Competition demystified
Streamlined business strategy
Description
Barriers to entry are the critical factor for business strategy. With barriers, firms can exploit advantages unavailable to rivals. Without barriers, strategy matters less - operational excellence becomes key.
When barriers exist, identify and manage interactions with competitors to fully leverage your advantage. Understand important outsiders and anticipate their actions. Develop a clear vision for the future.
Strategy complexity frustrates. Focus first on barriers to entry rather than equally weighing multiple factors. Barriers dominate, underlying potential entrants. Grasping their significance and operation is essential for effective strategy.
Table of contents
01Our competitive position
There are essentially three main types of sustainable competitive edge in business - privileged access to resources, customer preference for a particular brand, and production efficiencies from economies of scale. The first step in devising the optimal strategy is grasping what barriers prevent rivals from securing the same edge as current leading players. Market leaders' advantage stems from some mix of lower costs competitors can't match, exclusive customer access and loyalty, and much greater size conferring cost efficiencies. Firms can deter new entrants via aggressive pricing and superior service. Though proprietary technology offers temporary gains, rivals typically catch up. Customer allegiance requires high switching costs - new players must offset those. With economies of scale, a firm several times larger than its rivals has lower per-unit costs, allowing healthy profits at price points leaving others struggling. Scale advantages decline as markets expand, but still pack a punch alongside customer captivity.
The right strategy depends completely on the type and extent of edge. With no advantage, focus intensely on efficiency - the most profitable firm wins. Conventional wisdom says differentiate, but that rarely works alone - barriers to entry matter more. Branding has limits too - few translate it into exceptional profits. Barriers and advantages describe the same thing: incumbents' unique capacity. Last movers often temporarily benefit, but true edge requires barriers. Local conditions confer more durable advantage than global ones. Efficiency means controlling costs, generating returns on capital, maximizing bang for buck in key spending areas, and lifting productivity. Good management closes the performance gap between what's possible and actual. Gains come not just from pushing boundaries but better employing resources. With long-term efficiency gains, outstanding results emerge. Losing this focus causes problems.
02Market dominance assessment
In most marketplaces, no single company enjoys a decisive and sustainable competitive edge over the long run. As a result, strategic success depends largely on adeptly managing interactions with other firms, regardless of their size. Responding effectively to the initiatives of competitors becomes critical. Good strategy under these circumstances involves blending aspects of game theory, preemptive market entry moves, and cooperating or bargaining with industry peers.
When one firm can harness an enduring competitive advantage, it will dominate its industry and continually generate above-average returns over an extended period. In that scenario, business strategy is straightforward. The market leader aims to expand and exploit its advantage in every way possible, while everyone else focuses on operational efficiencies just to survive.
03Recreating reality through models
The "Prisoner's Dilemma" is a classic game theory scenario involving two criminals who are caught and interrogated separately. Each faces the choice to either cooperate by refusing to confess or negotiate a deal to testify against their partner for reduced jail time. This creates a temptation to abandon the collective interest and confess, especially if worried the other prisoner will confess first. Similar dilemmas frequently emerge in business competition. Consider two home improvement chains, Lowe's and Home Depot. If Lowe's opens a new store in a market dominated by Home Depot, how should Home Depot respond? Aggressively cutting prices or opening stores in Lowe's strongholds could spark a costly battle. Failure to respond at all however signals Home Depot won't react to further expansion. Lowe's must also weigh whether to concentrate on underserved markets instead.
Fortunately most commercial interactions evolve gradually, allowing adjustments towards cooperation over outright competition. Some approaches include: Avoiding direct comparison by targeting different customers or product niches. Airlines may schedule flights at different times, retailers cluster regionally, or specialize in non-overlapping products. Developing customer loyalty programs with cumulative rewards incentivizes staying versus switching. Limiting industry output or capacity means any price cuts won't gain market share. Adopting pricing policies requiring the same price be offered to all customers eliminates incentives to cut prices. Restricting purchasing negotiations to a short window limits playing suppliers against one another. Relying on industry social norms to discourage harmful pricing. Structuring rewards around profitability rather than sales growth or market share.
04Interrupting and replacing
Competing on price is common, but decisions about entering new markets against incumbents focuses more on production capacities than pricing. There are many examples:
Kodak attempted entering Polaroid's instant photography market in 1976. This lasted until 1985 when Kodak was ordered to stop production and sales for patent infringement, ultimately paying Polaroid almost $900 million in damages. Kiwi International Airlines started commercial flights in September 1992 with two leased planes on Newark routes. By its October 1996 bankruptcy, Kiwi had around $35 million in losses.
In 1985, Rupert Murdoch announced News Corporation would launch a fourth American TV network competing with ABC, CBS and NBC. He acquired six independent stations from Metromedia for $1.65 billion to establish Fox Broadcasting, synergizing with News Corporation's recent Twentieth Century Fox acquisition. Though succeeding with Fox Broadcasting, cable and other new technologies meant networks weren't as profitable.
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