Business Strategy and the Network Economy

If I had a nickel for every time I heard the phrase "in today's competitive environment," I'd be a rich man. Well, with the currency exchange rate not particularly favoring the US dollar, at least I'd have lots of nickels. That's got to be good for something. Door stop. Percussion instrument. Something.

But what's at the heart of "today's competitive environment," or is it just an empty phrase? Are we really seeing hyper-competition that drives down profits, and is that from a bunch of new players, or from other forces?

No, yes, yes, yes. No, it's not just an empty phrase. We are seeing increasing competition that drives down profits, there are plenty of "new entrants" (as Michael Porter would call them), and there are other forces at play.

There are some surprises here, though.

Increased Competition
How do you measure increased competition? Sometimes you can spot it when sectors lose overall profitability. Sometimes the clue is a flurry of mergers and acquisitions that help companies through scaling their efforts or eliminating competitors by buying them. And there's no question that some sectors show both of these happening. In banking and law, I've personally known executives who have face profit crunches and M&A.

But it's not always as easy to spot this trend because a natural response for a thoughtfully managed company is to specialize their offering -- or to offer it in a special way. In the first example, you'll see some law firms making more profit than ever focusing deeply on one subject matter, often a narrow niche in a traditional practice area. The more you know, the more effectively you can create winning legal strategies for your client -- and the more you can charge relative to your competition. You may spend fewer hours as an attorney working on an issue because of your effectiveness, but because you can charge more, each hour is more profitable. And banks differentiate themselves increasingly as being, for example, especially pro-small-business, or with a pure online play.

Banks that leverage social networks and online communities can provide marketing scale, improve loyalty, engage more "almost customers", and reduce the costs of acquiring customers. A pure web-play bank may or may not win big (Egg in the UK was not a big money-maker, but ING Direct and e-trade are doing well). But it does change the business model -- what your people do, whom you hire, the technology you use and the cost of your money.

The Perception of Increased Competition
Even if the signals that prove increased competition (lower profit margins, increased differentiation within a sector) are a bit fuzzy, there is nothing clearer than the perception among businesses that competition is fiercer. And, perception is often a precursor to reality ...

So, why do businesses think their competitors are gaining on them? Increased transparency of their competitors' offers (thanks to the Internet), added to increased transparency of dissatisfied customer comments. Really sophisticated companies, and many of the largest companies, get their competitive intelligence properly packaged, analyzed and contextualized. For the rest of us, we use Google -- and the results aren't pretty for most small and medium-sized businesses. We're not on the front page of Google when we do a search on our sector. We're able to find negative comments about our company just by looking. We can get competitor pricing easily -- and gosh, it's lower than ours! Gulp. And, of course, their sites look better than ours.

All this Google-snooping definitely paints an (anecdotal) picture of increased competition. It may also lead in fact to increased competition, because your prospects and customers can find the same information and they can make a vendor choice based on it. But, there's still hope for the nervous. More on that in another posting.

The forces at work
I mentioned Michael Porter at the top of this posting, and if you followed the link you found out a bit about his five forces. These are market forces that, in his studies, have shown to dramatically affect a company's ability to compete. If you add in regulatory forces, and partnerships, you've got seven forces, but who's counting?

But even companies like Wal-Mart, who do a terrific job competing "effectively" in the United States (definitely forcing down prices and even putting small, differentiated shops out of business), just got drummed out of Germany. While some analysts put this failure down to a really mature ecosystem of low-price stores, I think the issue is much more clearly a mismatch between Wal-Mart's fundamental organizational design and culture, and what German consumers really want.

In short, Wal-Mart didn't adapt to fit the experience expectations of German consumers. It's a perfect example of how five OTHER forces are at play in the marketplace -- the five forces of customer experience management.

What are those?

I'll post on that next time. Or, you can come to Bogota, where I'll be teaching them at a CRM/CEM Summit this May ... let me know if you're interested in attending. Even if you read my next posting, you might want to attend -- it's a great city!