Entrepreneur Myths (16 page)

Competitive Rivalry

How many companies are competing in your sector at the local, regional, national and global levels? Are Fortune 500 companies already fighting it out in the sector, or is it mainly startups or emerging companies? Do they know you’re in the game? Are you even on the fucking radar? The less they notice you in the beginning, the better.

Competitive Size

How big is the market sector in terms of current and potential users? Is it a billion dollar market? If not, is it forecasted to be a billion dollar market soon, and over how many years? How do you know the industry is growing fast? Are VC-funded companies already in the sector? Are any divisions of Fortune 500 companies in the sector? How big are the competitors? Does the market consist of mom and pop companies? Is there a clear leader or a few still fighting it out? Is there a clear follower? Is the market still young enough for new entrants? What is the largest company in the sector in terms of revenue? How much money has the sector received in investment dollars? Who has received the most funding?

Competitive Leverage

Are there companies in the sector that are leveraging their assets from different industries? Are there line extension brands from other related or unrelated categories? Are there any companies, especially Fortune 500, using profits from other markets to build their brand in your market?

Competitive Substitution

What is the substitution offering for this sector or market? For instance, in the entertainment film business, Hollywood competes against gaming video titles such as Counter Strike, NFL Madden Football, etc. Hollywood also competes indirectly with Facebook, Twitter, Zynga, Wooga and other social sites — not for money but for the customer’s attention.

You have to understand the customer’s bandwidth. Teenagers can’t watch TV, go to school, text 24/7, go to theaters, chat on the phone, sneak out of their room at three in the morning, listen to music, walk the malls, play video games on the computer or Wii, Nintendo or Xbox, play games on their cell phones, play sports, study, sleep, go out, have personal relationships, chew gum, bicker and fight with their parents — all in a 24-hour period. That’s what I mean by bandwidth. Something‘s got to give.

Competitive Differentiation

How are you different from your competitors? Find out if the variables, or what I call “differentiation vectors,” actually make a difference to the consumer — not just your company.

For 15 years I’ve said GM has gone sour due to lack of differentiation in some of their product lines. For instance, Pontiac, Chevrolet, Oldsmobile and Buick models looked somewhat the same. In my opinion, that’s one of the reasons why GM went bankrupt, and Uncle Sam had to bail them out.

Toyota has been much better at differentiation, until recently. They have separated their luxury brand, Lexus, successfully so far — despite recent quality issues. I see them coming into branding and positioning problems if they continue to come out with lower-priced Lexus models because, at the lower end of the spectrum, do you buy the Toyota Camry or the Lexus IS series?

Competitive Goals

Have you figured out the competitive goals of your competition? Are they trying to build the market, focus on growing the market, or suck out as much cash as possible from the industry while the sector is still financially healthy? You have to figure out the goals of each major competitor in order to determine how their strategy might affect yours. Dumb competitors, especially well-funded ones, can fuck up a sector in a hurry because they confuse the potential customer of a new market segment with various value propositions. One example is when a company sells products below cost, thinking they can make it up in sales volume.

As you can see from these competitive considerations, knowing your customer is important, but it is not enough. You can’t put on blinders and hope nobody will fucking notice you until you get big. You have to understand where you fit in the competitive landscape. On the other hand, having competition doesn’t mean you can’t succeed. Look at how many damn restaurants open every year. In any competitive marketplace, there is always “churn and burn” between winners and losers. Today’s leaders may be tomorrow’s goners.

I have two additional competitive strategic variables to add to Professor Porter’s theories:
competitive localization and competitive intensity
. I came up with these concepts after funding numerous companies in various sectors.

Competitive Localization

How many ventures are in your space at the regional, national and global level? Does geography matter or is some other competitive variable more important? Localization works in retail and internet. For instance, Costco Wholesale started on the West Coast while Sam’s Wholesale Club started in the Southeast. It took a decade for them to cross paths. Zynga social gaming started in California and Wooga started in Germany. Today they compete head-on.

Competitive Intensity

This is when a sector heats up in a hurry with new entrants, a proliferation of new products launched into the marketplace, and an intense increase in venture capital funding. I experienced this occurrence with Net Market Makers and later Futuredex. When a specific sector becomes hot, VC-funded companies come out of the woodwork.

Competitive intensity differs from competitive rivalry. With competitive rivalry, there could be a bunch of competitors milling around in a stagnant industry, boring the consumer to death. An eruption occurs, usually caused by the release of a product innovation by a startup or follower. Customers are mesmerized and rapidly buy the new product or service. The competition also experiences a ramp up in sales. When the entire category heats up in a hurry — that is competitive intensity.

