Competition brings out the best in products and the worst in men.
—David Sarnoff1
One of the first questions people ask about a new idea or venture is: Who is the competition? Who else is doing this? The worst rookie mistake in the world is to answer: No one. There is always a competitor. Even if you can’t find anybody else who is doing what you’re doing, someone probably is thinking about it. And even if nobody is thinking about it, you’ll always have indirect competitors, including the status quo and your customers’ thrift.
In 2007 four engineering students at Dartmouth’s Thayer School of Engineering developed a belt-mounted light for runners to use at night. Using light-emitting diodes (LEDs) and new battery technology, they created a very effective product they called Night Runner. Market research and field testing established a strong potential for customer interest at an attractive price. They looked carefully for competing patents or other prior art and found nothing conflicting. They filed a provisional patent and planned to use the year until they had to decide whether to file a non-provisional patent to fund a start-up or license the technology to an established company. After graduation they started to put together a company and had angel investors seriously interested, but in early September they found an almost identical product already on the market. Two people with experience in sports and retail had launched a company, GoMotion, about a month before and had a patent pending on their own version, which they called the Litebelt. It turned out that GoMotion’s patent was in the confidential phase when the Thayer team did its prior art search. Our students eventually concluded that even if the GoMotion patent did not preclude their design, a start-up without an experienced team or a manufacturing-level design could never compete successfully with an experienced team and a product already on the market.
In 2006 Aaron Teitelbaum, another engineering student at the Thayer School, developed a crutch with a spring-loaded length adjustment that made it easy to go up and down stairs. He searched prior art diligently, and although he found several alternative designs that proved unworkable in practice, he found nothing like his own. Customers seemed to like his prototype. When he began an independent study to launch the invention as a commercial product, one of his first assignments was to look even more carefully for prior art, and he found again nothing. Only when Aaron engaged a patent attorney to help him with a provisional patent did a patent identical to his own turn up. Some of the drawings and claims language so closely mirrored his provisional patent that Aaron felt the inventors must have seen his work—except that the patent had been filed in 1990.
In short, you’ll always have competition. If someone isn’t already thinking about your idea, someone else will imitate you and compete with you for customers and market share as soon as you show any signs of success.
Think about competition in three ways:
1. Barriers to entry. Competition often means that there is a barrier to entry: someone or something that stands between you and your customers. Facing a barrier to entry doesn’t necessarily mean that another person or company is doing exactly what you are or that it has a specific barrier such as a patent that impedes your entry. If a customer’s needs are being met, there is a barrier. Always ask: What barriers to entry will I have to surmount? How is the customer’s need being met right now?
2. Differentiation. Failing to differentiate and set up barriers to competitors and imitators inevitably leads to profit erosion. In this race to the bottom, the most efficient producers and the least profitable competitors drive down margins to push out their competition:
The larger theme … is the ordeal of what could be called “commodity hell,” the place where executives find themselves when they cannot convince customers that their widgets or services are better than those of their ever-burgeoning competitors. All they can say is: “Yep, we got ‘em too.”2
Failing to differentiate will eventually land you in commodity hell.
3. Resources. Competitors are not just a problem; they are a great source of information and ideas.
You must think relentlessly and incessantly about your competition: past, present, and future. A competitive landscape analysis starts with a thorough assay of the market: Who are your direct and indirect competitors? You should know everything about direct competitors, including how you measure up: your relative competitive advantages and disadvantages. There’s lots of information out there on public companies in the press, reports to shareholders, analysts’ reports, and filings with the Securities and Exchange Commission (SEC). Information on private companies is less accessible, but you’ll often find press coverage in addition to their own public relations and Web sites. Conferences, trade shows, distributors, retailers, and customers also can be good sources of information. You should always keep up with your competitors’ products. Buy and study them carefully.
Once you’ve gathered the information, it’s imperative that you be able to talk about it and show how you are different in a concise and compelling way. A features table is a particularly helpful device, especially in presentations. In 2000, we built a features table for a company working on a business-to-government Internet platform, a portion of which is shown in Table 11-1. For the row headings, we listed all the market-relevant products and features we could identify, and then we added our company and all our competitors as the column headings.
Table 11-1 Features Table for a Business-to-Government Internet Platform
Table 11-1 is only an excerpt, adapted from the original table, which was much larger. See Figure 11-1 to get an idea of how large the full table is, far too large to be legible here.
