Make growth easier, with a robust Competitive Strategy

By Logan
Estop-Hall

What is a Competitive Strategy? 

A Competitive Strategy is an explicit decision as to ‘how’ a firm wishes to compete. In essence it is the positioning of a company in relation to its environment with the goal of maximising its capabilities and defending against both competitive forces and any potential competitive retaliation – to increase its profit potential.  

This article will provide a high level summary about Competitive Strategy and why they are important, and about the analytical frameworks a company could use to develop one. 

Growth is easier where your competition is not! 

Sounds obvious right? 

Having worked in growth and strategy development for almost 20 years now I have come to realise that business growth can be made far easier, by simply choosing to operate in a low competition environment. 

If you were serious about winning a sporting match you would want to:

  1. choose what sport to play?
  2. choose the stadium to play in? 
  3. choose your opponents?

If you could do the above, you would feel far more confident stepping into any match, and significantly reduce the risks of losing. 

Well, what if I told you can do the same in a business context? You can consciously select to play the game in a way that will increase your chances of winning, which in turn will materially reduce your capital expenditure, improve your performance and unit economics and ultimately deliver far better growth and business performance over the mid to long term. 

What is Competition? 

Before we can wax lyrical about Competitive Strategy, we need to understand what competition really is. And for that, you need to expand your thinking a little. 

Competition is the rivalry between companies that seek to acquire a greater proportion of the profit potential in an industry. 

When thinking about competition, you need to expand your horizon to industry level and not market level. Within any industry there are discernible, structural forces that have a major impact on the available profit both within the entire industry and to any one company, and understanding what those are is critical to being able to build a Competitive Strategy. 

Competitiveness is vital to a functioning free market economy, and should play a pivotal role in shaping industry dynamics and any business strategy. 

Why do you need a Competitive Strategy 

The world is changing, at an accelerated pace. The technology that is both a competitive pressure and operational advantage is shifting under our feet, therefore relying on anything other than a more foundational view of accessing profit potential is very short term. 

There are 5 main reasons any business needs a formal Competitive Strategy 

  1. It reduces the risk of failure, as you can anticipate competitor moves
    1. It is the equivalent of your business opening its eyes. What you can see you can move against. 
    2. You don’t want a spanner in the face, be like Patches O’Houlihan – “Dodge, Duck, Dip, Dive, Dodge” 
      • Patches from Dodgeball
  2. [real] Differentiation in the eyes of the customer
    1. If you’re actively developing your competitiveness in ways that are unique, you will have a superior differentiation in the eyes of your customers. 
    2. There are many ways to peel an orange – true. But it’s still an orange to your customers. Be something else.  
  3. Facilitates market expansion
    1. If you are truly competitive, at a foundational level, expanding to new markets becomes far easier. 
    2. Not only are you likely to be similarly competitive in the new market, but more importantly the very process of analysing competitive forces at play will enable you to spot important differences and take action before choosing to expand. 
  4. Directional rudder for all functional strategies
    1. Once the business has decided how to compete, all functional strategies should work to deliver on this. If not, you have directionless growth of your core functional strategies, which is a huge waste of resources and capital. 
      • competitive strategy in relation to functional strategies
  5. Increases profitability
    1. All the above go to increasing your profitability. Not only are you working your way to a greater level of profitability within the industry, but you’re more efficient in getting there. Your CFO should be 100% onboard with this. 

How to create a Competitive Strategy 

The first step in creating a Competitive Strategy is to understand you need one, and then to ensure you have widespread buy-in from the board and executive team. The outputs of this work will shape the entire organisation. 

Once you have buy-in from company leadership there are 3 main components of analysis within any Competitive Strategy development: 

  1. Industry Analysis 
  2. Competitive Analysis 
  3. Perceptive Competitive Analysis 

Industry Analysis 

Competitive Strategy is, in essence, the positioning of a business in relation to its environment and how to defend itself from competitive forces. This requires both awareness of the environment and strategy to migrate to a chosen position in that environment.

A foundational component of commercial strategy is understanding the economic pressures within an industry. Structural analysis of an industry enables the business to determine how best to develop to both take advantage of these determinants of success and then maintain its competitive position. 

Michael Porter is the GOAT in this area, and proposes 5 basic competitive forces (called the Five Forces Model) within an industry, shown below. 

5 forces model michael porter for industry analysis

The interaction of these various forces ultimately determine the profit potential of any industry. Think of them as currents in a river that push and pull to determine how the water flows down a river. 

Evaluation of these forces should be done in a structured way, enabling a business strategist to go deep and get to the cause of each. It will provide the business a better understanding of its competitive strengths and weaknesses, and where it is vulnerable from competitive moves. 

Each of the following should be evaluated independently, and synthesised at the end alongside the other core industry forces. 

1) Threat of New Entrants 

There is always a threat of new businesses entering an industry (your business might be one!), and the retaliation expected to that entry determines the threat levels of new entrants. 

To put it simply, if the retaliation to an industry outsider stepping into an industry is expected to be VERY strong then the threat of new entrants would be reduced – aka a high barrier to entry. The opposite is also true. 

2) Threat of Substitutes 

All firms within an industry compete with businesses offering substitute products from another industry. The performance of these products is related to the profit cap placed on the industry (i.e. the better the performance of the substitute product, the tighter the cap on potential profits within the industry). 

Evaluation of substitute products requires identification of products that undertake the same function, and often lead to nuanced thinking and far removed industries (think how Google Sheets and Microsoft Excel could be a substitute product for databases, CRMS, accounting software and many more!.  

