Strategic Positioning & Competitive Advantage

Let me be blunt. If you haven’t differentiated your business, is it because you are too scared to be different?

In a survey people said that there were more scared of public speaking than dying!

That’s a bit extreme but some people don’t want to be the centre of attention, all eyes on them, watching what they do and listening to what they say.

Or what about the nightmare of being invited to a fancy dress party, getting dressed up in your Superman costume and getting to the party and finding out that your hosts changed their minds and it has become a black tie do? Just thinking about it sends shudders down my spine.

It can be like that when you think about differentiating your business.

The entire point is that you are standing out, different… even exposed.

The big name gurus say that you must be differentiated to earn big profits.

You see the problems of not being differentiated in your own purchases each week. It is difficult to make a buying decision when all your options seem to be virtually the same along with the worry that you might make an arbitrary choice and it turns out badly.

Like me, you probably get frustrated when you can find plenty of people selling what you don’t want and no one selling what you do.

You may also see the problems of not being differentiated in your own business.

The symptoms are pretty common:

• You find it difficult to attract leads.
• Not enough of the leads you get convert into customers.
• You have far too many conversations about price and really feel the pressure to cut your prices.
• You find it difficult to say what’s special about your business.
• Your customers show little loyalty and are tempted away as soon as a better price is offered to them.
• Your best staff leave you and go and work for your competitors.

But there’s a feeling of safety about being one of the crowd.

You have a chance – even if it’s a small chance – of getting an order from anyone who enters the market because you haven’t made the tough decisions of ruling anyone out.

There’s a feeling of safety of doing what everyone else is doing.

• Your competitors have a website so you have a website.
• Your competitors advertise in Yellow Pages so you advertise in Yellow Pages.
• Your competitors advertise in the local newspapers so you advertise in the local newspapers.
• Your competitors add the special widget to their product so you add the special widget to your product.

There’s a glimmer of sense and a lot of madness in this approach.

It is sensible to look at your competitors and see what seems to be working well and to work around the theme.

If a lot of business is done through the Internet, then you should probably have a website if you can make it special.

But the world doesn’t need a lot of clones in any market.

We don’t need Microsoft 2 because we’ve got Microsoft.

Or Google 2 because we’ve got Google.

Or Apple 2 because we’ve got Apple.

Or Starbucks 2 because we’ve got Starbucks.

Or Aston Martin 2 because we’ve got Aston Martin.

The world doesn’t even want another Paul Simister and there’s not much of me to go around. Crazy I know but that’s life.

But we do want variations on a theme.

A PC operating system that doesn’t crash so often or slow the processor down.

A place to have afternoon tea with the emphasis on the quality of the tea.

A fancy car that James Bond will drive and I can afford to buy without cashing in my life savings and selling the house.

Clone businesses survive because the cloned business is too busy or too expensive (mmm supply, demand and prices are linked – that’s interesting).

But what happens when the market dips down, like in these tough times, the business that is being copied still attracts plenty of clients because they are still first choice. The copies lose business and being near the bottom in a declining market is a very vulnerable place to be.

Perhaps you shouldn’t be too scared to differentiate but too scared not to differentiate.

In this article, I will look at the issues involved with finding and selecting a niche market that will help your business to attract, convert and keep customers.

What Is A Niche Market?

A niche market is a small segment of a bigger, more general market that you can specifically target in your marketing and sales efforts. Done right, niche marketing goes even further because it completely affects the way you design and operate your business.

Defining a niche market needs me to define a market.

A market is a group of customers with specific wants and needs who decide to buy particular products and services for what those items can do for them.

By definition, the car market is the big group of people who buy cars.

That’s self evident.

But you need to go further.

The car market is the group of people who buy cars because they want or need flexible, personal transport that puts them in control of where they go and when they go.

That definition helps you to understand why people buy cars rather than use public transport as a viable substitute product or service.

Two seater sports cars is a niche within the car market for people who only need to worry about transporting themselves and possibly a passenger and want to do it in a certain style. Buying a sports car says a lot about the person and what he or she values. Even this niche can be to big which is why there is a one seater sports car (the Briggs Mono).

Why You Need A Niche Market

In some ways it makes sense to think that you want to target a big market rather than a small one. It gives you more customers who could buy your product.

There are two flaws in this thinking.

1. You should be more interested in the balance between demand and supply in a market. A huge market where there is already more supply than demand is going to be extremely competitive and it’s going to be difficult to make a profit. If demand is much bigger than supply, then prices and profits can be high and customers have little choice than to buy (although this may change over the long term as new competitors enter the market).
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2. A smaller, more focused market means that your product can match the wants and needs of the customers while a bigger, more general market has more diverse needs and you can struggle to convince possible customers to make the buying decision, which means you miss the marketing bullseye.

Effective marketing is all about getting the right marketing message or offer in front of the right customers in the right way at the right time or as often as necessary (the 4 Ms Of Marketing).

Having a niche makes it much easier to:

• get the message right
• get the choices about marketing media right
• keep putting the message and offer in front of the eyes and ears of possible customers.

