Competition in Business: You're Thinking Too Narrowly

This article is an excerpt from the Shortform summary of "Understanding Michael Porter" by Joan Magretta. Shortform has the world's best summaries of books you should be reading.

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What is competition in business?

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

What is Competition in Business?

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.

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 “competition to be the best.”

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

For example, McDonald’s 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’re each playing their own sport.

In business, your default thought should not be “how do I win this market,” but rather “which segment of the industry can I service well?”

There’s no such thing as “the best.” 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?

A better analogy than war might be performing arts. There can be many good singers, each outstanding in a distinctive way, each with its own captive audience.

The point of competition is not beating your rivals. The point is to earn profits.

Bad Strategies

Strategy is the means by which a company, faced with competition, achieves superior profitability. Profits = Prices – Costs

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.

Here are examples of bad strategies that won’t lead to a viable long-term advantage.

Operational Effectiveness

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

This leads to a competition based solely on price, where products are undifferentiated and competitors erode each other’s profits.

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, leaving customers under-served or over-served.

Poor profitability undermines investment, making it harder to improve value for customers or fend off rivals.

Economies of Scale

There are advantages to being bigger in most businesses. This insidiously promotes “winner-takes-all” thinking. Mergers and acquisitions also fall into this bucket.

Unfortunately, economies of scale are exhausted at a relatively small share of sales. There’s little evidence showing that companies with the largest market share are the most profitable. It’s critical to examine the numbers and examine the mechanism by which size leads to better profits.

Seek to be “big enough” – say 10% of the market – rather than to dominate it.

Serving All Market Needs

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.

A common pitfall is that companies expect their customers to stay loyal to their brand when the company releases new products. “If customers come to us for auto loans, surely they would also come to us for home mortgages.” This loyalty is often overestimated. Consumers are fine going to different vendors for different products, if the value is superior.

In the extreme, consumer packaged goods companies like Johnson & Johnson have totally different brands for different categories – you don’t see Tide toilet cleaners.

For example, it’d be a mistake for In-N-Out to start a fancier sit-down restaurant brand like In-N-Out Gourmet, for a few reasons:

Their current activities are ill-suited for servicing the new segment. Starting a sit-down restaurant and operating a fast food restaurant require very different activities, some of them contradictory.
This expansion would pollute the brand and what In-N-Out stands for in customers’ minds.
Customers are happy going to other restaurants for fancier burgers. They don’t need In-N-Out specifically to fill that need, nor will their loyalty to In-N-Out carry over strongly to their new product.

Miscellaneous Bad Strategies

The following are not strategies, because they describe goals or tools, not how you will accomplish the goal:

Our strategy is to be the best. (Jack Welch at GE was famous for this.)
Our strategy is people.
Our strategy is to increase shareholder value.
Our strategy is to execute better than competitors.
Our strategy is [our value proposition]

Now you know the answer to the question “what is competition in business?” This can help you define your strategy and identify your competitors. Identifying and adjusting to real competition and business is an important part of your overall strategy.

Competition in Business: You’re Thinking Too Narrowly