The competitive strategies

No business can grow without being competitive, and there are only a few simple rules to stick with to make that happen.

I am working with some people on a start up at the moment, but when looking into their business plan it really amounted to a “me to” business, as there are quite a few players in the industry. So I had to give them a five minute introduction to “competitive strategies and competitive threats”.

I might have previously mentioned the Harvard guru Michael Porter, who is looked upon as the world expert in this area – and he charges accordingly (I heard that when he was in Australia some years ago, he offered a discount price to the Victorian Government for a half a day of his time at $60,000!).

According to Porter, there are three competitive strategies (and so far I haven’t come across a fourth!). The first is basically to have a niche market, which gives you some exclusivity. There are not a lot these days, and technology is constantly lowering the entry barrier to industries.

The second is called “cost leadership”. This is not what it sounds like, and to make the point, it does not mean price competitiveness. Lowering the price of a product is not in itself a competitive strategy.

It may be that the cost of bringing the product to the market is the same for competitors, in which case there is a limit below which it is impossible to lower the price without suffering losses.

Cost leadership, on the other hand, is that ability to produce the same or an equivalent product at a lower cost to your competitor. A business that is a cost leader, in that it can produce a product of equivalent quality to that produced by a competitor but at a lower cost, has an enormous advantage.

For instance, in a price war it can lower its price further than its competitor without losing money. Its margins will be greater than its competitor and this enables it to spend more on research and development; marketing; product innovation; value added and advertising etc, than its competitor.

The third competitive strategy is called “differentiation”. This involves differentiating your product and delivery from that of your competitor in a way that makes you more attractive to the customer than the offering of the competitor. Apple’s iPhone is an example.

However, closer to home I can recount that I recently came across a medical clinic in which the owners were contemptuous of the fact that their competitor provided tea or coffee to their patients on arrival and a “help” kit on their departure that put them in the picture of their clinical situation and the course of treatment they had to pursue. (These owners looked upon this approach as a gimmick).

Guess what! When we talked to the referring clinicians in the area, they all preferred to send their patients to the tea and coffee clinic because they not only got great feedback from their patients but they also found that they were treated by the competitive clinic with the same deference they extended to their patients. There was no price difference. The tea and coffee business was growing and the other clinic was going backwards.

All of this applies whether you are a start up or have been in business forever. Businesses are dependent upon their next sale and not the previous one. The next sale will be achieved to the extent that you have mastered one or more of the competitive strategies.

Nokia is the major supplier of mobile phones in the world and it is located in one of the smallest countries in the world (population 5.2 million) and one of the more remote countries in the Western economy. Nevertheless, it has grown this enormous enterprise by simply being a cost leader and using its cost advantage to constantly bring about product innovation and participate aggressively in the market place. These days, people often think in terms of “Nokia” rather than mobile phones – “I want a Nokia.”

Similarly, people who download music (or the modern day equivalent, if there is such a thing!) want an iPod because Apple has differentiated the product to the point where people don’t even think of a competitor.

So, if you are starting out or simply looking to move forward from your existing state of business, run a ruler over your business or your business plan and give yourself a mark as to how you are handling your competitive strategies. There are only three, so it shouldn’t be much of a burden, but the outcome could be illuminating.

Competitive threats will have to wait another day.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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