Rich Schefren is one of my business heroes, and in this 4-minute video, he reveals how your perceptions of your business may be damaging its chances of success.
Business Problems And Mistakes – Understand & Solve
What Is The Biggest Business Problem You Have?
For more information and discussion, please click over to What Is The Biggest Business Problem You Have?
Immediately below are a series of articles to help you with common business problems and mistakes.
I’m often approached by start-up entrepreneurs and asked to write their business plan.
I won’t do it.
I think it’s a rotten idea.
So does Dragons Den entrepreneur Duncan Bannatyne. I read his book Wake Up And Change Your Life – it’s very good for any aspiring entrepreneur.
In Chapter 4 he says “You’ll find several people offering to write your business plan for you – and charge you an arm and a leg for it.”
Duncan then gives two exceptionally important reasons why you should never get someone else to write your business plan for you:
- The first is about the money. He argues that it is poor judgement paying someone else to do something that you can easily do for yourself.
- The second is that you’ll understand your business much better if you write your business plan yourself.
I’d add a third reason.
You’ll be much more committed to putting the plan into action if you’ve done it yourself. You’ll have thought through your actions and whether you really intend to do the things you need to do to succeed.
Let’s dig deeper into each.
Spending Money You Don’t Need To On Having A Business Plan Written For You
Very few business start-ups are done with a big pot of cash which lets the entrepreneur splurge and even if there is plenty of money, I recommend you are very careful.
It’s much easier spending money than it is earning it.
Researching and writing a business plan takes a significant amount of time and professional time is expensive. It’s also an area where price and quality are closely related so if you penny pinch and find the cheapest source, you can expect the quality to be poor.
Paying to have your business plan critically reviewed and to get feedback on it is different. You’ll find that family and friends are either very encouraging (you can do anything you want) or very discouraging (you’ll never make it work, it’s much better to stay in your safe job). A professional will tell you what you need to hear and challenge your thoughts and assumptions. You may not like it but it will help you to develop a stronger, more robust plan.
You’ll Understand Your Business Better If You Write The Business Plan Yourself
As a general rule, the more you think, the better prepared you will be for action. You can go too far, and spend all your time thinking and planning but often people leap into action with little thought and hit major problems which were all too predictable.
This thinking and planning is invaluable and it can be very useful to work through a structured thinking process.
If you’ve picked a market that ignites your passion, you should find the research interesting and if you don’t, it may be a warning that the business isn’t right for you.
You’ll Be More Committed To A Business Plan You’ve Written Yourself
Do you work better when you’re told what to do or when you are clear on your objectives and decide what you need to do yourself?
If you want to be told, you may not be cut out for life as an entrepreneur.
If you decide on your own actions, then you’re not going to stick to a plan written by someone else. It’s just words on paper with no meaning.
But if you decide you need to do A, B and C and you commit to it in writing and promise other people (like a bank or investor) then you’re likely to follow through unless you get a better idea. If you don’t, you lose credibility with your financial backers and even more importantly, with yourself.
If you can’t trust yourself to deliver on promises, then who can you trust and why should anyone trust you?
Writing A Business Plan Is Easy
Perhaps easy is the wrong word. It does take time and effort but it’s not complicated. This isn’t brain surgery.
You can do it, words and numbers.
There is business planning software to help you that you can get for a low cost or even free.
What Help Should You Get With Your Business Plan?
I don’t believe you should pay anyone to write your business plan for you but I do think there are services which will help you to get a better business plan. Generally I think it’s a good idea to have a mentor or coach for your business start-up.
- Helping you to think better – start-up entrepreneurs can feel overwhelmed by how much could be done so it can be useful to get advice and help on how to focus your thinking on the critical issues. There will be plenty of distractions and people selling bright shiny buttons which promise a lot.
- Reviewing your business plan – you’ll be very lucky if you get constructive criticism of your ideas from family and friends unless they own their own small businesses. Even then, they may struggle to take what they know and apply it to your business idea.
- Help with the numbers – the profit and cash flow forecasts are particularly important if you need to raise finance and you don’t want to make errors which show your inexperience. The business planning software certainly helps because trying to model your business in a spreadsheet is complicated.
- Polishing up your plan – if your plan is going to third parties to raise finance, it needs to sell your business idea realistically. If your plan is poor quality because you struggle to express your ideas in writing, then it is useful to get someone to tighten up your language and make your business case more persuasive.
