Sometimes firms try and operate in very different markets – potentially trying to simultaneously offer cost-leading products to the price-sensitive segment of the market, while also offering more premium goods for customers willing to pay substantially more. Straddling different markets can lead to a potential loss of focus, with companies that attempt to operate in very different areas unable to be as effective as more dedicated companies. This article explores some of the challenges that come from operating across different parts of the market.
Difficulty 1: Loss of focus: Compromises mean you can't compete as successfully as a dedicated firm
The first challenge that comes from straddling different market segments is that the company can start to lose its focus – unable to compete as successfully as companies that concentrate on a particular area. Compromises may get made that are not optimal for either area. This can result in a company that is not attractive in either area – customers can choose a company that is better focused on their particular segment and better able to meet their needs than a more generally focused firm.
Difficulty 2: Don't have the capabilities to support both areas
The next challenge that comes when expanding beyond an initial focus to target a different segment of the market is that the firm doesn’t necessarily have the capabilities to satisfy the new part of the market.
If your firm has, for example, operated in the more premium segment of the market, it likely will have developed capabilities associated with this premium position – better customer service, higher quality of goods, or superior features. Trying to operate in the cost-focused segment of the market requires a completely different skill-set associated with removing costs from your operations. Thinking that you can easily add the cost-conscious segment to your portfolio likely overlooks that companies that serve this market have developed specific competencies involved in providing their goods and services at a lower price.
A similar story applies with a firm that began in the more cost-focused segment of the market – operating in the premium area requires a completely different set of skills that cost-focused firms likely don’t possess.
Difficulty 3: Customer expectations get muddled
A final danger of straddling different markets is that customer expectations can get muddled. Now you are trying to serve one set of customers who have one view of the firm – potentially as a cost leader – and another set of customers who expect a very different level of service. The difference can lead to a misalignment between expectations and reality – potentially unable to satisfy the demands of either side.