The essence of business strategy is competing to offer unique value to customers. This is different from competing to be the best.
The mindset of many firms is that they view competition as a contest where all competitors are vying to serve the same customers with the same products and services, and that the firm who does this best will win. This mindset reveals a lack of understanding about the true nature of competition.
When firms compete to be the best, they automatically enter a zero-sum game where there can only be one winner. If all competitors in an industry compete for the same customers with the same products and services, they will all converge at more or less the same point. This point is what economists call perfect competition – where there is little or no difference in the products or services being offered and customers have no incentive, other than price, to choose one provider over another. In such a situation, industry profitability approaches zero.
Rather than competing to be the best, competing effectively requires firms to differentiate themselves from the competition. This means identifying customer groups whose needs can be met with a value proposition that is distinct and different from the competition.When firms do this, they can generate returns that are above the average of the firms that are competing to be the best.
The starting point for strategy is not mission statements and goals, but rather with developing a deep understanding of the forces that are shaping industry competition and profitability. This understanding allows a firm to begin to see what forces are driving prices and costs and where there is opportunity to position within the industry to achieve differences in prices and cost relative to competitors. It is industry structure that determines industry economics and firms must understand their industry and competitors from this perspective.
Understanding industry structure and the nature of competition allows a firm to begin to determine the actions that can be taken to improve economic profit. These actions comprise the firm’s competitive strategy. Forsaking this analysis leads a firm into the dangerous trap of competing to be the best: the firm assumes that higher returns can be had by simply doing better what it is already doing. Avoid this trap at all costs.