Each of these are likely to cost money, but they should be working from a business plan you’ve drafted. You’ve done your thinking and tried to produce a business plan and you recognise that it could be better.
That’s very different from saying to a professional business plan writer, “Can you write my business plan for me please?”
In his book Competitive Strategy, Michael Porter introduces the idea of generic competitive strategies and says that a business must choose between differentiation and cost leadership or risk being “stuck in the middle”, missing on the high profitability that an effective strategy for one or the other.
Differentiation Or Cost Leadership
Porter argues that businesses face a choice – differentiation or cost leadership over a broad or narrow market – if the firm wants to avoid low profitability that comes from confused customers and employees from a “blurred corporate culture”.
This is because achieving cost leadership normally involves eliminating all those little bits of extra product functionality and customer service that bump up customer value in the eyes of customers looking for a differentiated product because they cost money.
This makes a lot of sense.
Business managers intuitively know that to give the customer more, it’s going to usually cost more.
But then examples started to appear which showed successful businesses which had established a cost leadership position but which were also differentiated.
Quality Is Free
Just as Michael Porter argued that cost leadership and differentiation involved trade-offs that meant you couldn’t do both, it used to be thought that businesses had to choose between low cost and good, consistent quality.
But the total quality movement popularised by Edwards Deming, Philip Crosby and Joseph Juran showed that cost of quality had an inverse relationship. As quality improves, costs didn’t increase as had been expected but reduced.
Differentiation And Cost Leadership
In Michael Porter’s next book, Competitive Advantage, he still warned about the dangers of being stuck in the middle.
“Becoming stuck in the middle is often a manifestation of a firm’s unwillingness to make choices about how to compete. It tries for competitive advantage through every means and achieved none, because achieving different types of competitive advantage usually requires inconsistent actions.” (page 17).
On the next two pages of the book, he softens his stance by admitting that reducing costs does not always mean sacrificing differentiation because using more effective methods and technology may reduce costs and improve differentiation. He goes on to point out that reducing costs from a high position is not the same as achieving a cost leadership position. He looked at this in more detail in What Is Strategy?
Porter identifies three conditions where a business can achieve differentiation and cost leadership:
- When competitors are stuck in the middle and don’t force the business to the point where differentiation and cost leadership are inconsistent. This may be more often than you would expect in local, fragmented markets where businesses don’t have opportunities for big differentials in input costs for materials and labour.
The downside is that weak competitors can make the firm complacent and leave it vulnerable to new market entrants that are better managed.
- When cost is strongly determined by market share or interrelationships. Large economies of scale can give the business a big enough cost advantage to allow it to spend some of its cost savings on elements to differentiate the products and still achieve cost leadership. Interrelationships may arise between elements of the industry value chain which one competitor can take advantage of and the others can’t.
- The business pioneers a major innovation. Innovative new process technologies may lower production costs that allow the business to invest in differentiation factors or product innovation may deliver both cost leadership and differentiation of customer value attributes. Sustaining this innovation advantage is vital because wants it gets into the general market, the business is forced into the differentiation or cost leadership trade-off. It may even find itself at a disadvantage if rival competitors improve the innovation specifically to lower costs or to create extra differentiation.
The Danger Of The Tempting Lure Of Differentiation And Cost Leadership
A business that achieves differentiation and cost leadership is in a very strong position and should be much the most profitable firm in the industry.
This is precisely why I believe that creating a strategy to achieve both is dangerous.
The lure is strong but so are the traps and being stuck in the middle remains a clear and present danger.
I agree with the conclusion Michael Porter came to in Competitive Advantage.
“A firm should always aggressively pursue all cost reduction opportunities that do not sacrifice differentiation. A firm should also pursue all differentiation opportunities that are not costly. Beyond this point, however, a firm should be prepared to choose what its ultimate competitive advantage will be and resolve the trade-offs accordingly.” (page 20 Competitive Advantage by Michael Porter)
The Value Chain And Competitive Advantage
The value chain was created to help businesses find competitive advantage and while the value chain can be criticised, the technique is very useful to look in detail at your business at the activity level and challenge each activity:
- How does this help differentiate our business from competitors in ways that matter to customers?
- How can we reduce costs in this activity without reducing customer value and service?
The book Battling Big Box referred to four niche marketing myths identified by entrepreneur, speaker and author Harvey Mackay which I thought were well worth telling you about.
Many business advisers and marketing experts say “get a niche” without saying much about how to choose a niche.
Let’s Go Niche Marketing Myths-Busting:
- Myth one – a niche market has to be chic.
