Published on December 15, 2013
MY DIRTY LITTLE START-UP SECRET BARRIER-TO-ENTRY STRATEGY FOR START-UPS http://www.flickr.com/p
when dealing with competitors
provided that you don't break the law
cheating is good
one of the best ways to cheat
is to change the rules of the game
to stack the deck
so that competitors find it harder, or more expensive, to do the same thing as you
in b-school, we teach Cheating 101
but we call it Barriers to Entry * From Porter’s 5 Forces if you’re looking to impress at a dinner party
ideally, you want to have low barriers to entry in any market space that you want to enter
once you are in
you immediately slap up high barriers, so that future competitors cannot follow you
historically, start-ups have placed an over-emphasis on intellectual property
IP gives you a government-protected monopoly to profit from a specific solution
it is no longer free-market competition
you've changed the rules of the game
but IP is just one of dozens of barriers that a start-up has at its disposal
and frankly, one of the weakest
let’s take a tour
LEGAL / GOV’T BARRIER INTELLECTUAL PROPERTY COMBAT RATING VULNERABILITIES BACKGROUND Leverage the government sponsored monopoly privileges that come with registering patents, trade marks, or copyrights. Competitors are blocked from using your innovations without obtaining a license from you to do so. • • • • • Innovation around the patent Reverse engineering Shameless piracy Prohibitive cost to enforce Inability to protect across all jurisdictions • Public disclosure of IP required in registration COMBAT STATS Defence Strength LOW Cost to Setup HIGH Cost to Maintain MED
LEGAL / GOV’T BARRIER TRADE REGULATION BACKGROUND If your competitors pay an additional 15% import tax in order to sell into your market, you're cooking on gas! COMBAT RATING VULNERABILITIES • Counter lobby • Forfeit of future growth markets Similarly, if you can help design safety regulations, subsidies, zoning, licensing procedures, subsidies or other laws such that your competitor products are disadvantaged, you are also laughing all the way to the bank. COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain MED
LEGAL / GOV’T BARRIER RECIPROCITY BACKGROUND In many political contexts, firms use lobbying, favours, outright bribes, or other creative means to create reciprocity debt with powerful market players. These reciprocity debt pools can be called upon when needed to address competitors in creative ways. COMBAT RATING VULNERABILITIES • Be especially wary of jail time • Reciprocity has a quick half-life. You need to earn quickly and spend quickly. COMBAT STATS Defence Strength HIGH Cost to Setup HIGH Cost to Maintain MED
SUPPLY CHAIN BARRIER CONTROL RAW MATERIALS BACKGROUND If you can control the raw materials required for production, you control the competitive landscape. For example, if the product absolutely requires Mangosteen extract to work, and you have 10-year exclusive contracts with 86% of the world's Mangosteen farmers, then your competitors won't be able to manufacture the product, as they simply won't be able to purchase raw material COMBAT RATING VULNERABILITIES • Competitor innovates an equivalent product from different raw material • Suppliers break their contract with you • Government intervention (anticompetition law) COMBAT STATS Defence Strength HIGH Cost to Setup HIGH Cost to Maintain MED
SUPPLY CHAIN BARRIER CONTROL TALENT COMBAT RATING BACKGROUND VULNERABILITIES This is like control of raw materials, but specific to knowledge industries like hightech, banking or pharma. • Spin out start-ups • Someone always can pay more or give better perks • High-flyers often don't get a long • There are always new PhD's that put your PhD's to shame In this case, you hire all the PhD's in the market so that competitors don't have access to the specific brain power. Then you comp them well and use bonus payments, equity, patenting support, etc to keep them locked-in COMBAT STATS Defence Strength LOW Cost to Setup MED Cost to Maintain MED
MANUFACTURING BARRIER COST OF PRODUCTION COMBAT RATING BACKGROUND VULNERABILITIES When you are big, and spending big wads of cash, your costs go down. For example, you get discounts for bulk ordering. • Once you drop your price, you may not be able to raise it again – you may win the war, but what you win is a no margin market. • Niche or Blue Ocean Strategies • Production / Manufacturing Innovation With a reduced cost model, you can drop your price below what smaller competitors can sustain. You can also leverage specialized knowhow (which requires high cost/long time to duplicate) or favourable geographical location to reduce cost. COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain MED
MANUFACTURING BARRIER CONTROL MANUFACTURING BACKGROUND The idea here is to control all the factories that make your widget or you control the technology required to manufacture it. COMBAT RATING VULNERABILITIES • Primarily works only for specialized (non commoditized) manufacturing processes • Easy to have facilities break ranks unless they are well locked-in by contract or otherwise COMBAT STATS Defence Strength MED Cost to Setup MED Cost to Maintain MED
