Competing From the Fringe

competition.JPGThe joys of competition.

Let's face it. Life would be pretty boring without the Darwinian struggle for survival. Without external forces pushing organisms to adapt in order to ensure their continued survival, you would be swimming in a primordial goop, along with the other single-cell creatures, rather than reading this enlightening article.

Having an Enemy is Good

In competitive sports, the better your competition, the better your game. In business, as in sports, it sometimes takes a formidable opponent to force you to perform at your peak. Just like a sports opponent you love to hate, your market competitors are invaluable in helping you focus your team's efforts and motivating them to perform at their best.

The power of an external enemy has not been lost on politicians through the ages. Nothing galvanizes a group better than a common enemy that can be vilified and made the target of the group's energy and aggression.

Use this facet of human nature to your advantage and focus your team on beating your competitive enemies. However, keep in mind that beating them and badmouthing them are two very different things. Publicly and privately, acknowledge your competitor's strengths and make it clear to your employees and other stakeholders that you respect your competitors and that you regard them as formidable adversaries.

It may sound counterintuitive, but talk up your competition. By acknowledging your competitors' strengths, you can effectively position yourself as the industry underdog. The role of industry underdog is compelling and fits well with a competitive drafting strategy (as discussed in "Breaking Wind" below). It is easier, and frankly more fun, to motivate a room full of Davids as opposed to a bunch of folks who think of themselves as a team of Goliaths. Also, by building up your competitors, you provide important validation to your industry, which is especially important if you are involved in an emerging product category.

As discussed in Competitive Sleuthing, you should designate a senior member of your team as the "Watson" to your Sherlock Holmes. Watson will be the company's competitive sleuth. In addition to monitoring your primary competitors, Watson should also focus on emerging trends and technologies that could negatively impact your business. Such external issues could represent opportunities for future competitors to encroach on your market. Watson should periodically communicate the status of the competitive landscape to your Core Team. In addition, any time your competition beats your company in any material regard, Watson should analyze the competitive loss and come up with a game plan to avoid similar losses in the future.

Keep Your Enemies Close

Get to know your competitors on a personal level. Are they smart, analytical leaders or are they brash and highly sales-oriented? Do they want to grow their company into an industry leader or will they be happy with a smaller but faster sale of the company? The better you know the players on the other side of the field, the more intelligence you can overlay onto Watson's competitive data.

Reach out to your competitors and make a point to meet them on neutral territory, such as at a tradeshow, in a hotel lobby, etc. By planning such meetings when you and your competitors are at the same location for an industry event, the parities will be less "on their guard" and thus the interactions will be more open and potentially more enlightening.

Just as you should never underestimate your competitors' capabilities, you hope your competitors do just that when they assess your adVenture's threat potential. Is this Machiavellian? Why yes, I believe it is. There is a reason why The Prince remains in print nearly 500 years after it was penned.

In all your interactions with your competitors, be humble and do a lot of listening (see "Listen"). Ideally, they will come away from such discussions believing you are a somewhat naïve, nice person who does not have a killer instinct. You want them watching the other guy, not you. In your discussions with your competitors, heed the words of Josh Boger, Founder of Vertex, "Tell them only what they need to hear so that they'll tell you what you need to know worse" (The Billion Dollar Molecule by Berry Werth).

Another great reason to get to know your competitors on a personal level is that a significant number of acquisitions and mergers happen between competitors. Thus, if you already have a rapport, the skids will be greased if it ever becomes applicable to discuss a merger or outright acquisition. It may also help you form an alliance against a common competitor, in the event a formidable company enters your market.

Knowing the people behind the corporate façade will also help you better understand and appropriately filter their public pronouncements and strategic positioning.

Breaking Wind

If you are attempting to establish a new product within a new market, the role of Fast Follower might be the most advantageous. In this way, you can draft your competitor and thus learn from their mistakes, leverage their expenditures to educate the market, poach their customers after they have completed the missionary sales process, etc. Drafting is a racing technique well understood by bikers, runners, racecar drivers and jockeys. By allowing your competitors to take the initial lead in the race, you can follow them closely and thus reduce your wind resistance, conserving your strength to ultimately win the race.

As in any race, you must be careful to not allow your competition to gain a large enough lead such that drafting is no longer possible. An opponent that is a significant distance ahead of you obviously offers negligible drafting opportunities. If you allow your competitor to raise more money than you and buy market share while you sit back and attempt to draft them, you may be doomed to be a secondary or tertiary player. Yes, sometimes the tortoise does win the race, but he usually needs to keep the rabbit in sight in order to do so.

During its expansion phase, McDonald's employed a large team to analyze demographics, local population shifts, and traffic patterns, and used this data to determine the optimum locations for its restaurants. Their competitors, including Burger King and Wendy's, did not employ such teams. They simply allowed McDonald's to expend the time, energy and money to perform their in-depth demographic analysis and they then leased locations as close to each McDonald's restaurant as possible. This is a classic example of Fast Follower drafting. For further discussion on Fast Follower tactics, see Inventors vs. Innovators.

Leave Your Competitor's Foot Firmly In Their Mouth

"Never interrupt your enemy when he is making a mistake."
Napoleon Bonaparte (1769-1821)

Napoleon might have had a serious Napoleonic complex, but he understood that there was little to be gained by offering your enemy a course correction on their road to failure. If this issue was so clear to the diminutive boy General, why is it that so many modern executives feel they must publicly point out their competitors' mistakes?