I can’t emphasise enough how important it is to see marketing as a process where through a series of contacts you turn someone who has a general problem, want or need into someone who trusts you enough to give you money for the product or services you can provide. It rarely happens in one contact or touch unless the problem is urgent.

The Three Big Issues To Confront When Choosing Your Niche Market

In my article, Will Your New Business Succeed? I talked about the three big risks:

• Demand risk
• Competitive risk
• Capability risk

All three need to be considered when you are looking to choose your niche market.

Thinking about the demand risk for your niche market:

• is the demand real? Will customers pay enough money to solve the problem or to meet their wants and needs? You only need to watch a TV programme like Dragons Den to see would be entrepreneurs trying to solve a problem that few other people care about.
• is demand big enough to support your business? This is a particular problem for businesses who find that demand is restricted by location issues. Conversely the Internet has made many more niche markets viable because it can bring customers from all over the world to a business.

Competitive risk means facing up to issues like:

• Will the business be able to sustain a competitive advantage in terms of cusstomer alue that encourages people to buy based on a low price or superior value?
• Will new suppliers enter the market or are there effective barriers to entry to stop or delay competitors?

Capability risk looks at the issue of whether the business has the capabilities and competences needed to deliver on the promises made in marketing to attract and convert customers.

Niche Marketing And Differentiation

Are niche marketing and differentiation the same concept?

No I don’t think they are but the ideas are related.

When you select a niche market, you cut down the number of competitors and customers who will be attracted to that niche.

Perhaps there are 50 competitors in the general market but only 5 in the niche. Think about moving from looking at small hotels to 5 star luxury hotels in a small city for example. The differences between the two groups is much bigger than teh difference within the groups.

When you’re differentiated, you create a market of one. If the customer wants the value proposition you offer, he or she has to buy from you.

Some times, selecting a niche automatically differentiate you from your competitors because no other business has chosen to target that particular niche. Going back to the hotel example, perhaps there is only one 5 star luxury hotel in a small city.

How To Find Your Niche Market

At its core, your niche market defines:

• Who your customers are:
• What they want and need to buy

Occasionally it can also involve some of the other big questions that can be used to differentiate your business – where, why, how, how many and how much.

I think it’s useful to draw a customer value map of the market you are working within or thinking about entering. This will encourage you to think about the different price points that customers buy at and the different customer value alternatives.

Many people find it difficult to think abstractly about a market and what customers want and need and persuades them to buy. It’s easier to compare two offerings at a similar price point and to see how they are similar and different. This lets you focus on the factors of differentiation.

You can do the same exercise at a different price point (it can be useful to look at economy, mid-market and premium prices) to get a better idea of the dimensions of differentiation.

Let’s think about cars again as the brands are meaningful worldwide.

A Rolls Royce and a Lamborghini may have very similar prices and they both meet the need to combine personalised transport with status but the attributes of the customer value proposition are very different and aren’t in the same niche market.

The customer value attributes of these cars are very different in some ways but similar in others. Both are expensive, offer massive prestige and status (who says “he only has a Lamborghini or Rolls Royce”?) and have big powerful engines that make the cars much faster than the average car.

The Rolls Royce emphasises comfort, space, ride quality. The Lamborghini has head-turning looks, incredible performance and astonishing road-holding and handling.

It can be worth looking at where customers have to make compromises and how readily the customers accept the problems. Anyone who can afford a Lamborghini or Rolls Royce probably doesn’t need to care about fuel consumption but perhaps the person has green views and would prefer lower emissions and more miles to the gallon. Depreciation may also be an issue if the person wants to replace the car every twelve months. These issues can help to explain how products can be differentiated within a niche market.

Once you’re clear on the main dimensions of differentiation, you can look at the different combinations that already exist in the market.

It can be useful to map two dimensions on an x-y graph so you can see how the competitors fit together. A 2×2 or 3×3 matrix can give you enough detail or you can increase the number of categories along each axis.

Think about the car market and the number of seats and price for example. To my knowledge, there is only the Briggs Mono that has one seat, so whatever price point it occupies, there is a potential niche to either side in price. In the mass market sectors, there will be a lot of cars with four and five seats around the main price points. These niches already have competition.

However, if you take one of those differentiation dimensions (e.g. number of seats) and then combine it with another (fuel economy) you may find that what looked like a busy niche has an opportunity gap.

Remember, if you’re looking at a niche market without any existing competitors, you need to consider demand risk very carefully. Perhaps there’s a good reason why this niche market is empty. If there are already competitors and the niche doesn’t subdivide nicely on another factor of differentiation, you need to think about whether you can survive competition by having low costs by producing at the minimum efficient scale.

By this stage, you should have a few ideas for the niche market you want to target in terms of the who and want (and possibly the other big questions).

At this stage your niche can have competitors because you’ll be looking at how to differentiate it within the niche later on.

The concern is whether the niche provides the opportunity for profit over the longer term. You don’t want to target a niche and find that it disappears after a couple of years.