If you can put together a table with all the backup research in an appendix on competitors, no one will question your understanding of the competition. Of course, the table is only as exhaustive as your research, so make sure your research is thorough. You don’t want to end up like the Night Runner or, worse, have an investor call your attention to a direct competitor you haven’t considered. You also want to think carefully about any future competition that may develop. Once you’ve done this analysis, you can make a realistic assessment of the barriers to your entry and start forming a plan to overcome them.
Figure 11-1 Original full version of Table 11-1.
Harvard’s Michael Porter has been writing on competition and competitive strategy since 1979, when he created the Five Forces framework3 to help companies think about competition. Like all frameworks, it has its advocates and its detractors, and it covers every aspect of the competitive universe, not only startups. However, it’s a constructive way to think about the marketplace:
Competitive rivalry. How many direct competitors do you have? How closely do they overlap? How effective are they? Is the industry fragmented4 or consolidated5? How attractive are growth rates and profit margins? Low growth and intense competition make for thin margins but sometimes offer unexploited opportunities for service or niche strategies.
Potential for new entrants. Is innovation opening new opportunities? How easily might new players enter? Are there high fixed-investment costs, cost advantages to existing players, issues with access to resources or distribution channels, existing relationships, or regulatory barriers? If entry is easy, it’s good for you now and bad later unless you can make entry by others more difficult by creating new barriers.
Threat of substitution. What is the indirect competition? Are there alternative solutions or products in the market that fill the same need you fill? Are there factors that hinder substitution that can work for you or against you, such as brand and customer loyalty, switching costs, and pricing?
Buyer power. How much pricing power do you have over your customers? How concentrated is the market?6 It’s risky to have only a few big customers; this generally means they have the pricing power and you can lose significant market share if one suddenly decides to leave you. What are the buying capacity and willingness of customers to buy? How differentiated are you? How high are the costs for customers to switch to competitors?
Supplier power. How much pricing power do they have? How many options for alternative suppliers or substitutes do you have? How high are your switching costs?
Beyond the Five Forces, which generally address directly competing products and services, there are also alternative products. Sometimes your biggest competitors are not the products that look just like yours, say, a Mac instead of a PC. Instead, sometimes you’ll have indirect competition that fills the same need but in a completely different way. Michael Clarkin, our HP executive friend from Chapter 4, often illustrates the idea of indirect competition with a conversation he had with a friend who was a marketing manager for the Porsche Cayenne. Clarkin’s friend explained that he often found that the Cayenne’s big competitors were not just other high-end SUVs such as the Range Rover, but a Bang & Olufsen sound system for the living room. Said the friend, “When a guy comes onto one of our lots, often he’s looking to spend $100,000 to show off how much money he has.” Seen through that lens, Porsche is selling a car, but it’s also selling status, self-esteem, and reputation. Looking at it this way opens up a host of competing alternatives from boats to artwork, jewelry, and real estate. Cadillac marketers used to say that diamonds were their biggest competitors.
Sometimes the alternatives are not something else customers can purchase to satisfy their need but an established habit or way of doing things that is entrenched in the customer base. This is the so-called “better-than” problem: Your product or solution must be sufficiently better than the current way of doing things to overcome old habits and customer inertia. Look again to Michael Clarkin’s experience at Hewlett-Packard with LEDs in Chapter 4.
Investors often worry most about large established companies. Unless you’re lucky enough to be looking at a market that has no dominant big companies, you’ll be asked how you plan to secure a beachhead against those big companies. Fortunately, bigness, like most things, can have disadvantages as well as advantages. Convention and size favor incumbents but also leave holes for creative and nimble small companies to exploit. Always question convention and old assumptions. The fact that something is done or structured a certain way doesn’t mean that’s the best way it can be done. Be willing to be different. Speed, agility, flexibility, and willingness to change are tremendous assets in environments marked by innovation or rapid and fundamental change. Big companies aren’t known for any of those traits, but you can be. Use your speed and ability to adapt quickly when entering and growing in an established market.
It’s hard to make a noticeable impact on a big revenue base with a small customer or market, and so big companies focus on big sales accounts that will affect the bottom line. Those neglected smaller customers and opportunities offer startups and small, low-overhead companies an opportunity even in a crowded market. Once inside, those companies can work their way up the food chain as they become effective and established.
