As uncertainty is increasing and competition is becoming more fierce, executives need to have a broader understanding of competition itself in order to sustain an edge. Executives should be thinking about four different types of competition to maintain relevance in a changing environment, which originate from our work on competitiveness, strategy, and strategic change.
In the figure below, these four competition types are positioned along two dimensions, which reflect two distinct questions: (1) “Are there customers for which to compete?” and (2) “Are we being outcompeted?” These questions will help you identify the type of competition that currently exposes you to the greatest existential threats. Executives who consider and discuss all four types of competition will uncover important insights, and such an analysis can help move your strategy forward.
The four types of competition
The table below provides an overview of the four types of competition and the four key questions that help identify important strategic issues:
Competition for relevance. The first, and most fundamental, level of competition relates to competition for relevance. Here, executives must ask: “Does our offering meet and satisfy actual consumer needs?”
Technological developments are often interesting to discuss in relation to relevance. For instance, numerous smartphone apps have been developed that do not solve any actual problems. A current example of uncertainty around relevance concerns blockchain, i.e. the technology behind virtual currencies such as bitcoin. On the one hand, it has been questioned whether blockchain is essentially hype, or whether it really fulfills an actual need among the mainstream public. On the other hand, if the blockchain technology really lives up to its promises of securing transparent and secure transmissions, then it will also challenge the relevance of intermediaries such as brokers and bankers who may no longer be needed. In other words, the technology can make brokers and bankers irrelevant. Consequently, the blockchain technology is a great example of the uncertainty that often accompanies new technological developments — it can either remove the relevance of established organizations or it can prove to be an unsustainable alternative without sufficient mainstream relevance.
Competition for dependence. When relevance is established, executives face another level of competition: competition for dependence. This refers to the notion that organizations also compete against consumers’ abilities to satisfy their own needs and their jobs-to-be-done. In other words, consumers can often create a solution for themselves, thereby making the organization’s offering obsolete.
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An example of the difficulties of competing for dependence can be seen in the rise of the “DIY-economy,” which was particularly pronounced after the 2008 recession. At that time, many consumers adopted a new level of frugality, such that they took on previously outsourced tasks and became more self-reliant. For example, many consumers started to dye and cut their own hair; brew their own espressos; wash their own cars; clean their own houses; and walk their own dogs. This “insourcing” of household chores hurt many of the small, service-oriented businesses that had previously handled these tasks. However, some organizations have been able to capitalize on self-reliance. For instance, Target has run marketing campaigns that glorify do-it-yourself alternatives, while IKEA has become synonymous with enabling consumers to do the work themselves.
Competition for preference. Given relevance and dependence, the next battle is to compete for preference. Organizations compete to gain customers’ preference for their offerings over those of competitors.
An example of competition for preference is the retail industry, which has long been a battleground for customer preferences. Interestingly, customers have varied preferences for retailers depending on the product category. Therefore, the retail market is actually several markets. For example, customers may prefer Target for product category A, Walmart for product category B, Staples for product category C, and Amazon or Alibaba for product category D. Consequently, the battle with competitors for customer preference often takes place on the specific product-category level. Moreover, this form of competition can lead to price pressure, which may have a damaging effect on industry profits. However, the battle for customer preference is not solely fought in specific product and price categories — it is also fought in the domains of location and promotional expenditure.
Competition for excellence. After successfully competing for relevance, dependence, and preference, organizations must consider competition for excellence. At this level, the challenge is to sustain the organization’s advantage while continuously seeking renewal.
An example of a failure to compete for excellence is illustrated by how Nokia, in the midst of their success, failed to keep up with the competitive threats from Apple. Despite being a leader in the mobile phone market with a market share of over 40%, Nokia experienced a dramatic decline that led to a sale of its mobile phone business to Microsoft in 2013. The demise was partly caused by a competitive shift towards software and ecosystems rather than hardware — and Nokia did not appropriately adapt to this environment due to conservatism and a belief in their existing strengths. Put differently, Nokia’s past success acted as a blinder to peripheral threats coming from unexpected sides.
How to use the four questions
How can executives actively ask these four questions and compete on all four levels to ensure renewal and sustain corporate performance? Executives can introduce three initiatives:
- Put the questions on the agenda and regularly challenge your strategy: The four types of competition should be used as a checklist for regularly challenging the strategy. Asking questions about the strategic plan is necessary for stress-testing a strategy and for applying a moderate amount of stress to your strategy.
- Let different employee types discuss the four questions: It can be beneficial to invite different types of employees to discuss the four questions, including employees at different hierarchical levels and different types of project managers.
- Implement strategic projects for all four types: The four types of competition can provide a categorization tool for different types of projects from which an organization can compete. For instance, companies can have a project where they collaborate with users to develop or refine a specific product or feature. Such an approach would improve the “competing for relevance” and “competing for dependence” dimensions, as it would secure user relevance while proactively co-developing for dependence.
Competition is a multifaceted concept that plays out in different ways. Therefore, executives need to keep an eye on all four types of competition in order to remain competitive in an ever-changing world.