Milestone #04: Four options for a profitable business positioning

There's a positioning strategy for a company's product or service offering that sounds reasonable at first glance and is frequently used in everyday business, but backfires spectacularly in the performance analysis: a little cheaper than the brands, a little better than the budget providers. The middle ground. Porter coined a less flattering name for this – " Stuck in the Middle " – and the numbers bear him out.

Milestone #04 answers the question that precedes every business decision:

With which products and which positioning/performance profile can the company successfully assert itself against the competition in the market? This question determines a company's commitment to a particular business area.

Based on his analysis of publicly traded companies in the USA, Porter concludes that, in order to create value, the offering of a business venture must be positioned with a clearly identifiable focus on the relevant target groups and their benefits. For a methodologically sound positioning, Porter proposes two dimensions, each with two options: 'supply' and 'demand' , each linked to the possibility of either serving a broad market (generalist) or operating as a niche provider (specialist). Porter's logic leads to four potential positioning profiles:

• Supply-side positioning options:

Low-price provider (cost leadership), differentiation (brand)

• Demand-oriented positioning options (Demand Side):

Generalist (broad market coverage), Specialist (niche provider)

Companies with a diffuse positioning (stuck in the middle) neither realize the necessary cost advantages to compete against low-price providers, nor do they deliver superior customer value to compete against brands. The profitability of diffusely positioned companies is approximately 25% lower than that of focused competitors.

The intensity of today's global competitive landscape necessitates the simultaneous mobilization of the company's price- and cost-driven value creation potential. This leads to the following strategic imperative for the supply side:

• Low-price provider: Cost minimization with the best possible competitive differentiation

• Brand providers: Maximum value-adding differentiation with the best possible cost structure

Four fundamental strategic questions are subject to a positioning process:

1. Which target groups are addressed with which service offering in which price segment?

2. What specific customer needs are particularly well met?

3. What specific USP creates sustainable purchase preferences on the customer side?

4. How independent and defensible is the competitive position against current and potential competitors?

The answers reflect the fundamental viability of an entrepreneurial venture in a particular business field. They are the result of comparing market and competitive conditions with the company's strengths and capabilities, with particular consideration given to the business expectations of shareholders, investors, and management.

Further in-depth discussion of the topic and practical examples can be found in my book

Internationaler Markterfolg - Wachstum im globalen Wettbewerb - (International Market Success - Growth in Global Competition, Springer Gabler 2023).

Frank Gebert — www.frankgebert.de

The graphic: two axes, four fields

The diagram shows the positioning matrix of generic strategies. It spans two axes:

• Strategic Strength (Supply Side) – the supply side with the characteristics Low cost competency and Uniqueness competency .

• Strategic Scope (Demand Side) – the demand side with the characteristics Broad target and Narrow target .

This combination results in four fields: Cost Leadership , Differentiation , Cost Segmentation , and Focused Segmentation . These are complemented by two action guidelines, highlighted as ellipses in the diagram: Minimum cost at best possible differentiation on the cost side and Maximum differentiation at best possible cost on the differentiation side.

Porter posits that competitive advantages, and thus above-average profitability, can be achieved through precisely two strategic strengths: cost leadership, i.e., high value creation through low costs, or differentiation, i.e., high value creation through a price premium based on exceptional customer value. He considers a combination of these two strategies to be fundamentally mutually exclusive due to the differing success factors.

(Gebert 2023, Chapter 4.2.1, pp. 31–32; graphic after Porter 2004, p. 12)

The four options – and what they look like in practice

1. Cost Leadership

A key characteristic is gaining market share through price leadership over the competition, often in the low-price segment. The book cites Haier (electrical household appliances), Ryanair (airline), Dacia (automobiles), and Walmart (retail) as examples.

Two conditions must be met for this to result in above-average profitability:

• The service offered must achieve a level of customer acceptance comparable to the average competitor's offering. Otherwise, the provider will have to lower their prices significantly – thus negating their own advantage.

• The value creation process must be implemented more cost-effectively than by any other competitor . If several providers with a comparable low-cost structure meet, a battle for market share ensues, which, in the absence of other differentiating features, is fought exclusively on the basis of price and terms.

Practical example – Ryanair vs. British Airways: Successful low-cost carriers can achieve higher profitability than their more differentiated, higher-priced competitors, despite their low-price strategy. The book's comparison of the two airlines illustrates this point: British Airways reports an operating margin of 7.35%, Ryanair 22.7% (Kumar 2006).

The key levers for success are: gaining market share, reducing all non-profit-generating operating costs, maximizing the use of existing resources, and using technology to reduce costs.

(Gebert 2023, Chapter 4.2.2.1, pp. 32–37)

2. Differentiation

Examples of successfully differentiated companies, according to the book, include Nike (sporting goods), Apple (digital electronics), Mercedes (automobiles), and Rolex (watches). These companies have managed over decades to build a special sense of value in the eyes of customers – resulting in price realizations of 30% or more compared to similar competitor products.

