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There’s a Difference Between Winning and Beating Your Rivals

September 1st, 2020

The basic purpose for developing and implementing a competitive strategy is to achieve superior economic performance in creating and delivering value to your selected customers. The most common way to monitor financial performance is by means of the return on invested capital but, in saying that, other non-financial outcomes are important as well.

Superior economic performance is a noble objective for two reasons. First, it reflects the fact that customers have been willing to favor you with their loyalty which is reflected in the net operating profit you have earned.

Second, the denominator in the ROIC formula represents the economic resources (debt and equity) that the business used to produce the value delivered to its customers. In other words, that the ROIC reflects the combined impact of an efficient and effective use of those resources.

Achieving superior performance as defined is not the same as beating the competition. It simply means performing better in terms of profitability per unit of invested capital than other firms in its industry. The idea of “beating”a competitor presents business as a zero-sum game as sports is. And while there are many useful similarities between sports and business, the idea of business being in a zero-sum game is not one of them.

I say that for two reasons. First, it is not unusual for a rival firm in an industry to also be a complimentor (a term invented by Brandenberger & Nalebuff – see below) and so the idea of “beating” you rival because the only way you can win is for the other party to lose not only makes no sense but that mindset is likely to destroy any prospect of mutually beneficial collaboration. We see synergy from inter-business collaboration all the time and it certainly happens in the accounting services sector.

The second reason (and one that is also shared by the leaders of great sports teams), is positive, results-orientated business leaders cherish the opportunity to compete against the best in class. This is what incents them to perform at a higher level. These people respect their rivals and consider them to be worthy opponents who serve to bring out the best in them. To be sure, they seek to win the superior performance race but that is a different objective to beating the opposition because the whole purpose of business strategy is to play a different value game from rivals.

Michael Porter in his work on competitive strategy talks about rivalry between competitors, the intensity of which is determined by five forces; (1) the threat of entry, the power of (2) buyers and (3) sellers, (4) the availability of substitute products and the mindset, the resources, and the (5) operational ability of rival forms.

At the end of the day, when businesses are competing for the same share of a customer’s wallet it may end up as a zero-sum game but what I’m suggesting in this post is that’s not the objective pursued by good competitors and, as game theory shows, it may not even be a good outcome for a dominant firm that had total annihilation of a competitor within its power.

I’ll leave you to read Porter’s book Competitive Strategy: Techniques of Analyzing Industries and Competitors, and Brandenberger & Nalebuff Co-opetition in which they show how game theory confirms what I’m discussing here.

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