6 Strategies to Take On an Established Competitor

A common refrain for people thinking up business ideas is that all the good ideas have already been done. This of course isn’t true, but it sure can feel that way!

On numerous occasions I’ve had what I thought was a lightening bolt idea only to find that someone has not only thought of it before but has even gone out and built a really great business out of it. While it is rather vindicating to see that your idea really did have merit, it is also a bit disappointing. But should you give up? And if you don’t, then how do you go about taking on such a challenge?

Finding an established competitor is not necessarily cause to quit on the spot. It is however reason to think very carefully, and assess whether you have the resources, energy and ingenuity to go for it. Make no mistake, having an established and successful competitor will make things much harder. On the other hand, they prove that a market exists, and for larger competitors, even the left-overs can be very worthwhile. In one of the biggest markets – internet search – even a measly 1% of the market is apparently worth $1 billion dollars in market cap – sort of explains why companies like Ask keep at it when Google seems to have won the market hands down.

Now not all businesses are the same and not all competitors are equally established. But for the purposes of this post, let’s assume that the established competitor is pretty well entrenched, well known, and generally accepted to be the company in this space. So think the TechCrunch of tech blogging, the Twitter of short messaging, the Digg of social news. And let’s assume that you want in on the action but are coming to the field as a total unknown.

Challenging an established competitor requires you to have a solid game plan. The one thing you definitely do not want to do is try to compete head on by creating a virtually identical product. That would be sort of like playing chicken with a Mack truck when you’re in a Ford Pinto. If there is a dominant competitor already in the market that everyone knows, it’s unlikely they are going to switch over to your product, even if it’s a little bit cheaper or a little bit better. Most people have a limited attention span meaning there is only so much room for different brands to compete for. Once they’ve gotten used to a product or company, it’s hard to get them to switch.

Here are six potential strategies on how you might go about taking on an entrenched competitor:

(1) Specialize / Subniche

Given a reasonably large market there are usually many sub-niches that can be served by a specialized provider. For example Google may dominate internet search, but there are many subsets of internet search where other companies are flourishing. Some great examples include SimplyHired and job searching, Technorati and blog searching (actually Google has been doing pretty well there too lately), travel search and Kayak, and so on. Similarly while Digg may arguably dominate social news, that doesn’t mean there isn’t room for niche social news sites like Sphinn for SEO news, Tipd for stock market news, ShowHype for celebrity news and my favourite Hacker News for startup and dev news.

Specialization works because it allows you to tailor a product more specifically to niche needs. The question then is how can you use this as a strategy to grow upwards and take on the original competitor. The answer lies in horizontal expansion.

If you look at each subniche as a front to use to gain ground on the top level competitor, then dominating one should give you enough leverage to move horizontally to fill another, and then another. Once you gain enough subniches your combined audience should start becoming sizeable and you begin to really compete.

The difficulty in this strategy is that subniching requires specialization and as you add subniches you necessarily loose some of that specialization, and therefore potentially leadership of each individual subniche. It can also be pretty hard to pull a brand out of a subniche and reinvent it to fill a larger category.

The great strength of this strategy is that you can build a profitable business in a subniche before trying to bite off more than you can chew. Even if you get stumped along the way, you should still be in a good position. For example let’s say SimplyHired decided to make SimplyTravel and then later SimplyRentals, to add travel and real estate search to its portfolio. It would seem doubtful that they’d manage to take on Google, but on the other hand provided they consolidate each subniche as they go, they should end up with three related profitable subniche businesses and potentially a “Simply” brand of quality niche search engine.

(2) Dramatically Change the Product Features (and Yes, Price is a Feature)

Changing features on a product is the most obvious way to take on a competitor. And out of all the features that businesses try to use as a hook, price is probably the most common. What is important to remember though is that you need a substantial difference in features for this to work. If you say take 10% off the price, add one or two “oh that’s neat” features, chances are your product won’t be different enough to really win away many users.

A while back I was surveying project management web apps for a blog post. The first couple I looked at stuck in my head, but by the time I’d gotten to about 10, they’d all kinda blurred into one. Sure some of them were cheaper, some had an extra feature or two, but really the only ones that I’d remember were the first couple. Now a small change in features or price may win some users, and you can even build a healthy business out of it.

But you will never be able to really challenge the competition with a 10% upgrade.

If you want to go this route, you need to turn things on their head. If price is the feature, then it needs to be like 90% cheaper. If it’s a feature it has to be a feature that makes people go “wow this changes everything”. These sorts of game busting differences effectively create new markets, ones which can then be dominated.

