Strategic planning is central to management study. It defines the long term direction for the company and all other business functions orbit around their established strategies. This article studies how a company formulates business-level strategies, optimize their competitive positioning and obtain a competitive advantage over their rivals. In order to further illustrate this management issue, this article investigates into the successful competitive positioning of a leading Hong Kong imported food and daily necessity retailer, the 759 Store 阿信屋. Despite 759 Store has a diversified range of business, this article focuses on its major business function as an imported packaged-snacks retailer. The chain-store has grown exponentially since its establishment in July 2010. By November 2014, it has 210 stores across Hong Kong and has significantly increased its market share in the industry.1 This achievement should be credited to the unique competitive strategy the company has adopted.
Michael Porter’s Generic Competitive Strategies analyzes how a company should formulate their business model to give them a specific form of competitive position in the market. The three strategies are low cost strategy, differentiation strategy and focus strategy respectively. Low cost strategy drives company to lower their cost and obtain high efficiency, so they can attract customers with lower prices than their competitors. Differentiation strategy, on the contrary, tries to satisfy customers’ needs in a way that its competitors cannot and it has the competitive advantage by charging premium prices.
Focus strategy suggests firms specialize in few segments or target market to attain cost advantage or differentiation advantage in the market.2 759 Store’s competitive strategy, however, has adopted both the differentiation and the low cost strategy simultaneously to attract and retain customers. On one hand, it has successfully challenged the cost-leaders in the industry by providing more differentiated products. On the other hand, it has minimized its costs so it charges differentiated products at a relatively low price. The two sections below could illustrate how 759 Store achieves this distinctive strategy.
In the aspect of differentiation strategy, companies offer customers with the unique products which are extraordinary or high quality. The uniqueness of the products is usually highly valued by the customers. Thus, those products are competitive in the market and are difficult to be replaced. This section is going to examine how 759 Store differentiate their products from others snacks retailers.
(1) Never selling the products which customers can find in chain supermarkets 759 Store differentiates itself from other competitors by providing uncommon products in the market. 759 Store cannot race their cost to the bottom when compare with ParknShop and Welcome, the two well established cost leaders. In order to survive under the oligopolistic market, the company differentiates itself by avoid selling the same products that the two major supermarkets are already selling.
759 Store would rather search for new products instead of competing directly with those supermarket chains.3 By selling different brands and types of snacks, customers cannot use the retail price to directly compare the products in 759 Store and supermarkets. Also, when compared, customers would find the products in 759 Store more trendy and unique than the products in the two traditional low cost leaders. (2) Exclusive sources of goods
759 Store differentiates its products by securing the exclusive source of goods by all means. The company first made headlines in 2011 when one of the local biggest distributor, Swire Group, refused to supply Coca-Cola to the store, claiming its retail price was too low which would harm supermarkets’ profit . After the incident, packaged-snacks imported directly from Japan accounted for over 60% of the main sales of 759 Store.4 Therefore, Coils Lam Wai-Chun, the CEO of 759 Store, have handled business connections with Japanese suppliers with great care. He has connected the first Japan snacks supplier in HKTDC Food Expo in 2011 by himself.5 In Japan, local products for domestic sales are not allowed to be sold to foreign companies.
Thus, Lam even went to Japan in person searching for suppliers and set up shadow companies in Japan sourcing for any popular and fair-price snacks that are not yet known to the Hong Kong market.6 That is the reason snacks sold in 759 Store always catch up with the trend in Japan. Thus, 759 Store provides exclusive products which cannot be found in its competitors’ stores. Furthermore, 759 Store establishes a stable and strong relationship with its suppliers in Japan, which are mostly small and medium enterprises. Some Japanese suppliers have even promised to supply their products exclusively to 759 Store as a gesture to thank the company’s support during the recovery hardship after the 311 Earthquake in Japan.7 All these business connections helped 759 Store to secure its exclusive sources of goods from Japan.
(3) Higher autonomy on goods selection through bypassing local distributors Today, more than 95% of products sold at 759 Store are imported directly bypassing distributors in Hong Kong.8 Therefore, 759 Store enjoys greater autonomy on deciding the variety of products they sell. 759 Store successfully develops a new market segment providing new and popular Japanese snacks to Hong Kong people. The self-reliance nature of 759 Store in terms of product purchasing enables the company to maintain its unique choice of trendy and diversified goods, thus differentiating itself from its competitors.
