To succeed, must I be a low-cost player?

No. There are many different ways to add value and many different ways to compete.

Historically, Michael Porter identified three generic strategies: low-cost producers; differentiators, who command premium prices for unique products; and focused firms who compete in very specific market segments, and could be either high- or low-cost producers. In practice there are an infinite number of strategies that are variations on these themes, and many successful strategies are not “pure plays.” Nevertheless, the notion of generic strategies is a useful insight that forces one to think hard about how a firm is adding value, and the tradeoffs that may require.

In groups of executives, I've found that relatively few claim that their companies are low-cost producers who compete primarily on price. Recognizing that, a majority, and some almost by default, claim to be differentiators. They think of themselves in that vein, describe themselves in that vein, and some have the evidence to prove it. But a fair number paint alluring pictures and have everything lined up, except customers who appreciate their “unique” value and are willing to pay for it. To earn that you need to have a system of value creation that enables you to produce and market products or services with a true difference that matters. That generally leads to higher costs, but higher costs that get you and your customers something in return.

Many successful small and medium-size players focus on narrow, rather than wide, groups of customers, and make deliberate choices to tighten the scope of their businesses. This enables them to zero in on the idiosyncratic needs of a particular set of customers and build systems of value creation that meet those needs particularly well. Doing so can distinguish them from more generic players who compete more broadly, and make customers, whose idiosyncratic needs are now addressed, better off.

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