A great example of a company that turned pricing on its head is iStockPhoto. Before they came along, traditional stock houses would charge hundreds of dollars per photo. iStock initially charged just 50 cents. Sure the product was the same – a photo is a photo (and believe me the quality sometimes is pretty indistinguishable between cheap and expensive stock) – but with that price difference they’d created an entirely new market. iStock went on to dominate so well that their original behemoth competitor Getty not only acquired them, but then made iStock a large part of the core strategy of the company.

Two examples of companies that have delivered huge non-pricing feature changes spring to mind, Dell and Amazon. In the first case, Dell introduced the ‘configure to order’ model of PC manufacturing, which along with its innovations in delivery changed a lot about how people bought PCs. In the latter case, Amazon took bookselling online effectively using online ordering and delivery as a massive feature change to a traditional business.

Of course a dramatic feature change doesn’t need to be quite as industry changing as these examples to be an effective strategy, but they do illustrate how the bigger the change, the better the play. It’s hard to imagine any other way unknown companies could have broken into the top echelons of industries like personal computers and book sales!

(3) Position Yourself as the Alternative

There’s a brilliant book on marketing called The 22 Immutable Laws of Branding, in which the authors discuss what they call the Law of Duality. The idea is that in the long run every market becomes a two horse race. So think Coca Cola and Pepsi, McDonalds and Burger King, Crest and Colgate. The authors state that there is only really room for two brands in a consumers head – the leader and the other guy.

This idea implies that one way to take on an established competitor is to be .. the other guy! Set yourself up as the yin to their yang. You can even market yourself that way – “Project Management for when Basecamp doesn’t cut it”, “Hi I’m PC, and I’m a Mac” – banking on a certain segment of the population not liking the market leader and playing up to it.

From a branding perspective being the other guy is a tough springboard to becoming market leader, but that doesn’t mean it’s not a profitable place to be. And history has shown us that if you wait long enough companies have a tendency to make mistakes. Sooner or later a new technology will come along that you can pounce on first, or your competitor will let some aspect of the business slide leaving a hole open for you to attack. Remember when you’re in second place, you’re ideally placed to take the crown if the leader falters.

(4) Internationalize

If you’re a fellow TechCrunch reader you’ll no doubt have noticed that in social networking there are often companies that are “big in Brazil” or that “really dominate Asia”. Just because Facebook and MySpace seem to be the market leaders, doesn’t mean there aren’t a dozen other social networking sites that are absolutely massive. Hi5, Orkut, Netlog, Friendster, Bebo … The list is pretty long (and incidentally has a particularly high number of silly names).

The funniest example of how successful internationalization can be was when the German Facebook clone Studivz sold for 100 million Euros. What’s so funny about that? Well lets just say if you changed blue to red, Facebook and Studivz showed some remarkable similarities. Even today, 2 years on, you can still see the lineage pretty clearly.

(5) Generalize / Superniche

Just like you can subniche, you can superniche too. That is go over the top of your competitor and build a service or product with broader appeal to capture the larger market. In many cases the most general, top level niche is, however, the first one occupied so this is potentially not a viable strategy in many cases.

For the same reasons that subniching is a relatively safe strategy, superniching is a potentially hazardous one. It means you have to be all things to all people and you risk missing the mark on many fronts. Instead of having a safe subniche to dominate, you are going to attempt to compete with the established competitor not only on their home turf, but on others too! Definitely not for the faint of heart, or empty of wallet.

(6) Parallel Niches

Just as internationalization lets you apply the same basic product idea to different global audiences, this strategy is about applying the same basic product idea to different audiences in other contexts. A great example comes from the world of social messaging where Twitter is rapidly becoming the de facto brand. But if recently I’ve also seen a lot of reapplications of the Twitter concept to other markets, like Yammer which is “Twitter for Business” and Edmodo which is “Twitter for Education”.

Note that these aren’t subniches of Twitter’s core niche, these are alternate markets. Often they will have specific features tailored to those markets which make the product reasonably different. You might look at this strategy as a sort of combination of (1) and (2) above. But the real difference is that another way of describing Twitter is as “Twitter for External Use” whereas the other two companies are subniches of a different market, namely “Twitter for Internal Use”.

It’s all about differentiation

The core idea behind all six strategies is really the same – differentiation. It’s hard to win in a head to head battle when your opponent has massive advantages in size, recognition, cash, audience and brand. So if you’re going to challenge them, the best thing to do is get them off their home turf. Using this secondary battleground you can build up your own size and strength until you’re finally ready to turn around and give them a run for their money.

This is a favourite subject of mine, so I’d love to hear your thoughts on it. Are there other strategies that I’ve missed? Are these six all really a single basic strategy? Is differentiation and brand positioning the most important thing in challenging an established competitor?