Competition and the health of your startup

All businesses exist in a competitive environment. Competition is healthy, and is essential for the growth of a market.

While most entrepreneurs would rather have a market all to themselves, research has shown that they are better off with some company. Competition, especially with big brands lends a startup an air of credibility and generates some buzz in the press.

Competition is what makes products and services appealing, by driving performance and innovation, while bringing down prices and offering a wider and more vibrant variety of options.

“If nobody is competing in your space, there’s a very good chance the market you’re going into is too small,” says Ben Yoskowitz, an angel investor and founding partner at Year One Labs, a start-up accelerator in Montreal.

A challenging environment causes start-ups to be tightly focused on satisfying customer needs along with lowering and containing costs.

For businesses, competition is either direct or indirect. Even if you have a product or business service that is completely niche or unique, it is impossible not to face some competition.

Direct competition comes from businesses producing or selling products or services comparable to another in the same market. Indirect competition on the other hand, happens when businesses compete for the same level of the profit margin, but they may be in different sectors of the same market

For a startup, the issue is how to exist as a small fish in a big pond.

Businesses should use their business plan partly to address the competition and how their idea differs from what’s already out there, said Steve Martorelli, CEO of Turnkey Processing, a payment processing provider.

“First, identify your X factor — what can you do 10 times better than your competition?” Martorelli said. “Next, test your hypothesis by talking to potential customers. Do they value what you are proposing to offer them as much as you think they do? Finding the answer to these two questions is the most important planning anyone can do.” This is what is clled competitive advantage.

Competitive advantage is a condition or circumstance that puts a company in a favorable or superior business position. These conditions allow the productive entity to generate more sales or superior margins than its competition.

What makes their business better than other people’s businesses and what is their USP? You must find a way to differentiate yourself – a niche in the market that your competitors would not satiate. This is the key to entering a busy market – what do you have to offer that sets you apart from the rest?

According to Michael Porter author of Competitive Advantage published in the 1980s, competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).

Porter put forth four “generic” business strategies that could be adopted in order to gain competitive advantage.

  • Cost leadership – With this strategy, the objective is to become the lowest-cost producer in the industry.
  • Differentiation focus – With differentiation focus, a business aims to differentiate within just one or a small number of target market segments.
  • Differentiation leadership – With differentiation leadership, the business targets much larger markets and aims to achieve competitive advantage across the whole of an industry.
  • Cost focus – With cost focus,  a firm seeks a cost advantage in its target segment

“If nobody is competing in your space, there’s a very good chance the market you’re going into is too small,” says Ben Yoskowitz, an angel investor and founding partner at Year One Labs, a start-up accelerator in Montreal.

 

Ultimately, all companies face some form of competition. Refusing to acknowledge this signals either ignorance of the competition or arrogance. Moreover, talking about the growth of the industry could have demonstrated that this is an attractive space for investment.

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