In the simplest terms, competitive strategy is business strategy. All companies face competition. If your company doesn’t have competitors, then you’re not in an interesting market. (Investors get particularly annoyed when entrepreneurs claim they don’t have competitors. It shows a failure to understand business fundamentals.)
Michael Porter has done most of the seminal thinking on competition, and everyone still riffs off his work. With out restating the whole treatise (which would make for an absurdly long blog post and a case of blatant plagiarism), let me hit a few highlights to get us started on this topic.
(I try to write most of my posts so they could apply broadly to a wide range of early stage businesses in a variety of industries. For purposes of this post, I’m going to focus particularly on software companies, but the principles still apply in other categories.)
Startups usually see competition from three sources:
- Direct Competitors
- Substitute Goods
- New Entrants (e.g. someone who is not in the market but moves into it)
Let’s look at each briefly…
This is what everyone first thinks of when you say competitors, and many entrepreneurs translate this into something very literal such as: “Is there a company that is perfectly identical to you?” Then they can answer: “No… well there is one other company but they use a lot of blue on their website and we use green.”
The point is there is a pretty good chance there are some direct competitors, even if you have something that is different or original. Moreover, in the world of tech startups, where seed funding is wild and loose, it’s no surprise if you don’t find several copy-cat start-ups hot on your trail as soon as you see a little success.
So the starting place for your competitive strategy is with your direct competitors. We’ll go more into this kind of a strategy in other posts, but it’s good to note there are lots of examples of startups facing very real direct competition and winning.
For example, Google entered a market with lots of search competitors and annihilated them. Salesforce.com came into what most people thought was a totally oversaturated CRM market and crushed it. Many people thought it would be crazy to launch a new airline given all the consolidation and the huge costs, but Southwest and JetBlue did it successfully, and they sustained it when United launched TED and Delta launched Song to compete.
The second source of competition is the one that most entrepreneurs overlook entirely. Before you’re amazing product changed their lives, your customers were probably already addressing the same needs your product meets, but not as well.
Before we had Facebook friends, people just had friends. We shared photos when we dropped by each other’s house (or we emailed them), and we chatted or emailed. You can go back hundreds of thousands of years and you’ll find a Facebook news feed. It will just look more like a group of people sitting around a cooking fire or a meal swapping stories and updates about their lives: “Did you see the size of that elephant?”
Facebook took these fundamental human activities, and they changed the way we do them. For a class of our friends who we didn’t do much with before, Facebook has become radically easier, faster, and more scalable than the substitute goods. But not everything works out that well.
Substitute goods can be distantly related or products that solve the same problem in a different way (e.g. sharing photos with Flickr rather than Facebook). Pay attention to the substitute goods, for many startups they are the not obvious at first, but they matter.
The final major source of competitors for startups is new entrants. Generally, this will be a big company adjacent to your space or a copy-cat startup.
The giant notices what you’re doing when it starts to get poked a little. For example, they realize they are losing some big customers. Then they try to crush you by releasing your product as a feature (ouch), building a direct competing product, or buying one of your competitors. The best case is they buy one of your competitors, since this almost always goes badly.
The copy-cats come running after you, and you end up in a foot race for market share and product differentiation. Sometimes the new entrants come in with something disruptive that takes you out at the knees. Ignoring entrants is a mistake, but getting to wrapped up in their threat is also a problem. As Andy Grove would say, “Only the paranoid survive.” So be worried, but win by out executing.
In other posts I’ll write more about how you compete against direct competitors, substitute goods, and new entrants. In the end competing is about creating sustainable differentiation, which is the heart of creating great businesses.