CHAPTER THIRTY

COMPETITION

CEOs in highly competitive spaces often claim that competition is critical and that they welcome it. I'm not convinced. It is much better to carve out a niche that doesn't have a lot of competition but still be disciplined about how you innovate and operate. Return Path doesn't live in a very crowded marketplace but take it from me: even without a competitor in sight, running a startup is stressful enough. If you do have competition, there are a few things you can do to win—or, at the very least, keep them from causing you to fail.

PLAYING HARDBALL

Two of the “big classics” I mentioned in Part One were written by George Stalk and Rob Lachenauer: Hardball and their follow-up article in the Harvard Business Review, “Curveball.”

As with most business books, Hardball isn't really geared toward small, entrepreneurial companies but most of the principles of competition—and how to win—are timeless. The basic principles, each of which gets a chapter, are on unleashing massive force, exploiting anomalies (perfect for the data junkie within), threatening the competition's profit zones, plagiarizing with pride, breaking compromises, and M&A.

The chapter on breaking compromises is my favorite because it deals with a facet of human nature that I think can be devastating to business: the “that's the way it's always worked” conundrum, otherwise known as “baggage.” Why does XYZ happen in our business, illogical as it may seem? Because that's how we have always done it!

We have a mechanism for dealing with the problem of baggage at Return Path, which is meant to be disarming, a bit funny but dead serious at the same time. Anytime anyone spots someone answering a question or a challenge with the “that's the way it works” response, they're strongly encouraged to pull themselves out of the situation and respond with a catchphrase like “baggage alert,” or “boy, that duffle bag must be heavy,” or “hey, nice knapsack—is that new or have you had it for a while?” While it may be a little embarrassing to the recipient, it's meant to challenge norms and bring about creative thought at all levels of the business.

Breaking compromises has led to Southwest and Jet Blue, to Saturn (the car, not the planet) and to automobile leasing. Just think about what it can do for your company or industry!

PLAYING OFFENSE VERSUS PLAYING DEFENSE

I hate playing defense in business. It doesn't happen all the time. Being behind a competitor in terms of feature development, scrambling to do custom work for a large client or doing an acquisition because you're getting blocked out of an emerging space—whatever it is, it just feels rotten when it comes up. It's someone else dictating your strategy, tactics and resource allocation; it's their agenda, not yours. It's a scramble. When the work is done, it's hard to feel great about it, even if it's required and well done.

The best thing you can do when you're behind is to turn a situation from defense into a combination of defense and offense and change the game a little bit. Playing offense, of course, is what it's all about. Your terms, your timetable, your innovation or opportunity creation, a smile on your face, knowing you're leading the industry, and making others course correct or play catch-up.

Here are a few examples:

• You're about to lose a big customer unless you develop a bunch of custom features ASAP. Use that work as prototype to a broader deployment of the new features across your product set. (Rumor has it that Groupware was started as a series of custom projects Lotus was doing for one of its big installations of Notes.) “Features” may be specific to tech companies but the principle holds true for any business: don't play catch-up with a competitor's offering unless it's an opportunity to develop a significant part of your business.
• Your competitor introduces new subfeatures that are of the “arms race” nature (more, more, more!). Instead of working to get to parity, add new functionality that changes the value proposition of the whole feature set. Google Docs, for instance, doesn't need to match Microsoft Office feature for feature, as its value proposition is about the cloud. Don't engage in an arms race; change the rules of engagement.
• Your accounting soft ware blows up. You have to redo an internal system. It's a total time sink. Use the opportunity to shift from a new version of the same, old school package you used to run—with dedicated hardware, database and support costs—to a new, sleek, lightweight, on-demand package that saves you time and money in the long run.

The best defense is, in fact, a good offense.

GOOD AND BAD COMPETITORS

While the ideal competition may be no competition, there are good competitors and bad competitors and it's important to respond to them differently.

The best competitors are small guys who keep you honest by punching above their weight. They may not have many customers, much in the way of resources or a recognizable brand but they have an idea that—in your heart of hearts—you know to be really, really good. This is the kind of competition you want: the kind that keeps you up at night because they're outperforming you on your own terms. Respond by out-innovating them. If you're at a later stage and have the resources, consider an acquisition.

The worst competition is the opposite: tons of money, not much thought. When they arrive on the scene early, they can be extremely disruptive—and not in a good way. Overfunded startups that miss the value proposition always fail but they can often take a lot of thoughtful competitors down with them. There are two ways this can happen. First, you might be tempted to compete with them on their terms and ramp up your burn rate accordingly. Pretty soon, you're spending money as recklessly as they are and there isn't any left in the bank. The second possibility is subtler but just as damaging: when investors see a certain kind of idea fail, spectacularly, they're less likely to fund a good idea along the same lines. (Selling pet food online isn't a bad idea but it took a long time for investors to take another shot after Pets.com failed to the tune of some $300 million.) The response? Have the stomach to wait them out.

While some techniques for winning are specific to the type of competition you're facing, most of them are universal. Concede that competitors will sometimes out-think you, so out-behave, out-prepare and out-execute them. (Moments when you have been “out-thought” are also the right times to “plagiarize with pride.”) Above all else: don't violate your core values for a short-term advantage. Lose a sale to the competition and you will recover. Lose your soul to the competition and you will have a much harder time getting it back.