The two main strategy models to think about are:

• PEST Analysis
• The Five Forces Of Industry Profitability

Many people are familiar with these two techniques but they are often done badly and therefore provide little of the long term insight that may be available about how the niche market can develop.

The SKEPTIC Model combines them together which can be useful if you’re jaded about the two individual strategy techniques.

As you look forward, you may find yourself looking at different potential trends and perhaps a few either/or situations. If these look to offer significant strategic risk, you may need to use scenario planning to develop a clearer view of the future.

Once you’re satisfied that your proposed niche has a good future, you can start looking in more detail at your strategic options. This will usually involve summarising the strengths, weaknesses, opportunities and threats in a SWOT chart.

If you’ve got an established business, you need to look at how well it can serve the chosen niche market. The value chain is a useful technique for looking at internal capabilities and resources and how everything you do ties together to form your competitive advantages.

If you’re starting a new business in a niche, you have the luxury of designing your business model from scratch.

Either way, you need to try to avoid the mistakes made in differentiation and not let your mind fall into any of the niche marketing myths.

Summary Of How To Choose Your Niche Market

Choosing a niche market can be easy for some people. The answer is obvious based on their past knowledge and experience or a huge gap in the market that is crying out to be filled.

Other people find it much harder. It is scary to choose a niche market or to differentiate a business within a niche.

Selecting a niche means saying Yes to some combination of customers and products/services.

More importantly it involves saying No to many more alternative combinations.

The strength and big advantage of niche marketing is that it gives the business focus, hopefully laser focus on a particular set of customers, products and services and the underlying capabilities needed to deliver customer value at a fair price. It gives the business a strong vision and makes it easier to ignore opportunities that arise outside of the vision.

How Did You Select Your Niche Market?

I’d like to collect a series of stories about how businesses decided on particular niches so if you’ve got a niche, please leave a comment.

Do marketing and business strategy fit together neatly like two complicated jigsaw puzzle pieces in the picture of “successful business management”?

Or do marketing and strategy overlap in a topic called “marketing strategy”?

It’s an interesting question and one that I picked up from the Harvard Business Review on an article called The Best Companies Combine Marketing and Strategy.

The Debate – Marketing or Strategy or Marketing Strategy?

It seems that the writer, Roger Martin has co-written a book called Playing to Win: How Strategy Really Works and one of the reviewers on Amazon agrees that it’s a good book but feels that the authors talk much more about marketing than they do about strategy. Roger argues that the distinction between strategy and marketing has dissolved.

Marketing grew out of sales and how a business could sell more products and services to more customers. Certainly the old copywriters used to talk about advertising as salesmanship in print or salesmanship multiplied.

Strategy developed out of military strategy and theory and how opponents could be beaten for the wanted territory, in this case the contents of the customers’ wallets and bank accounts.

This view of customers as something to win from competitors feels wrong. Unlike land that can be occupied, customers have decisions made by people who think and feel.

Yes some people can be manipulated by unethical marketers but as the saying goes “you can’t fool all the people, all the time.”

Roger says “Good marketing and good strategy are both about making choices that build and maintain a particular set of capabilities that enables the company to outperform its competitors with a particular set of customers. ”

I agree.

In my article, What Is Strategy, I define strategy as

“Strategy is how you achieve your own objectives by winning the hearts, minds and business of customers by out-thinking and outmanoeuvring competitors.”

In today’s world where supply exceeds demand, you must have the customer at the very centre of your strategy, your marketing strategy and marketing.

To ignore the customer is to commit financial suicide except for monopolistic situations or where an industry has been built up where virtually all suppliers ignore the wants and needs of customers and the customers, through ignorance and inertia, acquiesce to this terrible treatment e.g. financial services like banking, investments and insurance.

Personally I think it’s useful to think about how the customer impacts on the business as marketing strategy. There are certainly strategic issues that don’t directly impact on the customer (e.g. conglomerate diversification to reduce product/market risk) and marketing that is much more tactical than strategic in nature.

But if strategy steps too far away from thoughts about meeting current and future customer needs and wants, the business has a problem.

And marketing where tactics diverge from strategy to chase a quick buck also risk diluting the implementation of an effective strategy.

I wrote the Six Steps Profit Formula because I believe that strategy and marketing are often not joined up. Too often strategy issues are ignored in the rush to “do marketing” but marketing issues and how you can create and capture customer value are ignored in strategy work based around PEST Analysis and the Five Forces Analysis that can be too abstract.

Who Owns The Responsibility For Strategy, Marketing and Marketing Strategy

In my view:

• Strategy belongs to the board of directors and the senior executive management team. Those roles are often split in large companies but in smaller businesses, they are combined. Where split, I’d argue that the executive management develop the strategy and the board review and challenge it.

• Marketing tactics belong to the marketing managers and staff working with the sales management and staff if responsibilities are split.

• Marketing strategy belongs more to the senior executive management team than it does to the marketing department. In strategy workshops it’s essential that the voice of the customer comes through load and clear and that needs to be captured directly from customer and market research and from those people who spend most time listening to and dealing with customers.

