Maintaining Competitive Advantage
As a rule of thumb, the biggest threat to market leading, differentiated companies is imitation. That is, other companies trying to do the same as you’re doing, fighting over the same customer-base.
One way to prevent imitation from existing players in the market is to make some trade offs. What do I mean by that?
Making a trade off is the conscious decision to not do something. By doing this, it makes it harder for competition to imitate your business. Let’s look at an example:
Trader Joe’s is a grocery store in America. The founder could have looked at Walmart or Publix and chosen to imitate their strategies – it doesn’t seem too hard to do that, right?
But, he didn’t. He decided to make a number of trade offs which would put his business in a better position. Some of those decisions were:
- Only ‘Trader Joe’ brand items
- Limited & constantly changing product range
- Small stores with narrow aisles in old, undesirable mall’s
- No coupons or loyalty cards
- No special offers or sales
Why did he decide to do this? Well, let’s break the decisions down, using the 5 forces model we discussed here.
How did Trader Joe’s use the 5 forces?
The grocery industry suffers from all 5 forces generally working against companies operating within the industry. Trader Joe’s took a few of those forces and flipped them on their head, making them work for, rather than against their company.
By only stocking own-brand products, Trader Joe’s reduced the bargaining power of the buyers. After all, they have no idea who actually makes the product that they’re buying. If they want it, the only place they will find it is at Trader Joe’s.
By chopping and changing product ranges regularly, Trader Joe’s mitigated the risk of supplier negotiation. If the supplier knows that Trader Joe’s has no problem taking the products they supply off the shelves, they’re not going to negotiate too hard and risk losing business.
They further mitigated supplier negotiation by opening stores in old mall locations rather than prime locations. This ensured that property firms struggled to raise rental costs, keeping Trader Joe’s operational expenditure low.
They actually managed to somewhat mitigate the threat of alternatives / substitution too. Some customers view their trip to Trader Joe’s as ‘a Saturday morning vacation’ and actually view the trip as an enjoyable experience. That’s not something you get at any other supermarket.
That’s great, why don’t others copy their model?
Well, let’s break each one down, one at a time.
Firstly, could established competitors only stock their own brand items? Not really. They run the risk of alienating their existing customer base, should they decide to stop selling all the brands that they love.
Then there is the fact that the competitors all operate out of huge warehouse-sized buildings. If they only sold brand items, they’d have to re-locate all of their stores to smaller premises, in less ‘prime’ locations, again, losing some of their core customer base.
They probably already offer coupons and loyalty cards. How would existing customers feel if they suddenly took them away? This too could have an irreparable impact on the company reputation.
What about new competitors?
This has been attempted. Tesco launched a brand called Fresh & Easy, specifically aimed at competing with Trader Joe’s. This didn’t work as the company ended up straddling two different business models. They weren’t quite a fully fledged Tesco store, yet, they weren’t as simple as a Trader Joe’s. They still had loyalty cards and they even had parking spots for hybrid cars outside of their stores. They had $1.2bn of cumulative annual losses.
So what’s the moral?
By stopping negative forces against their business, Trader Joe’s mitigated the buyer and supplier powers against them. This put them into a very strong position.
However, Trade offs constrain growth as they narrow the customer market. In Trader Joe’s instance, they’ve narrowed their market to those individuals that don’t mind travelling to less-desirable locations for their weekly shop and those people that don’t mind going without brand products.
There are quite a number of companies that realise this and so they start to violate the trade offs they made to widen their target market. This is usually because they feel that they have saturated the market that they originally set out to dominate. This often waters down their original proposition and leaves them straddling two strategies – not a desirable position to be in.
So the moral of it all is that trade offs create a unique and hard to imitate strategy. This makes any competitive advantage gained much more sustainable. However, this can cause problems with long-term business growth.
Trade offs have been used by major companies. Google, for example made a number of trade offs to deliver one of the least cluttered web pages on the planet. They sacrificed having news & other content on their homepage. They then worked on amplifying what they did well by enhancing their search algorithms. This put them in a strong position – Yahoo couldn’t just remove their rich homepage content as that’d upset existing customers, yet Google was running away with the simplistic interface that they’d adopted. Do you see any similarities with Trader Joe’s? Sometimes simpler is better.
Remember that trying to copy other businesses strategies leads to homogenisation. Rather than copying others, you should work on amplifying what you do differently (and well), just like Google did, with their enhanced search algorithms.
If you want to know how long it’ll take for a company to double in size, you need to divide the number 72 by the company growth rate. For example, 72 divided by a growth rate of 20% would mean that the company would double in size within 3.6 years. Cool huh?