{"id":10803,"date":"2020-07-23T15:57:00","date_gmt":"2020-07-23T19:57:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=10803"},"modified":"2020-07-27T19:04:33","modified_gmt":"2020-07-27T23:04:33","slug":"what-is-competition-in-business","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/what-is-competition-in-business\/","title":{"rendered":"Competition in Business: You’re Thinking Too Narrowly"},"content":{"rendered":"\n

What is competition in business<\/a>?<\/p>\n\n\n\n

You might be thinking about it too narrowly as a vicious game of winner-takes-all. But business competition<\/a> can be more clever and healthy – multiple winners can win. Find out how below.<\/p>\n\n\n\n\n\n\n\n

What is Competition in Business?<\/strong><\/h2>\n\n\n\n

Business is often compared to sports or war because of dramatic appeal. A clash between business titans is dramatized to the conflict between nation-states or to a national sports championship. <\/p>\n\n\n\n

However, this metaphor is counterproductive when taken too far. War and sports are unidimensional and imply one victor. In business, this leads to the syndrome of \u201ccompetition to be the best.\u201d<\/p>\n\n\n\n

But competition in business is multidimensional<\/strong>. Buyers have a wide range of needs, and different companies can exist to service those different needs without demolishing each other<\/strong>. There are multiple contests that can support multiple winners.<\/p>\n\n\n\n

For example, McDonald\u2019s is a winner in fast food and fast burgers. But In-N-Out deliberately focuses on slow burgers, with non-processed meat and fresher ingredients. Both are winners in their own right. They\u2019re each playing their own sport.<\/p>\n\n\n\n

In business, your default thought should not be \u201chow do I win this market,\u201d but rather \u201cwhich segment of the industry can I service well?\u201d<\/strong><\/p>\n\n\n\n

There\u2019s no such thing as \u201cthe best.\u201d Is there a best car? A best hamburger? The best meal? If the answer is no, why would it make any more sense in your industry?<\/p>\n\n\n\n

A better analogy than war might be performing arts.<\/strong> There can be many good singers, each outstanding in a distinctive way, each with its own captive audience.<\/p>\n\n\n\n

The point of competition is not beating your rivals. The point is to earn profits.<\/strong><\/p>\n\n\n\n

Bad Strategies<\/strong><\/h3>\n\n\n\n

Strategy is the means by which a company, faced with competition, achieves superior profitability. Profits = Prices – Costs<\/p>\n\n\n\n

As explained in the rest of the book, a superior strategy is a combination of unique activities that is hard to replicate, allowing you to increase prices for superior value and\/or decrease costs uniquely.<\/p>\n\n\n\n

Here are examples of bad strategies that won\u2019t lead to a viable long-term advantage.<\/p>\n\n\n\n

Operational Effectiveness<\/strong><\/h4>\n\n\n\n

Competing using the same activities as competitors, but hoping to do it better, is often called operational effectiveness<\/strong>. This is an unsustainable strategy. Your best practices will quickly be copied by others, with the help of eager consultants, leading to competitive convergence<\/strong>. <\/p>\n\n\n\n

This leads to a competition based solely on price, where products are undifferentiated and competitors erode each other\u2019s profits. <\/p>\n\n\n\n

Competition here is zero-sum. While in the short-term this improves consumer surplus, in the long term competitors merge or die, thus decreasing consumer choice<\/a>, leaving customers under-served or over-served.<\/p>\n\n\n\n

Poor profitability undermines investment, making it harder to improve value for customers<\/a> or fend off rivals.<\/p>\n\n\n\n

Economies of Scale<\/strong><\/h4>\n\n\n\n

There are advantages to being bigger in most businesses. This insidiously promotes \u201cwinner-takes-all\u201d thinking. Mergers and acquisitions also fall into this bucket.<\/p>\n\n\n\n

Unfortunately, economies of scale<\/a> are exhausted at a relatively small share of sales<\/strong>. There\u2019s little evidence showing that companies with the largest market share are the most profitable. It\u2019s critical to examine the numbers and examine the mechanism <\/strong>by which size leads to better profits.<\/p>\n\n\n\n

Seek to be \u201cbig enough\u201d<\/strong> – say 10% of the market – rather than to dominate it.<\/p>\n\n\n\n

Serving All Market Needs<\/strong><\/h4>\n\n\n\n

By trying to be something for everyone, you risk being everything to no one. In contrast, competitors who focus on a specific need will attract that segment of customers. Competition in business is not always about being the best. It’s about making profits. <\/p>\n\n\n\n

A common pitfall is that companies expect their customers to stay loyal to their brand when the company releases new products. \u201cIf customers come to us for auto loans, surely they would also come to us for home mortgages.\u201d This loyalty is often overestimated.<\/strong> Consumers are fine going to different vendors for different products, if the value is superior.<\/p>\n\n\n\n

In the extreme, consumer packaged goods companies like Johnson & Johnson have totally different brands for different categories – you don\u2019t see Tide toilet cleaners.<\/p>\n\n\n\n

For example, it\u2019d be a mistake for In-N-Out to start a fancier sit-down restaurant brand like In-N-Out Gourmet, for a few reasons:<\/p>\n\n\n\n