Competition & Competitive Dynamics

Understanding how, where, and when to compete is like playing a game of chess. There is no one-size fits all strategy. The strongest players continuously adapt to each competitor’s moves; as well as take radical actions to redesign the playing field to their advantage.

1. Competitive Strategy

1.1 What is Competitive Strategy?

  • Competitive Strategy: “Concerns the specifics of management’s game plan for competing successfully and securing a competitive advantage over rivals”.
  • According to Michael Porter, there are five generic competitive strategies:

 

Generic Competitive Strategies.png

1.2 Strategy in Context

Let’s look at each competitive position:

  • Low-Cost: Offering lower-cost products than rivals; i.e.  outperforming your rivals on ‘essential’ value chain activities such that your costs are lower and your profits are higher. 
  • Differentiation: Being unique in ways that your customers value. 
  • Market Niche: Focusing on a narrow target of the total market and serving a particular subset of their needs. 
  • Best Cost: Satisfying buyer expectations on a subset of key attributes.
Strategy When to? When not to?
Low Cost
  • Buyers are price-sensitive
  • Low switching costs
  • Commodity like products
  • Price cut > Cost Advantage
  • Unsustainable advantage
  • Easy to copy
Differentiation
  • Diverse buyer preferences
  • Differentiation opportunities
  • Rapid product innovation
  • Expensive over-differentiation
  • Buyer indifference
  • Easy to copy
Market Niche
  • Niche is large, growing, and stable
  • Leaders unable to serve niche
  • High threat of new entrants
  • Shifting buyer preferences
  • Intense in-niche rivalry
Best Cost
  • Value-based buyer preference
  • Superior value chain efficiency
  • “Essential differentiation” at a low cost
  • Hybrid approach fails to build a competitive advantage
  • Deficient capabilities and inefficient value chains

For more on Competitive Strategies:

2. Adapting to Industry Change

There are 3 general causes for the industry to change:

  1. An industry incrementally grows and evolves along the Industry Life Cycle
  2. An industry is disrupted through radical innovation or discontinuous technological change. 
  3. An industry changes due to radical competitor actions.

2.1 Incremental Innovation

All industries follow a typical life cycle pattern:

industry-life-cycle

Along each stage of the industry life cycle, Porter’s Competitive Forces change and so should the elements of your competitive strategy: 

  1. Startup / Introduction: Niche-Competition. Competitors are few and costs are high.
  2. Growth: An increase in buyer preferences leads to differentiated competition. Broader markets.
  3. Maturity: Market consolidation. Cost-competition. Profit maximization.
  4. Decline: Decline in market demand. High threat of substitutes.

An example of how a company’s competitive strategy might change over time to best compete in the industry might look something like the following: 

strategy-and-industry-life-cycle

2.2 Disruptive Innovation

Sometimes, an entire industry is disrupted through a discontinuous technological change which essentially changes the attributes and value proposition on which products and companies compete. 

  • According to Clayton Christensen, “a disruptive innovation is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products and alliances.”

What does disruptive/radical innovation cycle look like?

disruptive-innovation


What happens to competition?

  • Extreme demand and high technological uncertainty
  • Increasing amount of new entrants, which later on consolidate
  • Rapid product innovation cycles
  • Continuously shifting set of buyer preferences
  • Obsoletion of the ‘resources and capabilities’ of incumbent firms

2.3 Radical Competition

Industries may also change as a response to radical actions taken by competitors.

Examples include:

  • Copa Airlines offers a budget-airline  Shift from customer-focus to operational  efficiency orientation. 
  • McDonald’s offers high-end McCafé → Changes in traditional customer segments. 
  • Google buys android entering phone industry → Shifts from product to plaftform offerings.
  • Tesla sells directly to consumers → Innovation in marketing/distribution channels

3. Changing your Competitive Strategy

3.1 First Mover vs. Fast Follower

Time to market can play a significant difference in developing a sustainable competitive advantage over your competition. Your strategy should reflect a conscious decision between being a first mover into a new industry; or waiting to be a fast follower and leveraging the foundations set by previous competitors. 

When to move first?

When the pace of technological change is slow and the market is growing fast, there is an opportunity to build a first mover advantage. Some strategic moves for building a first mover advantage include:

  1. Develop a technological edge over competitors
  2. Build exclusive resource channels
  3. Build customer loyalty; thus increasing the barrier to entry through high switching costs

When to follow fast?

When the pace of technological change is fast; it is best to take the position of a fast follower. In doing so, you can:

  1. Leapfrog competitors products by offering the next generation technological product
  2. Reduce the learning curve by taking advantage of your competitors mistakes

3.2 Offensive vs. Defensive

Changing your strategy often requires shifting back and forth between offensive and defensive positions.

Playing Offense

  • Offensive: aggressive moves to gain market share and build a competitive advantage over rivals.
    • Reposition and redesign the product along a new set of features and use cases
    • Radically redesign the value chain to eliminate a high-cost activity
    • Change the playing field
    • Rescale the industry from niche to broad, and vice-versa

Playing Defense

  • Defensive: protective moves to secure market share and reduce the risk of competition
    • Buy out the competition
    • Diversify your product and service portfolio
    • Lock out the competition through the use of contracts, patents, and regulations

3.3 Changing Scope of Activities

Another way to respond to competitor activity is to increase or decrease the scope of activity currently being performed by your company. Examples include:

Strategic Alliances

  • Involves sharing resources, knowledge, or some sort of competitive advantage.
  • This is useful when you want to make up for the lack of a valuable resource and leverage ‘complementary’ competences. 

Mergers & Acquisitions

  • Involves combining the operations of 2 different companies; with the goal of achieving a competitive advantage previously unobtainable. 
  • Examples include:
    • Increasing distribution reach by expanding geographic region
    • Expanding the product line by leveraging others research and development
    • Achieving operational efficiency by centralizing value chain activities
    • Gaining access to technological innovation by acquiring a first mover

Forward Integration

  • Involves moving the value chain closer to the customers
  • Benefits:
    • Better market visibility of customer needs allows for increasing differentiation opportunities
    • Increased control over customer experience

Backward Integration

  • Involves moving the value chain closer to suppliers
  • Benefits:
    • Higher profitability by squeezing out supplier margins
    • Increased control over the quality control of raw materials

Outsourcing

  • Involves contracting an external company to deliver on a value chain activity
  • Benefits:
    • Enables the company to focus on developing its competitive advantage
    • Enables the company to leverage out-house expertise

Main Takeaways

Competition isn’t easy. It’s neither a ‘pick and stick to it’ kind of game. Becoming and remaining competitive boils down to matching your company’s competitive strategy to the realities of the market. Most importantly, being competitive is about maximizing the advantage achieved from your company’s resources and competencies.

That’s it for now! I hope you’ve enjoyed this final post and series on Strategy and Competition.

Cheers ‘till next time!

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