Monday Mornings with Madison

Handling Competitors

There is no business that exists anywhere in the free-market world that is without competition… at least not for long.  The moment a product or service is invented and sold, someone somewhere opens a business that rivals it somehow.  The competitor’s delivery method might differ.  Or its service and support might be better.  Or the competitor’s product might be slightly improved.  Competition is inevitable.

Since part of being in business includes having competition, businesses must decide how to contend with competitors.  Is there a right way to handle business rivals?  Some entrepreneurs approach competitors like arch enemies.   Others see competition as a good thing, driving companies to continually improve.   Still others see competition as a non-issue.  And there are some who – at their own peril — dare to ignore competition altogether.  Which approach for dealing with business rivals is correct?   Is there a right way to view competition and handle competitors?

A Plethora of Approaches

It is said that there are different strokes for different folks.  That is certainly true for how business leaders view and deal with competitors.  Reactions and attitudes range from mild opposition to extreme antagonism.   While some organizations approach competition with decorum and an attitude of friendly competition, such as physicians, hospitals and the world of non-profits, other industries are much more ruthless with competitors.  Marketing campaigns for certain products have reflected this deep aggression, such as the “Cola Wars” between Coke and Pepsi, and the more recent battle between insurance giants Geico, Nationwide, State Farm and AllState.  The approach that employees take toward competitors is often a reflection of the position taken by a company’s leadership.  Which is right?

Competitor as Foe

Some entrepreneurs proudly approach competitors like arch enemies.   Their primary goal is to drive competitors out of business.  For example, serial entrepreneur Mark Cuban, owner of the NBA Dallas Mavericks basketball team and tech industry mogul (who made his first millions when he sold his computer consulting firm Microsolutions to CompuServe in 1990) is cutthroat with competitors.  He unapologetically seeks to squash all competitors to the over 30 businesses he invests in and/or owns.  Kevin O’Leary, mega Canadian entrepreneur and financial columnist, shares a similar sentiment.  “Business is war. I go out there. I want to kill the competitors. I want to make their lives miserable. I want to steal their market share. I want them to fear me and I want everyone on my team thinking we’re going to win.”  Many other business leaders take this dog-eat-dog approach to competition.  Facebook, for example, stopped indexing Twitter tweets, viewing that service as a direct competition to its own business lines.

However, this cutthroat approach is one that is not supported by research.  It is an approach that can, and often does, more harm than good.

Competitor as Friendly Colleague

While a kill-or-be-killed approach might seem to be in line with the values of good, old-fashioned capitalism, in which the best businesses thrive while the weaker, poorly managed, overpriced and underperforming companies fail, there are companies that don’t take an aggressive and adversarial position again competitors.  Such companies refuse to stoop to that kind of behavior.  They believe that overreacting to competitors might cause internal panic leading to irrational behavior such as slashing prices and overspending on aggressive marketing campaigns.  It might also lead staff to badmouth competitors, which can actually backfire.

In fact, research suggests that having big competition could actually work to a small or mid-sized company’s advantage  Large competitors are often viewed as a major threat for startups and small companies; big companies have more financial resources and greater scale, market power and brand awareness than smaller ones. However, research shows that a smaller brand actually benefits if consumers can see the competitive threat it faces from a larger organization.

Case in point.  When Cold Stone Creamery, a U.S.-based ice cream chain with about 1,400 stores, moved within 50 steps of a J.P. Licks ice cream store in Newton, Massachusetts, some people expected that J.P. Licks, a small, locally owned company, would be forced out of the market. Instead, consumers rallied around J.P. Licks, and Cold Stone later closed its nearby location.  Similarly, when a Starbucks opened next to the Los Angeles-based coffee store chain The Coffee Bean & Tea Leaf, sales shoot up — so much so that the owner started proactively co-locating new stores next to Starbucks.

These are not anomalies. Six studies reported in the MIT Sloan Management Review explored the effects of a company having a large, dominant competitor and found that highlighting a large competitor’s size and close proximity can help smaller brands, instead of harming them. Compared to when those brands are in competition with brands that are similar in size or when consumers view them outside of a competitive context, small brands see consumer support go up when faced with a competitive threat from large brands. This support translates into higher purchase intention, more purchases and more favorable online reviews.

Instead of a cutthroat approach, companies can take the stance of viewing competitors as ‘friendly foes’.  They can check out competitors on occasion, while continuing to put their best foot forward with their own customers.    In this approach, businesses study the strengths and weaknesses of competitors in order to improve their own quality and customer service.  They monitor competitors closely but focus the most energy on ensuring their own business is doing its best to keep customers and employees happy.  They also find out what their competitors do well and what they don’t do well, and how that might impact business. The goal is not to ruin competitors.  Instead they keep a close eye on sales numbers and other major metrics to ensure that business isn’t being hurt by competition.  This is a much more healthy approach.

Competitor as Non-Issue

Verne Harnish, CEO of Gazelles and speaker/author on entrepreneurship, has told business owners “You’re looking at a $74 trillion global economy – so there is plenty of business to go around.  Some companies see competition as a non-issue.  They choose to ignore competition and stayed focused on establishing a beachhead of customers.  Some business owners believe that they don’t need to worry about competition because there is enough business to go around for all.

Competitor as Real Threat

However, it is probably not wise to disregard competitors altogether.  Consider that the first home video recorder to hit the market back in 1975 was from Sony, using the company’s Betamax format. Soon after that, JVC released a competing home video recorder that was lighter, cheaper, and used VHS format tapes that could hold a two-hour movie instead of Betamax’s one-hour limit.  That was the key.  Sony did nothing to improve Betamax.  As a result, VHS was readily embraced by the video rental industry because a single cassette could hold an entire movie. It was that slight advantage in functionality and price that eventually gave VHS a greater market share that grew until Betamax became nothing more than a footnote in the history of consumer electronics.

Another company that ignored new competition was Borders Books.  In September, 2006, Borders – a 40-year-old company — was profitable and growing.  It was the number two book retailer in the U.S., selling cheap books at discount prices.  Borders’ competitive advantage in its heyday was that it stocked tens of thousands of titles in a single store when most independent bookstores could ill afford to stock a fraction of that.  Borders also had a superior inventory system that could optimize, and even predict, what books consumers nationwide were likely to buy.  Beyond the U.S., the Borders empire had grown to over 1,250 stores globally including the U.K., Ireland, Australia, New Zealand, Dubai, Oman and Malaysia.  Yet, in the span of five short but acutely painful years, Borders went from behemoth to bankruptcy.  Borders’ tragic end was not a mystery.   While the economic downturn certainly hastened Borders’ demise, it was not the primary cause of death.  Borders’ biggest mistake was that it ignored the competition.  It did nothing as box giants such as Walmart and Target entered the book-sales space.  Then they handed over their online sales to Amazon… synonymous to letting the fox in the hen house.  Borders underestimated its competition and paid the ultimate price.  They went out of business and over 10,700 people lost their jobs.

Perhaps the moral of the story is that the competition is neither friend nor foe, adversary nor colleague.  The competition is just that… businesses vying for every sale and maneuvering for market share.  It is best to have a healthy respect for and keep one eye on the competition, but understand that competition also serves as an impetus to change, improve and do better.

Quote of the Week

“No man ever got very high by pulling other people down. The intelligent merchant does not knock his competitors.”
Alfred Lord Tennyson

 

© 2015, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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