Choosing Competitors Wisely, and A Word On Spiders

Living in the Midwest, one of my biggest fears is the bite of a brown recluse spider. I'm not a big fan of spiders in general, but nothing is creepier than a highly venomous spider that likes to hide in damp dark places. Places like your clothes, your closet and your shoes. Awful isn't it? If you have these spiders you can call an exterminator and with the right treatment get rid of every spider in your house. They may be able to alleviate the problem for a month or two, but pretty soon they will be back. The worse thing is that after an extermination, your house can be overrun by a single species...possibly the brown recluse. This is actually how a lot of brown recluse infestations happen. The truth is, you are always going to have spiders in your house. Always. You might as well just accept that. The key is having the right kind of spiders. Harmless orb spiders and daddy long legs actually prevent the intrusion of the brown recluse. This same thinking applies to your competitors. Every business will have competitors no matter what actions are taken to defeat them.

Choosing Your Favorite Competitors

The key is knowing what a good or bad competitor is. The decision comes down to corporate strategy and industry structure. Choosing competitors based on corporate strategy requires a basic understanding of the four generic strategies. For example, if I am a cost leader (Target) in an industry I'm not focusing too much on the focused differentiators (specialty clothing stores etc.). This is only true if the focused differentiator knows their place in the industry. Companies that threaten to shift their generic strategy to compete with you directly are a problem (e.g Continental Airlines starting Continental Lite). This is pretty straightforward. Companies are threats when their generic strategy is similar to yours or threatens to be similar.

Industry structure is best analyzed through Porter's Five forces model. Each of these forces determines the profitability and health of your industry. Competitors that effect one of these forces in a way that decreases profitability should be targeted more heavily than those that don't. For example, competitors that decrease the barriers to entry in an industry when equally profitable barrier enforcing alternatives exist. Another form of bad competitor is the one that is too price focused and causes needless rivalry and reduces the profitability of all firms. Just look at each “force” and decide which competitors are making them better for your market and which ones are making them worse.

Good competitors understand the industry, their place in it, and the need to maintain strong profitability. Bad competitors do not adopt clear strategic positioning, make poor structural decisions and compete on price, ultimately reducing their own profitability. It's not an issue of collusion. It's a matter of good decision making. Why wreck an industry when equally good alternatives exist that reinforce an industries profitability. If you make a decision that hurts a good competitor and helps a bad one, your “house” could get overrun by the "brown recluse" of your industry. If you are presented with a decision that would either harm a bad competitor or a good one, and either decision produces the same result, harm the bad competitor. This philosophy will create more long run profit potential in your industry.

A great example of this was IBM and Cray Research (they make super computers) in the 80s. IBM loved Cray Research. IBM could have made more threatening moves toward Cray Research, but they wanted the company to prosper. The super computer market was a logical entry point for the Japanese. Cray was blocking this entry point and also understood their place. Cray had no desire to expand into the general PC market. They were good at what they did and made great money doing it. It was a great example of two competitors that understood their place and maintained their positions and in turn, sustained the profitability of their vertical.

Conclusion

Whether your trying to keep from being bitten by a brown recluse or being dethroned by the competition, you will always have both spiders and competitors. You just need to identify the good ones from the bad ones and make strategic moves that fill your house with friendly spiders and your industry with good competitors.