I posted recently about how competition operates through 3 distinct mechanisms:
- Racing to win new potential customers before rivals get them
- Fighting to steal existing customers from rivals – and stop them stealing ours!
- Battling to get more share of sales than rivals to disloyal customers
I mentioned that these 3 mechanisms feature more or less strongly in different markets, vary in their influence over an industry’s life, and most often operate simultaneously, though with varying significance.
This graphic shows how type-1 competition dominates the early days of a new market’s emergence. Type-2 competition becomes more significant as the market grows, and dominates any truly mature industry. If type-3 competition is possible (customers can switch who they buy from as often as every purchase-occasion), then that too will become increasingly significant as the market grows and matures.
(Experienced folk in any business probably know this already, but it helps to make it explicit, especially for new-comers to your environment).
If only life were so simple! Some extra issues to recognise …
Create the potential
We might just assume that there is already some potential market out there for some innovative product or service. Our challenge in a new market, then, is simply (!) to win the race to capture those potential customers.
But many of the great businesses we know did not make any such assumption, Instead, they believed that if a product’s benefits and value could be built strongly enough, then new potential customers could be brought into existence. This led Gary Hamel to remind us that we are competing for “opportunity share”, not for “market share”
You’d think that the market for children’s shoes would be ‘mature’, but every year, a new cohort of 5-year-olds need school shoes, so suppliers like the Clark’s in the UK are engaged in type-1 competition for the 1st-time purchases of those children’s parents. Then it’s type-2 competition for every larger size as the children grow up.
And every year there’s a new generation of older folk needing home-care or mobility scooters!
“Demographics” may not seem relevant to B2B cases, but new businesses too are ‘born’, becoming new potential customers for a range of product and services, such as food supplies to restaurants.
Markets where products or services get updated through successive generations also complicate the picture. If the current product generation is truly mature, all potential customers are either with us or with competitors, so we will be fighting type-2 competition. (Think back to when 3G phone services were pretty much universal).
Then we and competitors both develop and promote a new-generation product (4G phone services). Effectively, all the existing customers currently with each competitor become potential customers for the new product generation. And we start type-1 competition all over again. Of course, competitors in such cases try hard to migrate existing customers to the new product generation, but for a while, those customers could be lost.
Wherever your business is in this picture, It is best to be focused and intentional about exactly which type[s] of rivalry you choose to fight, and which tactics you pursue. In our digital-twin competition models, that means which flows of customers through the system we are trying to drive or restrain.
And if possible, pick your targets, which customer segments, from which competitor[s]?
As ever, it is of huge value to model how competition is affecting your business, so you can simulate how competitive strategies and tactics could play out, then manage events as the future unfolds. Learn all about modeling competition in our online class 7. You need to understand the Core principles first (classes 1-4), but classes 5 and 6 are not a pre-requisite.