MANUFACTURING BARRIER SUNK COSTS BACKGROUND If the manufacturing process requires expensive start-up costs and because of the nature of production, those assets can not be redeployed to some other production process, then entrants will be wary to invest because they may end up losing big. COMBAT RATING VULNERABILITIES • Competitors may not always be rational COMBAT STATS Defence Strength LOW Cost to Setup HIGH Cost to Maintain MED
DISTRIBUTION BARRIER CONTROL RETAIL REAL ESTATE BACKGROUND Why are there so many versions of Colgate on the shelf at your supermarket? It is not because they actually have that many distinct client segments. It is so that they can pack the limited shelf-space. If their competitors have no shelves upon which to display their products, nobody will be able to buy them. If you own shelf space your competitor is blocked. COMBAT RATING VULNERABILITIES • E-Commerce • Multi-level Marketing • Channel margin war COMBAT STATS Defence Strength HIGH Cost to Setup HIGH Cost to Maintain MED
CUSTOMER BARRIER CLIENT LOCK-IN: BRAND LOYALTY COMBAT RATING BACKGROUND VULNERABILITIES Brainwashing is great. With brand loyalty lock-in, you convince your customers that their very sense of self (self image or personal brand) depends on your product. • Brain rewashing • It’s hard to brainwash in the first place Without your product, or with another product, they are just sneetches without belly stars. COMBAT STATS Defence Strength HIGH Cost to Setup MED Cost to Maintain MED
CUSTOMER BARRIER CLIENT LOCK-IN: TYING BACKGROUND Tying happens when you force a customer to buy Product X if they buy Product Y. If Product Y is good enough, it locks in Product Y. COMBAT RATING VULNERABILITIES • Anti-competition laws • Need a pretty powerful product Y COMBAT STATS Defence Strength LOW Cost to Setup HIGH Cost to Maintain LOW
CUSTOMER BARRIER CLIENT LOCK-IN: SWITCHING COSTS BACKGROUND Make it financial difficult for a customer who has already purchased your product to switch to another one: • Phone number portability • Standards incompatibility & proprietary formats/APIs • Warranty on the whole, not the parts • Points & rewards programs • All or nothing service agreements • Licensing terms COMBAT RATING VULNERABILITIES • Adaptors • Signing “buy-out” bonuses COMBAT STATS Defence Strength HIGH Cost to Setup LOW Cost to Maintain LOW
CUSTOMER BARRIER NETWORK EFFECTS COMBAT RATING BACKGROUND VULNERABILITIES A network effect occurs when customers gain more value as more customers buy. Once a network reaches critical mass, it is hard for a customer to leave the network unless all the other customers move too. • Susceptibility to trend setters and new networks (Facebook vs MySpace) COMBAT STATS Defence Strength HIGH Cost to Setup MED Cost to Maintain LOW
GENERAL BARRIER PSYCHE WARFARE: VAPOURWARE COMBAT RATING BACKGROUND VULNERABILITIES You are a small start-up that has come up with a cool new software product for enterprises. Microsoft sees it and thinks that it is a good idea, but it will take them 2 years to build, or they don't want to build it & just want to squish you like a bug so that the tech is killed in the womb. • Clients may eventually see what you are doing • Lead users may still buy if they are too excited to wait They announce that the feature will be supported in the next version of Windows. Lies, damn lies, statistics….and marketing. COMBAT STATS MED Cost to Setup Will clients buy from you, or wait for MS? Defence Strength LOW Cost to Maintain LOW
GENERAL BARRIER PSYCHE WARFARE: RETRIBUTION COMBAT RATING BACKGROUND VULNERABILITIES Nobody wants to enter a bloody, embarrassing battle (price or marketing war). If you respond to the first few competitors quickly, harshly, and with deadly force, you'll develop a reputation for retribution. Competitors will have learned not to mess with you and will self-divert to another market without you actually doing anything • You have to always win • New punks with no memory will come eventually COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain HIGH
GENERAL BARRIER INNOVATIVE SPEED BACKGROUND Just innovate faster than your competitors. You know, whip those engineers until they bleed!!! COMBAT RATING VULNERABILITIES • Actually, you don't have the only smart team • The weight of operations will slow you down in practice • Talent poaching • Key-man risk • Burn out COMBAT STATS Defence Strength LOW Cost to Setup MED Cost to Maintain MED
GENERAL BARRIER WAR CHEST BACKGROUND Just out spend! Having a big war chest is its own barrier. You can just spend more on everything – Marketing, R&D, Manufacturing Infrastructure COMBAT RATING VULNERABILITIES • Fight fire with fire – clash of the titans COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain HIGH
GENERAL BARRIER CARTELS & EXCLUSIVE DEALING BACKGROUND Join together independent business organizations to regulate production, pricing, and marketing of goods by the members. COMBAT RATING VULNERABILITIES • Anti-competition law This can occur either vertically or horizontally. COMBAT STATS Defence Strength HIGH Cost to Setup LOW Cost to Maintain MED
ok, that’s my list so far
if you've got a sneaky trick to play on a competitor, please email it to me so that I can add it
thanks for reading this far!
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