology and iPhone with 3G and 3GS, for example.

Niche over time; shifting sand dunes

Niche products and markets are rarely static. They vanish and redevelop over time. In the trucking industry of the 1980s in India, heavy duty vehicles (HDVs), manufactured almost exclusively by Ashok Leyland, constituted a niche product group and a niche market for the company. With the enhancements in freight haulage patterns and improvements in highway network as well as entry of several new players such as Volvo, MAN, Hino and Navistar (besides the incumbent Tata Motors) into the heavy haulage segment, HDVs no longer constitute a niche. In the 1990s, a shopping mall would have been a niche retailing format or a multiplex would have been a niche cinematic experience in India. Today, shopping malls and multiplexes are commonplace with high competition. Dual time, multiple time zone or ana-digi watches could have been niche watch technologies a few years ago. These are now offered virtually by all watch makers. A decade ago, touch technology in cellular phones was a practical impossibility; today it dominates the cellular phones and is now set to extend to note-books and net-books. Today, 3D viewing technology is a highly niche technology whether for cinema or television, but tomorrow it could be more extensively available and highly competed. Such examples are indeed numerous.

Niche products and markets are verily created by innovation in terms of product technologies or marketing processes. However, as follow-on products, analogue products and even enhanced products get developed, and marketing becomes more intense with increased number of competitors, a niche strategy of the present could be commoditized by the time of actual commercialization. It is therefore necessary that firms that aim to follow niche strategy are always at the top of the innovation curve, constantly seeking enhancements in current niche products or exploring the avenues for a new generation of niche products. Even a series of successive niche products would at some point of time face saturation dictating the need for a breakthrough move to a new niche trajectory.

Niche is narrow; but needs a broad base

The development of skill-sets and competencies required for a niche strategy, in turn, require a broad operational base in an industry. A niche strategy which by definition tends to be exclusive to premium market segments may provide robust profitability but not necessarily huge revenues. The Swiss watch industry, especially the hand-crafted watch segment, was an example of a niche-driven industrial operation; where the niche was in terms of elegance, precision and quality. However, in terms of scale and scope the Swiss watch industry became a marginal player in the 1980s and 1990s relative to the more nimble, more efficient and more diversified Japanese watch markers. Only after the Swiss industry integrated new research and manufacturing technologies with its traditional niche of elegance and precision with quality that the industry became a global force again.

Firms and leadership teams that pursue a niche strategy cannot build business and operational models only on niche. An ability to develop and manufacture a broad range of products, in fact, helps the firm to support niche technology not only financially but also organizationally, with a scale that can attract the highly talented professionals who can deliver a niche platform. In several circumstances, niche emerges as an apex capability of a pyramid of normal, organizational competency hierarchy. The ability of Toyota to develop clean hybrid cars (for example, Prius) is a result of its ability to have a large and broad spectrum car manufacturing capability. On the other hand, a pure electric car manufacturer is unlikely to have either the scale or scope sufficient to support a sole, narrow niche strategy. Even a leading fragrance manufacturer such as Elizabeth Arden positions designer and premium fragrances on a base of hundreds of finely segmented cosmetic and perfumes base.

Value chain fragments; deceptively niche

Niche does not define industry; nor does industry determine niche. Yet many strategists fail to view niche and industry in proper perspectives. A full-fledged integrated pharmaceutical player may view an independent, drug discovery entity as a niche operation. Such a view is based wholly on the very special capabilities required to invent and develop new pharmaceutical products. On the other hand, a drug discovery entity which is broad based may consider a similar discovery entity which is specializing in just one therapeutic area as a niche player. Conceptually, each segment or sub-segment of an industrial value chain may appear to be a potential niche segment. Analytically, however, a strategy based on fragmentation of value chain fragment would qualify more as an optic of industry definition while a strategy based on competitiveness of specialization would be more reflective of a true niche.

By corollary, moving up the value chain of a product group does not necessarily confer a niche position. A manufacturer of value added steel products need not necessarily be a more successful niche player than a steel producer who has mastered the customization of basic steel specifications to a wide variety of applications. If at all, the broad based yet customized basic steel producer could have a better position as successful a niche player. To cite another example, while industrial biotechnology (classic fermentation) is commoditized, evolution of biotechnology in terms of mammalian cell culture and later plant and other DNA based developments led to a reinvention of the basic biotechnology value chain. To be a niche player, therefore, one has to look beyond industry or value chain definitions and focus more on the fundamentals of science, technology and management that make a product or service truly unassailable.