The finding regarding the mechanism of action is remarkable: Emotional influence has a significantly greater impact on the purchase decision than purely factually measurable parameters. With comparable factual characteristics, the purchase decision favors the product perceived as more emotionally compelling – even at a significantly higher price.

For this to become profitable, one simple condition applies: The price premium achievable through differentiation must be higher than the associated additional costs.

(Gebert 2023, Chapter 4.2.2.2, pp. 37–45)

3. and 4. Cost Segmentation and Focused Segmentation

A focused positioning concentrates the business model on selected customer segments and provides tailored services for their specific needs. Crucially, even in a niche market, the business must operate with a clear positioning, either as a cost leader or through differentiation . A niche market is not a third model, but rather a focused application of the first two.

The book assigns four examples:

Low-cost focus

• By target group – Flixbus: Low-price bus travel for nationwide city connections. Focus on socially disadvantaged customer groups, specific service: low-price travel.

• By Geography – Hawaiian Airlines: Daily shuttle flights between the Hawaiian Islands. Focus on local transport connections, specific service: frequent service in a convenient format.

Differentiation Focus

• By target group – Ferrari: High-priced luxury sports cars. Focus on socially affluent buyer groups, specific performance: exclusive car with sports car and status effect.

• By Geography – Orient Express: High-priced luxury train journeys on selected routes. Focus on wealthy, pleasure-seeking tourists; specific service: luxury travel experience with sightseeing and image benefits.

For a focused strategy to be successful, customer needs within the niche must have unique characteristics compared to the average overall market. By better fulfilling these characteristics, the specialist can differentiate themselves from broadly positioned competitors. Favorable factors include: sufficient segment size coupled with insufficient competition, high barriers to entry, and the fact that market-leading companies do not enter the niche because its needs are incompatible with their business model for the broader market.

(Gebert 2023, Chapter 4.2.2.3, pp. 45–47)

The most expensive position: Stuck in the Middle

Porter categorizes companies whose business model does not clearly position them in one of the four strategic areas as "stuck in the middle ." They have neither a competitive advantage through a low-cost structure, nor can they differentiate themselves and thereby occupy higher price points.

Practical example – Competitive analysis of the Kitchen Furniture Industry: The industry analysis documented in the book illustrates the effect in figures. Companies positioned as differentiation and cost leaders generate return on sales of 15.1% and 26.2% , respectively. The "stuck-in-the-middle " competitors, positioned at the average price and cost level, achieve 5.9% to 10.9% – up to four times lower profitability. (Calculation basis: operating profit as a percentage of net sales; source of analysis: Baelchenstein Management, based on confidential company data, representing over 30% of the German kitchen market.)

The consequences of a diffuse positioning extend beyond the margin:

• Reduced financial resources for business development – market cultivation, innovation, new markets, HR quality, organization, technology.

• Economic bottlenecks in the competitive market due to a lack of defense capabilities: neither against low-cost competitors in price wars nor against the market and product offensive of differentiated brand companies.

That even well-known names are not immune is demonstrated by the list in the book: Arcandor, Air Berlin, Lauda Air, Praktiker, Opel, Gerry Weber, Märklin, Thomas Cook. They failed due to a lack of clear positioning and/or insufficient fulfillment of the key factors required for their positioning.

(Gebert 2023, Chapter 4.2.3, pp. 47–49)

How companies slip into that situation

No one chooses to be stuck in the middle . They end up there. The book describes this "creeping derailment" as a three-phase pattern – and this pattern is the real practical value of the milestone because it is recognizable early on:

Phase 1 – Triggering external factors. Sales volume and price margin come under pressure due to demand or competition. Market- and inflation-related cost increases for materials, wages, energy, and logistics cannot be offset by price increases.

Phase 2 – Corporate Strategic Crisis Response. Aggressive pricing policy, initially selective with chosen customers and over a short period. Simultaneously, cost reductions in purchasing, personnel, marketing, and product development. The decline in earnings is mitigated – but the opportunity for further development of product ranges, technologies, and market approach is increasingly limited.

Phase 3 – Erosion of the original positioning. The price-aggressive strategy expands: more special offers, price reductions on fast-moving products, and special bonuses for retailers. Dependence on large distributors and the associated margin pressure increase. The credibility of the once-value-oriented brand positioning dwindles – and with it, customer loyalty, competitive position, sales, and market share.

Final result: Within a relatively short period, the company has slipped from a former premium provider to a stuck-in-the-middle player. Depending on the extent of its development activities, its very existence could be at stake.

The road back is expensive. Depending on its complexity, repositioning takes at least three to five years , requires fundamental changes to an established business structure, and is associated with revenue losses, extraordinary cost burdens, and a drop in profits. The willingness of shareholders, banks, and employees to embark on this path is crucial for success.