A differentiated product that you can defend against imitation is fundamental to maintaining your competitive advantage. Differentiated is the key word here—remember commodity hell? If you have a product that is no more than a commodity, that indeed is hell because you cannot differentiate it; consumers focus only on its utility. Price becomes the primary differentiator, pressuring margins and costs. Differentiation moves you from utility to value. Utility is about usefulness; value is the “monetary worth of something.”7 For example, think about some products that are all related to wheat: a bushel of wheat, a bag of branded flour, a loaf of branded organic whole-wheat bread, and the bread and pastries in a full-service, high-end specialty bakery. Is the utility of each of these products the same as the value customers perceive in them? Which is more like an undifferentiated commodity? Which would you rather be selling, wheat by the bushel at the farm gate or full-service specialty bakery breads in a fast-casual dining chain? Which adds the most value to the wheat and thus offers the most opportunities for margin and profits? More to the point, which offers the best opportunity for proprietary differentiation?
You also could compare the share of retail price attributable to utility versus value in a $2 branded high-end beverage such as SoBe Green Tea versus a 50-cent generic soft drink. The SoBe brand is a clear triumph of value over utility. The same is true of a leather winter jacket that retails in a discount store for $50, whereas almost the same jacket sells online with a New England Patriots logo on the back for $350. They have a similar cost of goods sold but very different prices. What value are people paying for over and above the utility? This is an important question as you think about defining, positioning, differentiating, and pricing a product.
In 1943, the psychologist Abraham Maslow created a framework called the hierarchy of needs8, 9 to analyze human motivation. See Figure 11-2. Maslow said that people generally fill their needs in a certain order, and at any given moment they are motivated to fill some classes of needs in a certain order. According to the hierarchy, people start at the bottom and fill those needs before moving up the pyramid to fill others. Maslow believed that once we fill the needs in one layer, we have little motivation to seek more: How much can you eat? How much shelter do you need? Instead, once a layer’s needs are filled, most of the motivational energy and resources (aka money) that people allocate will move up and focus on filling the next layer’s needs until that layer too is filled.
Maslow’s hierarchy predicts that people will spend their money on physical needs such as food and clothing first. In the developed world today, those physical needs are mostly or completely met for a large number of people in the marketplace. If Maslow is correct, once they have enough to eat and stay clothed, consumers will focus more attention up the hierarchy and allocate their next dollars on shelter, safety, and security and then on social activities. In the developed world today it’s probably fair to say that the majority of consumers have basic shelter and their choice of social activities, and so the need at the margin becomes ego, and that is where the marginal dollar of consumer spending will be most motivated.
Ego is about identity, signaling who we are, our preferences, and who we want to be like. Perhaps this explains why people place such a high value in the marketplace on trademarks, logos, and other forms of identity signaling. Start-ups should think carefully about the hierarchy framework and their product strategy. Where can you maximize your value-to-utility spread and use it as a competitive advantage? SoBe carved out a nice market share in an incredibly tough and glutted market dominated by big companies with great execution and smart branding. SoBe succeeded because the team understood what really drives consumer behavior in today’s market. They marketed identity, creating a value over and above being just another commodity beverage. Sobe means health, vitality, and cool. The New England Patriots are our team; they’re winners.
Figure 11-2 Maslow’s hierarchy of needs.
Today you can find ego-based products all over the marketplace. In that case, are consumers moving up to the next category of needs: self-actualization? Maslow predicts that they will do that. What kinds of products might fill the self-actualization needs at a high value-to-utility ratio? What are the opportunities in this space? Maslow predicts that this will be an attractive, high-margin place to be in the market.
In Chapter 4 we discussed the different components of your value proposition. These are your building blocks in differentiating yourself from the competition and defending your competitive advantage. You probably can think of companies that have built great businesses by differentiating themselves on one or another of the different elements. If your competitors cannot replicate something about your product—a product element, a service strategy, or the experience of using the product—they won’t as readily be able to send you into commodity hell by matching your prices and reducing your value to utility alone. Table 11-2 lists ways you might successfully differentiate.
Table 11-2 Options for Achieving Competitive Differentiation
Beyond differentiation, you can defend yourself from competition with the following:
Intellectual property. This was discussed in Chapter 5.
