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Second-Stage Sensei

by Dr. Dino Signore

Manager of Entrepreneurial Education

How to protect your market turf

Being savvy about the competition means being cognizant of not only existing rivals but also whoever might be slipping in the door behind you.

The threat of new entrants (one of “five forces” in Michael Porter’s classic framework for industry analysis) is important to think about because it can wreak havoc on your margins. Unless demand is rising in your industry, you’ll feel the pinch on your bottom line as more competitors enter the fray.

Exactly how many newcomers you may confront depends on how easy your industry is to enter. For example, becoming a player in the auto industry requires a lot of capital. What’s more, new entrants must compete with well-established brands and government regulations. On the other hand, executive coaching is relatively easy to get into, so lots of folks can follow in your footsteps.

What to do? The first step is to recognize what industry you’re in. This may sound like a no-brainer, but it’s not always crystal clear. Take Edward Lowe, founder of Kitty Litter and Tidy Cat as well as the Edward Lowe Foundation. For many years, Lowe assumed he was in the pet industry and tried to expand his business with related ventures that ranged from cat toys to franchised pet stores. Yet once Lowe realized his core business was actually the mineral industry (his cat box fillers were composed of fuller’s earth, a type of clay), it was a real turning point. He began to focus his energies on clay products — expanding the cat-box-filler brands and creating clay-based products for industrial and agricultural clients.

Once you’re clear on your industry, think about existing barriers you can leverage to improve marketshare — and what kind of new roadblocks you can create.

Even though Lowe created an entirely new industry with Kitty Litter, copycats quickly appeared on the scene. Two strategies that he took to retain his market leader position included:

  • Product differentiation. Lowe was continually making improvements to existing clay products and introducing new ones, such as dust-free cat-box filler to improve the health of cats. He even established an R&D division in which 120 cats were “on staff” to assist scientists with product development.
  • Economies of scale. This results from operational investments so you can perform faster, better, and cheaper than anyone else. For example, as soon as Lowe saw that Kitty Litter was a viable product, he focused on his supply chain, buying his own clay mines and then locating his manufacturing and packaging facilities near the mines to reduce transportation costs. He even owned pallet and trucking companies and eventually achieved vertical integration that required virtually no outsourcing.

Although highly effective, achieving economies of scale is typically harder for smaller companies because it can require considerable capital. In contrast, product differentiation is easier to tackle, especially for entrepreneurs who like to flex their innovative muscle. At the same time, you also need a strong marketing presence to tout how your products or services are different. I find it ironic that many executives refer to themselves as product differentiators yet don’t have a dedicated marketing department — or even an individual — or organizational practices that allow for innovative thinking. Product differentiation doesn’t come from wishful thinking. You have to put resources behind it.

There are a number of other ways to discourage new rivals from entering your turf, including:

  1. Access to distribution channels. Some growth companies establish their own supply or distribution operations — or have very strong relationships with existing partners.
  2. Government policy. Entrepreneurs usually look warily upon government intervention, but regulations could be your ally when it comes to staving off industry newcomers. Regulations might also present opportunities for you to step into new markets. The point is to stay on top of legal news and get involved with your industry’s associations and lobbying efforts. You want to understand what’s going on.
  3. Building a strong brand identity. This can be difficult for younger companies because brand identity typically requires intensive marketing over a period of time. The good news: The Internet has helped level the playing field from a marketing perspective, so even small companies can look larger.
  4. Expected retaliation. This is an aggressive response to a newcomer. You may decide to woo a competitor’s key customers or offer temporary price cuts. The point is to show rivals that you know they’re out there — and you’re going to push back.
  5. Switching costs. You’ve locked in customers in some way so that moving to a competitor is painful. There could be financial or legal factors that make it difficult to leave, such as having a written contract and penalties. Or there could be some sort of a psychological attachment for a product. For example, Apple customers often identify strongly with being Mac users; it’s part of their digital persona. 
  6. Proprietary learning curve. Knowledge can be a powerful barrier to entry because it’s intangible and hard to duplicate. What sort of information do only you and your staff know about your market or industry that you can leverage?

Granted, the threat of new entrants is just one piece of industry analysis, but it’s an important one that second-stage entrepreneurs often overlook because they’re usually focused on relationships with buyers and suppliers. As growth companies try to attract more buyers or get better deals from suppliers, they may not recognize industry turbulence being caused by an uptick in rivals.

Second stage is about profitable growth. Profits are what enable you to stay alive and reinvest in your company so you can continue on an upward trajectory. Yet research shows that industries with an increasing number of new entrants also tend to have an increasing number of exits. You don’t want one of those casualties to be you.

So start thinking strategically about potential rivals and barriers. What can you do to make access into your industry — or even your market — a little more difficult?

This article originally appeared Sept. 24, 2014 on Inc.com (http://www.inc.com/dino-signore/how-to-protect-your-market-turf.html)