Does your startup have a competitive advantage? Does your strategy call for particular actions to achieve a specific position in your marketplace? To understand what this means and how you can develop what investors consider a competitive advantage, you need an effective competitive strategy.
Why a Competitive Advantage Matters to Investors
The underlying premise of almost all high technology investments is that investors want to invest in companies with what they consider a sustainable, unfair, competitive advantage.
From an investor’s point of view, the ideal startup company has a lock on some industry segment and reasonable expectations that it will maintain this position for fifteen to twenty years into the future. This timing is important because the people who purchase your company in five years will want to know they have a ten to fifteen-year future.
How to Develop an Effective Competitive Strategy
You can achieve this proprietary position of having a competitive advantage by having an effective competitive strategy. The most common advantage is to have a portfolio of patents that would prevent competitors from entering and competing directly against your company. Although, patents may be challenging in today’s internet apps and web services. So companies need to look to other sources for competitive advantage. In today’s world, competitive advantage often results from first-mover advantage and out-spending the competition for customer acquisition.
Analyze Your Industry as Part of Your Strategy
As part of an effective competitive strategy, your startup needs to include an in-depth understanding of the competition within your industry.
For example, the pitch decks I see often reduce competition to a simple comparison of product features. However, this kind of analysis is superficial and cannot generally lead to an effective competitive strategy.
Michael Porter’s book, Competitive Strategy, is the Bible for analyzing competition within an industry. Porter presents a model based on four distinct elements of competitive rivalry within an industry,
- Bargaining power of suppliers
- Bargaining power of customers
- The threat of new entrants
- The threat of substitute products
A thorough analysis of your competitive situation requires an in-depth analysis of each of these forces.
Effective Competitive Strategy Requires An In-Depth Analysis
The frequently used product matrix may say something about the bargaining power of customers. However, customers may or may not be sensitive to the product features that companies list. The important question is not, “What features does your product have?”. The real important questions are, “How do customers make their buying decisions. What is important to them?”
Understanding how customers buy requires an in-depth understanding of the industry, the different players, and different market segments. This is why understanding the industry s important to developing an effective competitive strategy that results in a competitive advantage for your startup.
Also, consider that the bargaining power of suppliers can affect competition within an industry dramatically. If one vendor has access to significantly cheaper parts than another, it may have a significant competitive advantage, for example.
Don’t Overlook Established, As Well As New, Competitors
The threat of new entrants is always present, but most startups ignore this threat. The most obvious threat comes from existing vendors, who provide products that solve similar problems, or similar products that a competitor could easily repurpose to attack your market segment. Don’t overlook this significant threat when developing your startup’s effective competitive strategy.
In my experience, startups underestimate large companies, which usually move slower than small companies. But they do move. If it is relatively easy for an existing company to move into your market segment, your strategy should consider that. Ask yourself, what would you do if that happened? What can you do to prevent it or make it more difficult?
Effective Competitive Strategy Includes Awareness of Substitutes
The threat of substitute products can take many forms. Startups often fall in love with their inventive new product, and they assume that competition could only come from a similar but better product. But this is not true. Not seeing this can threaten your startup’s competitive advantage.
Many startups assume their creative new product solves a specific problem or set of problems. But there are usually multiple ways to solve a problem. Many companies ignore the present solution to the problem. Yet, the world has been getting along somehow without the company’s product. How can this be? How are people or companies solving the problem today? It’s essential to ask, “What completely different kind of solution could appear?” This situation is similar to the automobile replacing the horse and buggy.
Look at the Bigger Picture
Another example might be a drug for treating a specific disease. The drug might have a protectable market niche, but you are in trouble if someone invents a vaccine that eliminates the disease. Companies must broadly view how their competitive strategy could be affected.
All of these factors must be analyzed quantitatively. They must be measured. It’s not enough to claim, “Our product is better.” To maintain an effective competitive strategy your startup must be prepared to quantify what you mean by better and how that is measured.
Defining Your Target Market is Part of Creating an Effective Competitive Strategy
How do you define your target market? The most common approach is to segment markets according to the buying characteristics of customers. So, in the computer business, for example, there might be a segmentation along the lines of cost versus performance. For another product, the parameters might be ease-of-use versus completeness-of-solution.
The target market question is, “How do you want the market to perceive your company? How do you want the market to identify your company and its products in relation to the competition? Once you’ve reached a clear understanding of the competitive segments, you can define your target segment. Doing this is essential for creating an effective competitive strategy for your startup.
Make this Market Clearly Defined and Specific
Your target segment should be clearly defined, and it should be a market where you can obtain significant market share. Don’t make the mistake of targeting one percent of an enormous market. Investors do not like to hear this. To be profitable, companies generally need to capture fifteen to twenty-five percent market share in their served market.
However, this does not mean you should increase your revenue projections. If you’re thinking like a one percenter, you probably need to define your target more narrowly.
Now, Decide How to Get There
Once you’ve completed the competitive analysis of your market and defined your target market positioning, you need to consider all the operational options for obtaining your desired positioning. That’s the true meaning of an effective competitive strategy, and creating a competitive advantage. You’ll find that if you develop it carefully, you’ll probably outperform most startup companies.
To read more about what prospective investors are looking for from your startup, you can go to my blog. It covers many of the important questions aspiring startups have about the realities of being fundable. You can also find my book, The Fundable Startup, on Amazon now.
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