Editor’s note: This post was written by guest contributor Aaron Levie, CEO and co-founder of Box.net. His last post on TechCrunch was Go Forth and Conquer.
The narrative of the little guy going up against the hulking giant is baked into the history of Silicon Valley, starting with the traitorous eight leaving Shockley Semiconductor to subsequently found Intel, AMD, Kleiner Perkins, and many other industry disruptors of their time. Fighting unnaturally large battles is part of the technology industry’s DNA, and yet it would seem that every startup begins the process anew, rewriting the story of how to compete and succeed in the face of formidably large competitors.
There are times when competing against the incumbent feels like an insurmountable challenge (and by “times,” I mean pretty much every day). Your larger, more established and better-resourced competitor is an ominous and omnipresent danger to your existence. It will subsidize its products to compete with you, monopolize the distribution channel, spend more on marketing a single launch than you will ever raise, and create uncertainty in the market about your product among customers. Given all this, startups should be in an inherently disadvantaged position in any market, emerging or mature. And in most industries outside of technology – those that rely on high fixed costs, retail distribution, or a vast network of partners – this is absolutely the case. But in the world of internet-delivered services, rapid innovation, evolution, and constant disruption, no one’s power is guaranteed. This creates huge opportunities for startups going up against the big guys, if executed properly.
Finding the new dimension that matters
Larger competitors are rife with gaps in their product offerings, but these should never be the main impetus for starting a company. Blind spots or holes are often easy to spot, but rarely the best areas to compete on (unless you’re aiming for acquisition). Merely filling the gap of an existing player lacks the upside of an outsized return, and puts you at the mercy of the competitor “completing” its product and thus neutralizing your differentiation. Rather, success is best achieved by taking advantage of completely new vectors that the larger incumbent isn’t valuing appropriately, or can’t build on altogether.
“The supreme art of war is to subdue the enemy without fighting.” – Sun Tzu
Take the case of Box’s competition with SharePoint. When SharePoint launched, it started simply enough as a corporate portal tool that let you share documents and work on projects. After early success and rapid adoption, Microsoft evolved the product to cover broader content management and collaboration. SharePoint was the “light-weight” commodity solution in the space, competing with stalwarts like Documentum and even Oracle. Fast forward to 2011, and SharePoint has consistently expanded to tackle more and more enterprise use cases, with a staggering 125 million SharePoint licenses sold and 93,000 partners. If SharePoint were a stand-alone company, it would be one of the top 50 software firms in the world.
Yet this ubiquity and success has brought new challenges: SharePoint is nearly impossible to manage, prone to sprawl, and overkill for most organizations. Furthermore, the way people work has changed dramatically in the decade since SharePoint came into existence. While many of the extensive features that SharePoint offers are still critically important to some businesses, the core value of the service – document sharing and collaboration – has had its usability and innovation eroded by the clutter of countless other services. This has left a huge opening in the market for competitors to pivot off the specific dimensions that matter most today: getting access to content from mobile devices, working from anywhere, sharing outside the firewall, and more.
While this process of vigorously adding features (until the original point of differentiation is forgotten) is quite pervasive in the enterprise, leaders in the consumer space often share the same fate. While not every company succumbs to complexity, they do all generate sufficiently large weaknesses and gaps. Those that are focused on just a handful of problems (Apple and the ‘new Google’) present huge opportunities for startups in the areas they’re not attending to; other unfocused giants (Microsoft or IBM) often don’t serve their customers fully. And for every customer that feels they’re paying too much, dealing with too much complexity, or not solving fundamental problems with an existing solution, there lies an opportunity to compete on a new dimension in the market.
Giving startups the advantage yet again, large competitors are notoriously lazy when it comes to quickly finding emerging budgets at enterprise customers; this is why you’ll see categories like social CRM (Radian6), marketing automation (Eloqua, Marketo), or mobile security (MobileIron, Lookout) nearly always led by startups. And with business models on the internet constantly in flux, startups are able to penetrate markets more efficiently than ever before. MySQL made the database free, and charged for support. Skype collapsed the cost of calling by making it peer-to-peer. Zynga made playing games social instead of solitary, charging users incrementally versus up front. Salesforce helped customers get started with CRM in minutes, and charged elastically.
