16 Sep 2014

Understanding Business Competition for Entrepreneurs/Startup CEOs

Competition is a very big part of business, yet it often cloud entrepreneurs’ minds – and hearts as well – to the degree that they start acting, thinking and planning irrationally and often in a counterproductive way that would hurt their startups or even kill it.

I’m an entrepreneur myself so I’ve probably had first hand experience with that.

There also seems to be a movement that calls for pure, total and complete “Collaboration”, “Co-creation”. Beautiful words and principles that’s often misused with good intentions or bad. The biggest disappointments in my entrepreneurial career came from people who in the surface were calling for these beautiful principles.

So, between the extremes of hypersensitive hyper-competitive approach and an irrational, probably deceptive call for collaboration. Where entrepreneurs should be?

I recently completed two tracks on Business/Competitive Strategy, Foundation of Business Strategy by Professor Michael J. Lenox from University of Virginia and Competitive Strategy by Professor Tobias Kretschmer from Ludwig-Maximilians-Universität München (LMU) and I’m currently completing a follow-up course on Advanced Competitive Strategy.

As I enjoyed both courses and used them to structure my knowledge about competitive strategy I had been relating to startups along the whole thoughts and discussions of the course and reached a few thoughts to share.

Lesson #1: Fundamental Principle of Business Strategy

“If everyone can do it, it’s difficult to create and capture value from it”

Professor Lenox draws a clear example from the story of Pets.com a short lived web company started in 1998 and died in 2000, taking US$300 million of venture funding with it. Beside excessive investment in branding and advertising, the reason for the failure of Pets.com is that plenty of small competitors appeared and acquired a large portion of the market it created.

In economic terms the above principle can be expressed as:

In a perfectly competitive market, no firm realizes economic profits (rents).

The lesson for entrepreneurs here is that before jumping into an industry with a new idea or business model, make sure you clearly see where the unfair advantage that will keep you alive and profitable will come from, furthermore, it’s more important to judge how far to invest your energy, time and money – before others’ money – on a business with no future, in case it’s not possible to establish a competitive advantage.

If everyone can do what you do, you’ll never scale properly and it’s better not to enter that market – or this part of the market.

The supreme task of an entrepreneur/startup CEO is to constantly search, rediscover and pivot around the competitive advantage of the startup.

This is exactly why Innovation is a big thing whenever you start talking about entrepreneurship, you have to constantly establish a competitive advantage or die.

Away to simplify this is what Jim Collins called the Hedgehog concept an exercise used to identify the areas where a firm should focus its competitive activities

Lesson #2: It’s all about time and speed

Business opportunities are made up of what? Identification and formalization of a competitive advantage that can create an economic impact, but when? at a specific time frame, after which, the competitive advantage most likely will be outdated and undesirable.

What would you have over competitors is the speed and time frame to deploy your competitive advantage before they acquire and deploy it. So, you are in a constant battle with time to refresh, renew and acquire market share.

The more you work on building agility and ability for rapid execution, you’ll guarantee that the efforts invested in identifying and formulating the competitive advantage is not wasted with bad or late execution.

Lesson #3: It’s all come down to money and financial profit

Competition often clouds our minds to the extend it becomes a goal in itself, while the reason why we enter competition in business is to control the potential for more profits either at current state or in the future.

This piece of thought can dramatically shift the way entrepreneurs, CEOs act in competitive situations, if a collaboration proposal with your current competitor would allow you to make more money, would you consider it? would you not? and why?

It’s an unfortunate fact that competition is often about EGO other than actual numbers in financial documents, whenever you are faced with a competitive situation or a chance for collaboration, before running it by your ego and expectations of public image, run it by the spreadsheets and see if your startup can make more money if they venture into a partnership, or even completely ignore a competition.

So, what do you need to worry about as an entrepreneur?

As per the above, as you understand your competitive advantage you need to choose a scope of the market you want to venture into and by doing that you also choose a scope where you don’t want to venture into and you need to gain the speed by which you can acquire the economic benefit that this particular competitive advantage can create in this particular time frame.

So, what happens to all other areas where you are not interested in developing a competitive advantage or don’t have the time, resources or will to pursue.

That’s when collaboration and co-creation comes in and starts to make some serious strategic and economic sense. Strategically, it might be even better for you to invest in building capabilities in other firms in your industry or encourage the creation of new firms to cover areas that you are not interested in.