Legal and regulatory. You can position yourself to take advantage of legal restraints, government regulations, and leases on key assets. If you choose to rely on the law to defend your competitive advantage, you should plan to retain the necessary legal resources and allocate effort and overhead to keep current and vigilant.
Access to resources, suppliers/distributors, or capacity. If your product requires an essential component or resource to function properly, you can try to lock up its producers with an exclusive agreement. For a while at least, this can block competitors and imitators from following you. In some businesses, distribution is state-controlled—think alcohol—or there is a de facto monopoly or oligopoly of specialized distribution. This limited access to distribution is a powerful barrier to competition.
Technical expertise. A specialized competency that is difficult to replicate or access can provide an enduring competitive barrier. Unfortunately, this barrier is more a fundamental component of your idea than a tactic you invent as a barrier to entry.
Beyond these basic strategies, companies have used a variety of other value proposition components to increase their market competitiveness. Table 11-3 gives some examples.
Table 11-3 Value Propositions That Create Competitive Advantages
Many first-time entrepreneurs want to generate a sustained advantage by developing a brand. Although branding is an important strategy and you should deliberately create your brand from the start, a recognized brand is a result of success, not a cause. You can’t rely on brand identity until you have captured a market position and delivered consistent value to customers. Brand strategy is a good barrier to competitors, but only once you’re in the market. It seldom works for market entry.
One last barrier to competition that is mentioned frequently is the first mover advantage: the supposedly insurmountable competitive barrier that the first company into a market can erect behind itself to make it difficult or impossible for others to enter and compete. Some argue that this competitive advantage comes from the first company’s access to and control over resources. Others say that first movers have an advantage because identity and brand recognition prevent switching. Whatever the reason, start-ups believe that because they are first, they will take a commanding lead and thus erect a competitive barrier.
We’re not so sure. For example, have you ever heard of Eiger Labs’ MPMan F10, Diamond Multimedia’s Rio PMP300, or the Rio Riot? Maybe you’ve heard of Compaq’s Personal Jukebox? Probably not, but we’re pretty sure you would recognize an Apple iPod; you may own one. Apple released the iPod in 2001, a full four years after Eiger Labs introduced its MPMan F10 and two years after Compaq’s Personal Jukebox. This is hardly atypical. There is a problem with the so-called first mover advantage: It seldom exists. Actually, most of the products people think were first movers, such as the iPod, were actually fast followers. How many of these first movers did you know? Mostly, you think of the fast followers (below in italics) as the first mover!
The “mouse,” Doug Engelbart and Bill English (Xerox PARC) (1951, 1963): Apple, Microsoft
Sketchpad, WIMP (Xerox PARC) (1968): Apple, Microsoft
U-matic, Betamax (Sony, 1969): JVC and VHS
CP/M (Gary Kildall, 1974): MS/DOS
Visicalc (1978): Microsoft
Wordstar (1979): Microsoft
Prodigy (1988): AOL
Mosaic (1993): Microsoft
Bot-fed search engines (1993): JumpStation, the World Wide Web Worm, and the Repository-Based Software Engineering (RBSE) spider: Yahoo!, Google
Friendster (2002): MySpace, Facebook
84 Lumber, Handy Dan, Builders Square: Home Depot, Lowe’s
California Cooler wine cooler: Gallo, Seagram’s
Royal Crown Diet Cola: Diet Pepsi, Diet Coke
Wisk liquid detergent: Liquid Tide
Circuit City: Best Buy
DHL: Federal Express
Chux disposable diapers: Proctor & Gamble
Ampex video recorder: Sony, JVC, Matsushita
Rheingold Brewery’s Gablinger, Meister Brau light beers: Miller Lite
Book Stacks Unlimited (1992): Amazon (1994)
The idea of a first-to-enter advantage found support in business research in the early 1980s in the so-called PIMS and ASSESSOR studies: “[M]arket pioneers have enduring advantages in distribution, product-line breadth, product quality, and market share.”10 Unfortunately, those studies looked only at long-term survivors and lumped all early entrants together, first movers and early followers alike. Later studies have shown that for pioneers—defined as the first to sell in a category—the failure rate is 47 percent, whereas the failure rate for fast followers is “minimal.”11 Indeed, pioneers are current leaders in only 11 percent of the categories, and their mean market share is 10 percent, whereas the fast followers’ mean market share is 30 percent.12
In reality, moving first has strong disadvantages. For one thing, the first mover assumes all the risk of proving a market demand and converting customers to a new product or concept. The company that moves first proves the market not only for itself but also for everyone else. Worse, first movers must learn all the subtleties and land mines in an unknown market, and learning curves cost. Early product versions often are clunky, costly, and crude. Fast followers can poach the best ideas, imitating and improving on what they see. At the outset, no one knows enough to build only the absolute minimum infrastructure for internal production, sales, and support needed to meet a market most efficiently, and so first movers are often slow to streamline and reduce underutilized overhead. Imitators never need to deal with these cost burdens. Often these disadvantages more than outweigh the advantage of early proprietary knowledge. Further, pioneers are frequently small companies or start-ups whereas later entrants are strong, established companies that bring significant financial and execution strength to the opportunity defined by the pioneers.
