Establishing a winning position in the marketplace is obviously critical to your company’s success. That position, however, must be based on a sustainable competitive advantage.
What constitutes an unbeatable advantage? There are two strategies:
1. You have consistently lower costs than your rivals. As long as your product or service maintains an acceptable quality level, this advantage leads to higher margins.
2. You differentiate your product or service from your competition. In other words, your company is unique because it delivers something your customers think is important. That allows you to command a premium price. And provided you keep your costs under control, the premium price translates into a superior return.
There’s 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 small niche or market segment.
In cars, for example, Toyota is the broad competitor while BMW and Mercedes-Benz are differentiate 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 to not choose — to try a little bit of everything — and thus have no advantage at all. Being stuck in the middle doesn’t work because all good strategies involve trade-offs. You generally can’t 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 five 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. Or those that involve the latest technology. Or those that are the most glamorous. Of course, it isn’t so.
The most attractive businesses are those that have high barriers to entry and the fewest substitute products or services. In other words, it’s hard for others to get into the business and customers don’t have too many choices of similar products. The more high-tech or high-glamorous a business is, the more likely a lot of new competitors will enter and make it unprofitable.
2. No Real Competitive Edge
For many companies, strategy means imitating their rivals, which is easy to do and gives managers a sense of security. But copycats have no competitive advantage. They’re 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 for their products 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 alone gives can’t 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 organization. That provides barriers to entry.
Sometimes small companies simply can’t 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. Compromising to Grow Faster
Remember People Express Airlines? The company discovered a price-sensitive market in the Northeast Corridor and developed an artful strategy for delivering no-frills air travel at rock-bottom prices. It started making a lot of money.
But then the company’s founder wanted to turn it into a major airline. People Express expanded nationwide and began adding services, including first-class seats. Pretty soon, the major airlines started paying attention and offered blocks of incredibly low-fare seats on each flight. People Express was unable to match them and was eventually blown away by the competition. Perhaps if the no-frills airline had kept its focus, it would still be profitable today.
5. Not Communicating 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.
The key to running a profitable business is to find your competitive advantage. Once you find it, hang onto your edge by avoiding these mistakes.