The “Basis of competition” describes the collection of benefits that are the most important determinants of a customer’s choice between different competing products or services. It is the competitive battlefield where preference is determined.
The basis of competition is not static. It will change over time as competitors match each other in an area, making it a commodity or because customer needs change.
The “basis of competition” is formed by all product/service benefits that customers value AND where they perceive a difference between competitors.
On these factors, the better you perform, the higher premium you get.
“Hygiene factors” are important to customers, but they perceive little differentiation. On these factors, you have to exceed a minimum standard or you get no business, but once you achieve this there is no further reward for improving performance. A good example of a “hygiene factor” is cleanliness in Fast Food Restaurants. If the restaurant appears dirty, with cockroaches running around on the floor, you will get no sales. However, once the restaurant looks well looked after, customers will not reward with extra business restaurants that are even cleaner than others.
When is it useful?
When you are trying to understand the future business environment, it is critical to understand how the “basis of competition” is changing. By predicting the future basis of competition you can gain an advantage before competitors catch up. You will need to invest in new factors that are becoming the basis of competition and stop investing in areas that are becoming “hygiene factors”.
Changes in the basis of competition can cause value migration to suppliers or upstream partners, or can change the balance of power inside a company as previously ignored functions become critical to customer choice.
An Example? – Static snapshot
The picture on the left represents a static picture of the business class travel market.
On-time arrival has become a hygiene factor – although there are slight differences in performance, flyers do not think these are linked to the airline. Safety has become a total hygiene factor – every flyer lists it in surveys as their most important consideration, however in practice all major commercial airlines are perceived to be “safe enough”.
Price is in the basis of competition – yield management and different ticket terms make this to hard to track for your average business traveller. In any case, the company is paying. Price would be part of the basis of competition for economy leisure travellers.
The basis of competition consists of the schedule, prestige and cabin service. Schedule is differentiated because Business flyers will change airlines to get home to their families 2 hours earlier after their meeting. The prestige of the airline counts as you would expect – executives regard flying business class as a prestige perk, so you want to bump into the top businessmen in the Executive Lounge. Finally, cabin service is differentiated. Different people may have different preferences – from the more formal English Butler style of BA, to the beautiful ladies of Singapore Airlines, but a difference in the on-board atmosphere is tangible.
When a company finds a new Blue Ocean angle that customers like, new factors may enter the basis of competition. Then the race is on to see how fast competitors can reduce them to hygiene factors, or whether the company can maintain differentiation……
An Example? – Changes in the basis of competition over time
The basis of competition has changed over time in the airline industry. In the early years of commercial aviation, the chance of dying en-route was the overwhelming basis of competition.
However, competitive evolution grinds relentlessly. Unsafe airlines went bust and the safer ones grew. Since it won business, companies invested in safety.
Eventually, accident figures improved to the point where air crashes were rare shock news. Passengers started taking for granted that they wouldn’t die in the air on commercial flights. Safety had become a “hygiene factor” – no airline could win business by being slightly safer than another.
Customers always have some reason for picking their product, even if it is only price, so when safety became a hygiene factor, others replaced it as the basis of competition, like the convenience of frequent flights.
How do you do the analysis?
You will need to plot a separate basis of competition for each different needs-based segment you serve, since they put different importance on different factors.
Use classic market research to quantify the importance of a range of factors. Depending on your budget you can use simple surveys all the way up to full conjoint analysis to quantify the two axes.
By repeating this research at a regular interval, you can track changes and predict what the future basis of competition will be.