It gets messy. If the marketing department’s responsibility is to use effective marketing tactics to implement the marketing strategy developed by senior managers and if things don’t work out as expected, then who’s to blame?

Is it the strategy that is wrong and needs to be changed?

Or is the strategy right but the implementation of it has been badly done, in which case there needs to be an improvement in tactics but the strategy itself remains valid?

This is where the role of the marketing director is important. He’s been the person who was involved in the development of the marketing strategy and has direct responsibility for implementing it through tactics.

How Do You Think Marketing, Strategy And Marketing Strategy Fit Together?

I’m interested to know what you think. Do you see a clear divide between marketing and strategy or do you see some overlap?

I suspect some business schools have modules where there is quite a clear divide. Others may well have significant overlap between their strategy and marketing modules.

What about in real life?

Is it a good idea to have a one-day strategy workshop or planning workshop?

Why You Might Want A Strategy Workshop

Let’s imagine that your business performance has dipped or you fear that it might because of recent changes in environment conditions, customer needs or competitors.

And you get approached by a firm of strategy consultants, marketing consultants or even your accountants and you get offered the opportunity to have a one-day strategic planning workshop, either at your offices or at a nearby hotel.

Is A Workshop A Good Use Of Your Time?

Should you commit to a one-day strategy workshop? Is it a good idea? Well that depends.

It’s certainly a good idea to think about your business and how it can face up to the new challenges.

It’s a good idea to get your management team together and to shift their focus from the urgent:

• Can we get this order out tonight; what can we do now that Bloggs has told us they can’t deliver for two weeks;
• Can we still make our payroll payment if Jones doesn’t pay us…

to the important – how can we compete more effectively in the foreseeable future.

But whether a strategic planning workshop is a good idea depends on how big your issues are, how much things have changed since your last detailed review of strategy, how many options you have for the future and the differences of opinion in your management team.

The Problem Of A One-Day Strategy Workshop

The problem is that a one-day strategic planning workshop is by definition, done in a day.

I suppose you could see that as 24 hours but since you’re talking about the big, important issues for the future of your business, you need peoples’ brains to be in tip-top condition.

And one day strategy workshops can be frantic and frenzied.

To cover the subjects needed, they can gloss over the surface and give little comfort that you’ve really got to the bottom of the big dilemmas that you face.

A Typical One-Day Workshop Agenda

I’d expect you to have an agenda that looks pulls together some topics from the  following list:

1. Your current business and the issues you face
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2. Your objectives for the business, family (it is a family business) and personally
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3. What’s happening in the wider environment
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4. Your customers, what they want and how their needs will change in the future
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5. Your competitors, how they’ve changed since your last strategic planning workshop and how they are likely to change over the next year or two
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6. A performance review of your sales, margins and other important financials
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7. Your current strengths, weakness, opportunities and threats
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8. Your strategic options
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9. Selecting your preferred strategies
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10. A financial forecast of how the actions are likely to impact on your business to make sure that your business objectives will be met
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11. A gap analysis and further actions that need to be taken to close any gap between what you expect and what you want
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12. An action plan that identified what needs to be done, by whom and by when
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13. A communication plan for how you can share your intentions with the staff who will be involved in implementing the new strategy but haven’t been involved in the planning process.

I don’t know about you but I think that’s a scary amount of work to get done in one day.

Especially when we are talking about business strategy – the most important responsibility for a senior management team.

It may even be tough to cover the strategic planning workshop agenda in three consecutive days if you want proper debate rather than going through the motions and rubber-stamping the current popular ideas on how the business should be developed.

The Strategy Process In The Real World

Strategy isn’t a nice, linear process where you do step 1, then step 2 and then 3.

Strategy is about learning, reflecting and gaining insights.

It’s about building a shared vision of the future and what it will take to win.

It’s about change and that could mean moving in favour of one customer group  rather than another.

You may not be able to agree on current customer needs because it is surprising how different people see different things as important, even if the customer segments and niches are tightly defined.

And if you can’t agree on what’s most important to customers now, you have little chance to agree what will be the critical issues in one or two years time.

You need time to check with customers and understand their issues and problems.

But you can’t do that if you’re in a frenzied one-day or three-day workshop.

But it’s not just customers you need to think about.

A workshop can highlight just how little agreed consensus there is about all the important issues in a business.

I was talking to a friend who held a planning day, and he asked each of them to think about what they wanted for the business and themselves in five years time. Two came back and said that wanted to retire well before then but it had never been discussed before. Inevitably the meeting went off-topic but it surfaced issues that had to be resolved before the business could refocus.

The Advantages Of A One-Day Strategy Workshop

I’m not against one day strategic planning workshops because they can be exciting, dynamic, invigorating sessions that move you away from the urgent to the important.

A strategy workshop can your management team involved in thinking about the overall business and away from narrow functional positions.

I just don’t want you to have unrealistic expectations.

A one-day event is about tweaking your current strategy or getting the team reconnected with it.

If you face more fundamental challenges, then you’d be doing your business a grave disservice if you think you can plan its future in one day.

What is The Future Of Your Business Worth To You?

I read somewhere that you should spend 5% of your time thinking about the future of your business and working on your plans.

