Rafi Mohammed

Intense Competition...Healthy For Your Bottom Line?

Posted on October 11th, 2007 (0 Comments)

The standard way of thinking about intense competition is that it’s both no fun and hazardous to your profits, right? Corey Kilgannon recently wrote an interesting New York Times article titled “The Hustlers and Surgeons of Fender Dents.” Corey reports there are over 200 auto repair and parts shops in the Iron Triangle area of Queens, NY.

Customers in need of auto and body repair cruise this area…searching for the lowest price. Groups of mechanics surround cars in distress, each shouting their best price. Commenting on the perils of competing with a dozen closely situated tire merchants, one tire store owner sighed: “If a guy comes in and I can’t sell him right away, he’ll go across the street.” One repair customer claims to save 40% by getting his repairs done in the Iron Triangle.

When you think about it, this type of intense competition occasionally occurs in other industries. Wikipedia claims that 2,600 independent businesses are located in New York’s diamond district, most of them dealing in diamonds or jewelry. WNBC-TV reports that aggregate daily receipts in the diamond district average $400 million. Many cities have Chinatown and Little Italy restaurant areas. Just last week, I dined in Los Angeles’ Koreatown, where hundred of restaurants serve kalbi and bulgoki. My friend Bernie introduced me to the truly outstanding Corner Place – undoubtedly the best in LA! So…why would any seller want to locate in an area with such intense competition?

Strategy guru Michael Porter’s Diamond of National Advantage (a framework used to help developing countries) offers a few clues:

  1. Factor conditions: it’s reasonable that skilled labor congregates in these areas. So it’s easy to hire.
  1. Demand: a concentration of Chinese residents provides a built in audience for Chinatown restaurants. That said, while possible, it’s unlikely that an abnormally high concentration of people in Queens need their car repaired.
  1. Related and Supporting Industries: it may be advantageous to locate in an area where supporting retailer stores are close by (e.g., auto parts, food specialty shops, jewelry artisans).

I’ll add my insight that while margins are probably lower, locating in an area known for a specialty may profitably drive volume. Italian aficionados may gravitate to Little Italy because they know there’s great cuisine in the area. Upon reaching Little Italy, diners then search for a restaurant. The marketing benefits of being in a known specialty area make it more profitable than locating in a less competitive suburb.

While I understand the theory…it’s hard to believe that the 2601th diamond retailer in New York’s diamond district wouldn’t earn higher profits in another location.

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