This week saw the demise of a major book retailer in Australia, and with it calls for changes to Government regulation with the claim that retailers cannot compete with cheap imports from overseas suppliers.
It's a predictable response from companies that choose to compete primarily on price. The risk with this strategy, is that it's easy to be undercut. When you compete on the basis of price, you attract customers who are price sensitive and who will change their buying habits readily if a cheaper alternative is available. Competitive advantage based on price is most often driven by economies of scale, and there is always someone else who is bigger, faster & cheaper.
As well as books, there has been recent debate about retail more broadly and the role of Government regulation in these industries. A few key points have been largely missing from this debate:
Competing on price is not the only strategy
Michael Porter, in his classic book Competitive Strategy, defines three generic strategies on which companies compete. The first is price, the second is differentiation across the industry, and the third is niche specialisation. With the example of books, specialist retailers don't compete on price. Indeed, in most cases, they will be more expensive than the larger retailers. Instead, they offer a unique experience, specialised products in a niche focus area, or exceptional services that are not offered by their larger competitors. The advantage of this strategy, is that is doesn't rely on price sensitive customers.
What do customers want?
The other factor that has been starkly absent from the debate around retail regulation, is the question of what customers want. Indeed the customer seems to be left out of the equation altogether. The underlying assumption is that all customers are driven by price alone. While regulation might influence prices to some extent, no amount of regulation or taxes will protect retailers from smart competitors who listen to their customers and deliver a retail experience that is worth going out for.
For all businesses, it's important to understand who your competitors are and how you compete in your industry. There are risks in every strategy, but also opportunities to differentiate and come out a winner.
If it's time to review your competitive strategy - contact Monique for a strategy consultation.
2 comments:
Greetings Monique,
I heard this interview on Radio National breakfast on the weekend & thought that the topic fits well with your post.
"Much has been written about the collapse of REDgroup Retail, the company that owns bookstores Borders and Angus & Roberston. The future of more than 200 stores is now in doubt as administrators figure out the company's financial position.
But before we announce the last rites on book stores, it's worth noting that directly opposite the Borders store in Melbourne is the independent chain Readings. It has managed to survive intact, fighting not on price but by developing customer loyalty. Retail expert Ross Honeywill calls it 'investing in cultural capitalism'."
http://www.abc.net.au/rn/breakfast/stories/2011/3143860.htm
Ahh Monique, finally a voice of reason in this conversation about why such a large group can go into administration.
And yes, Jo, as you rightly point out with the story of Readings, it is laughable to suggest the reason a group like Borders is 'collapsing' because people aren't buying anymore? Really????
When Porter discussed different generic strategies in his book, he also points out that it's very hard to pursue more than 1 strategy at a time. In my opinion, Borders tried to go for both a niche strategy - providing an 'experience' for booklovers, whilst also pursuing a 'price' strategy based on volume buying. HOWEVER, you can't pursue a low-price stratgy whilst bearing the brunt of the massive overhead requirements (in terms of space) that Border have been bearing ... and sell 'cheap'. Worse ... you can't pursue a price strategy ... and encourage people to 'not buy', by encouraging them to read in the store whilst drinking a coffee. (we're also beginning to see the 'free' strategy flop online as well, but that's another story).
So I wholeheartedly agree Monique, a lot has been 'left out' of this conversation ... and the vital lesson for business owners is get clear on what your customers REALLY want ... then build a coherent strategy around delivering those wants.
:-)
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