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.
Who is your competition?
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 everburgeoning competitors. All they can say is: “Yep, we got ’em too.”
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.
How do you get into the market?
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. 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.
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.
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? 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, 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.
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.
Excerpted from From Idea to Success by Gregg Fairbrothers, reprinted with permission by McGraw-Hill Professional.
[Image: Flickr user familymwr]