‘Competitive Strategy’ is the beating heart of your business plan. But it is also the most neglected! Having a clear ‘helicopter’, view of how competition really works in your business sector is a rare and valuable resource. In most cases when companies feel under competitive pressure, they unconsciously reinforce a default strategy of ‘competing to be the best’ i.e following a very similar competitive strategy to their rivals.
There are only four generic strategies to follow – here’s an example from the food industry:-
Can you plot your competitive strategy on here? Is it clear cut? Or are you a little bit of this and that? Where are your rivals? Are you in a cluster? Do you all compete in the same way? This is without doubt the very worst possible competitive strategy.
Why? Well, firstly you need to continually invest in your business to match your rivals or make small improvements to make you slightly different, each time giving away profit. And/or you give profits to customers to be the same price or slightly cheaper. You work harder for less return.
Then because your rivals are following the same strategy, they copy you and the downward spiral continues.
Cost Leadership Strategy
An old school friend of mine, Ian, owned and operated a small bakery making traditional but hearty sandwiches with a healthy margin in his weekly £7k takings. Then a national chain sandwich shop opened over the road. With a very simple equipment list, and a standard layout, in four weeks they were up and running. In three month’s Ian’s takings were down to £4k. Customers of 20 years left because: they opened earlier, their breakfast and lunchtime deals were great, their coffee was better, they had a loyalty scheme on social media. But most of all, their prices were at least 40% lower across the board. They were crystal clear about their “cost leadership” strategy.
Their products factory made, frozen and baked off as needed on site. Their staff are on zero hours, minimum wage. Their equipment was procured by a national director with colossal buying power.
Ian soon came up with a genius strategic plan. He did an MBO with his head baker Graham and retired!
Graham set out to show his new rival that his quality could be just as good, and his prices just as cheap. He had the shop repainted, new uniforms, a new coffee machine, they started breakfast and lunchtime deals, reduced their prices and stopped selling slow-moving products…just like their new rival.
He recovered some customers, but his staff costs were too high, his buying power too weak and his prices were now too low. He lost money and closed down.
His business was sitting on the line between a cost and differentiation focus. We call this straddling. It always hurts!
Enter Ian’s daughter, Natasha who’d just finished her degree in Norway and returned to Yorkshire with her talented new husband Magnus, who wowed everyone with his homemade cinnamon cakes, Christmas biscuits and Smorgasbord’s of all descriptions.
They took out a loan and opened the shop again calling it “Skandi”, a Scandinavian themed sandwich shop/ cafe. Natasha was front of house making real barista coffees. Magnus made “signature” products in a reduced bakery section. Together their purpose was to bring the Scandinavian cuisine, culture and lifestyle they loved to the UK.
The space they saved was converted into tables. They captured the early morning commuters to Leeds, weekday mid-mornings were busy with small groups of mums or shoppers, lunchtimes were taken up with high-value sandwiches of Smorgasbords and afternoons eased back into coffee and cakes. Their seasonal products brought the Scandanavian culture and traditions to life. They closed at 3.00 pm Monday to Thursday but opened later the rest of the week for Smorgasbords and added beers, wines and of course, Aquavit until 8.00 pm. This drove up the average customer spend. Their prices were high, way too high for many, but for those that wanted something healthy, tasty and distinctive there was a strong appeal….
A subscription service followed, so many loyal customers also paid monthly to receive a weekly weekend box of fresh pastries. Then came an on-line shop selling some of their signature Cinnamon Cakes but also Norwegian specialties unavailable elsewhere. The business could afford to attract and train staff that stayed longer. The business thrived!
‘Skandi’ pursued a focused differentiation competitive strategy from the start. Accepting that not every customer wants Scandinavian produce, or is prepared to pay the high price. They knew the art of competition is choosing who not to serve, as much as who to serve. They are paid more by fewer customers. This is called a “trade-off” and is the essence of great strategy.
You must compete to be different, never better – that is the worst possible strategy….
Other Articles in our Rescue, Recovery, Reinvent Series:-
Article 1 – Businesses That Plan Do Better
Article 2 – Business Strategy, Why Bother?
Article 3 – The Importance of Purpose, Vision and Values
Article 4 – How to Predict the Unpredictable
Article 5 – Sh!t Happens