We think there is a first mover advantage, but not where most people think it is—first to enter. Remember Everett Rogers’ and Geoffrey Moore’s crossing the chasm chart (Figure 4-1). Notice where the first mover starts: at the far left with the innovators and early adopters. Moore said that the biggest challenge for first movers is the leap from those early markets to big-market, majority adoption. The goal is not to be first to the market but first across the chasm. Remember one of Moore’s fundamental points: First movers who have to introduce fundamentally new products have to make their appeal to innovators and early adopters, and what appeals to those groups often fails to appeal to the majority on the other side of the chasm. Fast followers don’t carry the baggage of that first strategy and can learn from the first mover to tailor an appeal specifically to the majority across the chasm, essentially starting on the other side and never having to leap it at all. Thus, if you have to be first to market, plan your entry strategy as not just an entry but a race to cross the chasm (Figure 11-3). That is the only first-mover advantage that counts.
Figure 11-3 First-mover advertiser: the race to cross the chasm.
Source: Geoffrey Moore, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (New York: HarperCollins: 1991): 17.
A lot! For one thing, you may find that you’re not the first mover after all. Many first-time entrepreneurs are crestfallen when they discover that someone else is working on the same idea or market they’re targeting. Sometimes this knowledge freezes them out—like the Night Runner students at the beginning of this chapter—and they quit. More often being a fast follower is a better position than first mover so long as you diligently and conscientiously consider how to overcome barriers to entry. Your competitors are one of your most valuable sources of information. You just have to get the information and then think creatively about how to profit from it.
Sadly, many start-ups do only a cursory job of studying the competition and don’t sufficiently incorporate competitive strategy into their plans. This is just as silly as failing to conduct a thorough market validation. Competitive research and strategizing don’t require a monetary investment, just time and focus. Unaddressed competition can kill your profits, put pressure on your market share, and even bar your entry into a market. The more you research the competition, differentiate, and develop barriers to competitors, the more you lower one of the biggest risks in starting a business, and that makes your idea more valuable.
What barriers will you be facing when you try to enter the market? What do you plan to do about them so that you don’t fail before you establish a position?
What do you anticipate your competitors will do? How far ahead can you think in this chess game?
How creative can you be in developing barriers to competition? What will it take to make them a reality? Can you justify the cost against the rewards?
1. David Sarnoff (1891–1971), the first president of RCA, was a pioneer in consumer television.
2. Buchholz, Todd G., “Drowning in Red Ink,” Wall Street Journal (May 30, 2007): D8.
3. Porter, Michael E., Competitive Strategy (New York: Free Press, 1980).
4. Fragmented industries are not dominated by one or a few major players. There may be room for new entrants or consolidation strategies such as roll-ups.
5. Consolidated industries typically have large established players, making entry difficult for a start-up.
6. Market concentration is a measure of how many customers there are per dollar of sales.
7. Webster’s Collegiate Dictionary, 11th ed. (Springfield, MA: G&C Merriam & Co., 2003).
8. Maslow, Abraham H., “A Theory of Human Motivation,” Psychological Review 50, no. 4 (1943): 370–396.
9. Maslow, Abraham, Motivation and Personality (New York: Harper, 1954): 236.
10. Tellis, Gerard J., and Peter N. Golder, “First to Market, First to Fail? Real Causes of Enduring Market Leadership,” Sloan Management Review 37, no. 2 (Winter 1996): 65–75.
11. Ibid.
12. Ibid.