The R.A.C.E. To The Bottom - How Businesses Destroy Value While Competing
The “race to the bottom” is a term I use to describe the actions that businesses sometimes engage in response to actions, perceived or actual, by competition which end up impacting negatively on them too. Most times, the actions are either price reductions or product feature increases usually creating an expectation of continually lowered prices and/or increased product differentiation in the minds of the consumer and reduced margins for the business.
The “race to the bottom” behaviour is triggered when businesses take competitive actions that do not take into consideration the factors and core capabilities, that make their competitors truly competitive. As a result, they are not able to make informed assumptions about how their competitors will most likely respond and sometimes even results in situations where their competitors gain an advantage over them due to the capabilities they possess.
Understanding that businesses respond to competition from their position of strength and not in a manner that threatens their competitive advantage, is one that is central for competitive decision making. For example, a business with greater economies of scale, and by default lower unit costs, is more likely to respond to a price reduction with price cuts of its own and that should be taken into consideration by its competitors.
The ability to determine with increased certainty a competitors most likely reaction to your competitive action is a critical requirement for out-planning and outperforming them and a good tool for achieving that is the VRIO Framework (VRIO is an acronym for value, rarity, imitability, and organisation). The use of the VRIO framework helps businesses deeply understand their competitors competitive advantages, why they have them and how well structured they are as an organisation to utilise them.
Another tool I use is a proprietary one that I call R.A.C.E. which can be used to quickly identify a competitor’s most likely strategic action. The answers to the questions within each step of the framework helps with the identification of not only the most likely action a competitor will take, but also helps with developing a strategic response that mitigates that action.
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