For instance, Coca-Cola or PepsiCo did not invent the energy drink sector. Red Bull, out of Europe, single-handedly created this monstrous category. Even though there was already competitive rivalry in the beverage sector, the competitive intensity was low or non-existent in a new category. This allowed Red Bull to take over a large market share before the rest of the industry woke up and smelled the coffee — well, in this case, the energy drink.

You have to be in tune with the level of competitive intensity in your sector because you have to know how to ride the market. The time you choose to get on the train or get off, due to competitive intensity, could make a difference between being acquired, going IPO, going Googlio, going bust, or not even getting into the game.

Brain Candy: questions to consider and ponder

(Q1)
Who is your competition today? How about tomorrow? Or do you have your head up your ass thinking you have none?

(Q2)
Have you read Harvard professor Michael Porter’s books? If you have, what do you think about them? If not, I suggest you read them.

(Q3)
How do you analyze competition?

(Q4)
What other competitive variables do you use?

Entrepreneur
Myth 25
| Getting distribution is easy

If you think getting distribution for your product or service is easy, you’re living in an enormous bubble, my friend. Distribution is critical for any venture and it’s not easy to secure.

I dealt with distribution for more than 20 years in the high-tech sector. If you have capital, getting distribution is easier, but you need to know what you’re doing, or you will get your ass kicked by the distributors and spend all your money before you get onto the retail shelf.

Distributors are like pimps. They’ll represent anyone for money. I guess that makes you the whore, and you have a lot of competition. Getting distribution is difficult in most industries unless you bring a substantial amount of dollars for consumer advertising, along with market development funds (MDF) for the distribution and retail channel. You could get lucky and obtain wide distribution without a substantial amount of MDF, but this depends on the sector and the marketing power of your brand.

Do you have any fucking idea what it takes to sell to Walmart, Sam’s or Best Buy? When you are seeking distribution of your product, consider every alternative. Even existing companies have to worry about getting their product on the retail shelf. Look at Procter and Gamble, the large consumer products company. They have a huge division in Bentonville, Arkansas — put there just for catering and kissing Walmart’s ass. They want to make sure all their products are marketed and represented well on their retail shelves.

Let’s say you have a software entertainment game you developed and you need distribution. Fuck it. Let me tell you a real story, which some people I worked with may not want to hear. Long ago, I worked for a software company, Berkeley Software Design Systems, which produced a very cool computer game called You Don’t Know Jack.
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Despite the software company having access to distribution with their other products in retail outlets across the country such as Sam’s, Walmart, Best Buy, EB Games, Target, and CompUSA, getting their first entertainment title into the channel was a nightmare.

Entertainment was not Berkeley’s forte. They made a shitload of money selling computer utilities such as the After Dark screensaver, but the new management team knew jack shit about the realities of distributing software in the entertainment sector. It couldn’t be any harder than selling utilities — so they thought. The company wanted to expand their product line, and entertainment was a hot category then as well as today. Their business strategy of entering the entertainment sector was right on. Their execution was horrible.

The marketing department produced the packaging, pricing and promotion without input from sales, distribution or retail buyers. The marketing people had a bunch of fucking MBA degrees. They thought they knew it all and refused to listen to any salesperson’s feedback — mine included. And Berkeley had some experienced and smart salespeople representing them to tens of thousands of retail stores across the country.

The retail and distribution channel hated the You Don’t Know Jack packaging and the price point. Entertainment products at the time sold for around $40, and our marketing wizards decided to price You Don’t Know Jack at $30. Nobody in the marketing department asked the retail buyers whether they wanted to buy the fucking software and sell it at that price. From a product standpoint, the marketing folks built “a better mousetrap” and expected the retail buyers to run to the door.

What made it worse is that Berkeley’s founder brought a new CEO into the company after he received venture funding. After the VCs got into bed with the founder, the pressure escalated to meet new financial numbers and expectations. The sales projections for You Don’t Know Jack were unrealistic. Shit, they wanted sales projections that matched Myst, the current smash-hit PC video game at the time.

You Don’t Know Jack was good enough to generate a lot of press, but the distribution and retail buyers didn’t give a shit. They were already maxed out on their shelf space in the entertainment category. Plus, they were making better margins from other hot games, including Myst. Even throwing in market development funds wasn’t enough. Why? Because every other entertainment company was doing the same — and those companies were throwing even more money behind their products. Some of them were putting millions of dollars into marketing their product during the Christmas season. You Don’t Know Jack was outgunned by the competition.

What made it more difficult were the expectations of the upper management team to load up the channel shelves with the tens of thousands of units — during the holidays when every other software fucker wanted to do the same thing. It was a classic case of a company wanting wide distribution, deep distribution, but not listening to their customer — which, in this case where the retailers.