Lately, what has been worrying me is how lightly most early stage start-up founders treat the issue of “Competitive Advantage”.  Founders often toss out phrases such as “first mover advantage”, “N number of patents” or “We have our secret sauce”.

Sorry to say but most of these strategies are not enough given all the competitive forces at play.  

So what are we missing? Me, with my management consulting background, I tend to go back to my roots of searching for a suitable “framework” or a “methodology” in whatever I do.

The beauty of frameworks, as any management consultant would tell you is that, they are comprehensive. In the sense that you can be assured that you are being thorough.

So on the subject of competitive advantage, I want to tell you about how one of our management gurus, Michael E. Porter, enlightens us with his classic “Porters Five Forces”. A perfect framework for a 360 degree analysis on competitive market forces.

Notice that I keep using the words “competitive forces” and not “competition”. Because here lies my point about lack of comprehensiveness by founders when it comes to addressing competition. To them, competition is just one dimensional i.e. the threat of competitors.

As the word framework suggests (Porters Five Forces), you can at once see that there are four more things to consider.

That is apart from the main one i.e. [Threat from your Competitors]

There are four other areas:

1. Threat of substitutes
2. Bargaining Power of suppliers
3. Bargaining Power of buyers
4. Degree of rivalry in competitors

So let’s discuss each one of these in the context of start-ups so you have a better understanding.

THREAT OF SUBSTITUES

If you were to be the founder of Swiggy or Zomato, think what can be a substitute that competes with your product?

1. Your customers mom’s cooking.
2. Decent and reasonably priced restaurants or take out places right near your customers homes.
3. Local delivery service from nearby restaurants
4. Customers staff who can nip down to their favourite restaurant and fetch it

Swiggy and Zomato can counter this with a fun experience In the app with beautiful pictures, discount coupons, loyalty programs and a huge selection. So they have covered this threat.

Have you, for your product?

BARGAINING POWER OF SUPPLIERS

I came across a start-up that depends on Linkedin to source candidate profiles for their jobs Application Tracking Software (ATS). So this means that they are dependent on Linkedin for their services to their clients. At some point Linkedin is going to wake up to these types of start-ups who are feeding off their bread and butter. They might slap on a charge or shut it down altogether.

Suddenly this ATS start-up will have to raise their prices or will be compelled to find an alternative to Linkedin. This type of situation (Bargaining Power of Suppliers) could significantly impact the bottom line or even force you to shut down. So the solution here is to ensure that you have built a way to counter the risk of your suppliers choking you.

The strategy for this ATS firm could be to start off with one supplier but quickly build other sources such as company jobs pages direct and strategic alliances with other jobs portals such as Manpower, Monster, HotJobs etc.

If your start-up has abundance of suppliers, then this is not a worry. And remember, suppliers can be a service or even a raw material. Let’s take the example of OYO Rooms, Their suppliers are existing hotel properties who are looking to bring in traffic albeit under the OYO banner.

Due to the pandemic, currently there is an oversupply of properties who are quite willing to give up their properties to OYO, so all good for now. But this situation can easily become a big challenge as soon as tourism starts to boom again. Hotel owners might find it more profitable to run it themselves rather than tie up with OYO.

So OYO has to watch out for the “bargaining power of their suppliers” in boom times.

What about your suppliers? What is your contingency plan? If you are too dependent on your downstream suppliers, you better have a risk management plan.

BARGAINING POWER OF BUYERS

Similar story buyers, so watch out. Buyers have choices you know. You must be familiar with how airlines always thank you for your choice by saying something like…. “We know you have a choice when it comes to flying so we thank you for choosing Indigo”.

Also think why some iOS users are moving to Android. I have. Not because of price, which is partly the reason, but also because when I moved from US to India, I had all sorts of issues with iTunes store setup which prevented me from using my subscription services such as iTunes.

In addtion, I could not download a whole bunch of apps that were not available in the US App Store that I needed here in India. As a result, I got frustrated and left for the Android world. I lost my coolness factor, but hey, functionality mattered more to me.

I am sure you have been told many times, no matter what you think, you will have competitors and therefore your buyers have a choice. Your buyers’ choice is bound to be based on features that is dear to them and might not be what YOU think is better than the competition.

So the solution in this case is to know your target customer well and give them the features and experience they would like. This way, they will buy your products and stay with you. If you are the founder of Swiggy, you need to stay up at nights and worry about how you will prevent your customers from defecting over to Zomato.

RIVALRY AMONGST COMPETITORS

Amazon is the amazon of book sellers. But look at all the e-book start-up competitors and see what they are offering to compete with the big daddy Amazon. Starting from free books to free publishing tools for authors to even revenue sharing with authors on sales.

There is one start-up I came across that is even doing the book marketing for new authors. There are other e-book start-up companies that are not only offering free publishing but also listing the books free of charge on multiple platforms such as Kindle, Nook, Apple iBooks, Kobo, Smashwords etc.

So please understand, when you appeared on the horizon, you may have disrupted the market with a new idea but what about the one who comes after you?

UBER and OLA are riding high but Blu Smart has come in with sanitized, economical and fully vaccinated drivers in electric cars. Clean energy, professionally trained drivers at lower prices. They even say that they do not have a “cancel” button on their driver apps! Watch out UBER and OLA!

Also, be aware that if your start-up is operating in a market crowded with competitors,  cost of marketing becomes significant. Success of Blue Smart will depend on how massive their marketing efforts will be.

So now there you have it! You now know what it takes to be full prepared to understand and defend the four other competitive market forces that our management guru Mr Porter taught us.

But what about the first one. The one that everyone talks about i.e. THREAT OF NEW ENTRANTS.

Remember, at the very beginning, I said things such as first mover advantage, patents and secret sauce are weak strategies. Well, I just said that to grab your attention. To be truthful, these are still needed. You need them to keep your competition at bay while you pick up momentum.

In fact, I would like to just add one more item to that list which is GTM and that is how efficiently you grab your market.

GTM is a topic that I have covered in detail in my prior podcast titled “The Importance of GTM”. You must listen to it.

Let’s recap:

To claim that you have competitive advantage, you must show strategies to handle competition along Porters 5 Forces:

1. Threat from new entrants – The most obvious one to all. How are you better than them?
2. Threat of substitutes – Can you make your customers use your product instead of how they handle it today?
3. Bargaining Power of suppliers – Can you prevent your suppliers from squeezing or choking you?
4. Bargaining Power of buyers – Can you convince your customers to buy your products?
5. Degree of rivalry in competitors – Can you counter your competitors’ strategies?

If you want to put yourself to the test, think of pitching to a Mr. Michael E Porter for a round of funding. Will he give you the money?

Yes, he would if you have answers to how you will handle the five competitive forces in your pitch deck.