While you are trying to develop your business model or refine the existing one (Related link:  Value of simple business models), I consider the basis of competition as something that you need to start worrying about as soon as you are ready with the "operational" elements of your business.  Whether you like it or not, you will always have competitive forces to deal with and you need to figure out how you will respond to these.  In other words, you need to develop a competitive strategy.  (Related article:  How to learn from the mistakes from others?  Lessons from Pfizer's mistakes in handling problems with Celebrex and Bextra)

Before I get into the Principles of Competitive Strategy, here are a few things that I prefer when I help a firm define its basis of competition:

• Think primarily from your customers' perspectives, rather than your own, or second-guessing what your customers are thinking (While it is good to do scenario analysis to assess what your competitors are likely to do or to gather competitive intelligence on what your competitors are up to, but when developing your own competitive strategy, think customers.  They are the most important players in the game.).
• Think positive competition (Why should our customers do business with us? ) versus negative competition (Why should our customers not do business with our competitors?).
• Unless you have the scale advantage (e.g. Wal-Mart), do not attempt to compete on price alone.  Generally it leads to price wars in which most participants lose.  When the only differentiation is price, you are setting yourself up to join a vicious circle from which you rarely come out a winner or create shareholder value.

Tangible Differentiation:  The differentiation should be obvious to your customers without you having to use a 20-slides presentation to explain it.  While all airlines get you from place A to B, Virgin, JetBlue, and Southwest are different in ways that we can clearly see.  On the other hand, while Delta or American Airlines or Continental might think of themselves as different, I see them as indistinguishable.

Measurable Value:  No matter how you create value for your customers, it should be measurable ("Your equipment will run 10% faster if you use our lubricant" or "Your phone bill will drop by 25%").  It doesn't work when you say that "We provide the best customer service".  It is not measurable.  Customers like results that can be represented by a simple number.

Solid Business Foundation:  It should be based on (a) Intellectual property (2) Human capital (3) An organization that is impregnated with innovation in its DNA.

Long-term Commitment:    Show it through your commitment to making things better for customers, employees, and shareholders (in this order).  

Examples of companies that have a good competitive strategy

• Target (Our prices are low but we create a cool shopping experience, even for a Yuppie)
• Starbucks (Not just coffee, but a lifestyle)
• Amazon (The best experience in online shopping)

Examples of companies with poor competitive strategy

• Sun Microsystems (We are not Microsoft)
• K-Mart (We are cheaper than Wal-Mart)
• SCO Group (We want to get rich by filing lawsuits against the rest of the world)