The Competition is Just a Fire-Breathing Dragon

When I think through a new business idea, I think about three things: the value proposition, the market size, and the competition.  I want to have a clear understanding of the product offerings and why customers would find those desirable. I want to know that the market for those offerings is large enough to offer an opportunity for a meaningful business.  And, I want to know who else is already trying to capture those same dollars.

Over the past few weeks, I’ve worked through several ideas.  In each case, the pattern of progress has been the same.  First, I think I’ve got an idea that is at least mildly innovative.  (I’m excited!) Next, I convince myself that the market is large enough to be interesting. (Now I’m very excited!) And, then, I realize that there is already well-established, credible competition offering similar products and services.  (Oh no!  I’ve ended up depressed.)

But, I’m not depressed today. And, no, I have not come up with an idea that will take over a large, competition-free market. I’m not depressed because I no longer fear the competition.

Just as the horrific dragon Smaug has one missing scale in his armored skin and is thus felled by Bard’s carefully-aimed arrow, all businesses have soft spots that can be exploited.  All I have to do to capture the competition’s market share is to find the chink in the armor — and aim carefully.

For example, today I was studying a market in which the current participants all use a franchise model.  That model is natural because the services provided have historically required a local presence. But, I think the market is ripe for disruption from a purely virtual competitor.  And, if I’m right, the franchise model is a fatal flaw.  The franchisees aren’t necessary if virtualization succeeds, so they will fight any effort from the corporate headquarters towards virtualization.  And, headquarters can’t sustain its current revenue stream without its franchisees.  So, the company will have no choice but to maintain its archaic business model.  Thus, even though the competition has the knowledge, skills, and capital to build the virtual offering, I think they won’t.  Franchising is the missing scale in their armor, and virtualization is the arrow that could prove fatal.  

I’m not committed to this particular business idea, but I’m no longer afraid to think about it just because there are several companies in the market who already have more than $100M in annual revenue. All they’ve done is convince me that there is a lot of money available to an innovative entrant.  Similarly, if I could provide a better search experience, I’d have no fear of Google. If I knew how to build a better car, I wouldn’t be afraid of General Motors.  If I could process payments more efficiently, I’d take on PayPal.  I don’t know how to do any of those things, and I’m skeptical that there is much low-hanging fruit in any of those markets, but it’s the fact that I lack a compelling idea — not the mere presence of massive competitors — that has led me to look elsewhere.

I’m not suggesting that one shouldn’t be aware of the competition and cognizant of its strengths.  Trying to burgle Smaug’s horde is a risky move, even if you have a magic ring.  No matter how large your army, an infantry assault on a dragon just isn’t going to work. And, if you find that you’ve awoken a sleeping dragon, you’d best stay out of the reach of its flaming breath.   The bigger and stronger the competition, the better the new idea has to be.  Nothing has displaced Windows on the desktop because it’s a good operating system and because there is a huge network effect.  I’d have to have a very compelling idea to think it was worth fighting that battle.  But, if I had the idea, I’d eagerly step into the ring.

So, I’m still considering value proposition, market size, and competition.  But, now, I’m not depressed when I find a competitor with a similar idea.  They’ve proven the viability of the market.  Their offerings are instructive.  And, if their products are not entirely satisfying, if their price is a little high, if their business model doesn’t scale, well, then, they can breathe as much fire as they like.  I’ll be stringing my trusty bow.


8 thoughts on “The Competition is Just a Fire-Breathing Dragon

  1. Complete inability to break from current business model is what _Innovators Dilemma_ is all about. One of the more fascinating aspects of Tesla is that they have no dealer network. That is a disadvantage, as it means that they don’t have voters in every congressional district. However, it is more of an advantage than a disadvantage, as Tesla customers are car-owners, while traditional automotive OEM’s customers are the dealers, who perhaps do not give the OEMs good advice.

    • Yes, you are right that the situation I described with respect to franchising is a classic _Innovators Dilemma_ problem. If Teslas model proves successful, we will say the same thing about the traditional car companies: they couldnt figure out how to break away from the dealer model. However, its not obvious to me that Tesla’s model is unambiguously superior, even discounting the (real and substantial) problem that dealers have successfully lobbied for laws in some states that require automobiles to be sold by dealers rather than manufacturers. Presuming that Tesla needs local stores, it will need to invest capital in building those stores, whereas traditional car companies leverage dealer capital. It will also be interesting to see whether Teslas pricing approach (cars have a price, that is what you pay) will be more appealing to consumers that the usual wheeling and dealing approach.

      • For what it’s worth, GM tried that pricing approach with Saturn for a few years, too; my impression is that basically it made no difference one way or the other.

      • Brooks and Mark, Tesla’s business model changes go beyond no-haggle: they have no franchisees. All sales locations are owned by Tesla corporate and “sell direct.” In part this ownership may reflect Tesla’s Apple-like secrecy. In some state (Texas?) Tesla was forbidden from selling cars because state law required the existence of dealerships.

  2. I have also undergone the same shift of paradigm in regards to competition. Competitors can be considered as outsourcing of market analysis – they have analyzed the existence of problem for you, so you can directly switch to the search of solution. In regards to big competitors, they aren’t scary either – the bigger the company the broader set of problems they have to address, so it is easier to win the customers with narrower needs frustrated by gozillion of features offered by the universal product. For example, let us take Google. Their search is superb with its intelligent guessing in majority of cases, but there are cases when I don’t need that because I exactly know what I am looking for.
    I am using the following motto for self-motivation: “Don’t be afraid of competition – you beat 40 millions of competitors to be born.”

  3. I’m pretty sure it was on the blog where I read a post talking about the fact that, if your idea doesn’t already have competition, it’s probably not a good idea. And somewhere else I got the idea that if you don’t think you have competition for a product, that just means you will get surprised by your competition.

    • Yes, it’s conventional wisdom that if you have no competition your idea isn’t worth having — or you haven’t defined the market broadly enough. For example, if you were Tesla Motors a few years back, you didn’t want to tell your investors that you had no competition simply because there were no electric cars in mainstream production; your competition was Ford, GM, BMW, etc. And, for that matter, the bus. But, to me, the interesting question was just how much competition you should want to have; if you’re David, does it really make sense to take on Goliath? I think the answer is that you should be afraid if you have only an incremental improvement — but if you have a truly compelling idea, or especially a business model shift that Goliath cannot make, you should not be scared.

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