Maybe it’s just that business plans are writing from the wrong perspective.
Any rational analysis of growth markets shows clearly that the best business strategy is based on competitive advantage. Yet in our consultancy work offering strategic advice work to corporations in growth markets, we find that many business plans are not based on the market. They are written from the inside out: management’s first concern is production, supply chain, shareholding structure, risk, compliance and all the internal issues that they confront daily while running the business.
Essentially the plan justifies how they will use the funds their sponsors provide. Business plans written from this perspective focus on how management will solve problems and create a strong organisation but fail to consider the business opportunity.
This is very understandable: the sponsor is concerned to see their money spent well while the management works hard to demonstrate that they will repay the faith of their financial sponsors. Both sides have their eyes on internal matters. This neglect of the outside perspective, the business opportunity, is generally temporary. In no time, reality intrudes, usually when a competitive initiative shocks both investors and management and drags their attention to the marketplace.
Warren Buffett, when examining what makes a company successful, points out that you can invest in one of “two classes of enterprise”: a franchise or a business. A franchise has a huge advantage over a business. Its product or service “(1) is needed or desired; (2) is thought by its customers to have no close substitute; and (3) is not subject to price regulation”.
The logic is clear: whether you have invested in a franchise or a business, you have to differentiate yourself from the market. If your investment is a franchise, you have to maintain its position of having no close substitute. If your investment is a business then it is engaged in a close fight with the competition. Whichever it is, you can only succeed if you understand your competition.
WHY YOU NEED TO RATE YOUR RIVALS
The academic case for studying the competition to create your strategy is very strong. Probably the best source for data is PIMS, the database founded by GE in the 1960s, run first by Harvard Business School and now by the Strategic Planning Institute. It is probably the most substantial continuously used database of business information and contains data submitted by many of the world’s best known companies. Mining the data to discover the critical factors that determine company profitability shows that the two most important factors are the quality of its product or service relative to the competition and its share of market. In other words, the most crucial determinants of profit can only be measured relative to the competition. The fact is that too many plans are little more than a recital of next year’s activities and their cost; the only valid basis of a business plan is the process of recognising, measuring, developing and building competitive advantage.
Our consultancy has as its founding principle that the best business decisions are those taken with a full knowledge of the facts. We use a team of specialists to ferret out the facts and a team of analysts to turn those facts into business insights and action plans. Our fact finders do not have a background in business; instead they come from journalism, law enforcement, science and other fields in which objective facts are the fundamental currency. Our analysts are business experts.
Together the team finds out the competition’s resources, plans, activities and aspirations and then reconstructs the P&L and balance sheet. As long as you are tireless in your search for facts and logical in your assumptions, you can reproduce their plans with uncanny accuracy. There is no need to resort to illegal methods of fact gathering such as electronic surveillance or looking through garbage. There is enough information in the public sphere to supply any competitive project; the key skill is to create a solid foundation by “triangulating” every important fact by using three or more sources.
In our experience competition falls into three categories: competent, incompetent and illegal.
Projects assessing competent competitors are the most rewarding. A private equity firm bought a manufacturer with a turnover of €1 billion which was number one in its field. Its main competitor inexplicably gained market share during a downturn. The investigation provided a complete view of the competitor: production costs, R&D resources, the level of training and empowerment in the sales team and so on.
Equipped with this information they took several measures and saw their EBITDA increase by 19 percent the following year. Another private equity firm made a major infrastructure investment and watched as a competitor grew capacity to take a third of the market within 18 months. The study showed that the competitor had a far broader vision of the market, a wider client base and a clear ability to work in partnership with government bodies. They realised that they needed to revise their business model to succeed.
The second category is incompetent competition. One company, this time not a private equity firm but a major blue chip, encountered a new competitor in one of their largest African markets. The competitor was a joint venture formed by three major global competitive companies, which had rapidly taken some 20 percent of the market.
We have never before seen a company so determined to take back the initiative. They took the findings and analysis and responded so effectively to the competitive threat that, within two years, the JV turned from a competent business rapidly gaining market share to a wreck of a business where the three founding partners were unable to agree on any point of policy. They closed down the JV. A couple of years later I overheard a colleague who had worked on the case briefing a new team member: the competition, she said, “lost the will to live”.
The third category describes companies that are ostensibly respectable and legal but which use illegal and unethical means to make a profit. Although these situations are rare, and you really hope this doesn’t happen to you, please be assured that there are techniques for resolving this.
This sort of issue is probably best covered in a separate article but here’s one example to illustrate the point. A company in Eastern Europe saw its profit drop to $50 million below target as a competitor grew market share at a stunning rate.
The research showed the intricate details of how the competitor illegally evaded tax and provided fact-based evidence to convince the authorities. The client was able to take remedial action and recover their market share and profit. The project lasted three years but ended in success; the owner of the competitor is now in jail and our client sold at a 500 percent profit.
Over years of developing strategies we have learnt the need to base them on competitive advantage. I realise that it is unwise for a consultant to make an absolute statement but I will confidently risk one here: I have never seen a situation where a business had nothing to learn from the competition.
Robert Bing is MD at Ivy Strategy, a consultancy that provides facts and analysis to help corporations make critical business decisions. They work globally, but their speciality is growth markets