The Garrison Report #2003-1

The Keys to Developing a Competitive Strategy—Part 3

The past two months the report discussed the first two generic ways to develop a competitive advantage: low-cost provider and differentiation. This month the report focuses on niche building.

However, when I suggest to contractors that they should develop a niche, many respond, “We can build anything, so why should we specialize?” As a builder, I empathize with that, but the problem with that logic is it’s from the contractor’s perspective. Niche building is about positioning your company as an expert in a niche from the customer’s perspective. For example, if you needed brain surgery, would you go to the world’s leading general practitioner, or would you go to a neurosurgeon? Of course, the answer is obvious. What’s important to understand is the generalist might make the long list, and even occasionally the short list, but in the end, the “expert” usually wins out. Customers perceive their problems are unique, and they want someone who understands them and speaks their language.

Merit/Dover Construction from Mount Holly, NJ, is a general contractor specializing in restaurants. Its customers will hire only contractors who specialize in their industry, but the benefit is it maintains profit margins substantially higher than standard general contractors. Mitchell-Ross Architects from Voorheesville, NY, specializes in firehouses. As Robert Mitchell explained to me, the company has been able to refine the process so it can make above-average profit margins on this highly competitive work. And in fact, they have introduced additional services that further improve their profit margins.

It should be noted that 17 percent of consumers purchase products and services based solely on value—our ideal customer and one who certainly seeks out the expert. Another 56 percent oscillate between price and value. The good news with these potential customers is they at least understand value, and when the case is presented correctly, they will purchase value. But when they can’t distinguish the value difference between two contractors, they resort to price differentiation. The final 27 percent always buy based on price, and I recommend you send them to your competitor because they won’t make any money off them either.

The problem is that unless you are perceived as an “expert” in the customer’s niche, you are classified as a generalist who provides a commodity, which is purchased based on price. Therefore, your challenge, if you want to make above-average profits, is to position your company as an expert by taking your services to the next level as Merit/Dover and Mitchell-Ross did. Unfortunately the only way to be a sufficient expert is to focus on a niche.

Now I’m not saying you can have only a single niche, but you certainly can’t be everything to everyone. In fact, you can be a “construction” generalist by focusing on the special and wide variety of needs of a single customer, such as Disney. In this situation, the expertise is more on Disney’s unique needs than on a certain type of construction. The danger of this approach is the uncertainty of what happens to your company if something happens to Disney.

Therefore, most companies develop an expertise in a particular kind of construction, whether building it, designing it or even both. The benefit to you is the necessary range of expertise is narrower and more realistic. But be careful!

First, the niche must have sufficient volume to support your company, so don’t overspecialize. Also, while a niche expertise will set you apart from many of your competitors, there will still be competitors unless you start subspecializing; for example, instead of doing any hospital, you do a certain kind of hospital, such as children’s hospitals.

To further eliminate the competition, you must differentiate (last month’s topic) your company from your competitors. This makes your niche position stronger, and when you match the customer’s specific and unique needs, you become the only contractor of choice. But as I mentioned last month, you can’t ignore costs either. Competitive price is always a factor in today’s environment. The difference is that if you’re an expert in a niche, you should be able to have lower costs by refining processes, as Mitchell-Ross did. Since the selection isn’t solely on price, this allows for higher profit margins.

 

Summary

To develop a competitive advantage, contractors and designers must incorporate all three concepts into a unified program. First, start with a niche to know where you want to develop your expertise. Second, determine how you can bring greater value to your customers by offering services and products that are different than your competitors within the niche. Third, use your expertise to lower the costs as much as possible because for many customers, that is a true value. You don’t need to be the lowest cost because of the added values you have brought to the process. More important, it allows your company to earn an above-average profit margin. After all, if you do all the above, you should earn more profit because you earned it!

 

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