Perfect competition – the economist’s market structure where many sellers are producing the same product, and selling it to many buyers, is an unfavourable scenario. Why? Because profits are ultimately driven to zero.
Why, then, would firms in imperfectly competitive markets want to pursue actions which would lead them closer to perfect competition? The answer is, of course, they wouldn’t (or shouldn’t).
The more firms are alike, the less reason there is for consumers to choose one seller over another. If all the firms in an industry have essentially the same product, the same quality, the same delivery, the same service, etc., then they have homogenized themselves into sameness. More than that, because of their sameness, no single seller has any ability to influence the market price for their product. Each firm thus gives up their market power and is reduced to the role of price-taking where they must accept the price consumers are willing to pay.
Sadly, many firms pursue policies and actions which lead to eroding their differences from rivals. Substituting operational excellence for strategy is one such example. Firms which are always striving to be “better than the competition” by doing the same things, only better, have fallen into this trap. Carried to its logical outcome, the blind pursuit of excellence leads to sameness, where all competitors are striving to outdo the other but yet achieving no valuable differences. Put another way, the more competition becomes symmetrical, the less profitable it becomes.
Does this mean firms should just be different for the sake of being different? Of course not. Differences must be valuable to customers, meaning that differences represent choices to be made – which customers to serve, which products to provide, which collaborators to involve, what activities to perform, what level of quality is appropriate, etc. Making choices and considering tradeoffs is the role of strategy, not operational improvement.
Competition is not about winner takes all. It is not a race where the most excellent company always wins. Competition is about building and leveraging valuable asymmetries between your firm and rivals. The more firms try to be the same, the more they set themselves up to fail.