(Gebert 2023, Chapter 4.2.3, pp. 49–51)

The modern addition: both levers simultaneously

At one point the book goes beyond Porter – and that is the point where the milestone becomes relevant to today's practice.

Porter's exclusive focus on low-cost or differentiation is certainly disputed in the literature; it is often argued that hybrid-positioned companies are more successful. The assessment in the book is more nuanced:

Global digital marketplaces enable price-aggressive suppliers from low-wage countries to sell worldwide, as well as companies from mature industrialized nations. The number and strength of competitors are difficult to predict. This creates an emergent price-performance competition that allows no company to forgo competitive advantages .

This leads to two statements that do not contradict each other:

1. A clear and independent positioning remains essential . Porter's four-field matrix provides a good framework for this.

2. At the same time, no company should forgo an option for value creation – regardless of whether it is positioned in the low-price segment or in the differentiated market.

The positioning segment merely dictates the priority :

• In the low-cost segment, price is the primary success factor. Cost leadership is the top priority. Within this framework, it is also essential to differentiate oneself from the competition as strongly as possible in order to make added value attractiveness perceptible.

• In the differentiation segment, the highest possible price margin with maximum market penetration is the primary goal. The better the cost structure is optimized, the greater the added value.

Summarized in the milestone formula: Minimum cost at best possible differentiation – maximum differentiation at best possible cost.

(Gebert 2023, Chapter 4.2.4, pp. 51–55)

Three questions for your own business

1. The field test: In which of the four fields does your business fall – Cost Leadership, Differentiation, Cost Segmentation, or Focused Segmentation? And would your customers give the same answer as your management?

2. The erosion test: Do you recognize elements from phase 1 or 2 in your own business – increasing special promotions, growing dependence on a few major customers, delayed product development? These are the leading indicators, not the margin for the current year.

3. The second-lever test: If you are positioned in a differentiated way – when did you last systematically work on your cost structure? If you are a cost leader – how does your customer recognize that you are more than just cheap?

Conclusion

The decision regarding a business's positioning is fundamental to its market success. It dictates the direction of the entire value chain, provides the orientation system for sales and marketing in relation to the market, and shapes the perception of the company by potential customers. If it goes wrong, it is almost impossible to correct without causing significant market disruption.

Four options are available, and the choice is serious: those who don't clearly define themselves in any of them either operate at too high a cost or are interchangeable – and in both cases, vulnerable. Around 25% lower profitability is the average; the kitchen furniture analysis in the book shows variations of up to four times that amount.

The true purpose of the milestone, however, lies not in the choice of field, but in what happens afterward: The chosen field determines the priority, not the decision to forgo certain areas. Global competition demands the simultaneous mobilization of all value creation potential – both in terms of costs and prices.

Further information

All Milestones to Market Success can be found at a glance on my homepage: ➔ www.frankgebert.de/meilensteine

Each milestone is also available as a downloadable PDF . In addition, each milestone has a corresponding paid self-study course that allows you to delve deeper into the content in a structured way and apply it directly to your own business. All previously published milestones can also be downloaded together as a self-study course. You can find the self-study courses at www.frankgebert.de/selbstglernkurse-markterfolg .

Milestone #4 overview: www.frankgebert.de/news/meilenstein4

Sources

• Milestone #4 – Playbook slide “4 options for a profitable business positioning”, Prof. Dr. Frank Gebert.

• Gebert, F.: Internationaler Markterfolg – Wachstum im globalen Wettbewerb [International Market Success – Growth in Global Competition]. Springer Gabler, Wiesbaden 2023, ISBN 978-3-658-39427-1. Chapter 4 “Competitive Positioning”, pp. 29–55. In detail: Chapter 4.1 (pp. 29–30), Chapter 4.2.1 (pp. 31–32), Chapter 4.2.2.1 Cost Leadership (pp. 32–37), Chapter 4.2.2.2 Differentiation (pp. 37–45), Chapter 4.2.2.3 Focused Segmentation (pp. 45–47), Chapter 4.2.3 “Stuck in the Middle” (pp. 47–51), Chapter 4.2.4 Executive Summary (pp. 51–55).

• Figure 4.1 / Preview image: Gebert, F., Internationaler Markterfolg , Wiesbaden 2023, p. 17 or p. 32; own illustration based on Porter, M. E.: Competitive Strategy , New York, First Free Press Edition 2004, p. 12.

• Kitchen furniture industry analysis (Fig. 4.7): Baelchenstein Management, industry analysis based on confidential company data, represents over 30% market share of the German kitchen market; cited in Gebert 2023, p. 48.

• Ryanair / British Airways Operating Margin: Kumar 2006, cited in Gebert 2023, p. 33.

• Stuck in the Middle: Porter, M. E., Competitive Strategy , 1980 or 2004a, p. 21; cited in Gebert 2023, pp. 31–32.

The book is available via link.springer.com , Amazon and professional bookstores.

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Prof. Dr. Frank Gebert — www.frankgebert.de