(4) Diversification of goods and fast moving trend
759 Store differentiate itself from others by diversifying its choice of goods and keeping its shopping shelves updated with new goods. Assuming customers from Japan, Korea, Taiwan and Hong Kong all share the same trend and taste, the item selection of 759 Store is based on the seasonal snack sales in Japan. The company only retains its top-500 sales items on its shelves and imports these items again.9 The rest of the products are purchased according to the sales trend of snacks in Japan every week.
The sales cycle for each snack product is around 3 months only.10 As a result, customers can always be surprised and refreshed by new snacks while enjoying their preferred snacks. The company has successfully differentiated itself from some traditional differentiators, such as Okashi Land零食物語. Both snack stores differentiate themselves from the cost leaders by selling imported snacks from Japan. However, the fast market reaction, diversification and regular replacement of products make 759 Store offers a higher value to customers than its rivals, as 759 Store’s products are more responsive to customers’ preferences.
Low Cost Strategy
Though 759 Store uses a lot of tactics to differentiate itself from its competitors, the company still manages to keep their operation at low cost. Hence, the company does not need to charge their customers a premium price for the extra differentiation strategies. This section would explain how 759 Store do everything possible to lower its cost structure and develop its competitive edge against the cost leaders in the market.
(1) Economies of scale through rapid horizontal expansion
Horizontal expansion is a growth strategy that expands within the same stage of the production process. 759 Store experienced rapid horizontal expansion which it has opened 210 stores in 4 years. Through rapid horizontal expansion, 759 Store benefits from several economies of scale – the reduction of long run per unit cost when the scale of production of a company has expanded. One significant average cost advantage is that the company has increased their bargaining power when purchasing from suppliers. If the scale of the company is small, it cannot enjoy the wholesale price offered by the suppliers.11 After enlarging their scale of operation, 759 stores received a reduction in average input price and transportation cost by more than 10%.12
(2) Cost reduction through backward vertical expansion
Backward vertical expansion is another growth strategy 759 Store practices to reduce the cost. By becoming companies’ own supplier, business can control its inputs and help them to provide more secure transaction.13 Due to the exclusive culture of the Japanese snack production industry, Japanese companies only supply their goods to local companies. To address this problem, 759 Store has to set up their shadowing companies in Japan to take up the functions of distributors. As 759 stores purchase the goods directly from the snack manufacturers without passing through any distributors and wholesalers, they could enjoy a lower import price and maintain a steady input supply by themselves. This in turn reduces the overall cost of production by integrating different business stages of business functions.
(3) Effective inventory management
The storage and management of inventories could be a huge source of expenditures for retailers. Packaged snacks are perishable and thus requires accurate inventory management In order to reduce inventory cost while diversifying its products, for each new product, 759 Store would first import 2400-3000 pieces of them to Hong Kong. The company then experiments the market reaction to the product and decides whether to import the product in bulk or not.14 This practice has greatly reduced the risks of stocking up unpopular goods in the warehouse, therefore reducing the cost for inventory storage.
(4) Less costly shop location choice
When it comes to choosing shop location, 759 Store does not chase after prime retailing locations with expensive rent. Instead, it usually opts for large, more remote and less visible shop locations in residential neighborhoods. The per-foot-square rent at these locations is generally cheaper and 759 Store can bargain for a lower rent as the shop’s presence can improve pedestrian flow nearby.15 In fact, most 759 Store’s customers are willing to sacrifice convenience for lower price of products as they usually purchase a lot of goods at once.16 According to the annual report of 2013-14, rent for shops only accounted for about 9.8% of the retail revenue. 759 Store successfully lowers its costs by choosing less popular shop location and turns it to its own advantages.
(5) Motivate employee: pay more for employees to work more
The 759 Store regards its employees as important assets of the company. It can help reduce the operating cost of the company by successfully motivating its staff to enhance their productivity. It always stresses the provision of a reasonable salary and fringe benefit to its staff. For example, when the existing minimum wage in Hong Kong is $30/hour, 759 Store can pay its staff up to $38/hour. A manager may get an attractive salary up to $30,000 per month.
