Racing to the bottom doesn’t win the race unless you’re a skier. When a business faces new competition and lowers its prices in a race to the bottom, it’s a quick route to commodity products and razor-thin margins.
What’s the alternative? In a one-page refresher course on competitive strategy, Hugh Macfarlane reminds us that Michael Porter proposed three generic strategies for responding to competitive forces.
The two main strategies are:
1. Spend less than your competition to produce your products and services. Spend less, but maintain your quality standards. This doesn’t mean just cut your prices. It means finding ways to use your unique capabilities to make things at the same level of quality as your competition, but at a lower cost.
WalMart sells products whose quality is at least as good as the competition in its market, but produces them at a lower cost. It purchases in large volume and pressures its vendors to lower their prices, it improves the efficiency of its distribution system, and it keeps labor costs low.
2. Charge more than your competition without increasing your costs. Charge more because you have found a way to use your capabilities to build a product that customers will pay more to obtain. Create this differentiation without increasing your costs.
Apple is a good example of a company that has not increased its costs to make something that customers willingly pay more to obtain.
Don’t try to do a little of each of these strategies. If neither of them work, then apply the third strategy.
Focus on a niche market and apply Spend Less or Charge More in your specialized market.
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