- Myth two – a niche has to be new.
- Myth three – a niche shouldn’t be too narrow.
- Myth four – a niche has to be neat.
Now let’s dig deeper into each.
Niche Marketing Myth 1 – A Niche Market Has To Be Chic
This is nothing to do with Nile Rodgers disco band called Chic in the 1970s although Chic were leaders of the disco music niche.
Chic normally means stylish or smart. If you want to build a business to be proud of, then the temptation is to pick something fashionable and potentially also move your business upmarket.
If you wanted to own a hotel or restaurant, wouldn’t you prefer it to be chic?
But it may not be where the money is.
There’s an old Northern English expression that says “where there’s muck, there’s brass” and brass means money. This line of thinking suggests that there’s a lot of money to be made doing jobs that other people think are dirty or unpleasant.
When I was a trainee accountant, I audited a local Funeral Director’s business, and I was shocked by how profitable it was. The thought of doing the work – although much needed – makes me shudder but it does prove the point.
To prove the myth wrong, that niches have to be stylish, you don’t even have to go from one extreme to the another. Everyday ordinary things may provide an opportunity for a successful niche. The book mentions Turtle Wax for cleaning cars and Harvey Mackay built a huge business selling envelopes.
Niche Marketing Myth 2 – A Niche Has To Be New
There’s a temptation to think that you’ll only find niche marketing opportunities in new markets.
Markets are in a constant state of movement:
- Customer needs, wants and populations change.
- Competitors change – some competitors leave the industry sector, others lose their niche appeal by chasing growth and new competitors enter the market.
- The wider business environment changes – there are many markets that looked good five years ago (property as an example) but these crashed in the 2008/9 recession and have stayed in the doldrums.
Niche marketing positions can emerge if you’ve got the imagination to spot them, or they can be vacated when the incumbent steps away.
In declining industries, the decline can be very unpleasant and involve lots of red ink but the position of being “last man standing” can be very profitable and explains why some players in declining marketers will help competitors to leave the market.
Niche Marketing Myth 3 A Niche Shouldn’t Be Too Narrow
I talked about this in my article on niche marketing and differentiation.
You can work in a niche market but it doesn’t mean that you don’t have any competitors in that niche. A big niche often creates the opportunity for micro-niches with products and services designed for an even smaller group of customers with special needs.
Take my business as an example. I help small business owners to differentiate their businesses from competitors and that will often involve focusing in on one niche.
I am a specialist as an expert in differentiation and the variety is something that I love but I know that a rival coach or consultant could specialise in differentiation for hotels and restaurants. That’s two markets I am interested in so it could hurt my positioning. On the other hand I think there’s potential for a contradiction because industry specialists can apply industry recipes and in effect create local clones, much as a franchising business might do.
There is a risk that you can focus on a niche that is too narrow. The essence of niching is captured in the idea of bullseye marketing – a highly targeted match of what the customer wants and what you offer. Some times the bullseye is too small and you need to focus on the next ring out on the target.
Niche Marketing Myth 4 A Niche Has To Be Neat
This may seem a contradiction since you establish a niche position so that customers have a very clear understanding of what you offer and what makes you special but a couple of examples will help it to make sense.
The book talks about liquor stores in affluent areas that sell specialist wines but also sell a lot of popular, low-priced wines. The reason is simple, people want variety and just because customers can afford the most expensive bottles, it doesn’t mean they want to drink vintage champagne every night. Sometimes a couple of glasses of a pleasant, fruity plonk is all they want.
A second example is my own business and that of many other business advisers. While we can focus on a specialist subject, the relationship can easily move to trusted advisor because we get to know the owner and the business so well and our knowledge base often has to be broad to understand how the speciality fits in with other situations.
Are There Other Niche Marketing Myths?
Yes I think there are.
That you must operate within a niche market is a myth.
You can differentiate your business across a wide market and appeal to many customers. In some cases you don’t even need to think about niche marketing and differentiation because the business opportunity creates its own local pocket of demand.
The easy example are local shops and pubs. If there’s a gap in the market – perhaps because a business has closed (although this may be a warning sign) – then you can open and sell all the usual stuff without any consideration of these concepts. The geographical location creates its own local monopoly.
In the UK TV soap Emmerdale, The Woolpack is the only pub in the village which gives it a big advantage but it does have some indirect competition. Eric Pollard’s restaurant at the B&B and the cafe give villagers plenty of opportunity to eat out when they don’t want to cook for themselves.
Are there other myths of niching?
Do you agree or disagree with the myths identified?
Please let me know by leaving a comment.
It’s very nice to build a business that is different and distinctive.
It gives you a feeling of superiority because you’ve created something that you can be really proud of.
But we can’t escape from the basic idea of differentiation…
Differentiation Must Be Profitable Differentiation
You differentiate your business because you believe you will make more profit than you will if you either get caught in the commodity trap or stay as a commodity and any business you win is by offering a low price.
Not all differentiation is profitable. You need to make sure you avoid the differentiation traps.
The 5 Differentiation Traps
First you can be different in ways that your customers don’t value – you don’t care whether I’m the tallest or shortest business coach in the world because my height is not one of your purchase criteria.
If you want your differentiation to be profitable, you must be different in ways that customers appreciate. I call these factors your order winners.
Second you can be genuinely different in ways that matter to your customers but you can hide your light under a bushel.
Differentiation will only create profit if the customers know about it and understand why your factors of difference create value for them through better results or a better experience.
A unique feature about your product or service only becomes a differentiating factor if customers understand the importance.
Third, you can fail the message to market test. You can have a great, well differentiated offer which is highly valued by one customer segment but if you send it to the wrong market, it will miss its target.
Different customers want different things.
Just think about clothes shops. What you want when buying clothes is very different from what your partner wants, what your teenage children want and what your parents want.
The choice of what you do has to be closely connected to whom you do it for.
To make matters more complicated, the same customer can want different things at different times.
The choice of hotels and restaurants may be very different for a business owner or manager when they are away on business than when they are buying for their family and friends.
Fourth, a classic differentiation trap is to increase your costs by more than the customer value you generate.
You do your market research and you find out that customers would love it if your product could have a longer battery life (think of a long-lasting smartphone for example). You research the market and you find that just like your products, your competitors products also need to be recharged every day.
After researching the product possibilities, you find that you can get a battery that will last 5 days. It sounds like a competitive advantage which will differentiate your product so you’re excited.
You buy the batteries, which cost £30 extra. You incorporate them into the product and you do a big marketing campaign only to find that no one buys.
The extra battery life will cost the consumer an extra £120 including sales taxes and profit for you and the distribution chain but the consumers don’t value it that much. The short battery life is an inconvenience but it’s not a critical inconvenience – it’s a “nice to have” rather than a “must have” and at an extra £120 price in the stores, it turns into a “can do without”.
The usual way to think about differentiation is to think about the price premium it can justify and higher price is certainly one way that differentiation can deliver profit.
The concept of the customer value maps makes it clear that providing extra value justifies a price increase if you stay on the fair value for money line. It can also create an irresistible offer if you move away and offer more value for money although it can trigger a price war.
The fifth way that differentiation can be a profit trap is to make promises that you can’t deliver. This is the distinction between shallow and deep differentiation.
Making big promises may convert leads into orders but failing to meet the promises won’t create a big group of customers eager to repeat the experience and buy again and again. I think the airline industry is the exception (Airlines suck).
This creates a bad experience and with social media, people love sharing their horror stories.
How To Have Profitable Differentiation
If you want profitable differentiation, you need to avoid the 5 differentiation traps
- Differentiating on factors the customers don’t value. Instead, differentiate on the factors your target customers value highly.
- Having a genuine difference and not telling the customers. Be proud of your valuable differences and make sure no customer who wants what you sell, misses out through ineffective marketing.
- Marketing a differentiated offer to the wrong customers. Get your marketing bullseye clear in your mind.
- Differentiation that costs more than it earns. Make sure you are clear o the difference between nice-to-have factors and those customers really want.
- Not delivering consistently on the differentiation promise. Repeat business is a key to creating a profitable business and you’ll only attract customers back if they believe they have received value for money.
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.
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?
Management-speak bingo is a fun game employees can play while listening to senior executives give a rallying call to the troops.
They pick ten popular management buzzwords or phrases along with their fellow players and wait for the esteemed leader to call them out.
If one gets a full house – every phrases they’ve selected has been mentioned – then they win.
That may seem silly to you as a small business owner – although I’m sure you’re hoping that your staff don’t play management speak bingo on you – bit what if you’re doing it to yourself in your marketing.
I have a variation on the management-speak bingo game called Marketing Bingo, Yellow Pages bingo or Website bingo, depending on which is your main source of leads who are looking for what you sell.
