January 16, 2008

Dealing with Competition - By Sanjay Anandaram

The founder was agitated. He had just read in the papers that some VCs had funded a company that appeared to compete head-on with his company. Some of his partners had also recently told him that other companies had contacted them with a better value proposition than what he had offered. And they were therefore re-thinking their position. A couple of his employees had also left to join a competing firm. It seemed that the whole market was, all of a sudden, conspiring against him! After all, he was the first company in the market (and the only company, as far as he knew). What was going on?

What was going on is all too common in the world of startups. Founders usually believe that their companies are unique. In fact, so unique that they believe there’s no competition of any kind whatsoever. Which is why VCs get to see pitches where the entrepreneur has positioned only his company in the top right quadrant of the familiar 2by2 market positioning landscape! Two of the most important things for the founding team to keep in mind is the following:

a) If you are absolutely the only company in a market, there’s a more than even chance that there’s no market at all OR,
b) You have not understood the market well-enough

Both the above are not exactly pats on the back for the capabilities of the founding team. It is fair to assume therefore that if there’s a market, there’s bound to be competition. And if there’s competition, it is but natural that they too are focused on the same customers as you are, are hell-bent on making sure that they win these customers, and will try everything possible to make sure that you don’t win. It would be na├»ve to think otherwise. Sometimes, the startup is the 1st company to offer a product or service. If you are making money and winning customers, then you can be sure that others will be attracted to the business. How does one then therefore build ‘sustainable competitive advantage?”, to use jargon.

Competitive advantage is obtained through multiple sources such as:
- Top class team
- Intellectual property rights
- Speed of execution
- Financial strength
- Business model
- Exclusive deals with customers, suppliers, partners
- Brand value
- Low cost
- Unique design
- Customer support

Usually, it’s a combination of these and other factors that give rise to competitive advantage. It is important for the founding team to therefore think through the sources of their advantage, continuously build upon them and create newer sources over time as the nature of competition changes. Competition could initially come from similar sized small companies. But very quickly, the big boys of the business could get attracted to the market and decide to come calling.

Speed is usually one of the key advantages that a startup enjoys. It is therefore important to deal with competitive pressures head-on, quickly and ideally, before they become pressures. How? By anticipating competition, market & technology trends, and by understanding the customer. And how does one do these then? The short answer is by being in the market and talking to customers, partners, suppliers and others who make up the market system. By spending time with them to understand their needs and motivations. Understanding why they aren’t interested in your company is as important as knowing why they are. Developing a competitive strategy therefore isn’t an ivory tower exercise at all.

Being proactive allows the startup time to rectify mistakes quickly as well. After all, trial and error is an accepted learning methodology but only if done speedily. Many a time, entrepreneurs believe that being first to market is sufficient advantage. Being first to market provides some initial advantage but not enough unless it is backed by relentlessly efficient execution. In addition, there must be a visible path to profits. After all, a company cannot win in the long term unless it starts generating profits. There’s an interesting saying that is worth remembering: “First to market doesn’t mean being first to arrive. Rather, it means being the first to survive!” And generating cash and profits is the only way to do so.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.