Know Thy Rivals as Well as Yourself
Except for when economic competition is limited by government intervention, businesses regularly compete with other market participants for customer attention, engagement, and—of course—the share of wallet. When transforming their business, companies must integrate competitors’ expected strategies and tactics into their transformation vision and roadmap to stay ahead and be successful.
In the context of the Transformation Board, the term “competitors” focuses on the specific, antagonistic market settings an enterprise faces in its quest to fulfill its commercial or social purpose. A comprehensive assessment of your enterprise’s rivals (factual or potential) includes an analysis of their business models and competitive strategies, as well as the corresponding strengths, weaknesses, opportunities, and threats to one’s own business.
According to Michael E. Porter’s Five Forces Framework for analyzing competition, first published in 1979, a company’s ability to yield profits is impacted by five factors: the degree of existing industry rivalry; the threat of new entrants; the threat of substitutes; the bargaining power of suppliers, and; the bargaining power of buyers.
At the time of Porter’s writing, the economic and social environments of business had largely settled from the turmoil in the first half of the twentieth century caused by two world wars and an intermediate economic crisis. Given the relative stability of the determining factors, industry rivalry was often a battle that unfolded on a largely firm ground.
Increasing Market Dynamics Exacerbate Competitive Intensity
With increasing political stability and rapid technological innovation at the end of the twentieth century, globalization and digitalization developed as two megatrends that would shape the start of the new millennium. These trends proved to have a fundamental impact on the degree of rivalry in nearly every industry as market entry hurdles were reduced and new business models and solutions devalued existing products and services. Seismic shifts within the world of business were underway.
Today, continued technological advancement is generating a highly dynamic competitive setting. Businesses face an urgent and escalating need to evolve and transform their business models and increase operational excellence to stay relevant, competitive, and profitable. As well, they must do so in a precarious environment that is more prone to repeated disruption than ever before.
Therefore, it is essential for enterprises in transformation to consider their competitors’ strategies.
One-Dimensional Competitive Strategy Definitions: A Thing of The Past
Following his Five Forces analysis, Porter published in 1980 his view on generic competitive strategies, where he differentiated three different approaches: cost leadership, differentiation, and focus (niche) strategies.
In 1993, these strategies were further modified by M. Treacy and F. Wiersema, who refined and relabeled them as operational excellence, product leadership, and customer intimacy. In the January-February 1993 issue of Harvard Business Review, they describe the three dimensions as follows:
Operational Excellence – The term “operational excellence” describes a specific strategic approach to the production and delivery of products and services. The objective of a company following this strategy is to lead its industry in price and convenience. Companies pursuing operational excellence are indefatigable in seeking ways to minimize overhead costs, to eliminate intermediate production steps, to reduce transaction and other “friction” costs, and to optimize business processes across functional and organizational boundaries. They focus on delivering their products or services to customers at competitive prices and with minimal inconvenience. Because they build their entire businesses around these goals, these organizations do not look or operate like other companies pursuing other value disciplines.
Customer Intimacy – While companies pursuing operational excellence concentrate on making their operations lean and efficient, those pursuing a strategy of customer intimacy continually tailor and shape products and services to fit an increasingly fine definition of the customer. This can be expensive, but customer-intimate companies are willing to spend now to build customer loyalty for the long term. They typically look at the customer’s lifetime value to the company, not the value of any single transaction. This is why employees in these companies will do almost anything—with little regard for initial cost—to make sure that each customer gets exactly what he or she really wants.
Product Leadership – Companies that pursue the third discipline, product leadership, strive to produce a continuous stream of state-of-the-art products and services. Reaching that goal requires them to challenge themselves in three ways. First, they must be creative. More than anything else, being creative means recognizing and embracing ideas that usually originate outside the company. Second, such innovative companies must commercialize their ideas quickly. To do so, all their business and management processes have to be engineered for speed. Third and most important, product leaders must relentlessly pursue new solutions to the problems that their own latest product or service has just solved. If anyone is going to render their technology obsolete, they prefer to do it themselves. Product leaders do not stop for self-congratulation; they are too busy raising the bar.
Business Model Innovation Triggers Comprehensive Strategic Overhaul
Around 2010, another competitive strategy emerged, focusing on companies’ business models and assuming a broader, more comprehensive perspective on an enterprise’s competitive approach.
Business Model Differentiation – Even when competing in the same market for the same customers, and using identical products, companies can pursue different business model strategies to gain a competitive advantage. As enterprises are dealing with increasingly rapid changes in their economic and social environments, competitive dynamics escalate. Traditional business models, which focus on one of the three above-mentioned strategies only, become more steadily subject to market disruption.
Business model innovation and differentiation strategies as promoted by thought leaders like Strategyzer and BMI Lab suggest that companies should relentlessly reflect on their current business model and continuously engage in the process of reinventing their business models through developing, validating, and launching new business approaches. In doing so, they can develop both a higher degree of innovation and resilience. In fact, companies pursuing this competitive strategy do not develop on only one of the previous strategic dimensions of competition, but on all three—simultaneously.
In Dynamic Markets, Rivals’ Strategies Are as Relevant as One’s Own
Whether a company’s business transformation approach aims to improve on an existing competitive strategy, transition to a different one, or seeks to implement an entirely new business model, a company in transition is likely more vulnerable and should thus always closely monitor their (future) competitors (including their strategic moves). Competitive markets are established by multiple contenders pursuing the same goals; as such, each participant’s change in tactics may trigger a relevant change in the overall setting that can make your plans and your transformation roadmap invalid seemingly overnight.
By integrating a competitive perspective in your transformation strategy, our Transformation Board helps you identify and outline the impact of the economic and social environment on the competitive setting. We provide a comprehensive structure to develop, evaluate, facilitate, and improve your transformation roadmap in line with your transformation vision. When using it to evaluate your competitors’ strategies and tactics, ask yourself the following questions:
- How do changes in the economic and social environment impact the competitive setting?
- Do those changes provide options for new entrants to disrupt the markets?
- Which strategic moves are to be expected from your competitors, and how do they impact your own transformation strategy and approach?
- Which competitive strategy provides the most promising, resilient approach to your business transformation?