Michael Porter, a Harvard business school graduate and current Harvard economics professor, pioneered the idea of strategic competition. According to Porter, business competition goes beyond the competition you engage in with your direct rivals. You also compete with customers, producers, suppliers, and new entrants on what prices you can charge and what prices you are charged. If Profits = Price – Cost, your business hinges on much more than the competition of direct rivals, it hinges on any touch point in your business where you are either charging a price or being charged a price. The real point of strategic competition, then, is not to beat your rivals, but to earn profits.
Intuitively you can see how these competitive factors affect profits, and therefore affect the value of your business. Substitute products, threat of new entrants, existing rivalry among competitors, and the power of buyers (customers) negatively affects your ability to charge a higher price for your product or service. Rivalry among competitors and the power of suppliers increases the costs of producing and selling your product or service. You can see how important it is to strategically plan for any form of competition that can reduce the price you sell your product or service for, or increase the costs associated with producing that product or service.
The definition of competitive advantage is a direct reflection of the overarching philosophy above. A business possesses a competitive advantage when it is able to either charge a higher relative price or incur a lower relative cost due to unique differences in business activities being performed. Ask any business professional and they will tell you that competitive advantage is what separates an average business from a stellar one. Positioning your business so that it gains some sort of competitive advantage is the key to success.
In order to create a competitive advantage for your business you need to implement and execute a competitive strategy. According to Porter, a strategy is deliberately choosing a different set of business activities to deliver a unique mix of value. In essence, a competitive strategy is how you go about gaining a competitive advantage by increasing value (price) or lowering cost, therefore increasing profit.
Strategy, by its definition, is unique to each and every business and unfortunately I can’t tell you exactly what your strategy should be. But as long as you understand that a strategy directly results in your ability to charge a higher price or incur a lower cost by addressing Porter’s competitive 5 forces, your strategy is already headed in the right direction.
All in all, strategic competition is what will positively differentiate your business. The key to strategic competition, and therefore competitive success, is the ability for a business to create unique value. Aim to be unique and focus on meeting customer needs; don’t aim to be the best or focus on demolishing your rivals. In essence, don’t look at your competition and decide what to do; look at your competition and decide what not to do.