Competition is for losers

That Eureka moment! When you’ve conceived a brilliant idea you felt could change the world. Only to realize that there are several other companies working on the same idea, or 3 months into developing your idea, you realize that MNCs are out-executing you distributing it throughout its extensive channels. Starting a company in this digital age has become more challenging, as information gets disseminated very quickly, competitors will be made aware of your new technology before its ready for commercialization.

The key to survive is to out-execute your competitors inorder to build an unassailable lead against them and monopolize the market. Google came in late to the search industry, but with laser focus to improve on its core competency (search algorithm) they provided the best search results and experience to users, and in the process gained an edge over the incumbents (Yahoo, Altavista, AOL, etc). Companies would always portray themselves in a position where there are operating in a competitive market to build good public relations, Google positioned itself as a tech company, competing against Apple, Facebook, etc. However, in reality, Google has dominated the search market for nearly a decade and in the process accumulated a huge amount of resources which enables the company to pursue other projects. Politicians would try to breakup monopolies to give consumers better value for money, as it is common consensus that competition drives down prices.

Competition destroys value

As a new company starting out, it is best to avoid competition within your market to allow your company to capture the value that it has created. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. However fore ever $100 value created, these companies only capture 25cents of profit. Comparing to Google, which creates less value but captures far more. Approximately 100times more where Google brought in 50billion dollars and had a 21% profit margin. That makes Google so profitable and is worth three times more than every U.S. airline combined. The airlines compete with each other, but Google stands alone. Thus every company’s dream is to monopolize the market that they operate in. When companies compete, they lose value as resources were spent to out-compete each other in every aspect of the business (e.g. marketing, R&D, sales, etc). Many would argue that competition is healthy as it promotes a vibrant ecosystem, encourages innovation and brings value for money products to consumers. These are legitimate reasons for competition, however, it occurs at the expense of the company. Being a startup with limited human and capital resources, entering into a competition will stifle the growth of your company. Uber, started off as a very successful private hire platform in San Francisco depleted its resources as it pursues global domination. It had to sell off its Asia(China & SEA) business to its competitor, along with raising a down round (decrease in valuation) from Softbank as clear signs of the company failing to capture value that it has created due to competition.

Market Identification

The key to your company’s survival in this competitive space is to identify a niche market that nobody is giving attention to. Innovate relentlessly, create products or services that give 10x or more value to users, and ensure that your company is defensible when competitors enter the market. Defensibility can be achieved in various ways, 1) go stealth with your company until you’ve achieved technological breakthrough that is miles ahead of current industry standards, 2) focus on metrics that you’ve validated that allows you to capture and retain your users and invest resources in making it better from Day 1, 3) create an ecosystem around your product/service that acts as a high barrier for competitors to enter.

How to monopolize the market

Apple came into the mobile phone market when incumbents like Nokia, Blackberry have already established themselves in the market. By introducing a product that improves user experience tremendously and employing network effects techniques to enhance its defensibility against its competitors, Apple manage to establish itself in a highly competitive and saturated market. Differentiating from its competition creates a community within the industry and building an ecosystem where users are able to thrive within it allows Apple to capture a huge amount of value that it has created

Facebook focused on metrics that they believed were essential to the survival of their product, despite being in a market where there were several established incumbents, Facebook manages to displace them. When Facebook first started in Harvard and positioned itself as a campus-only social media platform, they knew that retention metrics were key to understanding their users, the number of time users spent on its platform daily, how many percentages of students were active after 7, 10, 30 days. They were obsessed with improving these numbers and have conducted multiple user testing to figure out how they could excel in retaining their users. This was on the top of strong demand from colleges across the United States demanding Facebook to be on their campus. Mark and his team chose to perfect their product before growing their user base, and that turns out to be a strong strategy. After 18months of improving their product to optimize for user retention, they released Facebook to the next campus and it grew phenomenally, being able to retain its users and established a strong network effect around the product.

The narrative of spend to acquire users is misleading, as retaining users is the key to capturing value for your product/services, and it should be one of the top priority for companies.