Below are some ways that you need to avoid as an Entrepreneur/Startup CEO?

Avoid leaking your plans and strategies

As a competitive advantage has its time to return economic profits – or impact in case of non-profits – if another entity identifies to a level of details your future intentions and be able in acquiring resources to execute them, you’ll most likely be dead.

I remember when I was invited to a meeting with an organization that explained seeing great potential in our activities and interest in funding the activities we are intending to execute next year. We have excitedly put together a document explaining our future plans and surprisingly, the same document was shared with a hostile funder that ended up funding three of our main projects to other entities, blocking our ability to deploy them on our own.

Such situations can be the death of your startup, there are often limited resources and space to do a particular activity or launch a particular product, once information about your future plans and strategies are leaked, someone will reassemble what they thing is your “competitive advantage” and execute it in a time frame where you’ll probably not have the funds or capacity to compete.

Avoid the loss of your intangible assets

The biggest investment for early stage startups are usually placed on people and processes before the product itself. In order to reach the degree in which you’ll be able to launch a product you’ll need to invest in building the people and processes that leads to the product.

I came to believe that – especially for knowledge workers – it’s often hard and rare to extract value from your employees at the first three month of their involvement, that’s when you are needed to invest in coaching and building or training on existing processes, templates, procedures and ways to get things done.

It’s often after this investment is placed, you might lose your employees and sometimes some of the procedures, templates – if not strategies and plans – with them.

Such loss in intangible assets are very costly for early stage startups.

Avoid betrayal by a partner/competitor

People live with different paradigms and believe in different ethical frameworks with varying degrees of integrity, as I mentioned if you find a specific area where you don’t wish to venture into and integrate your activities with theirs.

While this form of partnerships makes huge strategic sense, at varying points of time partners who you have entrusted with parts of your operation might knowing that you are not venturing into their area, access information about competitive advantage and try to replicate it.

Back in 2010 I started working on a media product to promote entrepreneurship in Egypt as a part of my work at Egypreneur, despite the fact that I was surprised when a specific funding agency brought a contractor from its nationality to execute the project, which had been a pattern in projects they accessed through us, I preferred to peacefully move away from the scope of work and focus on building products in different domains.

With this shared in a strategic discussion to arrange the scope of work with the spirit of collaboration and co-creation, surprisingly, the same very entity for which we sacrificed part of our market to avoid a competition have illegally accessed our internal assets and tried to replicate everything else that was being built away from the media product.

You can not control how low others will go, your only option is to fortify yourself with all means against this form of back-stabbing, and this brings us to the role of the environment or ecosystem.

Some ways the environment or ecosystem can ruin the competitiveness of a marketplace?

Lack of equal opportunities

The more resources of startup support are controlled by a specific group of people, the more unfair an environment will continue to be. A fundamental requirement to build a fair environment for competition is to make resources and support services accessible to everyone equally based on competence other than any personal preferences.

This is a very challenging point because often once you place your investment with Startup A, it becomes your duty to protect it from competition, the more there are other investment options for a competing Startup B, the more healthy the environment are.

Environments monopolized by gate keepers who decides who to lives and who to die are not a healthy sign of a competitive environment.

Lack of accountability / corruption

Everyone can identify right from wrong, this clear distinction provides a protection to members of society that wrong behavior will not be tolerated, legally, morally and in any form. It’s when the surrounding chooses to skip or cover up on wrong doing for the sake of economic or moral returns the environment loses its reliability as an environment where entrepreneurship can grow.

Failure to communicate

It’s very healthy in an environment to communicate the principles, ideas, what works and does’t work, what’s needed and what’s not. Failure of members of a society to communicate properly, address most pressing issues and set the standard of act in their society will result in a jungle-like behavior.

It’s very positive to look someone in the eyes and let them know what you think and plan and your strategy or approach might affect them in the future.

Briefly, Is competition in startups overrated?

Yes and no. Often, the challenge with a startup is to produce and maintain a competitive advantage for a specific period to be able to reap what they sow, in order to do this startups should identify their “hedgehog” concept and then should encourage the development of new startups the complements this focused work.

As a startup entrepreneur, you are not in competition with everyone doing something in the same domain, you need to rethink your “hedgehog” concept to define who is really competition with you and who you should partner with.

The real challenge of competition in startups is more to the environment/ecosystem whether the legal, ethical and societal support will be there to block possibilities of corruption, betrayal and unfair competition.