For an organisation to be successful, it has to get many things correct through the execution of various strategies. For the purpose of this article, an organisation can be thought of as having a business strategy, how it will organise itself internally to achieve its goals, and a competitive strategy, where it will position itself within its industry context.
The success of a business via its various strategies depends on doing many things well – not just a few – and integrating them together. If there is no fit amongst activities, and indeed fit amongst strategies, there is no distinctive overall strategy and little sustainability.
A Competitive strategy is more than about being different, it is about being distinctive. It is the creation of a distinctive and valuable position in the minds of consumers, a Distinctive Value Proposition (DVP). It is about delivering a distinctive mix of benefits that customers value – the category benefits. A DVP is comprised of a whole system of interrelated and reinforcing benefits that fit together, it is not a collection of disparate parts.
A competitive strategy is also about trade-offs and choices, and those choices encompass not only what activities to do, but also what activities not to do. Activity-fit progresses along a continuum, starting with consistency between activities, to activities reinforcing each other, to finally optimisation of effort.
Whereas it is convenient for the purpose of analysis and discussion to consider business strategy and competitive strategy separately, in reality, they are closely related and they should reinforce each other.
Industries have a structure made up of suppliers, rivals, and buyers to name a few, as well as the activities between them.
When developing a business strategy, the organisation’s competitive strategy also needs to be developed, but this requires an understanding of the industry. Michael Porter (Porter, Competitive Strategy, 1990), developed what he called the 5-Forces Framework[1] as an aid for analysing competition within an industry.
Before we go too far, a point of clarification needs to be made about what competition is. Competition is not simply what an organisation experiences as a result of its rivals’ (aka competitors’) behaviours. Competition in the industry structure context is all those industry participants such as suppliers, rivals, buyers, substitute solution providers, and new entrants who all have a stake in improving their own welfare by maintaining and increasing their respective profits. For example, a supplier will naturally want to charge as high a price as the market will bear, but a buyer or consumer will naturally want to pay the least possible for a solution.
Once the forces affecting competition[2] in an industry and their underlying causes have been diagnosed, the organisation is ready to identify its own Strengths, Weaknesses, Opportunities, and Threats (SWOT) relative to those forces by performing a SWOT[3] analysis. The organisation performs this analysis both to determine its relative position within its industry, but also to determine if the industry is structurally attractive, meaning, is there a reasonable probability of making a profit?
From a competitive strategy perspective, the organisation must find an industry position where it can take advantage of its strengths, minimise its vulnerability to its weaknesses, where it is able to take advantage of opportunities, and that defends against or avoids threats. To create a defendable market position against industry forces, the organisation takes either an offensive or defensive position. This involves a number of possible non-exclusive approaches such as:
Positioning – taking a defensive position by understanding and accepting the existing industry structure, and therefore the causes underlying it, as given and finding a niche based on the organisation’s capabilities. This can be achieved by building defences against competitive forces or by finding a position where the forces are weakest.
Influencing the balance of power – developing an offensive strategy to change the balance of power. This can be achieved with actions such as innovation or differentiation of the organisation’s solutions which in effect changes the causes of the industry’s forces. For example, large-scale capital investment or vertical integration will have the effect of raising entry barriers.
Exploiting change – anticipating or recognising changes in the factors underlying industry forces, such as industry evolution, and therefore industry structure, before anyone else and exploiting those changes by changing strategy.
Diversification – using the 9-Forces model to identify as-yet unrecognised opportunities in other industries or for identifying relatedness with other industries where shared organisational capabilities can overcome entry barriers. For example, a shared distribution channel could reduce distribution costs as well as provide access to new markets.
[1] See The 9-Forces Model.
[2] Competition – should be thought of more widely than simply existing rivals. All organisations behind the 9-Forces in your industry are competitors in the sense that they are all trying to extract maximum profit for themselves. (Porter, Competitive Strategy, 1990).
[3] See SWOT Analysis.