Companies often have a clear picture of their internal performance but have little visibility into their markets and competitors. Knowing the attractiveness of your markets and your competitive position in them is critical, however, to understanding where and how to compete.
Pop quiz: If a business is earning a high profit margin, is it a good competitor?
Answer: Not always. Perhaps they are an average or below-average competitor in a very attractive market. For example, the Software and Programming sector earned $50 billion from $250 billion of revenue in the last 12 months, a 20 percent net income margin. A software company earning a healthy 10 percent margin is well below average and is probably at a competitive disadvantage.
Conversely, look at Alaska Airlines. Last year the air carrier delivered a 5.6 percent net income margin—well above the airline industry average of 1.3 percent. Alaska Airlines may be a good competitor in a difficult industry.
Picking Your Markets
One of our clients, a consumer packaged goods (CPG) company, wanted to understand their markets and competitors. Our analysis found that almost all their product lines were in attractive markets.
Although it was not an explicit part of their strategy, our client was very good at picking attractive markets in which to compete. More often than not, the management team chose markets with the following characteristics:
- Consumer spending on the products in the market was a relatively low percentage of household budget, creating little price sensitivity
- Brand equity and consumer faith in a brand’s promise had far more influence on a consumer’s buying decision than price
- Low-priced competitors and store brands were unable to gain significant share in the market
- New entrant brands were unable to gain significant shelf space without a “helping hand” from one of the major competitors (i.e., brands typically needed to be acquired by a major competitor to achieve national distribution and a meaningful national share)
As a result, those markets were very attractive for the average competitor. Our client, however, wanted to be an above-average competitor. By choosing attractive markets, they had won half the battle before they even began to compete.
How carefully do you choose your markets? How attractive are they?
Deciding How to Compete
Having decided where to compete, our client then needed to decide how to compete. Different markets have different winning formulas. In some markets, brand strength may be the best competitive differentiator, in others a low-cost position, in yet others a comprehensive product/service offering or an ability to innovate more quickly than rivals.
In our client’s markets, the strongest brands tended to win. There was a virtuous circle where strong brands gained significant retail shelf space, and a good shelf position built brand share and equity. This played right to our client’s strengths as a brand and distribution manager: their secret sauce was to buy up regional brands that had national promise, give them the national distribution and brand-building they deserved, then successfully manage them as long-term value-creating brands, with significant brand equity and retail shelf space.
As a result, our client was consistently an above-average competitor in attractive markets. They were able to generate significant returns on their brand acquisition investments. They did not need to create ground-breaking innovations or invent new markets. They could simply wait until a product category began to show some promise, then buy one of the more attractive brands in the category and build it into a top national competitor. Then simply “rinse and repeat” this very successful business model.
Perhaps the two most important strategic decisions a business manager can make is where and how to compete. You should make those investment decisions with the best information possible about your markets and competitors.