Riddell: The competitive choice
Not Business As Usual
Whether large or small, every business owner/manager should be able to answer the simple question of exactly what is the company’s competitive strategy. Unfortunately, once you get past the blank stares or eyes rolling to heaven, the simplistic answer is to sell more and/or make more money. I submit to you, however, that both responses are results of a competitive strategy—either consciously or unconsciously. The real pro, however, makes a conscious decision and thereby manages his or her business as opposed to the business managing him or her.
Michael Porter, a renowned Harvard business professor, did some extremely important and useful work in the area of competitive strategy. Without delving into a semester’s work of study, suffice it to say that he divided competitive strategy into two broad categories. The first is called Low Cost and is characterized by an organizational philosophy that focuses on lowering costs in every functional unit of the business. Interestingly enough, lower cost may or may not indicate lower prices. Pricing is a function of the marketplace. The second category is known as Value Added or Differentiation. With this approach a conscious effort is made to inject some customer driven value into the purchasing process and the customer is willing to pay for the cost of this increased value with a little extra thrown in for profit. This value or differentiation could be in the final product itself or it could be further up the value chain in an area such as distribution or further down the chain in post-sales service and support.
The great trap that many unaware business owners and manager fall into is that they profess to want to be both—low cost and value added. While on the surface, this bumper sticker slogan certainly sounds good, the simple fact is that you cannot do it. Simply stated, the companies that focus on low cost will one day achieve superiority in costing and the companies that focus on value will one day achieve superior value and those “stuck in the middle,” trying to do both, will get decimated on both ends.
I cannot begin to tell you the number of businesses, large and small, that I have been asked to help that could not define their basic competitive strategy. Yet when they did and we aligned all the functional units of the business, all saw dramatic improvement. Often the focus was simply a slight adjustment, but each always required that their internal compensation policy be addressed.
Whether Low Cost or Value Adding, compensation programs need to be structured such that every day, every employee is coming to work knowing their charter. Simply put, it is to either find some way to reduce costs without damaging customer satisfaction (Low Cost) or improve the perception of value while staying in the customer’s affordability range (Value Adding). Both approaches are also traditionally characterized by small incremental steps that over time add up and present a very formidable barrier to new competitors deciding to come into the market.
Deciding on and implementing a competitive strategy is a very effective tool for every manager desiring to put a little rhyme and reason into what often is a very chaotic environment. Next column we’ll deal with the difference in strategy and tactics and provide some tactical insights for both strategies.
Following a successful international business career, John Riddell turned his attention to small business/entrepreneurial pursuits that included corporate turn-arounds, start-ups, teaching, authoring business and sports columns and serving as VP for the Chattanooga Chamber of Commerce directing its Center for Entrepreneurial Growth.
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