December 2014 | Strategy
Imagine you are a strategist at American power tool company Black and Decker. You’ve done a great competitive analysis, and you not only know what Bosch, Makita, and Ryobi’s feature offerings and store displays are, but you have countered their every move. Yet despite these efforts your sales are plummeting, and the downturn has nothing to do with the competitors you’ve been so focused on.
“One of the deadliest threats to a firm’s competitive advantage,” says Wharton management professor Nicolaj Siggelkow, “can come from a direction you never expected. Black and Decker might have never imagined that their competition wasn’t Ryobi — it was neckties. It turns out that a lot of electric drills are bought as gifts for husbands and fathers rather than to fulfill the immediate need to drill a hole in the wall. Black and Decker is really competing against whatever the latest cool gift for dads is. (And to their credit they had figured this out.)”
Siggelkow, faculty director of Wharton’s Strategic Thinking and Management for Competitive Advantage program, explains that strategic substitutes, such as ties in this example, can catch you off guard, highlighting the fact that you don’t really understand the fundamental need your customer is trying to fulfill with your product or service. In this case, it wasn’t the need to make a hole in the wall — it was finding a gift. Taking such a limited view of your competition and your customers can be deadly.
But substitutes aren’t all bad news. On the positive side, they represent a potential source of growth. “If you’re trying to increase sales in a mature market,” Siggelkow explains, “the typical move is to try to wrestle away some of your competitors’ market share. But whatever strategy you use to do it can easily be copied, starting a fierce battle between established players. Instead, if you realize that you’re really competing against neckties and not other power tool companies, you can work on convincing people to buy a drill instead of a tie. That might be an easier way to grow than trying to gain market share from your traditional competitors.”
Once a company becomes aware of a substitute, strategic decisions can be adapted to move into that market and gain an advantage. Rather than Black and Decker putting print ads in a do-it-yourself magazine, for example, it could make more sense to run them in fashion magazines before Fathers’ Day. “It might look crazy,” says Siggelkow, “but if you really understand who is buying your product and for what reason, it makes sense.”
After exploring the topic with Siggelkow, executives who attend Strategic Thinking and Management for Competitive Advantage work together to determine potential substitutes for a particular product or service. One recent group listed Skype as a substitute for Marriot after they realized that video conferencing can eliminate the need for travel — and when you don’t need to travel, you don’t need a hotel. Once they identify potential substitutes, they can begin to think about ways to exploit them as sources of growth, making strategic choices about marketing, sales, and more.
Siggelkow notes that a move into a substitute’s market can also pay off long-term, citing Southwest Airlines as an example. “Early on, flying out of smaller airports at very low prices, Southwest’s competition wasn’t other airlines — it was busses. They attracted people who hadn’t flown before, growing not at the expense of other airlines, but at the expense of bus companies. Competing first against a substitute can be a successful entry strategy. It allows you to establish your business without attracting too much attention, getting a certain amount of scale and experience before going against larger competitors in your industry.”
Ultimately, says Siggelkow, substitutes are tremendously disruptive. No matter how much deep knowledge you have about your direct competitors, widening the scope to detect potential substitutes can not only prevent deadly threats, but can open up a source of growth you might never have detected otherwise.
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