1.1.21. Competitive Analysis


One of the key questions that we might think about as a new entrance in a new market space is this question, what would happen if our innovations were instantly available to all of our competitors? This question really forces us to confront and think deeply about on what basis our firm is really going to be able to capture returns as compared to everyone else who could be entering into the domain. Now, to set the table, I want to cover one general principle. I’m going to term it judo strategy and the imagery here is, if you are the startup entrant, how are you going to be able to flip or out-compete a much larger incumbent? After all, that’s the essential challenge that you have as the new entrant or startup entrepreneurial in a given space.
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It really forces us to think about this question, on what basis are you going to have any form of leverage as compared to outsiders? In general, it’s going to emphasize skill rather than strength and it’s going to emphasize this notion of how could we avoid head to head competition? Because after all, the incumbent is going to have much deeper pockets, going to have a more established corporate reputation as compared to any new entrant in any new market space. So let’s talk about several tactics that you might employ as a startup entrepreneur. The first one is you have to really be able to develop a theory as to why the incumbent will not have incentives to come in and aggressively compete against you right away. Now that may be because you’re flying below that radar screen that the incumbent doesn’t really notice you, but even if the incumbent does notice you are there some theories that you can think about as the entrepreneur as to why you’re going to have at least some small window of time in which the incumbent will not have tremendous incentives to come in and aggressively compete against you? These could be because, for example, the incumbent doesn’t want to cannibalize its existing products or services. It could be because the entry into the new market space that you are covering as a startup will have negative spillover effects compared to the home or flagship products of the incumbent. Let me illustrate that with an example. Take the case of Red Bull, the new entrant to the United States. The incumbent player may be Coca Cola. Now Red Bull consciously develops a reputation or position that it’s much more edgy, extreme.
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And that’s, by construction, is a very different positioning or brand than Coca Cola is trying to cultivate. The family imagery, wholesomeness, etc., etc. And because Red Bull, by construction, is really trying to distance itself from that
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brand imagery of the wholesomeness, family reputation, Coca Cola may be less incentivized to come in and compete aggressively in that new market space. A second tactic that you might use is to give a stake in the success of your startup with incumbent. Now, to the extent that it’s a win-win proposition, the better that you do as a startup, the better that the incumbent does in terms of how they do having an equity stake or a royalty stake in the success of your business that will naturally defray competition. Now the precondition to really employing the strategy is making sure that you have a compelling value proposition such that the incumbent wants to do a deal with you.
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The final aspect here in terms of tactic is being able to translate short term opportunity windows that you are able to get into as a startup and to take further moves so that you’re able to translate one success into another success that will prolong that opportunity window. Now, imagine that your competitors could instantly get access to your innovation soon after you enter. What protects you?
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This invokes the concept of a tightly held complimentary asset.
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Complimentary assets are those assets that are necessary to translate a given technical innovation into commercial returns. Examples of these are things like regulatory expertise, sales and manufacturing excellence, your knowledge or ability to cultivate a brand.
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What’s important here is that to be the basis of competitive advantage, those complementary assets have to be tightly held. That is, they have to be unique. They can’t be generally available to everyone in the industry. Consider the context of semiconductor chip designers. Now if all those designers had access to the same manufacturing facility to fabricate those chips, that manufacturing would no longer be the basis of any competitive advantage because everyone in the industry would have access to those same manufacturing facilities and therefore, it could no longer be the basis of a competitive advantage.
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Now those complimentary assets come into two buckets. The first are things that you own, resources, and the second are things that you can do, organizational capabilities or competencies.
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The resources that you own could be things like brand name or customer relationships, while things that you can do, organizational capabilities could be of the form of capturing information of customers and of what they prefer. Finally, let me give you some examples of three distinct entrepreneurial strategies when it comes to entry that could be the basis of competitive advantage. The first is a value chain strategy. This is essentially a cooperative strategy where you as the startup are working to reinforce an existing value chain that an incumbent has, but innovating along some aspect of the value chain. Consider Foxconn, that company that actually manufactures iPhones, iPads, and Kindles.
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They feed into the value chain of Apple and of Amazon by innovating on one segment along the value chain, but doing much better and more efficiently than Apple or Amazon could do it themselves. That’s the first strategy. The second strategy is essentially a competition strategy, a disruptive strategy in which you’re trying, as a startup entrepreneur, to upend the existing value chain of the industry incumbent.
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Here, we’re talking about theories that have been elaborated by Clay Christensen of Harvard Business School and others. To give a concrete example, consider Netflix. That company that is delivering streaming media content, movies over the Internet. Back in the early days of entry, the established industry incumbent was Blockbuster. They had a very particular way of distributing movies to consumers. That, namely, consumers would drive to the Blockbuster stores and check out the titles and then incur a late fee if they returned it late. Netflix pioneered a disruptive strategy that was essentially a substitute for Blockbuster by delivering DVDs by mail and then subsequently streaming content. Really, it’s a different value chain that replaces the market power of the industry incumbent. Finally, there’s the third strategy, a blue ocean strategy. Here, it’s not necessarily mutually exclusive with the disruptive strategy. But the essence here is that you’re trying to discover new market space, as elaborated by the champions of this strategy, professors at NCAD that you see listed there. To give a concrete example, consider Airbnb. This is the company that allows peers or users to essentially go in and rent an apartment or room of an apartment. It’s really a peer to peer type of platform. And it was discovering new market space because no one ever thought that this could be a basis of a viable business but ended up being quite disruptive in discovering a new market space that is eventually eclipsed the market capitalization of the likes of Hilton and the Sheraton. So in summary, we’ve covered some strategies by which entrants could really defray competition and address the question, what if competitors could instantly get access to the innovations that we’ve pioneered as a startup? On what basis could we really win and outcompete those competitors? Thank you.

Jim Rohn