I think that’s about right.

It works out at one day a month and not one day a year.

A plan and strategy should be a living thing that adapts as conditions change.

Helmuth van Molke, a German field marshall in the first world war said

“No plan survives contact with the enemy.”

That’s certainly true and explains why Dwight Eisenhower said

“Plans are nothing; planning is everything”.

Have You Held A One-Day Strategy Workshop?

Have you done a one-day workshop in your business and if so, did you find it helpful?

Did it help you to put together a strategic plan which you then followed through and implemented.

Please leave a comment and let me know about your experience of a strategic planning workshop.

One of the very best known strategy models is the Five Forces Of Industry Profitability that has been developed and promoted by Professor Michael Porter.

Background To The Five Forces Analysis Model

The Five Forces Analysis model was first introduced in the Harvard Business Review in 1979 in an article by Michael Porter called “How Competitive Forces Shape Strategy.”

It was then a major element in Michael Porter’s book, Competitive Strategy.

In 2008 Michael Porter returned to the Five Forces Model with an updated article in the Harvard Business Review called “The Five Competitive Forces That Shape Strategy.”

Even Michael Porter Didn’t Believe In The Five Forces

I found this article in Forbes.

It says that Michael Porter’s own strategy consultancy firm, Monitor, had stopped using the Five Forces Analysis.

That’s a big shock when the Five Forces are still a big part of the strategy courses that are taught on many MBA courses.

Sadly I didn’t feel the article went into too much more detail about the five forces and talked more about why the strategy firm failed.

I’ve said before, criticising the ideas of Michael Porter is very popular because of his preeminence but that criticism is often made based on a misrepresentation or simplification of Porter’s basic ideas to promote the “next big thing”.

Where’s The Customer In The Five Forces?

In my article, What Is Strategy, I define strategy as

“Strategy is how you achieve your own objectives by winning the hearts, minds and business of customers by out-thinking and outmanoeuvring competitors.”

While customers aren’t entirely ignored in the Five Forces model, there is little attention given to them. In fact big customers are seen as a negative force because of their enhanced bargaining power.

The Five Forces Analysis Isn’t Strategy

The Five Forces are one tool that takes a supply side approach to strategy.

Its focus tends to be on the industry – the companies who supply the products to meet customer demand – and the aim is to operate in an industry where there is enough profit to avoid the pitfalls of severe competitive rivalry.

You won’t get a winning strategy from just doing your Five Forces analysis.

No matter who much time and attention you give it.

But that’s not to say that it doesn’t serve a purpose to give insights into the competitive process.

My definition of strategy recognises that you need to understand your competitors and what they want to do and can do.

I’ve seen far too many hockey-stick style financial forecasts (where profit dips in the short term and then rises quickly in the future) to know that many businesses ignore competition. You need to accept the fact that competitors also want to grow and increase profitability.

I’m not going to criticise a tool that shines a light on competitors and how the industry fits together.

The five forces exist.

It’s a huge risk to ignore them and especially if there is a developing trend.

The Problem With The Five Forces

The big problem I see with a very detailed five forces analysis is finding the answers.

It’s much better at identifying problems than coming up with solutions.

Substitutes are a growing threat – so what do I do?

Bargaining power of customers and suppliers is growing – so what do I do?

New competitors are entering the market with much lower factor costs of products – so what do I do?

The slashed profits in the industry have caused competitive rivalry to become cut-throat – so what do I do?

I find it’s a better tool for asking:

• Should I go into this product-market (industry)?
• Should I look to diversify away from this product-market?
• Should I exit this product-market?

than for answering the question:

• How do I make more money in this product-market?

Those three questions are very valid in certain situations but the fourth question is the universal question of strategy that every business wants to answer.

The truth is that sometimes you can’t expect to make good profits in a product-market.

I think it’s useful to know that so that you don’t waste precious resources trying to do the impossible.

The Five Forces analysis does help. It wouldn’t have been accepted so readily when it first came out and it wouldn’t have stood the test of time.

The Five Forces are based on industrial economics which looked to explain why all markets weren’t perfectly efficient. The economists saw perfect competition as the ideal but as I explain in my article, It’s Not Perfect If I Can’t Make A Profit, entrepreneurs and business managers took a different view.

It’s just not the panacea to all strategy questions.

What Do You Think About The Five Forces Model?

I’d like to know your thoughts about the five forces.

Have you found the model helpful or do you think it’s a waste of time?

This article looks at prices wars and in particular, how to survive a price war if you find yourself being dragged into one by competitive rivalry by undifferentiated competitors or a particularly aggressive strategy by one competitor who may be differentiated but whose actions damage the entire market.

This is at the conflict end of the 5 levels of competition.

My Experience Of Price Wars

I have experienced a number of price wars while I was a senior manager in business and seen the effect of others since I’ve been a consultant/coach.

It’s a bloody business.

Each price war has been extremely damaging.

The big lesson I’ve learnt is that the best way to survive a price war is do you best to stop it from starting in the first place.

