Welcome, and getting started6 Lessons
Modelling Competition12 Lessons
An Extension to the Core principles and business models.
This short course is just one of several Extensions you can use on its own or add to other Dynamic Business models, and remember you can also buy the complete set here for a lower total price (opens in a new tab).
What will I learn?
This class will show you how to model just 3 mechanisms to understand and win competition for customers and sales - and for staff. (See the curriculum near the end of this page). It would be great if we could persuade people or companies to become our customers and only buy from us - but those pesky competitors are trying to do the same! How exactly competition works depends on the kind of business you are in, and whether it is an early-growth market or a mature one.
Type-1 competition. For any new type of product or service, we will be racing to capture potential customers before our competitors do. We may even have to create those potential customers in the first place!
Type-2 competition. Later, especially for very mature products or services, there are no new customers to go for, so our only option is to steal customers from our competitors - and stop them stealing ours!
Type-3 competition. If customers can easily share their purchases between competing products or services, we must also persuade disloyal customers to give us more of their purchases.
... and these mechanisms may operate together at the same time!
Not a commercial business?... you still compete, for the staff you need, for the funding you require and maybe for other scarce resources too.
How does it work? As explained in our Core classes customers drive sales. So to model how competition drives our sales, we capture the changes to the number of loyal customers who buy only from us, those disloyal customers who buy from both us and from competitors, and the sales rate to both these groups. To do all that, we work out what drives customers to change their behaviour - and that is usually a balance between the benefits they feel our product or service offers and the price we charge - that is, value for money. There are complications to these basic mechanisms, of course, but the lessons in this class explain all these:
... there may be barriers or "switching costs" preventing customers adopting our product or leaving the competitor
... things work differently for durable products or services that people buy only once
... you may have to compete for intermediaries (dealers, retailers ...) as well as for end-consumers
... competing for staff involves its own set of drivers and mechanisms.
Competition models are definitely useful on their own! Absolutely any competitive episode should be played out in software before reality hits us - launching a new product, entering a new market, fighting off the latest attack by some aggressive rival, and so on. But we also need competition structures as part of any overall strategic plan for the business! (Note, by the way, that balanced scorecards, business-model canvases and most other strategy and planning tools take no account of competition at all!)
Fighting on all fronts! Few markets are as competitive as "fast-moving consumers goods" or FMCG, and the whole war happens again and again for every clever new product category that gets created. Can the first mover catch all the consumers before rivals catch on - or will they be copied fast so consumers never become loyal? And can older products be reinvented so competitors' once-loyal consumers switch over to your product?
There are just too many things moving about in such cases for spreadsheet-analysis to show you just what is happening or to plan sales and marketing tactics!
Winners in many markets show just what it is worth to win competition - Ryanair or Air Asia in their regional air-travel sectors, eBay or Ali-Baba in online markets, GE in engineering products.
These leaders have won competitive episodes repeatedly over many years, but here is an example of just a single, very aggressive, competitive battle ...
The division of global pharmaceuticals leader GSK shown in this figure owned 100% of a seasonal travel-vaccine market with the only licensed product ... but in March of the year in question, a major rival won approval for a me-too product.
John, the CEO, knew (1) that the rival would compete on price and (2) that its larger sales force would be highly motivated and could make enough sales calls that, in principle, they could take all of his customers in just 10 weeks, with the potential loss of a third of his Division’s cash flow!
Working first over just an afternoon with the simplest version of our type-2 competition model, John worked out how careful timing of marketing messages and promotion offers before the competitor's launch could protect most of his customers from loss.
Once the battle started, John developed the model further, to track and respond to events day-by-day, and add other tactics to undermine the competitor's credibility and motivation (exploiting the modelling of Intangibles in our class 9). The green-line result in the figure shows how much of normal sales he was able to protect, and even start recouping some share of sales in later weeks.
Protecting a seasonal drug-product's sales (the blue line is the normal sales pattern over the peak season, with no rival) ...
Even for smaller businesses than this GSK Division, competitive attacks like this are hugely costly. On the other hand, winning such battles can add a large fraction to future sales and profits. And what did it cost John to largely see-off this attack? - a few hours of learning and a trivial cost he could expense!
You will be able to use models of competitive dynamics, based on this course, in two ways ...
Like John, you can use competition models alone for "war-gaming", to explore competitive strategies, then train the team in the required tactics, and manage the ensuing battle continually.
In addition, if competition continually affects how well you perform in achieving your Business Plan aims (as it nearly always does!), you can build competition into your overall business model, to explore scenarios, improve the strategy and continually manage the impact of pricing, marketing and sales plans on long-term performance.
Business leaders Some heads of marketing, R&D, HR - even some CEOs like John, feel it is so important to get a grip on the quality of their business that they invest effort in modelling it themselves - even a top level appreciation of the model will aid your thinking.
Analysts and accountants. Every analyst supporting a business or functional leader should know how to model the quality of their organisation's resources, and understand how they are changing through time so they can advise leaders on what needs to be done.
Consultants. These models are so powerful that clients will be blown away by the value you bring to their business. It's faster and easier than using spreadsheets and less prone to error. The approach used provides a valuable addition to a consultants toolbox.
Business students (and teachers*) The mechanisms in this course are a critical element of how business works - so understanding them will give you an important additional method for approaching strategic questions - and employers will really value this skill.
* Teachers - we can provide materials from this course for you to use in your classes - contact us for information. Please do let us know where you teach and approximate student numbers in addition to any questions or comments you have.
Like all of our courses, you do not have to start at the beginning and slave through every lesson to the end - we suggest key items to focus on first. Working carefully through just those key lessons may take about a half-day.
You can then come back to fill in important extra principles and skills. That could be another ½ to 1 day, depending on how deeply you want to get into each lesson and practice it on your own cases – all time that you can claim as self-directed CPD (continuous professional development).
Then, of course, you can spend any time you want on consolidating your skills and following our detailed guidance on how to apply the modelling to your own case and issues.
Why use these models - and when?
Whether launching a new business, tackling a problem or opportunity, or planning for the longer term, surely you would simulate what could happen, just like with other complicated things we do. This lets us:
Design what we might do before we risk serious cash and effort
Test those plans against all kinds of uncertainties (Would you rather experiment with the real world, using real money and people!?)
What is the alternative?
Spreadsheets could theoretically calculate-out everything in a business, but no human could reliably capture a living business system with only rows and columns of numbers to work with.
Balanced scorecards transformed business control by looking beyond the financials! But they do not calculate-out what causes what across the business "machine", and they leave out key issues - like competition! There is no better BSC than a good DBM!
KPI systems often try to be more comprehensive than BSCs, but they often go too far, including every indicator and ratio anyone thinks important. There is no better KPI system than a good DBM!
Business-model canvas and tools like Strategyzer or Leanstack share the same limitations as balanced scorecards and spreadsheets.
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