Niche is not strategy; it is a competency

Niche strategy is neither a product strategy nor a marketing strategy. It is in essence a competency. The examples cited throughout this discussion demonstrate that a sustainable niche strategy requires a series of successive innovative products which are proactively and competitively produced and are differentiated in the market place in terms of their user experience. At some point of time, even successive product enhancements would need to leapfrog into a totally new configuration. For example, after a series of successive improvements in both iPod and iPhone, the next wave could be in terms of an iTablet for a totally new technological and user experience. This sort of evolution and transformation in niche positioning requires a complete end-to-end capability in terms of nimble product development, lean manufacturing and aggressive marketing. Also implied in a niche strategy are several other attributes such as the ability to globally source the best technologies and components, to project-manage the processes of concurrent engineering and targeted product launch and to network with various collaborating partners.

Ability to innovate and differentiate on a product-market dimension with low cost global supply chain capabilities, high-end manufacturing efficiencies and broad-spectrum marketing capabilities requires a set of organizational competencies that are industry leading in each of the domains. A niche strategy should be enduring based on competencies that can deliver sustainable value. A niche strategy needs to be therefore seen as a comprehensive strategy encompassing and integrating all the three generic strategies proposed by Porter. In an industry, while there would be players following one of the three generic strategies proposed by Porter, the few real niche players would be the ones that would consciously develop the three types of generic competencies required for a niche strategy.

Industry leadership; sustainable niche

What constitutes a true industry leadership is a question that lends itself to several answers. At a simplistic level, scale is a major reckoner of leadership. However, as demonstrated by the virtual bankruptcy and the governmental bail-out of General Motors, once global leader in automobiles, scale without profitability and sustainability has little meaning. Neither is a classic niche product positioning of relevance in today’s scenario as demonstrated by the travails of Jaguar and Land Rover which led to a sale of those marquee brands to Tata Motors. Industry leadership occurs with a broad spectrum positioning that caters to a full market with as many products and with as much cost efficiency as possible, while creating unique niches based on innovation in each product-market segment. The objective of industry leadership is thus predicated upon combining scale, scope and niche into one business model.

Some firms are in a position to drive up, in a largely monopolistic manner, all the parameters of product performance (and hence the user experience) by themselves. Intel is a good example of monopolistic product positioning; it is able to dominate the industry with its successive generations of processors. Similarly, Microsoft is able to dominate the software industry with its successive releases of operating systems. These are however exceptions rather than the rule; and even such firms seek to expand their footprint as expansively as possible (for example, Intel manufacturing processors for all digital applications and Microsoft extending its Windows operating system to mobile phones, regardless of price points). Most firms in contemporary times, from Sony to Samsung, ABB to Siemens or Toyota to Renault are under pressure for maximal product-market coverage while also seeking appropriate niches. These firms have, however, developed their own sets of unique competencies to enable their own unique models of expansive niche strategies (for example, the well-known Toyota Production System and not so well-known but equally effective Toyota Development System, also called Set Based Concurrent Engineering at Toyota).

Summary

The prescription for a firm seeking sustainable industry leadership would be in terms of combining product or service variety with innovation, and excelling over other competitors in terms of unique user experiences in each case. Cost competitiveness and differentiation require to be fused into an integrated sustainable niche strategy, the conceptualization and execution of which calls for a very special competence on the part of a firm. An extremely inventive, creative and integrated research-manufacturing-marketing paradigm that is enhanced by industry leading capabilities in all the supportive functions is the essence of niche as a firm level competence.

Posted by Dr CB Rao on January 17, 2010

4 comments:

Narayanan said...

Porter's generic strategies is anachronistic for at least 2 reasons - we live in a connected world with information flow at warp speed, we now appreciate customer decisions are driven by emotions as much as rational thought i.e, we are homo sapiens first, homo economicus next. Examples listed in the blog clearly substantiate the argument for niche as a competency. While cost and differentiation as drivers have short shelf lives, focus (segmentation) could still provide opportunities for super-niche opportunities particularly in knowledge intensive industries protected by IP and/or inherent high barriers for entry due to regulatory constraints. Forward-looking organizations with superior execution capabilities are in a position to advance segmentation oriented niche products or services. In order to succeed however, such organizations will need to avoid the temptation of falling prey to hubris caused by past successes or try to seek salvation by "throwing money at the problem" or hiring industry "superstars" as proverbial white knights.

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