The way to compete
How do you draw the boundaries of competition in industries
Amazon's total sales in Q3 this year is estimated to be $53 Bn. Shopify, founded 12 years later, clocked a Q3 GMV of $30 Bn (revenue of $767 Mn), while they are doing completely different things. How did Shopify come out of nowhere to challenge Amazon?
Google created and monopolised the online advertising market, until Facebook and later Amazon came and started competing, with very different products. How did Google leave a spot open for searches on commerce?
These companies would have felt like a marathon champion, who looked over his back and found no one usually, but suddenly finds a lean runner stealthily rubbing shoulders out of nowhere. So, the question is how do you compete (well) with such sneaky players?
This begs the question - compete with whom?
Like all good things in business, let's start this from the customer. E.g. Let’s define Amazon's potential customer as anyone who buys online. So it's fairly obvious it competes with every e-commerce player (serving in that geography).
FK - flipkart
With these firms, the axes of competition are mostly incremental
Wider selection
Cheaper pricing
Faster delivery
There are other aspects as well - good customer support / return policies etc but the major turf wars are on these. Similarly, you can define such parameters for other industries (or customer definitions as well).
If you abstract all such parameters out, it ultimately comes from better access to a resource - capital, suppliers, technology etc.
Let's go a bit broad now - Amazon's potential customer is anyone who buys offline as well.
GT - General trade or Kirana shops
With this definition, we open up an entire channel. Now, the competitors are Walmart and small retailers. The axes of competition are different, because the customer might not value the same things as the earlier definition. E.g. An offline purchaser valuing trials, touch and feel and instant pick-up higher than broader selection or best pricing
There are of course things like brand, certain business processes/cultural practices, talent capability that are useful as a competition dimension regardless of the customer definition.
In The Innovator's Dilemma, Clayton Christensen defines two types of technology innovations
sustaining — with usually improvements on parameters existing customers value
disruptive — improvements/breakthroughs on completely different parameters
As you start defining customers more broadly, the type of innovation that ensconces one into a leadership position also moves from sustaining to disruptive. Considering that companies broaden the customer definition only if there's saturation in the narrower definition, this would mean either companies become large enough or the market was defined too narrowly earlier. If it were the latter, the next market definition becomes the new narrow market definition. (E.g. defining market as anyone who buys online through web browser/desktop vs any device).
If the reason for broadening the customer definition is size of the company, we come to a paradox. Large companies tend to replicate their existing playbooks into newer and larger markets, with minor tweaks. Hence, the proclivity is towards sustaining innovations as a way to compete, and not disruptive ones, whereas the latter are required to serve the new customer better.
An inability to solve this paradox, by a willingness to self-disrupt, usually leads to the sneaky runner suddenly running alongside you. But why dont companies, especially those not crippled by inertia, self disrupt?
Why did Amazon not enable small retailers to sell online like Shopify?
Why did Google not see that a lot of search volume was of e-commerce and create a business of its own?
My assessment seems it's mostly a danger of losing focus. For any company, they would want to move upwards, towards areas that give them potentially higher profits or growth. Doubling down on what is working is usually the best strategy, and with limited resources, it often becomes the only one. These fringe bets are hard and unproven and don't 'seem' profitable, until of course they are proven by another upstart.
To be fair to Amazon, one such bet in this area is Amazon Go, which is competing on the traditional retail dimensions (and not ecommerce). But such instances (and companies) are not as frequent.
This means that even though the best companies would know to self-disrupt. they will often not, in pursuit of higher profits coming from tweaks to existing scaffolds. This seems like bad news, but it's actually great for startups, who now know that the probability of an incumbent focusing on pressing problems on fringes, will be lower.
Then there are other competitive relationships we have seen emerge
suppliers going downstream (E.g. DTC brands, like Boat, that start selling on Amazon and then take over the relationship directly. A tangential example is also of Google integrating backward and owning the browser)
customers going upstream (E.g. Apple replacing Intel in chip-making, e-commerce websites making private labels).
Which is the equivalent of your trainer also running and competing with you.
Amazon’s and Shopify’s competition can be best described here - they dont compete directly, but Shopify powers all small online retailers to compete with Amazon.
However, once they enter the market, they will quickly classify them into either of the above buckets based on customer definition.
And finally, there are always players new to the industry and value chain at large.
Let's summarize what we said so far -
The narrower you define a customer, the more the competition will be on doing incrementally better on certain key parameters
As you broaden your customer definition, it is not about doing even better on those, but bringing a new set of parameters to compete on, often radically different from the previous one. This radical departure is a reason most companies successful in the previous bucket, are unlikely to do well here.
A company's suppliers and customers (if they are not the end-users) are potential competitors, that will fall into either of the above buckets and axes of competition will be defined accordingly.
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Great strategic piece of writing Nishad. Liked the reminder to innovater's dillema