Years ago as I was teaching a strategy course, I used a case study that continues to haunt me. The case focused on a young company founded by three friends who loved to cook and eat seafood gumbo. (Let’s call the company, “Bayou Nation’s Best Gumbo.”) They crafted an out-of-this-world recipe based on ingredients bought fresh-from-the-wharf near their Gulf Coast city and set up a small manufacturing operation. They sold primarily to distributors but also directly to a few local restaurants and individuals. They had trouble getting serious attention from restaurant chains because their facility lacked USDA certification, and their processes revealed some operational challenges. The story haunts me because the founders’ milestone for “making it” was placing their products in Walmart stores.
Selling through a mass-market, low-cost retailer seemed directly at odds with the product’s specialty appeal.
Michael Porter’s Generic Strategies
In that undergraduate course, students were guided to use Michael Porter’s writings on strategy. In one of his seminal works, Porter presented a framework that juxtaposed two continuua: target market and type of advantage. A company can target a broad or niche market, and its approach to distinction in that market can be through low-cost or differentiation. This leads one to place a company’s strategic approach in one of four resulting quadrants:
- Low-cost leadership
- Low-cost within a focused market
- Differentiation within a focused market
Those trying to be “all things to all people” may find themselves in the middle with a so-called “best cost” or “best value” approach, also known as “stuck in the middle.”PORTER'S GENERIC STRATEGIES
This simple framework has helped elucidate choices for many business leaders. Although it oversimplifies the dynamic nature of products, markets, and competition, it does help identify basic trade-offs a company may face in forming and sustaining its identity, primarily in terms of its products.
Bayou Nation’s Strategy Choices
In that case study, the seafood gumbo could be characterized as a differentiated product with a niche target market:
- Original fabulous recipe
- Crafted from fresh ingredients
- Not everyone loves seafood gumbo
- Initial focus on regional sales
As a differentiated product, Bayou Nation’s Best Gumbo could and should have commanded a higher price, consistent with the signal “this is something special.” Why, then, would the founders choose a channel that touts a broad, low-cost strategy; puts downward pressure on sellers’ prices; and seeks to commoditize goods rather than celebrate distinction?
Diseconomies of Scale
The founders, as so many of us, had internalized a long-dominant economic narrative. It says, to succeed you must develop economies of scale (increasing operations to reach broader populations) and economies of scope (increasing the range product offerings to appeal to broader populations).
But increasingly, for niche sellers this narrative is not relevant—and dangerously misleading. Fortunately some are helping voice a non-dominant, increasingly relevant, economic narrative: John Hagel and his research group, for example, speak explicitly of DISeconomies of scale, referring to company growth that jeopardizes products’ distinctive appeal to niche markets.THE HERO'S JOURNEY THROUGH THE LANDSCAPE OF THE FUTURE
Recent years’ growth in e-commerce options exacerbates the need to choose channels carefully. Back when I taught this case, Shopify didn’t exist. Websites required significant expertise and resources to create and were primarily the purview of large companies. Now a multitude of options help small sellers reach markets—online and in person, through independently developed brands and through established retailers.
The Functions of a Marketing Channel
It may help to recall the three functions of a channel:
- Communicate resonantly with the target market
- Provide a means for economic transaction, and
- Execute the logistics to place the goods in the customer’s hands
As we evaluate channel opportunities, how do each of these functions align with our product and the people we want to reach? A differentiated product deserves a differentiated distribution channel—and, for that matter, a strongly differentiated sourcing story as well.
WATCH VIDEO ON FUNCTIONS OF A MARKETING CHANNEL
If we were to overlay Bayou Nation’s Best Gumbo’s sourcing, target market, and distribution channel onto Porter’s strategy diagram introduced above, we might see the following:
Sourcing and Pricing
From a sourcing standpoint, Bayou Nation has advantageous access to high quality ingredients at relatively low cost. Though it might be able to charge a premium for its differentiated product, it has chosen to position itself as offering good value.
Product and Market
As discussed above, Bayou Nation’s product and market seem solidly in the Focused Differentiation Strategy quadrant. Although not exactly consistent, the company’s product and market positioning aren’t entirely in conflict with its sourcing positioning.
What does seem entirely out of character, though, is Bayou Nation’s founders’ interest in distributing product through Walmart. Walmart couldn’t be any clearer about its low-cost leadership approach to business. Logically, that is diametrically opposed to differentiated product sold to a focused market.
While the mismatch may appear plain as one looks across these diagrams, I am sure that I and many others, having ingested bigger-is-always-better assumptions, have made similarly conflicted choices and never recognized the incongruities.
Aligning Your Product, Market, and Channel
How do your channel choices align with your products and with your target markets? At Human Scale Business we are pleased to reinforce an alternative economic narrative focused on choosing narrower paths to sustain the kind of product distinction that thrives in long-tailed niche markets of today’s economies.
Yes, Bayou Nation’s Best Gumbo did succeed in placing its hallmark seafood gumbo in many Walmart stores in the Southern U.S. No, the company did not survive intact—and its conflicted channel-product choice was only one of the reasons.LEARN MORE