This time you select the five or ten words or phrases which best describe your business – they will be on your website home page and Yellow Pages advertisement won’t they?
And then you play Bingo by seeing how often they appear on your competitors yellow pages and websites.
In my Marketing bingo game, you’re not looking for the words to be repeated. Just the opposite.
You win if half or more of your keywords are not used by competitors.
That means that your message is different and has a chance of standing out and attracting attention.
But if more than half your keywords are also used by competitors, then your marketing messages merge into one and your customers get confused.
And a confused customer is a reluctant buyer.
Here is an example of Marketing Bingo – Marketing Bingo For Accountants
A business health check is a chance to stand back and look at your business with fresh eyes as it looks at many different aspects of your current business performance and the factors that determine future business performance.
Why You Need A Business Health Check
As the owner of a small business and a coach to other small business owners, I know how easy it is to get caught up in the day to day issues of managing your business.
Stephen Covey the time management expert splits activities into four sections:
- Not Urgent Not Important
- Urgent Not Important
- Urgent & Important
- Not Urgent & Important
I suspect that like many managers you can get caught up in the urgent categories as you fire-fight your way through your business day.
You probably know that you shouldn’t be doing the first category – not urgent and not important. If the tasks need to be done at all, then they should be delegated or outsourced.
But do you realise that the category that can have the most impact on your performance is the fourth and last one – not urgent and important?
Think about it.
If you spend your time doing important things when they are not urgent, you don’t have to make compromises because of time pressures so the most important things get the attention they deserve.
You do them better and that leads to superior performance.
The purpose of the business health check is to help you to find these “important but not yet urgent” tasks before they become urgent and dominate your time and energy.
My Business Health Check – The Strategic Snapshot
I first developed my business health check – what I now call my Strategic Snapshot – as part of my MBA dissertation when I looked in detail at how business advisors can prevent SME clients (small and medium sized businesses) getting into financial difficulty.
The idea is simple, prevention is much easier than cure.
Businesses can be turned around but if performance is declining sharply, then the time and money needed to put the business on the right track is often not available when the business owners and management team ask for help. This causes many businesses to fail or even become bankrupt unnecessarily.
My business health check is much more strategic than many I’ve seen which focus on tactics which the business owner/management is or isn’t doing.
I believe that if you’re going to use a business health check to look at your business health, you need to look much broader than tactical activities. Businesses get into trouble for a wide variety of reasons but often it’s a strategic problem at the route cause.
My Business Health Check Format – The Five Pathways To Profit And Loss
- Pathway 1 – market attractiveness – growing or declining
- Pathway 2 – market competitiveness – growing or declining
- Pathway 3 – competitive advantage – increasing or decreasing
- Pathway 4 – management skills, planning and control – effective or ineffective
- Pathway 5 – the business owner’s inner game – str0nger or weaker
The main emphasis is on the first four pathways although over time I’ve come to realise that the inner game of the business owner and his or her vision for the business, passion and commitment and the way it translates into priorities, goal-setting and time management is a vital issue.
But it’s personal and I prefer to explore these issues, with the owner’s permission verbally rather than through a business health check questionnaire.
The idea of the pathways is simple – a weak rating in one or more area either needs to be corrected there or compensated for elsewhere by a much stronger performance.
For example, if the business is trapped in a market that can only be described as unattractive and extremely competitive, then the management team must focus on its own management skills, planning and control procedures and look to develop competitive advantages. This is a similar idea to SPACE Analysis.
The Value Of A Business Health Check
The value of the business health check comes from three sources:
- Completing the business health check questionnaire may make you acknowledge issues and uncertainties that have been nagging away at the back of your mind and undermining your confidence without being formally recognised. You’ll know what I mean if you’ve ever felt anxious about something but not known why – you just had a bad feeling – and you’ve been frustrated because until you pinpoint the underlying issues, you can’t take actions to reduce your concerns.
- Your internal feedback to yourself – the health check helps you to identify what needs to be done and can give you incentive to do something. For example, if you’re always struggling to balance cash flow, then it’s logical that you should spend some time on cash flow forecasting to give you advanced warning of issues and time to do something about it.
- External feedback on your answers in the business health check questionnaire. My health check draws on the major strategic planning models to identify performance patterns and issues which you probably won’t see on your own.
Is A Business Health Check A Cynical Way To Sell Business Consultancy, Coaching & Advice?
My business health check is my preferred diagnostic tool when I first get involved with a business and certainly with a business of ten or more employees. It provides structure to the review process.
