Compete where you have an advantage and can win, and don’t be tempted by the siren song of business models you don’t know how to execute.
Do you have a business that can never seem to win? Is it continually passed over by customers in favor of competitors? Is it soaking up investment with little positive result? If so, it may be that you’re fighting on someone else’s battlefield. To which we have a simple prescription: Stop!
We recently wrote about a consumer packaged goods company that almost always did a great job of picking attractive markets and building a competitive advantage. Almost always. They had one division that was competing in an unattractive market, where they were at a competitive disadvantage.
Most of the company’s chosen markets had attractive characteristics:
Brand equity was a key factor in consumer buying decisions
Low-priced competitors and store brands were unable to gain significant share
However, this one division competed in a market with diametrically opposed competitive dynamics:
Little differentiation between competitors on product quality
Consumers were generally indifferent to brand
As a result, competition was primarily on price
Aggressive new low-cost competitors and store brands were gaining significant share
Given these dynamics, our recommendation was to divest the business, based on the following logic:
After years of investing in brand-building with no results to show for it, it was clear that the industry dynamics favored the low-cost competitor over the brand-building competitor.
Although many companies can thrive in such markets, by ruthlessly controlling costs and being the low-cost competitor, our client had no experience or track record competing that way. Their strength was in building and managing brands. It simply wasn’t in their DNA!
In these markets, well-established low-cost competitors had beaten them to the punch, so it was unclear whether they could win with a low-cost strategy even if they could achieve it.
In effect, they were fighting on someone else’s battlefield. With the resources they were burning in futile efforts to profitably grow this business, they could instead acquire and build new brands in much more attractive markets.
Regrettably, the company did not follow our advice on this business, and have continued to struggle. They have experienced declining volumes, lower pricing and have lost more than two percentage points of margin in recent years, and have had to increase their trade spending to achieve those result due to aggressive competitor activity. They continue to fight on others’ turf, with little positive to show for it.
The lesson: It is almost never profitable to fight on someone else’s turf. Stick to what you know how to do well, and don’t be tempted by the siren song of business models you don’t know how to execute.
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KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark