Competing in forgotten markets

In the digital age, not only is there no such thing as “first mover advantage,” I think being the last mover often conveys a significant advantage. There’s frequently more opportunity and less risk in well-known, mature markets than can be found in new segments or on new platforms. There are several compelling advantages of addressing an older market, along with one, cautionary disadvantage.

The biggest plus of mature markets is the lack of competition. That’s because the quality of the competition is weak. All the bright, young, aggressive, entrepreneurial thinkers, along with their cohort of bright, aggressive, well-heeled, older venture capitalists, will be studiously avoiding it, thus allowing you to master the market with little competitive pressure.

The other big advantage is the wealth of pre-existing, useful intelligence about the market, the product, and users. Existing products provide powerful insight into the problem to be solved, and the people or companies who have purchased or used it can be readily identified and researched. You can learn ways to beat the incumbent by studying the incumbent’s current users. What’s more, the market composition, size, and proven willingness to buy allays most of the risk that investors fear.

The single disadvantage of entering a mature market is the entrenched market leader’s large bank account, but this will only become apparent after you have begun to seriously threaten him with your disruptive product.

Go where the aggressive, well-funded competitors aren’t

Most eager young technical entrepreneurs imagine themselves creating the next Google, Twitter, or Instagram. They instinctively seek out the unpopulated, unserved places on new platforms and address them with their new technologies. Often, the functions provided are simple and commonly known, but not yet available on the new platform, like status updates on your mobile, or photography that instantly posts to the Web.

Today, entrepreneurism is the hottest segment of the job market, and college kids fantasize about being the next Jack Dorsey or Sean Parker. Where do all of those bright, enthusiastic, young entrepreneur wanna-bes go with their work-all-night energy? Right into each new platform that comes along. If Google announces an intelligent goggle that doesn’t do anything yet, all the twenty-somethings want to apply their boundless energy to inventing the next big goggle-based…whatever. The opportunity to be a big player in a new market beguiles many into trying for the big win. Do you want to bet your talent against theirs, or would you rather just build a successful business?

Given the choice, I would prefer not to compete head-on with these people. If you know about the new platform opportunity, so does everyone else. If you think you can make a splash in a new marketplace, so does everyone else. Why would you want to risk entering that free-for-all when a calmer, quieter, already proven opportunity sits begging for fresh talent?

Furthermore, if you are seduced by the siren song of the new platform, there is the very real risk of designing the wrong solution. The runaway successes of Instagram and Twitter, to take two examples, only appear successful in hindsight. It was absolutely not obvious in advance that either product would win, even to their creators. The inventors of those products were probing into the unknown, and the risks of choosing wrong were extremely high. The fact that they won makes their stories well known, and the human mind’s predilection for inventing a post facto cause-and-effect rationale makes the risk disappear from view.

Scott Berkun addresses this phenomenon in his fine book, “The Myths of Innovation.” The inevitability of their success is merely a cognitive illusion. We know the lesson of Twitter simply because it was successful, and its success makes it visible to us. We don’t know the lessons of the thousands of companies that tried and failed because their failure obscures their lessons.

The established market only seems riskier

When we see a large, established, mature marketplace with a couple of companies doing 90% of the business there, we imagine that the competition is tough and opportunities few, but this is illusory. Contrary to our expectations, the least competition is going to be where the market winner is big, successful, dominant, and obvious. Because they are so dominant, they will have forced their competitors out, and their success deters new competitors from entering. This is a classic case where our instinctive common sense leads us in precisely the wrong direction.

Misled by this illusion, the most creative competitors will ignore the mature market making it a far more tempting plum. There will be far fewer small competitors in it, and the eight hundred pound gorilla dominating it will be very weak in many of the most important ways.

A big company, to meet demand, must put all of its effort into selling product, and will put very little effort into innovating, which makes them vulnerable to a fresh approach.

A big company will listen closely to its existing customers, and pay particular attention to its biggest, most lucrative customers, leaving unaddressed whole swathes of the market that want more specialized, better behaved, or lower priced solutions. The best way to compete with the big guy is by taking over a portion of the market he disdains. By using that as a revenue source, the small company can assault the big one from the flank.

In his remarkable book, “The Innovator’s Dilemma,” Clayton Christensen discusses the problem facing successful companies. If they make the obviously correct choice to serve their most lucrative market, they leave themselves absolutely unprotected from attack by smaller companies with more focused offerings.

Christensen drives home the simple point that a big company will be less competitive because it will tend to reject innovations. Innovations are by definition new ways of doing things. The old ways of doing things have been proven to work, and the new ways are clearly unproven. Any “good” business person will choose the proven way over the unproven way, thus paving the road for a smaller, more innovative company to gain traction in a well-defined market segment.