Unfortunately sometimes, competitors are so stupid and behave so irrationally that a price war is inevitable.

The prolonged financial crisis and recession is increasing pressure on businesses to keep sales high and owners and managers can feel forced into cutting prices to keep their businesses above the survival line.

Why Do Price Wars Start?

Price wars start because:

• The market is declining and firms are fighting for a larger share of a smaller cake; or

• One (or more) firms have very aggressive growth objectives

• Price wars can even start by accident.

Aggressive competitors believe that they can make more money by:

• Trying to force competitors out of business because they have major cost advantages or can withstand the losses for a longer period. Once competitors leave, the aggressor believes they will have a dominant position in the market which allows them to control prices.

• They don’t understand how their own cost/volume/profit relationship works and may underestimate the cost of the product or service.T

• They don’t realise that if they lower prices, their competitors are likely to find out what is happening and respond. All too often strategies are considered in isolation without thinking about how competitors will react.

Price Wars Can Start By Accident

Competitors’ actions are misunderstood.

Perhaps there is a temporary special offer from one competitor to turn slow moving stock into much needed cash which escalates into a series of tit-for-tat price reductions as the other competitors respond to what they perceive as an aggressive action.

Or fluctuations in market demand are not understood and firms think that competitors must be stealing their business. I have written an extensive review of the beer game and how systems thinking can help you interpret fluctuations in demand.

There is also the risk that price wars can start because of manipulation by buyers and fear based naivety of suppliers. A buyer gains by paying a lower price so an unscrupulous buyer can:

• Exaggerate the offer from a competitor by outright lying – “Smith & Jones have offered us a price of £2.50 per unit when you are charging £3.30” (when their best price is actually £2.95)

• Mislead by missing out key terms – “Smith & Jones have offered us a price of £2.95 when you are charging £3.30” (but they want us to order and take immediate delivery of 10,000 units – their price for the 1,000 units that you provide us with is £3.35)

There Is Usually No Winner In A Price War

There are often no winners in a price war.

A price war can destroy the profitability of an industry for many years hurting every single competitor. Many industries have found that it is much easier to cut prices than it is to increase them again afterwards.

Even customers may lose out if a product is treated as a price based commodity when there are really valuable differences in either the product or the service. As struggling competitors withdraw from the market, either voluntarily of through bankruptcy and liquidation, customers are left with less choice.

What You Can’t Do To Survive A Price War

You can’t reach an agreement with competitors to fix prices to particular customers.

Cartels are illegal in the European Union, the USA and many other countries.

What You Can Do To Survive A Price War

• Emphasise the extra quality or service of your offering – don’t allow the customer to that the product or service is a commodity and  that all competitive products are equal so that price is all that matters

• Remind the customer of the risks in taking a low cost option

• Create a low cost, lower value alternative product of your own that gives extremely price conscious customers a chance to stay loyal to your business and brand.

• Work together to take costs out of the transactions. Recognise the difference between saving the customer money and your cutting your prices.

• Lower prices through a rebate scheme that rewards extra volume and not just promises of extra volume.

• Re-align your price lists. Supermarkets have low prices on the staple products like bread but make their margin on the extras that people buy. Can you use loss leaders to keep customers who will buy premium priced items out of convenience.

• Make it difficult to compare prices – e.g. mobile phone tariffs – although makes it difficult to win customers on price as well.

The Risks Of Buying From The Cheapest Competitor

Price is often used as an excuse for changing suppliers but it can be a disguise a service problem or general dissatisfaction with the customer supplier relationship.

Alternatively the customer may take for granted the customer service you provide and believe that is the industry norm when your service and dissatisfaction with that of your competitors wins you business elsewhere.

So make sure that the customer is aware of the risks of buying from a cheaper competitor:

• What will the customer lose that he takes for granted from you?

• What short cuts/cost savings must the competitor have made to sell at this price profitability? How will this impact on the customer?

• Why is the competitor so desperate to get extra business? Is this a last desperate attempt to win enough volume to stave off financial collapse and if that happens, where will that leave the customer.

Communicate By Signalling To Competitors Within The Market

Collusion is illegal and the punishments are high.

But that doesn’t mean that there can’t be some kind of indirect communication with competitors – perhaps with the market in general via the trade press, through customers (although you have to be careful that the true message is passed on) and through trade associations.

It’s what business strategists call signalling – making clear what is happening in the market and what you are doing so that the competitors are better informed and not left to make up their own minds.

Some of this signalling is counter-intuitive but it has to be to fight the idea that “more sales equals more profit”.

If the market is in severe decline, like the housing and car markets at the moment in the UK, it makes it much easier for business owners to understand why their sales volumes are down by 30%.

The market leader needs to make sure that they are not caught up in a bravado exercise for their own public relations – the industry is down a long way but we are selling more. That kind of statement signals to competitors that their volume is being “stolen”.

The same education is needed to explain the impact of the Beer Game and how de-stocking along the supply change exaggerates the impact of demand changes at the other end.

And if you are having a sale to sell off excess stocks, signal the fact that the sale is limited in quantity and duration. It may cause competitors some short term pain but it won’t last long.

