THE BLOG
05/02/2013 09:07 am ET Updated Jul 02, 2013

How to Escape the Gravity of Competition

The standard view is that businesses should strive to maintain a lead over their rivals. But this is wrong. A lead is something that connects two parties. You shouldn't be seeking a lead. An ever-growing distance from competitors is easier to achieve than an ever-growing lead over them, and is much more valuable. To gain a lead, you do things better. To put distance between you and them, you go in a different direction -- ideally the opposite one.

Here's my idea of the 'gravity of competition.' Isaac Newton's law of gravity makes two statements, the second being that the gravitational force between two bodies is inversely proportional to the square of the distance between them.

Competition is the economic equivalent of gravity. Just as gravity depresses objects, and stop stars going straight, so competition depresses returns on capital. The extent of margin gravity is proportional to the proximity of rival businesses. What stops a business moving forward in a straight line and achieving its plan is the gravity of competition.

The objective should be to increase distance from rivals. What is distance? It is whatever makes your business different. There are several dimensions of difference, including:

• Difference of objective. For example, one business may aim to have the most sophisticated product or service, and another may aim to have the most simple.

• Different customers and customer type.

• Different products, services, or business model.

• Different geography.

• Different type of employees and way of working.

• Different type of value added (for example, an exclusive focus on one stage of the 'value chain,' such as R&D, production, distribution, or sales and marketing)

• Different technology.

If your business is different on one or two of these dimensions, but the same as a rival on the rest, the difference is not really much. But if you are different on, say, six of these seven dimensions, you really are far apart.

A crude scoring system is to assess your difference on each dimension on a 1-5 scale, as follows:

1 = identical or very similar

2 = adjacent, close, but with a few differences

3 = considerable overlap, but neither very close nor very distant

4 = a degree of overlap but not very similar

5 = distant, dissimilar, fundamentally not the same.

You can then calculate a distance score by multiplying the seven numbers together. The distance score can range from 1 (if identical on all 7 dimensions) to 823,543 (if dissimilar on all 7 dimensions). You want a high score, of course, which will probably correlate with your profitability in each business segment.

The arithmetic is instructive because it shows that becoming dissimilar on just 3 of the 7 dimensions gives you a score of 343, even if you are identical on the other 4 dimensions, whereas a being adjacent on all seven, albeit with a few differences (a score of 2 on each dimension), gives a score of only 128.

After making the calculations, your closest rival may not be the one you first thought of. And you'll probably discover that there are more ways of creating distance between you and rivals than you thought there were. All energy should be devoted to improvements and innovations that increase your distance from your nearest opponents.

You may learn something else too. You may be fortunate enough to have one or two business segments that are free, or virtually free, from margin gravity. These are spaces where competition does not operate, and margins are limited not by competition but by what customers will pay, and by the distant hiss of competition from all other products clamoring for the customers' wallets. These non-competitive spaces, where gravity doesn't operate, are the most beautiful places in the economic universe. If you add just one such space during your time in any job, you will probably create enough value to last a lifetime.