What happens if you create the next UPS and someone else counters by starting FedEx? Or you introduce the world to crowdsourcing with Indigogo and Kickstarter surpasses it? Maybe you start Lyft and Uber overtakes it? Finding and executing a great business concept is only the start because distinction is temporary when it can be replicated.
Marketers often espouse traditional barriers to entry to limit rival competitive efforts. However, distinction must be infused in the company at its onset. Inimitable companies create solutions that can not easily be replicated and choose unconventional paths to grow. The following guidelines can build a side hustle to a multinational monstrosity to everything in between.
Why Traditional Barriers Don’t Fit
For years, marketers stressed a list of barriers that inhibit rivals from replicating a business concept. They emphasized the benefits of being a first mover, leveraging economies of scale, using geographic boundaries, and utilizing patent protections. In a marketplace with less reliance on hard assets and geographic barriers, these recommendations provide less protection than they once did. Ask Friendster and MySpace about being first movers after late starter Facebook entered the space. Veronica, Jughead, Infoseek, and Altavista were search engines when “googol” was an obscure math term and “Google” was a typo. In both instances, the newcomers overtook the market by improving upon the first-movers’ deficiencies. Being a first-mover provides no protection when the customer can effortlessly migrate to a rival.
The first-mover advantage hinges on the ability to limit a customer’s exit. Consider the contacts, photos, and applications that might be lost or become unusable when consumers switch from an iPhone to an Android or vice-versa. Conversely, Friendster and Altavista provided no incentive for customers to remain loyal. Moving was seen as a benefit rather than a challenge.
Large purchases mandate large discounts and it is easier to sell a thousand items to one customer than one item to a thousand. Larger quantities enable vendors to become more efficient and profitable, which is the primary argument for using economies of scale as a barrier. Large companies sell more, buy more, and can undercut smaller ones. Economies of scale rely on an established customer base and a wealth of cash to front large purchases of raw materials. Startups have neither.
Technology has made the world smaller, so geographic barriers are eroding. Since many markets no longer mandate a physical presence, copycats often need a website, an app, and the means to distribute goods. Technology decreased geography’s impact on business, so it is no longer a universal barrier.
Patents can protect a company, but they require cash to pursue legal action and still do not block all intellectual property infringements. Wealthier litigants can overwhelm small companies in legal entanglements and overseas companies receive governmental protections that the courts cannot pierce. Xiomi has been accused of copying Apple phones for years. The same can be said of Huawei and Cisco’s software. Think of the number of counterfeit handbags, video games, and pharmaceuticals that flood the market. If wealthy and established companies cannot successfully leverage the courts to stop copying, how will you?
Entrepreneurial barriers should not rely on company size, financial resources, or legal constraints. Conventional barriers to entry leverage a company’s girth and resources. Startups have neither.
Like Distinctiveness, Protection Must Be Part of the Initial Strategy
Recall that Google entered the search engine market late, but it didn’t matter. Google was almost impossible to copy because its search algorithm was unique and superior. While other search engines ranked sites by content, Google’s BackRub returned more relevant results faster. The idea for the algorithm resulted from the founders’ experience in academia as BackRub ordered pages like academic citations. It scored each website by the number and significance of references from others. More references – backlinks – and more prominent referrers produced higher rankings. It efficiently utilized thousands of commercially available and inexpensive computers to keep costs low. Google’s search algorithm is a corporate secret to this day and is shrouded in mystery. BackRub was the cornerstone of its success and was so distinctive, it was difficult to replicate. Because of it, Google became inimitable.
Google isn’t alone and you don’t need a billion-dollar idea or a Ph.D. from Stanford to erect barriers to entry. Companies have always built their futures on intellectual secrets, unique cultures, and uncommon practices. Kentucky Fried Chicken touted a recipe of 11 herbs and spices, but the real secret was a pressure cooker that prepared chicken in a fraction of the time of traditional methods. McDonald’s promised the Big Mac contained a special sauce but that was never the key to its success. The company adopted an assembly line approach to food preparation. Workers produced more, customers received selections faster, per-unit costs decreased, and burgers were produced uniformly across franchises. Barriers to entry do not need to be technical. They need to be valuable, different, and hard to replicate.
Experimentation Breeds Protection
Amazon started by selling books but didn’t stop there. Its marketplace dominates online sales, AWS, Amazon Web Services, is the largest cloud offering in the world, the Echo, aka Alexa, is the reference for all home automation, and the company may be a leader in facial recognition software as well. Amazon is so distinctive that it cannot be categorized because its growth strategy has no boundaries. It seeks opportunities that require new skills rather than leaning on existing ones. Every existing skill becomes the launching point to learn even more and enter a new market.
Online books evolved into a massive marketplace and the Kindle. The marketplace required specialized skills, which were applied to its cloud, AWS. The Kindle became a steppingstone for the Alexa. Amazon’s recipe for success involves one part existing skill, one part customer need, and one part willingness to experiment.
Experiments Test Boundaries
There is a rumor that an Amazon employee once asked, “What do we do with our excess computer capacity?” Building a global marketplace requires massive computer data centers, which do not always operate at 100% capacity. There are months when consumers buy more and periods when they buy less. Amazon’s computers were underutilized which presented an opportunity. The answer became AWS, Amazon’s cloud. All companies, like Amazon, initially built its data centers to meet the highest expected loads. Online retailers make as much as 70% of their revenue during the end-of-year holiday season and stress their resources more during those periods. During the remaining 11 months, datacenters went underutilized. Amazon’s AWS stepped in to offer extra capacity when retailers needed it.
AWS was born from a question that ignored market barriers. It didn’t ask how to sell more goods or creep into adjacent markets. Amazon found growth and protection by expanding its core competencies rather than augmenting them.
Failure Equals Learning Opportunity
Your favorite search engine and the creator of the Android Phone also produced flops, Google Glass and Google+, the social media platform that never gained traction. Streaming giant Netflix launched Quickster in 2011, a DVD rental service that disappeared. Customers reviled New Coke in 1985 and Crystal Pepsi seven years later. Microsoft launched the Zune MP3 player in 2006, which failed, and in 1985 Apple missed the mark with a $9,995 personal computer named Lisa. Back then, the average car cost $11,800 so do you think the Lisa came with a GPS? Each of these companies not only survived these misses but thrived because their cultures experiment and absorb the inevitable mistakes that accompany it.
Competition is ubiquitous but there is a difference between being the dominant player in a market and fighting for scraps among a pack of rivals. Protection is as critical as distinctiveness and must be ingrained at the onset. When developing a business consider what is required to replicate it. Seek out opportunities to continually distinguish the company and do not follow the conventional growth paths.
I once heard a CEO insist leaders don’t manage by watching the rear-view mirror. He has moved on since making the statement and I hope he has altered his stance. Every fighter plane and formula one race car use mirrors to track the threats behind them. Every business should as well. The rival in front of you may be your target but you are the target for the companies behind you.