When Facebook launched Places, its geo-location check-in service last week, the immediate question in the high tech industry was whether location-sharing start-ups like Foursquare could survive.
Foursquare CEO Dennis Crowley has tried to project confidence, which is what you would expect under the circumstances. But read how he sees Foursquare as different from Facebook, even with location services added. He makes some good points that you could generalize for all small companies. Competition from an established giant doesn't mean losing if you have can first establish enough barriers to entry.
It's odd to think of large companies facing competitive barriers in a new market, but that's because we're all quick to associate limitations with financial resources. At best, money allows a company to take actions. There's no guarantee that the actions will be successful.
When Lance Ulanoff writes about how Microsoft (MSFT) took over one category of Windows utility product after another, I agree completely. While at a big reseller of programming tools at the time, I heard the same things from vendors as he did: Microsoft only validated categories it entered. And then Microsoft wiped out all its small competitors. And yet, Microsoft hasn't been successful in entering all markets. Look at personal finance and portable MP3 players, to name just two.
Businesses, large or small, face multiple potential limitations when trying to enter a market. If a smaller competitor can erect enough obstacles, it can prevent the larger company from taking over. Here are some roadblocks that small companies can sometimes use to protect themselves:
- Brand Permission -- Consumers must perceive a company as being in a particular business. Creating a service and marketing alone won't do it if customers aren't inclined to extend their relationship with the company. At one point, Sony (SNE) extended its PlayStation brand to wine glasses and champagne flutes. Not a rousing success.
- User Niche -- Two products or services can seem the same to a casual glance, and yet serve subtly different needs or interests based on features, price, or even image. Neither Dunkin Donuts nor Starbucks (SBUX) is going to put the other out of business because consumers get different experiences at each, appealing to different demographics (or, at least, different moods).
- Context -- Even identical products can become different depending on such contexts as setting, associations, or location. Back to coffee for a moment. Many Barnes & Noble locations have Starbucks cafes within, but the book stores probably cannibalize few of the coffee company's customers. There's a difference between running out to get a cup on your way to work and spending time while browsing titles, especially if you typically make a purchase in the morning before the store is even open.
- Convenience -- There can be emotional, financial, and physical costs to changing behavior. It's one reason why wireless carrier turnover isn't far higher. That two-year contract locks people down, and then they often fail to perceive that service from another company would be far better.
- Lag Time -- The longer a company waits to enter the market, the harder it becomes to persuade consumers to try something different, especially if there isn't an obvious advantage to using one product or service over another. Microsoft spent about 18 years pushing its Money application to take market share from Intuit's (INTU) Quicken and finally gave up. Intuit had started selling back in the 1980s and had associated itself with personal money management, developing an insurmountable lead.
- Habit -- If people are accustomed to doing business a certain way, you need to give them a good reason to try something different. Resources can help in terms of promotion, but unless there is a perception of something better, it will be hard to get people to jump ship. One product line where Microsoft was madly successful in getting users to switch allegiance was Office. Offering compatibility modes for the leading spreadsheet and word processors -- Lotus 1-2-3 and WordPerfect -â€" eased the transition, but the level of integration possible with a single source of applications was the benefit that sold people on changing.
- Critical Mass -- Some types of businesses need a critical mass of adoption to really take off. Just having bodies may not be enough if they all have to be engaged in a certain type of activity to make a service valuable. Twitter and Facebook are both examples that have been able to put off larger competitors such as Google (GOOG) and Yahoo (YHOO), even though the latter two had much larger audiences for extended periods of time. Not only would Google and Yahoo have to convince people to change, but they would have to do it on a large scale fast enough to offer the same experience as the first two provided.
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