Having talked about the goal of competitive analysis and being better, not just different, it’s time to talk about a framework for doing competitive analysis. The Value Net, developed by Adam Brandenburger and Barry Nalebuff, is inspired by Porter’s Five Forces. It’s easy to understand but includes a lot of depth that will allow you to more fully understand the competitive forces surrounding your startup.
Let’s take a look at the graphic above. It shows 4 sources of potential competition surrounding you: Partners (whose products and services complement yours), Rivals (who compete with you), Suppliers (whose “raw materials” you require), and Customers (and distributors) who are the destination for your products. The horizontal items are the players in your industry and the vertical items are your supply chain.
Rivals: More than direct competitors
Most new companies do everything they can to say “there is no competition”. I’ve already covered why this is tantamount to saying “I do not know what I am doing.” Just because there isn’t a company that looks exactly like you doesn’t mean you don’t have competition.
Rivals are all the people or forces competing against you for the dollars and attention of your customers. They include:
- Direct competitors – if you’re a best-of-breed product, look for integrated solutions and vice versa
- Indirect competitors – if you’re a product company, watch out for service companies
- Alternatives – like doing nothing, in-house solutions
- Changing standards and regulation – when standards change, everyone in your industry might suffer
Think of it from the customer’s perspective. If you want to improve employee communication you might build an employee portal, buy one, hire a consultant or put it off until next year. There are many alternatives competing for your time and money.
Partners: Wolves in sheep’s clothing?
Partners are your “friends” in the marketplace whose products or services complement your own. This could be someone who integrates your product into theirs or provides a value-add service, like consulting, that makes it easier for people to adopt your product. Why even consider partners in a competitive analysis?
The reason is because partners, like rivals, are also fighting for customers’ attention. Sure, in the beginning you may specifically go into a partnership to reach markets outside your immediate target. That may be your partner’s strategy too. But the more successful you are, the more your partner might realize that your market (or your business) is something worth emulating. They could become a direct competitor. This is especially true in the type of partnerships startups tend to enter into, i.e. David (you) vs. Goliath (them).
Here’s an example. You build the next great mobile enterprise app. You license a “lite” version to a major portal so they can market it to individuals and SMEs. It becomes a success and the portal decides not only to replace you with something they developed on their own, but to release an enterprise version that competes directly with you in your other markets. For them, you were just free R&D.
Yes, you can do things legally to protect yourself. The point is don’t forget how easily partners can turn into rivals.
How can a supplier be a threat to you? When they decide to work with a rival instead of you. This isn’t as rare as you might think. Exclusivity agreements could lock you out of a key technology. Or a bigger rival could simply eat up so much bandwidth that your supplier can’t pay any attention to you. Employees are “suppliers” too and competitors would like nothing more than robbing you of your stock of talent.
Don’t overlook the fact that the more volume you drive to a supplier the more they might think about competing with you. This is called forward integration and it’s especially acute when your supplier has leverage over you in the form of an exclusive resource, the best price, or some other unique advantage. Here’s an example: you build the next great mobile enterprise app that relies on you licensing a patented mobile synch technology from another firm. This is great for them because you drive sales and they don’t have to do any work. But, the more successful you are the more it’s tempting for them to move forward in the supply chain with their own branded product. Worse, if they cut you off from your supply of technology it will put you at a competitive disadvantage.
Customers (and distributors)
The area of the Value Net above you includes your customers as well as any resellers or distributors you use. Like with partners and suppliers, be aware when these people have power over you in some way. E.g. customers (and distributors) have power when there are a lot of rivals in any industry. Or there may be other industry practices that favor resellers: e.g. brokers in real estate and insurance.
Understanding how your customers buy (from you or from your resellers) is an important aspect to understanding competition. Again, look at it from their point of view. The customer might value on-site installation and customization. Your Web 2.0 SaaS model might be feature-rich and inexpensive but your competitor’s product is sold through local VARs who can provide consulting, installation and after-sales support on the customer’s premises. The point is that competition can occur between different types of sales channels, not only between firms.
Putting it all together
To summarize, here’s how you can use Value Net to do competitive analysis:
- Identify your key Rivals, Partners, Suppliers and Customers/Distributors – Be paranoid and build a long list that you pare down later
- Look at the red arrows to understand behind-the-scenes competitive dynamics
- Look at the grey lines to understand your power relative to your rivals, suppliers, partners and customers – any area where you have less power is a potential competitive threat
The nice thing about the Value Net is that it’s easy to fit onto one Powerpoint slide. Showing this level of depth for your Competition slide will be a huge improvement over what I normally see in startup pitch decks. I’ll post some examples of completed Value Nets in a later post.