17 The CEO of 759 Store believes that a reasonable pay will increase working incentive of the staff to provide better service performance and deliver excellent service to the customers. According to the annual report of 759 Store, one can find that even though the company is renting larger stores, the number of frontline staff is similar as previous year which is approximately 4.1 staff per shop.18 Although the per-labor cost is higher, the overall cost on labor is reduced because the staff is more productive and the company can hire less labor.
(6) Inexpensive advertising and communication strategies
759 Stores adopts useful but inexpensive marketing strategies to gain its reputation. Unlike its competitors who promote their brands through traditional advertising channels, like newspaper, radio and television advertisement, 759 Stores uses word of mouth to promote its brand. Since their CEO has a good relationship with the media, he has been repeated interviewed by numerous press and television programs. It has helped 759 Store to gain exposure in the mass media without paying a penny. Also, 759 Store utilizes the technology to communicate with its customers, especially the internet platform like Facebook and blog. These platforms provide channels for 759 Store to communicate and respond to its customer directly. All these measure are cost-minimizing, yet they are very effective.
In a nutshell, 759 Store has developed its competitive business position by adopting features from both the differentiation strategy and the low-cost strategy. On one hand, 759 Store differentiated itself from traditional cost-leaders by providing exclusive, highly diversified and trendy goods to its customers, through exclusive sources of imported goods and autonomous purchasing practice. It has also avoided direct competition with the cost leaders on identical items. In terms of responsiveness to customers’ taste and catching up with trends, 759 Store’s performance is even superior to the traditional differentiators in the industry.
On the other hand, the company has adopted the strategy to lower its cost structure, therefore it does not has to charge products for premium prices even extra values has been added to its products. It has lowered its per-unit cost by economies of scale through rapid horizontal and backward vertical expansion. Other costs are being lowered by having better inventory control, choosing less costly shop location, using unconventional advertising methods and cutting overall labor cost by incentivizing individuals to achieve higher productivity. Some scholars identify this mixture of strategies as the broad differentiation strategy.19 The competitive advantage of companies adopting this strategy is that the company can offer customers quality products at reasonable prices.
As 759 Store has demonstrated, it has chosen a level of differentiation that gives the company on the market segment it has targeted. Besides, they have achieved this in a way that has allowed them to lower their cost structure over time. Though it has higher cost than the cost leader, as well as less differentiated products than the differentiator, 759 Store offers more value than its industry rivals, and therefore threatening both the cost leader and the differentiator. In the case of 759 Store, ParknShop, the traditional cost leader in the industry, has even referred to the business model of 759 Store and opened a subsidiary brand in order to compete with 759 Store.20 It is a proof that 759 Store has successfully weakened the competitive position of its rivals by adopting the right strategy.
The successful competitive positioning of 759 Store gives insights to future managers on strategic planning, especially regarding how to enter an oligopolistic market. 759 Store has found its unique competitive position to create a ‘third way” in the oligopolistic packaged-food retailing market, which was dominated by two traditional cost leaders. By adopting the broad differentiation strategy, 759 Store achieved rapid growth rate of stores and increased its market share steadily in a very short period of time. The successful identification of and expansion into a specific market segment has allowed 759 Store to spread out geographically in Hong Kong quickly. Also, this model cannot be imitated quickly by its competitors. Hence, it is a business model which a lot of companies in the growth stage of their business might want to model upon. We can also find the practices for 759 Store to pursue differentiation and low cost strategies are very innovative.
The company’s unique understanding of market taste and purchasing culture has enabled it to come up with efficient and effective strategies never adopted by its competitors. The differentiation by trendiness and the cost minimization through shop location choice are good example of the creative strategies 759 Store has adopted. Moreover, the company’s culture of giving genuine respect to their employees and suppliers has even given 759 Store special competitive advantages in the market.
The business model of adopting broad differentiation strategy, however, is not without risks. In order to achieve this distinctive competitive positioning, 759 Store has developed a number of potential risks. The company has an unhealthy amount of debts due to rapid expansion, which makes the company vulnerable to economic downturns. Besides, when compare with the differentiators and the cost leaders, the profit margin of 759 Store is significantly narrower. Profitability could be sacrificed during the growth stage of the company, but we foresee that the company has to adjust its competitive strategy in order to create a sustainable business model in the future.
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