“People in any organization are always attached to the obsolete - the things that should have worked but did not, the things that once were productive and no longer are.”
― Peter F. Drucker
Competition exists to choose who gets the prize when the prize can’t be shared. To prevail requires strategy, and businesses need to satisfy customers and reward capital providers. The business environment is about competition. Securing profitable customers, suitable capital, and qualified employees is not an accident; it is a consequence of strategy. The competition for customers, capital, or employees is typically a zero-sum game, there is only one winner. Every business employs a strategy though not always deliberate.
Conceptions of competitive strategy stir up a muddy mix of meanings and expressions. Even the most casual reader of business literature can’t help but feel bombarded with theories about strategy, touting success’s dependence on Big Data, Game Theory, Scenario Planning, Value Chains, Branding, and a long list of other ideas. To be clear, all-of-these ideas as well as others can contribute significantly to a business’s efforts to achieve a competitive advantage. These methods however are subordinate and have limited value in the absence of a solid foundation of competitive strategy. A sturdy business foundation requires understanding the basics necessary to produce sustainable advantage and superior performance.
Middle market companies rarely need overly complicated or sophisticated strategy methods. These companies do benefit from understanding strategy’s importance, how to develop strategy, and how to incorporate strategy into operations efficiently and effectively. A sound competitive strategy, effectively integrated into the business’s modus operandi, is unmistakable evidence of a business taking its maturity seriously.
What the Business Does (Outcome)
What the business does is a clear statement describing the customer satisfaction it creates. The standard is customer satisfaction not features or benefits. The following example illustrates the difference between customer satisfaction and product attributes. When Intuit developed its personal finance management software Quicken it could easily have conceived it as an accounting program for individuals. Most individuals maintain a checkbook and avoid anything remotely resembling accounting like the plague. Offering an individual automated personal accounting is trying to solve a problem most don’t have or want. Individuals want to pay bills, keep their accounts flush, and balance their checkbook. And about once a year they would like to eliminate some of the drudgery experienced preparing a tax return. Intuit, focusing on customer satisfaction and not a “product description” created the automated checkbook–-Quicken.
Satisfaction customers seek can take different forms. It is important that the individuals devoted to crafting strategy suspend personal bias by stepping into the shoes of their customer. Some customers seek economic satisfaction in the form of low price or cost of ownership. Others put higher importance on the value of time and hence look for usability or reliability. A different customer may place more importance on status or prestige looking for rarity or perceived quality. Or the customer may value social responsibility found with such attributes as sustainable materials, chemical free, living wages or contributions to worthy causes. All of these are forms of satisfaction customers seek and all are legitimate.
Who the Business Satisfies
Customers are people. Markets are abstractions. Relying on parsed demographic data from an attractive market produces an abstract composite caricature of an “idealized” customer. To the best of my knowledge, I’ve never actually met one of these people. Alternatively, conceptualizing a specific individual together with requirements and expectations reveals information that can be used to create a competitive advantage. Generalizing from the individual oftentimes produces unexpected markets. It doesn’t matter whether the satisfaction is delivered via product or service; or the customer is a consumer or institution. Every decision to buy is made by an individual (or perhaps several).
Why the Business is Different (Advantage)
To prevail in competition requires an advantage. Securing consequential competitive advantage starts with an understanding of what the business does and for whom it does it that is meaningful, effective and clear. Competitive advantage is the customer’s perception of the unique value that makes the business different. Customers have the choice to select a competitor, a substitute, or to do nothing. Any one of these alternatives means your business loses. So why will a customer select your business’s offering rather than one of these other alternatives?
Books, lectures, and other forums discuss the ideas, methods, and importance of strategy. This is a topic that can’t be discussed in 1,500 words or less. Suffice it to say, my goal is simple: business strategy is important. Adopt the basics and progress from there. Michael Porter describes three general competitive strategies: cost leadership, differentiation and focus. As an unapologetic Porter devotee, I will use these three generic strategies to offer a brief and overly simplified overview.
Cost leadership: An advantage the business achieves by its ability to offer its products or services at a cost less than a competitor. Using cost leadership as a source of advantage requires the business to tailor its entire way of doing business in a manner that allows it to maintain an overall cost structure that competitors cannot match. Contrary to popular thinking this doesn’t necessarily mean that all costs need to be minimized or that cost reduction is the panacea for success.
Differentiation: Businesses create competitive advantage when a customer can clearly perceive and value a difference. The complicating factor in devising differentiation strategies is the variety of alternatives and the temptation to do things that conflict. To illustrate a successful form of differentiation is the appeal to a customer’s desire for exclusivity or status; luxury cars are an easy example. Some customers seek products seeking to enhance an image of success or superiority. These customers will pay a premium for that privilege. I’ve seen on more than one occasion a business seeking to appeal to the status buyer but holding the steadfast belief that prices needed to be discounted compared to competing products. Big mistake. The status buyer is only satisfied with a product no else has, a discounted price may imply that the product will be accessible to everyone, defeating the purpose. This is not to say that pricing and managing costs are unimportant. Quite to the contrary, pricing and managing costs are always important. Premium pricing is not a license for frivolous spending.
Focus: Business can achieve a distinguishing and profitable advantage by focusing on a specialized segment of a market. Successful defense contractors employ specialized know-how pertaining to procurement processes, contracting, collections, and the appropriations process their customer use for future procurement. These companies build organizations that are profitably optimized to satisfy contracting requirements in an environment that is highly sensitive to cost. An interesting corollary is the difficulties successful defense contractors encounter trying to diversify and service private sector clients.
Successful competitive strategy and the advantages it creates require that these components be fully integrated into the way a business operates. Consider as an illustration of operational integration the recruiting function. The business seeking an advantage as a leader in technology innovation requires the ability to recruit and retain the most innovative and smartest people with recruiting becoming a critical competitive competency. Imagine yourself in a space capsule preparing to launch; you don’t want to be thinking that you’re sitting at the top of all the low-cost bidders – not a reassuring thought. I would much prefer to think that the smartest people in the world worked together to produce the rocket I’m sitting on. Customers have their own requirements and expectations of what they are paying for and want to believe that whatever that expectation, the business is structured to perform better than anyone else.
Developing a successful competitive strategy requires understanding how each component influences every activity the business needs to perform from the obvious examples such as pricing, developing products, and advertising to the not so obvious like recruiting, purchasing, and accounting. Meaningful competitive strategy affects everything. Thinking otherwise will result in second place in an environment that only rewards first.