If substitute products are identified, the choice then becomes a strategic one – how best to ‘head off’ the threat, and when? 

3) Bargaining Power of Buyers 

The ability of an industry to improve its profit potential is also affected by its buyers, who seek to reduce prices and increase the quality of the product. If these buyers are strong, then this can impact the cost structure and profitability of a business as it seeks to gain/maintain its competitive position relative to others. 

Ideally a business should seek an industry where buyers are weak.

4) Bargaining Power of Suppliers 

Suppliers to an industry have the ability to reduce profitability, therefore giving them power over the companies within it. Raising prices, simply reducing the quality of product or perhaps even extending the manufacturing cycle can lead to pressures within the industry that are not recoverable. Therefore suppliers have the potential to shape an industry. 

Companies should look for industries with weak suppliers. 

5) Rivalry Between Existing Competitors 

All competing firms in an industry are connected, ultimately being mutually dependent. A move from one will incite a reaction from another as they jockey to maintain and grow profitability within the industry – using various strategies (read about Strategic Groups below). 

Understanding how potential moves will incite reactions is important to understanding rivalry within an industry.

Competitive Analysis 

This is, oddly, the most misunderstood part of strategy development. Businesses seemingly undertake a cursory analysis of the competition, map them on some 2 dimensional graphs and ‘voila’ – they are done. 

I would encourage any business to have an ‘always-on’ approach to competitive analysis. Think of it like having your eyes open as you hurtle down a ski slope, looking for rocks, avalanches or beginner skiers way out of control! This is not a static landscape, you can’t just evaluate at the top of the slope, close your eyes and hope for the best. 

The same applies to the competitive landscape, startups get funded and enter industries, companies get new patents approved, new leadership starts with knowledge of an industry and can lead a business into a new competitive space. All of these are telegraphed ahead of time, and you should see these coming so you can make appropriate decisions. You should not be finding out about this in your Sunday newspaper! 

The main questions you’re trying to answer relating to all your competitors (ie all those than put pressure on your ability to acquire profit potential) are: 

  • What drives them? 
  • What are they doing? 

So we can answer one important question

What is that competitor likely to do in response to a variety of strategic moves? 

We evaluate each competitor on the parameters that are most important from the Industry Analysis (see above), to answer: 

  1. What are their future goals? 
  2. What assumptions do they operate under? 
  3. What is their current strategy? 
  4. What are their current capabilities? 
competitor analysis for competitive strategy

Perceptive Strategic Analysis 

So by now we should understand what the main forces within any industry are, and how each competitor is working to compete in the industry and their likely responses to various strategic moves. 

The next component is about abstracting away from the individual company to find groups of companies competing in the same way and on the same parameters. This enables: 

  1. The placement of your business within one of these strategic groups (if you’re already in the industry) 
  2. The identification of weak/strong competition groups
  3. The identification of strategic gaps (ie a combination of parameters that no one company is competing on (some called this a ‘Blue Ocean Strategy’). 
  4. A strategic path to the area of greatest profit potential for your firm, with a clear understanding of what competitive capabilities it needs to develop or downgrade to get there. 

Mobility Barriers 

Typically there are several core strategic groups within an industry. Much like at an industry level, there are entry and exit barriers to various strategic groups – making movement between strategic groups requisite of certain competitive traits. We call these mobility barriers, aka the barriers to movement between groups. 

Without the ability to overcome them, you simply can’t access the strategic group and compete. Therefore, movement between these groups (or setting up a completely new strategic group) should be a conscious decision at a leadership level. 

The opposite is true, in that once you know the mobility barriers within your strategic group you can double down to ensure you’re not being squeezed out of a strategic group.   

“So What?” 

So what? This is the best question, and something we ask ourselves daily at Daleth. 

Just because you have the information, does not mean anything. The most important thing a strategist can do is to synthesise the information. 

This requires pairing insight with proposed action. 

Insight + Action = Synthesis 

Strategy is inherently creative. With all the information from the analysis done above, a strategist now has to design the action plan, synthesising all the disparate information into a single coherent approach for a business to improve its competitive positioning. This is perhaps the most challenging, and yet most valuable, aspect of the whole process. It’s one of our main offerings here at Daleth

This is a brilliant post from Ameet Ranadive, an ex McKinsey consultant. 

Summary 

Not having a Competitive Strategy is like boxing with your eyes closed. You might knock out your opponent, but the chances are slim and you are very likely to end up exhausted, get a bloody nose or at worst end up on your back. 

boxer on back with bloody nose

Firstly, you need to know what forces impact the availability of profit potential across an industry. This will help you know where the power lies, what type of company makes all the profit and what type of company is squeezed. 

Then you need to get a full view of your competition, what their motivations and capabilities are and how they are likely to react to a range of strategic moves. 

Then lastly, you need to understand the core strategies at play within your competitive landscape and how hard it is to move between them. 

Once you have all this you can make real strategic choices about where you plan to compete, against what companies and in what manner. 

Remember, the best Competitive Strategy plots a route to success that does not rub up against large scale competition, instead it finds a quiet path to dominance and long term success.

Need help in building your Competitive Strategy?

Here at Daleth we help businesses grow, and Competitive Strategy is one of the cornerstones of our work. So if you need help in designing your firm’s Competitive Strategy, or want to talk to better understand it please get in touch via our website or just DM me on Linked here