Dealing with Competition
Jeff Bezos famously said, “The most important single thing is to focus obsessively on the customer.” Jeff never offered a quote on the second most important thing – the competition.
What is competition?
It’s easy to see “the competition” as the person down the street doing the same thing as you. They have a retail storefront, they offer similar products and services, and they probably own some of the same equipment. They are the ones to be worried about, right? Think again.
Who does American Airlines compete with? The easy answer is United and Delta. They also compete against Netjets, Greyhound, Amtrak, and every automobile company in the country. They are also competing against travel agents, user forums discussing travel, anybody out there who thinks they can start an airline business, battery manufacturers, FedEx/UPS/Amazon, Boeing/Airbus, and even to the slightest degree – boats.
American Airlines is in the business of moving things from point A to point B. In the modern economy, there are lots of ways to do that.
Porter’s Five Forces
Michael Porter identified five forces that make markets look attractive. These forces determine whether someone would want to participate there:
- Industry competitors
- Potential entrants
- Substitutes
- Buyers
- Suppliers
When you think about your business, you must absolutely consider the customer experience. Your next step is to figure out who is trying to take your customer from you. Understanding these forces can help determine who might be sneaking up behind you.
Identify the threats
Intense Segment Rivalry – This is the guy or gal down the street. They have the same products and services, they compete for the same SEO, you bump into them at trade shows and industry events, and you may exchange employees with them. They are probably the first thing that enters your mind when you think of the word competition. They are your biggest problem, but certainly not your only problem.
- Ask yourself if you would want to start a search engine, a social media network, or a computer company right now when you know that Google, Facebook, and Apple exist?
New Entrants – This is based on the concept of a barrier of entry. How easy is it to get into the business you are in? Does it require a license? A large capital investment? Years of training?
- Ask yourself if you would want to start an aerospace company, a medical device company, or a financial services company knowing how much intense regulatory requirements are needed from the FAA, FDA, and SEC?
Substitute Products – This is the possibility of other options out there to what you offer. Think about the purpose of your product or service. Are there other ways to accomplish the same goal? Consumers will choose partial functionality if it’s a fraction of the price.
- Consider cord-cutting vs. cable and satellite television. DirecTV offers 330 channels for $135/month. That’s 41 cents per channel. Cox cable offers 140 channels for $99.50/month. That’s 71 cents per channel. HBO Max starts at $9.99/month, and you only get one channel. On a per-unit basis, DirecTV provides 24X the value. People cut the cord because they don’t want to pay the $135. At some point, a substitute is good enough for their needs.
Buyer’s Growing Bargaining Power – This is when buyers work together to price you out of the system – also known as a buyer’s market. This is the essence of a product boycott due to bad press or a change in the consumer perception of your business.
- Consider the switch to electric vehicles from internal combustion engines or the switch the solar/wind power over fossil fuels. When the public changes its mind, it doesn’t matter how good your service is or what a tremendous value you provide, your pool of consumers has jointly decided that you are no longer a viable option for their needs.
Supplier’s Growing Bargaining Power – This is when your suppliers have too much power. The most famous of which is the oil and gas industry. When OPEC decides that the oil price is too low, they simply stop the pumps and wait for the price to go back up. Any industry with strong monopoly power can unilaterally decide that markets are working against them and constrict supply.
- If your workflow for your products and services relies on any “inelastic goods” to exist, you are in danger of supplier-based competition. They can price you out of the market or starch any profit margins you have left.
Competitor Myopia
Focusing on current competitors rather than latent ones can render your business extinct. Everyone loves to point to Kodak’s foolish dismissal of the digital camera, but there are plenty of other examples: Amazon for books (and everything else), Zoom for video communications (how many people predicted a pandemic?), Tesla Motors, Airbnb, and Uber. It’s easy to disregard a potential competitor based on existing consumer tastes, barriers to entry, financial resources, and industry expertise. Remember the guy that said the Internet would be a fad?
Maintain a balance
Racing is one of the oldest forms of human competition with multiple different varieties: running, bicycles, cars, boats, planes. Any racer will tell you that you need to keep an eye on the finish line or look ahead through the next turn but keep your opponent in the corner of your eye and know where they are. They help you know where you are in the race. Competition is a good thing. It keeps you sharp, forces you to be agile and improve, and provides a metric for success. Customer obsession is a noble pursuit, but make sure you know who’s coming up behind you. The next competitor could be coming from anywhere.
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