Unfortunately I found resistance from prospective clients and it hasn’t been the effective lead generator I expected.
I now believe that a business health check offered by a business coach or consultant is viewed suspiciously by an entrepreneur as a cynical way to sell consultancy services rather than a problem identifier.
I can understand that.
Holding your hand up and saying that X, Y and Z are problems is admitting that you do need to do something.
But whatever a free business health check says about your business problems, it doesn’t mean that you have to do something about it or that you have to buy from the business coach or consultant providing the health check.
Just as you take a medical health check and you may be advised to take more exercise, eat more fruit, lose weight, stop smoking and cut back on the booze, it doesn’t mean that you will follow the advice.
On my last health check I was told that I needed to lose about a stone in weight but I didn’t do anything about it. Now I need to lose about two stone! The basic rule seems to be that if you ignore a problem, then it tends to get worse.
I recommend that you see the business health check as an input into how you run your business. It will confirm some things that you already knew but it may tell you about other issues that you hadn’t appreciated but which are easily cured.
I’d like to know your thoughts. Do you reject offers of a business health check from a business coach or consultant because you don’t want to be “sold”?
Harvard professor and world famous business strategist Michael Porter has a simple view to business and how you can generate superior returns from your business – the generic strategies – but you can get stuck in the middle, not one thing or the other.
These ideas were introduced in the book Competitive Strategy by Michael Porter.
The Keys To Successful Competitive Strategy
- Work in a business which is an attractive industry – this is a business that is well positioned against the five competitive forces that Porter identified (threat of new entrants, threat of substitutes, buyer power, supplier power and intensity of competition).
- Have a competitive advantage.
Michael Porter & The Generic Strategies
And when it comes to competitive advantage, Porter was equally simple because your competitive advantage can either be:
- From being the lowest cost operator supplier acceptable goods and services at a reasonable price (and having the ability to beat anyone else on price if necessary)
- From winning buyer preferences based on providing a product or service which is differentiated.
Those two cost advantages can either be applied to the broad market or to narrow focused or niched markets.
The Danger Of Being Stuck In The Middle
Unfortunately many businesses fall into the trap of being “stuck in the middle” of the generic strategies of differentiation and cost leadership.
They don’t offer the high value for money and distinctive product or service that you get from a differentiated business.
And they don’t offer the low prices that can come from buying from the cost leader.
It happens because the business managers don’t know that they have to choose or think that they can be both.
Effectively being stuck in the middle comes from trying to compromise and it creates a muddle.
A muddle for your customers who don’t really know what you stand for or what to expect from you.
And a muddle for your employee who don’t understand the priorities of their work performance.
Other Stuck In The Middle Concepts
Stuck in the middle in this strategic context does not mean:
- Being in the middle of a value chain from raw material supplier at one end to end user of final product at the other. It can be uncomfortable being squeezed by big suppliers and big buyers but that’s even more reason to follow a cost leadership or differentiation strategy.
- Nor does it mean being stuck in mid market between the premium priced luxury products and the low-priced economy brands although that can also be uncomfortable if it’s not clear what your business stands for. This mid market position is sometimes combined with Porter’s stuck in the middle concept but it is a big simplification of what he’s trying to say. There is no reason why a business can’t have a very distinct and differentiated product offering and charge mid market prices for example in cars, think of the Mazda MX5 sports car.
How A Business Gets Stuck In The Middle
A stuck in the middle position happens when a business designed to be low cost starts adding little extra frills which don’t add a corresponding amount to the customer value of a product.
The business suffers the cost, the customer doesn’t get the benefit.
Or when a differentiated business comes under pressure on prices – perhaps there has been a market disruption from new technology or an ultra low-priced competitor from overseas – and starts cutting costs in areas which damage the differentiation advantage.
What To Do If Your Business Is Stuck In the Middle
If you think that your business is stuck in the middle – or heading in that direction – then you need to get to grips with your business strategy.
You need to decide what your business is and isn’t.
You need to decide who your business will sell to and who it won’t.
You need to decide what your business will sell and what it won’t.
Strategy is about making wise choices and then having the courage and conviction to follow through and commit to turning words and ideas into action.
The Role Of The Value Chain In Creating Competitive Advantage
In his follow-up book, Competitive Advantage, Michael Porter introduced the concept of value chain analysis to help you to analyse, understand and create competitive advantage so that a business isn’t stuck in the middle.
The value chain is an important technique which helps you to focus on advantage based on differentiation or cost leadership.