Business strategists constantly urge executives to “think outside the box.” And these days many retailers, hospitals, mall owners, and other business owners are doing just that.
In the past, competitive strategy was limited to what was inside the box. You competed on price, merchandising, customer service, product selection and ambiance of what was inside your box (store) versus what was inside your competitor’s box (store.)
Each company placed stores just about wherever they wanted. And then each would try to outdo the other on price, service and selection.
The trouble with this strategy was that it drove down market share and with it, profit margins. If there were three stores in a geographic area, each serving the same target market with the same total spending available, each location had, on average, a 33% market share.
But when a fourth competitor enters, puts up a location in the same area, each competitor now has on average, a 25% share. Each of the incumbents has lost 25% of its gross revenue and, usually, 5 to 15% of its gross margin. In a store or mall doing millions of dollars a week in sales, this is a huge loss.
And for the smaller, less dynamic incumbent, the reduction in sales and margin may be greater than average and they may find themselves out of business entirely.
Should they accept the terms of the competition, or attempt to move the battle to a place where they are not overmatched?
Mike Saint is chairman and CEO of The Saint Consulting Group, email firstname.lastname@example.org