Updated: Mar 30, 2020
In a study designed to simulate ‘fear of unknown’ 45 participants played a computer game where odds changed throughout the game.
The participants were required to turn over rocks, some of which had snakes underneath them — and if there was a snake, the players received a mild electric shock.
In one case, participants did not know about the coming shock, and in the other, they knew. The study found that when the shock was sudden and unannounced, participants were stressed; and calmer when they knew.
Sudden arrival or awareness of a threat or danger — whether real or imaginary — can trigger stress
And the fear of the unknown, causes our brain to freeze and impair the decision making. And this holds true when that threat is a competition to our business.
However, the truth is competition is always present, and it’s arrival is never sudden.Its only our awareness about it, that is sudden. Whether you are a business owner, a freelancer, an employee, or just going about life (think about competition for a parking spot, the line at the check-out counter, etc …), there is always someone out there vying what you want with same or greater earnestness. However, sudden discovery of a competitive threat can trigger fear, unease and that knot in the stomach.
So, how do make peace with your competition? The first step is learning to identify whether the competition is a real threat, an opportunity, or inconsequential.
So, let us start with categorizing business competition, shall we?
There are three scenarios that can occur with respect to competition
1. There is no competition
2. There is good competition
3. There is bad competition
Let’s take the case when there is no competition
Ah, such a utopia. No jealous gazers for my piece of pie!
But no competition also means the consumer has no choice. Consumers have to accept available good and services at the price determined by the company. There is no room for negotiations or product customizations. It’s either take it or leave it for the consumers.
In a free market environment, having no competition is impossible.
There is no competition (or monopoly) only if the industry or the company is protected by the government, there are high barriers to entry making it almost impossible for new industry or competition to enter the market place. We see this happening in socialist or controlled political environments where companies are owned by state.
Think about the Internet services or app based services in China. There is no Facebook, Google or Uber, but have their local versions in Baidu, WeChat, Didi Chuxing etc.
How many of us want to be in this environment? I presuppose - none of us. So, if you find no competition, carefully look around and check, if there truly is an opportunity. Or what appears to be an opportunity is not really there, as there are high barriers to entry.
For, the cousin of no competition is oligopoly (few companies offering similar services)
Oligopoly is mostly a result of consolidation - this situation happens when many of the companies in the industry consolidate to compete better. An example is the airline industry in the United States. It started with several regional and national airlines serving the marketplace, however, many of these airlines closed down and some like Continental, US Airways, etc, over the last few decades merged with bigger airlines, leaving 3-4 major airlines to serve the market.
In such a scenario, sometimes the companies charge more for a rather poor experience, and it does happen with United, American airlines, etc.
Another example is social media sites. The decade of 2000-2010 saw many social media companies, such as MySpace, Friendster, Orkut. But with Facebook’s dominance, the smaller companies closed down.
So, if you are thinking about a social media company, be aware of barriers to entry posed by a competitor like Facebook and it consolidating its power by acquisitions like Instagram, WhatsApp.
With oligopoly, alternatives are few and barriers to entry are very high.
Now, lets talk about good competition. Let’s examine the frozen yogurt trend around 2010.
A few years ago, there was a fad for frozen yogurt. Diet books, Hollywood stars endorsed the health benefits of frozen yogurt and probiotics, and as a result, people made a beeline for these yogurt shops. Before you could put a finger on what was happening, there were frozen yogurt shops everywhere. Why? Because, there was a business opportunity and entrepreneurs acted fast to cash on that opportunity. It was akin to the Gold Rush, where entrepreneurs started yogurt shops to ‘find’ their gold.
And then the frozen yogurt trend started to wane.
There were frozen yogurt shops with interesting names everywhere, consumers had too many choices. As the demand started to cool, these shops started to close. It’s not that all frozen yogurt shops have folded, A few such as Pinkberry and Yogurtland are still around. The ones that have stayed serve yogurt that consistently tastes good, is good quality combined with good customer service.
The competition was a good thing, it attracted entrepreneurs, but ultimately, those who survived the vicissitudes of market, distinguished themselves by serving a superior product, service, experience or even a superior business strategy like Pinkberry’s acquisition by Kahala Brands, a restaurant franchising chain.
And that set a barrier and benchmark for a new entrepreneur looking to enter this market
So, if you are looking to start a frozen yogurt business, you know what is in place in the market, and what expectations you need to exceed in terms of quality and customer experience. Or maybe you need to think of something totally unique that can ‘disrupt’ existing yogurt businesses. Otherwise, best not to enter this business.
So, this quality and service expectation brings out the best in you and eventually your business. This can be called as good competition.
And now what is bad competition and how does it look like?
Yes, contrary to the idea that competition is always good, I believe sometimes it is not good in situations where supply exceeds market demand. An example is if you are a driver with ride-hailing service like Uber. If you started when Uber was new, Uber incentives to the drivers were attractive and lucrative service, but over time, there are too many Uber drivers, and it has very easy to become one. With excess supply, the prices charged by the drivers are unrealistically low, to the point where becoming an Uber driver is a loss-making or a low-margin and eventually and unsustainable venture.
Bad competitive environment has too many competitors with hard-to-distinguish products or services and predatory pricing practices.
Just as in the case of Uber, another example of a bad competitive environment, could sometimes be an Amazon marketplace. In popular categories like ‘Home and Garden’, there are too many sellers selling the exact same generic white-labeled product. Active discounting is one of effective way to stand apart in such a marketplace. However, it leads to an environment that does not benefit the entrepreneur and is a race to the bottom.
So, you might be still uncertain about competitive forces challenging your business
So you may feel uneasy, if your business is well established but you are seeing new players entering the market. The feeling of unease is normal. Competition is an indicator of opportunity in your industry.
Always look at trend-lines with respect to competition
1. Does competition indicate your industry is toward consolidation, or
2. Does it mean an oversupply of providers and predatory pricing,
3. Or does it indicate that lower quality and me-too providers being wiped out?
If your industry is consolidating (most business is going towards a dominant provider), then it may be a time to plan an exit.
If competition is turning into a predatory environment, may be it is time to shut shop, or rethink your service and business offerings.
If ‘me-too’ providers are being wiped out, and only a few ones remaining, may be its time to strategize to up level your product and service offerings — and command that niche.
Well, rather than looking at the competition, I would rather ignore it, and focus on my working on my own product and things I can control
That is definitely an option, and in fact a healthy attitude. Why focus on situations that will cause worry and take your focus off? You could do it and should do it. But again, being aware of the competition and studying their services and products would not only make you aware of what is out there, but also, improve or differentiate your own products and services. Understanding your competition and their offerings well is an essential part of your competitive strategy.