The established firm faces other difficulties, too. Once a product attains mainstream success, the company becomes fully occupied with the demands of growth to exploit the huge demand for the winning product, typically by ignoring further product innovation. They grow their production and distribution arms, along with the concomitant management structure, because these provide immediate revenue and profit.

As the company grows, it becomes adept at tending to its own needs and propagating its own requirements, but is notoriously bad at responding to the demands of its users, and it will become unresponsive to little competitors like you.

The 800 pound gorilla

As I mentioned at the top, the one disadvantage of going up against an established market leader is his bank account. It’s hard to get his attention, but when you do, he will have more money to spend attacking you than you could possibly hope to have for defense.

At first, the successful market leader will ignore the little, entrepreneurial competitor, relaxing, secure in the knowledge that it is trusted by its market and unassailable in its success. This gives the startup just the opportunity it needs to get started in one of the many unserved corners of the market. Only when the little startup starts to steal customers away from the big guy will the giant awaken.

Many conventional business people see this as a big negative. I’ve spoken with many venture capitalists who are terrified of this prospect. I see it very differently. I see it as a huge advantage. Wouldn’t it be great to have a big, successful company telling the marketplace that you exist by spending its abundant cash to differentiate itself from you? The best thing that could happen for a startup would be for the market leader to take public notice. It’s practically a vote of confidence in your abilities.

Of course, they are still very dangerous simply because they are big and rich and they can play business games that you can’t afford to. But the Web is such a great, egalitarian communications tool that it tends to dissipate the advantage of market leaders. If the startup focuses purely on being wonderful, and delivering delightful experiences to its users, the Web will work as hard or harder for the startup than it will for the market leader.

Listen to your competitor’s customers

Any good user experience designer will tell you that the key to success is observing the user. You need to study the user to understand what he or she is trying to achieve. In a preexisting marketplace, identifying the user is far easier than it is with an unknown, new platform.

Most people tend to pay attention to their competition, but that makes you a follower instead of a leader. If you pay attention to your competitor’s customers instead, you learn valuable lessons about what they like, and more usefully, don’t like, about your competitor’s solution.

There is a considerable advantage to the competitor second in line for the same reason that a golfer on the green lying closer to the hole can watch the path of the ball putted by the player farther out. The product and positioning of the entrenched market leader will tell the later competitor volumes about what to do and what not to do, what works and what doesn’t. The new entry in the market doesn’t have to duplicate the research and experimentation that the first-to-market player did.

Most big business successes tend to come from unforeseen second order effects, rather than from the intended first order effect. The Web, for example, was supposed to be a haven for non-commercial, academic knowledge exchange. The hugely successful, and entirely unforeseen success of the Web came from its commercial exploitation. Google is another fine example: It was intended to be a search engine but its commercial success emerged when it became, surprise, an advertising medium.
In mature markets, the first order problems are already mapped out and empirically demonstrated. The smart player can step in and dominate the huge second order win while the existing leader struggles to maintain his customer base.

Who innovates?

I don’t know who is going to invent the next Facebook, but I can clearly see how to crush some of the biggest names in software in their own backyard. If I had a choice today of writing a new social networking program or going head-to-head with an established leader like Microsoft Office, Flickr, or Salesforce, I’d eschew the social networking. I’d eschew the opportunity to compete against thousands of bright, well-funded, nimble competitors in an unproven market. I’d choose instead to tackle the single, slow, saurian behemoth, squatting self-satisfied in the center of a wide and proven ring.

5 Comments

Bruce Kasanoff
Alan, I couldn't agree more. Yesterday I was speaking with a turnaround specialist who has "fixed" a number of old world, name brand companies - and we had the exact discussion you so eloquently outlined here. Disruptive forces don't just impact hot startups or those companies with the top 100 brands. They impact every business, and it makes so much more sense to apply an understanding of these forces to the less glamourous companies and industries. Huge opportunities lurk where very few are looking. -- co-author, Smart Customers, Stupid Companies
Rory O'Rourke
Fantastic stuff Alan. I'm working on my own very unsexy startup in a well established market (online dating) with a couple of dominant players. This kind of stuff inspires me to keep going instead of getting mired in what the next Facebook will be.
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Eric Nord
Is there truly tech driven market more forgotten than the Academic and Research Library space? The lack of User Based Design from the core vendors in this market is astounding - so bad infact that our library has opted to write our own interface (also a dancing bear - just no tutu). And we're not the only ones - there is a strong open source movement in our space see Vufind.org Libraries may not be the sexy place to be - but sometimes people make their millions by manufacturing plastic bags... Waging war for useful concise structure and design, - 北
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