Many companies embark on their strategies each year with the twin goals of growth and greater profits. They also tend to direct much of their efforts toward beating their rivals in the marketplace, which often leads to a disproportionate amount of resources being allocated to this head-to-head competition. This approach generally results in lower prices, meaning that the customer – not the company – is the ultimate winner.
Generally speaking, you can approach the market from a position of cost leadership or differentiation. It is often harder to be in a cost leadership position, unless you have certain structural advantages of scale or purchasing power (think Walmart). While all companies need to offer competitive pricing, the most successful ones generally don’t rely on price as their sole differentiating factor. They have figured out other ways to stand out from their competitors. We find that these companies build the most value in their businesses, because their returns on sales and invested capital are greater.
To identify what makes your company truly unique, the discussion needs to start with your strategy. We suggest identifying the parts of your market that can be served in new or different ways, rather than focusing on head-to-head competition and beating the other guys. Understanding these points of differentiation and figuring out how to exploit them in the market is one of the most important elements of your company’s strategy – particularly if you are in a highly commoditized product space.
There can be many differentiating factors – customer service, product lineup, delivery times, specialized runs, niches. The list can go on and on. Making the deliberate choice to compete this way, rather than on price, does often involve tradeoffs. Being different from competitors will occasionally require you to forgo some opportunities where the buyer is not interested in the value your company offers via its differentiators. It may mean letting your competitors have certain opportunities that don’t fit the profile of your business model. You have to be okay with that; you can’t be all things to all people.
Spending time to think about your points of difference versus your rivals will often reveal your true competitive advantage. It then takes operating discipline to execute on your position.
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