These were all angles that the incumbents couldn’t recognize or exploit, at the time, without dramatically shifting their businesses in response. If and when they do decide to get on board, it’s often too late for them to make a dent.
Why big companies struggle to compete
Investors, partners, potential employees and onlookers will nearly always default to believing the incumbent will win. Every leading company today was once an underdog without a chance: Apple and IBM. VMWare and Microsoft. Facebook and, uh, Myspace. Salesforce and Siebel, or Microsoft again. We instinctively expect big companies can take over the market, but it’s their size which renders them nearly defenseless against new, more agile competitors. The Innovator’s Dilemma describes the difficulty a larger corporation faces in competing with products or new solutions that serve to undercut their lucrative business model. While we tend to point our attention to the economic rationale around why this happens—most companies don’t want to disrupt a highly profitable business that’s working just fine—the organizational paralysis that prevents effective competition is far more interesting.
Simply put, the size of a company and its speed are inversely related. As a large system, organizations generally lack the ability to act and respond quickly to changes in a market, new challenges from customers, and disruptive new technologies. The very processes and procedures that keep a large business successful invariably slow down the key decisions and actions needed to compete in new areas; the travel time between customer feedback from a sales rep to decisions being made by a product organization, or actually getting built, can be measured in quarters, if not years. Andy Grove’s Intel famously made the rapid transition from memory to microprocessors, but far too few large organizations respond quickly enough, and with the right conviction to these types of difficult challenges.
Did Microsoft’s product managers not see the impact and importance of Android or the iPhone? Did Siebel not see CRM delivered over the web as a threat? When large organizations are attacked, it takes a disproportionate amount of energy to modify course, or affect meaningful change in the marketplace.
By comparison, in a startup, the distance from data to decision may be hours. Startups have the benefit of expending 100% of their energy on competing externally, ideally without the need to fight internally for resources, preparing obsequious strategy presentations, or disrupting existing lucrative businesses to address the market effectively. But to take advantage of this, you need to be incessantly focused on changes in the market, emerging technologies that drive cost performance, or new disruptions that can be leveraged that set you apart. And your startup must maintain the speed and agility of decision-making, but also execution, to respond in a way dissimilar to your larger competitors—whether it’s iPads emerging in the enterprise, Facebook becoming a “host” for social games, or cell phones being able to double as payment gateways.
Focus, Focus, Focus
Startups only have an opportunity at winning, though, if they focus on the new areas in which the incumbent players can’t compete, You only have an advantage over a big competitor if you focus disproportionately on your area of expertise and new dimension, avoiding all the common distractions that take you off course. In Geoffrey Moore’s new book, Escape Velocity, he calls this practice placing asymmetric bets. And your asymmetric bets need to be the opposite, or at least materially different, from your competitors (naturally). These are the attacks you’re going to bet the entire business on, and by doing so you earn a chance to win the market. Zendesk is doing it with socially-integrated customer support, Domo and GoodData with dramatically simpler business intelligence, SnapLogic with cloud integrations, and Zuora with subscription processing. In each of these areas, there’s reason to believe incumbents can’t or won’t get to the market fast enough before the products are scaled, and the payoff only comes when it’s taken to the max.
Startups often don’t exploit their advantage aggressively or acutely enough. It’s easy to get caught up in the different directions and opportunities that being in a new category creates. You have to constantly shy away from new product directions and extensions that may immediately net new customers or opportunities, but will ultimately take away from your critical focus. To succeed as a startup, you have to capitalize on the strengths that accompany your size and market position.
Going up against the big guys is insanely tough. But you don’t have to approach it blindly—the Valley is filled with broadly applicable battle tales and success stories. And there’s plenty of reasons to try.
Photo credit: Robert Scoble.