If there is a danger of a price war, the trade can be educated on the dangers of cutting price and the devastating effect on profit of just moving the purchase volumes around.

The aim of effective signalling is to stop the price war happening.

The Signals Of An Aggressive Competitor

Sometimes a competitor will signal an aggressive move. “It is our intention to grow market share to 40% and we will do whatever is necessary to get it there.”

This type of signal gives competitors a problem and a price war may be inevitable.

There are some key questions to ask?

• Is the threat credible? Does the competitor have the financial muscle to back up the intention?

• Will the expansion stop at 40% or will it then be 50%, then 60%…?

You need to reach a decision.

In fact it’s the classic survival decision of fight or flight.

If you are going to have to fight, it  may be better to fight the battle early.

What will it take to stop the competitor and is the fight worthwhile or should the business withdraw from the market?

It is better to withdraw early than suffer huge losses and being forced out.

Disciplining The Aggressor In A Price War

Some price wars are fought in public and in full view of all the market participants.

The market trader selling vegetables knows when his competitor has cut prices and can react immediately. The other party sees the reaction and has a choice of cutting price again, matching the price or increasing the price hoping the competitor will follow again.

Other price wars are in private.

The first the incumbent supplier may know that an aggressor is taking action is when the orders stop or a phone call comes in asking for a new competitive quote.

The choice is to match the lower price or to hold. Keep the business at a lower price, then your competitor has not gained but you have lost profit – and the customer may now be very marginal.

But do you leave it there, or should you try to rap the competitor across the knuckles?

It’s another signalling issue.

If you know the industry well, you can go to your competitors customers – not all of them but enough to get the point across – and either

• Submit a lower price yourself and threaten the established competitor’s volume.

• Discover the prices offered by your competitor and make their customers aware that the firm is aggressively offering new customers deals which may be far better than given to existing customers.

It’s one thing to try to increase profit by getting extra profit by winning your competitors customers on price but it is another to see the profit on the established business damaged.

What Are Your Thoughts On Price Wars?

Have you found yourself caught in a price war?

What happened and how did you get out of it? Which of the tactics to survive a price war mentioned above do you think could have helped you?

Let me know by leaving a comment?

The idea of working on your strategy and the entire strategy planning and management process can be daunting.

So daunting that it can put many business owners off.

And that leaves them stuck trying to get improved profit performance from implementing tactics.

I believe they are missing a big trick and it’s a trick that keeps running a business as hard work.

I first mentioned the idea of the Strategy Onion in my post Strategy From The Outside In or Inside Out

Strategic analysis can be extremely time-consuming as you look across the time periods – past, present and future to understand what’s happening, why it’s happening and how things are likely to change.

That’s why I like to think of strategy as an onion crossed with an orange.

You can think of it in terms of the different layers and segments.

You could go from top to bottom (i.e. down all the layers) in all the different aspects of your business (the segments).

Or can screen it by identifying what’s important and essential and what’s minor and trivial.

That way you spend your time investigating, analysing and thinking about what matters and skimp on the minor and the trivial.

Some industries are in chaos after major new discontinuities which have changed the basis of competition, some can see the threat coming and need to prepare and others are nice and stable.

Some customers are changing their needs and wants, some are stable.

Some markets are disrupted by a scary new competitor, some are ripe for disruption and some are stable and unattractive to new entrants.

The work you need to do in strategic planning and differentiating your business will depend on what is happening and what could happen.

You may be lucky and trade in a nice placid, protected harbour or you could be caught in a small dinghy 500 miles away from land and in the middle of a huge storm.

Your strategic planning process needs to reflect your world.

You can waste many hours looking for threats that aren’t there – or you can skimp over a clear and present danger.

That’s where the idea of peeling the strategy onion comes in.

A quick check on what’s happening and the likely consequences for the generic strategy models.

It’s not strategic planning but it is a strategic business health check or what I call a Strategic Snapshot.

And it’s the first stage in my process for differentiating your business.

As a business owner you have a simple choice.

You can:

1. Run your business opportunistically, jumping from one thing to the next which looks as if it could make you money; or
2. You can develop a strategy to create success in your market and then which guides your actions and decisions.

The first may work but the second increases your chances of success.

But where do you start?

Strategy (and business management) is about:

• using your resources and capabilities to create products and services
• which are bought by customers in preference to competitors
• to meet their wants and needs and
• make you a profit
• while at the same time your business is being affected by the wider business environment.

That’s five things that have to be lined up for a winning strategy:

1. Your resources and capabilities;
2. Your products;
3. Your customers’ wants and needs;
4. Your competitors; and
5. The wider environment.

The first two are internal and the remainder are external.

Where Do You Begin In Your Strategic Thinking

Do you start with your products and ask yourself who else may buy them?

Or with your resources and capabilities and ask what else can you make which customers will want?

Or do you start with customers and decide first who you want to serve and then find out what they want to buy?

Or should you focus on competitors to spot weaknesses where you can defeat them and capture their customers?

