While some may only grudgingly admit it, competition is good for business. The presence of competitors means that there are plenty of paying customers around. Also, by creating choice, competition forces you to compete for your customers’ attention and money, which, in turn, improves your focus on what it is that makes your business and its products unique and valuable to your customers.
Equally, competition results in better business practices. By watching what your competitors do, you can learn about their business and, in turn, learn how to make your business more efficient. Having competitors in the market means you must continually stay one step ahead, which has a very positive impact on innovation and consumer demand.
But not all competition is good – or, at least, certain types of competition can be very bad for business.
Irrational competitors
The most dangerous competitor is one whose primary competitive tool appears to be aggressive price competition, either rapidly moving prices down or, worse, selling products or services below cost, in an apparent effort to win sales volume.
This issue is particularly acute for those industries being disrupted by the emergence of digital market channels. Witness, for example, the impact on the profitability of the music industry of peer-to-peer file transfer services, such as BitTorrent and LimeWire. By providing large-scale access to ‘free’ (albeit illegal) versions of music products, these services are decimating margins within the industry.
How can your business compete with an ‘irrational’ competitor who offers equivalent products or service below cost or for free?
The first step is to return to the basics of competitive strategy, which is defining your business goals and objectives. As Michael Porter has observed:
“Economic value is created when customers are willing to pay a price for a product or service that exceeds the cost of producing it. When goals are defined in terms of volume or market share leadership, with profits assumed to follow, poor strategies often result.”
Smart businesses shoot for margin, not sales volumes and market share. While huge top-line numbers might appear more impressive, Year 9 maths belies the myth of market share: it is just as profitable to sell 1,000 widgets for $50 with a $5 margin as it is to sell 5000 widgets for $20 with a $1 margin.
Where you face intense (even irrational) price competition from one or more competitors, it is important to refocus your efforts on developing a value proposition that delivers a benefit, or set of benefits, that is different from that of your competitors and that creates unique value for a key set of customers.
The music industry again provides a good example of this strategy at work. The band Nine Inch Nails, in recognition of the impact of illegal music sharing services on album sales, recently released a new album in digital format free of charge. Alongside this free product, however, the band released ‘special edition’ albums, featuring additional video and audio content, plus a printed booklet, aimed at a very specific consumer segment that valued unique content of this nature, and who were prepared to pay a significant premium (the ‘ultra deluxe’ version of the NIN album, Ghosts, sold out, even though priced at $US300).
Refocusing your efforts to target consumer segments for which you are able to create unique value, or which fall outside those segments targeted by price-driven competitors, will require strict discipline.
Usually it will involve making a series of trade-offs, such as ceasing development of certain product features, or abandoning certain market activities. The end objective is redefining your value proposition to avoid head-to-head competition with price-oriented competitors, and shifting your focus to those customers’ needs for which you have a competitive advantage in addressing.
It is also important to understand the underlying cause of the competitor’s apparent ‘irrationality’. It may be that the competitor is merely responding to competitive moves by other businesses – including, perhaps, yours.
You should review your recent market initiatives to determine whether they triggered the problematic response. You should also review how you are communicating your business’s strategy to the broader market.
If your competitors do not know, broadly, what your market objectives are, and how you intend to achieve them, then they may not be able to avoid ‘attacking’ you. Very few business leaders are, in fact, irrational, and if your competitors are able to mark out a discrete section of the market to play in, without going into head-to-head competition, they usually will.
Communicating your business objectives, including your source of competitive advantage and how you propose to use it, will allow other market participants to adjust their strategies accordingly, to avoid a ‘destructive’, zero-sum form of competition, rather than the constructive form of competition which is good for business.
Mark Neely is a lawyer, technology commercialisation consultant and author of ten books, including The Business Internet Companion. Read more on his Neely Ready blog or visit his LinkedIn profile.