If your competitor is truly making decisions that you feel will cause them harm, why alert them to this fact? Do not emulate senior executives at Big Dumb Companies ("BDC") that publicly declare their disagreement with a competitor's strategy and then cite the specific reasons supporting their assertions. As long as what they are doing is not impacting your ability to execute your Action Plan, be content with their bad choices. In fact, either be silent or cheer them on, but do not publicly admonish them to change their ways.

Losing Twice Times Two

As Bill Gates is purported to have said, "If you lose a deal to a competitor, you have lost twice." I would argue that you lose four times when you lose to a competitor because: (i) the competitor gains additional resources, (ii) you earn no return on the resources you applied to win the deal, (iii) you are unable to offset the opportunity cost associated with alternative deals you could have pursued, and (iv) your team's morale suffers.

Good prospects are expensive to identify and the sales process is usually time-consuming and costly. As such, do not hesitate to pull a muscle to keep a customer out of the hands of competitor. If it means one more site visit, one more discount, providing a few extra features at no charge, reducing the cost of ongoing maintenance - whatever it takes - swallow your pride and do it.

I know the agony of losing a customer to a competitor first-hand. A few years ago, one of my startups had secured the business of a substantial, national cable provider. We had the account for several years and then suddenly (it appeared sudden to us, because we took our eye off the ball), the customer informed us that they were not going to renew our annual agreement. During our "lost customer" feedback call (see Competitive Sleuthing), we learned that the competitor's CEO had leased an apartment in the cable company's backyard and had camped out on the cable company's doorstep for weeks. In short, she (yes, the CEO was a woman) had valued the deal more highly than we did and through her diligent efforts, she took the deal away from us.

Fortunately, this loss was a wake-up call. Shortly thereafter, we instituted Quarterly Business Reviews with all of our major accounts. Such "QBRs" gave us a forum to assess the extent to which competitors were knocking on our customers' front doors. These meetings also proved to be a great opportunity to better understand our customers' operational issues, which in turn afforded us the insights necessary to effectively sell professional services and extensions of our product sets.

What's the Dough Boy Afraid Of?

If one of your competitors is a BDC and they attack your company in a particularly aggressive manner, consider publicly asking the question, "What are they afraid of?"

This strategy was effectively deployed by Ben & Jerry's when Pillsbury allegedly applied pressure on its distributors and retail partners to deny shelf space to Ben & Jerry's ice cream. In retaliation, Ben & Jerry's rented billboards asking, "What's the Dough Boy Afraid Of?"

The Doughboy campaign worked. The negative publicity forced Pillsbury to tone down its more aggressive competitive tactics and firmly positioned Ben & Jerry's as the industry underdog.

Pick Your Battles

"Don't try to take a fortified hill, especially if the army on top is bigger than your own."

Bill Hewlett, Co-founder, Hewlett-Packard

You cannot always pick your battles. Unforeseen new market entrants will attempt to take your market share. As such, you may find yourself competing with foes you would rather avoid. However, at the outset of your venture, you can increase your odds of success by properly assessing and anticipating the overall competitive climate of your primary markets.

Here it comes...the dreaded four-by-four. I found it entertaining at Wharton the degree to which authors attempted to analyze the most complex, multidimensional issues into a four-by-four paradigm. However, in the case of competitive markets, it actually serves as a reasonable tool to analyze the tactics which are most appropriate in the various competitive landscapes.

Market Maturity:         Low                                                           High

Product Maturity

High Existing Product in New Market
Can your startup adequately serve multiple markets? Mature product more likely from established, resource rich competitors
Existing Product in Existing Market
Fortified hill
Price and feature slugfest.
Compete with product delivery, customer service - something different.
Less mutual respect; nasty tactics
Low New Product in New Market
Best quadrant for a startup.
Drafting possibilities
Cooperation - play nice
Grow market together
More mutual respect
New Product in Existing Market
Entrenched players - defend share
Expensive to win new customers unless overall market grows or new product benefits are readily apparent

The preceding chart is a good place to start when assessing your macro competitive strategy. For instance, if you are contemplating entering into a new market with a new product, be aware that coopertition may be more effective than traditional competition.

Launching an Existing Product within an Existing Market is akin to entering into a "Coke vs. Pepsi" battle in which your claim to fame is "ours is red and theirs is blue". As a startup, it is unlikely you will not have the resources to create a brand-oriented differentiation in the minds of the potential consumers.

In The Innovator's Dilemma, Clay Christensen concludes that introducing New Products in New Markets may offer the highest probability for a startup's success, based on his research of the disk drive market. Obviously, many factors will impact a specific startup's ability to succeed in a specific market. However, Christensen's insights regarding the competitive landscapes which are most conducive to high-tech startups are worth heeding.

Competition may be good for the overall market, but it can be brutal on you, your Core Team and ultimately your adVenture. Increase the chances of your adVenture's success by launching your products into competitive markets that are growing and do not require excessive funding to reach potential end-users.

Exercise

Using the competitive four-by-four chart, identify the market and product maturity applicable to your startup and list those competitive factors which you think are most relevant to your success. I have included a few of the more generic factors to be considered in each competitive scenario. When evaluating your startup's competitive challenges, be sure to tailor your responses to your specific product and market.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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