Or do you recognise that your strategy is not about today’s markets but those of tomorrow and you need to understand how things will change in the next 2 to 5 years so that you are better prepared than your competitors for what is most likely to happen?

It’s tough to know where to start in your strategic thinking.

I laugh when I see business strategy advisors present a wonderfully linear process – first you do this, then that and then third…

Effective strategy in the real world isn’t like that.

It’s messy.

Yes strategy is messy

You’ve got to cover all five factors and perhaps a few others as well. (For example a subsidiary may be constrained by what its parent company management want to do, a family business may have to think about the retirement of the founder and the transfer of ownership within the family or outside it.)

But what you learn in one area affects what you think in another.

You can button down what you think customers want and then when you do the business environment research, you realise that customer needs are likely to change. And you look at your competitors and see who is strong for today and notice a small competitor who seems well positioned for the future. The competitor who you thought you had to beat has been replaced by another who is already ahead of you in the race to the future markets.

Make Strategy By Peeling the Strategy Onion

I encourage you to think of peeling the strategy onion (but with segments like an orange).

Start to see strategy as a process where you can go down to different levels in the different areas depending on what looks relevant and interesting (i.e. it is a source for competitive advantage and increased profit).

Strategy can seem very daunting if you think you’ve got to get all the way to the middle in each area. It’s time-consuming and mentally exhausting.

But it doesn’t have to be like that.

Some strategy is better than none

A direction gives you guidance, even if you don’t have it planned in great detail.

As an analogy, think of it as going on holiday.

Until you decide key factors like when and where, it’s very difficult to focus your thinking.

Pinning it down to June and Spain makes the number of choices much more manageable.

Deciding a budget and what you want to do on the holiday (go to see the sights, lie on the beach or a bit of both) again narrows down your options until finally you have a choice of a few alternatives and you can pick the one that feels best or offers the best value for money.

Some people will leave their holiday planning at that level while others will go to the next level and start scheduling out their days – what they will do and where they will go. Some will even create a schedule for each day based on what’s open when, so they don’t leave anything to chance.

The important thing is that you start and finish your holiday planning by doing enough to have the kind of holiday you really want.

It’s the same with business strategy which is designed to help you to get the business you really want.

There are two fundamental questions that business owners and managers ask all over the world:

• Why are some companies and businesses more profitable than others?

It’s a great starting point for the second, and even more important question.

• How can we this business or company more profitable?

Profit Or Sales

We know some people focus on the wrong issue.

They look to grow the top line rather than the bottom line in the mistaken belief that high sales revenue automatically leads to high profits.

That’s nonsense of course.

The biggest corporate losses in history come from giant businesses with huge sales revenues.

There’s a famous saying, sometimes called the Banker’s Mantra:

“Turnover is vanity, profit is sanity but cash is reality”

My advice is to forget all the ideas about mergers and acquisitions that create big businesses unless a very strong case can be made for much bigger bottom line profits.

Why Are Some Companies More Profitable Than Others?

This is the question that Professor Michael Porter set out to answer in his book, Competitive Strategy in 1980.

His answer was surprisingly simple although the answers led to some very cl;ever thinking on complicated subjects.

The most profitable businesses:

• Operate in industries that are particularly profitable; and
• Have big competitive advantages that mean they can capture a bigger share of the available profits than their competitors.

Businesses can make a good profit by meeting one of those conditions.

The weaker the performance in each dimension, the worse the business will perform so the most unprofitable companies:

• Operate in a horrible industry; and
• Have big competitive disadvantages which make it difficult to win business from customers or to service any orders profitably.

That’s why strategy is concerned with both the inside and the outside issues of a business.

It’s only by looking at both aspects that a business can map out the most likely route to profitable success.

What Can You Do To Make Sure You Have A Profitable Business?

Do you have a business or are you thinking about starting a business?

If you’re starting, you need to think about?

• Is the market niche you’re thinking about entering an attractive one that can provide you with good profits or is it a potential profit trap? The Five Competitive Forces Analysis and STEP Analysis are good starting points.
• When you enter this market, will you have a competitive advantage in terms of a differentiated value proposition or lower costs?

If the answer is No to both questions, don’t waste your time and money.It’s better to find another business opportunity that excites you.

If you have two Maybe’s or a Yes and a No, I think you need to think very carefully. Consider your options. Is this a market that you’re really committed to? Can you find a better niche? Can you find a business proposition and model that offers you the chance to have a competitive advantage?

A useful article to read is Will My New Business Venture Succeed Or Fail?

If you already have a business and it’s not performing very well, I think you need to ask yourself three questions:

1. If the market is bad, can you find a more profitable niche or segment that you can move to with confidence? This is easier if you’re a general business who needs to specialise rather than a specialist who has a reputation in one field and needs to jump to another specialism.
2. Do you have a competitive advantage that you’re not making the most of (it happens) that you can promote more extensively or can you development a competitive advantage (differentiation is usually easier than cost leadership)?
3. Are things so bad that you need to leave this market by selling or closing the business? Sometimes a business that isn’t commercial viable on its own can become a profitable sideline in a better established business through synergies and shared costs.