It may seem like that big incumbent is a major threat, but they could be sleeping on the job.
April 1, 2019 6 min read
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Every entrepreneur dreams of a blue ocean, full of customers and free of competitors. You want to change the world.
Luckily, startups don’t need to change the world to make people’s lives better. I say “luckily” because startups rarely have new markets all to themselves. More often, they invade incumbents’ territories, and the incumbents will fight back. That’s a problem for startups because incumbents have all the advantages.
Incumbents have name recognition, infrastructure, reputation, staff, products and services, logistics, supply chains, contracts, capital, and more; entire functioning businesses. You must develop all of that, and it’s harder, slower, and more expensive than most people think.
Incumbents can have all the advantages. There is nothing a startup can do that an incumbent cannot also do. But that doesn’t mean an incumbent does it. That gives you more than hope — it gives you opportunity.
You can boost your odds of success not only by heeding warning signs, but also by listening to the sounds that incumbents make. Do you hear roaring or snoring?
The thrumming fossil-fuel engines in Detroit sound like snoring. Tesla, for all its recent speedbumps, currently has a market capitalization higher than Ford and Fiat Chrysler’s, and only 10 percent below General Motors’. Not bad for a company that sold just a few percent of the vehicles Detroit sold in the USA in 2018. Plenty bad for the companies that could have done exactly what Tesla did.
Going by the world-famous ad in which Coca-Cola inspires people to join together and sing “I’d like to buy the world a Coke,” the soft-drink maker might seem sweet and peaceful. But if you challenge Big Soda you’ll find neither Coca-Cola nor PepsiCo is snoring. They are vigilant, perhaps due to the caffeine, but also because of their drive to develop products for every possible taste — no matter how niche. Orange Vanilla Coke, anyone? Or would you prefer Salted Caramel Pepsi?
When you choose the market you will dazzle, you also choose the market you will invade. You can strategize more effectively if you can distinguish the incumbents that are roaring with new ideas from the ones that are sleeping on the job.
How do they talk about market developments?
If the incumbents respond to changes by working with unconventional partners, hiring creative technologists, and keeping secrets about their R&D, they’re roaring. If they say “we have reorganized to better serve our customers and we believe our stock price is poised to recover,” they’re snoring.
How do they talk about themselves?
In the 1980s, Wang Laboratories’ minicomputers dominated corporate word processing. It was big, powerful, and growing fast. Then came the IBM PC, a toy by comparison to Wang, WordStar, WordPerfect, and Word. You haven’t heard of Wang? That’s because the PC drove it to bankruptcy in 1992. Companies roar if they talk about investments, which focus on markets, but not if they talk only about budgets. They snore if they cite last year’s happy results, as Wang did, to downplay this year’s competitive threat.
Do their results make them think they’re safe?
Blockbuster’s stock price rose for years after Netflix entered its market. Wang’s revenue continued to grow after the PC entered its market. Blockbuster and Wang stuck to their strategies because they thought it was a good idea. It’s hard to get a company to wake up when it’s dreaming its strategy is working. Notice that Netflix roared into video streaming early. They remembered Blockbuster.
Do they think they own the market?
Incumbents may mumble “our customers love us” between snores. But customers are not “ours” unless they’ve signed an unbreakable long-term contract or their switching costs are extremely high. An incumbent may be fast asleep, but that doesn’t mean its customers are too. Millions of dissatisfied cable and satellite customers were happy to cut the cord when they got the opportunity.
I facilitated a business war game for a company about to launch a new product against a well-established competitor. The company planned a vigorous campaign, touting their superiority and offering a low price to encourage customers to give the new product a try. The campaign looked obvious to the company, like marketing agency 101. Product managers were stunned when their colleagues, role-playing the competitor, woke up and turned the ocean red with a price war. The company simulated a less-aggressive strategy that had them enter at a premium price. They found it would gain less share, but it would make money.
The best case for entrepreneurs: You will discover a rare, unexplored blue ocean, with customers and without competitors. Emphasis on “rare.”
The worst (and most likely) case for entrepreneurs: You will be perceived as an unwelcome invader in an existing market. You must ensure that your business model, capital, and differentiation suffice not only to delight potential customers but also to withstand counterattack. Incumbents may ramp up their marketing agency to drown out yours, promise new features that negate your advantage, file patent-infringement lawsuits and even copy your products.
The second-best case for entrepreneurs: When you enter the market, you will choose a market with snoring competitors. They make a lot of noise, but they won’t pay close attention to you. Be careful not to come on too strong. For example, hiring away all their best salespeople, announcing extraordinary new products — especially if they won’t be available for a while — or touting growth projections that they will perceive as a death threat. Remember that they’re not stupid. They’re just sleeping.