At the highest level, business strategy is about being different, being less expensive, or some combination of both in a marketplace of products and services. As a startup, an established firm, or a nonprofit, carving out a unique position is critical for sustainable success. As consumers, we all understand this dynamic implicitly. In our daily lives we buying all sorts of things to satisfy important household or emotional needs based on differentiation and price. As a firm, identifying those factors is critical.
At the next level, business strategy is about understanding an industry’s structure and how one’s firm is positioned within that industry. Many firms lead a strategic evaluation by looking internally – current profitability or revenue growth, internal processes, human capital skills, balance sheet strength, geographic reach – and then look at industry opportunities they can exploit.
The problem with starting at the firm level and looking outward is that you have not evaluated what industry the firm is really in, if average industry profitability is growing or shrinking, and how many firms are sustainable in that industry. Understanding the real drivers of industry growth and profitability are critical to defining a firm’s market position or entry point.
For example, many firms sell handheld computing devices with phone capability in developed markets and some own significant marketshare. However, only one grabs the lion share of the profits in handheld markets on consistent basis. That is because the company understood the industry more clearly early on, carved out a unique market position, developed a compelling product ecosystem, optimized internal processes, and created a premium value proposition customers embraced. Other established industry participants, many with significant capabilities, earned and continue to earn poor returns.
The emerging nature and multi-dimensional complexity of the IoT space makes figuring out where a firm competes a significant challenge. Overlapping business domains, complex technology choices, security concerns, sourcing and building new and diverse teams, and integrating existing infrastructure all contribute to an environment of uncertainty. But it is precisely market transitions like the IoT that create opportunity. Being prepared increases the probability of success.
Gain clarity by defining first what IoT industry the firm is competing in and then, second, define what position the firm or business unit will take to reshape that segment. This order of thinking and effort will improve a company’s chances and help foster conditions that make an industry more dynamic and profitable. Too many firms fail to get this sequence right, which reinforces low industry profitability.
Low profit margin industries have very similar characteristics:
- New entrants are always a significant threat.
- Significant price competition among industry participants.
- Outside suppliers and customers have lots of bargaining power.
- Substitute products abound and switching costs are low.
Differentiating yourself in a low margin industry is very hard, even with great execution. Always begin a strategic analysis at the industry level and then move to the firm level.