Establishing a winning position in the marketplace is obviously critical to your company’s success. That ranking, however, must be based on a sustainable competitive advantage.
“How does your business gain an unbeatable advantage? There are two choices:”
Keep prices lower than those of the competition. As long as your product or service maintains an acceptable quality level, this advantage leads to higher margins. Differentiate products or services from the competition. In other words, your company stands out because it delivers something your customers think is important and unique. That allows you to command a premium price. Provided you keep your costs under control, that premium price translates into a superior return.
There is one other important variable in strategic positioning —competitive scope. Some companies seek an advantage in what might be called a broad scope by serving all types of customers, offering a wide product line and operating in many geographic areas.
Alternatively, companies with a narrow scope focus on a limited range of customers, products, or geographic areas and dedicate all their efforts to that niche or market segment.
In cars, for example, Toyota is the broad competitor while BMW and Mercedes-Benz are differentiators in the premium segment.
There’s room for several successful strategies, as long as each company makes a different choice from its rivals. The worst error is not to choose — to try a little bit of everything. Then your business has no advantage at all. Being “stuck in the middle” doesn’t work because all good strategies involve trade-offs. You generally cannot be both low-cost and differentiated because being unique at quality or service usually involves higher expenses.
Any strategy, of course, is only as good as its execution. Here are four other mistakes that business owners frequently make in applying strategic thinking to their competitive situations.
#1: Misreading Industry Attractiveness
Entrepreneurs have a tendency to think the most attractive industries are those that are growing the fastest, involve the latest technology or are the most glamorous.
In reality, the most attractive businesses are those that have high barriers to entry and the fewest substitute products or services. With those conditions, it is hard for others to get into the business and customers have few choices of similar products. The more high-tech or high-glamour a business is, the more likely a lot of competitors will enter and make it unprofitable.
#2: Lacking Any Real Competitive Edge
The key to running a profitable business is to find your competitive advantage. Once you find it, hang onto it. For many companies, strategy means imitating their rivals. That is easy to do and gives managers a sense of security. But the copycat strategy offers no competitive advantage. Copycats are stuck in the middle of the pack. To succeed, they need to find different ways of doing business. That is both risky and hard.
#3: Pursuing an Unsustainable Advantage
A lot of firms succeed initially because they discover a hot new product or service — for example, a new piece of software. But they’re so busy getting off the ground and finding buyers that they forget what will happen if they succeed. A successful software program is usually imitated in a matter of months. So the advantage it gives cannot be sustained. Real competitive benefits in software come from servicing and supporting buyers by providing regular upgrades and getting a company online with customers so it depends on your organisation. That provides barriers to entry.
Sometimes, small companies simply cannot sustain an advantage against rivals. In this case, it would be wise to regard your business as an investment rather than an ongoing institution. Get in, grow, and then sell out.
#4 Failing to Communicate Your Strategy
In a lot of entrepreneurial companies, the CEO thinks up a strategy and never tells anyone else. But without an explicit strategy, how can you test the assumptions on which it rests? How can you modify it over time?
To develop an explicit strategy, you don’t need a planning staff or even a formal planning process. All you need to do is write it down and talk about it with your key managers, directors or close counselors.
One of the fundamental benefits of communicating a strategy is that it creates unity, or consistency of action, throughout your company. Every department works toward the same objectives.